Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. L-24968 April 27, 1972

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.
Jesus A. Avanceña and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p

In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965 sentencing
defendant Development Bank of the Philippines (DBP) to pay actual and consequential damages to plaintiff Saura Import
and Export Co., Inc. in the amount of P383,343.68, plus interest at the legal rate from the date the complaint was filed and
attorney's fees in the amount of P5,000.00. The present appeal is from that judgment.

In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance Corporation (RFC),
before its conversion into DBP, for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for the
construction of a factory building (for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase
price of the jute mill machinery and equipment; and P9,100.00 as additional working capital.

Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura on the strength of
a letter of credit extended by the Prudential Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure
its release without first paying the draft, Saura, Inc. executed a trust receipt in favor of the said bank.

On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be secured by a
first mortgage on the factory building to be constructed, the land site thereof, and the machinery and equipment to be
installed. Among the other terms spelled out in the resolution were the following:

1. That the proceeds of the loan shall be utilized exclusively for the following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00
T O T A L P500,000.00

4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China Engineers,
Ltd. shall sign the promissory notes jointly with the borrower-corporation;

5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to availability of funds,
and as the construction of the factory buildings progresses, to be certified to by an appraiser of this Corporation;"

Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently having
otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a modification of the terms laid
down by it, namely: that in lieu of having China Engineers, Ltd. (which was willing to assume liability only to the extent of
its stock subscription with Saura, Inc.) sign as co-maker on the corresponding promissory notes, Saura, Inc. would put up
a bond for P123,500.00, an amount equivalent to such subscription; and that Maria S. Roca would be substituted for
Inocencia Arellano as one of the other co-makers, having acquired the latter's shares in Saura, Inc.

In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members of its Board
of Governors, for certain reasons stated in the resolution, "to reexamine all the aspects of this approved loan ... with
special reference as to the advisability of financing this particular project based on present conditions obtaining in the
operations of jute mills, and to submit his findings thereon at the next meeting of the Board."

On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer for the loan,
and asked that the necessary documents be prepared in accordance with the terms and conditions specified in Resolution
No. 145. In connection with the reexamination of the project to be financed with the loan applied for, as stated in
Resolution No. 736, the parties named their respective committees of engineers and technical men to meet with each
other and undertake the necessary studies, although in appointing its own committee Saura, Inc. made the observation
that the same "should not be taken as an acquiescence on (its) part to novate, or accept new conditions to, the agreement
already) entered into," referring to its acceptance of the terms and conditions mentioned in Resolution No. 145.

On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling, representing China
Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage, which was duly registered on the
following April 17.

It appears, however, that despite the formal execution of the loan agreement the reexamination contemplated in
Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June 10, 1954, at which Ramon Saura,
President of Saura, Inc., was present, it was decided to reduce the loan from P500,000.00 to P300,000.00. Resolution No.
3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution No. 145, C.S.,
from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-examination of all the various
aspects of the loan granted the Saura Import & Export Co. under Resolution No. 145, c.s., for the purpose of financing the
manufacture of jute sacks in Davao, with special reference as to the advisability of financing this particular project based
on present conditions obtaining in the operation of jute mills, and after having heard Ramon E. Saura and after extensive
discussion on the subject the Board, upon recommendation of the Chairman, RESOLVED that the loan granted the Saura
Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up to P100,000 may be authorized as
may be necessary from time to time to place the factory in actual operation: PROVIDED that all terms and conditions of
Resolution No. 145, c.s., not inconsistent herewith, shall remain in full force and effect."

On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China Engineers Ltd.
jointly and severally with the other RFC that his company no longer to of the loan and therefore considered the same as
cancelled as far as it was concerned. A follow-up letter dated July 2 requested RFC that the registration of the mortgage
be withdrawn.

In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The request was denied
by RFC, which added in its letter-reply that it was "constrained to consider as cancelled the loan of P300,000.00 ... in view
of a notification ... from the China Engineers Ltd., expressing their desire to consider the loan insofar as they are
concerned."

On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China Engineers, Ltd.
"will at any time reinstate their signature as co-signer of the note if RFC releases to us the P500,000.00 originally
approved by you.".

On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of P500,000.00, "it
appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly with the borrower-corporation," but
with the following proviso:

That in view of observations made of the shortage and high cost of imported raw materials, the
Department of Agriculture and Natural Resources shall certify to the following:
1. That the raw materials needed by the borrower-corporation to carry out its operation are available in
the immediate vicinity; and
2. That there is prospect of increased production thereof to provide adequately for the requirements of the
factory."

The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954, wherein it was
explained that the certification by the Department of Agriculture and Natural Resources was required "as the intention of
the original approval (of the loan) is to develop the manufacture of sacks on the basis of locally available raw materials."
This point is important, and sheds light on the subsequent actuations of the parties. Saura, Inc. does not deny that the
factory he was building in Davao was for the manufacture of bags from local raw materials. The cover page of its brochure
(Exh. M) describes the project as a "Joint venture by and between the Mindanao Industry Corporation and the Saura
Import and Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture copra and corn bags,
runners, floor mattings, carpets, draperies; out of 100% local raw materials, principal kenaf." The explanatory note on
page 1 of the same brochure states that, the venture "is the first serious attempt in this country to use 100% locally grown
raw materials notably kenaf which is presently grown commercially in theIsland of Mindanao where the proposed jutemill
is located ..."

This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first place, and to
require, in its Resolution No. 9083, a certification from the Department of Agriculture and Natural Resources as to the
availability of local raw materials to provide adequately for the requirements of the factory. Saura, Inc. itself confirmed the
defendant's stand impliedly in its letter of January 21, 1955: (1) stating that according to a special study made by the
Bureau of Forestry "kenaf will not be available in sufficient quantity this year or probably even next year;" (2) requesting
"assurances (from RFC) that my company and associates will be able to bring in sufficient jute materials as may be
necessary for the full operation of the jute mill;" and (3) asking that releases of the loan be made as follows:

a) For the payment of the receipt for jute mill

machineries with the Prudential Bank &
Trust Company P250,000.00
(For immediate release)
b) For the purchase of materials and equip-
ment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the open-
ing of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.

On January 25, 1955 RFC sent to Saura, Inc. the following reply:

Dear Sirs:

This is with reference to your letter of January 21, 1955, regarding the release of your
loan under consideration of P500,000. As stated in our letter of December 22, 1954, the
releases of the loan, if revived, are proposed to be made from time to time, subject to
availability of funds towards the end that the sack factory shall be placed in actual
 operating status. We shall be able to act on your request for revised purpose and manner
of releases upon re-appraisal of the securities offered for the loan.
With respect to our requirement that the Department of Agriculture and Natural
Resources certify that the raw materials needed are available in the immediate vicinity
and that there is prospect of increased production thereof to provide adequately the
requirements of the factory, we wish to reiterate that the basis of the original approval is
to develop the manufacture of sacks on the basis of the locally available raw materials.
Your statement that you will have to rely on the importation of jute and your request that
we give you assurance that your company will be able to bring in sufficient jute materials
as may be necessary for the operation of your factory, would not be in line with our
principle in approving the loan.

