Credit Transactions

Atty. Niedo DISCOUNT LOAN

2nd Semester, AY 2018-2019
Interest is deducted in advance Interest is taken at the expiration of credit
Chapter 1: LOAN
On double-name paper On single-name paper
Loan distinguished from discounting a paper
People v. Concepcion
The purpose of the Legislature in enacting section 35 of Act No. 2747 was to erect a wall of
FACTS: safety against temptation for a director of the PNB. A loan to a partnership of which the wife of
Concepcion, the president of PNB, authorized the extension of credit to a co-partnership where a director is a member falls within the prohibition.
his wife was a partner. This special authorization was in view of the memorandum order
limiting the discretional power of the local manager to grant loans and discount negotiable BANKS AND BANKING; "CREDIT" AND "LOAN," DEFINED AND
documents. Credit was granted and 6 demand notes were the only security required. The notes DISTINGUISHED.—The "credit" of an individual means his ability to borrow money by
and the interest were eventually taken up. virtue of the confidence or trust reposed by a lender that he will pay what he may promise. A
"loan" means the delivery by one party and the receipt by the other party of a given sum of
money, upon an agreement, express or implied, to repay the sum loaned, with or without
As a member of the BOD, Concepcion was held guilty with violation of Act 2747 prohibiting interest. The concession of a "credit" necessarily involves the granting of "loans" up to the
the granting of loans, directly or indirectly, to any member of the BOD nor to the agents of limit of the amount fixed in the "credit."
banks.
"LOAN" AND "DISCOUNT" DISTINGUISHED.—To discount a paper is a mode of
The defendant avers the following: loaning money, with these distinctions: (1) In a discount, interest is deducted in advance, while
1. The documents of record do not prove that authority to make a loan was given, but in a loan, interest is taken at the expiration of a credit; (2) a discount is always on double-name
only show concession of credit paper; a loan is generally on singlename paper.
2. The Insular Auditor opined that the prohibition referred to loans only and not on
discounts and the defendant relied on this. SECTION 35 OF ACT No. 2747; PROHIBITION AGAINST INDIRECT LOANS.—The
purpose of the Legislature in enacting section 35 of Act No. 2747 was to erect a wall of safety
The Insular Auditor ruled that the demand notes were not discount paper because interest was against temptation for a director of the Philippine National Bank. The prohibition against
not deducted from the face of the notes and they were single-name paper and not double-name indirect loans is a recognition of the familiar maxim that no man may serve two masters—that
paper. where personal interest clashes with fidelity to duty the latter almost always suffers.

ISSUE/S: A loan to a partnership of which the wife of a director is a member falls within the prohibition
Whether the granting of credit was a loan - YES in section 35 of Act No. 2747 against indirect loans.

HELD:
The judgment is affirmed.

RATIO DECIDENDI:
Credit - ability to borrow money by virtue of the confidence or trust reposed by a lender that he
will pay what he may promise.

Loan - delivery by one party and the receipt by the other party of a given sum of money, upon
an agreement, express or implied, to repay the sum loaned, with or without interest.

The concession of a "credit" necessarily involves the granting of "loans" up to the limit of the
amount fixed in the "credit."

Binding effect of accepted promise to lend
Saura Import and Export Co. v. DBP
FACTS:
A complaint was filed to assail the judgment requiring DBP to pay actual and consequential
damages to Saura for the non-disbursement of the loan proceeds.
Saura applied for a loan from DBP premised on several conditions. When the negotiations on
the conditions came to a standstill, Saura requested DBP to cancel the mortgage which was in
view of the registration of a mortgage contract over the same property in favor of Prudential
Bank. The deed of cancellation was executed by DBP and delivered to Saura himself. After
almost 9 years, Saura commenced the present suit for damages alleging failure of DBP to
comply with its obligation to release the proceeds of the loan, thereby preventing him of
completing his contractual commitments.
ISSUE/S:
Whether there was a perfected contract of loan – YES
HELD:
The complaint is dismissed.
RATIO DECIDENDI:
Where an application for a loan of money was approved by resolution of the defendant
corporation and the corresponding mortgage was executed and registered, there arises a
perfected-consensual contract of loan. There was offer and acceptance in this case but falls
short of resolving the claim that defendant failed to fulfill its obligation and that the plaintiff is
entitled to recover damages.
Where after approval of his loan, the borrower, instead of insisting for its release, asked that
the mortgage given as security be cancelled and the creditor acceded thereto, the action taken
by both parties was in the nature of mutual desistance 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. The
subsequent conduct of Saura confirmed the desistance where he did not protest any alleged
breach of contract.
Obligations and Contracts; When contract of simple loan perfected.—Where an application
for a loan of money was approved by resolution of the defendant corporation and the
corresponding mortgage was executed and registered, there arises a perfected-consensual
contract of loan.
Extinguishment of obligations by mutual desistance.—Where after approval of his loan, the
borrower, instead of insisting for its release, asked that the mortgage given as security be
cancelled and the creditor acceded thereto, the action taken by both parties was in the nature of
mutual desistance—what Manresa terms “mutuo disenso”—which is a mode of extinguishing
obligations. It is a concept that derives from, the principle that since mutual agreement can
create a contract, mutual disagreement by the parties can cause its extinguishment.
BPI Investment Corporation v. CA
FACTS:
A petition was filed to assail the decision of CA holding that the private respondents were not
in default and the extrajudicial foreclosure by BPIIC was premature.
The petitioner avers the following:
1. A contract of loan is a consensual contract and a loan contract is perfected at the
time the contract of mortgage is executed (March 31, 1981), hence, the amortization
and interests on the loan should be computed from said date.
2. While the documents showed that the loan was released only on August 1982, the
loan was actually released on March 31, 1981, when BPIIC issued a cancellation of
the mortgage on Roa’s loan.
3. The delay in the release of the loan was attributable to ALS as they required to
reduce Roa’s loan, which they were only able to do so in August 1982.
The private respondent asserts the following:
1. A simple loan is perfected upon the delivery of the object of the contract. In this
case, even though the loan contract was signed on March 1981, it was perfected
only on September 1982 when the full loan was released to private respondents
2. Even assuming that the loan was perfected on 1981, there was no delay since a
perfected loan agreement is a reciprocal obligation where the obligation of each
party is the consideration of the other party. They did not incur in delay when they
did not commence paying the monthly amortization as it was only in 192 when
petitioner complied with its obligation under the contract.
ISSUE/S:
Whether a contract of loan is a consensual contract – NO
HELD:
The CA decision is affirmed with modification as to the award of damages.
RATIO DECIDENDI:
A loan contract is not a consensual contract but a real contract. It is perfected only upon the
delivery of the object of the contract. It is an accepted promise to deliver something by way of
simple loan.
A perfected consensual contract can give rise to an action for damages. However, said contract
does not constitute the real contract of loan which requires the delivery of the object of the
contract for its perfection and which gives rise to obligations only on the part of the borrower.
A contract of loan involves a reciprocal obligation, wherein the obligation or promise of each
party is the consideration for that of the other; It is a basic principle in reciprocal obligations
that neither party incurs in delay, if the other does not comply or is not ready to comply in a obligation under the loan contract. Therefore, in computing the amount due as of the date when
proper manner with what is incumbent upon him. In the present case, the loan contract between BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13,
BPI, on the one hand, and ALS and Litonjua, on the other, was perfected only on September 1982 and not May 1, 1981.
13, 1982, the date of the second release of the loan. Following the intentions of the parties on
the commencement of the monthly amortization, as found by the Court of Appeals, private Bonnevie v. CA
respondents’ obligation to pay commenced only on October 13, 1982, a month after the
perfection of the contract. FACTS:
Bonnevie filed for the annulment of the Deed of Mortgage executed in favor of PBCOM by
BPIIC was negligent in relying merely on the entries found in the deed of mortgage, without spouses Lozano and the extrajudicial foreclosure.
checking and correspondingly adjusting its records on the amount actually released to private
respondents and the date when it was released. Such negligence resulted in damage to private Spouses Lozano are the owners of the property which they mortgaged to secure the payment of
respondents, for which an award of nominal damages should be given in recognition of their the loan they were about to obtain from PBCOM. They then executed a deed of sale with
rights which were violated by BPIIC. assumption of mortgage with Bonnevie in favor of PBCOM while the loan proceeds was not
yet received by them but Lim signed the promissory note for that. Bonnevie then made
A loan contract is not a consensual contract but a real contract, perfected only upon the payments to PBCOM and assigned his rights to his brother. Subsequently, PBCOM foreclosed
delivery of the object of the contract.—We agree with private respondents. A loan contract is the mortgage.
not a consensual contract but a real contract. It is perfected only upon the delivery of the object
of the contract. Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this
Court as a perfected consensual contract falls under the first clause of Article 1934, Civil Code. It was alleged by the petitioner that:
It is an accepted promise to deliver something by way of simple loan. 1. The Deed of Mortgage lacks consideration as the loan proceeds have not yet been
received
While a perfected loan contract can give rise to an action for damages, said contract does 2. The mortgage was executed by one who was not the owner of the mortgaged
not constitute the real contract of loan which requires the delivery of the object of the property.
contract for its perfection and which gives rise to obligations only on the part of the 3. The property was foreclosed not in compliance with the conditions imposed.
borrower.—In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44
SCRA 445, petitioner applied for a loan of P500,000 with respondent bank. The latter On the other hand, the Bank raised the following:
approved the application through a board resolution. Thereafter, the corresponding mortgage 1. The defendant has not given its consent on the sale of the mortgaged property to the
was executed and registered. However, because of acts attributable to petitioner, the loan was plaintiff
not released. Later, petitioner instituted an action for damages. We recognized in could have 2. The law on contracts requires the bank’s consent before Lozano can be released
made the bank liable for not releasing the loan. However, since the fault was attributable to from his agreement with the bank and before it may be substituted
petitioner therein, the court did not award it damages. A perfected consensual contract, as 3. The property remained in the name of Lozano
shown above, can give rise to an action for damages. However, said contract does not 4. The mortgage was without consideration as the signing and delivery of the
constitute the real contract of loan which requires the delivery of the object of the contract for promissory note and the disbursement of the proceeds are mere implementation of
its perfection and which gives rise to obligations only on the part of the borrower. this case, a the basic consensual contract of loan.
perfected consensual contract which under normal circumstances.
ISSUE/S:
A contract of loan involves a reciprocal obligation, wherein the obligation or promise of
Whether the foreclosure on the mortgage is validly executed – YES
each party is the consideration for that of the other; It is a basic principle in reciprocal
obligations that neither party incurs in delay, if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him.—We also agree with private HELD:
respondents that a contract of loan involves a reciprocal obligation, wherein the obligation or The decision of CA is affirmed.
promise of each party is the consideration for that of the other. As averred by private
respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration that RATIO DECIDENDI:
ALS and Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month The mortgage deed was executed for and on condition of the loan granted to the Lozano
after the supposed release of the loan. It is a basic principle in reciprocal obligations that spouses. The fact that the latter did not collect from the respondent Bank the consideration of
neither party incurs in delay, if the other does not comply or is not ready to comply in a proper the mortgage on the date it was executed is immaterial. A contract of loan being a consensual
manner with what is incumbent upon him. Only when a party has performed his part of the contract, the herein contract of loan was perfected at the same time the contract of mortgage
contract can he demand that the other party also fulfills his own obligation and if the latter was executed. The promissory note executed on December 12, 1966 is only an evidence of
fails, default sets in. Consequently, petitioner could only demand for the payment of the indebtedness and does not indicate lack of consideration of the mortgage at the time of its
monthly amortization after September 13, 1982 for it was only then when it complied with its execution.
The argument that the mortgage is null and void due to the subsequent renewals of the original
loan, using as security the property which was already sold to Bonnevie failed to consider that
the disposition of the mortgaged property without written consent is prohibited and the vendee
shall assume the mortgage in terms and conditions it is constituted.
A mortgage contract does not become invalid by mere failure of debtor to get the mortgage
consideration on the date the mortgage was executed. A loan is a consensual contract.—This
contention is patently devoid of merit. From the recitals of the mortgage deed itself, it is
clearly seen that the mortgage deed was executed for and on condition of the loan granted to
the Lozano spouses. The fact that the latter did not collect from the respondent Bank the
consideration of the mortgage on the date it was executed is immaterial. A contract of loan
being a consensual contract, the herein contract of loan was perfected at the sametime the
contract of mortgage was executed. The promissory note executed on December 12, 1966 is
only an evidence of indebtedness and does not indicate lack of consideration of the mortgage at
the time of its execution.
A mortgage is not rendered null and void by the use thereof as security in the renewal of the
original loan after the property mortgaged had already been sold to another without the sale
being registered.—This argument failed to consider the provision of the contract of mortgage
which prohibits the sale, disposition of, mortgage and encumbrance of the mortgaged
properties, without the written consent of the mortgagee, as well as the additional proviso that
if in spite of said stipulation, the mortgaged property is sold, the vendee shall assume the
mortgage in the terms and conditions under which it is constituted. These provisions are
expressly made part and parcel of the Deed of Sale with Assumption of Mortgage.
Petitioners admit that they did not secure the consent of respondent Bank to the sale with
assumption of mortgage. Coupled with the fact that the sale/assignment was not registered so
that the title remained in the name of the Lozano spouses, insofar as respondent Bank was
concerned, the Lozano spouses could rightfully and validly mortgage the property. Respondent
Bank had every right to rely on the certificate of title. It was not bound to go behind the same
to look for flaws in the mortgagor’s title, the doctrine of innocent purchaser for value being
applicable to an innocent mortgagee for value. (Roxas vs. Dinglasan, 28 SCRA 430; Mallorca
vs. De Ocampo, 32 SCRA 48). Another argument for the respondent Bank is that a mortgage
follows the property whoever the possessor may be and subjects the fulfillment of the
obligation for whose security it was constituted. Finally, it can also be said that petitioners
voluntarily assumed the mortgage when they entered into the Deed of Sale with Assumption of
Mortgage. They are, therefore, estopped from impugning its validity whether on the original
loan or renewals thereof.
Creditor has no duty to notify buyer of mortgaged estate of the foreclosure thereof where
creditor not notified of said sale.—The lack of notice of the foreclosure sale on petitioners is a
flimsy ground. Respondent Bank not being a party to the Deed of Sale with Assumption of
Mortgage, it can validly claim that it was not aware of the same and hence, it may not be
obliged to notify petitioners. Secondly, petitioner Honesto Bonnevie was not entitled to any
notice because as of May 14, 1968, he had transferred and assigned all his rights and interests
over the property in favor of intervenor Raoul Bonnevie and respondent Bank was not likewise
informed of the same. For the same reason, Raoul Bonnevie is not entitled to notice. Most
importantly, Act No. 3135 does not require personal notice on the mortgagor.
Central Bank of the Philippines v. CA
FACTS:
The bank approved the loan application of Tolentino for the amount of P80,000 and executed a
real estate mortgage over a 100-hectare land. However, a mere P17,000 was partially released
and advance interest for the whole amount was deducted. After being informed that there was
no fund available yet, the pre-deducted interest was refunded to Tolentino.
The Monetary Board, after finding that the bank was suffering liquidity problems issued a
resolution prohibiting it from making new loans and investments.
In view of the nonpayment of the P17,000 and interest, the bank filed an extra-judicial
foreclosure of the real estate mortgage covering the land. Tolentino then filed a petition for
specific performance on the delivery of the balance of the loan and rescission of the real estate
mortgage.
ISSUE/S:
Whether the action for specific performance shall prosper – NO
Whether Tolentino is liable to pay the P17,000 covered by the promissory note – YES
Whether the real estate mortgage may be foreclosed – NOT WHOLLY
HELD:
Tolentino is ordered to pay P17,000 plus interest
If he fails to pay, his real estate mortgage covering 21.25 hectares shall be foreclosed
The real estate mortgage covering the remaining area is declared unenforceable and released to
Tolentino.
RATIO DECIDENDI:
When Island Savings Bank and Tolentino entered into an P80,000.00 loan agreement, they
undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each
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. the Bank's delay in furnishing the entire loan
started when the Monetary Board of the Central Bank issued Resolution No. 967, which
prohibited Island Savings Bank from doing further business. However, this cannot interrupt the
default of Island Savings Bank in releasing the P63,000 balance as it is not a new loan but a
loan agreement previously contracted. The mere pecuniary inability to fulfill an engagement
does not discharge the obligation of the contract, nor does it constitute any defense to a decree
of specific performance.
The fact that Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be
taken as a waiver of his right to collect the P63,000.00 balance. The receipt by Tolentino of the
pre-deducted interest was an exercise of his right to it, which right exist independently of his
right to demand the completion of the P80,000.00 loan.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned.
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 loan, the
real estate mortgage of Tolentino became unenforceable to such extent. P63,000.00 is 78.75%
of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the
extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a
security for the P17,000.00 debt 21.25 hectares is more than sufficient to secure a P17,000.00
debt.
The rule of indivisibility of mortgage is inapplicable to the case at bar since it presupposes
several heirs of the debtor or creditor.
Banks; Obligations; Loans; Where a bank approved a loan for P80,000.00 but was able to
deliver only P1 7,000.00, it is in default for P63,000.00 to the borrower.—When Island
Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April
28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA
46 [1981]; Vda. de Quirino vs. Pelarca, 29 SCRA 1 [1969]); 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 (Art. 1169 of the Civil Code).
The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island
Savings Bank to furnish the ?80,000.00 loan. When Sulpicio M. Tolentino executed a real
estate mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan.
From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued.
Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a
period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967
on June 14, 1968, which prohibited Island Savings Bank from doing further business. Such
prohibition made it legally impossible for Island Savings Bank to furnish the P63,000.00
balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent banks
for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect
on June 15, 1948, the validity of which is not in question.
The fact that the creditor is insolvent or was stopped by the Central Bank from granting
further loans is no defense to its fulfillment to extend the loan applied for and approved by it
to the full amount.—The Monetary Board Resolution No. 1049 issued on August 13, 1965
cannot interrupt the default of Island Savings Bank in complying with its obligation of
releasing the P63,000.00 balance because said resolution merely prohibited the Bank from
making new loans and investments, and nowhere did it prohibit Island Savings Bank from
releasing the balance of loan agreements previously contracted. Besides, the mere pecuniary
inability to fulfill an engagement does not discharge the obligation of the contract, nor does it
constitute any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and
Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an excuse
for the non-fulfillment of an obligation but instead it is taken as a breach of the contract by him
(Vol. 17A, 1974 ed., CJS p. 650).
Acceptance of refund of excess pre-deducted interest for a supposed loan of P80,000.00 does
not constitute a waiver of right to collect the P63,000.00 unreleased balance of the
P80,000.00 loans. —The fact that Sulpicio M. Tolentino demanded and accepted the refund of
the pre-deducted interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a
6-month period cannot be taken as a waiver of his right to collect the P63,000.00 balance. The
act of Island Savings Bank, in asking the advance interest for 6 months on the supposed
P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00 loan
was released. A person cannot be legally charged interest for a nonexisting debt. Thus, the
receipt by Sulpicio M. Tolentino of the pre-deducted interest was an exercise of his right to it,
which right exist independently of his right to demand the completion of the P80,000.00 loan.
The exercise of one right does not affect, much less neutralize, the exercise of the other.
The bank must not rely on representations by its borrowers of the value of their collaterals.
The bank shall bear the risk in case of over-valuation.—The mere reliance by bank officials
and employees on their customer's representation regarding the loan collateral being offered as
loan security is a patent non-performance of this responsibility. If ever, bank officials and
employees totally rely on the representation of their customers as to the valuation of the loan
collateral, the bank shall bear the risk in case the collateral turn out to be over-valued. The
representation made by the customer is immaterial to the bank's responsibility to conduct its
own investigation. Furthermore, the lower court, on objections of Sulpicio M. Tolentino, had
enjoined petitioners from presenting proof on the alleged over-valuation because of their
failure to raise the same in their pleadings (pp. 198-199, t.s.n., Sept. 15, 1971). The lower
court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that
"defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed
waived." Petitioners, thus, cannot raise the same issue before the Supreme Court.
Due to CB prohibition, release of the entire loan cannot be granted; only rescission of the
loan agreement to the extent of the unreleased loan balance can be granted by the courts.—
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as
the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a
promissory note to cover it, the bank was deemed to have complied with its reciprocal
obligation to furnish a P17,000.00 loan.
A bank borrower who did not pay the partial loan release as per the terms of the promissory
note signed by him is in default to that extent even if the entire loan cannot be released
anymore.—The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to
pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under
the promissory note made him a party in default, hence not entitled to rescission (Article 1191
of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the
aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a promissory note
setting the date for payment of P17,000.00 within 3 years, he would be entitled to ask for
rescission of the entire loan because he cannot possibly be in default as there was no date for
him to perform his reciprocal obligation to pay.
Mortgages; Where only P 17,000.00 of the approved P80,000.00 loan was released, the real
estate mortgage thereon can be foreclosed only to the extent of 21.25%.—Since Island
Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 loan, the real estate
mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is
78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable
to the extent of 78.75 hectares, The mortgage covering the remainder of 21.25 hectares subsists
as a security for the P17,000.00 debt 21.25 hectares is more than sufficient to secure a
P17,000.00 debt.
Rule of indivisibility of a mortgage under Art. 2089, NCC does not apply where bank
released only part of the approved mortgage loan.—The rule of indivisibility, of a real estate
mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this
case. x x x The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted
presupposes several heirs of the debtor or creditor which does not obtain in this case. Hence,
the rule of indivisibility of a mortgage cannot apply.
Commodatum essentially gratuitous
Republic v. Bagtas
FACTS:
Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry
three bulls for breeding purposes subject to a breeding fee of 10% of the book value of the
bulls. Upon expiry, the borrower asked for renewal for another year but was only granted for
one bull. He then offered to buy the bulls at a value with a deduction on the yearly depreciation
but he failed to pay the same or return them. After some time, the two bulls were returned to
the Bureau but the third bull died from gunshot wounds inflicted during a Huk raid.
The appellant contends that the contract was commodatum and that the appellee retained the
ownership of the bull should it suffer loss due to force majeure.
ISSUE/S:
Whether Bagtas is liable to pay the dead bull
HELD:
Yes. The writ of execution appealed from is set aside.
RATIO DECIDENDI:
The loan of the 3 bulls for breeding purposes subject to the payment of breeding fee, if
considered a compensation, the contract should be a lease of the bulls. It could not be a
contract of commodatum, because the latter is essentially gratuitous. The lessee would be
subject to the responsibilities of a possessor in bad faith, because she had continued possession
of the bull after the possession of the bull after the expiry of the contract.
Even if the contract be commodatum, the appellant is still liable because a bailee in a contract
of commodatum is liable even if it should be through fortuitous event:
1. If he keeps it longer than the period stipulated
2. If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event
Loan of bulls for breeding purposes; Nature of contract affected by payment of fee.—The
loan by the Bureau of Animal Industry to the defendant of three bulls for breeding purposes for
a period of one year, later on renewed for another as regards one bull, was subject to the
payment by the borrower of breeding fee of 10% of the book value of the bulls. If the breeding
fee be considered a compensation, the contract would be a lease of the bulls; it could not be a
contract of commodatum, because that contract is essentially gratuitous.
Proceedings for administration and settlement of estate of the deceased; Enforcement of
money judgments.—Where special proceedings for the administration and settlement of the
estate of the deceased have been instituted, the money judgment rendered in favor of a party
cannot be enforced by means of a writ of execution, but must be presented to the probate court
for payment by the administrator appointed by the court.
Pajuyo v Court of Appeals
Pajuyo purchased the rights over a property from Pedro Perez. Thereafter, he constructed a
house and he and his family lived there. Later, Pajuyo agreed to let Guevarra live in the house
for free provided that Guevarra maintain cleanliness and orderliness of the house. They also
agreed that Guevarra should leave upon demand. But when Pajuyo later told Guevarra that he
needed the house, Guevarra refused, hence an ejectment case was filed.
Supreme Court held that the contract is not a commodatum. “In a contract of commodatum,
one of the parties delivers to another something not consumable so that the latter may use the
same for a certain time and return it. An essential feature of commodatum is that it is
gratuitous. Another feature of commodatum is that the use of the thing belonging to another is
for a certain period. Thus, the bailor cannot demand the return of the thing loaned until after
expiration of the period stipulated, or after accomplishment of the use for which the
commodatum is constituted. If the bailor should have urgent need of the thing, he may demand
its return for temporary use. If the use of the thing is merely tolerated by the bailor, he can
demand the return of the thing at will, in which case the contractual relation is called a
precarium. Under the Civil Code, precarium is a kind of commodatum.”
Pari Delicto; One of the exceptions to the application of the pari delicto principle is where its
application would violate wellestablished public policy.—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 ‘ex dolo malo non eritur actio’ and
‘in pari delicto potior est condition defedentis.’ The law will not aid either party to an illegal
agreement. It leaves the parties where it finds them. The application of the pari elicto principle
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.
Squatting; The application of the principle of pari delicto to a case of ejectment between
squatters is fraught with danger; Courts must resolve the issue of possession even if the
parties to the ejectment suit are squatters—courts should not leave squatters to their own
devices in cases involving recovery of possession.—Clearly, the application of the principle of
pari delicto to a case of ejectment between squatters is fraught with danger. To shut out relief
to squatters on the ground of pari delicto would openly invite mayhem 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.
Contracts; Commodatum; Precarium; Words and Phrases; An essential feature of
commodatum is that it is gratuitous, while another feature is that the use of the thing
belonging to another is for a certain period; If the use of the thing is merely tolerated by the
bailor, he can demand the return of the thing at will, in which case the contractual relation
is called a precarium; Precarium is a kind of commodatum.—In a contract of commodatum,
one of the parties delivers to another something not consumable so that the latter may use the
same for a certain time and return it. An essential feature of commodatum is that it is
gratuitous. Another feature of commodatum is that the use of the thing belonging to another is
for a certain period. Thus, the bailor cannot demand the return of the thing loaned until after
expiration of the period stipulated, or after accomplishment of the use for which the
commodatum is constituted. If the bailor should have urgent need of the thing, he may demand
its return for temporary use. If the use of the thing is merely tolerated by the bailor, he can
demand the return of the thing at will, in which case the contractual relation is called a
precarium. Under the Civil Code, precarium is a kind of commodatum.
Contracts; Human Relations; Squatting; There must be honor even between squatters.—
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a
squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land they
illegally occupy. Guevarra insists that the contract is void. Guevarra should know that there
must be honor even between squatters. Guevarra freely entered Guevarra freely entered into
the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from it.
The Kasunduan binds Guevarra.
Producers Bank v Court of Appeals
FACTS:
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend
Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his
business, the Sterela Marketing and Services (“Sterela” for brevity).  Specifically, Sanchez
asked private respondent to deposit in a bank a certain amount of money in the bank account of
Sterela for purposes of its incorporation.  She assured private respondent that he could
withdraw his money from said account within a month’s time. With this, Mrs. Vivies, Sanchez
and a certain Estrella Dumagpi, secretary of Doronilla, went to the bank to open an account
with Mrs. Vives and Sanchez as signatories. A passbook was then issued to Mrs. Vives.
Subsequently, private respondent learned that part of the money was withdrawn without
presentment of the passbook as it was his wife got hold of such. Mrs. Vives could not also
withdraw said remaining amount because it had to answer for some postdated checks issued by
Doronilla who opened a current account for Sterela and authorized the bank to debit savings.
Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla
for the return of his client’s money.  Doronilla issued another check for P212,000.00 in private
respondent’s favor but the check was again dishonored for insufficiency of funds.
Private respondent instituted an action for recovery of sum of money in the Regional Trial
Court (RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner.  The
RTC ruled in favor of the private respondent which was also affirmed in toto by the CA. Hence
this petition.
ISSUE:  WHETHER THE TRANSACTION BETWEEN THE DORONILLA AND
RESPONDENT VIVES WAS ONE OF SIMPLE LOAN.
HELD: NO.
A circumspect examination of the records reveals that the transaction between them was a
commodatum.  Article 1933 of the Civil Code distinguishes between the two kinds of loans in
this wise:
By the contract of loan, one of the parties delivers to another, either something not consumable
so that the latter may use the same for a certain time and return it, in which case the contract is
called a commodatum; or money or other consumable thing, upon the condition that the same
amount of the same kind and quality shall be paid, in which case the contract is simply called a
loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable
thing, such as money, the contract would be a mutuum.  However, there are some instances
where a commodatum may have for its object a consumable thing.  Article 1936 of the Civil
Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of
the parties is to lend consumable goods and to have the very same goods returned at the end of
the period agreed upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial consideration in
determining the actual character of a contract. In case of doubt, the contemporaneous and
subsequent acts of the parties shall be considered in such determination.

Loan; Distinguished from Commodatum; Article 1933 of the Civil Code distinguishes
between the two kinds of loans.—By the contract of loan, one of the parties delivers to
another, either something not consumable so that the latter may use the same for a certain time
and return it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of the same kind and quality shall
be paid, in which case the contract is simply called a loan or mutuum. Commodatum is
essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In
commodatum, the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.
Meaning of fungible things
Republic v. Grijaldo
FACTS:
Jose Grijaldo obtained five crop 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. All notes without due dates, but because the loans were crop
loans it was considered that 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 known as Hacienda Campugas. By virtue of “Trading with the Enemy Act” the assets in
the Philippines of the Bank of Taiwan, Ltd. were vested in the Government of the United
States which were subsequently transferred to the Republic of the Philippines. Grijaldo failed
to pay the crop loans despite the extra-judicial demand of the Government of the Philippines.
He argued that the Government 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 those crops were lost or
destroyed through enemy action his obligation to pay the loans was thereby extinguished.
ISSUE:
Whether or not Grijaldo’s obligation to pay the crop loans had extinguished due to the crops
that were lost or destroyed through enemy action.
HELD/RATIO: NO.
The obligation of the Grijaldo 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 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. The court ordered the estate of
Grijaldo to answer for the settlement of the crop loans.
Obligations and contracts; Crop loans obtained from the Bank of Taiwan, Ltd.; Right of
Philippine Government to collect the loans.—In 1943, appellant obtained crop loans from the
Bank of Taiwan, Ltd., Bacolod City Branch, evidenced by promissory notes. To secure
payment of the loans, appellant executed a chattel mortgage over the standing crops on his
land. After the war, the Republic of the Philippines brought the present action to collect from
appellant the unpaid account. Held: 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 loans. 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.,
were vested in the United States Government. Pursuant, further, to the Philippine Property Act
of 1946 and Transfer Agreements dated July 20, 1954 and June 15, 1957, between 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 transfers 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 interests
in said loans, thereby creating a privity of contract between the appellee and the appellant.
Destruction of crop through enemy action; Effect on the obligation.—Appellant 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 the land owned by him and those
crops were lost or destroyed through enemy action his obligation to pay the loans was thereby
extinguished. Held: This argument is untenable. The obligation of the appellant under the
promissory notes was not to deliver a determinate thing. namely, the crops to be harvested
from his land, but to pay a generic thing—the amount of money representing the total sum of
his loans, with interest. The chattel mortgage on the crops simply stood as a security for the
fulfillment of appellant's obligation covered by the, promissory notes, and the loss of the crops
did not 'extinguish his obligation to pay, because the ac count could still be paid from other
sources aside from the mortgaged crops.
Prescription of actions; Prescription does not run against the government.— 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 ever a public
property. 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).
Effect of moratorium laws.— Moreover, 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 Nos. 25, dated November 18. 1944; Executive Order No. 32, dated March 10, 1945;
and Republic Act No. 432, approved on July 26, 1948). Computed accordingly, the
prescriptive period was suspended for 8 years and 6 months. Hence, appellee's action had not
yet prescribed.
Payment in Japanese war notes; Application of Ballantyne scale of values.—Contracts
stipulating for payments presumably in Japanese war notes may be enforced 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. (Hilado vs. De la Costa L-150 April 30. 1049, 46 Off. Gaz. 5472.)
Effect of retention or adverse claim by bailee
Catholic Vicar Apostolic of the Mt. Province v. Court of Appeals
FACTS:
Catholic Vicar Apostolic was ordered to return and surrender 2 lots to the plaintiffs.
The subject lots, being the sites of the Catholic Church building, convents, high school
building, school gymnasium, school dormitories, social hall, stonewalls. The heirs of the
plaintiffs assert ownership and title on the subject lots.
ISSUE/S:
Whether Catholic Vicar Apostolic was the rightful owner of the subject lots
HELD:
No. The petition was denied for lack of merit.
RATIO DECIDENDI:
The petitioner was in possession as borrower in commodatum up to 1951, when it repudiated
the trust by declaring the properties in its name for taxation purposes. When petitioner applied
for registration of the 2 lots, it had been in possession in concept of an owner only for 11 years.
Ordinary acquisitive prescription requires 10 years with just title. Extraordinary acquisitive
prescription requires 30 years.
Private respondents were able to prove that their predecessors’ house was borrowed by
petitioner Vicar after the church and the convent were destroyed. They never asked for the
return of the house, but when they allowed its free use, they became bailors in commodatum
and the petitioner the bailee. The bailees’ failure to return the subject matter of commodatum to
the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust
the property subject matter of commodatum. The adverse claim of petitioner came only in 1951
when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse
claim could not ripen into title by way of ordinary acquisitive prescription because of the
absence of just title.
Civil Law; Credit Transactions; Commodatum; Property; Adverse Possession; Adverse
Claim; Acquisitive Prescription; When petitioner borrowed the house of private
respondents’ predecessors, and petitioner was allowed its free use, private respondents
became bailors in commodatum, and petitioner, the bailee.—Private respondents were able to
prove that their predecessors’ house was borrowed by petitioner Vicar after the church and the
convent were destroyed. They never asked for the return of the house, but when they allowed
its free use, they became bailors in commodatum and the petitioner the bailee. The bailees’
failure to return the subject matter of commodatum to the bailor did not mean adverse
possession on the part of the borrower. The bailee held in trust the property subject matter of
commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for
taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into
title by way of ordinary acquisitive prescription because of the absence of just title.
Case when contract is precarium
Quintos and Ansaldo v. Beck
FACTS:
An action was brought to compel the defendant to return to her certain furniture which she lent
him for his use. 3 gas heaters and 4 electric lamps were found in the possession of the Sheriff.
The defendant was a tenant of the plaintiff, the latter granting the use of the furniture
gratuitously subject to the condition that the defendant would return them to the plaintiff upon
the latter’s demand. Thereafter, the plaintiff required the defendant to return all the furniture
transferred to him for his use. The defendant declined to make deliver of all of them.
ISSUE/S:
Whether the defendant should return the furniture
HELD:
Yes. The defendant is ordered to return and deliver to the plaintiff.
RATIO DECIDENDI:
The contract entered into between the parties is one of commodatum, because under it the
plaintiff gratuitous granted the use of the furniture to the defendant, reserving for herself the
ownership thereof; by this contract the defendant bound himself to return the furniture to the
plaintiff, upon the latter's demand.
The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's
demand, means that he should return all of them to the plaintiff at the latter's residence or
house. The defendant did not comply with this obligation when he merely placed them at the
disposal of the plaintiff, retaining for his benefit the three gas heaters and the four electric
lamps.
COMMODATUM; OBLIGATION OF THE PARTIES.—The contract entered into
between the parties is one of commodatum, because under it the plaintiff gratuitously granted
the use of the furniture to the defendant, reserving for herself the ownership thereof; by this
contract the defendant bound himself to return the furniture to the plaintiff, upon the latter's
demand (Clause 7 of the contract, Exhibit "A"; articles 1740, paragraph 1, and 1741 of the
Civil Code). The obligation voluntarily assumed by the defendant to return the furniture upon
the plaintiff's demand, means that he should return all of them to the plaintiff at the latter's
residence or house. The defendant did not comply with this obligation when he merely placed
them at the disposal of the plaintiff, retaining for his benefit the three gas heaters and the four
electric lamps.
EXPENSES FOR DEPOSIT OF FURNITURE.—As the defendant had voluntarily
undertaken to return all the furniture to the plaintiff, upon the latter's demand, the Court could
not legally compel her to bear the expenses occasioned by the deposit of the furniture at the
defendant's behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor
was the plaintiff under a duty to accept the offer to return the furniture, because the defendant
wanted to retain the three gas heaters and the four electric lamps.

