G.R. No. 141181 April 27, 2007
SAMSON CHING
vs.
CLARITA NICDAO and HON. COURT OF APPEALS
CALLEJO, SR., J.:
 
Before the Court is a petition for review on certiorari filed by Samson Ching of the
Decision[1] dated November 22, 1999 of the Court of Appeals (CA) in CA-G.R. CR No.
23055. The assailed decision acquitted respondent Clarita Nicdao of eleven (11)
counts of violation of Batas Pambansa Bilang (BP) 22, otherwise known as The
Bouncing Checks Law. The instant petition pertains and is limited to the civil aspect of
the case as it submits that notwithstanding respondent Nicdaos acquittal, she should
be held liable to pay petitioner Ching the amounts of the dishonored checks in the
aggregate sum of P20,950,000.00.
 
Factual and Procedural Antecedents
 
On October 21, 1997, petitioner Ching, a Chinese national, instituted criminal
complaints for eleven (11) counts of violation of BP 22 against respondent
Nicdao. Consequently, eleven (11) Informations were filed with the First Municipal
Circuit Trial Court (MCTC) of Dinalupihan-Hermosa, Province of Bataan, which,
except as to the amounts and check numbers, uniformly read as follows:
 
The undersigned accuses Clarita S. Nicdao of a VIOLATION OF
BATAS PAMBANSA BILANG 22, committed as follows:
 
That on or about October 06, 1997, at
Dinalupihan, Bataan, Philippines, and within the
jurisdiction of this Honorable Court, the said accused did
then and there willfully and unlawfully make or draw and
issue Hermosa Savings & Loan Bank, Inc. Check No.
[002524] dated October 06, 1997 in the amount of
[P20,000,000.00] in payment of her obligation with
complainant Samson T.Y. Ching, the said accused
knowing fully well that at the time she issued the said
check she did not have sufficient funds in or credit with
the drawee bank for the payment in full of the said check
upon presentment, which check when presented for
payment within ninety (90) days from the date thereof,
was dishonored by the drawee bank for the reason that it
was drawn against insufficient funds and notwithstanding
receipt of notice of such dishonor the said accused failed
and refused and still fails and refuses to pay the value of
the said check in the amount of [P20,000,000.00] or to
make arrangement with the drawee bank for the
payment in full of the same within five (5) banking days
after receiving the said notice, to the damage and
prejudice of the said Samson T.Y. Ching in the
aforementioned amount of [P20,000,000.00], Philippine
Currency.
 
CONTRARY TO LAW.
 
Dinalupihan, Bataan, October 21, 1997.
 
(Sgd.) SAMSON T.Y.
CHING
Complainant
 
The cases were docketed as Criminal Cases Nos. 9433 up to 9443 involving the
following details:
 
Check No. Amount Date Private Reason for
Complainant the Dishonor
002524[2] P 20,000,000 Oct. 6, 1997 Samson T.Y. Ching DAIF*
008856[3] 150,000 Oct. 6, 1997 " "
012142[4] 100,000 Oct. 6, 1997 " "
004531[5] 50,000 Oct. 6, 1997 " "
002254[6] 100,000 Oct. 6, 1997 " "
008875[7] 100,000 Oct. 6, 1997 " "
008936[8] 50,000 Oct. 6, 1997 " "
002273[9] 50,000 Oct. 6, 1997 " "
008948[10] 150,000 Oct. 6, 1997 " "
008935[11] 100,000 Oct. 6, 1997 " "
010377[12] 100,000 Oct. 6, 1997 " "
At about the same time, fourteen (14) other criminal complaints, also for violation of
BP 22, were filed against respondent Nicdao by Emma Nuguid, said to be the
common law spouse of petitioner Ching. Allegedly fourteen (14) checks, amounting
to P1,150,000.00, were issued by respondent Nicdao to Nuguid but were dishonored
for lack of sufficient funds. The Informations were filed with the same MCTC and
docketed as Criminal Cases Nos. 9458 up to 9471.
 
At her arraignment, respondent Nicdao entered the plea of not guilty to all the
charges. A joint trial was then conducted for Criminal Cases Nos. 9433-9443 and
9458-9471.
 
For the prosecution in Criminal Cases Nos. 9433-9443, petitioner Ching and Imelda
Yandoc, an employee of the Hermosa Savings & Loan Bank, Inc., were presented to
prove the charges against respondent Nicdao. On direct-examination,[13] petitioner
Ching preliminarily identified each of the eleven (11) Hermosa Savings & Loan Bank
(HSLB) checks that were allegedly issued to him by respondent Nicdao amounting
to P20,950,000.00. He identified the signatures appearing on the checks as those of
respondent Nicdao.He recognized her signatures because respondent Nicdao
allegedly signed the checks in his presence. When petitioner Ching presented these
checks for payment, they were dishonored by the bank, HSLB, for being DAIF or
drawn against insufficient funds.
 
Petitioner Ching averred that the checks were issued to him by respondent Nicdao as
security for the loans that she obtained from him. Their transaction began sometime
in October 1995 when respondent Nicdao, proprietor/manager of Vignette
Superstore, together with her husband, approached him to borrow money in order for
them to settle their financial obligations. They agreed that respondent Nicdao would
leave the checks undated and that she would pay the loans within one
year. However, when petitioner Ching went to see her after the lapse of one year to
ask for payment, respondent Nicdao allegedly said that she had no cash.
Petitioner Ching claimed that he went back to respondent Nicdao several times more
but every time, she would tell him that she had no money. Then in September 1997,
respondent Nicdao allegedly got mad at him for being insistent and challenged him
about seeing each other in court. Because of respondent Nicdao's alleged refusal to
pay her obligations, on October 6, 1997, petitioner Ching deposited the checks that
she issued to him. As he earlier stated, the checks were dishonored by the bank for
being DAIF.Shortly thereafter, petitioner Ching, together with Emma Nuguid, wrote a
demand letter to respondent Nicdao which, however, went unheeded. Accordingly,
they separately filed the criminal complaints against the latter.
 
On cross-examination,[14] petitioner Ching claimed that he had been a salesman of the
La Suerte Cigar and Cigarette Manufacturing for almost ten (10) years already. As
such, he delivered the goods and had a warehouse. He received salary and
commissions. He could not, however, state his exact gross income. According to him,
it increased every year because of his business. He asserted that aside from being a
salesman, he was also in the business of extending loans to other people at an
interest, which varied depending on the person he was dealing with.
Petitioner Ching confirmed the truthfulness of the allegations contained in the eleven
(11) Informations that he filed against respondent Nicdao. He reiterated that, upon
their agreement, the checks were all signed by respondent Nicdao but she left them
undated. Petitioner Ching admitted that he was the one who wrote the date, October
6, 1997, on those checks when respondent Nicdao refused to pay him.
With respect to the P20,000,000.00 check (Check No. 002524), petitioner
Ching explained that he wrote the date and amount thereon when, upon his
estimation, the money that he regularly lent to respondent Nicdao beginning October
1995 reached the said sum. He likewise intimated that prior to 1995, they had another
transaction amounting to P1,200,000.00 and, as security therefor, respondent Nicdao
similarly issued in his favor checks in varying amounts of P100,000.00
and P50,000.00. When the said amount was fully paid, petitioner Ching returned the
checks to respondent Nicdao.
 
Petitioner Ching maintained that the eleven (11) checks subject of Criminal
Cases Nos. 9433-9443 pertained to respondent Nicdaos loan transactions with him
beginning October 1995. He also mentioned an instance when respondent Nicdaos
husband and daughter approached him at a casino to borrow money from him. He
lent them P300,000.00.According to petitioner Ching, since this amount was also
unpaid, he included it in the other amounts that respondent Nicdao owed to him which
totaled P20,000,000.00 and wrote the said amount on one of respondent Nicdaos
blank checks that she delivered to him.
 
Petitioner Ching explained that from October 1995 up to 1997, he regularly
delivered money to respondent Nicdao, in the amount of P1,000,000.00 until the total
amount reached P20,000,000.00. He did not ask respondent Nicdao to acknowledge
receiving these amounts. Petitioner Ching claimed that he was confident that he
would be paid by respondent Nicdao because he had in his possession her blank
checks. On the other hand, the latter allegedly had no cause to fear that he would fill
up the checks with just any amount because they had trust and confidence in each
other. When asked to produce the piece of paper on which he allegedly wrote the
amounts that he lent to respondent Nicdao, petitioner Ching could not present it; he
reasoned that it was not with him at that time.
It was also averred by petitioner Ching that respondent Nicdao confided to
him that she told her daughter Janette, who was married to a foreigner, that her debt
to him was only between P3,000,000.00 and P5,000,000.00. Petitioner Ching claimed
that he offered to accompany respondent Nicdao to her daughter in order that they
could apprise her of the amount that she owed him. Respondent Nicdao refused for
fear that it would cause disharmony in the family. She assured petitioner Ching,
however, that he would be paid by her daughter.
 
Petitioner Ching reiterated that after the lapse of one (1) year from the time
respondent Nicdao issued the checks to him, he went to her several times to collect
payment. In all these instances, she said that she had no cash. Finally, in September
1997, respondent Nicdao allegedly went to his house and told him that Janette was
only willing to pay him between P3,000,000.00 and P5,000,000.00 because, as far as
her daughter was concerned, that was the only amount borrowed from petitioner
Ching. On hearing this, petitioner Ching angrily told respondent Nicdao that she
should not have allowed her debt to reach P20,000,000.00 knowing that she would
not be able to pay the full amount.
 
Petitioner Ching identified the demand letter that he and Nuguid sent to
respondent Nicdao. He explained that he no longer informed her about depositing her
checks on his account because she already made that statement about seeing him in
court. Again, he admitted writing the date, October 6, 1997, on all these checks.
Another witness presented by the prosecution was Imelda Yandoc, an
employee of HSLB. On direct-examination,[15] she testified that she worked as a
checking account bookkeeper/teller of the bank. As such, she received the checks
that were drawn against the bank and verified if they were funded. On October 6,
1997, she received several checks issued by respondent Nicdao. She knew
respondent Nicdao because the latter maintained a savings and checking account
with them. Yandoc identified the checks subject of Criminal Cases Nos. 9433-9443
and affirmed that stamped at the back of each was the annotation DAIF. Further, per
the banks records, as of October 8, 1997, only a balance of P300.00 was left in
respondent Nicdaos checking account and P645.83 in her savings account. On even
date, her account with the bank was considered inactive.
 
On cross-examination,[16] Yandoc stated anew that respondent Nicdaos
checks bounced on October 7, 1997 for being DAIF and her account was closed the
following day, on October 8, 1997. She informed the trial court that there were
actually twenty-five (25) checks of respondent Nicdao that were dishonored at about
the same time. The eleven (11) checks were purportedly issued in favor of petitioner
Ching while the other fourteen (14) were purportedly issued in favor of
Nuguid. Yandoc explained that respondent Nicdao or her employee would usually call
the bank to inquire if there was an incoming check to be funded.
 
For its part, the defense proffered the testimonies of respondent Nicdao,
Melanie Tolentino and Jocelyn Nicdao. On direct-examination,[17] respondent Nicdao
stated that she only dealt with Nuguid. She vehemently denied the allegation that she
had borrowed money from both petitioner Ching and Nuguid in the total amount
of P22,950,000.00.Respondent Nicdao admitted, however, that she had obtained a
loan from Nuguid but only for P2,100,000.00 and the same was already fully paid. As
proof of such payment, she presented a Planters Bank demand draft dated August
13, 1996 in the amount of P1,200,000.00. The annotation at the back of the said
demand draft showed that it was endorsed and negotiated to the account of petitioner
Ching.
 
In addition, respondent Nicdao also presented and identified several
cigarette wrappers[18] at the back of which appeared computations. She explained that
Nuguid went to the grocery store everyday to collect interest payments. The principal
loan was P2,100,000.00 with 12% interest per day. Nuguid allegedly wrote the
payments for the daily interests at the back of the cigarette wrappers that she gave to
respondent Nicdao.
 
The principal loan amount of P2,100,000.00 was allegedly delivered by
Nuguid to respondent Nicdao in varying amounts of P100,000.00
and P150,000.00. Respondent Nicdao refuted the averment of petitioner Ching that
prior to 1995, they had another transaction.
 
With respect to the P20,000,000.00 check, respondent Nicdao admitted that
the signature thereon was hers but denied that she issued the same to petitioner
Ching. Anent the other ten (10) checks, she likewise admitted that the signatures
thereon were hers while the amounts and payee thereon were written by either
Jocelyn Nicdao or Melanie Tolentino, who were employees of Vignette Superstore
and authorized by her to do so.
 
Respondent Nicdao clarified that, except for the P20,000,000.00 check, the
other ten (10) checks were handed to Nuguid on different occasions. Nuguid came to
the grocery store everyday to collect the interest payments. Respondent Nicdao said
that she purposely left the checks undated because she would still have to notify
Nuguid if she already had the money to fund the checks.
 
Respondent Nicdao denied ever confiding to petitioner Ching that she was
afraid that her daughter would get mad if she found out about the amount that she
owed him.What allegedly transpired was that when she already had the money to pay
them (presumably referring to petitioner Ching and Nuguid), she went to them to
retrieve her checks.However, petitioner Ching and Nuguid refused to return the
checks claiming that she (respondent Nicdao) still owed them money. She demanded
that they show her the checks in order that she would know the exact amount of her
debt, but they refused. It was at this point that she got angry and dared them to go to
court.
 
After the said incident, respondent Nicdao was surprised to be notified by
HSLB that her check in the amount of P20,000,000.00 was just presented to the bank
for payment. She claimed that it was only then that she remembered that sometime in
1995, she was informed by her employee that one of her checks was missing. At that
time, she did not let it bother her thinking that it would eventually surface when
presented to the bank.
 
Respondent Nicdao could not explain how the said check came into
petitioner Chings possession. She explained that she kept her checks in an ordinary
cash box together with a stapler and the cigarette wrappers that contained Nuguids
computations. Her saleslady had access to this box. Respondent Nicdao averred that
it was Nuguid who offered to give her a loan as she would allegedly need money to
manage Vignette Superstore. Nuguid used to run the said store before respondent
Nicdaos daughter bought it from Nuguids family, its previous owner. According to
respondent Nicdao, it was Nuguid who regularly delivered the cash to respondent
Nicdao or, if she was not at the grocery store, to her saleslady. Respondent Nicdao
denied any knowledge that the money loaned to her by Nuguid belonged to petitioner
Ching.
 
At the continuation of her direct-examination,[19] respondent Nicdao said that
she never dealt with petitioner Ching because it was Nuguid who went to the grocery
store everyday to collect the interest payments. When shown the P20,000,000.00
check, respondent Nicdao admitted that the signature thereon was hers but she
denied issuing it as a blank check to petitioner Ching. On the other hand, with respect
to the other ten (10) checks, she also admitted that the signatures thereon were hers
and that the amounts thereon were written by either Josie Nicdao or Melanie
Tolentino, her employees whom she authorized to do so. With respect to the payee, it
was purposely left blank allegedly upon instruction of Nuguid who said that she would
use the checks to pay someone else.
 