With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter further. Instead, it
requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the corresponding deed of cancellation
and delivered it to Ramon F. Saura himself as president of Saura, Inc.

It appears that the cancellation was requested to make way for the registration of a mortgage contract, executed on
August 6, 1954, over the same property in favor of the Prudential Bank and Trust Co., under which contract Saura, Inc.
had up to December 31 of the same year within which to pay its obligation on the trust receipt heretofore mentioned. It
appears further that for failure to pay the said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15,
1955.

On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc., the
latter commenced the present suit for damages, alleging failure of RFC (as predecessor of the defendant DBP) to comply
with its obligation to release the proceeds of the loan applied for and approved, thereby preventing the plaintiff from
completing or paying contractual commitments it had entered into, in connection with its jute mill project.

The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the parties and that
the defendant was guilty of breach thereof. The defendant pleaded below, and reiterates in this appeal: (1) that the
plaintiff's cause of action had prescribed, or that its claim had been waived or abandoned; (2) that there was no perfected
contract; and (3) that assuming there was, the plaintiff itself did not comply with the terms thereof.

We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil Code, which
provides:

ART. 1954. An accepted promise to deliver something, by way of commodatum or simple loan is binding
upon the parties, but the commodatum or simple loan itself shall not be perferted until the delivery of the
object of the contract.

There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00 was
approved by resolution of the defendant, and the corresponding mortgage was executed and registered. But this fact
alone falls short of resolving the basic claim that the defendant failed to fulfill its obligation and the plaintiff is therefore
entitled to recover damages.

It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the factory to be
constructed would utilize locally grown raw materials, principally kenaf. There is no serious dispute about this. It was in
line with such assumption that when RFC, by Resolution No. 9083 approved on December 17, 1954, restored the loan to
the original amount of P500,000.00. it imposed two conditions, to wit: "(1) that the raw materials needed by the borrower-
corporation to carry out its operation are available in the immediate vicinity; and (2) that there is prospect of increased
production thereof to provide adequately for the requirements of the factory." The imposition of those conditions was by no
means a deviation from the terms of the agreement, but rather a step in its implementation. There was nothing in said
conditions that contradicted the terms laid down in RFC Resolution No. 145, passed on January 7, 1954, namely — "that
the proceeds of the loan shall be utilized exclusively for the following purposes: for construction of factory building —
P250,000.00; for payment of the balance of purchase price of machinery and equipment — P240,900.00; for working
capital — P9,100.00." Evidently Saura, Inc. realized that it could not meet the conditions required by RFC, and so wrote
its letter of January 21, 1955, stating that local jute "will not be able in sufficient quantity this year or probably next year,"
and asking that out of the loan agreed upon the sum of P67,586.09 be released "for raw materials and labor." This was a
deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying as it did a
diversion of part of the proceeds of the loan to purposes other than those agreed upon.

When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going on for the
implementation of the agreement reached an impasse. Saura, Inc. obviously was in no position to comply with RFC's
conditions. So instead of doing so and insisting that the loan be released as agreed upon, Saura, Inc. asked that the
mortgage be cancelled, which was done on June 15, 1955. The action thus taken by both parties was in the nature cf
mutual desistance — what Manresa terms "mutuo disenso"1 — which is a mode of extinguishing obligations. It is a
concept that derives from the principle that since mutual agreement can create a contract, mutual disagreement by the
parties can cause its extinguishment.2

The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged breach of contract
by RFC, or even point out that the latter's stand was legally unjustified. Its request for cancellation of the mortgage carried
no reservation of whatever rights it believed it might have against RFC for the latter's non-compliance. In 1962 it even
applied with DBP for another loan to finance a rice and corn project, which application was disapproved. It was only in
1964, nine years after the loan agreement had been cancelled at its own request, that Saura, Inc. brought this action for
damages.All these circumstances demonstrate beyond doubt that the said agreement had been extinguished by mutual
desistance — and that on the initiative of the plaintiff-appellee itself.

With this view we take of the case, we find it unnecessary to consider and resolve the other issues raised in the respective
briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against the plaintiff-
appellee.
Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ., concur.
Makasiar, J., took no part.
 
Footnotes
1 8 Manresa, p. 294.
2 2 Castan, p. 560.

PHILIPPINE SUPREME COURT DECISIONS

SECOND DIVISION
[G.R. No. L-22001. November 4, 1924. ]

CHINA BANKING CORPORATION, in substitution of Filipinas Compania de Seguros, Plaintiff-Appellee, v.

FAUSTINO LICHAUCO ET AL., Defendants-Appellants. Jose a. Espiritu for Appellants. Feria & La O and P. J.
Sevilla for Appellee.

SYLLABUS

1. INTEREST; INTEREST UPON INTEREST DUE. --The interest due at the time of the filing of the complaint for the
recovery thereof, earns legal interest from said date, under article 1109 of the Civil Code, although the obligation is silent
on this point, and the action of the trial court is in accordance with law, which includes in its judgment an order for the
payment of legal interest upon the interest due on the amount claimed, at the time of the filing of the complaint.

2. MORTGAGE; CONSIDERATION OF; MAY SECURE OBLIGATION OF THIRD PERSON. --The consideration of a
mortgage, which is an accessory contract, is that of the principal contract, from which it receives its life, and without which
it cannot exist as an independent contract, even if the obligation thereby secured is of a third person, and therefore it will
be valid, if the principal one is valid, and cannot be avoided on the ground of lack of consideration.

DECISION
AVANCEÑA, J. :

The dispositive part of the judgment appealed from is literally as follows:jgc:chanrobles.com.ph

"For all of the foregoing it is adjudged and decreed that the defendant Faustino Lichauco be, as is hereby, sentenced to
pay the plaintiff the sum of P21,500, with interest at 12 per cent per year from September 13, 1922 until full payment
thereof, and in addition, interest at 6 per cent per annum from the filing of the complaint upon P1,935, interest of the sum
claimed for 9 months prior to the filing of the complaint, and of such sums as subsequently have become or may become
due, from their respective dates of maturity until the payment of said interest; he is further sentenced to pay the sum of
P14,200 as fees of plaintiff’s attorney, expenses and troubles caused by the litigation for the collection of said sum of
P21,500, with interest thereon; and all the defendants are sentenced to pay the sum of P50,000 with interest at the rate of
12 per cent annum from September 5, 1921, capitalized monthly to earn the same interest as the principal, until full
payments thereof, and in addition 5 per cent of P50,000 and the interest due at the time of the filing of the complaint, as
costs of suit and other expenses of whatever kind, including attorney’s fees, incurred by the plaintiff for the recovery of
said sum, and it is ordered that the payment of all these amounts be made within three months from the date of the
judgment and that in case of non-payment of all these amounts within the aforesaid period, the mortgaged property be
sold for the payment of the amount or amounts not paid."cralaw virtua1aw library

The judgment appealed from contains a complete and exact statement of all the facts from which the liability of the
defendants arose.