VALUE OF FURNITURE.—As to the value of the furniture. we do not believe that the
plaintiff is entitled to the payment thereof by the defendant in case of his inability to return
some of the furniture, because under paragraph 6 of the stipulation of facts, the defendant has
neither agreed to nor admitted the correctness of the said value. Should the defendant fail to
deliver some of the furniture, the value thereof should be later determined by the trial Court
through evidence which the parties may desire to present.
Liability for interest even in the absence of stipulation
Cortes v. Venturanza
FACTS: The remaining balance of Debtor’s indebtedness to Creditor is P576,573.90 with an
agreed interest at the rate of6% per annum from January 1, 1959, secured by Real Estate
Mortgage on Debtor’s land. Then Debtor defaulted. So,Creditor filed a suit for foreclosure of
mortgage on December 12, 1962.
ISSUE: How much interest is payable?
HELD: The interest at 6% per annum from January 1, 1959 to December 12, 1962 is
P136,482.13. This is to be added tothe principal amount, thus making a total of P713,056.03
which shall earn legal interest at 6% (now 12%) per annumfrom December 12, 1962 until fully
paid. Such interest is not due by stipulation but by the mandate of the law, i.e.,Article 2212
Contracts; Filing of complaint not premature effects of default had already arisen from
non-payment of contractual obligations.—With respect to the first issues— whether the
complaint was filed prematurely—there is no dispute that plaintiffs filed their complaint on
December 12, 1962; that under the terms of the contract, x x x, the defendants were given until
January 1, 1962 within which to pay their obligation; and that January 1, 1962 had passed
without the defendants having paid to the plaintiffs the sum of P576,573.90 and the
corresponding interest thereon notwithstanding repeated demands for payment made upon and
duly received by them x x x. Therefore, when plaintiffs filed the complaint on December 12,
1962, the effects of default as against the defendants had already arisen. Besides no less than
the defendants Venturanzas themselves admitted in their brief that they were delayed in the
payment of the balance of their obligation to the plaintiffs.
Admission of a party in delay in the payment of an obligation means that obligation had
already become due and demandable; Failure to pay unjustified when cause of delay is not
force majeure nor an Act of God.—One cannot admit being delayed in the payment of his
obligation unless he believes that his obligation is already due and demandable. Stated
otherwise, there is no delay if the obligation is not yet due. The alleged cause of their default in
paying the balance of the price, is not force majeure nor an act of God. Hence, their failure to
pay is not justified.
If intention of the parties is that the consummation of the contract, Deed of Sale with
Purchase Money Mortgage should be dependent on the ability of the buyer collect the
purchase price on their two haciendas, the intention should have been clearly stated in the
contract; When deed of sale specifies with a period it is an obligation with a definite period
case at bar. —x x x A careful reading of the Deed of Sale with Purchase Money Mortgage,
Exhibit B, reveals the conspicuous absence of any provision making the consummation of the
said contract dependent on the ability of defendants Venturanzas to collect the purchase price
of their two haciendas. If this were the intention of the parties, they should have clearly tated it
in the contract. x x x The deed of sale with purchase money mortgage clearly indicates that the
balance of P576,573.90 shall be paid by the defendants, jointly and severally, within three (3)
years from January 1, 1959, with interest at the rate of 6% per annum, until fully paid. On
January 1, 1962, the defendants failed and refused to pay their obligation. This is a clear case
of an obligation with a definite period ex die, hich
period was incidentally established for the benefit of the defendants. The evidence presented
by the plaintiffs to substantiate these facts approaches moral certainty, not merely
preponderance of evidence. x x x x x x
Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith; Deed of sale did not contravene limitations of
freedom of contract.—Furthermore, according to Article 1159 of the New Civil Code,
obligations arising from contracts have the force of law between the contracting parties, and
should be complied with in good faith. The deed does not show on its face that any of the
limitations of the freedom of contract under Article 1306 of the same Code, such as law,
morals, good customs, public order, or public policy, exists. On the contrary, the terms of said
exhibit are so clear and leave no doubt with respect to the intention of the contracting parties.
Hence, the literal meaning of its stipulations shall control. This is so because the intention of
the parties is clearly manifested and they are presumed to know the consequences of their
voluntary acts. x x x.
Since the period of payment of the mortgage on the land had become due, and no payment
therefor had been received, foreclosure of mortgage would be proper.—We, therefore, see no
reason to overturn the finding of the court a quo that the defendants are indebted to the
plaintiffs on the mortgage constituted by them over the 33 parcels of land in question since the
period for payment of the obligation had become due and, therefore, plaintiffs are entitled to a
foreclosure of the said mortgage.
Novation; Concept and nature of novation as a mode of extinguishing obligations.—
According to Manresa, novation is the extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object or principal conditions, or by substituting the person of the debtor, or by
subrogating a third person to the rights of the creditor. Unlike other modes of extinction of
obligations, novation is a juridical act with a dula function—it extinguishes an obligation and
creates a new one in lieu of the old. x x x Under the provision on Novations, there are two
forms of novation by substituting the person of the debtor, and they are: (1) expromision and
(2) delegacion. In the former, the initiative for the change does not come from the debtor and
may even be made without his knowledge, since it consists in a third person assuming the
obligation. As such, it logically requires the consent of the third person and the creditor. In the
latter, the debtor offers and the creditor accepts a third person who consents to the substitution
and assumes the obligation x x x. In these two modes of substitution, the consent of the
creditor is an indispensable requirement.
While the documents of sale of the property between defendants and cross-defendants might
have created a judicial relation as between them, it cannot however affect the relation of
said defendants and plaintiffs since the latter as creditors are not privies to said agreement
and they have not given their consent to the substitution of the person of the debtor;
Reasons for requirement.—x x x suffice it to state that while the Agreement and Deed of Sale
of Undivided Share in Real Estate x x x, might have created a juridical relation as between
defendants Venturanzas and Oledans, it cannot however affect the relation between them on
one hand, and the plaintiffs, on the other, since the latter are not privies to the said agreement,
and this kind of novation cannot be made without the consent of the plaintiffs.
One reason for the requirement of the creditor’s consent to such substitution is obvious.
Substitution of one debtor for another may delay or prevent the fulfillment of the obligation by
reason of the financial inability or insolvency of the new debtor; hence, the creditor should
agree to accept the substitution in order that it may be binding on him. x x x In the case at bar,
the agreement x x
relied upon by the defendants Oledas dows not show on its face that the plaintiffs intervened
in, much less gave their consent to, the substitution; as a matter of fact, plaintiff Cortes
vehemently denied having consented to the transfer of rights from the Oledans to the
Venturanzas alone. Res inter alios acta alteri nocere non debet x x x There is thus a complete
absence of animus novandi, whether express or implied, on the part of the creditors —the
Corteses.
Tolentino and Manio vs. Gonzalez Sy Chiam
Tolentino purchased land from Luzon Rice Mills for Php25,000 payable in three installments.
Tolentino defaulted on the balance so the owner sent a letter of demand to him. To pay,
Tolentino applied for loan from Gonzalez on condition that he would execute a pacto de retro
sale on the property in favor of Gonzalez. Upon maturation of loan, Tolentino defaulted so
Gonzalez is demanding recovery of the land. Tolentino contends that the pacto de retro sale is a
mortgage and not an absolute sale.
The Supreme Court held that upon its terms, the deed of pacto de retro sale is an absolute sale
with right of repurchase and not a mortgage. Thus, Gonzalez is the owner of the land and
Tolentino is only holding it as a tenant by virtue of a contract of lease.
**LOAN: A contract of loan 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. 
RENTAL CONTRACTS; USURY.—A contract for the lease of property is not a "loan."
Under the Usury Law the defense of usury cannot be based thereon. The Usury Law in this
jurisdiction prohibits a certain rate of interest on "loans." A contract of "loan" is a very
different contract from that of "rent." A "loan," as that term is used in the statute, signifies the
giving of a sum of money, goods or credit to another, with a promise to repay, but not a
promise to return the same thing. In a con-tract of "rent' the owner of the property does not lose
his ownership. He simply loses his control over the property rented during the period of the
contract. In a contract of rent the relation between the contractors is that of landlord and tenant.
In a contract of loan of money, goods, chattels or credits, the relation between the parties is that
of obligor and obligee.
RENTS, CONTRACT OF ; DEFINED.—A contract of "rent" may be defined as the
compensation either in money, provisions, chattels or labor, received by the owner of the soil
or the property rented, f rom the occupant thereof.
LOAN, CONTRACT OF; DEFINED.—A contract of "loan," as that term is used in the
statute, signifies the giving of a sum of money, goods or credits to another, with a promise to
repay, but not a promise to return the same thing. It has been defined as an advancement of
money, goods or credits upon a contract or stipulation to repay, not to return, the thing loaned
at some future day in accordance with the terms of the contract. The moment the contract is
completed, the money, goods or chattels given cease to be the property of the former owner
and become the property of the obligor to be used according to his own will, unless the
contract itself expressly provides for a special or specific use of the same. At all events, the
money, goods or chattels, the moment the contract is executed, cease to be the property of the
former owner and become the sole property of the obligor. A contract of "loan" differs
materially and essentially from a contract of "rent."
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.
Chapter 2: SIMPLE LOAN OR MUTUUM
Garcia v Thio
FACTS
Respondent Thio received from petitioner Garcia two crossed checks which amount to
US$100,000 and US$500,000, respectively, payable to the order of Marilou Santiago.
According to petitioner, respondent failed to pay the principal amounts of the loans when they
fell due and so she filed a complaint for sum of money and damages with the RTC. Respondent
denied that she contracted the two loans and countered that it was Marilou Satiago to whom
petitioner lent the money. She claimed she was merely asked y petitioner to give the checks to
Santiago. She issued the checks for P76,000 and P20,000 not as payment of interest but to
accommodate petitioner’s request that respondent use her own checks instead of Santiago’s.
 
RTC ruled in favor of petitioner. CA reversed RTC and ruled that there was no contract of loan
between the parties.
 
ISSUE
(1) Whether or not there was a contract of loan between petitioner and respondent.
(2) Who borrowed money from petitioner, the respondent or Marilou Santiago?
 
HELD
(1) The Court held in the affirmative. A loan is a real contract, not consensual, and as
such I perfected only upon the delivery of the object of the contract. Upon delivery
of the contract of loan (in this case the money received by the debtor when the
checks were encashed) the debtor acquires ownership of such money or loan
 proceeds and is bound to pay the creditor an equal amount. It is undisputed that the
checks were delivered to respondent.
(2) However, the checks were crossed and payable not to the order of the respondent
but to the order of a certain Marilou Santiago. Delivery is the act by which
the res or substance is thereof placed within the actual or constructive possession or
control of another. Although respondent did not physically receive the proceeds of
the checks, these instruments were placed in her control and possession under an
arrangement whereby she actually re-lent the amount to Santiago.
 
Petition granted; judgment and resolution reversed and set aside.
Contracts; A loan is a real contract, not consensual, and as such is perfected only upon the
delivery of the object of the contract.—A loan is a real contract, not consensual, and as such is
perfected only upon the delivery of the object of the contract.
Upon delivery of the object of the contract of loan (in this case the money received by the
debtor when the checks were encashed) the debtor acquires ownership of such money or
loan proceeds and is bound to pay the creditor an equal amount.—Upon delivery of the
object of the contract of loan (in this case the money received by the debtor when the checks
were encashed) the
Delivery is the act by which the res or substance thereof is placed debtor acquires ownership
of such money or loan proceeds and is bound to pay the creditor an equal amount.
within the actual or constructive possession or control of another.—Delivery is the act by
which the res or substance thereof is placed within the actual or constructive possession or
control of another. Although respondent did not physically receive the proceeds of the checks,
these instruments were placed in her control and possession under an arrangement whereby
she actually re-lent the amounts to Santiago.
Loans; Interests; Article 1956 of the Civil Code provides that “no interest shall be due
unless it has been expressly stipulated in writing.”— We do not, however, agree that
respondent is liable for the 3% and 4% monthly interest for the US$100,000 and P500,000
loans respectively. There was no written proof of the interest payable except for the verbal
agreement that the loans would earn 3% and 4% interest per month. Article 1956 of the Civil
Code provides that “[n]o interest shall be due unless it has been expressly stipulated in
writing.”
While there can be no stipulated interest, there can be legal interest pursuant to Article 2209
of the Civil Code.—Be that as it may, while there can be no stipulated interest, there can be
legal interest pursuant to Article 2209 of the Civil Code. It is well-settled that: When the
obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
Development Bank of the Philippines v Guarina Agricultural and Realty Development
Corporation
FACTS:
In July 1976, Guariña Corporation applied for a loan from DBP to finance the development of
its resort complex. The loan, in the amount of P3,387,000.00, was approved on August 5, 1976.
Guariña Corporation executed a promissory note that would be due on November 3, 1988. On
October 5, 1976, Guariña Corporation executed a real estate mortgage over several real
properties in favor of DBP as security for the repayment of the loan. On May 17, 1977,
Guariña Corporation executed a chattel mortgage over the personal properties existing at the
resort complex and those yet to be acquired out of the proceeds of the loan, also to secure the
performance of the obligation. Prior to the release of the loan, DBP required Guariña
Corporation to put up a cash equity of P1,470,951.00 for the construction of the buildings and
other improvements on the resort complex.
The loan was released in several installments, and Guariña Corporation used the proceeds to
defray the cost of additional improvements in the resort complex. In all, the amount released
totaled P3,003,617.49, from which DBP withheld P148,102.98 as interest.
Guariña Corporation demanded the release of the balance of the loan, but DBP refused.
Instead, DBP directly paid some suppliers of Guariña Corporation over the latter’s objection.
DBP found upon inspection of the resort project, its developments and improvements that
Guariña Corporation had not completed the construction works. In a letter dated February 27,
1978, and a telegram dated June 9, 1978, DBP thus demanded that Guariña
Corporation expedite the completion of the project, and warned that it would initiate
foreclosure proceedings should Guariña Corporation not do so.
Unsatisfied with the non-action and objection of Guariña Corporation, DBP initiated
extrajudicial foreclosure proceedings
 
ISSUE:
Whether or not Guarina was in delay in performing its obligation making DBP’s action to
foreclose the mortgage proper.
 
HELD:
NO. The Court held that the foreclosure of a mortgage prior to the mortgagor’s default on the
principal obligation is premature, and should be undone for being void and ineffectual. The
mortgagee who has been meanwhile given possession of the mortgaged property by virtue of a
writ of possession issued to it as the purchaser at the foreclosure sale may be required to restore
the possession of the property to the mortgagor and to pay reasonable rent for the use of the
property during the intervening period.
The agreement between DBP and Guariña Corporation was 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 or quality shall be paid.
Loan is a reciprocal obligation, as it arises from the same cause where 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 amount and the debtor repays it
when it becomes due and demandable.
The loan agreement between the parties is a reciprocal obligation. Appellant in the instant
case bound itself to grant appellee the loan amount of P3,387,000.00 condition on appellee’s
payment of the amount when it falls due. The appellant did not release the total amount of the
approved loan. Appellant therefore could not have made a demand for payment of the loan
since it had yet to fulfil its own obligation. Moreover, the fact that appellee was not yet in
default rendered the foreclosure proceedings premature and improper.
By its failure to release the proceeds of the loan in their entirety, DBP had no right yet to exact
on Guariña Corporation the latter’s compliance with its 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 it while the other’s obligation remains
unfulfilled. In other words, the latter party does not incur delay.
Contracts; Loans; 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 or quality shall be paid.—The agreement between DBP and Guariña
Corporation was 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 or quality shall be paid. Loan is a reciprocal obligation, as it arises from
the same cause where 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 amount and the debtor repays it when it becomes due and demandable.
Mortgages; By its nature, a mortgage remains an accessory contract dependent on the
principal obligation, such that enforcement of the mortgage contract will depend on whether
or not there has been a violation of the principal obligation.—DBP’s actuations were legally
unfounded. 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 will depend 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 — before it could
demand that the borrower repay the loaned amount. In other words, Guariña Corporation
would not incur in delay before DBP fully performed its reciprocal obligation.
Central Bank v Court of Appeals G.R. No. L-45710 October 3, 1985
Facts:
Island Savings Bank, upon favorable recommendation of its legal department, approved the
loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las
Nieves, Agusan. The loan called for a lump sum of P80,000, repayable in semi-annual
installments for 3 yrs, with 12% annual interest. After the agreement, a mere P17K partial
release of the loan was made by the bank and Tolentino and his wife signed a promissory note
for the P17,000 at 12% annual interest payable w/in 3 yrs. An advance interest was deducted fr
the partial release but this prededucted interest was refunded to Tolentino after being informed
that there was no fund yet for the release of the P63K balance.
Monetary Board of Central Bank, after finding that bank was suffering liquidity problems,
prohibited the bank fr making new loans and investments. And after the bank failed to restore
its solvency, the Central Bank prohibited Island Savings Bank from doing business in the
Philippines. Island Savings Bank in view of the non-payment of the P17K filed an application
for foreclosure of the real estate mortgage. Tolentino filed petition for specific performance or
rescission and damages with preliminary injunction, alleging that since the bank failed to
deliver P63K, he is entitled to specific performance and if not, to rescind the real estate
mortgage.
Issues:
 Whether or not Tolentino’s can collect from the bank for damages
 Whether or not the mortgagor is liable to pay the amount covered by the promissory note
 Whether or not the real estate mortgage can be foreclosed
Held:
(1) Whether or not Tolentino’s can collect from the bank for damagesThe loan agreement
implied reciprocal obligations. When one party is willing and ready to perform, the other
party not ready nor willing incurs in delay. When Tolentino executed real estate
mortgage, he signified willingness to pay. That time, the bank’s obligation to furnish the
P80K loan accrued. Now, the Central Bank resolution made it impossible for the bank to
furnish the P63K balance. The prohibition on the bank to make new loans is irrelevant
bec it did not prohibit the bank fr releasing the balance of loans previously contracted.
Insolvency of debtor is not an excuse for non-fulfillment of obligation but is a breach of
contract.
The bank’s asking for advance interest for the loan is improper considering that the total
loan hasn’t been released. A person can’t be charged interest for nonexisting debt. The
alleged discovery by the bank of overvaluation of the loan collateral is not an issue. The
bank officials should have been more responsible and the bank bears risk in case the
collateral turned out to be overvalued. Furthermore, this was not raised in the pleadings
so this issue can’t be raised. The bank was in default and Tolentino may choose bet
specific performance or rescission w/ damages in either case. But considering that the
bank is now prohibited fr doing business, specific performance cannot be granted.
Rescission is the only remedy left, but the rescission should only be for the P63K
balance.
(2) Whether or not the mortgagor is liable to pay the amount covered by the promissory note
The promissory note gave rise to Sulpicio M. Tolentino’s reciprocal obligation to pay the
P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to rescission (Article
1191 of the Civil Code). If there is a right to rescind the promissory note, it shall belong
to the aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a
 promissory note setting the date for payment of P17,000.00 within 3 years, he would be
entitled to ask for rescission of the entire loan because he cannot possibly be in default as
there was no date for him to perform his reciprocal obligation to pay. Since both parties
were in default in the performance of their respective reciprocal obligations, that is,
Island Savings Bank failed to comply with its obligation to furnish the entire loan and
Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt
within 3 years as stipulated, they are both liable for damages.
(3) Whether or not the real estate mortgage can be foreclosed
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00
loan, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such
extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100
hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the
remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25 hectares
is more than sufficient to secure a P17,000.00 debt.
Obligations; Loans; Where a bank approved a loan for P80,000.00 but was able to deliver
only P1 7,000.00, it is in default for P63,000.00 to the borrower.—When Island Savings Bank
and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they
undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each
party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda.
de Quirino vs. Pelarca, 29 SCRA 1 [1969]); 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 (Art. 1169 of the Civil Code). The promise of
Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank
to furnish the ?80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on
April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the
obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's
delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years
or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14, 1968,
which prohibited Island Savings Bank from doing further business. Such prohibition made it
legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the
P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the
protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June
15, 1948, the validity of which is not in question.
The fact that the creditor is insolvent or was stopped by the Central Bank from granting
further loans is no defense to its fulfillment to extend the loan applied for and approved by it
to the full amount.—The Monetary Board Resolution No. 1049 issued on August 13, 1965
cannot interrupt the default of Island Savings Bank in complying with its obligation of
releasing the P63,000.00 balance because said resolution merely prohibited the Bank from
making new loans and investments, and nowhere did it prohibit Island Savings Bank from
releasing the balance of loan agreements previously contracted. Besides, the mere pecuniary
inability to fulfill an engagement does not discharge the obligation of the contract, nor does it
constitute any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and
Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an excuse
for the non-fulfillment of an obligation but instead it is taken as a breach of the contract by
him.
Acceptance of refund of excess pre-deducted interest for a supposed loan of P80,000.00 does
not constitute a waiver of right to collect the P63,000.00 unreleased balance of the
P80,000.00 loans. —The fact that Sulpicio M. Tolentino demanded and accepted the refund of
the pre-deducted interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a
6-month period cannot be taken as a waiver of his right to collect the P63,000.00 balance. The
act of Island Savings Bank, in asking the advance interest for 6 months on the supposed
P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00 loan
was released. A person cannot be legally charged interest for a nonexisting debt. Thus, the
receipt by Sulpicio M. Tolentino of the pre-deducted interest was an exercise of his right to it,
which right exist independently of his right to demand the completion of the P80,000.00 loan.
The exercise of one right does not affect, much less neutralize, the exercise of the other.
A bank borrower who did not pay the partial loan release as per the terms of the promissory
note signed by him is in default to that extent even if the entire loan cannot be released
anymore.—The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to
pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under
the promissory note made him a party in default, hence not entitled to rescission (Article 1191
of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the
aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a promissory note
setting the date for payment of P17,000.00 within 3 years, he would be entitled to ask for
rescission of the entire loan because he cannot possibly be in default as there was no date for
him to perform his reciprocal obligation to pay.
Mortgages; Where only P 17,000.00 of the approved P80,000.00 loan was released, the real
estate mortgage thereon can be foreclosed only to the extent of 21.25%.—Since Island
Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 loan, the real estate
mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is
78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable
to the extent of 78.75 hectares, The mortgage covering the remainder of 21.25 hectares subsists
as a security for the P17,000.00 debt 21.25 hectares is more than sufficient to secure a
P17,000.00 debt.
Rule of indivisibility of a mortgage under Art. 2089, NCC does not apply where bank
released only part of the approved mortgage loan.—The rule of indivisibility, of a real estate
mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this
case. x x x The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted
presupposes several heirs of the debtor or creditor which does not obtain in this case. Hence,
the rule of indivisibility of a mortgage cannot apply.
YONG CHAN KIM vs .PEOPLE
 
In commodatum, the bailor retains the ownership of the thing loaned, while in simpleloan,
ownership passes to the borrower.
Facts:
Petitioner Yong Chan Kim was employed as a Researcher at the Aquaculture Departmentof the
Southeast Asian Fisheries Development Center (SEAFDEC) with head station at
Tigbauan,Province of Iloilo. As Head of the Economics Unit of the Research Division, he
conducted prawnsurveys which required him to travel to various selected provinces in the
country where there arepotentials for prawn culture.On 15 June 1982, petitioner was issued
Travel Order No. 2222 which covered his travels todifferent places in Luzon from 16 June to
21 July 1982, a period of thirty five (35) days, where hereceived P6,438.00 as cash advance to
defray his travel expenses.
 
Within the same period, petitioner was issued another travel order, T.O. 2268, requiringhim to
travel from the Head Station at Tigbauan, Iloilo to Roxas City from 30 June to 4 July 1982,a
period of five (5) days, where petitioner received a cash advance of P495.00.
 
On 14 January 1983, petitioner presented both travel orders for liquidation, submittingTravel
Expense Reports to the Accounting Section. When the Travel Expense Reports wereaudited, it
was discovered that there was an overlap of four (4) days (30 June to 3 July 1982) inthe two (2)
travel orders for which petitioner collected per diems twice.Petitioner was required to comment
on the internal auditor's report regarding the allegedanomalous claim for per diems. In his
reply, petitioner denied the alleged anomaly, claiming thathe made make-up trips to
compensate for the trips he failed to undertake under T.O. 2222because he was recalled to the
head office and given another assignment.
Issue:
Was petitioner under obligation to return the same money (cash advance), which he
hadreceived?
 
Held:
No. Excutive Order No. 10, dated 12 February 1980 provides as follows:
 
"B. Cash Advance for Travel
 
"4. All cash advances must be liquidated within 30 days after date of projected return of the
person. Otherwise, corresponding salary deduction shall be made immediately following the
expiration day."
Liquidation simply means the settling of indebtedness. An employee, such as herein petitioner,
who liquidates a cash advance is in fact paying back his debt in the form of a loan of money
advanced to him by his employer, as per diems and allowances. Similarly, as stated in the
assailed, decision of the lower court, if the amount of the cash advance he received is less than
the amount he spent for actual travel x x x he has the right to demand reimbursement from his
employer the amount he spent coming from his personal funds ."In other words, the money
advanced by either party is actually a loan to the other.
Fiduciary relationship between the complainant and the accused is an essential element of
estafa by misappropriation or conversion.—The ruling of the trial judge that ownership of the
cash advanced to the petitioner by private respondent was not transferred to the latter is
erroneous. Ownership of the money was transferred to the petitioner. x x x Since ownership of
the money (cash advance) was ransferred to petitioner, no fiduciary relationship was created.
Absent this fiduciary relationship between petitioner and private respondent, which is an
essential element of the crime of estafa by misappropriation or conversion, petitioner could not
have committed estafa.
Consolidated Bank and Trust Corporation v. CA,
G.R. No. 114286, April 19, 2001
 
FACTS:
Respondents Continental Cement Corporation (Corporation) and Gregory T. Lim obtained,
frompetitioner Consolidated Bank and Trust Corporation, Letter of Credit No. DOM-23277  in
the amount ofP 1,068,150.00. The letter of credit was used to purchase around five hundred
thousand liters of bunkerfuel oil from Petrophil Corporation, which the latter delivered directly
to respondent Corporation in itsBulacan plant. In relation to the same transaction, a trust
receipt for the amount of P 1,001,520.93 wasexecuted by respondent Corporation, with
respondent Lim as signatory. Claiming that respondents failed to turn over the goods covered
by the trust receipt or theproceeds thereof ,  petitioner filed a complaint for sum of money with
application for preliminaryattachment. In answer to the complaint, respondents averred that the
transaction between them wasa simple loan and not a trust receipt transaction, and that the
amount claimed by petitioner did nottake into account payments already made by them.
Respondent Lim also denied any personal liability inthe subject transactions.The trial court
dismissed the Complaint. Both parties appealed to the Court of Appeals, whichpartially
modified the Decision by deleting the jaward of attorney's fees in favor of respondents
and,instead, ordering respondent Corporation to pay petitioner P37,469.22 as and for attorney's
fees andlitigation expenses.
ISSUE:
Whether the transaction was a trust receipt transaction?
 
RULING:
 
NO.The Supreme Court held that petitioner failed to convince them that the transaction is
really atrust receipt transaction instead of merely a simple loan, as found by the lower
court and the CA.As held in Colinares v. Court of Appeals, which appears to be foursquare
with the facts obtainingin the case at bar, inasmuch as the debtor received the goods subject of
the trust receipt before thetrust receipt itself was entered into, the transaction in question was a
simple loan  and not a trustreceipt agreement. Prior to the date of execution of the trust receipt,
ownership over the goods wasalready transferred to the debtor. This situation is inconsistent
with what normally obtains in a puretrust receipt transaction, wherein the goods belong in
ownership to the bank and are only released tothe importer in trust after the loan is granted
 