On cross-examination,[20] respondent Nicdao explained that Josie Nicdao
and Melanie Tolentino were caretakers of the grocery store and that they manned it
when she was not there. She likewise confirmed that she authorized them to write the
amounts on the checks after she had affixed her signature thereon. She stressed,
however, that the P20,000,000.00 check was the one that was reported to her as lost
or missing by her saleslady sometime in 1995. She never reported the matter to the
bank because she was confident that it would just surface when it would be presented
for payment.
 
Again, respondent Nicdao identified the cigarette wrappers which indicated
the daily payments she had made to Nuguid. The latter allegedly went to the grocery
store everyday to collect the interest payments. Further, the figures at the back of the
cigarette wrappers were written by Nuguid. Respondent Nicdao asserted that she
recognized her handwriting because Nuguid sometimes wrote them in her
presence. Respondent Nicdao maintained that she had already paid Nuguid the
amount of P1,200,000.00 as evidenced by the Planters Bank demand draft which she
gave to the latter and which was subsequently negotiated and deposited in petitioner
Chings account. In connection thereto, respondent Nicdao refuted the prosecutions
allegation that the demand draft was payment for a previous transaction that she had
with petitioner Ching. She clarified that the payments that Nuguid collected from her
everyday were only for the interests due. She did not ask Nuguid to make written
acknowledgements of her payments.
 
Melanie Tolentino was presented to corroborate the testimony of respondent
Nicdao. On direct-examination,[21] Tolentino stated that she worked at the Vignette
Superstore and she knew Nuguid because her employer, respondent Nicdao, used to
borrow money from her. She knew petitioner Ching only by name and that he was the
husband of Nuguid.
 As an employee of the grocery store, Tolentino stated that she acted as its
caretaker and was entrusted with the custody of respondent Nicdaos personal
checks. Tolentino identified her own handwriting on some of the checks especially
with respect to the amounts and figures written thereon. She said that Nuguid
instructed her to leave the space for the payee blank as she would use the checks to
pay someone else. Tolentino added that she could not recall respondent Nicdao
issuing a check to petitioner Ching in the amount of P20,000,000.00. She confirmed
that they lost a check sometime in 1995. When informed about it, respondent Nicdao
told her that the check could have been issued to someone else, and that it would just
surface when presented to the bank.
 
Tolentino recounted that Nuguid came to the grocery store everyday to
collect the interest payments of the loan. In some instances, upon respondent
Nicdaos instruction, Tolentino handed to Nuguid checks that were already signed by
respondent Nicdao. Sometimes, Tolentino would be the one to write the amount on
the checks. Nuguid, in turn, wrote the amounts on pieces of paper which were kept by
respondent Nicdao.
 
On cross-examination,[22] Tolentino confirmed that she was authorized by
respondent Nicdao to fill up the checks and hand them to Nuguid. The latter came to
the grocery store everyday to collect the interest payments. Tolentino claimed that in
1995, in the course of chronologically arranging respondent Nicdaos check booklets,
she noticed that a check was missing. Respondent Nicdao told her that perhaps she
issued it to someone and that it would just turn up in the bank. Tolentino was certain
that the missing check was the same one that petitioner Ching presented to the bank
for payment in the amount of P20,000,000.00.
 
Tolentino stated that she left the employ of respondent Nicdao sometime in
1996. After the checks were dishonored in October 1997, Tolentino got a call from
respondent Nicdao. After she was shown a fax copy thereof, Tolentino confirmed that
the P20,000,000.00 check was the same one that she reported as missing in 1995.
 
Jocelyn Nicdao also took the witness stand to corroborate the testimony of
the other defense witnesses. On direct-examination,[23] she averred that she was a
saleslady at the Vignette Superstore from August 1994 up to April 1998. She knew
Nuguid as well as petitioner Ching.
 
Jocelyn Nicdao further testified that respondent Nicdao was indebted to
Nuguid. Jocelyn Nicdao used to fill up the checks of respondent Nicdao that had
already been signed by her and give them to Nuguid. The latter came to the grocery
store everyday to pick up the interest payments. Jocelyn Nicdao identified the checks
on which she wrote the amounts and, in some instances, the name of Nuguid as
payee. However, most of the time, Nuguid allegedly instructed her to leave as blank
the space for the payee.
 
Jocelyn Nicdao identified the cigarette wrappers as the documents on which
Nuguid acknowledged receipt of the interest payments. She explained that she was
the one who wrote the minus entries and they represented the daily interest payments
received by Nuguid.
On cross-examination,[24] Jocelyn Nicdao stated that she was a distant
cousin of respondent Nicdao. She stopped working for her in 1998 because she
wanted to take a rest. Jocelyn Nicdao reiterated that she handed the checks to
Nuguid at the grocery store.
 
After due trial, on December 8, 1998, the MCTC rendered judgment in
Criminal Cases Nos. 9433-9443 convicting respondent Nicdao of eleven (11) counts
of violation of BP 22. The MCTC gave credence to petitioner Chings testimony that
respondent Nicdao borrowed money from him in the total amount
of P20,950,000.00. Petitioner Ching delivered P1,000,000.00 every month to
respondent Nicdao from 1995 up to 1997 until the sum reached P20,000,000.00. The
MCTC also found that subsequent thereto, respondent Nicdao still borrowed money
from petitioner Ching. As security for these loans, respondent Nicdao issued checks
to petitioner Ching. When the latter deposited the checks (eleven in all) on October 6,
1997, they were dishonored by the bank for being DAIF.
 
The MCTC explained that the crime of violation of BP 22 has the following
elements: (a) the making, drawing and issuance of any check to apply to account or
for value; (b) the knowledge of the maker, drawer or issuer that at the time of issue he
does not have sufficient funds in or credit with the drawee bank for the payment of
such check in full upon its presentment; and (c) subsequent dishonor of the check by
the drawee bank for insufficiency of funds or credit or dishonor for the same reason
had not the drawer, without any valid cause, ordered the bank to stop payment.[25]
 
According to the MCTC, all the foregoing elements are present in the case of
respondent Nicdaos issuance of the checks subject of Criminal Cases Nos. 9433-
9443. On the first element, respondent Nicdao was found by the MCTC to have
made, drawn and issued the checks. The fact that she did not personally write the
payee and date on the checks was not material considering that under Section 14 of
the Negotiable Instruments Law, where the instrument is wanting in any material
particular, the person in possession thereof has a prima facie authority to complete it
by filling up the blanks therein. And a signature on a blank paper delivered by the
person making the signature in order that the paper may be converted into a
negotiable instrument operates as a prima facie authority to fill it up as such for any
amount x x x. Respondent Nicdao admitted that she authorized her employees to
provide the details on the checks after she had signed them.
 
The MCTC disbelieved respondent Nicdaos claim that the P20,000,000.00
check was the same one that she lost in 1995. It observed that ordinary prudence
would dictate that a lost check would at least be immediately reported to the bank to
prevent its unauthorized endorsement or negotiation. Respondent Nicdao made no
such report to the bank.Even if the said check was indeed lost, the MCTC faulted
respondent Nicdao for being negligent in keeping the checks that she had already
signed in an unsecured box.
 
The MCTC further ruled that there was no evidence to show that petitioner
Ching was not a holder in due course as to cause it (the MCTC) to believe that the
said check was not issued to him. Respondent Nicdaos admission of indebtedness
was sufficient to prove that there was consideration for the issuance of the checks.
 
The second element was also found by the MCTC to be present as it held
that respondent Nicdao, as maker, drawer or issuer, had knowledge that at the time
of issue she did not have sufficient funds in or credit with the drawee bank for the
payment in full of the checks upon their presentment.
  
As to the third element, the MCTC established that the checks were
subsequently dishonored by the drawee bank for being DAIF or drawn against
insufficient funds.Stamped at the back of each check was the annotation DAIF. The
bank representative likewise testified to the fact of dishonor.
 
Under the foregoing circumstances, the MCTC declared that the conviction
of respondent Nicdao was warranted. It stressed that the mere act of issuing a
worthless check was malum prohibitum; hence, even if the checks were issued in the
form of deposit or guarantee, once dishonored, the same gave rise to the prosecution
for and conviction of BP 22.[26] The decretal portion of the MCTC decision reads:
 
WHEREFORE, in view of the foregoing, the accused is
found guilty of violating Batas Pambansa Blg. 22 in 11 counts, and
is hereby ordered to pay the private complainant the amount
of P20,950,000.00 plus 12% interest per annum from date of filing
of the complaint until the total amount had been paid. The prayer
for moral damages is denied for lack of evidence to prove the
same. She is likewise ordered to suffer imprisonment equivalent to
1 year for every check issued and which penalty shall be served
successively.
 
SO ORDERED.[27]
Incidentally, on January 11, 1999, the MCTC likewise rendered its judgment in
Criminal Cases Nos. 9458-9471 and convicted respondent Nicdao of the fourteen
(14) counts of violation of BP 22 filed against her by Nuguid.
On appeal, the Regional Trial Court (RTC) of Dinalupihan, Bataan, Branch 5, in
separate Decisions both dated May 10, 1999, affirmed in toto the decisions of the
MCTC convicting respondent Nicdao of eleven (11) and fourteen (14) counts of
violation of BP 22 in Criminal Cases Nos. 9433-9443 and 9458-9471, respectively.
 
Respondent Nicdao forthwith filed with the CA separate petitions for review of the two
decisions of the RTC. The petition involving the eleven (11) checks purportedly
issued to petitioner Ching was docketed as CA-G.R. CR No. 23055 (assigned to the
13th Division). On the other hand, the petition involving the fourteen (14) checks
purportedly issued to Nuguid was docketed as CA-G.R. CR No. 23054 (originally
assigned to the 7th Division but transferred to the 6th Division). The Office of the
Solicitor General (OSG) filed its respective comments on the said
petitions. Subsequently, the OSG filed in CA-G.R. CR No. 23055 a motion for its
consolidation with CA-G.R. CR No. 23054. The OSG prayed that CA-G.R. CR No.
23055 pending before the 13th Division be transferred and consolidated with CA-G.R.
CR No. 23054 in accordance with the Revised Internal Rules of the Court of Appeals
(RIRCA).
Acting on the motion for consolidation, the CA in CA-G.R. CR No. 23055 issued a
Resolution dated October 19, 1999 advising the OSG to file the motion in CA-G.R.
CR No. 23054 as it bore the lowest number. Respondent Nicdao opposed the
consolidation of the two cases. She likewise filed her reply to the comment of the
OSG in CA-G.R. CR No. 23055.
 
On November 22, 1999, the CA (13th Division) rendered the assailed Decision in CA-
G.R. CR No. 23055 acquitting respondent Nicdao of the eleven (11) counts of
violation of BP 22 filed against her by petitioner Ching. The decretal portion of the
assailed CA Decision reads:
 
WHEREFORE, being meritorious, the petition for review is
hereby GRANTED. Accordingly, the decision dated May 10, 1999,
of the Regional Trial Court, 3rd Judicial Region, Branch 5, Bataan,
affirming the decision dated December 8, 1998, of the First
Municipal Circuit Trial Court of Dinalupihan-Hermosa, Bataan,
convicting petitioner Clarita S. Nicdao in Criminal Cases No. 9433
to 9443 of violation of B.P. Blg. 22 is REVERSED and SET ASIDE
and another judgment rendered ACQUITTING her in all these
cases, with costs de oficio.
 
SO ORDERED.[28]
 
 
On even date, the CA issued an Entry of Judgment declaring that the above decision
has become final and executory and is recorded in the Book of Judgments.
 
In acquitting respondent Nicdao in CA-G.R. CR No. 23055, the CA made the
following factual findings:
Petitioner [respondent herein] Clarita S. Nicdao, a middle-
aged mother and housekeeper who only finished high school, has a
daughter, Janette Boyd, who is married to a wealthy expatriate.
Complainant [petitioner herein] Samson Ching is a
Chinese national, who claimed he is a salesman of La Suerte Cigar
and Cigarette Factory.
 
Emma Nuguid, complainants live-in partner, is a CPA and
formerly connected with Sycip, Gorres and Velayo. Nuguid used to
own a grocery store now known as the Vignette Superstore. She
sold this grocery store, which was about to be foreclosed, to
petitioners daughter, Janette Boyd. Since then, petitioner began
managing said store. However, since petitioner could not always be
at the Vignette Superstore to keep shop, she entrusted to her
salesladies, Melanie Tolentino and Jocelyn Nicdao, pre-signed
checks, which were left blank as to amount and the payee, to cover
for any delivery of merchandise sold at the store. The blank and
personal checks were placed in a cash box at Vignette Superstore
and were filled up by said salesladies upon instruction of petitioner
as to amount, payee and date.
Soon thereafter, Emma Nuguid befriended petitioner and
offered to lend money to the latter which could be used in running
her newly acquired store. Nuguid represented to petitioner that as
former manager of the Vignette Superstore, she knew that
petitioner would be in need of credit to meet the daily expenses of
running the business, particularly in the daily purchases of
 merchandise to be sold at the store. After Emma Nuguid
succeeded in befriending petitioner, Nuguid was able to gain
access to the Vignette Superstore where petitioners blank and pre-
signed checks were kept.[29]
 
In addition, the CA also made the finding that respondent Nicdao borrowed money
from Nuguid in the total amount of P2,100,000.00 secured by twenty-four (24) checks
drawn against respondent Nicdaos account with HSLB. Upon Nuguids instruction, the
checks given by respondent Nicdao as security for the loans were left blank as to the
payee and the date. The loans consisted of (a) P950,000.00 covered by ten (10)
checks subject of the criminal complaints filed by petitioner Ching (CA-G.R. CR No.
23055); and (b) P1,150,000.00 covered by fourteen (14) checks subject of the
criminal complaints filed by Nuguid (CA-G.R. CR No. 23054). The loans
totaled P2,100,000.00 and they were transacted between respondent Nicdao and
Nuguid only. Respondent Nicdao never dealt with petitioner Ching.
 
Against the foregoing factual findings, the CA declared that, based on the evidence,
respondent Nicdao had already fully paid the loans. In particular, the CA referred to
the Planters Bank demand draft in the amount of P1,200,000.00 which, by his own
admission, petitioner Ching had received. The appellate court debunked petitioner
Chings allegation that the said demand draft was payment for a previous
transaction. According to the CA, petitioner Ching failed to adduce evidence to prove
the existence of a previous transaction between him and respondent Nicdao.
 
Apart from the demand draft, the CA also stated that respondent Nicdao made
interest payments on a daily basis to Nuguid as evidenced by the computations
written at the back of the cigarette wrappers. Based on these computations, as of July
21, 1997, respondent Nicdao had made a total of P5,780,000.00 payments to Nuguid
for the interests alone.Adding up this amount and that of the Planters Bank demand
draft, the CA placed the payments made by respondent Nicdao to Nuguid as already
amounting to P6,980,000.00 for the principal loan amount of only P2,100,000.00.
 