There is no question in this appeal but that the defendant Faustino Lichauco owes the plaintiff the sum of P21,500, with
interest thereon at the rate of 12 per cent per year from September 13, 1922. Nor is there about the fact that, at the filing
of the herein complaint, Faustino Lichauco owed the sum of P1,935, as interest for the preceding nine months. But it is
alleged that the lower court erred in allowing legal interest at the rate of 6 per cent from the filing of the complaint upon
this sum of P1,935, the amount of interest due on that date. This is no error. Article 1109 of the Civil Code expressly
provides that interest due shall earn legal interest from the date payment thereof is judicially demanded, although the
obligation may be silent on the matter.

As to the part of the judgment sentencing all the defendants to pay the plaintiff the sum of P50,000, it is necessary to take
into account the previous transactions that gave rise to this liability of the defendants. Lichauco & Company, Inc., owed
the plaintiff a large sum by way of loan. On September 5, 1921, Faustino Lichauco and wife Luisa F. de Lichauco
executed a document (Exhibit C) in favor of the plaintiff whereby they secured with a mortgage upon the property
described in the document the payment of a part of this loan in the amount of P50,000 with interest at 9 per cent per year.
It was agreed that in case of non-fulfillment of the contract, this mortgage would stand as security also for the payment of
all the costs of the suit and expenses of any kind, including attorney’s fees, which by way of liquidated damages are fixed
at 5 per cent of the principal. It is stated lastly in this document that if Faustino Lichauco and Luisa F. de Lichauco should
fail to pay this amount of P50,000, the mortgage shall be in full force and effect.

On the 20th of December, 1922, Lichauco & Co., Inc., Faustino Lichauco, and Luisa F. de Lichauco executed another
document (Exhibit D) in which, among other things, they ratified the former mortgage and stated that the payment of the
P50,000 shall continue to be secured in the same manner and with the same property, and shall earn interest at 12 per
cent per year from October 20, 1920.

The appellants argue in this court that the obligation of Faustino Lichauco and Luisa F. de Lichauco lacked consideration,
because what they guaranteed with this mortgage was a debt of Lichauco & Co., Inc. This contention does not find
support in law. As a mortgage is an accessory contract, its consideration is the very consideration of the principal contract,
from which it receives its life, and without which it cannot exist as an independent contract, although, as in the instant
case, it may secure an obligation incurred by another (art. 1857 of the Civil Code). That this amount of P50,000 is to earn
interest, and that 5 per cent must be paid in addition for judicial expenses and attorney’s fees, was expressly stipulated in
the contract. The trial court, however, fixed this interest at 12 per cent from September 5, 1921, which we believe is an
error. In the contract of December 20, 1922, it was stipulated that from October 20, 1920, the interest must be 12 per cent.
Undoubtedly a clerical error was committed in the writing of this date, inasmuch as then Faustino Lichauco and Luisa F.
de Lichauco had not executed the mortgage yet. The lower court held that this date must be September 5, 1921, but this
view is groundless, since in the contract of September 5, 1921, this interest was fixed at 9 per cent. This date must,
therefore, be construed to be the date of the second contract, December 20, 1922, as it cannot be presumed that the
parties ever intended to make it effective from a former date.

For the foregoing, it being understood that the defendants may pay interest at 9 per cent from September 5, 1921, and 12
per cent from December 20, 1922, the judgment appealed from is affirmed in all other respects, with out special
pronouncement as to costs. So ordered.

Johnson, Street, Malcolm, Villamor, Ostrand, and Romualdez, JJ., concur.

G.R. No. L-8321 October 14, 1913

ALEJANDRA MINA, ET AL., Plaintiffs-Appellants, vs. RUPERTA PASCUAL, ET AL., Defendants-Appellees.

N. Segundo for appellants.

Iñigo Bitanga for appellees.

ARELLANO, C.J.: chanrobles virtual law library

Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired during his lifetime, on March 12,
1874, a lot in the center of the town of Laoag, the capital of the Province of Ilocos Norte, the property having been
awarded to him through its purchase at a public auction held by the alcalde mayor of that province. The lot has a frontage
of 120 meters and a depth of 15.chanroblesvirtualawlibrary chanrobles virtual law library

Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of the said lot, embracing 14
meters of its frontage by 11 meters of its depth.chanroblesvirtualawlibrary chanrobles virtual law library

Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandro Mina, et al., were recognized
without discussion as his heirs.chanroblesvirtualawlibrary chanrobles virtual law library

Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta Pascual were recognized
likes without discussion, though it is not said how, and consequently are entitled to the said building, or rather, as Ruperta
Pascual herself stated, to only six-sevenths of one-half of it, the other half belonging, as it appears, to the plaintiffs
themselves, and the remaining one-seventh of the first one-half to the children of one of the plaintiffs, Elena de Villanueva.
The fact is that the plaintiffs and the defendants are virtually, to all appearance, the owners of the warehouse; while the
plaintiffs are undoubtedly, the owners of the part of the lot occupied by that building, as well as of the remainder
thereof.chanroblesvirtualawlibrary chanrobles virtual law library

This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the guardian of her minor children, the herein
defendants, petitioned the Curt of First Instance of Ilocos Norte for authorization to sell "the six-sevenths of the one-half of
the warehouse, of 14 by 11 meters, together with its lot." The plaintiffs - that is Alejandra Mina, et al. - opposed the petition
of Ruperta Pascual for the reason that the latter had included therein the lot occupied by the warehouse, which they
claimed was their exclusive property. All this action was taken in a special proceeding in re
guardianship.chanroblesvirtualawlibrary chanrobles virtual law library

The plaintiffs did more than oppose Pascual's petition; they requested the court, through motion, to decide the question of
the ownership of the lot before it pass upon the petition for the sale of the warehouse. But the court before determining the
matter of the ownership of the lot occupied by the warehouse, ordered the sale of this building, saying:

While the trial continues with respect to the ownership of the lot, the court orders the sale at public auction of the said
warehouse and of the lot on which it is built, with the present boundaries of the land and condition of the building, at a
price of not less than P2,890 Philippine currency . . . .