Loans; Banks and Banking; Letters of Credit; Interest Rates; Compensation; It would be
onerous to compute interest and other charges on the face value of the letter of credit which
a bank issued, without first crediting or setting off the marginal deposit which the borrower
paid to it— compensation is proper and should take effect by operation of law because the
requisites in Article 1279 of the Civil Code are present and should extinguish both debts to
the concurrent amount.—Petitioner’s contention that the marginal deposit made by
respondent Corporation should not be deducted outright from the amount of the letter of credit
is untenable.
Petitioner argues that the marginal deposit should be considered only after computing the
principal plus accrued interests and other charges. However, to sustain petitioner on this score
would be to countenance a clear case of unjust enrichment, for while a marginal deposit earns
no interest in favor of the debtor-depositor, the bank is not only able to use the same for its
own purposes, interest-free, but is also able to earn interest on the money loaned to respondent
Corporation. Indeed, it would be onerous to compute interest and other charges on the face
value of the letter of credit which the petitioner issued, without first crediting or setting off the
marginal deposit which the respondent Corporation paid to it. Compensation is proper and
should take effect by operation of law because the requisites in Article 1279 of the Civil Code
are present and should extinguish both debts to the concurrent amount.
Floating Rates of Interest; Trust Receipts Law; A stipulation for a floating rate of interest in a
letter of credit in which there is no reference rate set either by it or by the Central Bank,
leaving the determination thereof to the sole will and control of the lender bank is invalid;
While it may be acceptable, for practical reasons given the fluctuating economic conditions,
for banks to stipulate that interest rates on a loan not be fixed and instead be made dependent
upon prevailing market conditions, there should always be a reference rate upon which to peg
such variable interest rates.—Neither do we find error when the lower court and the Court of
Appeals set aside as invalid the floating rate of interest exhorted by petitioner to be applicable.
The pertinent provision in the trust receipt agreement of the parties fixing the interest rate
states: I, WE jointly and severally agree to any increase or decrease in the interest rate which
may occur after July 1, 1981, when the Central Bank floated the interest rate, and to pay
additionally the penalty of 1% per month until the amount/s or installment/s due and unpaid
under the trust receipt on the reverse side hereof is/are fully paid. We agree with respondent
Court of Appeals that the foregoing stipulation is invalid, there being no reference rate set
either by it or by the Central Bank, leaving the determination thereof at the sole will and
control of petitioner. While it may be acceptable, for practical reasons given the fluctuating
economic conditions, for banks to stipulate that interest rates on a loan not be fixed and instead
be made dependent upon prevailing market conditions, there should always be a reference rate
upon which to peg such variable interest rates.
Trust Receipts Law; Where the debtor received the goods subject of the trust receipt before the
trust receipt itself was entered into, the transaction in question is a simple loan and not a trust
receipt agreement.— The recent case of Colinares v. Court of Appeals appears to be
foursquare with the facts obtaining in the case at bar. There, we found that inasmuch as the
debtor received the goods subject of the trust receipt before the trust receipt itself was entered
into, the transaction in question was a simple loan and not a trust receipt agreement. Prior to
the date of execution of the trust receipt, ownership over the goods was already transferred to
the debtor. This situation is inconsistent with what normally obtains in a pure trust receipt
transaction, wherein the goods belong in ownership to the bank and are only released to the
importer in trust after the loan is granted. In the case at bar, as in Colinares, the delivery to
respondent Corporation of the goods subject of the trust receipt occurred long before the trust
receipt itself was executed. More specifically, delivery of the bunker fuel oil to respondent
Corporation’s Bulacan plant commenced on July 7, 1982 and was completed by July 19, 1982.
Further, the oil was used up by respondent Corporation in its normal operations by August,
1982. On the other hand, the subject trust receipt was only executed nearly two months after
full delivery of the oil was made to respondent Corporation, or on September 2, 1982.
Certainly, the payment of the sum of P1,832,158.38 on a loan with a principal amount of
P681,075.93 negates any badge of dishonesty, abuse of confidence or mishandling of funds
on the part of the borrower, which are the gravamen of a trust receipt violation.—
Respondent Corporation cannot be said to have been dishonest in its dealings with petitioner.
Neither has it been shown that it has evaded payment of its obligations. Indeed, it continually
endeavored to meet the same, as shown by the various receipts issued by petitioner
acknowledging payment on the loan. Certainly, the payment of the sum of P1,832,158.38 on a
loan with a principal amount of only P681,075.93 negates any badge of dishonesty, abuse of
confidence or mishandling of funds on the part of respondent Corporation, which are the
gravamen of a trust receipt violation.
Furthermore, respondent Corporation is not an importer which acquired the bunker fuel oil for
re-sale; it needed the oil for its own operations. More importantly, at no time did title over the
oil pass to petitioner, but directly to respondent Corporation to which the oil was directly
delivered long before the trust receipt was executed.
Colinares v CA G.R. No. 90828. September 5, 2000
The ownership of the merchandise continues to be vested in the person who had advanced
payment until he has been paid in full, or if the merchandise has already been sold, the
proceeds of the sale should be turned over to him by the importer or by his representative or
successor in interest.
Facts: Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for a
consideration of P40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the
latter’s convent at Camaman-an, Cagayan de Oro City. Colinares applied for a commercial
letter of credit  with the Philippine Banking Corporation, Cagayan de Oro City branch
(hereafter PBC) in favor of CM Builders Centre. PBC approved the letter of credit 
for P22,389.80 to cover the full invoice value of the goods. Petitioners signed a pro-forma trust
receipt  as security.
PBC debited P6,720 from Petitioners’ marginal deposit as partial payment of the loan.  After
the initial payment, the spouses defaulted.  PBC wrote  to Petitioners demanding that the
amount be paid within seven days from notice. Instead of complying with PBC’s demand,
Veloso confessed that they lost P19,195.83 in the Carmelite Monastery Project and requested
for a grace period of until 15 June 1980 to settle the account.  Colinares proposed  that the
terms of payment of the loan be modified P2,000 on or before 3 December 1980, and P1,000
per month . Pending approval of the proposal, Petitioners paid P1,000 to PBC on 4 December
1980, and thereafter P500 on 11 February 1981, 16 March 1981, and 20 April 1981.
Concurrently with the separate demand for attorney’s fees by PBC’s legal counsel, PBC
continued to demand payment of the balance.  On 14 January 1983, Petitioners were charged
with the violation of P.D. No. 115 (Trust Receipts Law) in relation to Article 315 of the
Revised Penal Code
During trial, petitioner Veloso insisted that the transaction was a “clean loan” as per verbal
guarantee of Cayo Garcia Tuiza, PBC’s former manager. He and petitioner Colinares signed
the documents without reading the fine print, only learning of the trust receipt implication
much later. When he brought this to the attention of PBC, Mr. Tuiza assured him that the trust
receipt was a mere formality. The Trust Receipts Law does not seek to enforce payment of the
loan, rather it punishes the dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of another regardless of whether the latter is the owner. Here, it is
crystal clear that on the part of Petitioners there was neither dishonesty nor abuse of confidence
in the handling of money to the prejudice of PBC. Petitioners continually endeavored to meet
their obligations, as shown by several receipts issued by PBC acknowledging payment of the
loan.
Issue: Whether or not the transaction of Colinares falls within the ambit of the Law on Trust
Receipt
Held: Colinares received the merchandise from CM Builders Centre on 30 October 1979. On
that day, ownership over the merchandise was already transferred to Petitioners who were to
use the materials for their construction project. It was only a day later, 31 October 1979 that
they went to the bank to apply for a loan to pay for the merchandise. This situation belies what
normally obtains in a pure trust receipt transaction where goods are owned by the bank and
only released to the importer in trust subsequent to the grant of the loan.
The bank acquires a “security interest” in the goods as holder of a security title for the
advances it had made to the entrustee. The ownership of the merchandise continues to be
vested in the person who had advanced payment until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the sale should be turned over to him by
the importer or by his representative or successor in interest. To secure that the bank shall be
paid, it takes full title to the goods at the very beginning and continues to hold that title as his
indispensable security until the goods are sold and the vendee is called upon to pay for them;
hence, the importer has never owned the goods and is not able to deliver possession. In a
certain manner, trust receipts partake of the nature of a conditional sale where the importer
becomes absolute owner of the imported merchandise as soon as he has paid its price. There
are two possible situations in a trust receipt transaction. The first is covered by the provision
which refers to money received under the obligation involving the duty to deliver it
(entregarla) to the owner of the merchandise sold. The second is covered by the provision
which refers to merchandise received under the obligation to “return” it (devolvera) to the
owner. Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by
the trust receipt to the entruster or to return said goods if they were not disposed of in
accordance with the terms of the trust receipt shall be punishable as estafa under Article 315
(1) of the Revised Penal Code, without need of proving intent to defraud.
Criminal Law; Trust Receipts Law (P.D. 115); Words and Phrases; “Trust Receipt
Transaction,” Defined.—Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust
receipt transaction as any transaction by and between a person referred to as the entruster, and
another person referred to as the entrustee, whereby the entruster who owns or holds absolute
title or security interest over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latter’s execution and delivery to the entruster
of a signed document called a “trust receipt” wherein the entrustee binds himself to hold the
designated goods, documents or instruments with the obligation to turn over to the entruster the
proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust
receipt or the goods, documents or instruments themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and conditions specified in the trust receipt.
Estafa; Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by
the trust receipt to the entruster or to return said goods if they were not disposed of in
accordance with the terms of the trust receipt is punishable as estafa.—There are two
possible situations in a trust receipt transaction. The first is covered by the provision which
refers to money received under the obligation involving the duty to deliver it (entregarla) to the
owner of the merchandise sold. The second is covered by the provision which refers to
merchandise received under the obligation to “return” it (devolvera) to the owner. Failure of
the entrustee to turn over the proceeds of the sale of the goods, covered by the trust receipt to
the entruster or to return said goods if they were not disposed of in accordance with the terms
of the trust receipt shall be punishable as estafa under Article 315 (1) of the Revised Penal
Code, without need of proving intent to defraud.
In a pure trust receipt transaction, the goods are owned by the bank and only released to the
importer in trust subsequent to the grant of the loan—the bank acquires a “security
interest” in the goods as holder of a security title for the advances it had made to the
entrustee; In a certain manner, trust receipts partake of the nature of a conditional sale
where the importer becomes absolute owner of the imported merchandise as soon as he has
paid its price.—Petitioners received the merchandise from CM Builders Centre on 30 October
1979. On that day, ownership over the merchandise was already transferred to Petitioners who
were to use the materials for their construction project. It was only a day later, 31 October
1979, that they went to the bank to apply for a loan to pay for the merchandise. This situation
belies what normally obtains in a pure trust receipt transaction where goods are owned by the
bank and only released to the importer in trust subsequent to the grant of the loan. The bank
acquires a
“security interest” in the goods as holder of a security title for the advances it had made to the
entrustee. The ownership of the merchandise continues to be vested in the person who had
advanced payment until he has been paid in full, or if the merchandise has already been sold,
the proceeds of the sale should be turned over to him by the importer or by his representative
or successor in interest. To secure that the bank shall be paid, it takes full title to the goods at
the very beginning and continues to hold that title as his indispensable security until the goods
are sold and the vendee is called upon to pay for them; hence, the importer has never owned
the goods and is not able to deliver possession. In a certain manner, trust receipts partake of the
nature of a conditional sale where the importer becomes absolute owner of the imported
merchandise as soon as he has paid its price.
The Trust Receipts Law does not seek to enforce the payment of the loan, rather it punishes
the dishonesty and abuse of confidence in the handling of money or goods to the prejudice
of another.— The Trust Receipts Law does not seek to enforce payment of the loan, rather it
punishes the dishonesty and abuse of confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is the owner. Here, it is crystal clear that
on the part of Petitioners there was neither dishonesty nor abuse of confidence in the handling
of money to the prejudice of PBC. Petitioners continually endeavored to meet their obligations,
as shown by several receipts issued by PBC acknowledging payment of the loan.
The mala prohibita nature of the alleged offense notwithstanding, intent as a state of mind
was not proved to be present in the situation of the accused—they employed no artifice in
dealing with the bank and never did they evade payment of their obligation nor attempt to
abscond.—The Information charges Petitioners with intent to defraud and misappropriating the
money for their personal use. The mala prohibita nature of the alleged offense
notwithstanding, intent as a state of mind was not proved to be present in Petitioners’ situation.
Petitioners employed no artifice in dealing with PBC and never did they evade payment of
their obligation nor attempt to abscond. Instead, Petitioners sought favorable terms precisely to
meet their obligation.
The fact that the accused are not importers acquiring the goods for re-sale, contrary to the
express provision embodied in the trust receipt and at no time did the title pass to the bank
impresses upon the trust receipt in question vagueness and ambiguity which should not be
the basis for criminal prosecution in the event of violation of its provisions.— Also
noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale,
contrary to the express provision embodied in the trust receipt. They are contractors who
obtained the fungible goods for their construction project. At no time did title over the
construction materials pass to the bank, but directly to the Petitioners from CM Builders
Centre. This impresses upon the trust receipt in question vagueness and ambiguity, which
should not be the basis for criminal prosecution in the event of violation of its provisions.
Banks and Banking; Contracts; Contracts of Adhesion; The practice of banks of making
borrowers sign trust receipts to facilitate collection of loans and place them under the
threats of criminal prosecution should they be unable to pay it may be unjust and
inequitable, if not reprehensible.—The practice of banks of making borrowers sign trust
receipts to facilitate collection of loans and place them under the threats of criminal
prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible.
Such agreements are contracts of adhesion which borrowers have no option but to sign lest
their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the
mercy of banks, and is prone to misinterpretation, as had happened in this case. Eventually,
PBC showed its true colors and admitted that it was only after collection of the money, as
manifested by its Affidavit of Desistance.
PEOPLE VS. PUIG
Facts:
Respondents were conspiring, confederating, and helping one another, with grave abuse of
confidence, being the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan,
Iloilo, without the knowledge and/or consent of the management of the Bank and with intent of
gain, did then and there willfully, unlawfully and feloniously take, steal and carry away the
sum of P15,000.00, Philippine Currency, to the damage and prejudice of the said bank in the
aforesaid amount.
However, the trial court did not find the existence of probable cause because (1) the element of
‘taking without the consent of the owners’ was missing on the ground that it is the depositors-
clients, and not the Bank, which filed the complaint in these cases, who are the owners of the
money allegedly taken by respondents and hence, are the real parties-in-interest; and (2) the
Informations are bereft of the phrase alleging "dependence, guardianship or vigilance between
the respondents and the offended party that would have created a high degree of confidence
between them which the respondents could have abused.".
Issue:
Whether or not the 112 informations for qualified theft sufficiently allege the element of taking
without the consent of the owner, and the qualifying circumstance of grave abuse of
confidence.
Held:
Yes.
The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the
Informations and, therefore, because of this defect, there is no basis for the existence of
probable cause which will justify the issuance of the warrant of arrest. Petitioner assails the
dismissal contending that the Informations for Qualified Theft sufficiently state facts which
constitute (a) the qualifying circumstance of grave abuse of confidence; and (b) the element of
taking, with intent to gain and without the consent of the owner, which is the Bank.
The RTC Judge based his conclusion that there was no probable cause simply on the
insufficiency of the allegations in the Informations concerning the facts constitutive of the
elements of the offense charged.
The relationship between banks and depositors has been held to be that of creditor and debtor.
Articles 1953 and 1980 of the New Civil Code, as appropriately pointed out by petitioner,
provide as follows:
Article 1953. A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and
quality.
Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning loan.
Court has consistently considered the allegations in the Information that such employees
acted with grave abuse of confidence, to the damage and prejudice of the Bank, without
particularly referring to it as owner of the money deposits, as sufficient to make out a case
of Qualified Theft In a long line of cases involving Qualified Theft, this Court has firmly
established the nature of possession by the Bank of the money deposits therein, and the duties
being performed by its employees who have custody of the money or have come into
possession of it. The Court has consistently considered the allegations in the Information that
such employees acted with grave abuse of confidence, to the damage and prejudice of the
Bank, without particularly referring to it as owner of the money deposits, as sufficient to make
out a case of Qualified Theft.
Banks, where monies are deposited, are considered the owners thereof; The relationship
between banks and depositors has been held to be that of creditor and debtor.—It is beyond
doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come into
possession of the monies deposited therein enjoy the confidence reposed in them by their
employer. Banks, on the other hand, where monies are deposited, are considered the owners
thereof. This is very clear not only from the express provisions of the law, but from established
jurisprudence. The relationship between banks and depositors has been held to be that of
creditor and debtor.
When the defendant, with grave abuse of confidence, removed the money and appropriated
it to his own use without the consent of the Bank, there was taking as contemplated in the
crime of Qualified Theft.—People v. Locson, 57 Phil. 325 (1932), in addition to People v.
Sison, described the nature of possession by the Bank. The money in this case was in the
possession of the defendant as receiving teller of the bank, and the possession of the defendant
was the possession of the Bank. The Court held therein that when the defendant, with grave
abuse of confidence, removed the money and appropriated it to his own use without the
consent of the Bank, there was taking as contemplated in the crime of Qualified Theft.
Banks and Banking; Criminal Law; Qualified Theft; The Bank acquires ownership of the
money deposited by its clients; and the employee of the Bank, who are entrusted with the
possession of money of the Bank due to the confidence reposed in them, occupy positions of
confidence.—In summary, the Bank acquires ownership of the money deposited by its clients;
and the employees of the Bank, who are entrusted with the possession of money of the Bank
due to the confidence reposed in them, occupy positions of confidence. The Informations,
therefore, sufficiently allege all the essential elements constituting the crime of Qualified
Theft.

BPI FAMILY BANK VS. FRANCO
 
FACTS:
On August 15, 1989, Tevesteco opened a savings and current account with BPI-FB. Soon
thereafter, FMIC also opened a timedeposit account with the same branch of BPI-FBOn
August 31, 1989, Franco opened three accounts, namely, a current, savings, and time deposit,
with BPI-FB. The total amountof P2,000,000.00 used to open these accounts is traceable to a
check issued by Tevesteco allegedly in consideration of Franco’s introduction of Eladio Teves,
to Jaime Sebastian, who was then BPI-FB SFDM’s Branch Manager. In turn, the funding for
theP2,000,000.00 check was part of the P80,000,000.00 debited by BPI-
FB from FMIC’s time deposit account and credited toTevesteco’s current account pursuant to
an Authority to Debit purportedly signed by FMIC’s officers.
 It appears, however, that the signatures of FMIC’s officers on the Authority to Debit were
forged. BPI-FB, debited Franco’s savings and current accounts for the amounts remaining
therein. In the meantime, two checks drawn by Franco against his BPI-FB current account
were dishonored and stamped with a notation “account under garnishment.” Apparently,
Franco’s current account was garnished by virtue of an Order ofNotably, the dishonored
checks were issued by Franco and presented for payment at BPI-FB prior to Franco’s receipt
ofnotice that his accounts were under garnishment. It was only on May 15, 1990, that Franco
was impleaded in the Makati case.Immediately, upon receipt of such copy, Franco filed a
Motion to Discharge Attachment. On May 17, 1990, Franco pre-terminatedhis time deposit
account.BPI-FB deducted the amount of P63,189.00 from the remaining balance of the time
deposit account representingadvance interest paid to him. Consequently, in light of BPI-FB’s
refusal to heed Franco’s demands to unfreeze his accounts andrelease his deposits therein,
Franco filed on June 4, 1990 with the Manila RTC the subject suit.
 
ISSUE: WON Respondent had better right to the deposits in the subject accounts which are
part of the proceeds of a forgedAuthority to Debit
 