The CA negated petitioner Chings contention that the payments as reflected at the
back of the cigarette wrappers could be applied only to the interests due. Since the
transactions were not evidenced by any document or writing, the CA ratiocinated that
no interests could be collected because, under Article 1956 of the Civil Code, no
interest shall be due unless it has been expressly stipulated in writing.
 
The CA gave credence to the testimony of respondent Nicdao that when she had fully
paid her loans to Nuguid, she tried to retrieve her checks. Nuguid, however, refused
to return the checks to respondent Nicdao. Instead, Nuguid and petitioner Ching filled
up the said checks to make it appear that: (a) petitioner Ching was the payee in five
checks; (b) the six checks were payable to cash; (c) Nuguid was the payee in
fourteen (14) checks. Petitioner Ching and Nuguid then put the date October 6,
1997 on all these checks and deposited them the following day. On October 8, 1997,
through a joint demand letter, they informed respondent Nicdao that her checks were
dishonored by HSLB and gave her three days to settle her indebtedness or else face
prosecution for violation of BP 22.
 
With the finding that respondent Nicdao had fully paid her loan obligations to Nuguid,
the CA declared that she could no longer be held liable for violation of BP 22. It was
explained that to be held liable under BP 22, it must be established, inter alia, that the
check was made or drawn and issued to apply on account or for value. According to
the CA, the word account refers to a pre-existing obligation, while for value means an
obligation incurred simultaneously with the issuance of the check. In the case of
respondent Nicdaos checks, the pre-existing obligations secured by them were
already extinguished after full payment had been made by respondent Nicdao to
Nuguid. Obligations are extinguished by, among others, payment. [30] The CA believed
that when petitioner Ching and Nuguid refused to return respondent Nicdaos checks
despite her total payment of P6,980,000.00 for the loans secured by the checks,
petitioner Ching and Nuguid were using BP 22 to coerce respondent Nicdao to pay a
debt which she no longer owed them.
 
With respect to the P20,000,000.00 check, the CA was not convinced by petitioner
Chings claim that he delivered P1,000,000.00 every month to respondent Nicdao until
the amount reached P20,000,000.00 and, when she refused to pay the same, he
filled up the check, which she earlier delivered to him as security for the loans, by
writing thereon the said amount. In disbelieving petitioner Ching, the CA pointed out
that, contrary to his assertion, he was never employed by the La Suerte Cigar and
Cigarette Manufacturing per the letter of Susan Resurreccion, Vice-President and
Legal Counsel of the said company. Moreover, as admitted by petitioner Ching, he
did not own the house where he and Nuguid lived.
 
Moreover, the CA characterized as incredible and contrary to human experience that
petitioner Ching would, as he claimed, deliver a total sum of P20,000,000.00 to
respondent Nicdao without any documentary proof thereof, e.g., written
acknowledgment that she received the same. On the other hand, it found plausible
respondent Nicdaos version of the story that the P20,000,000.00 check was the same
one that was missing way back in 1995. The CA opined that this missing check
surfaced in the hands of petitioner Ching who, in cahoots with Nuguid, wrote the
amount P20,000,000.00 thereon and deposited it in his account. To the mind of the
CA, the inference that the check was stolen was anchored on competent
circumstantial evidence. Specifically, Nuguid, as previous manager/owner of the
grocery store, had access thereto. Likewise applicable, according to the CA, was the
presumption that the person in possession of the stolen article was presumed to be
guilty of taking the stolen article.[31]
 
The CA emphasized that the P20,000,000.00 check was never delivered by
respondent Nicdao to petitioner Ching. As such, the said check without the details as
to the date, amount and payee, was an incomplete and undelivered instrument when
it was stolen and ended up in petitioner Chings hands. On this point, the CA applied
Sections 15 and 16 of the Negotiable Instruments Law:
 
SEC. 15. Incomplete instrument not delivered. Where an
incomplete instrument has not been delivered, it will not, if
completed and negotiated without authority, be a valid contract in
the hands of any holder, as against any person whose signature
was placed thereon before delivery.
 
SEC. 16. Delivery; when effectual; when presumed. Every
contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument for the purpose of giving effect
thereto. As between immediate parties and as regards a remote
party other than a holder in due course, the delivery, in order to be
 effectual, must be made either by or under the authority of the party
making, drawing, accepting or indorsing, as the case may be; and,
in such case, the delivery may be shown to have been conditional,
or for a special purpose only, and not for the purpose of transferring
the property. But where the instrument is in the hands of a holder in
due course, a valid delivery thereof by all parties prior to him so as
to make them liable to him is conclusively presumed. And where
the instrument is no longer in the possession of a party whose
signature appears thereon, a valid and intentional delivery by him is
presumed until the contrary is proved.
 
The CA held that the P20,000,000.00 check was filled up by petitioner Ching without
respondent Nicdaos authority. Further, it was incomplete and undelivered. Hence,
petitioner Ching did not acquire any right or
interest therein and could not assert any cause of action founded on the
 
 
stolen checks.[32] Under these circumstances, the CA concluded that respondent
could not be held liable for violation of BP 22.
 
 The Petitioners Case
 
As mentioned earlier, the instant petition pertains and is limited solely to the civil
aspect of the case as petitioner Ching argues that notwithstanding respondent
Nicdaos acquittal of the eleven (11) counts of violation of BP 22, she should be held
liable to pay petitioner Ching the amounts of the dishonored checks in the aggregate
sum of P20,950,000.00.
 
He urges the Court to review the findings of facts made by the CA as they are
allegedly based on a misapprehension of facts and manifestly erroneous and
contradicted by the evidence. Further, the CAs factual findings are in conflict with
those of the RTC and MCTC.
 
Petitioner Ching vigorously argues that notwithstanding respondent Nicdaos acquittal
by the CA, the Supreme Court has the jurisdiction and authority to resolve and rule on
her civil liability. He invokes Section 1, Rule 111 of the Revised Rules of Court which,
prior to its amendment, provided, in part:
 
SEC. 1. Institution of criminal and civil actions. When a
criminal action is instituted, the civil action for the recovery of civil
liability is impliedly instituted with the criminal action, unless the
offended party waives the civil action, reserves his right to institute
it separately, or institutes the civil action prior to the criminal action.
 
Such civil action includes the recovery of indemnity under
the Revised Penal Code, and damages under Articles 32, 33, 34
and 2176 of the Civil Code of the Philippines arising from the same
act or omission of the accused. x x x
 
Supreme Court Circular No. 57-97[33] dated September 16, 1997 is also cited
as it provides in part:
 
1. The criminal action for violation of Batas Pambansa
Blg. 22 shall be deemed to necessarily include the corresponding
civil action, and no reservation to file such civil action separately
shall be allowed or recognized. x x x
 
Petitioner Ching theorizes that, under Section 1, Rule 111 of the Revised Rules of
Court, the civil action for the recovery of damages under Articles 32, 33, 34, and 2176
arising from the same act or omission of the accused is impliedly instituted with the
criminal action. Moreover, under the above-quoted Circular, the criminal action for
violation of BP 22 necessarily includes the corresponding civil action, which is the
recovery of the amount of the dishonored check representing the civil obligation of the
drawer to the payee.
 
In seeking to enforce the alleged civil liability of respondent Nicdao, petitioner Ching
maintains that she had loan obligations to him totaling P20,950,000.00. The existence
of the same is allegedly established by his testimony before the MCTC. Also, he asks
the Court to take judicial notice that for a monetary loan secured by a check, the
check itself is the evidence of indebtedness.
 
He insists that, contrary to her protestation, respondent Nicdao also transacted with
him, not only with Nuguid. Petitioner Ching pointed out that during respondent
Nicdaos testimony, she referred to her creditors in plural form, e.g. [I] told them, most
checks that I issued I will inform them if I have money. Even respondent Nicdaos
employees allegedly knew him; they testified that Nuguid instructed them at times to
leave as blank the payee on the checks as they would be paid to someone else, who
turned out to be petitioner Ching.
 
It was allegedly erroneous for the CA to hold that he had no capacity to
lend P20,950,000.00 to respondent Nicdao. Petitioner Ching clarified that what he
meant when he testified before the MCTC was that he was engaged in dealership
with La Suerte Cigar and Cigarette Manufacturing, and not merely its sales agent. He
stresses that he owns a warehouse and is also in the business of lending
money. Further, the CAs reasoning that he could not possibly have
lent P20,950,000.00 to respondent Nicdao since petitioner Ching and Nuguid did not
own the house where they live, is allegedly non sequitur.
 
Petitioner Ching maintains that, contrary to the CAs finding, the Planters
Bank demand draft for P1,200,000.00 was in payment for respondent Nicdaos
previous loan transaction with him. Apart from the P20,000,000.00 check, the other
ten (10) checks (totaling P950,000.00) were allegedly issued by respondent Nicdao to
petitioner Ching as security for the loans that she obtained from him from 1995 to
1997. The existence of another loan obligation prior to the said period was allegedly
established by the testimony of respondent Nicdaos own witness, Jocelyn Nicdao,
who testified that when she started working in Vignette Superstore in 1994, she
noticed that respondent Nicdao was already indebted to Nuguid.
  
Petitioner Ching also takes exception to the CAs ruling that the payments
made by respondent Nicdao as reflected on the computations at the back of the
cigarette wrappers were for both the principal loan and interests. He insists that they
were for the interests alone. Even respondent Nicdaos testimony allegedly showed
that they were daily interest payments. Petitioner Ching further avers that the interest
payments totaling P5,780,000.00 can only mean that, contrary to respondent Nicdaos
claim, her loan obligations amounted to much more than P2,100,000.00. Further, she
is allegedly estopped from questioning the interests because she willingly paid the
same.
 
Petitioner Ching also harps on respondent Nicdaos silence when she
received his and Nuguids demand letter to her. Through the said letter, they notified
her that the twenty-five (25) checks valued at P22,100,000.00 were dishonored by the
HSLB, and that she had three days to settle her ndebtedness with them, otherwise,
face prosecution.Respondent Nicdaos silence, i.e., her failure to deny or protest the
same by way of reply, vis--vis the demand letter, allegedly constitutes an admission of
the statements contained therein.
 
On the other hand, the MCTCs decision, as affirmed by the RTC, is allegedly
based on the evidence on record; it has been established that the checks were
respondent Nicdaos personal checks, that the signatures thereon were hers and that
she had issued them to petitioner Ching. With respect to the P20,000,000.00 check,
petitioner Ching assails the CAs ruling that it was stolen and was never delivered or
issued by respondent Nicdao to him. The issue of the said check being stolen was
allegedly not raised during trial. Further, her failure to report the alleged theft to the
bank to stop payment of the said lost or missing check is allegedly contrary to human
experience. Petitioner Ching describes respondent Nicdaos defense of stolen or lost
check as incredible and, therefore, false.
 
Aside from the foregoing substantive issues that he raised, petitioner Ching
also faults the CA for not acting and ordering the consolidation of CA-G.R. CR No.
23055 with CA-G.R. CR No. 23054. He informs the Court that latter case is still
pending with the CA.
 
In fine, it is petitioner Chings view that the CA gravely erred in disregarding
the findings of the MCTC, as affirmed by the RTC, and submits that there is more
than sufficient preponderant evidence to hold respondent Nicdao civilly liable to him in
the amount of P20,950,000.00. He thus prays that the Court direct respondent Nicdao
to pay him the said amount plus 12% interest per annum computed from the date of
written demand until the total amount is fully paid.
 
The Respondents Counter-Arguments
 
 
Respondent Nicdao urges the Court to deny the petition. She posits
preliminarily that it is barred under Section 2(b), Rule 111 of the Revised Rules of
Court which states:
 
SEC. 2. Institution of separate of civil action. - Except in
the cases provided for in Section 3 hereof, after the criminal action
has been commenced, the civil action which has been reserved
cannot be instituted until final judgment in the criminal action.
 
xxxx
 
(b) Extinction of the penal action does not carry with it
extinction of the civil, unless the extinction proceeds from a
declaration in a final judgment that the fact from which the civil
might arise did not exist.
  
According to respondent Nicdao, the assailed CA decision has already made a
finding to the effect that the fact upon which her civil liability might arise did not
exist. She refers to the ruling of the CA that the P20,000,000.00 check was stolen;
hence, petitioner Ching did not acquire any right or interest over the said check and
could not assert any cause of action founded on the said check. Consequently, the
CA held that respondent Nicdao had no obligation to make good the stolen check and
cannot be held liable for violation of BP 22. She also refers to the CAs
pronouncement relative to the ten (10) other checks that they were not issued to
apply on account or for value, considering that the loan obligations secured by these
checks had already been extinguished by her full payment thereof.
 
To respondent Nicdaos mind, these pronouncements are equivalent to a finding that
the facts upon which her civil liability may arise do not exist. The instant petition,
which seeks to enforce her civil liability based on the eleven (11) checks, is thus
allegedly already barred by the final and executory decision acquitting her.
 
In any case, respondent Nicdao contends that the CA did not commit serious
misapprehension of facts when it found that the P20,000,000.00 check was a stolen
check and that she never made any transaction with petitioner Ching. Moreover, the
other ten (10) checks were not issued to apply on account or for value. These findings
are allegedly supported by the evidence on record which consisted of the respective
testimonies of the defense witnesses to the effect that: respondent Nicdao had the
practice of leaving pre-signed checks placed inside an unsecured cash box in the
Vignette Superstore; the salesladies were given the authority to fill up the said checks
as to the amount, payee and date; Nuguid beguiled respondent Nicdao to obtain
loans from her; as security for the loans, respondent Nicdao issued checks to Nuguid;
when the salesladies gave the checks to Nuguid, she instructed them to leave blank
the payee and date; Nuguid had access to the grocery store; in 1995, one of the
salesladies reported that a check was missing; in 1997, when she had fully paid her
loans to Nuguid, respondent Nicdao tried to retrieve her checks but Nuguid and
petitioner Ching falsely told her that she still owed them money; they then maliciously
filled up the checks making it appear that petitioner Ching was the payee in the five
checks and the six others were payable to cash; and knowing fully well that these
checks were not funded because respondent Nicdao already fully paid her loans,
petitioner Ching and Nuguid deposited the checks and caused them to be dishonored
by HSLB.
 
It is pointed out by respondent Nicdao that her testimony (that the P20,000,000.00
check was the same one that she lost sometime in 1995) was corroborated by the
respective testimonies of her employees. Another indication that it was stolen was the
fact that among all the checks which ended up in the hands of petitioner Ching and
Nuguid, only the P20,000,000.00 check was fully typewritten; the rest were invariably
handwritten as to the amounts, payee and date.
 
Respondent Nicdao defends the CAs conclusion that the P20,000,000.00 check was
stolen on the ground that an appeal in a criminal case throws open the whole case to
the appellate courts scrutiny. In any event, she maintains that she had been
consistent in her theory of defense and merely relied on the disputable presumption
that the person in possession of a stolen article is presumed to be the author of the
theft.
 