So, the warehouse, together with the lot on which it stands, was sold to Cu Joco, the other defendant in this case, for the
price mentioned.chanroblesvirtualawlibrary chanrobles virtual law library

The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the court decided it by holding that
this land belonged to the owner of the warehouse which had been built thereon thirty years
before.chanroblesvirtualawlibrary chanrobles virtual law library

The plaintiffs appealed and this court reversed the judgment of the lower court and held that the appellants were the
owners of the lot in question. 1 chanrobles virtual law library

When the judgment became final and executory, a writ of execution issued and the plaintiffs were given possession of the
lot; but soon thereafter the trial court annulled this possession for the reason that it affected Cu Joco, who had not been a
party to the suit in which that writ was served.chanroblesvirtualawlibrary chanrobles virtual law library

It was then that the plaintiffs commenced the present action for the purpose of having the sale of the said lot declared null
and void and of no force and effect.chanroblesvirtualawlibrary chanrobles virtual law library

An agreement was had ad to the facts, the ninth paragraph of which is as follows:

9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the Supreme Court which found for them
by holding that they are the owners of the lot in question, although there existed and still exists a commodatum by virtue
of which the guardianship (meaning the defendants) had and has the use, and the plaintiffs the ownership, of the property,
with no finding concerning the decree of the lower court that ordered the sale.
The obvious purport of the cause "although there existed and still exists a commodatum," etc., appears to be that it is a
part of the decision of the Supreme Court and that, while finding the plaintiffs to be the owners of the lot, we recognized in
principle the existence of a commodatum under which the defendants held the lot. Nothing could be more inexact.
Possibly, also, the meaning of that clause is that, notwithstanding the finding made by the Supreme Court that the
plaintiffs were the owners, these former and the defendants agree that there existed, and still exists, a commodatum, etc.
But such an agreement would not affect the truth of the contents of the decision of this court, and the opinions held by the
litigants in regard to this point could have no bearing whatever on the present decision.chanroblesvirtualawlibrary
chanrobles virtual law library

Nor did the decree of the lower court that ordered the sale have the least influence in our previous decision to require our
making any finding in regard thereto, for, with or without that decree, the Supreme Court had to decide the ownership of
the lot consistently with its titles and not in accordance with the judicial acts or proceedings had prior to the setting up of
the issue in respect to the ownership of the property that was the subject of the judicial decree.chanroblesvirtualawlibrary
chanrobles virtual law library

What is essentially pertinent to the case is the fact that the defendant agree that the plaintiffs have the ownership, and
they themselves only the use, of the said lot.chanroblesvirtualawlibrary chanrobles virtual law library

On this premise, the nullity of the sale of the lot is in all respects quite evident, whatsoever be the manner in which the
sale was effected, whether judicially or extrajudicially.chanroblesvirtualawlibrary chanrobles virtual law library

He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale being a transfer of the
ownership of the thing, it is evident that he who has only the mere use of the thing cannot transfer its ownership. The sale
of a thing effected by one who is not its owner is null and void. The defendants never were the owners of the lot sold. The
sale of it by them is necessarily null and void. On cannot convey to another what he has never had
himself.chanroblesvirtualawlibrary chanrobles virtual law library

The returns of the auction contain the following statements:

I, Ruperta Pascual, the guardian of the minors, etc., by virtue of the authorization conferred upon me on the 31st of July,
1909, by the Court of First Instance of Ilocos Norte, proceeded with the sale at public auction of the six-sevenths part of
the one-half of the warehouse constructed of rubble stone, etc.chanroblesvirtualawlibrary chanrobles virtual law library

Whereas I, Ruperta Pascual, the guardian of the minors, etc., sold at public auction all the land and all the rights title,
interest, and ownership in the said property to Cu Joco, who was the highest bidder, etc.chanroblesvirtualawlibrary
chanrobles virtual law library

Therefore, . . . I cede and deliver forever to the said purchaser, Cu Joco, his heirs and assigns, all the interest, ownership
and inheritance rights and others that, as the guardian of the said minors, I have and may have in the said property, etc.

The purchaser could not acquire anything more than the interest that might be held by a person to whom realty in
possession of the vendor might be sold, for at a judicial auction nothing else is disposed of. What the minor children of
Ruperta Pascual had in their possession was the ownership of the six-sevenths part of one-half of the warehouse and the
use of the lot occupied by his building. This, and nothing more, could the Chinaman Cu Joco acquire at that sale: not the
ownership of the lot; neither the other half, nor the remaining one-seventh of the said first half, of the warehouse.
Consequently, the sale made to him of this one-seventh of one-half and the entire other half of the building was null and
void, and likewise with still more reason the sale of the lot the building occupies.chanroblesvirtualawlibrary chanrobles
virtual law library

The purchaser could and should have known what it was that was offered for sale and what it was that he purchased.
There is nothing that can justify the acquisition by the purchaser of the warehouse of the ownership of the lot that this
building occupies, since the minors represented by Ruperta Pascual never were the owners of the said lot, nor were they
ever considered to be such.chanroblesvirtualawlibrary chanrobles virtual law library

The trial court, in the judgment rendered, held that there were no grounds for the requested annulment of the sale, and
that the plaintiffs were entitled to the P600 deposited with the clerk of the court as the value of the lot in question. The
defendants, Ruperta Pascual and the Chinaman Cu Joco, were absolved from the complaint, without express finding as to
costs.chanroblesvirtualawlibrary chanrobles virtual law library

The plaintiffs cannot be obliged to acquiesce in or allow the sale made and be compelled to accept the price set on the lot
by expert appraisers, not even though the plaintiffs be considered as coowner of the warehouse. It would be much indeed
that, on the ground of coownership, they should have to abide by and tolerate the sale of the said building, which point
this court does not decide as it is not a question submitted to us for decision, but, as regards the sale of the lot, it is in all
respects impossible to hold that the plaintiffs must abide by it and tolerate, it, and this conclusion is based on the fact that
they did not give their consent (art. 1261, Civil Code), and only the contracting parties who have given it are obliged to
comply (art. 1091, idem).chanroblesvirtualawlibrary chanrobles virtual law library

The sole purpose of the action in the beginning was to obtain an annulment of the sale of the lot; but subsequently the
plaintiffs, through motion, asked for an amendment by their complaint in the sense that the action should be deemed to be
one for the recovery of possession of a lot and for the annulment of its sale. The plaintiff's petition was opposed by the
defendant's attorney, but was allowed by the court; therefore the complaint seeks, after the judicial annulment of the sale
of the lot, to have the defendants sentenced immediately to deliver the same to the plaintiffs.chanroblesvirtualawlibrary
chanrobles virtual law library