HELD: NOThere is no doubt that BPI-FB owns the deposited monies in the accounts of
Franco, but not as a legal consequence of
its unauthorized transfer of FMIC’s deposits to Tevesteco’s account. BPI-FB conveniently
forgets that the deposit of money inbanks is governed by the Civil Code provisions on simple
loan or mutuum. As there is a debtor-creditor relationship between a bank and its depositor,
BPI-FB ultimately acquired ownership of Franco’s deposits, but such ownership is coupled
with a corresponding obligation to pay him an equal amount on demand. Although BPI-FB
owns the deposits in Franco’s accounts, it cannot prevent him from demanding payment of
BPI-FB’s obligation by drawing checks against his current account, or asking for the release of
the funds in his savings account. Thus, when Franco issued checks drawn against his current
account, he had everyright as creditor to expect that those checks would be honored by BPI-FB
as debtor.
More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco
based on its mere suspicionthat the funds therein were proceeds of the multi-million peso scam
Franco was allegedly involved in. To grant BPI-FB, or anybank for that matter, the right to
take whatever action it pleases on deposits which it supposes are derived from
shadytransactions, would open the floodgates of public distrust in the banking industry.
Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the
signatures of its customers. Having failed to detect the forgery in the Authority to Debit and in
the process inadvertently facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now shift
liability thereon to Franco and the other payees of checks issued by Tevesteco, or prevent
withdrawals fromtheir respective accounts without the appropriate court writ or a favorable
final judgment.
Mercantile Law; Banking Laws; Money as a Medium of Exchange; Money, which had
passed through various transactions in the general course of banking business, even if of
traceable origin, bears no earmarks of peculiar ownership.—It bears emphasizing that money
bears no earmarks of peculiar ownership, and this characteristic is all the more manifest in the
instant case which involves money in a banking transaction gone awry. Its primary function is
to pass from hand to hand as a medium of exchange, without other evidence of its title. Money,
which had passed through various transactions in the general course of banking business, even
if of traceable origin, bears no earmarks of peculiar ownership.
Nature of a Bank; As a business affected with public interest and because of the nature of
its functions, the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of the relationship.—In every
case, the depositor expects the bank to treat his account with the utmost fidelity, whether such
account consists only of a few hundred pesos or of millions. The bank must record every single
transaction accurately, down to the last centavo, and as promptly as possible. This has to be
done if the account is to reflect at any given time the amount of money the depositor can
dispose of as he sees fit, confident that the bank will deliver it as and to whomever directs. A
blunder on the part of the bank, such as the dishonor of the check without good reason, can
cause the depositor not a little embarrassment if not also financial loss and perhaps even civil
and criminal litigation. The point is that as a business affected with public interest and because
of the nature of its functions, the bank is under obligation to treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature of their relationship. x x x.
REPUBLIC vs. Grijaldo
Art 1953: A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and
quality.
FACTS: Jose Grijaldo obtained five crop 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. All notes without due dates, but because the loans were crop
loans it was considered that 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 known as Hacienda Campugas.
By virtue of “Trading with the Enemy Act” the assets in the Philippines of the Bank of Taiwan,
Ltd. were vested in the Government of the United States which were subsequently transferred
to the Republic of the Philippines. Grijaldo failed to pay the crop loans despite the extra-
judicial demand of the Government of the Philippines. He argued that the Government 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 those crops were lost or destroyed through enemy action his
obligation to pay the loans was thereby extinguished.
ISSUE: Whether or not Grijaldo’s obligation to pay the crop loans had extinguished due to the
crops that were lost or destroyed through enemy action.
HELD/RATIO: NO. The obligation of the Grijaldo 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 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. The court ordered the estate of Grijaldo to
answer for the settlement of the crop loans.
Obligations and contracts; Crop loans obtained from the Bank of Taiwan, Ltd.; Right of
Philippine Government to collect the loans.—In 1943, appellant obtained crop loans from the
Bank of Taiwan, Ltd., Bacolod City Branch, evidenced by promissory notes. To secure
payment of the loans, appellant executed a chattel mortgage over the standing crops on his
land. After the war, the Republic of the Philippines brought the present action to collect from
appellant the unpaid account. Held: 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 loans.
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., were vested in the United States Government. Pursuant,
further, to the Philippine Property Act of 1946 and Transfer Agreements dated July 20, 1954
and June 15, 1957, between 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 transfers 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 interests in said loans, thereby creating a privity of contract
between the appellee and the appellant.
Destruction of crop through enemy action; Effect on the obligation.—Appellant 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 the land owned by him and those
crops were lost or destroyed through enemy action his obligation to pay the loans was thereby
extinguished. Held: This argument is untenable. The obligation of the appellant under the
promissory notes was not to deliver a determinate thing. namely, the crops to be harvested
from his land, but to pay a generic thing—the amount of money representing the total sum of
his loans, with interest. The chattel mortgage on the crops simply stood as a security for the
fulfillment of appellant's obligation covered by the, 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.
Prescription of actions; Prescription does not run against the government.— 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 ever a public
property. 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).
Effect of moratorium laws.—Moreover, 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 Nos. 25, dated November 18. 1944; Executive Order No. 32, dated March 10, 1945;
and Republic Act No. 432, approved on July 26, 1948). Computed accordingly, the
prescriptive period was suspended for 8 years and 6 months. Hence, appellee's action had not
yet prescribed.
Payment in Japanese war notes; Application of Ballantyne scale of values.—Contracts
stipulating for payments presumably in Japanese war notes may be enforced 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. (Hilado vs. De la Costa L-150 April 30. 1049, 46 Off. Gaz. 5472.)
DE LA PAZ V L & J DEVELOPMENT COMPANY
734 SCRA 364 (2014)
FACTS: Out of trust and confidence, Rolando dela Paz lent a sum of money worth Php
350,000 to L & J Development Corporation, a property developer represented by Atty. Esteban
Salonga as its president and general manager.
The loan was executed without any security and no maturity date. It was however agreed
between the parties that the loan will have a 6% monthly interest (amounting to Php 21,000).
So far, L&J paid a total of Php 576,000 already – including interest charges from December
2000 to August 2003.
L&J later failed to make payments due to financial difficulties in the business. Rolando then
filed a collection case with the MTC and alleged as of January 2005, L&J still owes him Php
772,000 inclusive of monthly interests.
L&J (represented by Atty. Salonga) did not deny that they did incurred a debt from Rolando,
and admitted that they failed to pay due to a fortuitous event (financial difficulties). They also
contended that the 6% monthly interest is unconscionable and that their total payment of Php
576,000 should be applied to the principal loan which only amounts to Php 350,000.
Rolando also contends that Atty. Salonga tricked him to execute the said loan plus interest
without reducing the agreement in writing. He also said that the 6% interest rate was at the
suggestion and insistence of L&J.
The MTC rendered judgment in favor of Rolando and upheld the 6% interest rate as valid since
L&J complied to it as evidenced by the payment they made from December 2000 to August
2003. L&J is now estopped to impugn said interest rate.
The MTC also reduced the legal interest rate to 12% per annum on the remaining loan for
reasons of equity. They did not grant the prayer of moral damages to Rolando since there was
no bad faith on the part of L&J.
L&J appealed the decision to the RTC – contending once again that the 6% interest rate is
unconscionable, and that their previous payment which totaled Php 576,000 should be used to
set off the principal loan of Php 350,000. RTC however affirmed the decision of the MTC.
L&J appealed to the CA.
CA ruled in favor of L&J, noting that the agreed 6% interest rate was not reduced in a written
agreement and hence, it should not be considered due. CA ruled that the loan was already paid,
and that Rolando should return the excess Php 226,000 with interest of 12% per annum. The
case has now reached the Supreme Court.
ISSUE: Whether or not the unwritten 6% interest agreement should be honored.
HELD: No. The Supreme Court held that, as provided under the Civil Code, an agreement
regarding loan interests should be stipulated in writing. Even if the 6% monthly rate was done
in writing, it will still be void for being unconscionable and contrary to morals and public
policy – for at this time, an interest rate of 3% and higher is considered excessive and
exorbitant.
Furthermore, the lack of maturity date puts the total interest to a whooping 72% per annum
which the Supreme Court considered to be “definitely outrageous and inordinate.” The
Supreme Court affirmed CA’s ruling, but as to Rolando’s obligation to pay the excess Php
226,000, the interest rate was reduced from 12% to 6% per annum.
Interest Rates; Jurisprudence holds that for interest to be due and payable, two
conditions must concur: a) express stipulation for the payment of interest; and b) the
agreement to pay interest is reduced in writing.—Under Article 1956 of the Civil Code, no
interest shall be due unless it has been expressly stipulated in writing. Jurisprudence on the
matter also holds that for interest to be due and payable, two conditions must concur: a)
express stipulation for the payment of interest; and b) the agreement to pay interest is reduced
in writing.
Usury Law; At present, usury has been legally nonexistent in view of the suspension of
the Usury Law by Central Bank Circular No. 905 S. 1982. Even so, not all interest rates
levied upon loans are permitted by the courts as they have the power to equitably reduce
unreasonable interest rates.—Indeed at present, usury has been legally nonexistent in view of
the suspension of the Usury Law by Central Bank Circular No. 905 S.1982. Even so, not all
interest rates levied upon loans are permitted by the courts as they have the power to equitably
reduce unreasonable interest rates. In Trade & Investment Development Corporation of the
Philippines v. Roblett Industrial Construction Corporation, 490 SCRA 1 (2006), we said:
While the Court recognizes the right of the parties to enter into contracts and who are expected
to comply with their terms and obligations, this rule is not absolute. Stipulated interest rates are
illegal if they are unconscionable and the Court is allowed to temper interest rates when
necessary. In exercising this vested power to determine what is iniquitous and unconscionable,
the Court must consider the circumstances of each case. What may be iniquitous and
unconscionable in one case, may be just in another.
Central Bank Circular No. 799; Pursuant to Central Bank Circular No. 799 S. 2013 which took
effect on July 1, 2013, the interest imposed by the Court of Appeals (CA) must be accordingly
modified. The P226,000.00 which Rolando is ordered to pay L&J shall earn an interest of 6%
per annum from the finality of this Decision.—Pursuant to Central Bank Circular No. 799 S.
2013 which took effect on July 1, 2013, the interest imposed by the CA must be accordingly
modified. The P226,000.00 which Rolando is ordered to pay L&J shall earn an interest of 6%
per annum from the finality of this Decision.
Relucio vs. Brillante-Garfin
G.R. No. 76518. July 13, 1990.
FACTS:
Private respondent Zeida B. Brillante-Garfin filed a complaint for specific performance with
damages against petitioner Irene P. Relucio, to compel the latter to execute, in compliance with
the Contract to Buy and Sell, a final deed of sale in favor of the former over two (2) residential
subdivision lots in the Mariano Village Subdivision, Naga City. Private respondent alleged that
the lots, which have a total contract price of P10,800.00, have already been paid for, as she had
already paid P200.00 as down payment, and had subsequently completed payment of 128 equal
monthly installments of P89.45 each amounting to P11,450.00; that as the law allows the
charging of interest only as monetary interest or as compensatory interest, none of which have
obtained in her case, as she had never incurred in delay in the payment of installments due, the
stipulated interest of six percent (6%) per annum on the outstanding balance is null and void;
and that the amount of 650.00 representing overpayment be returned to her. Petitioner alleged
that private respondent is obliged to pay interest on the installment payments of the unpaid
outstanding balance even if paid on their "due dates" per schedule of payments; that private
respondent had actually been in arrears in the amount of P4,269.40, representing such interest
as of June 1979, which therefore entitled petitioner to cancel the contract in question.
ISSUE: Whether or not petitioner has the right to rescind the contract for private respondent's
continued refusal to pay the monthly installments on the contract price
HELD: No. Vendor and vendee are legally free to stipulate for the payment of either the cash
price of a subdivision lot or its installment price. Should the vendee opt to purchase a
subdivision lot via the installment payment system, he is in effect paying interest on the cash
price, whether the fact and rate of such interest payment is disclosed in the contract or not. The
contract for the purchase and sale of a piece of land on the installment payment system in the
case at bar is not only quite lawful; it also reflects a very wide spread usage or custom in our
present day commercial life.
Despite private respondent's failure to fully pay the stipulated price of the two lots in question,
petitioner, however, could not validly rescind the contract not being lawfully entitled to do so.
Petitioner failed to rebut private respondents' allegations that the former had failed to introduce
required improvements in the subdivision.
Vendor and vendee are legally free to stipulate for the payment of either the cash price of
a subdivision lot or its installment price.—Vendor and vendee are legally free to stipulate for
the payment of either the cash price of a subdivision lot or its installment price. Should the
vendee opt to purchase a subdivision lot via the installment payment system, he is in effect
paying interest on the cash price, whether the fact and rate of such interest payment is disclosed
in the contract or not. The contract for the purchase and sale of a piece of land on the
installment payment system in the case at bar is not only quite lawful; it also reflects a very
wide spread usage or custom in our present day commercial life.
Presidential Decree No. 957; The law vests upon the buyer the option to demand
reimbursement of the total amount paid or to wait for further development of the
subdivision.—In this respect, the trial court was correct in holding that petitioner could not
rescind the contract. As the law vests upon the buyer the option to demand reimbursement of
the total amount paid, or to wait for further development of the subdivision, private respondent
who opted for the latter alternative by waiting for the proper development of the site, may not
be ousted from the subdivision.
State Investment House, Inc. vs. Court of Appeals
G.R. No. 90676. June 19, 1991
Facts:
Nora Moulic issued to Corazon Victoriano, as security for pieces of jewellery to be sold on
commission, two postdated checks in the amount of fifty thousand each. Thereafter, Victoriano
negotiated the checks to State Investment House, Inc. When Moulic failed to sell the jewellry,
she returned it to Victoriano before the maturity of the checks. However, the checks cannot be
retrieved as they have been negotiated. Before the maturity date Moulic withdrew her funds
from the bank contesting that she incurred no obligation on the checks because the jewellery
was never sold and the checks are negotiated without her knowledge and consent. Upon
presentment of for payment, the checks were dishonoured for insufficiency of funds.
Issues:
1. Whether or not State Investment House inc. was a holder of the check in due course
2. Whether or not Moulic can set up against the petitioner the defense that there was failure or
absence of consideration
Held:
Yes, Section 52 of the NIL provides what constitutes a holder in due course. The evidence
shows that: on the faces of the post dated checks were complete and regular; that State
Investment House Inc. bought the checks from Victoriano before the due dates; that it was
taken in good faith and for value; and there was no knowledge with regard that the checks were
issued as security and not for value. A prima facie presumption exists that a holder of a
negotiable instrument is a holder in due course. Moulic failed to prove the contrary.
No, Moulic can only invoke this defense against the petitioner if it was a privy to the purpose
for which they were issued and therefore is not a holder in due course.
No, Section 119 of NIL provides how an instruments be discharged. Moulic can only invoke
paragraphs c and d as possible grounds for the discharge of the instruments. Since Moulic
failed to get back the possession of the checks as provided by paragraph c, intentional
cancellation of instrument is impossible. As provided by paragraph d, the acts which will
discharge a simple contract of payment of money will discharge the instrument. Correlating
Article 1231 of the Civil Code which enumerates the modes of extinguishing obligation, none
of those modes outlined therein is applicable in the instant case. Thus, Moulic may not
unilaterally discharge herself from her liability by mere expediency of withdrawing her funds
from the drawee bank. She is thus liable as she has no legal basis to excuse herself from
liability on her check to a holder in due course. Moreover, the fact that the petitioner failed to
give notice of dishonor is of no moment. The need for such notice is not absolute; there are
exceptions provided by Sec 114 of NIL.
Civil Law; Damages; The appropriate measure for damages in case of delay in
discharging an obligation consisting of the payment of a sum of money is the payment of
penalty interest at the rate agreed upon.––It must be stressed in this connection that under
Article 2209 of the Civil Code x x x the appropriate measure for damages in case of delay in
discharging an obligation consisting of the payment of a sum of money, is the payment of
penalty interest at the rate agreed upon; and in the absence of a stipulation of a particular rate
of penalty interest, then the payment of additional interest at a rate equal to the regular
monetary interest; and if no regular interest had been agreed upon, then payment of legal
interest or six percent (6%) per annum.
Fact that respondent Aquino spouses were not in default did not mean that they were
relieved from the payment not only of penalty or compensatory interest of 24% per
annum but also of regular or monetary interest of 17% per annum.––The fact that the
respondent Aquino spouses were not in default did not mean that they, as a matter of law were
relieved from the payment not only of penalty or compensatory interest at the rate of twenty-
four percent (24%) per annum but also of regular or monetary interest of seventeen percent
(17%) per annum. The regular or monetary interest continued to accrue under the terms of the
relevant promissory note until actual payment is effected. The payment of egular interest
constitutes the price or cost of the use of money and thus, until the principal sum due is
returned to the creditor, regular interest continues to accrue since the debtor continues to use
such principal amount.
Payment; Consignation; Conditions to be complied with by debtor desirous of being
released from his obligation.––Where the creditor unjustly refuses to accept payment, the
debtor desirous of being released from his obligation must comply with two (2) conditions: (a)
tender of payment; and (b) consignation of the sum due. Tender of payment must be
accompanied or followed by consignation in order that the effects of payment may be
produced. Thus, in Llamas v. Abaya, the Supreme Court stressed that a written tender of
payment alone, without consignation in court of the sum due, does not suspend the accruing of
regular or monetary interest.
Respondent spouses Aquino failed to consign in Court in amount due at the time of the
maturity of Account No. IF-82-0904-AA.––In the instant case, respondent spouses Aquino,
while they are properly regarded as having made a written tender of payment to petitioner
State, failed to consign in court the amount due at the time of the maturity of Account No. IF-
82-0904-AA. It follows that their obligation to pay principal-cum-regular or monetary interest
under the terms and conditions of Account No. IF-82-0904-AA was not extinguished by such
tender of payment alone.
Eastern Shipping Lines, Inc. vs. Court of Appeals
G.R. No. 97412. July 12, 1994
FACTS: Eastern Shipping Lines [Eastern] is a common carrier engaged in transportation of
goods. It was supposed to deliver goods to the consignee wherein the latter’s goods was
covered by marine insurance policy by Mercantile Insurance Company, Inc. [Mercantile]. The
goods upon reaching the consignee were damaged and thus claimed benefits from Mercantile
which made the latter be subrogated to the case at bar. Mercantile filed damage against Eastern
which was granted by the lower court with the imposition of 12% interest. Eastern contends
that neither the contract was explicit in imposing the rate of interest, thus, at most, the interest
after the judgment should have only been 6%.
ISSUE: Whether the imposition of 12% interest by the lower court was justified.
HELD: No. In deciding the case, the Court laid down principle with regard to the imposition
of interest for the payment of damages, to wit: “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 [Art 1956 NCC]. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 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.
Damages; Interest Rates; Rules of thumb for future guidance in the award of damages
and interest rates.—The ostensible discord is not difficult to explain. The factual
circumstances may have called for different applications, guided by the rule that the courts are
vested with discretion, depending on the equities of each case, on the award of interest.
Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest the
following rules of thumb for future guidance.
When an obligation is breached, the contravenor can be held liable for damages.—When
an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held liable for damages. The provisions under Title
XVIII on “Damages” of the Civil Code govern in determining the measure of recoverable
damages.
Interests in the Concept of Actual and Compensatory Damages; In a loan or forbearance
of money, the interest due should be that stipulated in writing, and in the absence thereof,
the rate shall be 12% per annum.—With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof,
is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall
be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil Code.
In case of other obligations, the interest on the amount of damages may be imposed at the
discretion of the court at the rate of 6% per annum.—When an obligation, not constituting
a loan or forbearance of money, is breached, an interest on the amount of damages awarded
may be imposed at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is
made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run only from
the date the judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest 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.—
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.
New Sampaguita Builders Construction, Inc. (NSBCI) vs. Philippine National Bank
G.R. No. 148753. July 30, 2004
Sampaguita loaned money from PNB. PNB unilaterally increased rates of interest in the loan
w/o informing Sampaguita. PNB claimed they were authorized to do it as there was a clause in
the agreement that they may do so. Besides, Usury law was no longer in force
The SC ruled on the negative. PNB cannot do so; it will violate mutuality of contracts under
1308. Besides, SC may intervene when amount of interest is unconscionable.
Facts:
Sampaguita secured a loan from PNB in an aggregate amount of 8M pesos, mortgaging the
properties of Sampaguita’s president and chairman of the board. Sampaguita also executed
several promissory notes due on different dates (payment dates). The first promissory note had
19.5% interest rate. The 2nd and 3rd had 21.5%. a uniform clause therein permitted PNB to
increase the rate “within the limits allowed by law at any time depending on whatever policy it
may adopt in the future x x x,” without even giving prior notice to petitioners. There was also a
clause in the promissory note that stated that if the same is not paid 2 years after release then it
shall be converted to a medium term loan – and the interest rate for such loan would apply.
Later on, Sampaguita defaulted on its payments and failed to comply with obligations on
promissory notes. Sampaguita thus requested for a 90 day extension to pay the loan. Again
they defaulted, so they asked for loan restructuring. It partly paid the loan and promised to pay
the balance later on. AGAIN they failed to pay so PNB extrajudicially foreclosed the
mortgaged properties. It was sold for 10M. PNB claimed that Sampaguita owed it 12M so they
filed a case in court asking sampaguita to pay for deficiency.
RTC found that Sampaguita was automatically entitled to the debt relief package of PNB and
ruled that the latter had no cause of action against the former. CA reversed, saying Sampaguita
was not entitled, thus ordered them to pay the deficiency – Appeal = Went to SC. Sampaguita
claims the loan was bloated so they don’t really owe PNB anymore, but it just overcharged
them!
Issue:
Whether PNB could unilaterally increase interest rates: NO
Held:
Sampaguita’s accessory duty to pay interest did not give PNB unrestrained freedom to charge
any rate other than that which was agreed upon. No interest shall be due, unless expressly
stipulated in writing. It would be the zenith of farcicality to specify and agree upon rates that
could be subsequently upgraded at whim by only one party to the agreement.
The “unilateral determination and imposition” of increased rates is “violative of the principle
of mutuality of contracts ordained in Article 1308 of the Civil Code.” One-sided impositions
do not have the force of law between the parties, because such impositions are not based on the
parties’ essential equality.
Although escalation clauses are valid in maintaining fiscal stability and retaining the value of
money on long-term contracts, giving respondent an unbridled right to adjust the interest
independently and upwardly would completely take away from petitioners the “right to assent
to an important modification in their agreement” and would also negate the element of
mutuality in their contracts. The clause cited earlier made the fulfillment of the contracts
“dependent exclusively upon the uncontrolled will” of respondent and was therefore void.
Besides, the pro forma promissory notes have the character of a contract d’adhésion, “where
the parties do not bargain on equal footing, the weaker party’s [the debtor’s] participation
being reduced to the alternative ‘to take it or leave it.’”
Circular that lifted the ceiling of interest rates of usury law did not authorize either party to
unilaterally raise the interest rate without the other’s consent.
The interest ranging from 26 percent to 35 percent in the statements of account -- “must be
equitably reduced for being iniquitous, unconscionable and exorbitant.” Rates found to be
iniquitous or unconscionable are void, as if it there were no express contract thereon. Above
all, it is undoubtedly against public policy to charge excessively for the use of money.
It cannot be argued that assent to the increases can be implied either from the June 18, 1991
request of petitioners for loan restructuring or from their lack of response to the statements of
account sent by respondent. Such request does not indicate any agreement to an interest
increase; there can be no implied waiver of a right when there is no clear, unequivocal and
decisive act showing such purpose. Besides, the statements were not letters of information sent
to secure their conformity; and even if we were to presume these as an offer, there was no
acceptance. No one receiving a proposal to modify a loan contract, especially interest -- a vital
component -- is “obliged to answer the proposal.”
Besides, PNB did not comply with its own stipulation that should the loan not be paid 2 years
after release of money then it shall be converted to a medium term loan.
*Court applied 12% interest rate instead for being a forbearance of money
(there were some pieces of evidence presented by PNB in court that sampaguita objected to.
Lower courts overruled the objections but SC said the objections were correct and the evidence
should not have been admitted. i.e. contract wasn’t signed by the parties, a part of the contract
wasn’t properly annexed/no reference was made in the main contract.)
In addition to the preceding discussion, it is then useless to labor the point that the increase in
rates violates the impairment clause of the Constitution, because the sole purpose of this
provision is to safeguard the integrity of valid contractual agreements against unwarranted
interference by the State in the form of laws. Private individuals’ intrusions on interest rates is
governed by statutory enactments like the Civil Code.
Obligations and Contracts; Loans; Promissory Notes; Interest Rates; Escalation Clauses;
Principle of Mutuality of Contracts; A borrower’s accessory duty to pay interest does not
give the lender unrestrained freedom to charge any rate other than that which was
agreed upon—it would be the zenith of farcicality to specify and agree upon rates that could
be subsequently upgraded at whim by only one party to the agreement; The “unilateral
determination and imposition” of increased rate is violative of the principle of mutuality of
contracts ordained in Article 1308 of the Civil Code.—In each drawdown, the Promissory
Notes specified the interest rate to be charged: 19.5 percent in the first, and 21.5 percent in the
second and again in the third. However, a uniform clause therein permitted respondent to
increase the rate “within the limits allowed by law at any time depending on whatever policy it
may adopt in the future x x x,” without even giving prior notice to petitioners. The Court holds
that petitioners’ accessory duty to pay interest did not give respondent unrestrained freedom to
charge any rate other than that which was agreed upon. No interest shall be due, unless
expressly stipulated in writing. It would be the zenith of farcicality to specify and agree upon
rates that could be subsequently upgraded at whim by only one party to the agreement. The
“unilateral determination and imposition”of increased rates is “violative of the principle of
mutuality of contracts ordained in Article 1308 of the Civil Code.” One-sided impositions do
not have the force of law between the parties, because such impositions are not based on the
parties’ essential equality.
Although escalation clauses are valid in maintaining fiscal stability and retaining the
value of money on long-term contracts, giving the lender an unbridled right to adjust the
interest independently and upwardly would completely take away from the borrower the
“right to assent to an important modification in their agreement” and would also negate
the element of mutuality in their contracts.—Although escalation clauses are valid in
maintaining fiscal stability and retaining the value of money on long-term contracts, giving
respondent an unbridled right to adjust the interest independently and upwardly would
completely take away from petitioners the “right to assent to an important modification in their
agreement” and would also negate the element of mutuality in their contracts. The clause cited
earlier made the fulfillment of the contracts “dependent exclusively upon the uncontrolled
will” of respondent and was therefore void. Besides, the pro forma promissory notes have the
character of a contract d’adhésion, “where the parties do not bargain on equal footing, the
weaker party’s [the debtor’s] participation being reduced to the alternative ‘to take it or leave
it.’ ”
Usury Law; While the Usury Law ceiling on interest rates was lifted by Central Bank
Circular No. 905, nothing in the said Circular 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. —“While the Usury Law ceiling on interest rates was lifted by
[Central Bank] Circular No. 905, nothing in the said Circular 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.” In fact, we have declared nearly ten years ago that neither this
Circular nor PD 1684, which further amended the Usury Law, “authorized either party to
unilaterally raise the interest rate without the other’s consent.”
Rates found to be iniquitous or unconscionable are void, as if there were no express
contract thereon.—A similar case eight years ago pointed out to the same respondent (PNB)
that borrowing signified a capital transfusion from lending institutions to businesses and
industries and was done for the purpose of stimulating their growth; yet respondent’s continued
“unilateral and lopsided policy” of increasing interest rates “without the prior assent” of the
borrower not only defeats this purpose, but also deviates from this pronouncement. Although
such increases are not usurious, since the “Usury Law is now legally inexistent”—the interest
ranging from 26 percent to 35 percent in the statements of account—“must be equitably
reduced for being iniquitous, unconscionable and exorbitant.” Rates found to be iniquitous or
unconscionable are void, as if it there were no express contract thereon. Above all, it is
undoubtedly against public policy to charge excessively for the use of money.
A borrower’s request for restructuring does not indicate any agreement to an interest
increase—there can be no implied waiver of a right when there is no clear, unequivocal
and decisive act showing such purpose; No one receiving a proposal to modify a loan
contract, especially interest—a vital component—is obliged to answer the proposal.—It
cannot be argued that assent to the increases can be implied either from the June 18, 1991
request of petitioners for loan restructuring or from their lack of response to the statements of
account sent by respondent. Such request does not indicate any agreement to an interest
increase; there can be no implied waiver of a right when there is no clear, unequivocal and
decisive act showing such purpose. Besides, the statements were not letters of information sent
to secure their conformity; and even if we were to presume these as an offer, there was no
acceptance. No one receiving a proposal to modify a loan contract, especially interest—a vital
component—is “obliged to answer the proposal.”
Where the disclosure statements, as well as the credit agreements, do not provide for any
increase in the specified interest rates, none would be permitted.—In sum, the three
disclosure statements, as well as the two credit agreements considered by this Court, did not
provide for any increase in the specified interest rates. Thus, none would now be permitted.
When cross-examined, Julia Ang-Lopez, Finance Account Analyst II of PNB, Dagupan
Branch, even testified that the bases for computing such rates were those sent by the head
office from time to time, and not those indicated in the notes or disclosure statements.
Disclosure Statements; Truth in Lending Act; The effect, when the borrower is not
clearly informed of the Disclosure Statements—prior to the consummation of the
availment or drawdown—is that the lender will have no right to collect upon such charge
or increases thereof, even if stipulated in the Notes; The time is now ripe to give teeth to
the often ignored forty-one-year old “Truth in Lending Act” and thus transform it from a
snivelling paper tiger to a growling financial watchdog of hapless borrowers.—No penalty
charges or increases thereof appear either in the Disclosure Statements or in any of the clauses
in the second and the third Credit Agreements earlier discussed. While a standard penalty
charge of 6 percent per annum has been imposed on the amounts stated in all three Promissory
Notes still remaining unpaid or unrenewed when they fell due, there is no stipulation therein
that would justify any increase in that charges. The effect, therefore, when the borrower is not
clearly informed of the Disclosure Statements—prior to the consummation of the availment or
drawdown—is that the lender will have no right to collect upon such charge or increases
thereof, even if stipulated in the Notes. The time is now ripe to give teeth to the often ignored
forty-oneyear old “Truth in Lending Act” and thus transform it from a snivelling paper tiger to
a growling financial watchdog of hapless borrowers.
Damages; Liquidated damages intended as penalty shall be equitably reduced to zilch
where iniquitous or unconscionable.—We have earlier said that the Notes are contracts of
adhesion; although not invalid per se, any apparent ambiguity in the loan contracts—taken as a
whole—shall be strictly construed against respondent who caused it. Worse, in the statements
of account, the penalty rate has again been unilaterally increased by respondent to 36 percent
without petitioners’ consent. As a result of its move, such liquidated damages intended as a
penalty shall be equitably reduced by the Court to zilch for being iniquitous or unconscionable.
Castelo vs. Court of Appeals
G.R. No. 96372. May 22, 1995
FACTS
On 15 October 1982, petitioners Antonio Castelo, Bernabe Banson, Lourdes Banson and
Pompeyo Depante entered into a contract denominated as a "Deed of Conditional Sale" with
private respondent Milagros Dela Rosa involving a parcel of land. The agreed price of the land
was P269,408.00. Upon signing the contract, private respondent paid petitioners P106,000.00
leaving a balance of P163,408.00. The Deed of Conditional Sale also stipulated that:
"xxx xxx xxx
b.)The balance of P163,408.00 to be paid on or before December 31, 1982 without interest and
penalty charges;
c.)Should the said balance [remain unpaid] by the VENDEE, the VENDORS hereby agree to
give the VENDEE a grace period of SIX (6) months or up to June 30, 1983 to pay said
balance provided that interest at the rate of 12% per annum shall be charged and 1% penalty
charge a month shall be imposed on the remaining diminishing balance. 
Private respondent Dela Rosa was unable to pay the remaining balance. Petitioners filed an
action for specific performance with damages. RTC rendered the decision ordering the
rescission of the Deed of Conditional Sale. Petitioners went on Certiorari to CA. They claimed
that rescission of the contract was only an alternative relief available under the Civil Code,
while they in their complaint before the RTC, had asked for specific performance with
damages.CA reversed the RTC decision. Writ of execution was issued. Private respondent Dela
Rosa was required to  pay petitioners a total of P197,723.68. Petitioners filed a motion for
reconsideration and a separate motion for alias  writ of execution contending that the sum of
P197,723.68 was erroneous. They argued that the obligation of private respondent was to pay
(a) interest at the rate of twelve percent (12%) per annum plus  (b) one percent (1%) penalty
charge per month, from default, i.e, from 1 January 1983; that the amount to be paid by the
Defendant should be P398,814.88 instead and not P197,723.68 or a difference of P201,091.20.
RTC denied the motion. Further contends that the phrase "to pay interest" found in the
dispositive portion of the CA’s November 21, 1986 decision did not refer to the stipulation in
the "Deed of Conditional Sale" but rather to the legal rate of interest imposed by the CA which
started to run from 12 February 1987, the date of entry of judgment.
Petitioner filed on certiorari to CA. CA dismissed it. But stated that the part of the dispositive
portion, ordering the "defendant . . . to pay the balance of the conditional sale in the amount of
P163,408.00, to pay interest . . . ." Being a "new" judgment or decision, the computation of the
"interest" on the balance of the conditional sale should commence from the date of its ENTRY
on February 12, 1987, when the decision became FINAL and EXECUTORY.  of payment of legal interest which is six percent (6%) or, in the case of loans or forbearances of
ISSUE
What is the correct interpretation of the phrase "to pay interest" set out in the dispositive
portion of the CA decision?
HELD
The established doctrine is that when the dispositive portion of a judgment, which has become
final and executory, contains a clerical error or an ambiguity arising from an inadvertent
omission, such error or ambiguity may be clarified by reference to the body of the decision
itself.
SC believe and so hold that the phrase “to pay interest,” found in the dispositive portion of the
CA decision must, under applicable law, refer to the interest stipulated by the parties in the
Deed of Conditional Sale which they had entered into on 15 October 1982. SC note, in the first
place, that the phrase “to pay interest” comes close upon the heels of the preceding phrase "to
comply with her obligation under the conditional sale to pay the balance — of P163,408.00." A
strong inference thus arises that the "interest" required to be paid is the interest stipulated as
part of the “obligation [of private respondent dela Rosa] under the conditional sale [agreement]
to pay the balance of [the purchase price of the land.
In the computation for the amount to be paid, The question is whether, during the period of 1
January 1983 up to 30 June 1983, 12% interest per annum plus 1% penalty charge a month
was payable "on the remaining diminishing balance;" or whether during the period from 1
January 1983 to 30 June 1983, only 12% per annum interest was payable while the 1% per
month penalty charge would in addition begin to accrue on any balance remaining unpaid as of
1 July 1983.
SC believed the parties intended the latter view. The interpretation SC adopted is also
supported by the principle that in case of ambiguity in contract language, that interpretation
which establishes a less onerous transmission of rights or imposition of lesser burdens which
permits greater reciprocity between the parties, is to be adopted (Art. 1378).
WHEREFORE, the writ of certiorari is hereby GRANTED.
“xxx xx xx
(2)ordering the defendant to comply with her obligation under the conditional sale to pay the
balance of the conditional sale in the amount of P163,408.00, to pay interest on the amount of
the balance remaining unpaid during the period from 1 January 1983 to 30 June 1983 at the
rate of 12% per annum; and, from 1 July 1983 until full payment of the amount due, to pay
interest at the rate of 12% per annum plus another 12% per annum (i.e., 1% penalty charge
per month), or a total of 24% per annum, on the balance remaining unpaid; and
(3)in default thereof, the rescission of the "Deed of Conditional Sale" is the alternative."
Art. 2209 of the Civil Code; Interests; Damages; The appropriate measure for damages
in case of delay in discharging an obligation consisting of a payment of a sum of money is
the payment of penalty interest.—Under Article 2209, the appropriate measure for damages
in case of delay in discharging an obligation consisting of the payment of a sum of money is
the payment of penalty interest at the rate agreed upon in the contract of the parties. In the
absence of a stipulation of a particular rate of penalty interest, payment of additional interest at
a rate equal to the regular or monetary interest, becomes due and payable. Finally, if no regular
interest had been agreed upon by the contracting parties, then the damages payable will consist
money, twelve percent (12%) per annum.
The “obligation consisting in the payment of a sum of money” referred to in Article 2209
is not confined to a loan or forbearance of money.—The contention of private respondent
that Article 2209 of the Civil Code is not applicable in this case because the interest referred to
therein is given as compensation for the use of money, not for the incurring of delay as in the
instant case, need not detain us for long. Article 2209 governs transactions involving the
payment of indemnity in the concept of damages arising from delay in the discharge of
obligations consisting of the payment of a sum of money. The “obligation consisting in the
payment of a sum of money” referred to in Article 2209 is not confined to a loan or
forbearance of money.
Contracts; In case of ambiguity in contract language, that interpretation which
establishes a less onerous transmission of rights or imposition of lesser burdens which
permits greater reciprocity between the parties, is to be adopted.—The interpretation we
adopt is also supported by the principle that in case of ambiguity in contract language, that
interpretation which establishes a less onerous transmission of rights or imposition of lesser
burdens which permits greater reciprocity between the parties, is to be adopted.
Nacar vs. Gallery Frames
G.R. No. 189871. August 13, 2013
Facts:
Nacar was constructively dismissed by Gallery Frames at the NLRC. A decision favoring
Nacar was made by the NLRC on October 15, 1998. Respondents appealed the decision but
was denied at the NLRC. At the CA, the ruling of the NLRC was upheld. Upon relief at the
SC, the respondents’ petition was denied.
However, on November 5, 2002, petitioner asked for re-computation of his backwages from
his dismissal on 1997 up to the decision of the SC on May 27, 2002. An increase of backwages
was later awarded to Nacar. Respondents filed a motion to quash. After a final computation,
and in lieu of the Monetary Board Resolution No. 796 that took effect on July 1, 2013, the
computation of awards provided to Nacar were as follows: Interest of twelve percent (12%) per
annum of the total monetary awards, computed from May 27, 2002 to June 30, 2013 and six
percent (6%) per annum from July 1, 2013 until their full satisfaction.
Issue:
Whether the computation of the LA on October 15, 1998’s decision be applied on Nacar’s
backwages. –NO.
Held:
The SC ruled that since the finality of the decision was on May 27, 2002, backwages computed
from the time petitioner was illegally dismissed on January 24, 1997 up to May 27, 2002, when
the Resolution of this Court in G.R. No. 151332 became final and executory shall be applied.
Likewise, since there is an absence of an express stipulation as to the rate of interest that would
govern the parties, the rate of legal interest for loans or forbearance of any money, goods or
credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum
— as reflected in the case of Eastern Shipping Lines 40 and Subsection X305.1 of the Manual
of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of
Regulations for Non-Bank Financial Institutions, before its amendment by BSP-MB Circular
No. 799 — but will now be six percent (6%) per annum effective July 1, 2013. It should be
noted, nonetheless, that the new rate could only be applied prospectively and not retroactively.
Thus, interest of twelve percent (12%) per annum of the total monetary awards, computed from
May 27, 2002 to June 30, 2013 and six percent (6%) per annum from
July 1, 2013 until their full satisfaction shall be applied.
Doctrine: The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the
following revisions governing the rate of interest in the absence of stipulation in loan
contracts, thereby amending Section 2 of Circular No. 905, Series of 1982: Section 1. The rate
of interest for the loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to such rate of interest, shall be six percent
(6%) per annum. Section 2. In view of the above, Subsection X305.1 36 of the Manual of
Regulations for Banks and Sections 4305Q.1, 37 4305S.3 38 and 4303P.1 39 of the Manual of
Regulations for Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013. This rule does apply retroactively.
Interest Rates; In the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance of any money,
goods or credits and the rate allowed in judgments shall no longer be twelve percent
(12%) per annum — as reflected in the case of Eastern Shipping Lines vs. Court of Appeals,
234 SCRA 78 (1994), and Subsection X305.1 of the Manual of Regulations for Banks and
Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial
Institutions, before its amendment by BSPMB Circular No. 799 — but will now be six percent
(6%) per annum effective July 1, 2013.—In the absence of an express stipulation as to the rate
of interest that would govern the
parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the
rate allowed in judgments shall no longer be twelve percent (12%) per annum — as reflected in
the case of Eastern Shipping Lines, Inc. v. Court of Appeals, 234 SCRA 78 (1994) and
Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3
and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its
amendment by BSP-MB Circular No. 799 — but will now be six percent (6%) per annum
effective July 1, 2013. It should be noted, nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the twelve percent (12%) per annum legal
interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent
(6%) per annum shall be
the prevailing rate of interest when applicable.
Monetary Board; The Bangko Sentral ng PilipinasMonetary Board may prescribe the
maximum rate or rates of interest for all loans or renewals thereof or the forbearance of
any money, goods or credits, including those for loans of low priority such as consumer
loans, as well as such loans made by pawnshops, finance companies and similar credit
institutions.—In the recent case of Advocates for Truth in Lending, Inc. and Eduardo B.
Olaguer v. Bangko Sentral Monetary Board, 688 SCRA 530 (2013), this Court affirmed the
authority of the BSPMB to set interest rates and to issue and enforce Circulars when it ruled
that “the BSP-MB may prescribe the maximum rate or rates of interest for all loans or renewals
thereof or the forbearance of any money, goods or credits, including those for loans of low
priority such as consumer loans, as well as such loans made by pawnshops, finance companies
and similar credit institutions. It even authorizes the BSP-MB to prescribe different maximum
rate or rates for different types of borrowings, including deposits and deposit substitutes, or
loans of financial intermediaries.”
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; In the absence of stipulation, the rate of interest shall be 6% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.—When the obligation is
breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the NCC.
.
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.—When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art.
1169, Civil Code), but when such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, shall be 6% per annum from such finality until its satisfaction .
—When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.
DE CORTES V VENTURANZA
79 SCRA 709 (1977)
Facts:
The plaintiffs sold and delivered to the defendants all the thirty-three (33) parcels of land with
all the improvements thereon for the total sum of P716,573.90 where the defendants agreed to
pay jointly and severally the plaintiffs the sum of P100,000.00 upon the signing and execution
of a deed of sale and P40,000.00 on January 1, 1959 thereby leaving a balance of P576,573.90
which the defendants agreed and bound themselves to pay plaintiffs jointly and severally
within three (3) years from January 1, 1959 with interest thereon at the rate of 6% per annum.
They agreed and bound themselves to secure the payment of the said balance of P576,573.90
with a first mortgage. Thereafter, the defendants have already paid the plaintiffs the total sum
of P140,000.00 that of the unpaid balance owing to plaintiffs, P169,484.24 pertain(ing)s to
plaintiff Felix Cortes and P407,089.66 pertains to plaintiff Noel J. Cortes.
Issue:
How much is the interest is payable?
Held:
The judgment is hereby rendered in favor of plaintiffs and against the defendants, ordering the
latter jointly and severally to pay to the former or to deposit with the clerk of court the sum of
P576,573.90 with interest thereon at the stipulated rate of 6% per annum until fully paid,
within 90 days from notice hereof. In default of such payment the mortgaged property will be
sold at public auction to realize the mortgage indebtedness and costs, in accordance with law.
Hence, for the period from January 1, 1959 to December 12, 1962, the date of the filing of the
complaint, plaintiffs are entitled to collect from the defendants, by way of interest at six
percent per annum, the sum of P136,482.13. Applying the Article 2212 of the New Civil Code,
which provides: “Interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point.”, this amount of P136,482.13 should be
added to the principal of P576,573.90, making a total of P713,056.03, which shall earn legal
interest stipulated at six percent per annum from December 13, 1962 until fully paid. Such
interest is not due to stipulation; rather it is due to the mandate of the law hereinbefore quoted.
Ligutan vs. Court of Appeals
G.R. No. 138677. February 12, 2002
Facts: Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the amount of
P120,000.00 from respondent Security Bank and Trust Company. Petitioners executed a
promissory note binding themselves, jointly and severally, with an interest of 15.189% per
annum upon maturity and to pay a penalty of 5% every month on the outstanding principal and
interest in case of default and also a 10% attorney’s fees if the matter were indorsed to a lawyer
for collection.
The obligation matured, the petitioners were not able to settle the obligation; The bank gave an
extension, still the same happened. Since the petitioners still defaulted, the former filed a
complaint for recovery of the due amount.
Issue: Whether the interest and penalty charge imposed by private respondent bank on
petitioners’ loan are manifestly exorbitant, iniquitous and unconscionable?
Held: The obligor would then be bound to pay the stipulated indemnity without the necessity
of proof on the existence and on the measure of damages caused by the breach. Although a
court may not at liberty ignore the freedom of the parties to agree on such terms and conditions
as they see fit that contravene neither law nor morals, good customs, public order or public
policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is
iniquitous or unconscionable or if the principal obligation has been partly or irregularly
complied with.
The question of whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective. Its resolution would depend on such factors as, but not necessarily confined
to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach
and its consequences, the supervening realities, the standing and relationship of the parties, and
the like, the application of which, by and large, is addressed to the sound discretion of the
court.
The CA exercised good judgment in reducing the stipulated penalty interest from 5% to 3% a
month. It was also been held that the 15.189% per annum stipulated interest and the 10%
attorney’s is reasonable and not excessive. The interest prescribed in loan financing
arrangements is a fundamental part of the banking business and the core of a bank's existence.
Penalty Clauses; Words and Phrases; A penalty clause, expressly recognized by law, is an
accessory undertaking to assume greater liability on the part of an obligor in case of
breach of an obligation; Although a court may not at liberty ignore the freedom of the
parties to agree on such terms and conditions as they see fit that contravene neither law
nor morals, good customs, public order or public policy, a stipulated penalty,
nevertheless, may be equitably reduced by the courts if it is iniquitous or unconscionable
or if the principal obligation has been partly or irregularly complied with.—A penalty
clause, expressly recognized by law, is an accessory undertaking to assume greater liability on
the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive
force of the obligation and to provide, in effect, for what could be the liquidated damages
resulting from such a breach. The obligor would then be bound to pay the stipulated indemnity
without the necessity of proof on the existence and on the measure of damages caused by the
breach. Although a court may not at liberty ignore the freedom of the parties to agree on such
terms and conditions as they see fit that contravene neither law nor morals, good customs,
public order or public policy, a stipulated penalty, nevertheless, may be equitably reduced by
the courts if it is iniquitous or unconscionable or if the principal obligation has been partly or
irregularly complied with.
The question of whether a penalty is reasonable or iniquitous can be partly subjective
and partly objective.—The question of whether a penalty is reasonable or iniquitous can be
partly subjective and partly objective. Its resolution would depend on such factors as, but not
necessarily confined to, the type, extent and purpose of the penalty, the nature of the
obligation, the mode of breach and its consequences, the supervening realities, the standing and
relationship of the parties, and the like, the application of which, by and large, is addressed to
the sound discretion of the court. In Rizal Commercial Banking Corp. vs. Court of Appeals,
just an example, the Court has tempered the penalty charges after taking into account the
debtor’s pitiful situation and its offer to settle the entire obligation with the creditor bank. The
stipulated penalty might likewise be reduced when a partial or irregular performance is made
by the debtor. The stipulated penalty might even be deleted such as when there has been
substantial performance in good faith by the obligor, when the penalty clause itself suffers
from fatal infirmity, or when exceptional circumstances so exist as to warrant it.
Interests; The essence or rationale for the payment of interest, quite often referred to as
cost of money, is not exactly the same as that of a surcharge or a penalty, and a penalty
stipulation is not necessarily preclusive of interest, if there is an agreement to that effect,
the two being distinct concepts which may separately be demanded; What may justify a
court in not allowing the creditor to impose full surcharges and penalties, despite an
express stipulation therefor in a valid agreement, may not equally justify the non-
payment or reduction of interest.—Anent the stipulated interest of 15.189% per annum,
petitioners, for the first time, question its reasonableness and prays that the Court reduce the
amount. This contention is a fresh issue that has not been raised and ventilated before the
courts below. In any event, the interest stipulation, on its face, does not appear as being that
excessive. The essence or rationale for the payment of interest, quite often referred to as cost of
money, is not exactly the same as that of a surcharge or a penalty. A penalty stipulation is not
necessarily preclusive of interest, if there is an agreement to that effect, the two being distinct
concepts which may separately be demanded. What may justify a court in not allowing the
creditor to impose full surcharges and penalties, despite an express stipulation therefor in a
valid agreement, may not equally justify the non-payment or reduction of interest. Indeed, the
interest prescribed in loan financing arrangements is a fundamental part of the banking
business and the core of a bank’s existence.
Philippine National Bank vs. Court of Appeals
G.R. No. 107569. November 8, 1994
It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one
who contracts, his act has no more efficacy than if it had been done under duress or by a person
of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The
minds of all the parties must meet as to the proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the
rate of interest is always a vital component, for it can make or break a capital venture. Thus,
any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.
FACTS:
On April 7, 1982, (private respondents) as owners of a NACIDA-registered enterprise,
obtained a loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from the Philippine
National Bank (PNB) in the amount of Fifty Thousand (P50,000.00) Pesos, as evidenced by a
Credit Agreement. Under the Promissory Note covering the loan, the loan was to be amortized
over a period of three (3) years to end on March 29, 1985, at twelve (12%) percent interest
annually.
To secure the loan, (private respondents) executed a Real Estate Mortgage and a Chattel
Mortgage. The agreement herewith authorized the PNB to raise the rate of interest, at any time
without notice, beyond the stipulated rate of 12% but only "within the limits allowed by law."
During the term of the agreement, PNB on several occasion imposed interest rate of 25% per
annum to 30% to 42% on Private Respondents plus a penalty of 6% per annum on past dues."
Private respondents filed a suit for specific performance against petitioner PNB and the
NACIDA. The trial court dismissed private respondents' complaint.
The Court of Appeals reversed the dismissal with respect to petitioner bank, and disallowed the
increases in interest rates.
Petitioner bank now contends that "respondent Court of Appeals committed grave error when it
ruled (1) that the increase in interest rates are unauthorized.
ISSUE:
Can a creditor raise the legal interest based on a certain clause in the contract and without
consent from the debtor
HELD:
No. We cannot countenance petitioner bank's posturing that the escalation clause at bench
gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan.
That would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts.
In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we
held —
. . . The unilateral action of the PNB in increasing the interest rate on the private
respondent's loan violated the mutuality of contracts ordained in Article 1308 of
the Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them. In order that obligations arising from contracts may have the
force or law between the parties, there must be mutuality between the parties based on their
essential equality. A contract containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties, is void . .
. . Hence, even assuming that the loan agreement between the PNB and the private respondent
gave the PNB a license (although in fact there was none) to increase the interest rate at will
during the term of the loan, that license would have been null and void for being violative of
the principle of mutuality essential in contracts. It would have invested the loan agreement with
the character of a contract of adhesion, where the parties do not bargain on equal footing, the
weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it" .
. . . Such a contract is a veritable
trap for the weaker party whom the courts of justice must protect against abuse and imposition.
Civil Law; Contracts; P.D. No. 1684 and C.B. Circular No. 905 did not authorize either
party to unilaterally raise the interest rate without the other’s consent.—P.D. No. 1684
and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding
any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of
money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest
previously stipulated. However, contrary to the stubborn insistence of petitioner bank, the said
law and circular did not authorize either party to unilaterally raise the interest rate without the
other’s consent.
No one receiving a proposal to change a contract to which he is a party, is obliged to
answer the proposal, and his silence per se cannot be construed as an acceptance.—
Private respondents are not also estopped from assailing the unilateral increases in interest rate
made by petitioner bank. No one receiving a proposal to change a contract to which he is a
party, is obliged to answer the proposal, and his silenceper se cannot be construed as an
acceptance. In the case at bench, the circumstances do not show that private respondents
implicitly agreed to the proposed increases in interest rate which by any standard were too
sudden and too stiff.
Solid Bank Corporation vs. Permanent Homes, Incorporated
G.R. No. 171925. July 23, 2010