Considering that it was stolen, respondent Nicdao argues, the P20,000,000.00 check
was an incomplete and undelivered instrument in the hands of petitioner Ching and
he did not acquire any right or interest therein. Further, he cannot assert any cause of
action founded on the said stolen check. Accordingly, petitioner Chings attempt to
collect payment on the said check through the instant petition must fail.
 
Respondent Nicdao describes as downright incredible petitioner Chings testimony
that she owed him a total sum of P20,950,000.00 without any documentary proof of
the loan transactions. She submits that it is contrary to human experience for loan
transactions involving such huge amounts of money to be devoid of any documentary
proof. In relation thereto, respondent Nicdao underscores that petitioner Ching lied
about being employed as a salesman of La Suerte Cigar and Cigarette
Manufacturing. It is underscored that he has not adequately shown that he possessed
the financial capacity to lend such a huge amount to respondent Nicdao as he so
claimed.
 Neither could she be held liable for the ten (10) other checks (in the total amount
of P950,000,000.00) because as respondent Nicdao asseverates, she merely issued
them to Nuguid as security for her loans obtained from the latter beginning October
1995 up to 1997. As evidenced by the Planters Bank demand draft in the amount
of P1,200,000.00, she already made payment in 1996. The said demand draft was
negotiated to petitioner Chings account and he admitted receipt thereof. Respondent
Nicdao belies his claim that the demand draft was payment for a prior existing
obligation. She asserts that petitioner Ching was unable to present evidence of such
a previous transaction.
 
In addition to the Planters Bank demand draft, respondent Nicdao insists that
petitioner Ching received, through Nuguid, cash payments as evidenced by the
computations written at the back of the cigarette wrappers. Nuguid went to the
Vignette Superstore everyday to collect these payments. The other defense
witnesses corroborated this fact. Petitioner Ching allegedly never disputed the
accuracy of the accounts appearing on these cigarette wrappers; nor did he dispute
their authenticity and accuracy.
Based on the foregoing evidence, the CA allegedly correctly held that, computing the
amount of the Planters Bank demand draft (P1,200,000.00) and those reflected at the
back of the cigarette wrappers (P5,780,000.00), respondent Nicdao had already paid
petitioner Ching and Nuguid a total sum of P6,980,000.00 for her loan obligations
totaling only P950,000.00, as secured by the ten (10) HSLB checks excluding the
stolen P20,000,000.00 check.
Respondent Nicdao rebuts petitioner Chings argument (that the daily payments were
applied to the interests), and claims that this is illegal. Petitioner Ching cannot insist
that the daily payments she made applied only to the interests on the loan obligations,
considering that there is admittedly no document evidencing these loans, hence, no
written stipulation for the payment of interests thereon. On this point, she invokes
Article 1956 of the Civil Code, which proscribes the collection of interest payments
unless expressly stipulated in writing.
 
Respondent Nicdao emphasizes that the ten (10) other checks that she issued to
Nuguid as security for her loans had already been discharged upon her full payment
thereof. It is her belief that these checks can no longer be used to coerce her to pay a
debt that she does not owe.
 
On the CAs failure to consolidate CA-G.R. CR No. 23055 and CA-G.R. CR
No. 23054, respondent Nicdao proffers the explanation that under the RIRCA,
consolidation of the cases is not mandatory. In fine, respondent 
Nicdao urges the Court to deny the petition as it failed to discharge the burden of
proving her civil liability with the required preponderance of evidence. Moreover, the
CAs acquittal of respondent Nicdao is premised on the finding that, apart from the
stolen check, the ten (10) other checks were not made to apply to a valid, due and
demandable obligation. This, in effect, is a categorical ruling that the fact from which
the civil liability of respondent Nicdao may arise does not exist.
 
The Courts Rulings
 
The petition is denied for lack of merit.
 
 Notwithstanding respondent Nicdaos
acquittal, petitioner Ching is entitled
to appeal the civil aspect of the case
within the reglementary period
 
It is axiomatic that every person criminally liable for a felony is also civilly liable.
[34]
 Under the pertinent provision of the Revised Rules of Court, the civil action is
generally impliedly instituted with the criminal action. At the time of petitioner Chings
filing of the Informations against respondent Nicdao, Section 1, [35] Rule 111 of the
Revised Rules of Court, quoted earlier, provided in part:
 
 
SEC. 1. Institution of criminal and civil actions. When a
criminal action is instituted, the civil action for the recovery of civil
liability is impliedly instituted with the criminal action, unless the
offended party waives the civil action, reserves his right to institute
it separately, or institutes the civil action prior to the criminal action.
Such civil action includes the recovery of indemnity under
the Revised Penal Code, and damages under Articles 32, 33, 34
and 2176 of the Civil Code of the Philippines arising from the same
act or omission of the accused.
 
xxxx
 
 
As a corollary to the above rule, an acquittal does not necessarily carry with it the
extinguishment of the civil liability of the accused. Section 2(b)[36] of the same Rule,
also quoted earlier, provided in part:
 
(b) Extinction of the penal action does not carry with it
extinction of the civil, unless the extinction proceeds from a
declaration in a final judgment that the fact from which the civil
might arise did not exist.
 
It is also relevant to mention that judgments of acquittal are required to state whether
the evidence of the prosecution absolutely failed to prove the guilt of the accused or
merely failed to prove his guilt beyond reasonable doubt. In either case, the judgment
shall determine if the act or omission from which the civil liability might arise did not
exist.[37]
 
In Sapiera v. Court of Appeals,[38] the Court enunciated that the civil liability is not
extinguished by acquittal: (a) where the acquittal is based on reasonable doubt; (b)
where the court expressly declares that the liability of the accused is not criminal but
only civil in nature; and (c) where the civil liability is not derived from or based on the
criminal act of which the accused is acquitted. Thus, under Article 29 of the Civil Code
 
ART. 29. When the accused in a criminal prosecution is acquitted
on the ground that his guilt has not been proved beyond reasonable
doubt, a civil action for damages for the same act or omission may
be instituted. Such action requires only a preponderance of
evidence. Upon motion of the defendant, the court may require the
plaintiff to file a bond to answer for damages in case the complaint
should be found to be malicious.
 
If in a criminal case the judgment of acquittal is based upon
reasonable doubt, the court shall so declare. In the absence of any
declaration to that effect, it may be inferred from the text of the
decision whether or not the acquittal is due to that ground.
 
 
The Court likewise expounded in Salazar v. People[39] the consequences of
an acquittal on the civil aspect in this wise:
The acquittal of the accused does not prevent a judgment against
him on the civil aspect of the criminal case where: (a) the acquittal
is based on reasonable doubt as only preponderance of evidence is
required; (b) the court declared that the liability of the accused is
only civil; (c) the civil liability of the accused does not arise from or
is not based upon the crime of which the accused is
acquitted. Moreover, the civil action based on the delict is
extinguished if there is a finding in the final judgment in the criminal
action that the act or omission from which the civil liability may arise
did not exist or where the accused did not commit the act or
omission imputed to him.
If the accused is acquitted on reasonable doubt but the court
renders judgment on the civil aspect of the criminal case, the
prosecution cannot appeal from the judgment of acquittal as it
would place the accused in double jeopardy. However, the
aggrieved party, the offended party or the accused or both may
appeal from the judgment on the civil aspect of the case within the
period therefor.
 
From the foregoing, petitioner Ching correctly argued that he, as the offended party,
may appeal the civil aspect of the case notwithstanding respondent Nicdaos acquittal
by the CA. The civil action was impliedly instituted with the criminal action since he
did not reserve his right to institute it separately nor did he institute the civil action
prior to the criminal action.
 
Following the long recognized rule that the appeal period accorded to the
accused should also be available to the offended party who seeks redress of the civil
aspect of the decision, the period to appeal granted to petitioner Ching is the same as
that granted to the accused. [40] With petitioner Chings timely filing of the instant
petition for review of the civil aspect of the CAs decision, the Court thus has the
jurisdiction and authority to determine the civil liability of respondent Nicdao
notwithstanding her acquittal.
 
In order for the petition to prosper, however, it must establish that the judgment of the
CA acquitting respondent Nicdao falls under any of the three categories enumerated
in Salazar and Sapiera, to wit:
 
(a) where the acquittal is based on reasonable doubt as only
preponderance of evidence is required;
 
(b) where the court declared that the liability of the accused is only
civil; and
 
(c) where the civil liability of the accused does not arise from or is
not based upon the crime of which the accused is acquitted.
 
Salazar also enunciated that the civil action based on the delict is
extinguished if there is a finding in the final judgment in the criminal action that the act
or omission from which the civil liability may arise did not exist or where the accused
did not commit the act or omission imputed to him.
For reasons that will be discussed shortly, the Court holds that respondent
Nicdao cannot be held civilly liable to petitioner Ching.
 
The acquittal of respondent Nicdao
likewise effectively extinguished her
civil liability
 
A painstaking review of the case leads to the conclusion that respondent Nicdaos
acquittal likewise carried with it the extinction of the action to enforce her civil
liability. There is simply no basis to hold respondent Nicdao civilly liable to petitioner
Ching.
First, the CAs acquittal of respondent Nicdao is not merely based on reasonable
doubt. Rather, it is based on the finding that she did not commit the act penalized
under BP 22. In particular, the CA found that the P20,000,000.00 check was a stolen
check which was never issued nor delivered by respondent Nicdao to petitioner
Ching. As such, according to the CA, petitioner Ching did not acquire any right or
interest over Check No. 002524 and cannot assert any cause of action founded on
said check,[41] and that respondent Nicdao has no obligation to make good the stolen
check and cannot, therefore, be held liable for violation of B.P. Blg. 22.[42]
 
With respect to the ten (10) other checks, the CA established that the loans secured
by these checks had already been extinguished after full payment had been made by
respondent Nicdao. In this connection, the second element for the crime under BP
22, i.e., that the check is made or drawn and issued to apply on account or for value,
is not present.
 
Second, in acquitting respondent Nicdao, the CA did not adjudge her to be civilly
liable to petitioner Ching. In fact, the CA explicitly stated that she had already fully
paid her obligations. The CA computed the payments made by respondent
Nicdao vis--vis her loan obligations in this manner:
 
Clearly, adding the payments recorded at the back of the cigarette
cartons by Emma Nuguid in her own handwriting
totaling P5,780,000.00 and the P1,200,000.00 demand draft
received by Emma Nuguid, it would appear that petitioner
[respondent herein] had already made payments in the total
amount of P6,980,000.00 for her loan obligation of
only P2,100,000.00 (P950,000.00 in the case at bar
and P1,150,000.00 in CA-G.R. CR No. 23054).[43]
 
On the other hand, its finding relative to the P20,000,000.00 check that it was a stolen
check necessarily absolved respondent Nicdao of any civil liability thereon as well.
Third, while petitioner Ching attempts to show that respondent Nicdaos
liability did not arise from or was not based upon the criminal act of which she was
acquitted (ex delicto) but from her loan obligations to him (ex contractu), however,
petitioner Ching miserably failed to prove by preponderant evidence the existence of
these unpaid loan obligations. Significantly, it can be inferred from the following
findings of the CA in its decision acquitting respondent Nicdao that the act or
omission from which her civil liability may arise did not exist. On the P20,000,000.00
check, the CA found as follows:
 
True, indeed, the missing pre-signed and undated check no.
002524 surfaced in the possession of complainant Ching who, in
cahoots with his paramour Emma Nuguid, filled up the blank check
with his name as payee and in the fantastic amount
of P20,000,000.00, dated it October 6, 1997, and presented it to the
bank on October 7, 1997, along with the other checks, for payment.
Therefore, the inference that the check was stolen is anchored on
competent circumstantial evidence. The fact already established is
that Emma Nuguid , previous owner of the store, had access to
said store. Moreover, the possession of a thing that was stolen ,
absent a credible reason, as in this case, gives rise to the
presumption that the person in possession of the stolen article is
presumed to be guilty of taking the stolen article (People v. Zafra,
237 SCRA 664).
 
As previously shown, at the time check no. 002524 was stolen, the
said check was blank in its material aspect (as to the name of
payee, the amount of the check, and the date of the check), but
was already pre-signed by petitioner. In fact, complainant Ching
himself admitted that check no. 002524 in his possession was a
blank check (TSN, Jan. 7, 1998, pp. 24-27, Annex J, Petition).
 
Moreover, since it has been established that check no. 002524 had
been missing since 1995 (TSN, Sept. 9, 1998, pp. 14-15, Annex
DD, Petition; TSN, Sept. 10, 1998, pp. 43-46, Annex EE, Petition),
it is abundantly clear that said check was never delivered to
complainant Ching. Check no. 002524 was an incomplete and
undelivered instrument when it was stolen and ended up in the
hands of complainant Ching. Sections 15 and 16 of the Negotiable
Instruments Law provide:
 
xxxx
 
In the case of check no. 002524, it is admitted by complainant
Ching that said check in his possession was a blank check and was
subsequently completed by him alone without authority from
petitioner. Inasmuch as check no. 002524 was incomplete and
undelivered in the hands of complainant Ching, he did not acquire
any right or interest therein and cannot, therefore, assert any cause
of action founded on said stolen check (Development Bank of
the Philippines v. Sima We, 219 SCRA 736, 740).
It goes without saying that since complainant Ching did not acquire
any right or interest over check no. 002524 and cannot assert any
cause of action founded on said check, petitioner has no obligation
to make good the stolen check and cannot, therefore, be held liable
for violation of B.P. Blg. 22.[44]
 
Anent the other ten (10) checks, the CA made the following findings:
 
Evidence sufficiently shows that the loans secured by the ten (10)
checks involved in the cases subject of this petition had already
been paid. It is not controverted that petitioner gave Emma Nuguid
a demand draft valued at P1,200,000 to pay for the loans
guaranteed by said checks and other checks issued to her.
Samson Ching admitted having received the demand draft which
he deposited in his bank account. However, complainant Samson
Ching claimed that the said demand draft represents payment for a
previous obligation incurred by petitioner. However, complainant
Ching failed to adduce any evidence to prove the existence of the
alleged obligation of the petitioner prior to those secured by the
subject checks.
 
 Apart from the payment to Emma Nuguid through said demand
draft, it is also not disputed that petitioner made cash payments to
Emma Nuguid who collected the payments almost daily at the
Vignette Superstore. As of July 21, 1997, Emma Nuguid collected
cash payments amounting to approximately P5,780,000.00. All of
these cash payments were recorded at the back of cigarette
cartons by Emma Nuguid in her own handwriting, the authenticity
and accuracy of which were never denied by either complainant
Ching or Emma Nuguid.
 