Such a finding appears to be in harmony with the decision rendered by the Supreme Court in previous suit, wherein it was
held that the ownership of the lot lay in the plaintiffs, and for this reason steps were taken to give possession thereof to
the defendants; but, as the purchaser Cu Joco was not a party to that suit, the present action is strictly one for recover
against Cu Joco to compel him, once the sale has been annulled, to deliver the lot to its lawful owners, the
plaintiffs.chanroblesvirtualawlibrary chanrobles virtual law library
As respects this action for recovery, this Supreme Court finds:

1. That it is a fact admitted by the litigating parties, both in this and in the previous suit, that Andres Fontanilla, the
defendants' predecessor in interest, erected the warehouse on the lot, some thirty years ago, with the explicit consent of
his brother Francisco Fontanilla, the plaintiff's predecessor in interest.chanroblesvirtualawlibrary chanrobles virtual law
library

2. That it also appears to be an admitted fact that the plaintiffs and the defendants are the coowners of the
warehouse.chanroblesvirtualawlibrary chanrobles virtual law library

3. That it is a fact explicitly admitted in the agreement, that neither Andres Fontanilla nor his successors paid any
consideration or price whatever for the use of the lot occupied by the said building; whence it is, perhaps, that both parties
have denominated that use a commodatum.

Upon the premise of these facts, or even merely upon that of the first of them, the sentencing of the defendants to deliver
the lot to the plaintiffs does not follow as a necessary corollary of the judicial declaration of ownership made in the
previous suit, nor of that of the nullity of the sale of the lot, made in the present case.chanroblesvirtualawlibrary
chanrobles virtual law library

The defendants do not hold lawful possession of the lot in question.chanroblesvirtualawlibrary chanrobles virtual law
library

But, although both litigating parties may have agreed in their idea of the commodatum, on account of its not being, as
indeed it is not, a question of fact but of law, yet that denomination given by them to the use of the lot granted by
Francisco Fontanilla to his brother, Andres Fontanilla, is not acceptable. Contracts are not to be interpreted in conformity
with the name that the parties thereto agree to give them, but must be construed, duly considering their constitutive
elements, as they are defined and denominated by law.

By the contract of loan, one of the parties delivers to the other, either anything not perishable, in order that the latter may
use it during the certain period and return it to the former, in which case it is called commodatum . . . (art. 1740, Civil
Code).

It is, therefore, an essential feature of the commodatum that the use of the thing belonging to another shall for a certain
period. Francisco Fontanilla did not fix any definite period or time during which Andres Fontanilla could have the use of
the lot whereon the latter was to erect a stone warehouse of considerable value, and so it is that for the past thirty years of
the lot has been used by both Andres and his successors in interest. The present contention of the plaintiffs that Cu Joco,
now in possession of the lot, should pay rent for it at the rate of P5 a month, would destroy the theory of the commodatum
sustained by them, since, according to the second paragraph of the aforecited article 1740, "commodatum is essentially
gratuitous," and, if what the plaintiffs themselves aver on page 7 of their brief is to be believed, it never entered
Francisco's mind to limit the period during which his brother Andres was to have the use of the lot, because he expected
that the warehouse would eventually fall into the hands of his son, Fructuoso Fontanilla, called the adopted son of Andres,
which did not come to pass for the reason that Fructuoso died before his uncle Andres. With that expectation in view, it
appears more likely that Francisco intended to allow his brother Andres a surface right; but this right supposes the
payment of an annual rent, and Andres had the gratuitous use of the lot.chanroblesvirtualawlibrary chanrobles virtual law
library

Hence, as the facts aforestated only show that a building was erected on another's ground, the question should be
decided in accordance with the statutes that, thirty years ago, governed accessions to real estate, and which were Laws
41 and 42, title 28, of the third Partida, nearly identical with the provisions of articles 361 and 362 of the Civil Code. So,
then, pursuant to article 361, the owner of the land on which a building is erected in good faith has a right to appropriate
such edifice to himself, after payment of the indemnity prescribed in articles 453 and 454, or to oblige the builder to pay
him the value of the land. Such, and no other, is the right to which the plaintiff are entitled.chanroblesvirtualawlibrary
chanrobles virtual law library

For the foregoing reasons, it is only necessary to annul the sale of the said lot which was made by Ruperta Pascual, in
representation of her minor children, to Cu Joco, and to maintain the latter in the use of the lot until the plaintiffs shall
choose one or the other of the two rights granted them by article 361 of the Civil Code.chanroblesvirtualawlibrary
chanrobles virtual law library

The judgment appealed from is reversed and the sale of the lot in question is held to be null and void and of no force or
effect. No special finding is made as to the costs of both instances.chanroblesvirtualawlibrary chanrobles virtual law library

Torres, Johnson, Carson, Moreland and Trent, JJ., concur.

FIRST DIVISION
[G.R. No. 26085. August 12, 1927. ]
SEVERINO TOLENTINO and POTENCIANA MANIO, Plaintiffs-Appellants, v. BENITO GONZALEZ SY
CHIAM, Defendant-Appellee.
Araneta & Zaragoza for Appellants.
Eusebio Orense for Appellee.

SYLLABUS

1. CONTRACTS; "PACTO DE RETRO;" MORTGAGE. — Held, That the contract which is copied in full in the decision is a
pacto de retro and not a mortgage; that at the time of its execution and delivery the parties thereto intended to
execute a pacto de retro (a conditional sale) and not a mortgage (a loan); that the vendor became a tenant of the
purchaser and not a mortgagor.

2. ID.; ID. — It has been the uniform rule of this court, due to the severity of a contract of pacto de retro, to declare
the same to be a mortgage and not a sale whenever the interpretation of Tolentino and Manio v. Gonzalez Sy Chiam
such a contract justifies that conclusion. There must be something, however, in the language of the contract or in the
conduct of the parties which shows clearly and beyond doubt that they intended the contract to be a mortgage and
not a pacto de retro.

3. ID.; EVIDENCE TO VARY TERMS OF. — While it is a general rule that parol evidence is not admissible for the
purpose of varying the terms of a contract, yet when an issue is squarely presented, that a contract does not express
the intention of the parties, the courts will, when a proper foundation is laid therefor, hear evidence for the purpose of
ascertaining the true intention of the parties. In every case in which the court has considered a contract to be a
mortgage or a loan instead of a sale with pacto de retro, it has done so, either because the terms of such contract are
ambiguous or because the circumstances surrounding the execution or the performance of the contract were
incompatible or inconsistent with the theory that said contract was one of purchase and sale.