FACTS: The records disclose that PERMANENT HOMES is a real estate development
company, and to finance its housing project known as the “Buena Vida Townhome” located
within Merville Subdivision, Parañaque City, it applied and was subsequently granted by
SOLIDBANK with an “Omnibus Line” credit facility in the total amount of SIXTY MILLION
PESOS. Of the entire loan, FIFTY NINE MILLION as time loan for a term of up to three
hundred sixty (360) days, with interest thereon at prevailing market rates, and subject to
monthly repricing. The remaining ONE MILLION was available for domestic bills purchase.
To secure the aforesaid loan, PERMANENT HOMES initially mortgaged three(3) townhouse
units within the Buena Vida project in Parañaque. At the time, however, the instant complaint
was filed against SOLIDBANK, a total of thirty six (36) townhouse units were mortgaged with
said bank. Of the 60 million available to PERMANENT HOMES, it availed of a total of 41.5
million pesos covered by three(3) promissory notes. There was a standing agreement by the
parties that any increase or decrease in interest rates shall be subject to the mutual agreement of
the parties.
For the three loan availments that PERMANENT HOMES obtained, the herein respondent
argued that SOLIDBANK unilaterally and arbitrarily accelerated the interest rates without any
declared basis of such increases, of which PERMANENT HOMES had not agreed to, or at the
very least, been informed of.
On July 5, 2002, the trial court promulgated its Decision in favor of Solidbank. Permanent then
filed an appeal before the appellate court which was granted, in which reversed and set aside
the assailed decision dated July 5, 2002. Hence, the present petition.
ISSUES:
(1) Whether the Honorable Court of Appeals was correct in ruling that the increases in the
interest rates on Permanent’s loans are void for having been unilaterally imposed without basis.
(2) Whether the Honorable Court of Appeals was correct in ordering the parties to enter into an
express agreement regarding the applicable interest rates on Permanent’s loan availments
subsequent to the initial thirty-day (30) period.
Held:
(1) Yes. Although interest rates are no longer subject to a ceiling, the lender still does not have
an unbridled license to impose increased interest rates. The lender and the borrower should
agree on the imposed rate, and such imposed rate should be in writing of which was not
provided by petitioner.
(2) Yes. In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential quality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties is void. There was no showing that either
Solidbank or Permanent coerced each other to enter into the loan agreements. The terms of the
Omnibus Line Agreement and the promissory notes were mutually and freely agreed upon by
the parties.
Usury Law; Interest Rates; The Usury Law had been rendered legally ineffective by
Resolution No. 224 dated 3 December 1982 of the Monetary Board of the Central Bank,
and later by Central Bank Circular No. 905 which took effect on 1 January 1983; These
circulars removed the ceiling on interest rates for secured and unsecured loans regardless
of maturity; the effect of these circulars is to allow the parties to agree on any interest
that may be charged on a loan, the virtual repeal of the Usury Law is within the range of
judicial notice which courts are bound to take into account.—The Usury Law had been
rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of the Monetary
Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect on 1
January 1983. These circulars removed the ceiling on interest rates for secured and unsecured
loans regardless of maturity. The effect of these circulars is to allow the parties to agree on any
interest that may be charged on a loan. The virtual repeal of the Usury Law is within the range
of judicial notice which courts are bound to take into account. Although interest rates are no
longer subject to a ceiling, the lender still does not have an unbridled license to impose
increased interest rates. The lender and the borrower should agree on the imposed rate, and
such imposed rate should be in writing.
Silos vs. Philippine National Bank
G.R. No. 181045. July 2, 2014.
Summary:
Sps. Silos obtained a revolving credit line from PNB, secured by a mortgage. The interest rate
was initially agreed upon at 19.5% but a Supplement to the Credit Agreement provided that the
Bank may modify the interest rate in the Loan depending on whatever policy the Bank may
adopt in the future, including without limitation, the shifting from the floating interest rate
system to the fixed interest rate system, or vice versa. The spouses were able to pay the
interests on the loan up until their last promissory note which covered the principal amount.
Because of this their properties were foreclosed and sold by auction to PNB. The spouses filed
a petition to annul the foreclosure sale and for the accounting of PNB’s credit. The RTC
dismissed their petition. The CA affirmed. The SC annulled and set aside the CA decision
Doctrine: n loan agreements, it cannot be denied that the rate of interest is a principal
condition, if not the most important component. Thus, any modification thereof must be
mutually agreed upon; otherwise, it has no binding effect.
Moreover, the Court cannot consider a stipulation granting a party the option to prepay the loan
if said party is not agreeable to the arbitrary interest rates imposed. Premium may not be placed
upon a stipulation in a contract which grants one party the right to choose whether to continue
with or withdraw from the agreement if it discovers that what the other party has been doing all
along is improper or illegal.
Issue:
Whether the interest rate provision in the credit agreement and the amendment to the same is
null and void for leaving the interest at the sole and unilateral determination of the bank. YES
What interest rate should be applied to the loan? 19.5% asto the 1st promissory note and 12%
as to all the other notes
Held:
1. The unilateral action of the PNB in increasing the interest rate on the private respondent’s
loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code :Art.
1308. The contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them. In order that obligations arising from contracts may
have the force of law between the parties, there must be mutuality between the parties
based on their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the contracting
parties, is void.
Hence, even assuming that the . . . loan agreement between the PNB and the private respondent
gave the PNB a license (although in fact there was none) to increase the interest rate at will
during the term of the loan, that license would have been null and void for being violative of
the principle of mutuality essential in contracts. It would have invested the loan agreement with
the character of a contract of adhesion, where the parties do not bargain on equal footing, the
weaker party’s (the debtor) participation being reduced to the alternative “to take it or leave
it” . . . . Such a contract is a veritable trap for the weaker party whom the courts of justice must
protect against abuse and imposition.
Article 1956 also provides that “No interest shall be due unless it has been expressly stipulated
in writing.” What has been “stipulated in writing” from a perusal of interest rate provision of
the credit agreement signed between the parties is that petitioners were bound merely to pay
21% interest, subject to a possible escalation or de-escalation, when 1) the circumstances
warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon
agreement. Escalation clauses are not basically wrong or legally objectionable so long as they
are not solely potestative but based on reasonable and valid grounds
2. With regard to interest, the Court finds that since the escalation clause is annulled, the
principal amount of the loan is subject to the original or stipulated rate of interest, and
upon maturity, the amount due shall be subject to legal interest at he rate of 12% per
annum. This is the uniform ruling adopted in previous cases. Thus, the parties’ original
agreement stipulated the payment of 19.5% interest; however, this rate was intended to
apply only to the first promissory note which expired on November 21, 1989 and was
paid by petitioners; it was not intended to apply to the whole duration of the loan.
Subsequent higher interest rates have been declared illegal; but because only the rates are
found to be improper, the obligation to pay interest subsists, the same to be fixed at the
legal rate of 12% per annum. However, the 12% interest shall apply only until June 30,
2013. Starting July 1, 2013, the prevailing rate of interest shall be 6% per annum pursuant
to our ruling in Nacar v. Gallery Frames and Bangko Sentral ng Pilipinas-Monetary
Board Circular No. 799
Delos Santos vs. Metropolitan Bank and Trust Company
G.R. No. 153852. October 24, 2012
Facts:
From December 9, 1996 until March 20, 1998, the petitioners took out several loans totaling
P12,000,000.00 from Metrobank, Davao City Branch, the proceeds of which they would use in
constructing a hotel on their 305-square-meter parcel of land located in Davao City and
covered by Transfer Certificate of Title No. I-218079 of the Registry of Deeds of Davao City.
They executed various promissory notes covering the loans, and constituted a mortgage over
their parcel of land to secure the performance of their obligation. The stipulated interest rates
were 15.75% per annum for the long term loans (maturing on December 9, 2006) and 22.204%
per annum for a short term loan of P4,400,000.00 (maturing on March 12, 1999). The interest
rates were fixed for the first year, subject to escalation or de-escalation in certain events
without advance notice to them.
The loan agreements further stipulated that the entire amount of the loans would become due
and demandable upon default in the payment of any installment, interest or other charges.
On December 27, 1999, Metrobank sought the extrajudicial foreclosure of the real estate
mortgage after the petitioners defaulted in their installment payments. The petitioners were
notified of the foreclosure and of the forced sale being scheduled on March 7, 2000. The notice
of the sale stated that the total amount of the obligation was P16,414,801.36 as of October 26,
1999. On April 4, 2000, prior to the scheduled foreclosure sale (i.e., the original date of March
7, 2000 having been meanwhile reset to April 6, 2000), the petitioners filed in the RTC a
complaint (later amended) for damages, fixing of interest rate, and application of excess
payments (with prayer for a writ of preliminary injunction).
They alleged therein that Metrobank had no right to foreclose the mortgage because they were
not in default of their obligations; that Metrobank had imposed interest rates (i.e., 15.75% per
annum for two long-term loans and 22.204% per annum for the short term loan) on three of
their loans that were different from the rate of 14.75% per annum agreed upon;
that Metrobank had increased the interest rates on some of their loans without any basis by
invoking the escalation clause written in the loan agreement; that they had paid P2,561,557.87
instead of only P1,802,867.00 based on the stipulated interest rates, resulting in their excess
payment of P758,690.87 as interest, which should then be applied to their accrued obligation;
that they had requested the reduction of the escalated interest rates on several occasions
because of its damaging effect on their hotel business, but Metrobank had denied their request;
and that they were not yet in default because the long-term loans would become due and
demandable on December 9, 2006 yet and they had been paying interest on the short-term loan
in advance.
Issue: Is the escalation clause valid?
Held: Yes. escalation clauses like those affecting the petitioners were not void per se, and that
an increase in the interest rate pursuant to such clauses were not necessarily void. In Philippine
National Bank v. Rocamora, Court has said: Escalation clauses are valid and do not contravene
public policy. These clauses are common in credit agreements as means of maintaining fiscal
stability and retaining the value of money on long-term contracts. To avoid any resulting one-
sided situation that escalation clauses may bring, we required in Banco Filipino the inclusion in
the parties’ agreement of a de-escalation clause that would authorize a reduction in the interest
rates corresponding to downward changes made by law or by the Monetary Board.
The validity of escalation clauses notwithstanding, we cautioned that these clauses do not give
creditors the unbridled right to adjust interest rates unilaterally. As we said in the same Banco
Filipino case, any increase in the rate of interest made pursuant to an escalation clause
must be the result of an agreement between the parties. The minds of all the parties must
meet on the proposed modification as this modification affects an important aspect of the
agreement. There can be no contract in the true sense in the absence of the element of an
agreement, i.e., the parties’ mutual consent. Thus, any change must be mutually agreed
upon, otherwise, the change carries no binding effect. A stipulation on the validity or
compliance with the contract that is left solely to the will of one of the parties is void; the
stipulation goes against the principle of mutuality of contract under Article 1308 of the Civil
Code.
Medel v CA and Cruz
299 SCRA 481; GR No. 131622, November 27, 1998
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.
Defendants obtained another loan from Defendant in the amount of P90, 000.00, payable in 2
months, at 6% interest per month. They executed a promissory note to evidence the loan and
received only P84, 000.00 out of the proceeds of the loan.
For the third time, Defendants secured from Plaintiff another loan in the amount of P300,
000.00, maturing in 1 month, and secured by a real estate mortgage. They executed a
promissory note in favor of the Plaintiff. However, only the sum of P275, 000.00, was given to
them out of the proceeds of the loan.
Upon maturity of the three promissory notes, Defendants failed to pay the indebtedness.
Defendants consolidated all their previous unpaid loans totalling P440, 000.00, and sought
from Plaintiff another loan in the amount of P60, 000.00, bringing their indebtedness to a total
of P50,000.00. They executed another promissory note in favor of 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.
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% interest per annum and 1% per month as penalty.
On appeal, Plaintiff-appellants argued that the promissory note, which consolidated all the
unpaid loans of the defendants, is the law that governs the parties.
The Court of Appeals ruled in favor of the Plaintiff-appellants on the ground that the Usury
Law has become legally inexistent with the promulgation by the Central Bank in 1982 of
Circular No. 905, the lender and the borrower could agree on any interest that may be charged
on the loan, and ordered the 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 month as penalty charges.
Defendants filed the present case via petition for review on certiorari.
Issue: WON the stipulated 5.5% interest rate per month on the loan in the sum of P500, 000.00
is usurious.
Held: No.
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 hemorrhaging of
their assets (Almeda vs. CA, 256 SCRA 292 [1996]).
Usury Law; Interest Rates; A stipulated rate of interest at 5.5% per month on a
P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant; The Usury Law
is now “legally inexistent.”—We agree with petitioners that the stipulated rate of interest at
5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and
exorbitant. However, we can not consider the rate “usurious” because this Court has
consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982,
has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury
Law is now “legally inexistent.”
C.B. Circular No. 905 “did not repeal nor in any way amend the Usury Law but simply
suspended the latter’s effectivity.”—In Security Bank and Trust Company vs. Regional Trial
Court of Makati, Branch 61 the Court held that CB Circular No. 905 “did not repeal nor in any
way amend the Usury Law but simply suspended the latter’s effectivity.” Indeed, we have held
that “a Central Bank Circular can not repeal a law. Only a law can repeal another law.” In the
recent case of Florendo vs. Court of Appeals, the Court reiterated the ruling that “by virtue of
CB Circular No. 905, the Usury Law has been rendered ineffective.” “Usury has been legally
non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree
upon.”
The courts shall reduce equitably liquidated damages, whether intended as an indemnity
or a penalty if they are iniquitous or unconscionable.—We find the interest at 5.5% per
month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or
unconscionable, and, hence, contrary to morals (“contra bonos mores”), if not against the law.
The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended
as an indemnity or a penalty if they are iniquitous or unconscionable.
RELUCIO vs. BRILLANTE-GARFIN
G.R. NO. 76518, JULY 13, 1990
FACTS: Private respondent Zeida B. Brillante-Garfin filed a complaint for specific
performance with damages against petitioner Irene P. Relucio, to compel the latter to execute,
in compliance with the Contract to Buy and Sell, a final deed of sale in favor of the former
over two (2) residential subdivision lots in the Mariano Village Subdivision, Naga City. Private
respondent alleged that the lots, which have a total contract price of P10,800.00, have already
been paid for, as she had already paid P200.00 as down payment, and had subsequently
completed payment of 128 equal monthly installments of P89.45 each amounting to
P11,450.00; that as the law allows the charging of interest only as monetary interest or as
compensatory interest, none of which have obtained in her case, as she had never incurred in
delay in the payment of installments due, the stipulated interest of six percent (6%) per annum
on the outstanding balance is null and void; and that the amount of 650.00 representing
overpayment be returned to her. Petitioner alleged that private respondent is obliged to pay
interest on the installment payments of the unpaid outstanding balance even if paid on their
"due dates" per schedule of payments; that private respondent had actually been in arrears in
the amount of P4,269.40, representing such interest as of June 1979, which therefore entitled
petitioner to cancel the contract in question.
ISSUE: Whether or not petitioner has the right to rescind the contract for private respondent's
continued refusal to pay the monthly installments on the contract price
HELD: No. Vendor and vendee are legally free to stipulate for the payment of either the cash
price of a subdivision lot or its installment price. Should the vendee opt to purchase a
subdivision lot via the installment payment system, he is in effect paying interest on the cash
price, whether the fact and rate of such interest payment is disclosed in the contract or not. The
contract for the purchase and sale of a piece of land on the installment payment system in the
case at bar is not only quite lawful; it also reflects a very wide spread usage or custom in our
present day commercial life. Despite private respondent's failure to fully pay the stipulated
price of the two lots in question, petitioner, however, could not validly rescind the contract not
being lawfully entitled to do so. Petitioner failed to rebut private respondents' allegations that
the former had failed to introduce required improvements in the subdivision.
Civil Law; Sale; Vendor and vendee are legally free to stipulate for the payment of either
the cash price of a subdivision lot or its installment price. —Vendor and vendee are legally
free to stipulate for the payment of either the cash price of a subdivision lot or its installment
price. Should the vendee opt to purchase a subdivision lot via the installment payment system,
he is in effect paying interest on the cash price, whether the fact and rate of such interest
payment is disclosed in the contract or not. The contract for the purchase and sale of a piece of
land on the installment payment system in the case at bar is not only quite lawful; it also
reflects a very wide spread usage or custom in our present day commercial life.
Presidential Decree No. 957; The law vests upon the buyer the option to demand
reimbursement of the total amount paid or to wait for further development of the
subdivision.—In this respect, the trial court was correct in holding that petitioner could not
rescind the contract. As the law vests upon the buyer the option to demand reimbursement of
the total amount paid, or to wait for further development of the subdivision, private respondent
who opted for the latter alternative by waiting for the proper development of the site, may not
be ousted from the subdivision.
Philippine National Bank vs. Court of Appeals
G.R. No. 88880. April 30, 1991
DOCTRINE:
Removal of Usury Law Ceiling on interest rates does not authorize banks to unilaterally and
successively increase interest rates.
FACTS:
Ambrosio Padilla, private respondents, was granted by petitioner Philippine National Bank, a
credit line, secured by a real estate mortgage, for a term of 2 years, with 18% interest per
annum.
Private respondent executed in favor of the PNB a Credit Agreement, 2 promissory notes in the
amount of P900,000.00 each, and a Real Estate Mortgage Contract. Stipulations in the
Promissory Note authorizes PNB to increase the stipulated 18% interest per annum "within the
limits allowed by law at any time depending on whatever policy it [PNB] may adopt in the
future;
Provided, that, the interest rate on this note shall be correspondingly decreased in the event that
the applicable maximum interest rate is reduced by law or by the Monetary Board." Padilla
requested to the increase in the rate of interest from 18% be fixed at 21% or 24% but was
denied by PNB.
ISSUE:
Whether PNB, within the term of the loan which it granted to the private respondent, may
unilaterally change or increase the interest rate stipulated therein at will and as often as it
pleased.
HELD: No.
Central Bank Circular No. 905, Series of 1982 removed the Usury law ceiling on interest rates,
however, it did not authorize the PNB, or any bank for that matter, to unilaterally and
successively increase the agreed interest rates from 18% to 48% within a span of four (4)
months, in violation of P.D. 116 which limits such changes to "once every twelve months."
Increase of interest rate; The increases imposed by PNB contravene Art. 1956 of the Civil
Code.—PNB’s successive increases of the interest rate on the private respondent’s loan, over
the latter’s protest, were arbitrary as they violated an express provision of the Credit
Agreement (Exh. 1) Section 9.01 that its terms “may be amended only by an instrument in
writing signed by the party to be bound as burdened by such
amendment.” The increases imposed by PNB also contravene Art. 1956 of the Civil Code
which provides that “no interest shall be due unless it has been expressly stipulated in writing.”
Estoppel to question excessive rates
Asian Cathay Finance and Leasing Corporation vs. Gravador
FACTS:
On October 22, 1999, petitioner Asain Cathay Finance and Leasing Corporation (ACFLC)
extended a loan of Eight Hundred Thousand Pesos (₱800,000.00) to respondent Cesario
Gravador, with respondents Norma de Vera and Emma Concepcion Dumigpi as co-makers.
The loan was payable in sixty (60) monthly installments of ₱24,000.00 each. To secure the
loan, respondent Cesario executed real estate mortgage over his property in Sta. Maria,
Bulacan, covered by Transfer Certificate of Title No. T-29234.
Respondents paid the initial installment due in November 1999. However, they were unable to
pay the subsequent ones. Consequently, on February 1, 2000, respondents received a letter
demanding payment of ₱1,871,480.00 within five (5) days from receipt thereof. Respondents
requested for an additional period to settle their account, but ACFLC denied the request.
Petitioner filed a petition for extrajudicial foreclosure of mortgage with the Office of the
Deputy Sherrif of Malolos, Bulacan.
would it affect the terms of the real estate mortgage.—Stipulations authorizing the imposition
of iniquitous or unconscionable interest are contrary to morals, if not against the law. Under
Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning.
They cannot be ratified nor the right to set up their illegality as a defense be waived. The
nullity of the stipulation on the usurious interest does not, however, affect the lender’s right to
recover the principal of the loan. Nor would it affect the terms of the real estate mortgage. The
right to foreclose the mortgage remains with the creditors, and said right can be exercised upon
the failure of the debtors to pay the debt due. The debt due is to be considered without the
stipulation of the excessive interest. A legal interest of 12% per annum will be added in place
of the excessive interest formerly imposed. The nullification by the CA of the interest rate and
the penalty charge and the consequent imposition of an interest rate of 12% and penalty charge
of 1% per month cannot, therefore, be considered a reversible error.

ISSUE: Whether the Honorable Court of Appeals erred in invalidating the interest rates
imposed on the respondents’ loan, and the waiver of the right of redemption.

RULING: No. The imposition of an unconscionable rate of interest on a money debt, even if
knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant
spoilation and an iniquitous deprivation of property, repulsive to the common sense of man. It
has no support on law, in principles of justice, or in the human conscience nor is there any
reason whatsoever which may justify such imposition as righteous and as one that may be
sustained within the sphere of public or private morals.

Settled is the rule that for a waiver to be valid and effective, it must, in the first place, be
couched in clear and unequivocal terms which will leave no doubt as to the intention of a party
to give up a right or benefit which legally pertains to him. Additonally, the intention to waive a
right or an advantage must be shown clearlly and convincingly. Unfortunately, ACFLC failed
to convince us that respondents waived their right of redemption voluntarily.
Loans; Interests; Interest rates, whenever unconscionable, may be equitably reduced or even
invalidated.—It is true that parties to a loan agreement have a wide latitude to stipulate on any
interest rate in view of Central Bank Circular No. 905, series of 1982, which suspended the
Usury Law ceiling on interest rate effective January 1, 1983. However, interest rates, whenever
unconscionable, may be equitably reduced or even invalidated. In several cases, this Court had
declared as null and void stipulations on interest and charges that were found excessive,
iniquitous and unconscionable. Records show that the amount of loan obtained by respondents
on October 22, 1999 was P800,000.00. Respondents paid the installment for November 1999,
but failed to pay the subsequent ones. On February 1, 2000, ACFLC demanded payment of
P1,871,480.00. In a span of three months, respondents’ obligation ballooned by more than
P1,000,000.00. ACFLC failed to show any computation on how much
interest was imposed and on the penalties charged. Thus, we fully agree with the CA that the
amount claimed by ACFLC is unconscionable.
Usury Law; Stipulations authorizing the imposition of iniquitous or unconscionable interest
are contrary to morals, if not against the law; The nullity of the stipulation on the usurious
interest does not however, affect the lender’s right to recover the principal of the loan, nor
Chapter III: Usury Law
Rono v Gomez
On October 5, 1944, Cristobal Roño received as a loan from Jose L. Gomez P4,000.00 in
Japanese fiat money (mickey mouse money). The contract of loan is under the condition that
said loan will not earn interest and that it will be paid in the currency then prevailing one
year after the execution of the contract. After a year, a collection suit was filed by respondent
Gomez against petitioner Rono to collect the latter’s debt. Subsequently, the trial court ruled in
favor of Gomez. The court ordered Rono to pay the respondent an amount of P4,000.00 in
Philippine currency which was then the prevailing currency at the time of payment.
Contending such decision, Rono insists that the contract taken in favor of respondent is
contrary to law, public order and good morals since his loan then of P4,000.00 “mickey
mouse” money is equivalent only to P100.00 of the Philippine currency which is the prevailing
currency at the time of payment.
CONTENTION OF THE PETITIONER: Roño asserts that the decision of the trial court
ruling in favor of respondent is contrary to the Usury law, because on the basis of calculations
by Government experts he only received the equivalent of P100 Philippine pesos and now he is
required to give four thousand pesos or interest greatly in excess of the lawful rates.
CONTENTION OF THE RESPONDENT: That both parties agreed that the loaned amount
of P4,000.00 mickey mouse money be paid in “the currency prevailing by the end of one year.”
The civil code supports such agreement when it says "obligations arising from contracts shall
have the force of law between the contracting parties and must be performed in accordance
with their stipulations" (Article 1091).
Issue: Whether the contract is legal and obligatory.
RESOLUTION OF SC:
Yes. The SC ruled that that the contract between the parties is an aleatoty contract. The
eventual gain of Gomez is not “interest” within the meaning of the Usury law. In the first
place, Rono is not paying an interest. Such is evidenced by the fact that in his promissory note,
he indicated that the money loaned “will not earn any interest.”
Furthermore, both parties clearly agreed at the time of the execution of the contract that the
loaned money (P4,000.00 “mickey mouse) will be paid in “the currency prevailing by the end
of the stipulated period of one year.”
The devaluation of the Mickey mouse money is due to an event unforseable by any man; that
the increased intrinsic value and purchasing power of the current money is consequence of an
event (change of currency) which at the time of the contract neither party knew would certainly
happen within the period of one year. However, both parties subjected their rights and
obligations to that contingency. Thus, the contract in question is legal and obligatory and is not
subject to the operation of the Usury law.
In the first place, the Court of Appeals found that he voluntarily agreed to sign and signed the
document without having been misled as to its contents and "in so far as knowledge of war
events was concerned" both parties were on "equal footing." In the second place although on
October 5, 1944 it was possible to surmise the impending American invasion, the date of
victory or liberation was anybody's guess. In the third place there was the possibility that
upon re-occupation the Philippine Government would not invalidate the Japanese currency,
which after all had been forced upon the people in exchange for valuable goods and property.
The odds were about even when Roño and Gomez played their bargaining game. There was no
overreaching, nor unfair advantage.
Again Roño alleges it is immoral and against public order for man to obtain four thousand
pesos in return for an investment of forty pesos (his estimate of the value of the Japanese
money he borrowed). According to his line of reasoning it would be immoral for the home
owner to recover ten thousand pesos (P10,000), when his house is burned, because he invested
only about one hundred pesos for the insurance policy. And when the holder of a sweepstakes
ticket who paid only four pesos luckily obtains the first prize of one hundred thousand pesos or
over, the whole business is immoral or against public order. In this connection we should
explain that this decision does not cover situations where borrowers of Japanese fiat currency
promised to repay "the same amount" or promised to return the same number of pesos "in
Philippines cur rency" or "in the currency prevailing after the war." There may be room for
argument when those litigations come up for adjudication. All we say here and now is that the
contract in question is legal and obligatory.
A minor point concerns the personality of the plaintiff, the wife of Jose L. Gomez. We opine
with the Court of Appeals that the matter may involve a defect in procedure which does not
amount to prejudicial error.
ObliCon; Validity of Agreement of Loan in Japanese Fiat Money made during enemy
occupation; payment to be paid one year after the date with currency then prevailing -
on October 5, 1944, received as a loan four thousand pesos in Japanese fiat money from G and
agreed to pay said debt one year after date in the currency then pre vailing by signing a
promissory note of the following tenor: "For value received, I promise to pay one year after
date the sum of four thousand pesos (P4,000), to Jose L. Gomez. It is agreed that this will not
earn any interest and the pay ment will be made in currency that will be prevailing by the end
of the stipulated period of one year." On October 15, 1945, i. e. after the liberation R was sued
for the payment of the aforesaid debt. Held: R must pay 4,000 pesos in Philippine currency. He
may not discharge his debt by paying only the equivalent of the Japanese currency he had
received in 1944. The contract is the law between the parties.
Sunga-Chan vs. Court of Appeals
Facts:
Lamberto Chua & Jacinto Sunga formed a partnership to engage in the marketing of liquefied
petroleum gas under the name Shellite Gas Appliance Center (Shellite). When Jacinto died, his
widow petitioner Cecilia Sunga and daughter Lilibeth Sunga-Chan continued with the business
without Chua’s consent. Since Chua’s demands for accounting and winding up were unheeded,
he filed a complaint for Winding Up of a Partnership Affairs, Accounting, Appraisal &
Recovery of Shares & Damages with Writ of Preliminary Attachment with the RTC of
Zamboanga.
The RTC ruled in his favor and the same was upheld by the CA. Chua then asked the trial court
to commission a CPA to undertake accounting work but later moved to withdraw and asked for
the admission of an accounting report by CPA Cheryl A. Gahuman. The petitioners submitted
their own CPA accounting report which limited Chua’s entitlement from the winding up of
partnership to P3,154,736.65 only but the RTC rejected it and approved the new computation
claims of Chua.
Issue:
Whether or not RTC can impose interest on a final judgment of unliquidated claims.
Held: Petitioners are partly correct.
As may be recalled, the trial court admitted and approved Chua’s computation of claims
amounting to PhP 8,733,644.75, but rejected that of petitioners, who came up with the figure of
only PhP 3,154,736.65. We highlight the substantial differences in the accounting reports on
the following items, to wit:  (1) the aggregate amount of the partnership assets bearing on the
50% share of Chua thereon; (2) interests added on Chua’s share of the assets; (3) amount of
profits from 1988 through May 30, 1992, net of alleged payments made to Chua; and (4)
interests added on the amount entered as profits.
Forbearance is described as a contractual obligation of a 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.
1. When an obligation is breached, the contravenor can be held liable for damages.
2. Regarding award of interest in the concept if actual & compensatory damages, the rate of
interest, as well as accrual thereof is imposed as follows:
a. Obligation(payment of a sum of money) – interest due should be stipulated in
writing. Interest due shall itself earn legal interest from the time it is judicially
demanded. Absence of stipulation, rate shall be 12% p.a. to be computed from
default.
b. Obligation(not loans or forbearance of money) – is breached, interest on the amount
of damages awarded may be imposed at discretion of court at the rate 6% p.a. No
interest on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty
c. Judgment(award sum of money) becomes final & executor, rate of legal interest
shall be 12% p.a.
Guided by the foregoing rules, the award to Chua of the amount representing earned but
unremitted profits must earn interest at 6% p.a. the total monthly profits inclusive of the add
on 6% shall earn 12% p.a.
We agree with petitioners that Chua’s share & interest on partnership assets partake of an
unliquidated claim and shall not earn interest until reasonably determined. Considering Chua’s
computation of claim was submitted only Oct. 15, 2002, no interest in his favor can be added
to his share of the partnership assets.
The obligation of petitioners is Solidary because of the impossibility of quantifying how much
of the partnership assets or profits was misappropriated by each petitioner.
The levying and selling at public auction of the property of petitioner Sunga – Chan to answer
for the obligation of petitioners is also proper since an absolute community property may be
held liable for the obligations contracted by either spouse.
Obligations and Contracts; Interests; Words and Phrases; 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; The term
“forbearance,” within the context of usury law, has been described as a contractual obligation
of a 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.—In Reformina v. Tomol, Jr., 139
SCRA 260 (1985), 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 of a 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.
Rivero vs. Rabe
Facts:
The defendant administrator, Domingo Ragaza, is hereby granted ninety days from this date to
pay or deposit in the office of the clerk of this Court of First Instance all the amounts
mentioned above, and upon failure so to do, this court shall order the sale of the property
described in the complaint, in accordance with the law. So ordered." In support of his appeal,
the appellant assigns the following alleged errors as committed by the trial court, to wit:
 The lower court erred in ordering defendant to pay ten per cent interest, instead of six per
cent per annum to the plaintiff, in accordance with the law and the agreement.
 The trial court erred in ordering the defendant to pay the plaintiff one hundred and fifty
pesos as attorney's fee, and to defray the costs,
 The trial court erred in denying the motion for a new trial."
The following relevant facts are required to decide all the questions of fact and of law raised in
this appeal:
On the 9th of April, 1919, Inocente Rabe obtained a thousand peso loan from the late Salvador
Rivero, payable within the year, with interest at the rate fixed by Act No. 2655, giving by way
of security four parcels of land belonging to himself, two of them in the barrio of Cabuloan,
municipality of Santa Catalina, one in the barrio of Nalasin, and the other in Bantaoay,
municipality of San Vicente, IIocos Sur, all of them being registered pursuant to the Mortgage
Law in the register of deeds of said province. Inocente Rabe, the defendant, offered to pay
10 per cent interest, and his heirs after his death still held out the offer, to Salvador
Rivero, the plaintiff, and after his death, to his widow, but it was rejected and a demand
was made for 12 per centum.
Issue:
Which among the several rates of interest fixed in the Act did the parties agreed on.
Held:
The contract between the parties was a loan secured by a mortgage of real estate, the ownership
whereof had been duly registered; therefore, when in the deed, the defendantappellant stated
that the loan should earn the interest fixed by Act No. 2655, he could not have had in mind
anything else than section 2, of said Act No. 2655, quoted above, for that alone fixed the
maximum interest chargeable on loans secured by a mortgage, namely, 12 per cent per annum.
The question, then, to be determined is, what is the rate agreed upon by the parties, which is
not to exceed 12 per cent per annum?
Section 1 of the law under discussion, quoted above, fixes 6 per centum as the rate of interest
to be charged when the rate is not expressly stipulated. Six per cent per annum certainly is
favorable to the defendant-appellant, who maintains that is the rate he must pay;
but article 1288 of the Civil Code which also enunciates a rule for the interpretation of
contracts, in case of ambiguity or obscurity in the terms used, provides: "ART. 1288. Obscure
terms of a contract shall not be so construed as to favor the party who occasioned the
obscurity." This rule has been applied by this court in H. E. Heacock Co. vs. Macondray & Co.
(42 Phil., 205), and in Rubio vs. Villanueva (45 Phil., 842). Ambiguity or obscurity in a
contract must be construed against the party causing it, and inasmuch as it is the
defendantappellant who executed the contract in question, and who is therefore responsible for
the ambiguity respecting the rate of interest, said ambiguity must be construed against him.
Article 1282 of the Civil Code provides as follows:
"ART. 1282. In order to judge as to the intention of the contracting parties, attention must be
paid principally to their conduct at the time of making the contract and subsequently thereto."
The defendant Inocente Rabe, and his heirs after his death, offered to pay the plaintiff Salvador
Rivero, and his widow after his death, 10 per cent interest. This subsequent act also indicates
that the rate of interest agreed upon by and between the parties is that fixed in section 2, Act
No. 2655.
MORTGAGE CONTRACT; INTEREST.—Since the contract between the parties was a
loan secured by a mortgage on real property and the defendant having stated in the contract
that the loan would bear interest at the rate fixed by Act No. 2655, said defendant could only
have in mind the provision of section 2 of said Act, fixing the maximum interest which may be
collected upon loans secured by a mortgage at 12 per cent per annum; and in accordance with
article 1288 of the Civil Code, and the repeated rulings of this court, the interpretation of
obscure clauses in a contract should not favor the party who occasioned the obscurity, who in
the present case was the said defendant.
Phil. American Accident Insurance Company, Inc. vs. Flores
FACTS: Respondent Judge Flores rendered a judgment in favor of the Respondent Navalta
asking Petitioner Phil-Am Accident Incurance Company Inc. to pay the former the amount of
P75,000.00 with legal interest from Oct. 1968, as attorney’s fees and the cost of the suit.
Petitioner paid respondent the principal amount with legal interest at 6% per annum from Oct
1968 to Apr. 30 1978 (in accordance with Art. 2209 of the CC which provides: “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." – This appears to be the basis for the awarding interest at the legal rate from Oct.
1968, although the debt was judicially demanded only on July 6 1970) and attorney’s fees and
the cost of the suit. Later on, Respondent advised the petitioner that payment was not in fun
satisfaction of the judgment because he has to pay compound interest or additional sum of P10,
375.77. The respondent secured a writ if execution upon the refusal of the petitioner to pay the
additional sum claimed; which was affirmed by the Judge. Hence this review.
ISSUE: Whether or not the petitioner is obligated to pay compound interest under the
judgment.
HELD: The questioned Order cannot be sustained. The judgment which was sought to be
executed ordered the payment of simple "legal interest" only. It said nothing about the payment
of compound interest. Accordingly, when the respondent judge ordered the payment of
compound interest he went beyond the confines of his own judgment which had been affirmed
by the Court of Appeals and which had become final.
Private Respondent invokes Sec. 5 of the Usury Law which reads in part as follows: “In
computing the interest on any obligation, promissory note or other instrument or contract,
compound interest shall not be reckoned, except by agreement, or in default thereof, whenever
the debt is judicially claimed in which case it shall draw sic per centum per annum interest xxx
as well as Art. 2212 of the Civil Code which stipulates: “Interest due shall earn legal interest
from the time it is judicially demanded, although the obligation may be silent upon this point.”
Both legal provisions are inapplicable for they contemplate the presence of stipulated or
conventional interest which had accrued when demand was judicially made.
In this case, no interest had been stipulated by the parties. In other words, there was no accrued
conventional interest which could further earn interest upon judicial demand. Wherefore,
decision was set aside.
Doctrine: Both Art. 2212 of the Civil code and Section 5 of the Usury Law refer to
stipulated or conventional interest and does not apply where no interest was stipulated by
the parties. Private respondent invokes Sec. 5 of the Usury Law which reads in part as
follows: “In computing the interest on any obligation, promissory note or other instrument or
contract, compound interest shall not be reckoned, except by agreement, or, in default thereof,
whenever the debt is judicially claimed in which last case it shall draw six per centum per
annum interest x x x” as well as Art. 2212 of the Civil Code which stipulates: “Interest due
shall earn legal interest from the time it is judicially demanded, although the obligation may be
silent upon this point.” Both legal provisions are in applicable for they contemplate the
presence of stipulated or conventional interest which had accrued when demand was judicially
made. (Sunico vs. Ramirez, 14 Phil. 500 [1909]; Salvador vs. Palencia, 25 Phil. 661 [19131;
Bachrach vs. Golingco, 39 Phil. 912 [1919]; Robinson vs. Sackermann, 46 Phil. 539 [1924];
Philippine Engineering Co. vs. Green, 48 Phil. 466 [1925]; and Cu Unjieng vs. Mabalacat
Sugar Co., 54 Phil. 916 [1930]. In this case no interest had been stipulated by the parties. In
other words, there was no accrued conventional interest which could further earn interest upon
judicial demand.
Banco Filipino Savings & Mortgage Bank vs. Navarro
Navarro’s loan secured with a mortgage from Banco Filipino had an escalation clause BASED
ON CIRCULAR 494 OF THE CENTRAL BANK providing as follows:
I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in
this contract without advance notice to me/us in the event law should be enacted increasing the
lawful rates of interest that may be charged on this particular kind of loan.
On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER
on June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum
effective on March 1, 1976.
Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of
the promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory
Relief" and pray that the escalation clause be null and void.