Clearly, adding the payments recorded at the back of the cigarette
cartons by Emma Nuguid in her own handwriting
totaling P5,780,000.00 and the P1,200,000.00 demand draft
received by Emma Nuguid, it would appear that petitioner had
already made payments in the total amount of P6,980,000.00 for
her loan in the total amount of P6,980,000.00 for her loan obligation
of only P2,100,000.00 (P950,000.00 in the case at bar and
P1,150,000.00 in CA-G.R. CR No. 23054).[45]
 
Generally checks may constitute evidence of indebtedness.[46] However, in
view of the CAs findings relating to the eleven (11) checks - that the P20,000,000.00
was a stolen check and the obligations secured by the other ten (10) checks had
already been fully paid by respondent Nicdao they can no longer be given credence
to establish respondent Nicdaos civil liability to petitioner Ching. Such civil liability,
therefore, must be established by preponderant evidence other than the discredited
checks.
 
After a careful examination of the records of the case,[47] the Court holds that the
existence of respondent Nicdaos civil liability to petitioner Ching in the amount
of P20,950,000.00 representing her unpaid obligations to the latter has not been
sufficiently established by preponderant evidence. Petitioner Ching mainly relies on
his testimony before the MCTC to establish the existence of these unpaid
obligations. In gist, he testified that from October 1995 up to 1997, respondent Nicdao
obtained loans from him in the total amount of P20,950,000.00. As security for her
obligations, she issued eleven (11) checks which were invariably blank as to the date,
amounts and payee. When respondent Nicdao allegedly refused to pay her
obligations despite his due demand, petitioner filled up the checks in his possession
with the corresponding amounts and date and deposited them in his account. They
were subsequently dishonored by the HSLB for being DAIF and petitioner Ching
accordingly filed the criminal complaints against respondent Nicdao for violation of BP
22.
 
It is a basic rule in evidence that the burden of proof lies on the party who makes the
allegations Et incumbit probatio, qui dicit, non qui negat; cum per rerum naturam
factum negantis probatio nulla sit (The proof lies upon him who affirms, not upon him
who denies; since, by the nature of things, he who denies a fact cannot produce any
proof).[48] In civil cases, the party having the burden of proof must establish his case
by a preponderance of evidence. Preponderance of evidence is the weight, credit,
and value of the aggregate evidence on either side and is usually considered to be
synonymous with the term greater weight of evidence or greater weight of the credible
evidence. Preponderance of evidence is a phrase which, in the last analysis, means
probability of the truth. It is evidence which is more convincing to the court as worthy
of belief than that which is offered in opposition thereto.[49] Section 1, Rule 133 of the
Revised Rules of Court offers the guidelines in determining preponderance of
evidence:
 
SEC. 1. Preponderance of evidence, how determined. In civil
cases, the party having the burden of proof must establish his case
by a preponderance of evidence. In determining where the
preponderance or superior weight of evidence on the issues
involved lies, the court may consider all the facts and
circumstances of the case, the witnesses manner of testifying, their
intelligence, their means and opportunity of knowing the facts to
which they are testifying, the nature of the facts to which they
testify, the probability or improbability of their testimony, their
interest or want of interest, and also their personal credibility so far
as the same may legitimately appear upon the trial. The court may
also consider the number of witnesses, though the preponderance
is not necessarily with the greater number.
 
Unfortunately, petitioner Chings testimony alone does not constitute
preponderant evidence to establish respondent Nicdaos civil liability to him amounting
to P20,950,000.00. Apart from the discredited checks, he failed to adduce any other
documentary evidence to prove that respondent Nicdao still has unpaid obligations to
him in the said amount. Bare allegations, unsubstantiated by evidence, are not
equivalent to proof under our Rules.[50]
 
In contrast, respondent Nicdaos defense consisted in, among others, her allegation
that she had already paid her obligations to petitioner Ching through Nuguid. In
support thereof, she presented the Planters Bank demand draft
for P1,200,000.00. The said demand draft was negotiated to petitioner Chings
account and he admitted receipt of the value thereof. Petitioner Ching tried to
controvert this by claiming that it was payment for a previous transaction between him
and respondent Nicdao. However, other than his self-serving claim, petitioner Ching
did not proffer any documentary evidence to prove the existence of the said previous
transaction. Considering that the Planters Bank demand draft was dated August 13,
1996, it is logical to conclude that, absent any evidence to the contrary, it formed part
of respondent Nicdaos payment to petitioner Ching on account of the loan obligations
that she obtained from him since October 1995.
 
Additionally, respondent Nicdao submitted as evidence the cigarette
wrappers at the back of which were written the computations of the daily payments
that she had made to Nuguid. The fact of the daily payments was corroborated by the
other witnesses for the defense, namely, Jocelyn Nicdao and Tolentino. As found by
the CA, based on these computations, respondent Nicdao had made a total payment
of P5,780,000.00 to Nuguid as of July 21, 1997. [51] Again, the payments made, as
reflected at the back of these cigarette wrappers, were not disputed by petitioner
Ching. Hence, these payments as well as the amount of the Planters Bank demand
draft establish that respondent Nicdao already paid the total amount of P6,980,000.00
to Nuguid and petitioner Ching.
 
The Court agrees with the CA that the daily payments made by respondent
Nicdao amounting to P5,780,000.00 cannot be considered as interest payments
only. Even respondent Nicdao testified that the daily payments that she made to
Nuguid were for the interests due. However, as correctly ruled by the CA, no interests
could be properly collected in the loan transactions between petitioner Ching and
respondent Nicdao because there was no stipulation therefor in writing. To reiterate,
under Article 1956 of the Civil Code, no interest shall be due unless it has been
expressly stipulated in writing.
Neither could respondent Nicdao be considered to be estopped from
denying the validity of these interests. Estoppel cannot give validity to an act that is
prohibited by law or one that is against public policy.[52] Clearly, the collection of
interests without any stipulation therefor in writing is prohibited by law. Consequently,
the daily payments made by respondent Nicdao amounting to P5,780,000.00 were
properly considered by the CA as applying to the principal amount of her loan
obligations.
 
With respect to the P20,000,000.00 check, the defense of respondent
Nicdao that it was stolen and that she never issued or delivered the same to petitioner
Ching was corroborated by the other defense witnesses, namely, Tolentino and
Jocelyn Nicdao.
 
All told, as between petitioner Ching and respondent Nicdao, the requisite
quantum of evidence - preponderance of evidence - indubitably lies with respondent
Nicdao. As earlier intimated, she cannot be held civilly liable to petitioner Ching for
her acquittal; under the circumstances which have just been discussed lengthily, such
acquittal carried with it the extinction of her civil liability as well.
 
The CA committed no reversible error
in not consolidating CA-G.R. CR No.
23055 and CA-G.R. CR No. 23054
 
During the pendency of CA-G.R. CR No. 23055 and CA-G.R. CR No. 23054
in the CA, the pertinent provision of the RIRCA on consolidation of cases provided:
 
SEC. 7. Consolidation of Cases. Whenever two or more
allied cases are assigned to different Justices, they may be
consolidated for study and report to a single Justice.
 
(a) At the instance of any party or Justice to whom the
case is assigned for study and report, and with the conformity of all
the Justices concerned, the consolidation may be allowed when the
cases to be consolidated involve the same parties and/or related
questions of fact and/or law.[53]
 
 
The use of the word may denotes the permissive, not mandatory, nature of the above
provision, Thus, no grave error could be imputed to the CA when it proceeded to
render its decision in CA-G.R. CR No. 23055, without consolidating it with CA-G.R.
CR No. 23054.
 
WHEREFORE, premises considered, the Petition is DENIED for lack of
merit.
 
SO ORDERED.
G.R. No. 138739 July 6, 2000
RADIOWEALTH FINANCE COMPANY
vs.
Spouses VICENTE and MA. SUMILANG DEL ROSARIO
PANGANIBAN, J.:
When a demurrer to evidence granted by a trial court is reversed on appeal, the
reviewing court cannot remand the case for further proceedings. Rather, it should
render judgment on the basis of the evidence proffered by the plaintiff. Inasmuch as
defendants in the present case admitted the due execution of the Promissory Note
both in their Answer and during the pretrial, the appellate court should have rendered
judgment on the bases of that Note and on the other pieces of evidence adduced
during the trial.
The Case
Before us is a Petition for Review on Certiorari of the December 9, 1997 Decision[1]
and the May 3, 1999 Resolution[2] of the Court of Appeals in CA-GR CV No. 47737.
The assailed Decision disposed as follows:
WHEREFORE, premises considered, the appealed order (dated November 4, 1994)
of the Regional Trial Court (Branch XIV) in the City of Manila in Civil Case No. 93-
66507 is hereby REVERSED and SET ASIDE. Let the records of this case be
remanded to the court a quo for further proceedings. No pronouncement as to costs.
[3]
The assailed Resolution denied the petitioners Partial Motion for Reconsideration.[4]
The Facts
The facts of this case are undisputed. On March 2, 1991, Spouses Vicente and Maria
Sumilang del Rosario (herein respondents), jointly and severally executed, signed
and delivered in favor of Radiowealth Finance Company (herein petitioner), a
Promissory Note[5] for P138,948. Pertinent provisions of the Promissory Note read:
FOR VALUE RECEIVED, on or before the date listed below, I/We promise to pay
jointly and severally Radiowealth Finance Co. or order the sum of ONE HUNDRED
THIRTY EIGHT THOUSAND NINE HUNDRED FORTY EIGHT Pesos (P138,948.00)
without need of notice or demand, in installments as follows:
P11,579.00 payable for 12 consecutive months starting on ________ 19__ until the
amount of P11,579.00 is fully paid. Each installment shall be due every ____ day of
each month. A late payment penalty charge of two and a half (2.5%) percent per
month shall be added to each unpaid installment from due date thereof until fully paid.
xxxxxxxxx
It is hereby agreed that if default be made in the payment of any of the installments or
late payment charges thereon as and when the same becomes due and payable as
specified above, the total principal sum then remaining unpaid, together with the
agreed late payment charges thereon, shall at once become due and payable without
need of notice or demand.
xxxxxxxxx
If any amount due on this Note is not paid at its maturity and this Note is placed in the
hands of an attorney or collection agency for collection, I/We jointly and severally
agree to pay, in addition to the aggregate of the principal amount and interest due, a
sum equivalent to ten (10%) per cent thereof as attorneys and/or collection fees, in
case no legal action is filed, otherwise, the sum will be equivalent to twenty-five (25%)
percent of the amount due which shall not in any case be less than FIVE HUNDRED
PESOS (P500.00) plus the cost of suit and other litigation expenses and, in addition,
a further sum of ten per cent (10%) of said amount which in no case shall be less
than FIVE HUNDRED PESOS (P500.00), as and for liquidated damages.[6]
Thereafter, respondents defaulted on the monthly installments. Despite repeated
demands, they failed to pay their obligations under their Promissory Note.
On June 7, 1993, petitioner filed a Complaint[7] for the collection of a sum of money
before the Regional Trial Court of Manila, Branch 14.[8] During the trial, Jasmer
Famatico, the credit and collection officer of petitioner, presented in evidence the
respondents check payments, the demand letter dated July 12, 1991, the customers
ledger card for the respondents, another demand letter and Metropolitan Bank
dishonor slips. Famatico admitted that he did not have personal knowledge of the
transaction or the execution of any of these pieces of documentary evidence, which
had merely been endorsed to him.
On July 4, 1994, the trial court issued an Order terminating the presentation of
evidence for the petitioner.[9] Thus, the latter formally offered its evidence and
exhibits and rested its case on July 5, 1994.
Respondents filed on July 29, 1994 a Demurrer to Evidence[10] for alleged lack of
cause of action. On November 4, 1994, the trial court dismissed[11] the complaint for
failure of petitioner to substantiate its claims, the evidence it had presented being
merely hearsay.
On appeal, the Court of Appeals (CA) reversed the trial court and remanded the case
for further proceedings.
Hence, this recourse.[12]
Ruling of the Court of Appeals
According to the appellate court, the judicial admissions of respondents established
their indebtedness to the petitioner, on the grounds that they admitted the due
execution of the Promissory Note, and that their only defense was the absence of an
agreement on when the installment payments were to begin. Indeed, during the
pretrial, they admitted the genuineness not only of the Promissory Note, but also of
the demand letter dated July 12, 1991. Even if the petitioners witness had no
personal knowledge of these documents, they would still be admissible if the purpose
for which [they are] produced is merely to establish the fact that the statement or
document was in fact made or to show its tenor[,] and such fact or tenor is of
independent relevance.
Besides, Articles 19 and 22 of the Civil Code require that every person must -- in the
exercise of rights and in the performance of duties -- act with justice, give all else their
due, and observe honesty and good faith. Further, the rules on evidence are to be
liberally construed in order to promote their objective and to assist the parties in
obtaining just, speedy and inexpensive determination of an action.
Issue
The petitioner raises this lone issue:
The Honorable Court of Appeals patently erred in ordering the remand of this case to
the trial court instead of rendering judgment on the basis of petitioners evidence.[13]
For an orderly discussion, we shall divide the issue into two parts: (a) legal effect of
the Demurrer to Evidence, and (b) the date when the obligation became due and
demandable.
The Courts Ruling
The Petition has merit. While the CA correctly reversed the trial court, it erred in
remanding the case "for further proceedings."
Consequences of a Reversal, on Appeal, of a Demurrer to Evidence
Petitioner contends that if a demurrer to evidence is reversed on appeal, the
defendant should be deemed to have waived the right to present evidence, and the
appellate court should render judgment on the basis of the evidence submitted by the
plaintiff. A remand to the trial court "for further proceedings" would be an outright
defiance of Rule 33, Section 1 of the 1997 Rules of Court.
On the other hand, respondents argue that the petitioner was not necessarily entitled
to its claim, simply on the ground that they lost their right to present evidence in
support of their defense when the Demurrer to Evidence was reversed on appeal.
They stress that the CA merely found them indebted to petitioner, but was silent on
when their obligation became due and demandable.
The old Rule 35 of the Rules of Court was reworded under Rule 33 of the 1997 Rules,
but the consequence on appeal of a demurrer to evidence was not changed. As
amended, the pertinent provision of Rule 33 reads as follows:
SECTION 1. Demurrer to evidence.After the plaintiff has completed the presentation
of his evidence, the defendant may move for dismissal on the ground that upon the
facts and the law the plaintiff has shown no right to relief. If his motion is denied, he
shall have the right to present evidence. If the motion is granted but on appeal the
order of dismissal is reversed he shall be deemed to have waived the right to present
evidence.[14]
Explaining the consequence of a demurrer to evidence, the Court in Villanueva
Transit v. Javellana[15] pronounced:
The rationale behind the rule and doctrine is simple and logical. The defendant is
permitted, without waiving his right to offer evidence in the event that his motion is not
granted, to move for a dismissal (i.e., demur to the plaintiffs evidence) on the ground
that upon the facts as thus established and the applicable law, the plaintiff has shown
no right to relief. If the trial court denies the dismissal motion, i.e., finds that plaintiffs
evidence is sufficient for an award of judgment in the absence of contrary evidence,
the case still remains before the trial court which should then proceed to hear and
receive the defendants evidence so that all the facts and evidence of the contending
parties may be properly placed before it for adjudication as well as before the
appellate courts, in case of appeal. Nothing is lost. The doctrine is but in line with the
established procedural precepts in the conduct of trials that the trial court liberally
receive all proffered evidence at the trial to enable it to render its decision with all
possibly relevant proofs in the record, thus assuring that the appellate courts upon
appeal have all the material before them necessary to make a correct judgment, and
avoiding the need of remanding the case for retrial or reception of improperly
excluded evidence, with the possibility thereafter of still another appeal, with all the
concomitant delays. The rule, however, imposes the condition by the same token that
if his demurrer is granted by the trial court, and the order of dismissal is reversed on
appeal, the movant losses his right to present evidence in his behalf and he shall
have been deemed to have elected to stand on the insufficiency of plaintiffs case and
evidence. In such event, the appellate court which reverses the order of dismissal
shall proceed to render judgment on the merits on the basis of plaintiffs evidence.
(Underscoring supplied)
In other words, defendants who present a demurrer to the plaintiffs evidence retain
the right to present their own evidence, if the trial court disagrees with them; if the trial
court agrees with them, but on appeal, the appellate court disagrees with both of
them and reverses the dismissal order, the defendants lose the right to present their
own evidence.[16] The appellate court shall, in addition, resolve the case and render
judgment on the merits, inasmuch as a demurrer aims to discourage prolonged
litigations.[17]
In the case at bar, the trial court, acting on respondents demurrer to evidence,
dismissed the Complaint on the ground that the plaintiff had adduced mere hearsay
evidence. However, on appeal, the appellate court reversed the trial court because
the genuineness and the due execution of the disputed pieces of evidence had in fact
been admitted by defendants.
Applying Rule 33, Section 1 of the 1997 Rules of Court, the CA should have rendered
judgment on the basis of the evidence submitted by the petitioner. While the appellate
court correctly ruled that the documentary evidence submitted by the [petitioner]
should have been allowed and appreciated xxx, and that the petitioner presented
quite a number of documentary exhibits xxx enumerated in the appealed order,[18]
we agree with petitioner that the CA had sufficient evidence on record to decide the
collection suit. A remand is not only frowned upon by the Rules, it is also logically
unnecessary on the basis of the facts on record.
Due and Demandable Obligation
Petitioner claims that respondents are liable for the whole amount of their debt and
the interest thereon, after they defaulted on the monthly installments.
Respondents, on the other hand, counter that the installments were not yet due and
demandable. Petitioner had allegedly allowed them to apply their promotion services
for its financing business as payment of the Promissory Note. This was supposedly
evidenced by the blank space left for the date on which the installments should have
commenced.[19] In other words, respondents theorize that the action for immediate
enforcement of their obligation is premature because its fulfillment is dependent on
the sole will of the debtor. Hence, they consider that the proper court should first fix a
period for payment, pursuant to Articles 1180 and 1197 of the Civil Code.
This contention is untenable. The act of leaving blank the due date of the first
installment did not necessarily mean that the debtors were allowed to pay as and
when they could. If this was the intention of the parties, they should have so indicated
in the Promissory Note. However, it did not reflect any such intention.
On the contrary, the Note expressly stipulated that the debt should be amortized
monthly in installments of P11,579 for twelve consecutive months. While the specific
date on which each installment would be due was left blank, the Note clearly provided
that each installment should be payable each month.
Furthermore, it also provided for an acceleration clause and a late payment penalty,
both of which showed the intention of the parties that the installments should be paid
at a definite date. Had they intended that the debtors could pay as and when they
could, there would have been no need for these two clauses.
Petitioner, in its Complaint, prayed for 14% interest per annum from May 6, 1993 until
fully paid. We disagree. The Note already stipulated a late payment penalty of 2.5
percent monthly to be added to each unpaid installment until fully paid. Payment of
interest was not expressly stipulated in the Note. Thus, it should be deemed included
in such penalty.
In addition, the Note also provided that the debtors would be liable for attorneys fees
equivalent to 25 percent of the amount due in case a legal action was instituted and
10 percent of the same amount as liquidated damages. Liquidated damages,
however, should no longer be imposed for being unconscionable.[24] Such damages
should also be deemed included in the 2.5 percent monthly penalty. Furthermore, we
hold that petitioner is entitled to attorneys fees, but only in a sum equal to 10 percent
of the amount due which we deem reasonable under the proven facts.[25]
The Court deems it improper to discuss respondents' claim for moral and other
damages. Not having appealed the CA Decision, they are not entitled to affirmative
relief, as already explained earlier.[26]
WHEREFORE, the Petition is GRANTED. The appealed Decision is MODIFIED in
that the remand is SET ASIDE and respondents are ordered TO PAY P138,948, plus
2.5 percent penalty charge per month beginning April 2, 1991 until fully paid, and 10
percent of the amount due as attorneys fees. No costs.
SO ORDERED.