4. ID.; WHEN MAY BE REFORMED. — It is a well settled rule of law that courts of equity will reform a written contract
where, owing to mutual mistake, the language used therein did not fully or accurately express the agreement and
intention of the parties. Relief, however, by way of reformation will not be granted unless the proof of mutual mistake
be of the clearest and most satisfactory character.

5. ID.; RENTAL CONTRACTS; USURY. — A contract for the lease of property is not a "loan." Under the Usury Law the
defense of usury cannot be based thereon. The Usury Law in this jurisdiction prohibits a certain rate of interest on
"loans." A contract of "loan" is a very different contract from that of "rent." A "loan," as that term is used in the
statute, signifies the giving of a sum of money, goods or credit to another, with a promise to repay, but not a promise
to return the same thing. In a contract of "rent ’ the owner of the property does not lose his ownership. He simply
loses his control over the property rented during the period of the contract. In a contract of rent the relation between
the contractors is that of landlord and tenant. In a contract of loan of money, goods, chattels or credits, the relation
between the parties is that of obligor and obligee.

6. RENTS, CONTRACT OF; DEFINED. — A contract of "rent" may be defined as the compensation either in money,
provisions, chattels or labor, received by the owner of the soil or the property rented, from the occupant thereof.

7. LOAN, CONTRACT OF; DEFINED. — A contract of "loan," as that term is used in the statute, signifies the giving of a
sum of money, goods or credits to another, with a promise to repay, but not a promise to return the same thing. It
has been defined as an advancement of money, goods or credits upon a contract or stipulation to repay, not to return,
the thing loaned at some future day in accordance with the terms of the contract. The moment the contract is
completed, the money, goods or chattels given cease to be the property of the former owner and become the property
of the obligor to be used according to his own will, unless the contract itself expressly provides for a special or specific
use of the same. At all events, the money, goods or chattels, the moment the contract is executed, cease to be the
property of the former owner and become the sole property of the obligor. A contract of "loan" differs materially and
essentially from a contract of "rent."cralaw virtua1aw library

8. USURY; DEFINED. — Usury may be defined as contracting for or receiving something in excess of the amount
allowed by law for the loan or forbearance of money, goods or chattels. It is the taking of more interest for the use of
money, goods or chattels or credits than the law allows. Usury has been regarded with abhorrence from the earliest
times.

DECISION
JOHNSON, J.:

PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL

The principal questions presented by this appeal are: chanrob1es virtual 1aw library

(a) Is the contract in question a pacto de retro or a mortgage?

(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and agrees to pay a certain amount
per month as rent, may such rent render such a contract usurious when the amount paid as rent, computed upon the
purchase price, amounts to a higher rate of interest upon said amount than that allowed by law?
(c) May the contract in the present case be modified by parol evidence?

ANTECEDENT FACTS

Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon Rice Mills, Inc., a piece or
parcel of land with the camarin located thereon, situated in the municipality of Tarlac of the Province of Tarlac for the
price of P25,000, promising to pay therefor in three installments. The first installment of P2,000 was due on or before
the 2d day of May, 1921; the second installment of P8,000 was due on or before the 31st day of May, 1921; the
balance of P15,000 at 12 per cent interest was due and payable on or about the 30th day of November, 1922. One of
the conditions of that contract of purchase was that on failure of the purchasers (plaintiffs and appellants) to pay the
balance of said purchase price or any of the installments on the date agreed upon, the property bought would revert
to the original owner.

The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far as the record shows upon
the due dates. The balance of P15,000 due on said contract of purchase was paid on or about the 1st day of
December, 1922, in the manner which will be explained below. On the date when the balance of P15,000 with interest
was paid, the vendor of said property had issued to the purchasers transfer certificate of title to said property, No.
528. Said transfer certificate of title (No. 528) was transfer certificate of title from No. 40, which shows that said land
was originally registered in the name of the vendor on the 7th day of November, 1913.

PRESENT FACTS

On the 7th day of November, 1922, the representative of the vendor of the property in question wrote a letter to the
appellant Potenciana Manio (Exhibit A, p. 50), notifying the latter that if the balance of said indebtedness was not
paid, an action would be brought for the purpose of recovering the property, together with damages for non
compliance with the condition of the contract of purchase. The pertinent parts of said letter read as follows: jgc:chanrobles.com.ph

"Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente, procederemos judicialmente contra Vd.
para reclamar la devolucion deI camarin y los danos y perjuicios ocasionados a la compania por su incumplimiento al
contrato.

"Somos de Vd. atentos y S. S.

"SMITH, BELL & CO., LTD.
"BY (Sgd.) F. I. HIGHAM
"Treasurer.
"General Managers
"LUZON RICE MILLS INC." cralaw virtua1aw library

According to Exhibits B and D, which represent the account rendered by the vendor, there was due and payable upon
said contract of purchase on the 30th day of November, 1922, the sum P16,965.09. Upon receiving the letter of the
vendor of said property of November 7, 1922, the purchasers, the appellants herein, realizing that they would be
unable to pay the balance due, began to make an effort to borrow money with which to pay the balance of their
indebtedness on the purchase price of the property involved. Finally an application was made to the defendant for a
loan for the purpose of satisfying their indebtedness to the vendor of said property. After some negotiations the
defendant agreed to loan the plaintiffs the sum of P17,500 upon condition that the plaintiffs execute and deliver to
him a pacto de retro of said property.

In accordance with that agreement the defendant paid to the plaintiffs by means of a check the sum of P16,965.09.
The defendant, in addition to said amount paid by check, delivered to the plaintiffs the sum of P354.91 together with
the sum of P180 which the plaintiffs paid to the attorneys for drafting said contract of pacto de retro, making a total
paid by the defendant to the plaintiffs and for the plaintiffs of P17,500 upon the execution and delivery of said
contract. Said contract was dated the 28th day of November, 1922, and is in the words and figures following: jgc:chanrobles.com.ph

"Sepan todos por la presente: jgc:chanrobles.com.ph

"Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores de edad, residentes en el
Municipio de Calumpit, Provincia de Bulacan, propietarios y transeuntes en esta Ciudad de Manila, de una parte, y de
otra, Benito Gonzalez Sy Chiam, mayor de edad, casado con Maria Santiago, comerciante y vecinos de esta Ciudad de
Manila.