BANCO FILIPINO maintained that the Escalation Clause signed by the BORROWER
authorized it to increase the interest rate once a law was passed increasing the rate of interest
and that its authority to increase was provided for by CIRCULAR No. 494.
In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO
FILIPINO to desist from enforcing the increased rate of interest on the BORROWER's loan. It
reasoned out that P.D. No. 116 does not expressly grant the Central Bank authority to
maximize interest rates with retroactive effect and that BANCO FILIPINO cannot legally
impose a higher rate of interest before the expiration of the 15-year period in which the loan is
to be paid other than the 12% per annum in force at the time of the execution of the loan.
THUS, THIS CASE.
ISSUE
What should be resolved is whether BANCO FILIPINO can increase the interest rate on the
LOAN from 12% to 17% per annum under the Escalation Clause..
RULING; the court may not increase the interest rate on the loan. Although the stipulation of
the parties is very clear that the interest rate may be increased “in the event a law should be
enacted increasing the lawful rate that maybe charged on this loan” Circular 494 is not strictly
a statute or law but an administrative order that has the effect of law.
The difference between a law an administrative regulation is recognized in the monetary
Board guidelines where under provides that for a loan’s interest to be subject to the increase
provided under Circular 494, there must be an ESCALATION clause allowing the increase “ in
the event that any law or Central bank regulation is promulgated increasing the max interest for
loans. “The guidelines thus presupposes that a central bank regulation is not within the term
“any law”.
For the escalation clause to be valid; it must specifically provide as follows;
1. There can be an increase in interest IF INCREASED by law or by the MONETARY
BOARD
2. For the stipulation to be valid, it must include a provision for reduction of the stipulated
interest “in the event that the applicable maximum rate of interest is reduced by law or by
the Monetary Board.
While PD no 1684 is not to be given retroactive effect, te absence of De-escalation clause in
the Escalation Clause in question provides another reason why it should not be given effect
because of its one –sidedness in favor of the lender.
The escalation clause specifically stipulated that the increase in interest was to be “ on this
particular kind of loan”’ meaning one secured by registered real estate mortgage
COURT RULES THAT WHILE AN ESCALATION CLAUSE LIKE THE ONE IN THIS
CASE CAN ORDINARILY BE HELD VALID, NEVERTHELESS PETITIONER BANCO
FILIPINO CANNOT RELY THEREON TO RAISE THE INTEREST ON THE
BORROWERS LOAN FROM 12% TO 17% PER ANNUM BECAUSE CIRCULAR NO. 494
OF THE MONETARY BOARD WAS NOT THE “LAW” CONTEMPLATED BY THE
PARTIES, NOR SHOULD SAID CIRCULAR BE HELD AS APPLICABLE TO LOANS
SEECURED BY REGISTERED REAL ESTATE IN THE ABSENCE OF ANY SUCH
SPECIFIC INDICATION AND IN CONTRAVENTION OF THE POLICY BEHIND THE
USURY LAW
Contracts; Banking Laws; A contract which embodies an Escalation Clause authorizing
automatic increase in interest rates in the event a law increasing the lawful rates of interest
that may be charged, does not include a Central Bank Circular, which, altho', having the
face and effect of law, is not strictly a statute or a law.—The Escalation Clause reads as
follows: "I/We hereby authorize Banco Filipino to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event a law increasing the
lawful rates of interest that may be charged on this particular kind of loan." (Paragraphing and
italics supplied) It is clear from the stipulation between the parties that the interest rate may be
increased "in the event a law should be enacted increasing the lawful rate of interest that may
be charged on this particular kind of loan." The Escalation Clause was dependent on an
increase of rate made by "law" alone. CIRCULAR No. 494, although it has the effect of law, is
not a law.
"Although a circular duly issued is not strictly a statute or a law, it has, however, the force and
effect of law." (Italics supplied). "An administrative regulation adopted pursuant to law has the
force and effect of law." "That administrative rules and regulations have the force of law can
no longer be questioned." The distinction between a law and an administrative regulation is
recognized in the Monetary Board guidelines quoted in the letter to the BORROWER of Ms.
Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be
subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause
allowing the increase "in the event that any law or Central Bank regulation is promulgated
increasing the maximum interest rate for loans."
The guidelines thus presuppose that a Central Bank regulation is not within the term "any law."
The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding
section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could
stipulate that the rate of interest agreed upon may be increased in the event that the applicable
maximum rate of interest is increased "by law or by the Monetary Board." To quote: "Sec. 7-a.
Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may
stipulate that the rate of interest agreed upon may be increased in the event that the applicable
maximum rate of interest is increased by law or by the Monetary Board: Provided, That such
stipulation shall be valid only if there is also a stipulation in the agreement that the rate of
interest agreed upon shall be reduced in the event that the applicable maximum rate of interest
is reduced by law or by the Monetary Board; Provided, further, That the adjustment in the rate
of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in
the maximum rate of interest."
Escalation Clause to be valid must include de-escalation clause. —There can be an increase
in interest if increased by law or by the Monetary Board; and in order for such stipulation to be
valid, it must include a provision for reduction of the stipulated interest "in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board."
Chapter IV: Deposit
CHAN vs. MACEDA, 402 SCRA 352 (2003)
FACTS:
On July 28, 1976, Bonifacio S. Maceda, Jr., herein respondent, obtained a P7.3 million loan
from the Development Bank of the Philippines for the construction of his New Gran Hotel
Project in Tacloban City. Thereafter, on September 29, 1976, respondent entered into a
building construction contract with Moreman Builders Co., Inc., (Moreman). They agreed that
the construction would be finished not later than December 22, 1977.
Respondent purchased various construction materials and equipment in Manila. Moreman, in
turn, deposited them in the warehouse of Wilson and Lily Chan, herein petitioners. The deposit
was free of charge. Unfortunately, Moreman failed to finish the construction of the hotel at the
stipulated time. Hence, on February 1, 1978, respondent filed with the then Court of First
Instance (CFI, now Regional Trial Court), Branch 39, Manila, an action for rescission and
damages against Moreman, docketed as Civil Case No. 113498.
Meanwhile, during the pendency of the case, respondent ordered petitioners to return to him
the construction materials and equipment which Moreman deposited in their warehouse.
Petitioners, however, told them that Moreman withdrew those construction materials in 1977.
Hence, on December 11, 1985, respondent filed with the Regional Trial Court, Branch 160,
Pasig City, an action for damages with an application for a writ of preliminary attachment
against petitioners,7 docketed as Civil Case No. 53044.
ISSUES:
1. Has respondent presented proof that the construction materials and equipment were actually
in petitioners' warehouse when he asked that the same be turned over to him? NO
2. If so, does respondent have the right to demand the release of the said materials and
equipment or claim for damages? NO
HELD:
Under Article 1311 of the Civil Code, contracts are binding upon the parties (and their assigns
and heirs) who execute them. When there is no privity of contract, there is likewise no
obligation or liability to speak about and thus no cause of action arises. Specifically, in an
action against the depositary, the burden is on the plaintiff to prove the bailment or deposit and
the performance of conditions precedent to the right of action. A depositary is obliged to return
the thing to the depositor, or to his heirs or successors, or to the person who may have been
designated in the contract.
In the present case, the record is bereft of any contract of deposit, oral or written, between
petitioners and respondent. If at all, it was only between petitioners and Moreman. And
granting arguendo that there was indeed a contract of deposit between petitioners and
Moreman, it is still incumbent upon respondent to prove its existence and that it was executed
in his favor. However, respondent miserably failed to do so. The only pieces of evidence
respondent presented to prove the contract of deposit were the delivery receipts. Significantly,
they are unsigned and not duly received or authenticated by either Moreman, petitioners or
respondent or any of their authorized representatives. Hence, those delivery receipts have no
probative value at all. While our laws grant a person the remedial right to prosecute or institute
a civil action against another for the enforcement or protection of a right, or the prevention or
redress of a wrong, every cause of action ex-contractu must be founded upon a contract, oral or
written, express or implied.
Moreover, respondent also failed to prove that there were construction materials and equipment
in petitioners' warehouse at the time he made a demand for their return.
Considering that respondent failed to prove (1) the existence of any contract of deposit
between him and petitioners, nor between the latter and Moreman in his favor, and (2) that
there were construction materials in petitioners' warehouse at the time of respondent's demand
to return the same, we hold that petitioners have no corresponding obligation or liability to
respondent with respect to those construction materials.
Anent the issue of damages, petitioners are still not liable because, as expressly provided for in
Article 2199 of the Civil Code, actual or compensatory damages cannot be presumed, but must
be proved with reasonable degree of certainty. A court cannot rely on speculations,
conjectures, or guesswork as to the fact and amount of damages, but must depend upon
competent proof that they have been suffered by the injured party and on the best obtainable
evidence of the actual amount thereof. It must point out specific facts which could afford a
basis for measuring whatever compensatory or actual damages are borne.
Considering our findings that there was no contract of deposit between petitioners and
respondent or Moreman and that actually there were no more construction materials or
equipment in petitioners' warehouse when respondent made a demand for their return, we hold
that he has no right whatsoever to claim for damages.
Civil Law; Obligations and Contracts; Deposits; In an action against the depositary, the
burden is on the plaintiff to prove the bailment or deposit and the performance of conditions
precedent to the right of action; A depositary is obliged to return the thing to the depositor,
or to his heirs or successors, or to the person who may have been designated in the contract .
—Under Article 1311 of the Civil Code, contracts are binding upon the parties (and their
assigns and heirs) who execute them. When there is no privity of contract, there is likewise no
obligation or liability to speak about and thus no cause of action arises. Specifically, in an
action against the depositary, the burden is on the plaintiff to prove the bailment or deposit and
the performance of conditions precedent to the right of action. A depositary is obliged to return
the thing to the depositor, or to his heirs or successors, or to the person who may have been
designated in the contract.
US vs. IGPUARA, 27 Phil 619 (1913)
Facts:
The defendant herein is charged with the crime of estafa, for having swindled Juana Montilla
and Eugenio Veraguth out of P2,498 Philippine currency, which he had taken 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 & Co."
CFI’s ruling:
 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 the CFI’s decision. He argued that 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.
Issue:
WON the defendant is guilty of misappropriating the deposit under his custody.
Held:
It is erroneous to assert that the certificate of deposit in question is negotiable like any other
commercial instrument; First, because every commercial 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 the 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 of the 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 some time in demanding restitution of the thing 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 that when he only has a personal action for recovery.
In a decision of an appeal, 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 detriment of his principal, Juana Montilla, and of the depositor, Eugenio Veraguth,
belong to the defendant.
Likewise erroneous is the construction apparently attempted 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 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 of 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 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 with law and the merits of the case, the judgment appealed from is affirmed,
with costs.
"ESTAFA"; MISAPPROPRIATION OF DEPOSIT BY AGENT.— The balance of a
commission account remaining in possession of the agent at the principal's disposal acquires at
once the character of a deposit which the former must return or restore to the latter at any time
it is demanded, nor can he lawfully dispose of it without incurring criminal responsibility for
appropriating or diverting to his own use another's property.
It could only become his as a loan, if so expressly agreed by its owner, who would then be
obligated not to demand it until the expiration of the legal or stipulated period for a loan. ID.;
ID.; He undoubtedly commits the crime of estafa who, having in his possession a certain
amount of another's money on deposit at its owner's disposal, appropriates or diverts it to his
own use, with manifest damage to its owner, for he has not restored it and has so acted
willfully and wrongfully in abuse of the confidence reposed in him.
BPI vs IAC, 164 SCRA 630 (1988)
FACTS:
The original parties to the case were Zshornack and Commercial Bank and Trust Company of
the Phils (Comtrust). In 1980, BPI absorbed Comtrust through a merger and was substituted as
party to the case.
Zshornack and his wife maintained in Comtrust a dollar savings account and a peso current
account. On Dec 8, 1975, Zshornack delivered to the bank $3000 for safekeeping. When he
requested the return of the money, Comtrust explained that the sum was disposed of in this
manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to
P14,920.00 were deposited to Zshornack's current account per deposit slip accomplished by
Garcia; the remaining US$1,000.00 was sold on February 3, 1976 and the peso proceeds
amounting to P8,350.00 were deposited to his current account per deposit slip also
accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current
account at prevailing conversion rates, BPI now posits another ground to defeat private
respondent's claim. It now argues that the contract embodied in the document is the contract of
depositum (as defined in Article 1962, New Civil Code), which banks do not enter into. The
bank alleges that Garcia exceeded his powers when he entered into the transaction. Hence, it is
claimed, the bank cannot be liable under the contract, and the obligation is purely personal to
Garcia.
ISSUE:
WON the contract between petitioner and respondent bank is a deposit   YES
HELD:
The document which embodies the contract states that the US$3,000.00 was received by the
bank for safekeeping. The subsequent acts of the parties also show that the intent of the parties
was really for the bank to safely keep the dollars and to return it to Zshornack at a later time,
Thus, Zshornack demanded the return of the money on May 10, 1976, or over five months
later.
The above arrangement is that contract defined under Article 1962, New Civil Code, which
reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to
another, with the obligation of safely keeping it and of returning the same. If the safekeeping of
the thing delivered is not the principal purpose of the contract, there is no deposit but some
other contract.
Note that the object of the contract between Zshornack and COMTRUST was foreign
exchange. Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions on
Gold and Foreign Exchange Transactions, promulgated on December 9, 1949, which was in
force at the time the parties entered into the transaction involved in this case. Under the said
circular, safekeeping of the greenbacks without selling them to Central Bank within 1 business
day from receipt, is a transaction which is not authorized.
As earlier stated, the document and the subsequent acts of the parties show that they intended
the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his
complaint that he is a Philippine resident. The parties did not intended to sell the US dollars to
the Central Bank within one business day from receipt. Otherwise, the contract of depositum
would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within
one business day from receipt, is a transaction which is not authorized by CB Circular No. 20,
it must be considered as one which falls under the general class of prohibited transactions.
Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed against the
provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a
cause of action against the other. "When the nullity proceeds from the illegality of the cause or
object of the contract, and the act constitutes a criminal offense, both parties being in pari
delicto, they shall have no cause of action against each other. . ." [Art. 1411, New Civil Code.]
The only remedy is one on behalf of the State to prosecute the parties for violating the law.
Therefore, Zshornack cannot recover under this cause of action.
Banking Laws; Central Bank Laws; Foreign Exchange Transactions; CB Circular No. 281;
Sec. 6 of CB Circular No. 281 requires that all receipts of foreign exchange by any resident
person shall be sold to authorized Central Bank agents within one business day following
the receipt of said foreign exchange.—Paragraph 4 (a) above was modified by Section 6 of
Central Bank Circular No. 281, Regulations on Foreign Exchange, promulgated on November
26, 1969 by limiting its coverage to Philippine residents only. Section 6 provides:” SEC. 6. All
receipts of foreign exchange by any resident person, firm, company or corporation shall be
sold to authorized agents of the Central Bank by the recipients within one business day
following the receipt of such foreign exchange. Any resident person, firm, company or
corporation residing or located within the Philippines, who acquires foreign exchange shall
not, unless authorized by the Central Bank, dispose of such foreign exchange in whole or in
part, nor receive less than its full value, nor delay taking ownership thereof except as such
delay is customary; Provided, That, within one business day upon taking ownership or
receiving payment of foreign exchange the aforementioned persons and entities shall sell such
foreign exchange to the authorized agents of the Central Bank. As earlier stated, the document
and the subsequent acts of the parties show that they intended the bank to safekeep the foreign
exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine
resident. The parties did not intend to sell the US dollars to the Central Bank within one
business day from receipt. Otherwise, the contract of depositum would never have been entered
into at all. Since the mere safekeeping of the greenbacks, without selling them to the Central
Bank within one business day from receipt, is a transaction which is not authorized by CB
Circular No. 20, it must be considered as one which falls under the general class of prohibited
transactions.
Civil Law; Obligations and Contracts; Contract of Deposit; The contract between Zshornack
and the bank, as to the $3,000.00, was a contract of deposit defined under Art. 1962 of the
New Civil Code.—The document which embodies the contract states that the US$3,000.00 was
received by the bank for safekeeping. The subsequent acts of the parties also show that the
intent of the parties was really for the bank to safely keep the dollars and to return it to
Zshornack at a later time. Thus, Zshornack demanded the return of the money on May 10,
1976, or over five months later. The above arrangement is that contract defined under Article
1962, New Civil Code, which reads: Art. 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the obligation of safely keeping it and for
returning the same. If the safekeeping of the thing delivered is not the principal purpose of the
contract, there is no deposit but some other contract.
Void Contracts; The contract between the parties being void, affords neither of the parties a
cause of action against each other.— Hence, pursuant to Article 5 of the Civil Code, it is
void, having been executed against the provisions of a mandatory/prohibitory law. More
importantly, it affords neither of the parties a cause of action against the other. “When the
nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes
a criminal offense, both parties being in pari delicto, they shall have no cause of action against
each other . . .” [Art. 1411, New Civil Code.] The only remedy is one on behalf of the State to
prosecute the parties for violating the law.
TRIPLE-V FOOD SERVICES INC. vs. FILIPINO MERCHANTS INSURANCE
COMPANY, GR. No. 160554, February 21, 2005
FACTS:
Mary Jo-Anne De Asis dined at petitioner's Kamayan Restaurant. De Asis was using a
Mitsubishi Galant Super Saloon Model 1995 issued by her employer Crispa Textile Inc.. On
said date, De Asis availed of the valet parking service of petitioner and entrusted her car key to
petitioner's valet counter. Afterwards, a certain Madridano, valet attendant, noticed that the car
was not in its parking slot and its key no longer in the box where valet attendants usually keep
the keys of cars entrusted to them. The car was never recovered. Thereafter, Crispa filed a
claim against its insurer, herein respondent Filipino Merchants Insurance Company, Inc.
Having indemnified Crispa for the loss of the subject vehicle, FMICI, as subrogee to Crispa's
rights, filed
with the RTC at Makati City an action for damages against petitioner Triple-V Food Services,
Inc. Petitioner claimed that the complaint failed to adduce facts to support the allegations of
recklessness and negligence committed in the safekeeping and custody of the subject vehicle.
Besides, when De Asis availed the free parking stab which contained a waiver of petitioner’s
liability in case of loss, she had thereby waived her rights.
ISSUE:
Whether or not petitioner Triple-V Food Services, Inc. is liable for the loss.
HELD:
The Supreme Court ruled in the affirmative. In a contract of deposit, a person receives an
object belonging to another with the obligation of safely keeping it and returning the same. A
deposit may be constituted even without any consideration. It is not necessary that the
depositary receives a fee before it becomes obligated to keep the item entrusted for safekeeping
and to return it later to the depositor. Petitioner cannot evade liability by arguing that neither a
contract of deposit nor that of insurance, guaranty or surety for the loss of the car was
constituted when De Asis availed of its free valet parking service.
THE ROMAN CATHOLIC BISHOP OF JARO vs. GREGORIO DE LA PEÑA
FACTS :
The plaintiff is the trustee of a charitable bequest made for the construction of a leper hospital
and that father Agustin de la Peña was the duly authorized representative of the plaintiff to
receive the legacy. The defendant is the administrator of the estate of Father De la Peña.
In the year 1898 the books Father De la Peña, as trustee, showed that he had on hand as such
trustee the sum of P6,641, collected by him for the charitable purposes aforesaid. In the same
year he deposited in his personal account P19,000 in the Hongkong and Shanghai Bank at
Iloilo. Shortly thereafter and during the war of the revolution, Father De la Peña was arrested
by the military authorities as a political prisoner, and while thus detained made an order on said
bank in favor of the United States Army officer under whose charge he then was for the sum
thus deposited in said bank. The arrest of Father De la Peña and the confiscation of the funds in
the bank were the result of the claim of the military authorities that he was an insurgent and
that the funds thus deposited had been collected by him for revolutionary purposes. The money
was taken from the bank by the military authorities by virtue of such order, was confiscated
and turned over to the Government.
While there is considerable dispute in the case over the question whether the P6,641 of trust
funds was included in the P19,000 deposited as aforesaid, nevertheless, a careful examination
of the case leads us to the conclusion that said trust funds were a part of the funds deposited
and which were removed and confiscated by the military authorities of the United States.
ISSUE :
Whether or not Father de la Peña is liable for the loss of the money under his trust?
RULING :
The court, therefore, finds and declares that the money which is the subject matter of this
action was deposited by Father De la Peña in the Hongkong and Shanghai Banking
Corporation of Iloilo; that said money was forcibly taken from the bank by the armed forces of
the United States during the war of the insurrection; and that said Father De la Peña was not
responsible for its loss.
Father De la Peña's liability is determined by those portions of the Civil Code which relate to
obligations. (Book 4, Title 1.)
Although the Civil Code states that "a person obliged to give something is also bound to
preserve it with the diligence pertaining to a good father of a family" (art. 1094), it also
provides, following the principle of the Roman law, major casus est, cui humana infirmitas
resistere non potest, that "no one shall be liable for events which could not be foreseen, or
which having been foreseen were inevitable, with the exception of the cases expressly
mentioned in the law or those in which the obligation so declares." (Art. 1105.)
By placing the money in the bank and mixing it with his personal funds De la Peña did not
thereby assume an obligation different from that under which he would have lain if such
deposit had not been made, nor did he thereby make himself liable to repay the money at all
hazards. If the had been forcibly taken from his pocket or from his house by the military forces
of one of the combatants during a state of war, it is clear that under the provisions of the Civil
Code he would have been exempt from responsibility. The fact that he placed the trust fund in
the bank in his personal account does not add to his responsibility. Such deposit did not make
him a debtor who must respond at all hazards.
TRUST FUNDS; LIABILITY OF TRUSTEE.—One who, having in his possession trust
funds, deposits them in his personal account in a bank and mixes them with his own funds,
does not thereby assume an obligation different from that under which he would have lain if
such deposit had not been made; nor does he thereby become liable to repay the money at all
hazards; and where such funds are taken from the bank by fuerza mayor, he is relieved from
responsibility in relation thereto.
ENGLISH AND AMERICAN LAW OF TRUSTS NOT APPLICABLE.—That branch of
the law, known in England and America as the law of trusts, has no counterpart in the Roman
law and none under the Spanish law.
KUCHINSKY, Appellant, v. EMPIRE LOUNGE, INC., Respondent.
Action by plaintiff, Thomas J. Kuchinsky, against defendant, Empire Lounge, Inc., to recover
damages for the wrongful taking of plaintiff's overcoat, gloves, and keys, while plaintiff was a
customer in defendant's cocktail lounge.
Plaintiff's complaint alleged two causes of action. The allegation of the first cause of action
was that on January 5, 1963, while plaintiff was on defendant's premises as an invitee plaintiff
delivered to defendant for safekeeping his overcoat, gloves, and keys, to be safely kept and
redelivered to plaintiff on demand; that defendant received such property upon such
conditions; and that defendant failed to deliver back said property to plaintiff on demand
because the same had been lost through the negligence and carelessness of defendant's
employees. The second cause of action alleged that plaintiff's overcoat, gloves, and keys had
been wrongfully taken while plaintiff was a business invitee of defendant and that such
wrongful taking was due to the negligence of defendant; and defendant's negligence consisted
of the following:
(1) It failed to control and manage the conduct of its patrons therein;
(2) It failed to adequately protect the interests of its business invitees;
(3) It failed to exercise that degree of care imposed upon it as a business invitor.
The defendant's answer denied the allegations of bailment set forth in the first cause of action
of plaintiff's complaint, and also denied all allegations of negligence contained in both the first
and second causes of action.
The action was tried to the court without a jury. The county court in addition to filing a
memorandum decision also made and filed findings of fact and conclusions of law. Such
findings of fact are as follows:
"Findings of Fact.
" First. That the plaintiff, his wife and another couple were in the Defendant's establishment on
the morning of January 6, 1963 at or about 3:00 A. M.
" Second. That there was only one waitress working on the morning in question.
" Third. That the Plaintiff and his party passed the coat tree as they took their seats and that it
was twenty feet from where they sat and in view of at least one of the parties as they were
seated.
" Fourth. That when the lounge closed at about 3:30 A. M. the Plaintiff went to the tree to get
his coat and found that it was not there.
" Fifth. That the Plaintiff was at complete liberty to retreive [sic] his coat from the tree without
requesting such from the waitress.
" Sixth. That no signs were posted on the premises warning the invitees to watch their coat or
stating that the management would not be responsible for losses.
" Seventh. That the Defendant had no employees whose duties were exclusively to safeguard
or protect the garments of the patrons or whose duties included the protecting or safeguarding
of the garments of the patrons as part of their duties.
" Eighth. That the only facility Defendant provided for the patrons to leave their garments were
coat trees in the bar area about five feet from the entrance to the premises."
The conclusions of law determined that no bailment had been established and that there was no
negligence on the part of defendant and judgment was directed dismissing the complaint upon
its merits.
Judgment was entered December 29, 1964, which dismissed the complaint on the merits
together with costs. Plaintiff has appealed.
CURRIE, C. J.
In the absence of a transcript our review is limited to the question of whether the pleadings,
decision, findings, and conclusions sustain the judgment. Estate of Reynolds (1964), 24 Wis.2d
370, 374, 129 N.W.2d 251.
Appellant plaintiff has raised no issue on this appeal with respect to the trial court's
determination that no bailment existed. Thus the issue before us is whether, under the facts as
found by the trial court, defendant cocktail-lounge operator, was negligent as a matter of law.
A case very much in point is Montgomery v. Ladjing (1899), 30 Misc. 92, 61 N.Y. Supp. 840.
There the plaintiff entered the restaurant kept by the defendant with a party of friends; he
removed his overcoat and hung it on a hook affixed to a post near the table at which he seated
himself; the attention of neither the defendant nor of any of his employees was called to the
coat in any way; and fifteen minutes later the coat was missing. The court held that the plaintiff
had wholly failed to show failure on the part of the defendant to exercise ordinary care, and
declared ( 30 Misc. at p. 96):
"The rule to be deduced from all these cases, therefore, is: That, before a restaurant keeper will
be held liable for the loss of an overcoat of a customer while such customer takes a meal or
refreshments, it must appear either that the overcoat was placed in the physical custody of the
keeper of the restaurant or his servants, in which case there is actual bailment, or that the
overcoat was necessarily laid aside under circumstances showing at least notice of the fact and
of such necessity to the keeper of the restaurant or his servants, in which case there is an
implied bailment or constructive custody, or that the loss occurred by reason of the
insufficiency of the general supervision exercised by the keeper of the restaurant for the
protection of the property of customers temporarily laid aside."
In National Fire Ins. Co. v. Commodore Hotel (1961), 259 Minn. 349, 107 N.W.2d 708, the
plaintiff was a guest at a luncheon held at the defendant's hotel. She hung her mink jacket in an
unattended cloakroom on the main floor across from the lobby desk. After the luncheon and
ensuing card party the plaintiff went to the cloakroom to retrieve her jacket and discovered it
was gone. The court held that no negligence had been established against the defendant and
stated ( 259 Minn. at pp. 353, 354):
". . . In any event, we do not feel that it is incumbent upon a hotel or restaurant owner to keep
an attendant in charge of a free cloakroom for luncheon or dinner guests or otherwise face
liability for loss of articles placed therein. The maintenance of such rooms without attendants is
a common practice, and where the proprietor has not accepted control and custody of articles
placed therein, no duty rests upon him to exercise any special degree of care with respect
thereto.
"Likewise, failure to post a warning disclaiming responsibility would not seem to constitute
negligence when, as here, a guest is aware that a cloakroom is unattended, adjacent to the
lobby, and accessible to anyone, and has used it under similar circumstances on many prior
occasions. The absence of such warning signs does not appear to have been material in a
number of decisions absolving proprietors from liability, although when posted they appear to
be regarded as an added factor in establishing such nonliability."
See also annotation, "Liability for loss of hat, coat or other property deposited by customer in
place of business," 1 A.L.R.2d 802.
Under the foregoing authorities we conclude not only do the findings of fact and conclusions of
law support the judgment, but also that these findings would not support a judgment in favor of
plaintiff.
Defendant has requested the imposition of double costs against plaintiff because of alleged
flagrant violation of our rules. The most serious of these rule infractions was plaintiff's failure
to print in its appendix the trial court's memorandum decision, findings of fact, conclusions of
law, and judgment. If it were not for the fact that plaintiff's counsel has been less than a year in
practice and this is his first supreme court appeal we would grant the request for double costs.
It is incumbent even upon the neophyte lawyer to familiarize himself with the rules of practice
of this court set forth in ch. 251, Stats., before drafting his brief and appendix. By the Court. —
Judgment affirmed.
CA AGRO-INDUSTRIAL DEVELOPMENT CORP. vs. THE HONORABLE COURT
OF APPEALS
FACTS :
Is the contractual relation between a commercial bank and another party in a contract of rent of
a safety deposit box with respect to its contents placed by the latter one of bailor and bailee or
one of lessor and lessee?
Petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao
entered into an agreement whereby the former purchased from the latter two (2) parcels of
land. P75,725.00 was paid as downpayment while the balance was covered by three (3)
postdated checks and based on the agreement the titles to the lots shall be transferred to the
petitioner upon full payment of the purchase price and that the owner's copies of the
certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall
be deposited in a safety deposit box of any bank. The same could be withdrawn only upon the
joint signatures of a representative of the petitioner and the Pugaos upon full payment of the
purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit
Box No. 1448 of private respondent Security Bank and Trust Company, a domestic banking
corporation hereinafter referred to as the respondent Bank. For this purpose, both signed a
contract of lease stating that the nank is not depositary of the contents of the safe neither the
possession nor control of the same and assumes absolutely no liability in connection therewith.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots
at a price of P225.00 per square meter which, as petitioner alleged in its complaint, translates to
a profit of P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs.
Ramos demanded the execution of a deed of sale which necessarily entailed the production of
the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to
the respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates
of title. However, when opened in the presence of the Bank's representative, the box yielded no
such certificates. Hence, the latter filed on 1 September 1980 a complaint  2 for damages against
the respondent Bank with the Court of First Instance. In its answer with counterclaim,
respondent bank alleges that the petitioner has no cause of action because of the provisions
stated in the contract of lease.
The trial court rendered a decision adverse to the petitioner. The unfavorable verdict is based
on the trial court's conclusion that under paragraphs 13 and 14 of the contract of lease, the
Bank has no liability for the loss of the certificates of title. The court declared that the said
provisions are binding on the parties.
ISSUE :
the contractual relation between a commercial bank and another party in a contract of rent of a
safety deposit box with respect to its contents placed by the latter one of bailor and bailee or
one of lessor and lessee?
RULING:
We observe, however, that the deposit theory itself does not altogether find unanimous support
even in American jurisprudence. We agree with the petitioner that under the latter, the
prevailing rule is that the relation between a bank renting out safe-deposit boxes and its
customer with respect to the contents of the box is that of a bail or and bailee, the bailment
being for hire and mutual benefit. 21 This is just the prevailing view because:
There is, however, some support for the view that the relationship in question might be more
properly characterized as that of landlord and tenant, or lessor and lessee. It has also been
suggested that it should be characterized as that of licensor and licensee. The relation between
a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box therein,
is often described as contractual, express or implied, oral or written, in whole or in part. But
there is apparently no jurisdiction in which any rule other than that applicable to bailments
governs questions of the liability and rights of the parties in respect of loss of the contents of
safe-deposit boxes. 22 (citations omitted)
It is not correct to assert that the Bank has neither the possession nor control of the contents of
the box since in fact, the safety deposit box itself is located in its premises and is under its
absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated
earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting
and using this guard key. Clearly then, to the extent above stated, the foregoing conditions in
the contract in question are void and ineffective. It has been said:
With respect to property deposited in a safe-deposit box by a customer of a safe-deposit
company, the parties, since the relation is a contractual one, may by special contract define
their respective duties or provide for increasing or limiting the liability of the deposit company,
provided such contract is not in violation of law or public policy. It must clearly appear that
there actually was such a special contract, however, in order to vary the ordinary obligations
implied by law from the relationship of the parties; liability of the deposit company will not be
enlarged or restricted by words of doubtful meaning. The company, in renting safe-deposit
boxes, cannot exempt itself from liability for loss of the contents by its own fraud or
negligence or that of its agents or servants, and if a provision of the contract may be construed
as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that
the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through
its own negligence, the view has been taken that such a lessor may limits its liability to some
extent by agreement or stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the
petition should be dismissed, but on grounds quite different from those relied upon by the
Court of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to the
holding of the Court of Appeals, be based on or proceed from a characterization of the
impugned contract as a contract of lease, but rather on the fact that no competent proof was
presented to show that respondent Bank was aware of the agreement between the petitioner and
the Pugaos to the effect that the certificates of title were withdrawable from the safety deposit
box only upon both parties' joint signatures, and that no evidence was submitted to reveal that
the loss of the certificates of title was due to the fraud or negligence of the respondent Bank.
This in turn flows from this Court's determination that the contract involved was one of
deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter's
key, it was obvious that either of them could ask the Bank for access to the safety deposit box
and, with the use of such key and the Bank's own guard key, could open the said box, without
the other renter being present.
Civil Law; Deposit; Commercial Law; Banks and Banking; A contract for the rent of a
safety deposit box is not an ordinary contract of lease but a special kind of deposit.—We
agree with the petitioner's contention that the contract for the rent of the safety deposit box is
not an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do
not fully subscribe to its view that the same is a contract of deposit that is to be strictly
governed by the provisions in the Civil Code on deposit; the contract in the case at bar is a
special kind of deposit. It cannot be characterized as an ordinary contract of lease under Article
1643 because the full and absolute possession and control of the safety deposit box Was not
given to the joint renters.
Primary function of banking institutions authorized to rent out safety deposit box, within the
parameters of contract of deposit in accord with General Banking Act which adopts prevailing
rule in American jurisprudence.—In the context of our laws which authorize banking
institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing
rule in the United States has been adopted. Section 72 of the General Banking Act pertinently
provides: xxx Note that the primary function is still found within the parameters of a contract
of deposit. i.e., the receiving in custody of funds, documents and other valuable objects for
safekeeping. The renting out of the safety deposit boxes is not independent from, but related to
or in conjunction with, this principal function.\
Any stipulation exempting depository from liability for loss of thing deposited on account of
fraud, negligence or delay considered void for being contrary to law and public policy.—The
depositary's responsibility for the safekeeping of the objects deposited in the case at bar is
governed by Title I, Book IV of the Civil Code. Accordingly the depositary would be liable if,
in perform: ng its obligation, it is found guilty of fraud, negligence, delay or contravention of
the tenor of the agreement. In the absence of any stipulation prescribing the degree of diligence
required, that of a good father of a family is to be observed. Hence, any stipulation exempting
ng the depositary from any liability arising from the loss of the thing deposited on account of
fraud, negligence or delay would be void for being contrary to law and public policy. Same;
Same; Same; Same; Liability of lessor in contract of lease of safety deposit box can be limited
by stipulation but any stipulation for exemption shall be held ineffective.—With respect to
property deposited in a safe-deposit box by a customer of a safe deposit company, the parties,
since the relation is a contractual one, may by special contract define their respective duties or
provide for increasing or limiting the liability of the deposit company, provided such contract
is not in violation of law or public policy. xxx The company, in renting safe-deposit boxes,
cannot exempt itself from liability for loss of the contents by its own fraud or negligence or
that of its agents or servants, and if a provision of the contract may be construed as an attempt
to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of
a safe-deposit box cannot limit its liability for loss of the contents thereof through its own
negligence, the view has been taken that such a lessor may limit its liability to some extent by
agreement or stipulation.
Bank's exoneration from liability not by virtue of characterization of impugned contract as a
contract of lease but by reason of the absence of proof as to its knowledge about
existing\agreement between the other parties, as well as, that the loss of certificates not
attributable to its negligence or fraud.—In the instant case, the respondent Bank's exoneration
cannot, contrary to the holding of the Court of Appeals, be based on or proceed from a
characterization of the impugned contract as a contract of lease, but rather on the fact that no
competent proof was presented to show that respondent Bank was aware of the agreement
between the petitioner and the Pugaos to the effect that the certificates of title were
withdrawable from the safety deposit box only upon both parties' joint signatures, and that no
evidence was submitted to reveal that the loss of the certificates of title was due to the fraud or
negligence of the respondent Bank. This in turn flows from this Court's determination that the
contract involved was one of deposit.
SIA vs CA, 222 SCRA 24 (1993)
Doctrine:
Contract of the use of a safety deposit box of a bank is not a deposit but a lease under Sec
72, A of General Banking Act.  Accordingly, it should have lost no time in notifying the
petitioner in order that the box could have been opened to retrieve the stamps, thus saving
the same from further deterioration and loss. The bank’s negligence aggravated the injury
or damage to the stamp collection..
 
Facts:    Plaintiff Luzon Sia rented a safety deposit box of Security Bank and Trust Co.
(Security Bank) at its Binondo Branch wherein he placed his collection of stamps. The said
safety deposit box leased by the plaintiff was at the bottom or at the lowest level of the safety
deposit boxes of the defendant bank. During the floods that took place in 1985 and 1986,
floodwater entered into the defendant bank’s premises, seeped into the safety deposit box
leased by the plaintiff and caused, according damage to his stamps collection. Security Bank
rejected the plaintiff’s claim for compensation for his damaged stamps collection.
 
Sia, thereafter, instituted an action for damages against the defendant bank. Security Bank
contended that its contract with the Sia over safety deposit box was one of lease and not of
deposit and, therefore, governed by the lease agreement which should be the applicable law;
the destruction of the plaintiff’s stamps collection was due to a calamity beyond obligation on
its part to notify the plaintiff about the floodwaters that inundated its premises at Binondo
branch which allegedly seeped into the safety deposit box leased to the plaintiff. The trial court
rendered in favor of plaintiff Sia and ordered Sia to pay damages.
 
Issue:    Although flooding could be considered a fortuitous event, failure of the bank to give notice
Whether or not the Bank is liable for negligence.
 
Held:
Contract of the use of a safety deposit box of a bank is not a deposit but a lease. Section 72 of
the General Banking Act [R.A. 337, as amended] pertinently provides: In addition to the
operations specifically authorized elsewhere in this Act, banking institutions other than
building and loan associations may perform the following services (a) Receive in custody
funds, documents, and valuable objects, and rent safety deposit boxes for the safequarding of
such effects.
As correctly held by the trial court, Security Bank was guilty of negligence. The bank’s
negligenceaggravated  the injury or damage to the stamp collection. SBTC was aware of the
floods of 1985 and 1986; it also knew that the floodwaters inundated the room where the safe
deposit box was located. In view thereof, it should have lost no time in notifying the petitioner
in order that the box could have been opened to retrieve the stamps, thus saving the same from
further deterioration and loss. In this respect, it failed to exercise the reasonable care and
prudence expected of a good father of a family, thereby becoming a party to the aggravation of
the injury or loss. Accordingly, the aforementioned fourth characteristic of a fortuitous event is
absent. Article 1170 of the Civil Code, which reads “Those who in the performance of their
obligation are guilty of fraud, negligence, or delay, and those who in any manner contravene
the tenor thereof, are liable for damages” is applicable. Hence, the petition was granted.
The provisions contended by Security Bank in the lease agreement which are meant to exempt
SBTC from any liability for damage, loss or destruction of the contents of the safety deposit
box which may arise from its own agents’ fraud, negligence or delay must be stricken down for
being contrary to law and public policy.
Civil Law; Deposit; Contract for the use of safety deposit box is a special kind of deposit and
the relationship between the parties thereto, with respect to the contents of the box, is that of
a bailor and bailee, the bailment being for hire and mutual benefit.—In the recent case of CA
Agro-Industrial Development Corp. vs. Court of Appeals, this Court explicitly rejected the
contention that a contract for the use of a safety deposit box is a contract of lease governed by
Title VII, Book IV of the Civil Code. Nor did We fully subscribe to the view that it is a
contract of deposit to be strictly governed by the Civil Code provision on deposit; it is, as We
declared, a special kind of deposit. The prevailing rule in American jurisprudence—that the
relation between a bank renting out safe deposit boxes and its customer with respect to the
contents of the box is that of a bailor and bailee, the bailment being for hire and mutual benefit
has been adopted in this jurisdiction.
Conditions in a “Lease Agreement” covering a safety deposit box which exempt the bank
from any liability for damage, loss or destruction of the contents thereof arising from its
own or its agent’s fraud, negligence or delay are considered null and void, for being
contrary to law and public policy.—Assayed in the light of Our aforementioned
pronouncements in CA Agro-Industrial Development Corp., it is not at all difficult to conclude
that both conditions No. 9 and No. 13 of the “Lease Agreement” covering the safety deposit
box in question (Exhibits “A” and “1”) must be stricken down for being contrary to law and
public policy as they are meant to exempt SBTC from any liability for damage, loss or
destruction of the contents of the safety deposit box which may arise from its own or its
agents’ fraud, negligence or delay. Accordingly, SBTC cannot take refuge under the said
conditions.
to the renter of such fact makes it liable for damages, its negligence caused to aggravate
injury or damage to the renter; Case at bar.—Unfortunately, however, the public respondent
failed to consider that in the instant case, as correctly held by the trial court, SBTC was guilty
of negligence. The facts constituting negligence are enumerated in the petition and have been
summarized in this ponencia. SBTC’s negligence aggravated the injury or damage to the
petitioner which resulted from the loss or destruction of the stamp collection. SBTC was aware
of the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where
Safe Deposit Box No. 54 was located. In view thereof, it should have lost no time in notifying
the petitioner in order that the box could have been opened to retrieve the stamps, thus saving
the same from further deterioration and loss. In this respect, it failed to exercise the reasonable
care and prudence expected of a good father of a family, thereby becoming a party to the
aggravation of the injury or loss. Accordingly, the aforementioned fourth characteristic of a
fortuitous event is absent x x x The destruction or loss of the stamp collection which was, in
the language of the trial court, the “product of 27 years of patience and diligence” caused the
petitioner pecuniary loss; hence, he must be compensated therefor.
ANGEL JAVELLANA vs. JOSE LIM, ET AL.
FACTS:
Angel Javellana filed a complaint on the 30th of October, 1906 against Jose Lim and Ceferino
Domingo Lim. It was then alleged that on the 26th of May, 1897, Lim executed and subscribed
a document, in favor of Javellana, reading as follows:
We have received from Angel Javellana, as a deposit without interest, the sum of two thousand
six hundred and eighty-six cents of  pesos fuertes, which we will return to the said gentleman,
jointly and severally, on the 20th of January, 1898. — Jaro, 26th of May, 1897. — Signed Jose
Lim. — Signed: Ceferino Domingo Lim.
 
It was also alleged that, when the obligation became due, Lim begged Javellana for an
extension of time for the payment thereof, building themselves to pay interest at the rate of 15
per cent on the amount of their indebtedness, to which Javellana acceded; that on the 15th of
May, 1902, the debtors paid on account of interest due the sum of P1,000 pesos, with the
exception of either capital or interest, had thereby been subjected to loss and damages.
 