Verily, the contemporaneous and subsequent acts of the parties manifest their
intention and knowledge that the monthly installments would be due and demandable
each month.[20] In this case, the conclusion that the installments had already became
due and demandable is bolstered by the fact that respondents started paying
installments on the Promissory Note, even if the checks were dishonored by their
drawee bank. We are convinced neither by their avowals that the obligation had not
yet matured nor by their claim that a period for payment should be fixed by a court.

Convincingly, petitioner has established not only a cause of action against the
respondents, but also a due and demandable obligation. The obligation of the
respondents had matured and they clearly defaulted when their checks bounced. Per
the acceleration clause, the whole debt became due one month (April 2, 1991) after
the date of the Note because the check representing their first installment bounced.

As for the disputed documents submitted by the petitioner, the CA ruling in favor of
their admissibility, which was not challenged by the respondents, stands. A party who
did not appeal cannot obtain affirmative relief other than that granted in the appealed
decision.[21]

It should be stressed that respondents do not contest the amount of the principal
obligation. Their liability as expressly stated in the Promissory Note and found by the
CA is P13[8],948.00[22] which is payable in twelve (12) installments at P11,579.00 a
month for twelve (12) consecutive months. As correctly found by the CA, the
"ambiguity" in the Promissory Note is clearly attributable to human error.[23]

G.R. No. 173227 January 20, 2009
SEBASTIAN SIGA-AN
vs.
ALICIA VILLANUEVA
CHICO-NAZARIO, J.:
Before Us is a Petition[1] for Review on Certiorari under Rule 45 of the Rules of
Court seeking to set aside the Decision,[2] dated 16 December 2005, and Resolution,
[3] dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No. 71814, which
affirmed in toto the Decision,[4] dated 26 January 2001, of the Las Pinas City
Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint[5] for sum of
money against petitioner Sebastian Siga-an before the Las Pinas City Regional Trial
Court (RTC), Branch 255, docketed as Civil Case No. LP-98-0068. Respondent
alleged that she was a businesswoman engaged in supplying office materials and
equipments to the Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig
City, while petitioner was a military officer and comptroller of the PNO from 1991 to
1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the
PNO and offered to loan her the amount of P540,000.00. Since she needed capital
for her business transactions with the PNO, she accepted petitioners proposal. The
loan agreement was not reduced in writing. Also, there was no stipulation as to the
payment of interest for the loan.[6]
On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as
partial payment of the loan. On 31 October 1993, she issued another check in the
amount of P200,000.00 to petitioner as payment of the remaining balance of the loan.
Petitioner told her that since she paid a total amount of P700,000.00 for the
P540,000.00 worth of loan, the excess amount of P160,000.00 would be applied as
interest for the loan. Not satisfied with the amount applied as interest, petitioner
pestered her to pay additional interest. Petitioner threatened to block or disapprove
her transactions with the PNO if she would not comply with his demand. As all her
transactions with the PNO were subject to the approval of petitioner as comptroller of
the PNO, and fearing that petitioner might block or unduly influence the payment of
her vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash
and checks as interests for the loan. She asked petitioner for receipt for the payments
but petitioner told her that it was not necessary as there was mutual trust and
confidence between them. According to her computation, the total amount she paid to
petitioner for the loan and interest accumulated to P1,200,000.00.[7]
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest
on the loan despite absence of agreement to that effect. Her lawyer told her that
petitioner could not validly collect interest on the loan because there was no
agreement between her and petitioner regarding payment of interest. Since she paid
petitioner a total amount of P1,200,000.00 for the P540,000.00 worth of loan, and
upon being advised by her lawyer that she made overpayment to petitioner, she sent
a demand letter to petitioner asking for the return of the excess amount of
P660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim for
reimbursement.[8]
Respondent prayed that the RTC render judgment ordering petitioner to pay
respondent (1) P660,000.00 plus legal interest from the time of demand; (2)
P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4) an
amount equivalent to 25% of P660,000.00 as attorneys fees.[9]
In his answer[10] to the complaint, petitioner denied that he offered a loan to
respondent. He averred that in 1992, respondent approached and asked him if he
could grant her a loan, as she needed money to finance her business venture with the
PNO. At first, he was reluctant to deal with respondent, because the latter had a
spotty record as a supplier of the PNO. However, since respondent was an
acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the
loan in full.[11]
Subsequently, respondent again asked him to give her a loan. As respondent had
been able to pay the previous loan in full, he agreed to grant her another loan. Later,
respondent requested him to restructure the payment of the loan because she could
not give full payment on the due date. He acceded to her request. Thereafter,
respondent pleaded for another restructuring of the payment of the loan. This time he
rejected her plea. Thus, respondent proposed to execute a promissory note wherein
she would acknowledge her obligation to him, inclusive of interest, and that she would
issue several postdated checks to guarantee the payment of her obligation. Upon his
approval of respondents request for restructuring of the loan, respondent executed a
promissory note dated 12 September 1994 wherein she admitted having borrowed an
amount of P1,240,000.00, inclusive of interest, from petitioner and that she would pay
said amount in March 1995. Respondent also issued to him six postdated checks
amounting to P1,240,000.00 as guarantee of compliance with her obligation.
Subsequently, he presented the six checks for encashment but only one check was
honored. He demanded that respondent settle her obligation, but the latter failed to do
so. Hence, he filed criminal cases for Violation of the Bouncing Checks Law (Batas
Pambansa Blg. 22) against respondent. The cases were assigned to the Metropolitan
Trial Court of Makati City, Branch 65 (MeTC).[12]
Petitioner insisted that there was no overpayment because respondent admitted in
the latters promissory note that her monetary obligation as of 12 September 1994
amounted to P1,240,000.00 inclusive of interests. He argued that respondent was
already estopped from complaining that she should not have paid any interest,
because she was given several times to settle her obligation but failed to do so. He
maintained that to rule in favor of respondent is tantamount to concluding that the
loan was given interest-free. Based on the foregoing averments, he asked the RTC to
dismiss respondents complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent
made an overpayment of her loan obligation to petitioner and that the latter should
refund the excess amount to the former. It ratiocinated that respondents obligation
was only to pay the loaned amount of P540,000.00, and that the alleged interests due
should not be included in the computation of respondents total monetary debt
because there was no agreement between them regarding payment of interest. It
concluded that since respondent made an excess payment to petitioner in the amount
of P660,000.00 through mistake, petitioner should return the said amount to
respondent pursuant to the principle of solutio indebiti.[13]
The RTC also ruled that petitioner should pay moral damages for the sleepless nights
and wounded feelings experienced by respondent. Further, petitioner should pay
exemplary damages by way of example or correction for the public good, plus
attorneys fees and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the provisions of
law and jurisprudence on the matter, judgment is hereby rendered in favor of the
plaintiff and against the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal
interest of 12% per annum computed from 3 March 1998 until the amount is paid in
full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral damages;
(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary
damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of P660,000.00
as attorneys fees; and
(5) Ordering defendant to pay the costs of suit.[14]
Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate
court promulgated its Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and
the assailed decision [is] AFFIRMED in toto.[15]
Petitioner filed a motion for reconsideration of the appellate courts decision but this
was denied.[16] Hence, petitioner lodged the instant petition before us assigning the
following errors:
I. THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT
NO INTEREST WAS DUE TO PETITIONER;
II. THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING
THE PRINCIPLE OF SOLUTIO INDEBITI.[17]
Interest is a compensation fixed by the parties for the use or forbearance of money.
This is referred to as monetary interest. Interest may also be imposed by law or by
courts as penalty or indemnity for damages. This is called compensatory interest.[18]
The right to interest arises only by virtue of a contract or by virtue of damages for
delay or failure to pay the principal loan on which interest is demanded.[19]
Article 1956 of the Civil Code, which refers to monetary interest,[20] specifically
mandates that no interest shall be due unless it has been expressly stipulated in
writing. As can be gleaned from the foregoing provision, payment of monetary interest
is allowed only if: (1) there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in writing. The
concurrence of the two conditions is required for the payment of monetary interest.
Thus, we have held that collection of interest without any stipulation therefor in writing
is prohibited by law.[21]
It appears that petitioner and respondent did not agree on the payment of interest for
the loan. Neither was there convincing proof of written agreement between the two
regarding the payment of interest. Respondent testified that although she accepted
petitioners offer of loan amounting to P540,000.00, there was, nonetheless, no verbal
or written agreement for her to pay interest on the loan.[22]
Petitioner presented a handwritten promissory note dated 12 September 1994[23]
wherein respondent purportedly admitted owing petitioner capital and interest.
Respondent, however, explained that it was petitioner who made a promissory note
and she was told to copy it in her own handwriting; that all her transactions with the
PNO were subject to the approval of petitioner as comptroller of the PNO; that
petitioner threatened to disapprove her transactions with the PNO if she would not
pay interest; that being unaware of the law on interest and fearing that petitioner
would make good of his threats if she would not obey his instruction to copy the
promissory note, she copied the promissory note in her own handwriting; and that
such was the same promissory note presented by petitioner as alleged proof of their
written agreement on interest.[24] Petitioner did not rebut the foregoing testimony. It
is evident that respondent did not really consent to the payment of interest for the
loan and that she was merely tricked and coerced by petitioner to pay interest.
Hence, it cannot be gainfully said that such promissory note pertains to an express
stipulation of interest or written agreement of interest on the loan between petitioner
and respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found
that he and respondent agreed on the payment of 7% rate of interest on the loan; that
the agreed 7% rate of interest was duly admitted by respondent in her testimony in
the Batas Pambansa Blg. 22 cases he filed against respondent; that despite such
judicial admission by respondent, the RTC and the Court of Appeals, citing Article
1956 of the Civil Code, still held that no interest was due him since the agreement on
interest was not reduced in writing; that the application of Article 1956 of the Civil
Code should not be absolute, and an exception to the application of such provision
should be made when the borrower admits that a specific rate of interest was agreed
upon as in the present case; and that it would be unfair to allow respondent to pay
only the loan when the latter very well knew and even admitted in the Batas
Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on the loan.[25]
We have carefully examined the RTC Decision and found that the RTC did not make
a ruling therein that petitioner and respondent agreed on the payment of interest at
the rate of 7% for the loan. The RTC clearly stated that although petitioner and
respondent entered into a valid oral contract of loan amounting to P540,000.00, they,
nonetheless, never intended the payment of interest thereon.[26] While the Court of
Appeals mentioned in its Decision that it concurred in the RTCs ruling that petitioner
and respondent agreed on a certain rate of interest as regards the loan, we consider
this as merely an inadvertence because, as earlier elucidated, both the RTC and the
Court of Appeals ruled that petitioner is not entitled to the payment of interest on the
loan. The rule is that factual findings of the trial court deserve great weight and
respect especially when affirmed by the appellate court.[27] We found no compelling
reason to disturb the ruling of both courts.
Petitioners reliance on respondents alleged admission in the Batas Pambansa Blg. 22
cases that they had agreed on the payment of interest at the rate of 7% deserves
scant consideration. In the said case, respondent merely testified that after paying the
total amount of loan, petitioner ordered her to pay interest.[28] Respondent did not
categorically declare in the same case that she and respondent made an express
stipulation in writing as regards payment of interest at the rate of 7%. As earlier
discussed, monetary interest is due only if there was an express stipulation in writing
for the payment of interest.
There are instances in which an interest may be imposed even in the absence of
express stipulation, verbal or written, regarding payment of interest. Article 2209 of
the Civil Code states that if the obligation consists in the payment of a sum of money,
and the debtor incurs delay, a legal interest of 12% per annum may be imposed as
indemnity for damages if no stipulation on the payment of interest was agreed upon.
Likewise, Article 2212 of the Civil Code provides that interest due shall earn legal
interest from the time it is judicially demanded, although the obligation may be silent
on this point.
All the same, the interest under these two instances may be imposed only as a
penalty or damages for breach of contractual obligations. It cannot be charged as a
compensation for the use or forbearance of money. In other words, the two instances
apply only to compensatory interest and not to monetary interest.[29] The case at bar
involves petitioners claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because it
was not duly proven that respondent defaulted in paying the loan. Also, as earlier
found, no interest was due on the loan because there was no written agreement as
regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio
indebiti does not apply to the instant case. Thus, he cannot be compelled to return the
alleged excess amount paid by respondent as interest.[30]
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there
has been no stipulation therefor, the provisions of the Civil Code concerning solutio
indebiti shall be applied. Article 2154 of the Civil Code explains the principle of solutio
indebiti. Said provision provides that if something is received when there is no right to
demand it, and it was unduly delivered through mistake, the obligation to return it
arises. In such a case, a creditor-debtor relationship is created under a quasi-contract
whereby the payor becomes the creditor who then has the right to demand the return
of payment made by mistake, and the person who has no right to receive such
payment becomes obligated to return the same. The quasi-contract of solutio indebiti
harks back to the ancient principle that no one shall enrich himself unjustly at the
expense of another.[31] The principle of solutio indebiti applies where (1) a payment
is made when there exists no binding relation between the payor, who has no duty to
pay, and the person who received the payment; and (2) the payment is made through
mistake, and not through liberality or some other cause.[32] We have held that the
principle of solutio indebiti applies in case of erroneous payment of undue interest.
[33]
It was duly established that respondent paid interest to petitioner. Respondent was
under no duty to make such payment because there was no express stipulation in
writing to that effect. There was no binding relation between petitioner and
respondent as regards the payment of interest. The payment was clearly a mistake.
Since petitioner received something when there was no right to demand it, he has an
obligation to return it.
We shall now determine the propriety of the monetary award and damages imposed
by the RTC and the Court of Appeals.
Records show that respondent received a loan amounting to P540,000.00 from
petitioner.[34] Respondent issued two checks with a total worth of P700,000.00 in
favor of petitioner as payment of the loan.[35] These checks were subsequently
encashed by petitioner.[36] Obviously, there was an excess of P160,000.00 in the
payment for the loan. Petitioner claims that the excess of P160,000.00 serves as
interest on the loan to which he was entitled. Aside from issuing the said two checks,
respondent also paid cash in the total amount of P175,000.00 to petitioner as interest.
[37] Although no receipts reflecting the same were presented because petitioner
refused to issue such to respondent, petitioner, nonetheless, admitted in his Reply-
Affidavit[38] in the Batas Pambansa Blg. 22 cases that respondent paid him a total
amount of P175,000.00 cash in addition to the two checks. Section 26 Rule 130 of the
Rules of Evidence provides that the declaration of a party as to a relevant fact may be
given in evidence against him. Aside from the amounts of P160,000.00 and
P175,000.00 paid as interest, no other proof of additional payment as interest was
presented by respondent. Since we have previously found that petitioner is not
entitled to payment of interest and that the principle of solutio indebiti applies to the
instant case, petitioner should return to respondent the excess amount of
P160,000.00 and P175,000.00 or the total amount of P335,000.00. Accordingly, the
reimbursable amount to respondent fixed by the RTC and the Court of Appeals
should be reduced from P660,000.00 to P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas
Pambansa Blg. 22 against respondent. In the said cases, the MeTC found
respondent guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored
checks to petitioner. Nonetheless, respondents conviction therein does not affect our
ruling in the instant case. The two checks, subject matter of this case, totaling
P700,000.00 which respondent claimed as payment of the P540,000.00 worth of loan,
were not among the five checks found to be dishonored or bounced in the five
criminal cases. Further, the MeTC found that respondent made an overpayment of
the loan by reason of the interest which the latter paid to petitioner.[39]
Article 2217 of the Civil Code provides that moral damages may be recovered if the
party underwent physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation and similar
injury. Respondent testified that she experienced sleepless nights and wounded
feelings when petitioner refused to return the amount paid as interest despite her
repeated demands. Hence, the award of moral damages is justified. However, its
corresponding amount of P300,000.00, as fixed by the RTC and the Court of Appeals,
is exorbitant and should be equitably reduced. Article 2216 of the Civil Code instructs
that assessment of damages is left to the discretion of the court according to the
circumstances of each case. This discretion is limited by the principle that the amount
awarded should not be palpably excessive as to indicate that it was the result of Decision; and (4) an interest of 12% per annum is also imposed from the finality of
prejudice or corruption on the part of the trial court.[40] To our mind, the amount of this Decision up to its satisfaction. Costs against petitioner.
P150,000.00 as moral damages is fair, reasonable, and proportionate to the injury
suffered by respondent. SO ORDERED.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti,
exemplary damages may be imposed if the defendant acted in an oppressive
manner. Petitioner acted oppressively when he pestered respondent to pay interest
and threatened to block her transactions with the PNO if she would not pay interest.
This forced respondent to pay interest despite lack of agreement thereto. Thus, the
award of exemplary damages is appropriate. The amount of P50,000.00 imposed as
exemplary damages by the RTC and the Court is fitting so as to deter petitioner and
other lenders from committing similar and other serious wrongdoings.[41]