"MANIFESTAMOS Y HACEMOS CONSTAR: jgc:chanrobles.com.ph

"Primero. Que nosotros, Severino Tolentino y Potenciana Manio, por y en consideracion a la cantidad de diecisiete mil
quinientos pesos (P17,500) moneda filipina, que en este acto hemos recibido a nuestra entera satisfaccion de Don
Benito Gonzalez Sy Chiam, cedemos, vendemos y traspasamos a favor de dicho Don Benito Gonzalez Sy Chiam, sus
herederos y causahabientes, una finca que, segun el Certificado de Transferencia de Titulo No. 40 expedido por el
Registrador de Titulos de la Provincia de Tarlac a favor de ’Luzon Rice Mills Company Limited’ que al incorporarse se
denomino y se denomina ’Luzon Rice Mills Inc.,’ y que esta corporacion nos ha transferido en venta absoluta, se
describe como sigue: jgc:chanrobles.com.ph

"Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el Municipio de Tarlac. Linda por el O. y N.
con propiedad de Manuel Urquico; por el E. con propiedad de la Manila Railroad Co.; y por el S. con un camino.
Partiendo de un punto marcado 1 en el plano, cuyo punto se halla al N. 41 gds. 17’ E. 859.42 m. del mojon de
localizacion No. 2 de la Oficina de Terrenos en Tarlac; y desde dicho punto 1 N. 81 gds. 31’ O., 77 m. al punto 2;
desde.este punto N. 4 gds. 22’ E.; 54.70 m. al punto 3; desde este punto S. 86 gds. 17’ E.; 69.25 m. al punto 4;
desde este punto S. 2 gds. 42’ E., 61.48 m. al punto de partida; midiendo una extension superficial de cuatro mil
doscientos diez y seis metros cuadrados (4,216) mas o menos. Todos los puntos nombrados se hallan marcados en el
plano y sobre el terreno los puntos 1 y 2 estan determinados por mojones de P. L. S. de 20 x 20 x 70 centimetros y
los puntos 3 y 4 por mojones del P. L. S. B. L.; la orientacion seguida es la verdadera, siendo la declinacion magnetica
de 0 gds. 45’ E. y la fecha de la medicion, 1.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-20240      December 31, 1965
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
JOSE GRIJALDO, defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.
Isabelo P. Samson for defendant-appellant.

ZALDIVAR, J.:

In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank of Taiwan, Ltd. in
Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per annum, compounded quarterly. These
loans are evidenced by five promissory notes executed by the appellant in favor of the Bank of Taiwan, Ltd., as
follows: On June 1, 1943, P600.00; on June 3, 1943, P159.11; on June 18, 1943, P22.86; on August 9,
1943,P300.00; on August 13, 1943, P200.00, all notes without due dates, but because the loans were due one year
after they were incurred. To secure the payment of the loans the appellant executed a chattel mortgage on the
standing crops on his land, Lot No. 1494 known as Hacienda Campugas in Hinigiran, Negros Occidental.

By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided for in the Trading with
the Enemy Act, as amended, the assets in the Philippines of the Bank of Taiwan, Ltd. were vested in the
Government of the United States. Pursuant to the Philippine Property Act of 1946 of the United States, these assets,
including the loans in question, were subsequently transferred to the Republic of the Philippines by the Government
of the United States under Transfer Agreement dated July 20, 1954. These assets were among the properties that
were placed under the administration of the Board of Liquidators created under Executive Order No. 372, dated
November 24, 1950, and in accordance with Republic Acts Nos. 8 and 477 and other pertinent laws.

On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman of the Board of
Liquidators, made a written extrajudicial demand upon the appellant for the payment of the account in question. The
record shows that the appellant had actually received the written demand for payment, but he failed to pay.

The aggregate amount due as principal of the five loans in question, computed under the Ballantyne scale of values
as of the time that the loans were incurred in 1943, was P889.64; and the interest due thereon at the rate of 6% per
annum compounded quarterly, computed as of December 31, 1959 was P2,377.23.

On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of Hinigaran, Negros
Occidental, to collect from the appellant the unpaid account in question. The Justice of the Peace Of Hinigaran, after
hearing, dismissed the case on the ground that the action had prescribed. The appellee appealed to the Court of
First Instance of Negros Occidental and on March 26, 1962 the court a quo rendered a decision ordering the
appellant to pay the appellee the sum of P2,377.23 as of December 31, 1959, plus interest at the rate of 6% per
annum compounded quarterly from the date of the filing of the complaint until full payment was made. The appellant
was also ordered to pay the sum equivalent to 10% of the amount due as attorney's fees and costs.

The appellant appealed directly to this Court. During the pendency of this appeal the appellant Jose Grijaldo died.
Upon motion by the Solicitor General this Court, in a resolution of May 13, 1963, required Manuel Lagtapon, Jacinto
Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are the legal heirs of Jose Grijaldo to appear and be
substituted as appellants in accordance with Section 17 of Rule 3 of the Rules of Court.

In the present appeal the appellant contends: (1) that the appellee has no cause of action against the appellant; (2)
that if the appellee has a cause of action at all, that action had prescribed; and (3) that the lower court erred in
ordering the appellant to pay the amount of P2,377.23.

In discussing the first point of contention, the appellant maintains that the appellee has no privity of contract with the
appellant. It is claimed that the transaction between the Taiwan Bank, Ltd. and the appellant, so that the appellee,
Republic of the Philippines, could not legally bring action against the appellant for the enforcement of the obligation
involved in said transaction. This contention has no merit. It is true that the Bank of Taiwan, Ltd. was the original
creditor and the transaction between the appellant and the Bank of Taiwan was a private contract of loan. However,
pursuant to the Trading with the Enemy Act, as amended, and Executive Order No. 9095 of the United States; and
under Vesting Order No. P-4, dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity which
was declared to be under the jurisdiction of the enemy country (Japan), were vested in the United States
Government and the Republic of the Philippines, the assets of the Bank of Taiwan, Ltd. were transferred to and
vested in the Republic of the Philippines. The successive transfer of the rights over the loans in question from the
Bank of Taiwan, Ltd. to the United States Government, and from the United States Government to the government
of the Republic of the Philippines, made the Republic of the Philippines the successor of the rights, title and interest
in said loans, thereby creating a privity of contract between the appellee and the appellant. In defining the word
"privy" this Court, in a case, said:

The word "privy" denotes the idea of succession ... hence an assignee of a credit, and one subrogated to it,
etc. will be privies; in short, he who by succession is placed in the position of one of those who contracted
the judicial relation and executed the private document and appears to be substituting him in the personal
rights and obligation is a privy (Alpurto vs. Perez, 38 Phil. 785, 790).

The United States of America acting as a belligerent sovereign power seized the assets of the Bank of Taiwan, Ltd.
which belonged to an enemy country. The confiscation of the assets of the Bank of Taiwan, Ltd. being an
involuntary act of war, and sanctioned by international law, the United States succeeded to the rights and interests
of said Bank of Taiwan, Ltd. over the assets of said bank. As successor in interest in, and transferee of, the property
rights of the United States of America over the loans in question, the Republic of the Philippines had thereby
become a privy to the original contracts of loan between the Bank of Taiwan, Ltd. and the appellant. It follows,
therefore, that the Republic of the Philippines has a legal right to bring the present action against the appellant Jose
Grijaldo.