Lim answered that they admitted the statements of the plaintiff relative to the payment of
1,102.16 pesos made on the 15th of November, 1902, not, however, as payment of interest on
the amount stated in the foregoing document, but on account of the principal, and denied that
there had been any agreement as to an extension of the time for payment and the payment of
interest at the rate of 15 per cent per annum.
 
ISSUE:
WON the contract is a deposit. NO, it was a contract of loan.
 
HELD:
The document of indebtedness inserted in the complaint states that the Javellana left on deposit
with Lim a given sum of money which they were jointly and severally obliged to return on a
certain date fixed in the document; but that, nevertheless, when the document written in the
Visayan dialect and followed by a translation into Spanish was executed, it was acknowledged,
at the date thereof, the 15th of November, 1902, that the amount deposited had not yet been
returned to Javellana. He was subjected to losses and damages amounting to 830 pesos since
the 20th of January, 1898, when the return was again stipulated with the further agreement that
the amount deposited should bear interest at the rate of 15 per cent per annum from January 20.
The 1,000 pesos paid to the depositor on the 15th of May, 1900, according to the receipt issued
by him to the debtors, would be included, and that the said rate of interest would obtain until
the debtors on the 20th of May, 1897, it is called a deposit consisted, and they could have
accomplished the return agreed upon by the delivery of a sum equal to the one received by
them.
 
For this reason it must be understood that the debtors were lawfully authorized to make use of
the amount deposited, which they have done, as subsequent shown when asking for an
extension of the time for the return thereof, inasmuch as, acknowledging that they have
subjected the letter, their creditor, to losses and damages for not complying with what had been
stipulated, and being conscious that they had used, for their own profit and gain, the money
that they received apparently as a deposit, they engaged to pay interest to the creditor from the
date named until the time when the refund should be made. Such conduct on the part of the
debtors is unquestionable evidence that the transaction entered into between the interested
parties was not a deposit, but a real contract of loan.
 
Article 1767 of the Civil Code provides that —
The depository can not make use of the thing deposited without the express permission of the
depositor.
Otherwise he shall be liable for losses and damages.
 
Article 1768 also provides that —
When the depository has permission to make use of the thing deposited, the contract loses the
character of a deposit and becomes a loan or bailment.
The permission shall not be presumed, and its existence must be proven.
 
Depository making use of the thing deposited: When on one of the latter days of January, 1898,
Jose Lim went to the office of the creditor asking for an extension of one year, in view of the
fact the money was scare, and because neither himself nor the other defendant were able to
return the amount deposited, for which reason he agreed to pay interest at the rate of 15 per
cent per annum, it was because, as a matter of fact, he did not have in his possession the
amount deposited, he having made use of the same in his business and for his own profit;
 
Express permission: Javellana, the creditor, by granting them the extension, evidently
confirmed the express permission previously given to use and dispose of the amount stated as
having been deposited, which, in accordance with the loan, to all intents and purposes
gratuitously, until the 20th of January, 1898, and from that dated with interest at 15 per cent
per annum until its full payment, deducting from the total amount of interest the sum of 1,000
pesos, in accordance with the provisions of article 1173 of the Civil Code.
Notwithstanding that it does not appear that Jose Lim signed the document executed in the
presence of three witnesses on the 15th of November, 1902, by Ceferino Domingo Lim on
behalf of himself and the former, nevertheless, the said document has not been contested as
false, either by a criminal or by a civil proceeding, nor has any doubt been cast upon the
authenticity of the signatures of the witnesses who attested the execution of the same; and from
the evidence in the case one is sufficiently convinced that the said Jose Lim was perfectly
aware of and authorized his joint codebtor to liquidate the interest, to pay the sum of 1,000
pesos, on account thereof, and to execute the aforesaid document No. 2. A true ratification of
the original document of deposit was thus made, and not the least proof is shown in the record
that Jose Lim had ever paid the whole or any part of the capital stated in the original document.
 
There was no renewal of the contract deposited converted into a loan, because, as has already
been stated, the defendants received said amount by virtue of real loan contract under the name
of a deposit, since the so-called bailees were forthwith authorized to dispose of the amount
deposited. This they have done, as has been clearly shown.
CONTRACT; BAILMENT OR DEPOSIT; LOAN.—Where money, consisting of coins of
legal tender, is deposited with a person and the latter is authorized by the depositor to use and
dispose of the same, the agreement thus entered into between the depositor and the depositary
is not a contract of deposit, but a loan.
SUBSEQUENT AGREEMENT AS TO INTEREST; NOVATION.—A subsequent
agreement between the parties as to interest on the amount said to have been deposited,
because the same could not be returned at the time fixed therefor, does not constitute a renewal
of an agreement of deposit, but is the best evidence that the original contract entered into
between the parties therein was for a loan under the guise of a deposit.
MANUEL GARCIA GAVIERES vs. T.H. PARDO DE TAVERA
Art. 1978: When the depositary has permission to use the thing deposited, the contract loses the
concept of a deposit and becomes a loan or commodatum, except where safekeeping is still the
principal purpose of the contract.
Facts:
This is an appeal from a decision made by the Court of First of Tondo, commenced on January
10, 1900 by Don Manuel Garcia Gavieres as Plaintiff and successor in interest of the deceased
Doña Ignacia de Gorricho against Don Trinidad H. Pardo de Taverna as universal heir and
successor of the deceased Don Felix Pardo de Taverna.
The Plaintiff alleges that Doña Ignacia deposited with Don Trinidad the amount of 3000 pesos
in gold, as a deposit payable on two months’ notice in advance, with interest at 6% per annum
that was evidenced by an agreement signed by the two parties on October 31, 1859. Don
Manuel came before the court to seek aid in recovering the balance of 1,423 pesos and 75 cents
from the estate of Don Trinidad.
The Defendant in answering the original complaint alleged that the document which the
complaint is based upon was not a contract of deposit but one for a contract of loan. The
defendant further presented evidence that showed that the principal obligation was paid by Don
Trinidad through his agent and that in case of non-payment of the balance that any action is
barred by prescription.
Issue:
WON the document presented by the plaintiff a contract of loan or that of a deposit
Held/Ratio:
The Court Held that the contract was that of a contract of loan.
Although in the document in question a deposit is spoken of, nevertheless from an examination
of the entire document it clearly appears that the contract was a loan and that such was the
intention of the parties. The obligation of the depositary to pay interest at the rate of 6 per cent
to the depositor suffices to cause the obligation to be considered as a loan and makes it
likewise evident that it was the intention of the parties that the depositary should have the right
to make use of the amount deposited, since it was stipulated that the amount could be collected
after notice of two months in advance. Such being the case, the contract lost the character of a
deposit and acquired that of a loan.
All personal actions, such as those which arise from a contract of loan, cease to have legal
effect after twenty years according to the former law and after fifteen years according to the
Civil Code now in force. The document dated January 8, 1869, executed by Don Felix Garcia
Gavieres, husband and legal representative of Doña Ignacia Gorricho, acknowledges the
receipt of 1,224 pesos from Don Manuel Darvin, representative of the deceased Don Felix
Pardo de Tavera. This sum is declared in the document was the balance due upon the debt of
2,000 pesos. This was more or less the amount which remained as due upon the original
obligation after deducting the payment which was admitted to have been made. In the absence
of evidence disclosing that there were other claims in favor of Gavieres it is reasonably to be
supposed that this payment was made to satisfy the balance due upon the original obligation.
He who by laches in the exercise of his rights has caused a failure of proof has no right to
complain if the court does not apply the strict rules of evidence which are applicable in
ordinary cases, and admits to a certain extent the presumption to which the conduct of the
interest party himself naturally gives rise.
It is was the opinion of the court that the judgment of the Court of First Instance should be
affirmed, and it was so ordered, with costs of appeal taxed against the appellant.
INTERPRETATION OF CONTRACTS; LOAN; DEPOSIT.—An instrument
acknowledging receipt of a sum of money as a deposit returnable two months after notice with
interest is evidence of a contract of loan and not of deposit.
EVIDENCE; LOAN; PAYMENT.—Where plaintiff's receipt for a sum of money, paid by
defendant in satisfaction of an unidentified balance, is introduced to prove payment of an
obligation sued upon, it will be regarded after a lapse of thirty years a satisfaction of the
obligation in question in the absence of showing of other obligations between the parties.
—Laches in the commencement of an action causing a possible failure of proof will prevent
court from applying strict rules of evidence.
Baron v David
FACTS
PABLO RUNS A RICE MILL, PLAINTIFF PLACES RICE IN MILL, FIRE GUTS
MILL, PALAY GONE
Defendant Pablo David has been running a rice mill in Pampanga. One day a fire occurred that
destroyed the mill and its contents. Silvestra Baron, the plaintiff in the first action, is an aunt of
the defendant; while Guillermo Baron, the plaintiff in the other action; is his uncle. In the
months of March, April, and May, 1920, Silvestra Baron placed a quantity of palay in the
defendant's mill. During the same period Guillermo Baron also placed palay in the mill.
PLAINTIFFS CLAIM PALAY WAS SOLD, DEFENDANT ARGUES IT WAS
DEPOSIT AND THAT THE FIRE RELIEVED HIM OF LIABILITY
Both plaintiffs claim that the palay delivered by them to defendant was sold to defendant;
while defendant claims that the palay was deposited subject to future withdrawal by the
depositors or subject to some future sale which was never effected. He therefore supposes
himself to be relieved from all responsibility by virtue of the fire, already mentioned.
ISSUE:
WON the palay was a deposit or a sale (SALE)
WON defendants are liable to plaintiffs (YES)
HELD
PALAY WAS SOLD, LIABILITY NOT EXTINGUISHED BY FIRE. PLAINTIFF
BOUND TO ACCOUNT FOR IT
In view of the nature of the defendant's activities and the way in which the palay was handled
in the defendant's mill, it is quite certain that all of the plaintiffs' palay, which was put in before
June 1, 1920, been milled and disposed of long prior to the fire of January 17, 1921.
Considering the fact that the defendant had thus milled and doubtless sold the plaintiffs' palay
prior to the date of the fire, it result that he is bound to account for its value, and his liability
was not extinguished by the occurrence of the fire.
EVEN IF DEPOSIT, USE OF THE THING BINDS DEFENDANT TO ACCOUNT FOR
ITS VALUE
Even supposing that the palay may have been delivered in the character of deposit, subject to
future sale or withdrawal at plaintiffs' election, nevertheless if it was understood that the
defendant might mill the palay and he has in fact appropriated it to his own use, he is of course
bound to account for its value
Under art 1768 of the Civil Code when the depository has permission to make use of the thing
deposited, the contract loses the character of mere deposit and becomes a loan or a
commodatum; and of course by appropriating the thing, the bailee becomes responsible for its
value.
In this connection we wholly reject the defendant's pretense that the palay delivered by the
plaintiffs or any part of it was actually consumed in the fire of January, 1921. Nor is the
liability of the defendant in any wise affected by the circumstance that, by a custom prevailing
among rice millers in this country, persons placing palay with them without special agreement
as to price are at liberty to withdraw it later, proper allowance being made for storage and
shrinkage, a thing that is sometimes done, though rarely.
DEPOSIT; USE OF THING DEPOSITED; LIABILITY OF DEPOSITARY.—The owner
of a rice mill who, in conformity with custom prevailing in the trade, receives palay and
converts it into rice, selling the product for his own benefit, must account for the palay to the
owner at the price prevailing at the time demand is made.
DESTRUCTION OF RICE MILL BY FIRE.—The destruction of a rice mill, with its
contents, by fire after palay thus deposited has been milled and marketed does not affect the
liability of the miller.
ATTACHMENT; DAMAGES RESULTING FROM WRONGFUL ATTACHMENT.—A
plaintiff who, by means of a false affidavit, procures an attachment to be issued and levied
upon a rice mill belonging to his debtor is liable in damages for the loss of profits resulting
from the closure of the mill, as well as for compensation for the loss occasioned to the good-
will of the business in driving away customers.
DEPOSITION ; READING OF DEPOSITION IN COURT.— When a deposition as
presented at the trial and admitted by the court, it is competent evidence for the party in whose
behalf it was taken, although it may not have been actually read when introduced in evidence.
Obejera v Iga Sy
Facts:
On December 13, 1941, plaintiffs and defendant sought refuge in the house of Leon Villena, on
account of the Japanese invasion of the Philippines. News having spread that the Japanese were
committing barbarous acts, plaintiffs and defendant decided to hide their things and valuables
in a dugout belonging to Villena.
On February 18, 1942, it was discovered that their money and things had been lost. The
defendant reported the loss of her valuables causing the arrest and investigation of Villena, two
others and the plaintiff Engracio Obejera, who were released shortly after, except Engracio
Obejera who was released only on April 19, 1912 after he, with his wife, had consented to
execute a transfer agreement with the defendant which was annulled by the Court of First
Instance in Batangas on the ground of force and intimidation.
Issue:
Whether or not Obejera is civilly liable to the assets that were lost by Sy?
Held:
NO. Decision AFFIRMED
Ratio Decidendi:
The Supreme Court ruled that the alleged deposit cannot be believed and is contrary to the
ordinary course of nature and the ordinary habits of life. Even if it was considered, any
obligation or liability arising therefrom was extinguished upon the loss. The evidence of record
shows that the plaintiffs were not in any way responsible for the loss of the defendant's money
and jewelry. It necessarily follows that the deed of transfer whereby the plaintiffs promised to
transfer their property cannot be held liable, is null and void for lack of cause or consideration
and lack of free consent.
DEPOSIT; EVIDENCE; DISPUTABLE PRESUMPTION; ORDINARY COURSE OF
NATURE AND ORDINARY HABITS OF LIFE; CASE AT BAR.—After a careful
consideration of the nine assignments of error and examination of the evidence of this case, the
contention of the defendant and appellant cannot be sustained. The alleged deposit cannot be
believed and is contrary to the ordinary course of nature and the ordinary habits of life.
LOSS OF THING DEPOSITED; EXTINCTION OF LIABILITY.—Even if the
defendant's theory of deposit were sustained, any obligation arising" therefrom was
extinguished upon the loss, without the fault of the depositee and under circumstances which at
the time were inevitable.
CONTRACTS; NULLITY; LACK OF CAUSE OR CONSIDERATION.—The deed of
transfer dated April 19, 1942 (Exhibit Y), whereby the plaintiffs paid P500 to the defendant
and further promised to transfer their property under Transfer Certificate of Title No. 666 in
case they failed to return on December 31, 1942 the balance of the loss for which they cannot
be held liable, is null and void for lack of cause or consideration (article 1275, Civil Code).
DURESS AND INTIMIDATION.—Under the facts stated in the opinion, it was held that
there had been employed in this case irresistible force and intimidation to coerce the plaintiffs
into executing the document in question, rendering it, therefore, null and void for lack of free
consent (articles 1265, 1267, 1268, Civil Code).
Central Bank of the Philippines vs. Citytrust Banking Corporation
Facts:
If the plaintiff’s negligence was only contributory, the immediate and proximate cause of the
injury being the defendant’s lack of due care, the plaintiff may recover damages, but the courts
shall mitigate the damages to be awarded.
The Citytrust Banking Corporation (Citytrust) gave Central Bank of the Philippines a list of
signatures of five of its officers authorized to sign checks and serve as drawers and indorsers
for its account, and also the list of the roving tellers authorized to perform other transactions on
its behalf, one of whom was Rounceval Flores (Flores). Flores presented two checks to the
Central Bank’s Senior Teller Iluminada dela Cruz (Dela Cruz) and was subsequently approved.
Dela Cruz prepared the cash transfer slip where Flores should sign but instead he sign as one
Rosauro C. Cayabyab. This fact was missed by Dela Cruz. It was given to Cash Department
and the signatures were examined and later on paid Flores for the checks. After one year and
nine months, the Citytrust demanded that the checks be cancelled and the funds taken out be
returned because the check was stolen before. Central Bank did not heed such call. Citytrust
filed a complaint to collect the sum of money with damages against Central Bank to the
Regional Trial Court (RTC). RTC found both parties negligent and held them equally liable for
the loss. Court of Appeals affirmed the decision.
ISSUE:
Whether or not Citytrust can collect sum of money as damages from the Central Bank.
HELD:
The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2
of Republic Act No. 8791 (R.A. 8791), which took effect on 13 June 2000, declares that the
State recognizes the “fiduciary nature of banking that requires high standards of integrity and
performance.”
This fiduciary relationship means that the bank’s obligation to observe “high standards of
integrity and performance” is deemed written into every deposit agreement between a bank and
its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence
higher than that of a good father of a family. Article 1172 of the Civil Code states that the
degree of diligence required of an obligor is that prescribed by law or contract, and absent such
stipulation then the diligence of a good father of a family. Section 2 of R.A. 8791 prescribes
the statutory diligence required from banks – that banks must observe “high standards of
integrity and performance” in servicing their depositors. Citytrust’s failure to timely examine
its account, cancel the checks and notify petitioner of their alleged loss/theft should mitigate
petitioner’s liability, in accordance with Article 2179 of the Civil Code which provides that if
the plaintiff’s negligence was only contributory, the immediate and proximate cause of the
injury being the defendant’s lack of due care, the plaintiff may recover damages, but the courts
shall mitigate the damages to be awarded.
Banks and Banking; Fiduciary Nature of Banking; The bank is under obligation to treat the
accounts of its depositors with meticulous care, always having in mind the fiduciary nature
of their relationship; The fiduciary nature of banking requires banks to assume a degree of
diligence higher than that of a good father of a family.—The law imposes on banks high
standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 (“RA
8791”), which took effect on 13 June 2000, declares that the State recognizes the “fiduciary
nature of banking that requires high standards of integrity and performance.” This new
provision in the general banking law, introduced in 2000, is a statutory affirmation of Supreme
Court decisions, starting with the 1990 case of Simex International v. Court of Appeals,
holding that “the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship.” This
fiduciary relationship means that the bank’s obligation to observe “high standards of
integrity and performance” is deemed written into every deposit agreement between a
bank and its depositor. The fiduciary nature of banking requires banks to assume a
degree of diligence higher than that of a good father of a family.
Petitioner’s liability to Citytrust mitigated on a 60-40- ratio.—Citytrust’s failure to timely
examine its account, cancel the checks and notify petitioner of their alleged loss/theft should
mitigate petitioner’s liability, in accordance with Article 2179 of the Civil Code which
provides that if the plaintiff’s negligence was only contributory, the immediate and proximate
cause of the injury being the defendant’s lack of due care, the plaintiff may recover damages,
but the courts shall mitigate the damages to be awarded. For had Citytrust timely discovered
the loss/theft and/or subsequent encashment, their proceeds or part thereof could have been
recovered. In line with the ruling in Consolidated Bank and Trust Corporation v. Court of
Appeals, 410 SCRA 562 (2003), the Court deems it proper to allocate the loss between
petitioner and Citytrust on a 60-40 ratio.
VICENTE DELGADO vs. PEDRO BONNEVIE
FACTS:
DELGADO vs. BONNEVIE and ARANDEZ 23 PHIL 308 FACTS: Appellant Bonnevie and
Arandez formed a regular general partnership in Nueva Caceres, Ambos, Camarines Sur which
engaged in the business of threshing paddy/palay. Vicente Delgado undertook to deliver to the
appellants, 2003 and a half paddy. The palays are to be cleaned and returned to him as rice
with the agreement of payment of 10 centimos for each cavan and to have it returned in the
rice, onehalf the amount received as palay. Delgado appeared in CFI on February 6, 1909,
demanding the return of the 2003 and a half cavanes of palay. Prior to the pendency of the trial,
the partnership was already dissolved.
ISSUES:
1. W/N the nature of the obligation contracted by the appellants (Bonnevie & Arandez) is a
deposit or a hire of service.
2. W/N the right to demand the return of the things has prescription.
HELD:
1. The obligation of the appellants arose primarily out of deposit. While the deposit was later
converted into a contract of hire services, even after the hire of service had been fulfilled, the
object (rice) in every way remained as a deposit in the possession of the appellants, for them to
return to the depositor at any time they might be required to do so and nothing has released
them of this obligation. Moreover, neither the dissolution of the partnership that united them,
nor the revolutionary movement of a political character that seems to have occurred in 1898,
nor the fact that they may at some time have lost possession of the rice has released them from
the obligation to return it. 2. Under the title of deposit or hire of services, the possession of the
appellants can in no way amount to prescription, for the thing received on deposit or for hire of
service could not prescribe, since for every prescription of ownership, the possession must be
in the capacity of an owner, public, peaceful and uninterrupted (Civil Code 1941). The
appellants could not possess the rice in the capacity of owners, taking for granted that the
depositor or lessor never could have believed that he had transferred to them ownership of the
thing deposited or leased, but merely the care of the thing on deposit and the use or profit
thereof; which is expressed in legal terms by saying that the possession of the depositary or of
the lessee is not adverse to that of the depositor or lessor, who continues to be the owner of the
thing which is merely held in trust by the depositary or lessee.
COMPANIA AGRICOLA  VS. NEPOMUCENO
FACTS:
The registered partnerships, Mariano Velasco & Co., Mariano Velasco, Sons, & Co., and
Mariano Velasco & Co., Inc., were, on petition of the creditors, declared insolvent by the Court
of First Instance of Manila. Compania Agricola de Ultramar filed a claim against one of the
insolvents Mariano Velasco & Co., claiming the sum of P10,000, with the agreed interest
thereon at the rate of 6 per cent per annum from April 5, 1918, until its full payment was a
deposit with said Mariano Velasco & Co. and asked the court to declare it a preferred claim.
The court rendered a decision declaring that the alleged deposit was a preferred claim for the
sum mentioned, with interest at 6 per cent per annum from April 5, 1918, until paid. From this
decision the assignee appealed.
The evidence presented by the claimant Compania Agricola de Ultramar consisted of a receipt
in writing, and the testimony of Jose Velasco who was manager of Mariano Velasco & Co. at
the time the note was executed. Received from the "Compania Agricola de Ultramar" the sum
of ten thousand Philippine pesos as a deposit at the interest of six per cent annually, for the
term of three months from date.
ISSUE:
Whether the claim of the appellee should be considered a deposit and a preferred claim.
RULING:
NO. The transaction involved was a loan and not a deposit.
Although in the document in question a deposit is spoken of, nevertheless from an
examination of the entire document it clearly appears that the contract was a loan and that such
was the intention of the parties. It is unnecessary to recur to the cannons of interpretation to
arrive at this conclusion. The obligation of the depository to pay interest at the rate of 6 per
cent to the depositor suffices to cause the obligation to be considered as a loan and makes it
likewise evident that it was the intention of the parties that the depository should have the right
to make use of the amount deposited, since it was stipulated that the amount could be collected
after notice of two months in advance. Such being the case, the contract lost the character of a
deposit and acquired that of a loan. (Art. 1768, Civil Code.) [Gavieres vs. De Tavera]
Article 1767 of the Civil Code provides that —
"The depository cannot make use of the thing deposited without the express permission of the
depositor."
 "Otherwise he shall be liable for losses and damages."
Article 1768 also provides that —
"When the depository has permission to make use of the thing deposited, the contract loses the
character of a deposit and becomes a loan or bailment."
"The permission not be presumed, and its existence must be proven."
Moreover, it may be inferred that there was no renewal of the contract of deposit which
converted into a loan, because, as has already been stated, the defendants received said amount
by virtue of a real loan contract under the name of a deposit, since the so-called bailees were
forthwith authorized to dispose of the amount deposited. This they have done, as has been
clearly shown.
The ten thousand pesos delivered by the appellee to Mariano Velasco & Co. cannot be
regarded as a technical deposit. But the appellee argues that it is at least an "irregular deposit."
This argument is, we think, sufficiently answered in the case of Rogers vs. Smith, Bell & Co.
(10 Phil., 319). There this court said:
         . . . Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664), states that there
are three points of difference between a loan and an irregular deposit. The first difference
which he points out consists in the fact that in an irregular deposit the only benefit is that which
accrues to the depositor, while in a loan the essential cause for the transaction is the necessity
of the borrower.
         Nor does the contract in question fulfill the third requisite indicated by Manresa, which
is, that in an irregular deposit, the depositor can demand the return of the article at any time,
while a lender is bound by the provisions of the contract and cannot seek restitution until the
time for payment, as provided in the contract, has arisen. It is apparent from the terms of this
documents that the plaintiff could not demand his money at any time. He was bound to give
notice of his desire for its return and then to wait for six months before he could insist upon
payment.
         In the present case the transaction in question was clearly not for the sole benefit of the
Compania Agricola de Ultramar; it was evidently for the benefit of both parties. Neither could
the alleged depositor demand payment until the expiration of the term of three months.
For the reasons stated, the appealed judgment is reversed, and we hold that the transaction in
question must be regarded as a loan, without preference.
BPI VS CA, 232 SCRA 302 (1994)
BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND
TRUST CO.), petitioner,
vs. HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D.
LIM, respondents.
FACTS:
Private respondents Eastern Plywood Corporation (Eastern) and Benigno D. Lim (Lim), held
one joint bank account with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-
interest of petitioner Bank of the Philippine Islands (BPI). Sometime in March 1975, a joint
checking account with Lim in the amount of P120,000.00 was opened by Mariano Velasco
with funds withdrawn from the account of Eastern and/or Lim.
Velasco died. At the time of his death, the outstanding balance of the account stood at
P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim one-
half of this amount was provisionally released and transferred to one of the bank accounts of
Eastern with CBTC.
Thereafter, Eastern obtained a loan of P73,000.00 from CBTC as "Additional Working
Capital,". Eastern issued a negotiable promissory note for P73,000.00 payable on demand to
the order of CBTC with interest at 14% per annum.  The note was signed by Lim. The loan is
wholly/partly secured by the Hold-Out on a 1:1 on C/A No. 2310-001-42, which refers to the
joint account of Velasco and Lim with a balance of P331,261.44. In addition, Eastern and Lim,
and CBTC signed another document entitled "Holdout Agreement,"
On the other hand, a case for the settlement of Velasco's estate was filed. In the said case, the
whole balance of P331,261.44 in the aforesaid joint account of Velasco and Lim was being
claimed as part of Velasco's estate. The intestate court granted motion of the heirs of Velasco
to withdraw the balance and authorized the heirs to divide among themselves the amount
withdrawn.
CBTC was merged with BPI. BPI filed a complaint against Lim and Eastern demanding
payment of the promissory note for P73,000.00. Defendants Lim and Eastern, in turn, filed a
counterclaim against BPI for the return of the balance in the disputed account subject of the
Holdout Agreement and the interests thereon after deducting the amount due on the promissory
note.
RTC dismissed the complaint and CA affirmed the decision.
PETITIONER’s CONTENTION: BPI alleged that the Holdout Agreement in question was
subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall become a
security for respondent Lim's promissory note only if respondents' Lim and Eastern Plywood
Corporation's interests to that amount are established as a result of a final and definitive
judicial action or a settlement between and among the contesting parties thereto."  Hence, BPI
asserts, the Court of Appeals erred in affirming the trial court's decision dismissing the
complaint on the ground that it was the duty of CBTC to debit the account of the defendants to
set off the amount of P73,000.00 covered by the promissory note.
PRIV. RESPONDENT’s CONTENTION: Eastern and Lim dispute the "suspensive
condition" argument of the petitioner that they are rightful owners of the money in question,
the suspensive condition does not find any application in this case and the bank had the duty to
set off this deposit with the loan.
ISSUES:
1. WON BPI can demand payment of the loan of P73,000.00 despite the existence of the
Holdout Agreement? YES
2. WON BPI is still liable to the private respondents on the account subject of the Holdout
Agreement after its withdrawal by the heirs of Velasco? YES
HELD:
ISSUE 1:
It is clear in paragraph 02 of the “Holdout Agreement” that CBTC, or BPI as its successor-in-
interest, had every right to demand that Eastern and Lim settle their liability under the
promissory note. It cannot be compelled to retain and apply the deposit in Lim and Velasco's
joint account to the payment of the note. What the agreement conferred on CBTC was a power,
not a duty. Generally, a bank is under no duty or obligation to make the application. To apply
the deposit to the payment of a loan is a privilege, a right of set-off which the bank has the
option to exercise.
Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement,
CBTC was not in any way precluded from demanding payment from Eastern and from
instituting an action to recover payment of the loan. What it provides is an alternative, not an
exclusive, method of enforcing its claim on the note. Its suit for the enforcement of the note
was then in order and it was error for the trial court to dismiss it on the theory that it was set off
by an equivalent portion in C/A No. 2310-001-42 which BPI should have debited. The
"suspensive condition" theory of the petitioner is, therefore, untenable.
ISSUE 2:
The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and
Lim for the return of the P331,261.44  was equivalent to a demand that they be allowed to
withdraw their deposit with the bank. Article 1980 of the Civil Code expressly provides that
"[f]ixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan."
In Serrano vs. Central Bank of the Philippines, we held that bank deposits are in the nature of
irregular deposits; they are really loans because they earn interest. The relationship then
between a depositor and a bank is one of creditor and debtor. The deposit under the questioned
account was an ordinary bank deposit; hence, it was payable on demand of the depositor.
The account was proved and established to belong to Eastern even if it was deposited in the
names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it
or to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply
because it already allowed the heirs of Velasco to withdraw the whole balance of the account.
The petitioner should not have allowed such withdrawal because it had admitted in the Holdout
Agreement the questioned ownership of the money deposited in the account.  Moreover, the
order of the court merely authorized the heirs of Velasco to withdraw the account. BPI was not
specifically ordered to release the account to the said heirs; hence, it was under no judicial
compulsion to do so.
Because the ownership of the deposit remained undetermined, BPI, as the debtor, had no right
to pay to persons other than those in whose favor the obligation was constituted or whose right
or authority to receive payment is indisputable. Payment made by the debtor to the wrong party
does not extinguish the obligation as to the creditor who is without fault or negligence, even if
the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through
error induced by fraud of a third person.  The payment then by BPI to the heirs of Velasco,
even if done in good faith, did not extinguish its obligation to the true depositor, Eastern.
POLICY:
Bank deposits are in the nature of irregular deposits; they are really loans because they earn
interest. The relationship then between a depositor and a bank is one of creditor and debtor.
Durban Apartments Corporation vs. Pioneer Insurance and Surety Corporation
FACTS: July 22, 2003, Pioneer Insurance and Surety Corp, by right of subrogation, filed with
the RTC of Makati a Complaint for Recovery of Damages against Durban Apartments Corp.
(or City Garden Hotel) and defendant before the RTC, Vicente Justimbaste. Respondent
averred that it is the insurer for loss and damage of Jeffrey S. See’s 2001 Suzuki Grand Vitara
in the amount of P1,175,000.00. On April 30, 2002, See arrived and checked in at the City
Garden Hotel before midnight, and its parking attendant, Justimbaste got the key to said Vitara
from See to park it. On May 1, 2002, at about 1:00 am, See received a phone call where the
Hotel Chief Security Officer informed him that his Vitara was carnapped while it was parked
unattended at the parking area of Equitable PCI Bank See went to see the Security Officer,
thereafter reported the incident to the Operations Division of the Makati City Police Anti-
Carnapping Unit, and a flash alarm was issued. The police investigated Hotel Security Officer,
Ernesto T. Horlador, Jr. and Justimbaste. See gave his Sinumpaang Salaysay to the police
investigator, and filed a Complaint Sheet with the PNP Traffic Management Group in Camp
Crame. it paid the P1,163,250.00 money claim of See and mortgagee ABN AMRO Savings
Bank, Inc. as indemnity for the loss of the Vitara.
The Vitara was lost due to the negligence of Durban Apartments and Justimbaste because it
was discovered during the investigation that this was the second time that a similar incident of
carnapping happened in the valet parking service and no necessary precautions were taken to
prevent its repetition. Durban Apartments was wanting in due diligence in the selection and
supervision of its employees particularly defendant Justimbaste. Both failed and refused to pay
its valid, just, and lawful claim despite written demands.
ISSUE: Is petitioner liable for the loss of See’s vehicle?
RULING: Yes.
Article 1962, in relation to Article 1998, of the Civil Code defines a contract of deposit and a
necessary deposit made by persons in hotels or inns:
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to
another, with the obligation of safely keeping it and returning the same. If the safekeeping of
the thing delivered is not the principal purpose of the contract, there is no deposit but some
other contract.
Art. 1998. The deposit of effects made by travelers in hotels or inns shall also be regarded as
necessary. The keepers of hotels or inns shall be responsible for them as depositaries, provided
that notice was given to them, or to their employees, of the effects brought by the guests and
that, on the part of the latter, they take the precautions which said hotel-keepers or their
substitutes advised relative to the care and vigilance of their effects.
Plainly, from the facts found by the lower courts, the insured See deposited his vehicle for
safekeeping with petitioner, through the latter’s employee, Justimbaste. In turn, Justimbaste
issued a claim stub to See. Thus, the contract of deposit was perfected from See’s delivery,
when he handed over to Justimbaste the keys to his vehicle, which Justimbaste received with
the obligation of safely keeping and returning it. Ultimately, petitioner is liable for the loss of
See’s vehicle.

Contract of Deposit; Hotels and Inns; The contract of deposit was perfected when the hotel
guest handed over to the hotel’s parking attendant the keys to his vehicle, which the latter
received with the obligation of safely keeping and returning it.—Article 1962, in relation to
Article 1998, of the Civil Code defines a contract of deposit and a necessary deposit made by
persons in hotels or inns: Art. 1962. A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of safely keeping it and returning the
same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there
is no deposit but some other contract. Art. 1998. The deposit of effects made by travelers in
hotels or inns shall also be regarded as necessary. The keepers of hotels or inns shall be
responsible for them as depositaries, provided that notice was given to them, or to their
employees, of the effects brought by the guests and that, on the part of the latter, they take the
precautions which said hotelkeepers or their substitutes advised relative to the care and
vigilance of their effects. Plainly, from the facts found by the lower courts, the insured See
deposited his vehicle for safekeeping with petitioner, through the latter’s employee,
Justimbaste. In turn, Justimbaste issued a claim stub to See. Thus, the contract of deposit was
perfected from See’s delivery, when he handed over to Justimbaste the keys to his vehicle,
which Justimbaste received with the obligation of safely keeping and returning it. Ultimately,
petitioner is liable for the loss of See’s vehicle.
Makati Shangri-La Hotel and Resort, Inc. vs. Harper circumstances, used that reasonable care and caution which an ordinary person would have
DOCTRINE: used in the same situation.”

Negligence – Article 2176 0f the New Civil Code provides “Whoever by act or omission
causes damage to another, there being fault or negligence, is obliged to pay for the damage
done. Such fault or negligence, if there is no pre-existing contractual relation between the
parties, is called a quasi-delict and is governed by the provisions of this Chapter.”
The hotel business is imbued with public interest. Hotelkeepers are bound to provide not only
lodging for their guests but also security to their persons and belongings to their guest. The
twin duty constitutes the essence of the business (Arts 2000-2001 New Civil Code).
Hotel owner is liable for civil damages to surviving heirs of hotel guest whom strangers
murder inside his hotel room.
FACTS:
Christian Harper was a Norweigian who came to Manila on a business trip. He stayed at
Makati Shangri-la Hotel, but he was murdered in his hotel room [Specifically Room 1428. His
ghost can be found there].
Hotelkeepers; The hotel business is imbued with public interest. Catering to the public,
hotelkeepers are bound to provide not only lodging for their guests but also security to the
persons and belongings of their guests. The twin duty constitutes the essence of the
business.―The hotel business is imbued with public interest. Catering to the public,
hotelkeepers are bound to provide not only lodging for their guests but also security to the
persons and belongings of their guests. The twin duty constitutes the essence of the business.
Applying by analogy Article 2000, Article 2001 and Article 2002 of the Civil Code (all of
which concerned the hotelkeepers’ degree of care and responsibility as to the personal effects
of their guests), we hold that there is much greater reason to apply the same if not greater
degree of care and responsibility when the lives and personal safety of their guests are
involved. Otherwise, the hotelkeepers would simply stand idly by as strangers have
unrestricted access to all the hotel rooms on the pretense of being visitors of the guests, without
being held liable should anything untoward befall the unwary guests. That would be absurd,
something that no good law would ever envision.