The appellant likewise maintains, in support of his contention that the appellee has no cause of action, that because
the loans were secured by a chattel mortgage on the standing crops on a land owned by him and these crops were
lost or destroyed through enemy action his obligation to pay the loans was thereby extinguished. This argument is
untenable. The terms of the promissory notes and the chattel mortgage that the appellant executed in favor of the
Bank of Taiwan, Ltd. do not support the claim of appellant. The obligation of the appellant under the five promissory
notes was not to deliver a determinate thing namely, the crops to be harvested from his land, or the value of the
crops that would be harvested from his land. Rather, his obligation was to pay a generic thing — the amount of
money representing the total sum of the five loans, with interest. The transaction between the appellant and the
Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money. "By a contract of (simple) loan,
one of the parties delivers to another ... money or other consumable thing upon the condition that the same amount
of the same kind and quality shall be paid." (Article 1933, Civil Code) The obligation of the appellant under the five
promissory notes evidencing the loans in questions is to pay the value thereof; that is, to deliver a sum of money —
a clear case of an obligation to deliver, a generic thing. Article 1263 of the Civil Code provides:

In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not
extinguish the obligation.
The chattel mortgage on the crops growing on appellant's land simply stood as a security for the fulfillment of
appellant's obligation covered by the five promissory notes, and the loss of the crops did not extinguish his
obligation to pay, because the account could still be paid from other sources aside from the mortgaged crops.

In his second point of contention, the appellant maintains that the action of the appellee had prescribed. The
appellant points out that the loans became due on June 1, 1944; and when the complaint was filed on January
17,1961 a period of more than 16 years had already elapsed — far beyond the period of ten years when an action
based on a written contract should be brought to court.

This contention of the appellant has no merit. Firstly, it should be considered that the complaint in the present case
was brought by the Republic of the Philippines not as a nominal party but in the exercise of its sovereign functions,
to protect the interests of the State over a public property. Under paragraph 4 of Article 1108 of the Civil Code
prescription, both acquisitive and extinctive, does not run against the State. This Court has held that the statute of
limitations does not run against the right of action of the Government of the Philippines (Government of the
Philippine Islands vs. Monte de Piedad, etc., 35 Phil. 738-751).Secondly, the running of the period of prescription of
the action to collect the loan from the appellant was interrupted by the moratorium laws (Executive Orders No. 25,
dated November 18, 1944; Executive Order No. 32. dated March 10, 1945; and Republic Act No. 342, approved on
July 26, 1948). The loan in question, as evidenced by the five promissory notes, were incurred in the year 1943, or
during the period of Japanese occupation of the Philippines. This case is squarely covered by Executive Order No.
25, which became effective on November 18, 1944, providing for the suspension of payments of debts incurred after
December 31, 1941. The period of prescription was, therefore, suspended beginning November 18, 1944. This
Court, in the case of Rutter vs. Esteban (L-3708, May 18, 1953, 93 Phil. 68), declared on May 18, 1953 that the
Moratorium Laws, R.A. No. 342 and Executive Orders Nos. 25 and 32, are unconstitutional; but in that case this
Court ruled that the moratorium laws had suspended the prescriptive period until May 18, 1953. This ruling was
categorically reiterated in the decision in the case of Manila Motors vs. Flores, L-9396, August 16, 1956. It follows,
therefore, that the prescriptive period in the case now before US was suspended from November 18,1944, when
Executive Orders Nos. 25 and 32 were declared unconstitutional by this Court. Computed accordingly, the
prescriptive period was suspended for 8 years and 6 months. By the appellant's own admission, the cause of action
on the five promissory notes in question arose on June 1, 1944. The complaint in the present case was filed on
January 17, 1961, or after a period of 16 years, 6 months and 16 days when the cause of action arose. If the
prescriptive period was not interrupted by the moratorium laws, the action would have prescribed already; but, as
We have stated, the prescriptive period was suspended by the moratorium laws for a period of 8 years and 6
months. If we deduct the period of suspension (8 years and 6 months) from the period that elapsed from the time
the cause of action arose to the time when the complaint was filed (16 years, 6 months and 16 days) there remains
a period of 8 years and 16 days. In other words, the prescriptive period ran for only 8 years and 16 days. There still
remained a period of one year, 11 months and 14 days of the prescriptive period when the complaint was filed.

In his third point of contention the appellant maintains that the lower court erred in ordering him to pay the amount of
P2,377.23. It is claimed by the appellant that it was error on the part of the lower court to apply the Ballantyne Scale
of values in evaluating the Japanese war notes as of June 1943 when the loans were incurred, because what
should be done is to evaluate the loans on the basis of the Ballantyne Scale as of the time the loans became due,
and that was in June 1944. This contention of the appellant is also without merit.

The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of December 31, 1959, plus
interest rate of 6% per annum compounded quarterly from the date of the filing of the complaint. The sum total of
the five loans obtained by the appellant from the Bank of Taiwan, Ltd. was P1,281.97 in Japanese war notes.
Computed under the Ballantyne Scale of values as of June 1943, this sum of P1,281.97 in Japanese war notes in
June 1943 is equivalent to P889.64 in genuine Philippine currency which was considered the aggregate amount due
as principal of the five loans, and the amount of P2,377.23 as of December 31, 1959 was arrived at after computing
the interest on the principal sum of P889.64 compounded quarterly from the time the obligations were incurred in
1943.

It is the stand of the appellee that the Ballantyne scale of values should be applied as of the time the obligation was
incurred, and that was in June 1943. This stand of the appellee was upheld by the lower court; and the decision of
the lower court is supported by the ruling of this Court in the case of Hilado vs. De la Costa (G.R. No. L-150, April
30, 1949; 46 O.G. 5472), which states:

... Contracts stipulating for payments presumably in Japanese war notes may be enforced in our Courts after
the liberation to the extent of the just obligation of the contracting parties and, as said notes have become
worthless, in order that justice may be done and the party entitled to be paid can recover their actual value in
Philippine Currency, what the debtor or defendant bank should return or pay is the value of the Japanese
military notes in relation to the peso in Philippine Currency obtaining on the date when and at the place
where the obligation was incurred unless the parties had agreed otherwise. ... . (italics supplied)

IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs against the appellant. Inasmuch
as the appellant Jose Grijaldo died during the pendency of this appeal, his estate must answer in the execution of
the judgment in the present case.

Bengzon, C.J., Concepcion, Barrera, Regala, Bautista Angelo, Reyes, J.B.L., Makalintal and Bengzon, J.P.,
JJ., concur.