It was found that the muderer, a Caucasian male, was able to trespass into the hotel room of the
victim and was then able to murder and rob the victim. The heirs of the victim blame the
hotel's gross negligence in providing the most basic security system of its guests.

The RTC held in favor of the heirs and ordered Shangri-la to pay damages. CA affirmed.

ISSUE: WON Shangri-la Hotel is liable for damages.

HELD:
Yes. Shangri-la is liable due to its own negligence.

The testimony revealed that the management practice of the hotel prior to the death of the
victim was to deploy only one security or roving guard for every three or four floors of the
hotel, which is inadequate because the hotel is L-shaped that rendered hallways not visible end
to end. That there was a recommendation to increase security to one guard per floor but this
was not followed. This omission is critical. The hotel business is imbued with public interest.
Hotelkeepers are bound to provide not only lodging for their guests but also security to their
persons and belongings to their guest. The twin duty constitutes the essence of the business.

Therefore, the hotel has a greater degree of care and responsibility for its guests , otherwise the
hotelkeepers would just stand idly by while strangers have unrestricted access to all hotel
rooms on the pretense of being visitors of the guests which is absurd.

Note: The decision of the CA was reproduced in the decision to which the SC concurred. The
CA discussed the test of negligence as:

“The test of negligence is objective. WE measure the act or omission of the tortfeasor with a
perspective as that of an ordinary reasonable person who is similarly situated. The test, as
applied to the extant case, is whether or not [Shangri-la Hotel], under the attendant
YHT Realty Corporation vs. Court of Appeals
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 in the possession of the management of the hotel. McLoughlin allegedly placed the
following in his safety deposit box – 2 envelopes containing US 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 the safety
box which includes the ff: envelope containing Five Thousand US Dollars (US$5,000.00), the
other envelope containing Ten Thousand Australian Dollars (AUS$10,000.00), his passports
and his credit cards. The other items were left in the deposit box. Upon arrival, he found out
that a fewd ollars were missing and the jewelry he bought was likewise missing. Eventually, he
confronted Lainez and Paiyam who admitted that Tan opened the safety deposit box with the
key assigned to him. McLoughlin went up to his room where Tan was staying and confronted
her. Tan admitted that she had stolen McLouglin’s key and was able to open the safety deposit
box with the assistance of Lopez, Paiyam and Lainez. Lopez also told McLoughlin that 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 he suffered. Lopez refused to
accept responsibility relying on the conditions for renting the safety deposit box entitled
“Undertaking For the Use of Safety Deposit Box”
ISSUE
WON the “Undertaking for the Use of Safety Deposit Box” admittedly executed by private
respondent is null and void.
HELD
YES Article 2003 was incorporated in the New Civil Code as an expression of public policy
precisely to apply to situations such as that presented in this case. The hotel business like the
common carrier’s business is imbued with public interest. Catering to the public, hotelkeepers
are bound 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 to the public to be negated or diluted by any contrary stipulation in so-called
“undertakings” that ordinarily 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 or innkeeper liable for the effects of their guests, it is not necessary that they be
actually delivered to the innkeepers or their employees. It is enough that such effects are within
the hotel or inn. With greater reason should the liability of the hotelkeeper be enforced when
the missing items are taken without the guest’s knowledge and consent from a safety deposit
box provided by the hotel itself, as in this case. Paragraphs (2) and (4) of the “undertaking”
manifestly contravene Article 2003, CC for they allow Tropicana to be released from liability
arising from any loss in the contents and/or use of the safety deposit box for any cause
whatsoever. Evidently, the undertaking was intended to bar any claim against Tropicana for
any loss of the contents of the safety deposit box whether or not negligence was incurred by
Tropicana or its employees. The New Civil Code is explicit that the responsibility of the hotel-
keeper shall extend to loss of, or injury to, the personal property of the guests even if caused by
servants or employees of the keepers of hotels or inns as well as by strangers, except as it may
proceed from any force majeure.
Hotels and Inns; Deposits; Safety Deposit Boxes; Mere close companionship and intimacy are
not enough to warrant the conclusion that a hotel guest and his companion are husband and
wife—it is no excuse for the hotel to have allowed the latter to open the safety deposit box of
the former.—The management contends, however, that McLoughlin, by his act, made its
employees believe that Tan was his spouse for she was always with him most of the time. The
evidence on record, however, is bereft of any showing that McLoughlin introduced Tan to the
management as his wife. Such an inference from the act of McLoughlin will not exculpate the
petitioners from liability in the absence of any showing that he made the management believe
that Tan was his wife or was duly authorized to have access to the safety deposit box. Mere
close companionship and intimacy are not enough to warrant such conclusion considering that
what is involved in the instant case is the very safety of McLoughlin’s deposit. If only
petitioners exercised due diligence in taking care of McLoughlin’s safety deposit box, they
should have confronted him as to his relationship with Tan considering that the latter had been
observed opening McLoughlin’s safety deposit box a number of times at the early hours of the
morning. Tan’s acts should have prompted the management to investigate her relationship with
McLoughlin. Then, petitioners would have exercised due diligence required of them. Failure to
do so warrants the conclusion that the management had been remiss in complying with the
obligations imposed upon hotel-keepers under the law.
Quasi-Delicts; Torts; Where the loss of a hotel guest’s money was consummated through the
negligence of the hotel employee in allowing the companion of said guest to open the safety
deposit box without the guest’s consent, both the assisting employees and the hotel owner
and operator are solidarily liable.—Under Article 1170 of the New Civil Code, those who, in
the performance of their obligations, are guilty of negligence, are liable for damages. As to
who shall bear the burden of paying damages, Article 2180, paragraph (4) of the same Code
provides that the owners and managers of an establishment or enterprise are likewise
responsible for damages caused by their employees in the service of the branches in which the
latter are employed or on the occasion of their functions. Also, this Court has ruled that if an
employee is found negligent, it is presumed that the employer was negligent in selecting and/or
supervising him for it is hard for the victim to prove the negligence of such employer. Thus,
given the fact that the loss of McLoughlin’s money was consummated through the negligence
of Tropicana’s employees in allowing Tan to open the safety deposit box without the guest’s
consent, both the assisting employees and YHT Realty Corporation itself, as owner and
operator of Tropicana, should be held solidarily liable pursuant to Article 2193.
Catering to the public, hotel-keepers are bound to provide not only lodging for hotel guests
but also security to their persons and belongings—a twin duty which the law does not allow
to be negated or diluted by any contrary stipulation in so-called “undertakings” that
ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature.
—The issue of whether the “Undertaking For The Use of Safety Deposit Box” executed by
McLoughlin is tainted with nullity presents a legal question appropriate for resolution in this
petition. Notably, both the trial court and the appellate court found the same to be null and
void. We find no reason to reverse their common conclusion. Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the
effect that he is not liable for the articles brought by the guest. Any stipulation between the
hotel-keeper and the guest whereby the responsibility of the former as set forth in Articles 1998
to 2001 is suppressed or diminished shall be void. Article 2003 was incorporated in the New
Civil Code as an expression of public policy precisely to apply to situations such as that
presented in this case. The hotel business like the common carrier’s business is imbued with
public interest. Catering to the public, hotelkeepers are bound 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 to the public to be negated or diluted
by any contrary stipulation in so-called “undertakings” that ordinarily appear in prepared forms
imposed by hotel keepers on guests for their signature.
With greater reason should the liability of the hotelkeeper be enforced when the missing items
are taken without the guest’s knowledge and consent from a safety deposit box provided by the
hotel itself.—In an early case, the Court of Appeals through its then Presiding Justice (later
Associate Justice of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers or innkeeper
liable for the effects of their guests, it is not necessary that they be actually delivered to the
innkeepers or their employees. It is enough that such effects are within the hotel or inn. With
greater reason should the liability of the hotelkeeper be enforced when the missing items are
taken without the guest’s knowledge and consent from a safety deposit box provided by the
hotel itself, as in this case.
Article 2002 of the Civil Code which exempts the hotel-keeper from liability if the loss is due
to the acts of his guest, his family, or visitors presupposes that the hotel-keeper is not guilty
of concurrent negligence or has not contributed in any degree to the occurrence of the loss
—a depositary is not responsible for the loss of goods by theft, unless his actionable
negligence contributes to the loss.— Petitioners likewise anchor their defense on Article 2002
which exempts the hotel-keeper from liability if the loss is due to the acts of his guest, his
family, or visitors. Even a cursory reading of the provision would lead us to reject petitioners’
contention. The justification they raise would render nugatory the public interest sought to be
protected by the provision. What if the negligence of the employer or its employees facilitated
the consummation of a crime committed by the registered guest’s relatives or visitor? Should
the law exculpate the hotel from liability since the loss was due to the act of the visitor of the
registered guest of the hotel?
Hence, this provision presupposes that the hotel-keeper is not guilty of concurrent negligence
or has not contributed in any degree to the occurrence of the loss. A depositary is not
responsible for the loss of goods by theft, unless his actionable negligence contributes to the
loss.
The hotel was guilty of concurrent negligence in allowing the hotel guest’s companion, who
was not the registered guest, to open the safety deposit box of the guest, even assuming that the
latter was also guilty of negligence in allowing another person to use his key—to rule
otherwise would result in undermining the safety of the safety deposit boxes in hotels for the
management will be given imprimatur to allow any person, under the pretense of being a
family member or a visitor of the guest, to have access to the safety deposit box without fear of
any liability that will attach thereafter in case such person turns out to be a complete stranger .
—In the case at bar, the responsibility of securing the safety deposit box was shared not only
by the guest himself but also by the management since two keys are necessary to open the
safety deposit box. Without the assistance of hotel employees, the loss would not have
occurred. Thus, Tropicana was guilty of concurrent negligence in allowing Tan, who was not
the registered guest, to open the safety deposit box of McLoughlin, even assuming that the
latter was also guilty of negligence in allowing another person to use his key. To rule otherwise
would result in undermining the safety of the safety deposit boxes in hotels for the
management will be given imprimatur to allow any person, under the pretense of being a
family member or a visitor of the guest, to have access to the safety deposit box without fear of
any liability that will attach thereafter in case such person turns out to be a complete stranger.
This will allow the hotel to evade responsibility for any liability incurred by its employees in
conspiracy with the guest’s relatives and visitors.
A tort liability can exist even if there are already contractual relations—the act that breaks the
contract may also be tort.—Petitioners contend that McLoughlin’s case was mounted on the
theory of contract, but the trial court and the appellate court upheld the grant of the claims of
the latter on the basis of tort. There is nothing anomalous in how the lower courts decided the
controversy for this Court has pronounced a jurisprudential rule that tort liability can exist even
if there are already contractual relations. The act that breaks the contract may also be tort.

Chapter V: Warehouse Receipts Law
ROMAN V. ASIA BANKING CORPORATION
FACTS: U. de Poli, for value received, issued a quedan convering the 576 bultos of tobacco to
the Asia Banking Corporation (claimant & appellant). It was executed as a security for a loan.
The aforesaid 576 butlos are part and parcel of the 2, 766 bultos purchased by U. de Poli from
Felisa Roman (claimant & appellee).
The quedan was marked as Exhibit D which is a warehouse receipt issued by the warehouse of
U. de Poli for 576 bultos of tobacco. In the left margin of the face of the receipt, U. de Poli
certifies that he is the sole owner of the merchandise therein described. The receipt is endorsed
in blank; it is not marked”non-negotiable” or “not negotiable”.
Since a sale was consummated between Roman and U. de Poli, Roman’s claim is a vendor’s
lien. The lower court ruled in favor of Roman on the theory that since the transfer to Asia
Banking Corp. (ASIA) was neither a pledge nor a mortgage, but a security for a loan, the
vendor’s lien of Roman should be accorded preference over it.
However, if the warehouse receipt issued was non-negotiable, the vendor’s lien of Roman
cannot prevail against the rights of ASIA as indorsee of the receipt.
ISSUE: WON the quedan issued by U. de Poli in favor of ASIA. is negotiable, despite failure
to mark it as not negotiable?
HELD: YES. The warehouse receipt in question is negotiable. It recited that certain
merchandise deposited in the ware house “por orden” of the depositor instead of “a la orden”,
there was no other direct statement showing whether the goods received are to be delivered to
the bearer, to a specified person, or to a specified order or his order. However, the use of “por
orden” was merely a clerical or grammatical error and that the receipt was negotiable.
As provided by the Warehouse Receipts Act, in case the warehouse man fails to mark it as
“non-negotiable”, a holder of the receipt who purchase if for value supposing it to be
negotiable may, at his option, treat such receipt as imposing upon the warehouseman the same
liabilities he would have incurred had the receipt been negotiable. This appears to have given
any warehouse receipt not marked “non-negotiable” practically the same effect as a receipt
which, by its terms, is negotiable provided the holder of such unmarked receipt acquired it for
value supposing it to be negotiable, circumstances which admittedly exist in the present case.
Hence, the rights of the indorsee, ASIA, are superior to the vendor’s lien.
WAREHOUSE RECEIPT; VENDOR'S LIEN.—A vendor's lien upon goods stored in a
public warehouse cannot prevail against the rights of a purchaser, mortgagee, or pledgee, for
value and in good faith to whom the negotiable warehouse receipt for such goods has been
indorsed.
INTERPRETATION.—A warehouse receipt like any other document must be interpreted
according to its evident intent.
.—A warehouse receipt recited that certain merchandise was deposited in the warehouse "por
orden" of the depositor instead of "a la orden." It was not marked "non-negotiable" or "not
negotiable" as required by statute for non-negotiable warehouse receipts. Held: That the use of
"por orden" was merely a clerical or grammatical error and that the receipt was negotiable.
Bank of P.I. v. Herridge
FACTS:
The insolvent Umberto de Poli was for several years engaged on an extensive scale in the
exportation of Manila hemp, maguey and other products of the country.
He was also a licensed public warehouseman, though most of the goods stored in his
warehouses appear to have been merchandise purchased by him for exportation and deposited
there by he himself.
In order to finance his commercial operations De Poli established credits with some of the
leading banking institutions doing business in Manila at that time, among them the Hongkong
& Shanghai Banking Corporation, the Bank of the Philippine Islands, the Asia Banking
Corporation, the Chartered Bank of India, Australia and China, and the American Foreign
Banking Corporation.
De Poli opened a current account credit with the bank against which he drew his checks in
payment of the products bought by him for exportation.
Upon the purchase, the products were stored in one of his warehouses and warehouse receipts
issued therefor which were endorsed by him to the bank as security for the payment of his
credit in the account current.
When the goods stored by the warehouse receipts were sold and shipped, the warehouse receipt
was exchanged for shipping papers, a draft was drawn in favor of the bank and against the
foreign purchaser, with bill of landing attached, and the entire proceeds of the export sale were
received by the bank and credited to the current account of De Poli.
De Poli was declared insolvent by the Court of First Instance of Manila with liabilities to the
amount of several million pesos over and above his assets. An assignee was elected by the
creditors and the election was confirmed by the court.
Among the property taken over the assignee was the merchandise stored in the various
warehouses of the insolvent. This merchandise consisted principally of hemp, maguey and
tobacco.

The various banks holding warehouse receipts issued by De Poli claim ownership of this
merchandise under their respective receipts, whereas the other creditors of the insolvent
maintain that the warehouse receipts are not negotiable, that their endorsement to the present
holders conveyed no title to the property, that they cannot be regarded as pledges of the
merchandise inasmuch as they are not public documents and the possession of the merchandise
was not delivered to the claimants and that the claims of the holders of the receipts have no
preference over those of the ordinary unsecured creditors.law lib

ISSSUE:
Whether or not the warehouse receipts issued are negotiable?

HELD:
Yes, a warehouseman who deposited merchandise in his own warehouse, issued a warehouse
receipts therefore and thereafter negotiated the receipts by endorsement. The receipt recites that
the goods were deposited “por orden” of the depositor, the warehouseman, but contained no
statement that the goods were to be delivered to the bearer of the receipts or to a specified
person. It is in the form of a warehouse receipts and was not mark “nonnegotiable”.

Therefore the receipts was negotiable warehouse receipts and the words “por orden” must be
construed to mean “to the order”.
WRITTEN INSTRUMENTS; CONSTRUCTION.—Whenever possible, writings must be
so construed as to give effect to their general intent and so as to avoid absurdities.
WAREHOUSE RECEIPTS; CONSTRUCTION.—As instruments of credit, warehouse
receipts play an important role in modern commerce and the present day tendency of the courts
is towards a liberal construction of the law in favor of bona fide holders of such receipts.
—A warehouseman deposited merchandise in his own warehouse, issued a warehouse receipt
therefor and thereafter negotiated the receipt by endorsement. The receipt recites that the goods
were deposited "por orden" of the depositor, the warehouseman, but contained no statement
that the goods were to be delivered to the bearer of the receipt or to a specified person. It was
in the form of a negotiable warehouse receipt and was not marked "nonnegotiable" or "not
negotiable." Held: That, the receipt was a negotiable warehouse receipt and that the words "por
orden" must be construed to mean "to the order."
CHATTEL MORTGAGE; NOVATION.—A chattel mortgage was taken by a bank upon
the goods previously transferred to the same bank by warehouse receipt. Held: That, under the
circumstances of the case, the chattel mortgage did not work a novation of the warehouse
contract between the parties and that the bank might still insist on the rights acquired by it
under the warehouse receipt.
National Bank vs. Producers' Warehouse Association
Facts:
In May 1916 PWA and PFPC entered into a written contract, wherein PFPC would act as the
general manager of the business of PWA, and that PFPC would exercise a general and
complete supervision over the management of the business of PWA, subject to the control of
PWA’s board of directors. It is further agreed that PWA has an annual salary of P7,500 for its
services as general manager, and that its local agents will also be paid P300 per month for their
services. The agreement also provides that it shall remain in force and effect ten years from
date, with the right of the Produce Company to renew it for a further period of one to ten years
at its option.  of Quedans on which it is based, and then claim that the plaintiff has not complied with the
 
On November and December 1918, PWA issued seven (7) negotiable quedans to PFPC for
15,699.34 piculs of Copra, in and by which, subject to the terms and conditions therein stated,
it agreed to deliver that amount of copra to the Produce Company or its order.Said terms and
conditions also includes the following:  described was not in its warehouse, is estopped to claim or assert that the plaintiff did not
That PWA will deliver the packages noted therein upon the surrender of the warrant to PWA>
No transfer of interest/ownership will be recognized unless registered in the books of PWA   Cannot deny existence of Quedans and Plead their provisions.—In an action to recover the
The words “negotiable warrant” were printed in red ink in the quedan, viz: "This warrant is of
no value unless signed by an officer of the association," and were signed “PWA by Mr. Wicks,
Treasurer, and by R. Torres, Warehouseman." 
 Each receipt was also numbered, and stated the number of the warehouse and where situated
and recited that storage charges were at the rate of P0.04 per picul per month, and that the
insurance rate was 1/3% per month of the declared value.  —Where by the provisions of the quedans the property was to be delivered upon the payment
 PFPC then arranged for overdraft with PNB (bank) for P1M and to secure it, the
subject quedans were endorsed in blank and delivered by PFPC to PNB as a collateral security.
The latter then became the owner and holder thereof. 
Without making a tender of any charges, PNB REQUESTED THE DELIVERY OF THE
COPRA DESCRIBED IN THE QUEDANS, and, for its failure to do so, commenced an action
to recover its value alleged to be P240k+, with interest at the rate of 6 % per annum. In good
faith, PNB purchased these quedans, as such PNB requested the defendant to register
the quedans in the name of PNB, and to deliver to it the 14,587.19 piculs of copra, and, upon
that date, that it had offered to satisfy any lien that defendant might have, to surrender the
receipts with such indorsement that it might require, and the receipt therefor, when the goods
were delivered, if such signature is requested by the defendant.  
 
However, PWA refused to comply despite repeated requests of PNB, stating that it could not
be delivered since the goods mentioned are not in the warehouse. PWF further stated that
the quedans were invalid and wrongfully issued.  
ISSUE: Whether the quedans were validly negotiated to PNB? 
HELD:  
The Court ruled in the affirmative racitionating that the quedans have legal force and effect as
they were duly EXECUTED by Wicks, as TREASURER and Torres as WAREHOUSEMAN,
for and in behalf of the defendant. 
That it were POSSESSION WAS DELIVERED to PNBas  COLLATERAL SECURITY for
the overdraft of PFPC and ENDORSED IN BLANK and PHYSICAL POSSESSION WAS
DELIVERED to PNB as  COLLATERAL SECURITY for the overdraft of PFPC and that
the quedans were in NEGOTIABLE FORM.  
 Consequently, PWA was estopped to claim or assert that PNB did not comply with any
condition precedent. In this kind of action, a person has no legal right to deny the existence
provisions of the instrument. 
Estoppel, to assert.—In an action to recover the value of the property, the defendant, having
alleged that the quedans were invalid and wrongfully issued, and that the copra therein
comply with conditions precedent.
value of the property de scribed in quedans which were duly issued, the defendant has no legal
right to deny the existence of the quedans, and then claim that the plaintiff has not complied
with their provisions."
In an action to recover personal property or its value, tender of charges and liens is not
necessary where defendant claims that the property is not in existence or in its possession.
of certain charges, it is not necessary to tender such charges where the other party denies
liability, is not willing to perform its part, or to deliver the property.
Consolidated Terminals, Inc. vs. Artex Dev. Co., Inc.
Facts: Consolidated Terminals Inc (CTI) operated a customs warehouse in Manila. It received
193 bales of high density compressed raw cotton worth P99k. It was understood that CTI
would keep the cotton on behalf of Luzon Brokerage until the consignee Paramount Textile
had opened the corresponding letter of credit in favor of Adolph Hanslik Cotton. By virtue of
forged permits, Artex was able to obtain the bales of cotton and paid P15k.
Issue: W/N CTI as warehouseman was entitled to the possession of the bales of cotton?
Ruling: No. CTI had no cause of action. It was not the owner of the cotton. It was not a real
party of interest in the case. CTI was not sued for damages by the real party in interest.
Warehouse Receipts law; A warehouseman has no cause of action for repossession and
damages against a person to whom it delivered deposited articles on the basis of an alleged
falsified delivery permit where the real parties interested in the questioned articles have not
yet sued the warehouseman for damages on account of said wrong delivery.—CTI in this
appeal contends that, as warehouseman, it was entitled to the possession (should be
repossession) of the bales of cotton; that Artex acted wrongfully in depriving CTI of the
possession of the merchandise because Artex presented a falsified delivery permit, and that
Artex should pay damages to CTI. The only statutory rule cited by CTI is section 10 of the
Warehouse Receipts Law which provides that
“where a warehouseman delivers the goods to one who is not in fact lawfully entitled to the
possession of them, the warehouseman shall be liable as for conversion to all having a right of
property or possession in the goods x x x”.
We hold that CTI’s appeal has no merit. Its amended complaint does not clearly show that, as
warehouseman, it has a cause of action for damages against Artex. The real parties interested in
the bales of cotton were Luzon Brokerage Corporation as depositor, Paramount Textile Mills,
Inc. as consignee, Adolph Hanslik Cotton as shipper and the Commissioners of Customs and
Internal Revenue with respect to the duties and taxes. These parties have not sued CTI for
damages or for recovery of the bales of cotton or the corresponding taxes and duties.
LUA KIAN v. MANILA RAILROAD COMPANY and MANILA PORT
SERVICEG.R. No. L-23033 January 5, 1967
FACTS
Manila Port Service as a subsidiary of defendant Manila Railroad Company operated the
arrastre service at the Port of Manila under and pursuant to the Management Contract entered
into by and between the Bureau of Customs and defendant Manila Port Service.
Lua Kian imported 2,000 cases of Carnation Milk from the Carnation Company of San
Francisco, California, and shipped on Board SS "GOLDEN BEAR" per Bill of Lading No.
17.Out of the aforesaid shipment of 2,000 cases of Carnation Milk per Bill of Lading
No. 17, only 1,829 cases marked `LUA KIAN 1458' were discharged from the vessel
SS `GOLDEN BEAR' and received by Manila Port Service per pertinent tally sheets issued
by the said carrying vessel.
Discharged from the same vessel on the same date unto the custody of Manila Port Service
were 3,171 cases of Carnation Milk marked "CEBU UNITED 4860-PH-MANILA"
consigned to Cebu United Enterprises, per Bill of Lading No. 18.
Manila Port Service delivered to the plaintiff thru its broker, Ildefonso Tionloc, Inc. 1,913
cases of Carnation Milk marked "LUA KIAN 1458" per pertinent gate passes and broker's
delivery receipts.
Lua Kian as consignee thereof filed a claim for short-delivery against Manila Port Service,
and Manila Port Service paid Lua Kian plaintiff herein, P750.00 in settlement of its
claim.
CFI: ruled that 1,829 cases marked Lua Kian (171 cases less than the 2,000 cases
indicated in the bill of lading and 3,171 cases marked "Cebu United" (171 cases over the
3,000 cases in the bill of lading were discharged to the Manila Port Service.on Considering
that Lua Kian and Cebu United Enterprises were the only consignees of the shipment of
5,000 cases of "Carnation" milk, it found that of the 3,171 cases marked "Cebu United",
171 should have been delivered to Lua Kian. Inasmuch as the defendant Manila Port
Service actually delivered 1,913 cases to plaintiff, which is only 87 cases short of 2,000
cases as per bill of lading the former was ordered to pay Lua Kian the sum of P1,183.11
representing such shortage of 87 cases, with legal interest from the date of the suit, plus
P500 as attorney's fees.
Defendants appealed to the Supreme Court and contend that they should not be made
to answer for the undelivered cases of milk, insisting that Manila Port Service was
bound to deliver only 1,829 cases to Lua Kian and that it had there before in fact over-
delivered to the latter.
ISSUE: Whether defendant Manila Port Service is liable for the undelivered cases of
“Carnation” milk to petitioner due to improper marking. Yes.
RATIO: The bill of lading in favor of Cebu United Enterprises indicated that only
3,000 cases were due to said consignee, although 3,171 cases were marked in its favor. Lua
Kianwhose bill of lading on the other hand indicated that it should receive 171 cases more.•The
legal relationship between an arrastre operator and the consignee is akin to that of
a depositor and warehouseman. As custodian of the goods discharged from the vessel, it was
defendant arrastre operator's duty, like that of any ordinary depositary, to take good care
of the goods and to turn them over to the party entitled to their possession.oThe said
defendant should have withheld delivery because of the discrepancy between the bill
of lading and the markings and conducted its own investigation, not unlike that under
Section 18 of the Warehouse Receipts Law, or called upon the parties, to interplead, such
as in a case under Section 17 of the same law, in order to determine the rightful owner of the
goods.oIt is true that Section 12 of the Management Contract exempts the arrastre
operator from responsibility for misdelivery or non-delivery due to improper or
insufficient marking.•It cannot however excuse the defendant from liability in this case
because the bill of lading showed that only 3,000 cases were consigned to Cebu United
Enterprises. The fact that the excess of 171 cases were marked for Cebu United
Enterprises and that the consignment to Lua Kian was 171 cases less than the 2,000 in
the bill of lading, should have been sufficient reason for the defendant Manila Port
Service to withhold the goods pending determination of their rightful ownership.•With
respect to the attorney's fees awarded below, this Court notices that the same is about 50%
of the litigated amount of P1,183.11. Attorney’s fees was decreased to P300.00.

Arrastre service; Nature of relationship of arrastre operator and consignee.—The legal
relationship between an arrastre operator and the consignee is akin to that of a depositor and
warehouseman (Northern Motors, Inc. vs. Prince Line, L-13884, February 29, 1960). As
custodian of the goods discharged from the vessel, it is the duty of the arrastre operator to take
good care of the goods and turn them over to the party entitled to their possession (Macondray
& Co., Inc. vs. Delgado Brothers, Inc., L-13118, April 28, 1960),
Duty of arrastre operator to follow procedure in Warehouse Receipts Law in case there is a,
conflict between markings on goods and the bills of lading.—Where the arrastre operator
received into its custody a shipment of 5,000 cases of milk, of which 3,171 cases were marked
for Cebu United Enterprises, as consignee, and 1,829 cases were marked for “1. Lua Kian, but,
according to the bills of lading in its possession, Cebu United Enterprises was entitled only to
3,000 cases and Lua Kian was entitled to 2,000 cases, the arrastre operator should have
withheld delivery because of this discrepancy between the markings and the bill of lading
conducted its own investigation, similar to that required under Section 18 of the Warehouse
Receipts Law, or called upon the two consignees to interplead, as in the case under Section 17
of the same law, in order to determine the rightful owner of the milk. In delivering to Lua Kian
only 1,913 cases or 87 cases short, the arrastre operator became liable for the shortage of 87
cases, but without prejudice to its action for recovery of the excess cases delivered to Cebu
United Enterprises.
Felisa Roman, appellee v. Asia Banking Corporation, appellant
GR. No. 17825 June 26, 1922
Facts: Subject 576 tobacco leaf bales were part of the 2,777 bales purchased by Umberto de
Poli from appellee, Roman. Months after, involuntary insolvency proceeding against U. De
Poli was instituted. Poli issued a quedan to Asia Banking Corporation (ABC) covering said
576 bultos for value. Roman notified ABC of her contention for her vendor’s lien in
proceedings. CFI found for Roman. CFI Basis: Transfer to ABC was for security of a loan
hence vendor’s lien has better right.
Issues: 1. Whether or not warehouse receipt negotiable. 2. Whether or not vendor’s lien
superior over mortgagee.
Held: YES, warehouse receipt is negotiable. Although it contained no direct statement
showing whether goods received to be delivered to bearer/specified person/specified person or
his order, nevertheless it is negotiable because: 1. It is evident that deposit, as evidenced by
receipt here, was intended to be made subject to the ORDER of depositor and Poli was the
authorized person to indorse it; 2. Indorsement in blank and delivery to ABC was made on the
same date as issuance of Warehouse receipt; and, 3. Warehouse receipt not marked “Non-
negotiable” or “Not negotiable” General Rule: If warehouseman fails to indicate “Non-
negotiable” on face of warehouse receipt, holder in good faith and for value, at his election,
treat it as negotiable imposing upon warehouseman same liabilities as if it were one.
Exception: When marked “non-negotiable” on its face by warehouseman issuing it. Doctrine:
A warehouse receipt like any other document must be interpreted according to its evident
intent. NO, Doctrine: A vendor's lien upon goods stored in a public warehouse cannot prevail
against the rights of a purchaser, mortgagee, or pledgee, for value and in good faith to whom
the negotiable warehouse receipt for such goods has been indorsed. Here, CFI failed to
consider Section 49 of Act No. 2137: “Where a negotiable receipt has been issued for goods,
no seller's lien or right of stoppage in transitu shall defeat the rights of any purchaser for value
in good faith to whom such receipt has been negotiated, whether such negotiation be prior or
subsequent to the notification to the warehouseman who issued such receipt of the seller's
claim to a lien or right of stoppage in transitu. Nor shall the warehouseman be obliged to
deliver or justified in delivering the goods to an unpaid' seller unless the receipt is first
surrendered for cancellation.” Art. 58, same Act: “Purchase” includes Mortgagee and Pledgee.
Hence, CFI order reversed.
Siy Cong Bieng & Co. vs. Hongkong & Shanghai Bank
Facts:
Plaintiff is a corporation engaged in business generally, and that the Defendant HSBC is a
foreign bank authorized to engage in the banking business in the Philippines.
On June 25, 1926, Otto Ranft called the office of the Plaintiff to purchase hemp (abaca), and he
was offered the bales of hemp as described in the contested negotiable quedans.
The parties agreed to the aforesaid price, and on the same date the quedans, together with the
covering invoice, were sent to Ranft by the Plaintiff, without having been paid for the hemp,
but the Plaintiff's understanding was that the payment would be made against the same
quedans, and it appear that in previous transaction of the same kind between the bank and the
Plaintiff, quedans were paid one or two days after their delivery to them. Immediately these
Quedans were pledged by Otto Ranft to the Defendant HSBC to secure the payment of his
preexisting debts to the latter.
The baled hemp covered by these warehouse receipts was worth P31,635; 6 receipts were
endorsed in blank by the Plaintiff and Otto Ranft, and 2 were endorsed in blank, by Otto Ranft
alone
On the evening of the said delivery date, Otto Ranft died suddenly at his house in the City of
Manila.
When the Plaintiff found out, it immediately demanded the return of the quedans, or the
payment of the value, but was told that the quedans had been sent to the herein Defendant as
soon as they were received by Ranft.
Shortly thereafter the Plaintiff filed a claim for the aforesaid sum of P31,645 in the intestate
proceedings of the estate of the deceased Otto Ranft, which on an appeal from the decision of
the committee on claims, was allowed by the CFI Manila.
In the meantime, demand had been made by the Plaintiff on the Defendant bank for the return
of the quedans, or their value, which demand was refused by the bank on the ground that it was
a holder of the quedans in due course.
ISSUE
Whether or not the Quedans endorsed in blank gave the HSBC rightful and valid title to the
goods?
 HELD
ESTOPPEL TO DENY VALID TITLE.— Since plaintiff had voluntarily clothed the person
YES. SC ruled in favour of Defendant HSBC. who negotiated the quedans with all the attributes of ownership and upon which the bank
relied, it is estopped to deny that the bank had a valid title to the quedans.
It may be noted,
first, that the quedans in question were negotiable in form;
second, that they were pledged by Otto Ranft to the Defendant bank to secure
the payment of his preexisting debts to said bank;
third, that such of the quedans as were issued in the name of the Plaintiff were
duly endorsed in blank by the Plaintiff and by Otto Ranft;
and fourth, that the two remaining quedans which were duly endorsed in
blank by him.
The bank had a perfect right to act as it did, and its action is in accordance with sections
47, 38, and 40 of the Warehouse Receipts Act
However, the pertinent provision regarding the rights the Defendant bank acquired over
the aforesaid quedans after indorsement and delivery to it by Ranft, is found in section 41
of the Warehouse Receipts Act (Act No. 2137):

SEC. 41. Rights of person to whom a receipt has been negotiated. — A person
to whom a negotiable receipt has been duly negotiated acquires thereby:
Such title to the goods as the person negotiating the receipt to him had or had ability to
convey to a purchaser in good faith for value, and also such title to the goods as the
depositor of person to whose order the goods were to be delivered by the terms of the
receipt had or had ability to convey to a purchaser in good faith for value, and. . . .
Therefore, the bank is not responsible for the loss; the negotiable quedans were duly
negotiated to the bank and as far as the record shows, there has been no fraud on the part
of the Defendant.

Moreover, Plaintiff is estopped to deny that the bank had a valid title to the quedans for
the reason that the Plaintiff had voluntarily clothed Ranft with all the attributes of
ownership and upon which the Defendant bank relied. Subsequently, Plaintiff in this case
has suffered the loss of the quedans, but as far as the court sees it, there is now no remedy
available to the Plaintiff equitable estoppel place the loss upon him whose misplaced
confidence has made the wrong possible as ruled in National Safe Deposit vs. Hibbs (a
US case)

NEGOTIABLE WAREHOUSE RECEIPTS; ENDORSED IN BLANK.—Plaintiff sold

certain quantity of hemp to one by the name of Otto Ranft by quedans and sent the quedans,
together with the covering invoice, to Ranft, without having been paid for, but plaintiff's
understanding was that the payment would be made
against the quedans. Ranft on the same day turned over the quedans to the defendant bank to
secure payment of his preexisting debts. Ranft died on the evening of the day the quedans were
delivered to the bank. Plaintiff brought this action to recover the quedans or their values. Held:
Taking into consideration that thequedans were negotiable in form and duly endorsed in blank
by the plaintiff and by Otto Ranft, it follows that on delivery of the quedans to the bank, they
were no longer the property of the indorser unless he liquidated his debts with the bank.

AUTHORITY TO NEGOTIATE.—The bank had a perfect right to accept the quedans in

security of preexisting debts without investigation of the authority of the person negotiating
them. (Sections 47, 38 and 40 of the Warehouse Receipts Act No. 2137.)