Jurisprudence instructs that in awarding attorneys fees, the trial court must state the
factual, legal or equitable justification for awarding the same.[42] In the case under
consideration, the RTC stated in its Decision that the award of attorneys fees
equivalent to 25% of the amount paid as interest by respondent to petitioner is
reasonable and moderate considering the extent of work rendered by respondents
lawyer in the instant case and the fact that it dragged on for several years.[43]
Further, respondent testified that she agreed to compensate her lawyer handling the
instant case such amount.[44] The award, therefore, of attorneys fees and its amount
equivalent to 25% of the amount paid as interest by respondent to petitioner is proper.

Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the
amount refundable to respondent computed from 3 March 1998 until its full payment.
This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals,[45] that when an
obligation, not constituting a loan or forbearance of money is breached, an interest on
the amount of damages awarded may be imposed at the rate of 6% per annum. We
further declared that when the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether it is a
loan/forbearance of money or not, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed equivalent to a forbearance of credit.

In the present case, petitioners obligation arose from a quasi-contract of solutio

indebiti and not from a loan or forbearance of money. Thus, an interest of 6% per
annum should be imposed on the amount to be refunded as well as on the damages
awarded and on the attorneys fees, to be computed from the time of the extra-judicial
demand on 3 March 1998,[46] up to the finality of this Decision. In addition, the
interest shall become 12% per annum from the finality of this Decision up to its
satisfaction.

WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated
16 December 2005, is hereby AFFIRMED with the following MODIFICATIONS: (1)
the amount of P660,000.00 as refundable amount of interest is reduced to THREE
HUNDRED THIRTY FIVE THOUSAND PESOS (P335,000.00); (2) the amount of
P300,000.00 imposed as moral damages is reduced to ONE HUNDRED FIFTY
THOUSAND PESOS (P150,000.00); (3) an interest of 6% per annum is imposed on
the P335,000.00, on the damages awarded and on the attorneys fees to be computed
from the time of the extra-judicial demand on 3 March 1998 up to the finality of this
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC.
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC.
VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage
sustained on a shipment of goods can be a solidary, or joint and several, liability of
the common carrier, the arrastre operator and the customs broker; (b) whether the
payment of legal interest on an award for loss or damage is to be computed from the
time the complaint is filed or from the date the decision appealed from is rendered;
and (c) whether the applicable rate of interest, referred to above, is twelve percent
(12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent
and undisputed facts that have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and broker-
forwarder for damages sustained by a shipment while in defendants' custody, filed by
the insurer-subrogee who paid the consignee the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama,
Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern
Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance
Policy No. 81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto
the custody of defendant Metro Port Service, Inc. The latter excepted to one drum,
said to be in bad order, which damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the shipment
from defendant Metro Port Service, Inc., one drum opened and without seal (per
"Request for Bad Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries
of the shipment to the consignee's warehouse. The latter excepted to one drum which
contained spillages, while the rest of the contents was adulterated/fake (per "Bad
Order Waybill" No. 10649, Exh. E).
Plaintiff contended that due to the losses/damage sustained by said drum, the
consignee suffered losses totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against defendants who failed and refused to pay
the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained, plaintiff was compelled to pay the
consignee P19,032.95 under the aforestated marine insurance policy, so that it
became subrogated to all the rights of action of said consignee against defendants
(per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O).
(pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the
appellate court said:
Defendants filed their respective answers, traversing the material allegations of the
complaint contending that: As for defendant Eastern Shipping it alleged that the
shipment was discharged in good order from the vessel unto the custody of Metro
Port Service so that any damage/losses incurred after the shipment was incurred
after the shipment was turned over to the latter, is no longer its liability (p. 17,
Record); Metroport averred that although subject shipment was discharged unto its
custody, portion of the same was already in bad order (p. 11, Record); Allied
Brokerage alleged that plaintiff has no cause of action against it, not having negligent
or at fault for the shipment was already in damage and bad order condition when
received by it, but nonetheless, it still exercised extra ordinary care and diligence in
the handling/delivery of the cargo to consignee in the same condition shipment was
received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in the custody of
defendants (in whose respective custody, if determinable);
3. Whether or not defendant(s) should be held liable for the losses/damages
(see plaintiff's pre-Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting
plaintiff's Records, p. 38).
As to the first issue, there can be no doubt that the shipment sustained
losses/damages. The two drums were shipped in good order and condition, as clearly
shown by the Bill of Lading and Commercial Invoice which do not indicate any
damages drum that was shipped (Exhs. B and C). But when on December 12, 1981
the shipment was delivered to defendant Metro Port Service, Inc., it excepted to one
drum in bad order.
Correspondingly, as to the second issue, it follows that the losses/damages were
sustained while in the respective and/or successive custody and possession of
defendants carrier (Eastern), arrastre operator (Metro Port) and broker (Allied
Brokerage). This becomes evident when the Marine Cargo Survey Report (Exh. G),
with its "Additional Survey Notes", are considered. In the latter notes, it is stated that
when the shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila
on December 12, 1981, it was observed that "one (1) fiber drum (was) in damaged
condition, covered by the vessel's Agent's Bad Order Tally Sheet No. 86427." The
report further states that when defendant Allied Brokerage withdrew the shipment
from defendant arrastre operator's custody on January 7, 1982, one drum was found
opened without seal, cello bag partly torn but contents intact. Net unrecovered
spillages was
15 kgs. The report went on to state that when the drums reached the consignee, one
drum was found with adulterated/faked contents. It is obvious, therefore, that these
losses/damages occurred before the shipment reached the consignee while under the
successive custodies of defendants. Under Art. 1737 of the New Civil Code, the
common carrier's duty to observe extraordinary diligence in the vigilance of goods
remains in full force and effect even if the goods are temporarily unloaded and stored
in transit in the warehouse of the carrier at the place of destination, until the
consignee has been advised and has had reasonable opportunity to remove or
dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own exhibit, the
"Turn-Over Survey of Bad Order Cargoes" (Exhs. 3-Eastern) states that on December
12, 1981 one drum was found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of 12% per annum
from October 1, 1982, the date of filing of this complaints, until fully paid (the
liability of defendant Eastern Shipping, Inc. shall not exceed US$500 per
case or the CIF value of the loss, whichever is lesser, while the liability of
defendant Metro Port Service, Inc. shall be to the extent of the actual invoice
value of each package, crate box or container in no case to exceed
P5,000.00 each, pursuant to Section 6.01 of the Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant
Allied Brokerage Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the conclusion drawn
therefrom is correct. As there is sufficient evidence that the shipment sustained
damage while in the successive possession of appellants, and therefore they are
liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 87-89,
Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and
grave abuse of discretion on the part of the appellate court when —
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE
WITH THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM
OF PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE
RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE
COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF
FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE
RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner
carrier are not all that novel. Indeed, we do have a fairly good number of previous
decisions this Court can merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods
lasts from the time the articles are surrendered to or unconditionally placed in the
possession of, and received by, the carrier for transportation until delivered to, or until
the lapse of a reasonable time for their acceptance by, the person entitled to receive
them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui
Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost
or arrive in damaged condition, a presumption arises against the carrier of its failure
to observe that diligence, and there need not be an express finding of negligence to
hold it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals,
139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are,
of course, exceptional cases when such presumption of fault is not observed but
these cases, enumerated in Article 17341 of the Civil Code, are exclusive, not one of
which can be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation
of properly delivering the goods to the consignee has, too, been passed upon by the
Court. In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we
have explained, in holding the carrier and the arrastre operator liable in solidum, thus:
The legal relationship between the consignee and the arrastre operator is akin to that
of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5
[1967]. The relationship between the consignee and the common carrier is similar to
that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line,
et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care
of the goods that are in its custody and to deliver them in good condition to the
consignee, such responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the obligation to deliver
the goods in good condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre operator
and the customs broker are themselves always and necessarily liable solidarily with
the carrier, or vice-versa, nor that attendant facts in a given case may not vary the
rule. The instant petition has been brought solely by Eastern Shipping Lines, which,
being the carrier and not having been able to rebut the presumption of fault, is, in any
event, to be held liable in this particular case. A factual finding of both the court a quo
and the appellate court, we take note, is that "there is sufficient evidence that the
shipment sustained damage while in the successive possession of appellants" (the
herein petitioner among them). Accordingly, the liability imposed on Eastern Shipping
Lines, Inc., the sole petitioner in this case, is inevitable regardless of whether there
are others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves
more than just a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service,2 decided3 on 15 May 1969, involved a suit for recovery of money arising out
of short deliveries and pilferage of goods. In this case, appellee Malayan Insurance
(the plaintiff in the lower court) averred in its complaint that the total amount of its
claim for the value of the undelivered goods amounted to P3,947.20. This demand,
however, was neither established in its totality nor definitely ascertained. In the
stipulation of facts later entered into by the parties, in lieu of proof, the amount of
P1,447.51 was agreed upon. The trial court rendered judgment ordering the
appellants (defendants) Manila Port Service and Manila Railroad Company to pay
appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the
date the complaint was filed on 28 December 1962 until full payment thereof. The
appellants then assailed, inter alia, the award of legal interest. In sustaining the
appellants, this Court ruled:
Interest upon an obligation which calls for the payment of money, absent a stipulation,
is the legal rate. Such interest normally is allowable from the date of demand, judicial
or extrajudicial. The trial court opted for judicial demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be
recovered upon unliquidated claims or damages, except when the demand can be
established with reasonable certainty." And as was held by this Court in Rivera vs.
Perez,4 L-6998, February 29, 1956, if the suit were for damages, "unliquidated and
not known until definitely ascertained, assessed and determined by the courts after
proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis
supplied)
The case of Reformina vs. Tomol,5 rendered on 11 October 1985, was for "Recovery
of Damages for Injury to Person and Loss of Property." After trial, the lower court
decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
defendants and against the defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay
jointly and severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of
P131,084.00 which is the value of the boat F B Pacita III together with its accessories,
fishing gear and equipment minus P80,000.00 which is the value of the insurance
recovered and the amount of P10,000.00 a month as the estimated monthly loss
suffered by them as a result of the fire of May 6, 1969 up to the time they are actually
paid or already the total sum of P370,000.00 as of June 4, 1972 with legal interest
from the filing of the complaint until paid and to pay attorney's fees of P5,000.00 with
costs against defendants and third party plaintiffs. (Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages
awarded but sustained the trial court in adjudging legal interest from the filing of the
complaint until fully paid. When the appellate court's decision became final, the case
was remanded to the lower court for execution, and this was when the trial court
issued its assailed resolution which applied the 6% interest per annum prescribed in
Article 2209 of the Civil Code. In their petition for review on certiorari, the petitioners
contended that Central Bank Circular
No. 416, providing thus —
By virtue of the authority granted to it under Section 1 of Act 2655, as amended,
Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that
the rate of interest for the loan, or forbearance of any money, goods, or credits and
the rate allowed in judgments, in the absence of express contract as to such rate of
interest, shall be twelve (12%) percent per annum. This Circular shall take effect
immediately. (Emphasis found in the text) —
should have, instead, been applied. This Court6 ruled:
The judgments spoken of and referred to are judgments in litigations involving loans
or forbearance of any money, goods or credits. Any other kind of monetary judgment
which has nothing to do with, nor involving loans or forbearance of any money, goods
or credits does not fall within the coverage of the said law for it is not within the ambit
of the authority granted to the Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is one rendered
in an Action for Damages for injury to persons and loss of property and does not
involve any loan, much less forbearances of any money, goods or credits. As
correctly argued by the private respondents, the law applicable to the said case is
Article 2209 of the New Civil Code which reads —
Art. 2209. — If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the
contrary, shall be the payment of interest agreed upon, and in the absence of
stipulation, the legal interest which is six percent per annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz,7
promulgated on 28 July 1986. The case was for damages occasioned by an injury to
person and loss of property. The trial court awarded private respondent Pedro
Manabat actual and compensatory damages in the amount of P72,500.00 with legal
interest thereon from the filing of the complaint until fully paid. Relying on the
Reformina v. Tomol case, this Court8 modified the interest award from 12% to 6%
interest per annum but sustained the time computation thereof, i.e., from the filing of
the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for the recovery
of damages arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from
November 29, 1968, the date of the filing of the complaint until full payment . . . ."
Save from the modification of the amount granted by the lower court, the Court of
Appeals sustained the trial court's decision. When taken to this Court for review, the
case, on 03 October 1986, was decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the
special and environmental circumstances of this case, we deem it reasonable to
render a decision imposing, as We do hereby impose, upon the defendant and the
third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723,
Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION
(P5,000,000.00) Pesos to cover all damages (with the exception to attorney's fees)
occasioned by the loss of the building (including interest charges and lost rentals) and
an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for
attorney's fees, the total sum being payable upon the finality of this decision. Upon
failure to pay on such finality, twelve (12%) per cent interest per annum shall be
imposed upon aforementioned amounts from finality until paid. Solidary costs against
the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis
supplied)
A motion for reconsideration was filed by United Construction, contending that "the
interest of twelve (12%) per cent per annum imposed on the total amount of the
monetary award was in contravention of law." The Court10 ruled out the applicability
of the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15
April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to Central
Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2)
forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans
or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v.
Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It
is true that in the instant case, there is neither a loan or a forbearance, but then no
interest is actually imposed provided the sums referred to in the judgment are paid
upon the finality of the judgment. It is delay in the payment of such final judgment,
that will cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed on
the total sum, from the filing of the complaint until paid; in other words, as part of the
judgment for damages. Clearly, they are not applicable to the instant case. (Emphasis
supplied.)
The subsequent case of American Express International, Inc., vs. Intermediate
Appellate Court11 was a petition for review on certiorari from the decision, dated 27
February 1985, of the then Intermediate Appellate Court reducing the amount of
moral and exemplary damages awarded by the trial court, to P240,000.00 and
P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the
amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages
and P400,000.00 as exemplary damages with interest thereon at 12% per annum
from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this
Court, while recognizing the right of the private respondent to recover damages, held
the award, however, for moral damages by the trial court, later sustained by the IAC,
to be inconceivably large. The Court12 thus set aside the decision of the appellate
court and rendered a new one, "ordering the petitioner to pay private respondent the
sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid.
(Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz13
which arose from a breach of employment contract. For having been illegally
dismissed, the petitioner was awarded by the trial court moral and exemplary
damages without, however, providing any legal interest thereon. When the decision
was appealed to the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros
Oriental dated October 31, 1972 is affirmed in all respects, with the modification that
defendants-appellants, except defendant-appellant Merton Munn, are ordered to pay,
jointly and severally, the amounts stated in the dispositive portion of the decision,
including the sum of P1,400.00 in concept of compensatory damages, with interest at
the legal rate from the date of the filing of the complaint until fully paid (Emphasis
supplied.)
The petition for review to this Court was denied. The records were thereupon
transmitted to the trial court, and an entry of judgment was made. The writ of
execution issued by the trial court directed that only compensatory damages should
earn interest at 6% per annum from the date of the filing of the complaint. Ascribing
grave abuse of discretion on the part of the trial judge, a petition for certiorari assailed
the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the
legal rate" from the time of the filing of the complaint. . . Said circular [Central Bank
Circular No. 416] does not apply to actions based on a breach of employment
contract like the case at bar. (Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be
computed from the time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power
Corporation vs. Angas,14 decided on 08 May 1992, involved the expropriation of
certain parcels of land. After conducting a hearing on the complaints for eminent
domain, the trial court ordered the petitioner to pay the private respondents certain
sums of money as just compensation for their lands so expropriated "with legal
interest thereon . . . until fully paid." Again, in applying the 6% legal interest per
annum under the Civil Code, the Court15 declared:
. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods
or credits but expropriation of certain parcels of land for a public purpose, the
payment of which is without stipulation regarding interest, and the interest adjudged
by the trial court is in the nature of indemnity for damages. The legal interest required
to be paid on the amount of just compensation for the properties expropriated is
manifestly in the form of indemnity for damages for the delay in the payment thereof.
Therefore, since the kind of interest involved in the joint judgment of the lower court
sought to be enforced in this case is interest by way of damages, and not by way of
earnings from loans, etc. Art. 2209 of the Civil Code shall apply.
Concededly, there have been seeming variances in the above holdings. The cases
can perhaps be classified into two groups according to the similarity of the issues
involved and the corresponding rulings rendered by the court. The "first group" would
consist of the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v.
Cruz (1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be
Malayan Insurance Company v. Manila Port Service (1969), Nakpil and Sons v. Court
of Appeals (1988), and American Express International v. Intermediate Appellate
Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under
the Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is
easily discernible in these cases that there has been a consistent holding that the
Central Bank Circular imposing the 12% interest per annum applies only to loans or
forbearance16 of money, goods or credits, as well as to judgments involving such
loan or forbearance of money, goods or credits, and that the 6% interest under the
Civil Code governs when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the performance of
obligations in general. Observe, too, that in these cases, a common time frame in the
computation of the 6% interest per annum has been applied, i.e., from the time the
complaint is filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or
12% interest per annum,17 depending on whether or not the amount involved is a
loan or forbearance, on the one hand, or one of indemnity for damage, on the other
hand. Unlike, however, the "first group" which remained consistent in holding that the
running of the legal interest should be from the time of the filing of the complaint until
fully paid, the "second group" varied on the commencement of the running of the legal
interest.
Malayan held that the amount awarded should bear legal interest from the date of the
decision of the court a quo, explaining that "if the suit were for damages, 'unliquidated
and not known until definitely ascertained, assessed and determined by the courts
after proof,' then, interest 'should be from the date of the decision.'" American
Express International v. IAC, introduced a different time frame for reckoning the 6%
interest by ordering it to be "computed from the finality of (the) decision until paid."
The Nakpil and Sons case ruled that 12% interest per annum should be imposed from
the finality of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have
called for different applications, guided by the rule that the courts are vested with
discretion, depending on the equities of each case, on the award of interest.
Nonetheless, it may not be unwise, by way of clarification and reconciliation, to
suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts18 is breached, the contravenor can be held liable
for damages.19 The provisions under Title XVIII on "Damages" of the Civil Code
govern in determining the measure of recoverable damages.20
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing.21 Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded.22 In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 116923
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court24 at the rate of 6% per annum.25 No interest, however, shall
be adjudged on unliquidated claims or damages except when or until the demand can
be established with reasonable certainty.26 Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED
with the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on
the amount due computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of
SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision
until the payment thereof.
SO ORDERED.
24 Art. 2210. Interest may, in the discretion of the court, be allowed
upon damages awarded for breach of contract.
Art. 2211. In crimes and quasi-delicts, interest as a part of the damages may,
in a proper case, be adjudicated in the discretion of the court.
25 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.
26 Art. 2213. Interest cannot be recovered upon unliquidated claims or
damages, except when the demand can be established with reasonable certainty.
G.R. No. 175139 April 18, 2012
HERMOJINA ESTORES
vs.
SPOUSES ARTURO and LAURA SUPANGAN
DEL CASTILLO, J.:
The only issue posed before us is the propriety of the imposition of interest and
attorneys fees.
Assailed in this Petition for Review[1] filed under Rule 45 of the Rules of Court is the
May 12, 2006 Decision[2] of the Court of Appeals (CA) in CA-G.R. CV No. 83123, the
dispositive portion of which reads:
WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six
percent (6%) per annum, computed from September 27, 2000 until its full payment
before finality of the judgment. If the adjudged principal and the interest (or any part
thereof) remain unpaid thereafter, the interest rate shall be adjusted to twelve percent
(12%) per annum, computed from the time the judgment becomes final and executory
until it is fully satisfied. The award of attorneys fees is hereby reduced to
P100,000.00. Costs against the defendants-appellants.
SO ORDERED.[3]
Also assailed is the August 31, 2006 Resolution[4] denying the motion for
reconsideration.
Factual Antecedents
On October 3, 1993, petitioner Hermojina Estores and respondent-spouses Arturo
and Laura Supangan entered into a Conditional Deed of Sale[5] whereby petitioner
offered to sell, and respondent-spouses offered to buy, a parcel of land covered by
Transfer Certificate of Title No. TCT No. 98720 located at Naic, Cavite for the sum of
P4.7 million. The parties likewise stipulated, among others, to wit:
xxxx
1. Vendor will secure approved clearance from DAR requirements of which are (sic):
a) Letter request
b) Title
c) Tax Declaration
d) Affidavit of Aggregate Landholding Vendor/Vendee
e) Certification from the Provl. Assessors as to Landholdings of Vendor/Vendee
f) Affidavit of Non-Tenancy
g) Deed of Absolute Sale
xxxx
4. Vendee shall be informed as to the status of DAR clearance within 10 days upon
signing of the documents.
xxxx
6. Regarding the house located within the perimeter of the subject [lot] owned by
spouses [Magbago], said house shall be moved outside the perimeter of this subject
property to the 300 sq. m. area allocated for [it]. Vendor hereby accepts the
responsibility of seeing to it that such agreement is carried out before full payment of
the sale is made by vendee.
7. If and after the vendor has completed all necessary documents for registration of
the title and the vendee fails to complete payment as per agreement, a forfeiture fee
of 25% or downpayment, shall be applied. However, if the vendor fails to complete
necessary documents within thirty days without any sufficient reason, or without
informing the vendee of its status, vendee has the right to demand return of full
amount of down payment.
xxxx
9. As to the boundaries and partition of the lots (15,018 sq. m. and 300 sq. m.)
Vendee shall be informed immediately of its approval by the LRC.
10. The vendor assures the vendee of a peaceful transfer of ownership.
x x x x [6]
After almost seven years from the time of the execution of the contract and
notwithstanding payment of P3.5 million on the part of respondent-spouses, petitioner
still failed to comply with her obligation as expressly provided in paragraphs 4, 6, 7, 9
and 10 of the contract. Hence, in a letter[7] dated September 27, 2000, respondent-
spouses demanded the return of the amount of P3.5 million within 15 days from
receipt of the letter. In reply,[8] petitioner acknowledged receipt of the P3.5 million
and promised to return the same within 120 days. Respondent-spouses were
amenable to the proposal provided an interest of 12% compounded annually shall be
imposed on the P3.5 million.[9] When petitioner still failed to return the amount
despite demand, respondent-spouses were constrained to file a Complaint[10] for
sum of money before the Regional Trial Court (RTC) of Malabon against herein
petitioner as well as Roberto U. Arias (Arias) who allegedly acted as petitioners
agent. The case was docketed as Civil Case No. 3201-MN and raffled off to Branch
170. In their complaint, respondent-spouses prayed that petitioner and Arias be
ordered to:
1. Pay the principal amount of P3,500,000.00 plus interest of 12%
compounded annually starting October 1, 1993 or an estimated amount of
P8,558,591.65;
2. Pay the following items of damages:
a) Moral damages in the amount of P100,000.00;
b) Actual damages in the amount of P100,000.00;
 c) Exemplary damages in the amount of P100,000.00;
d) [Attorneys] fee in the amount of P50,000.00 plus 20% of
recoverable amount from the [petitioner].
e) [C]ost of suit.[11]
In their Answer with Counterclaim,[12] petitioner and Arias averred that they are
willing to return the principal amount of P3.5 million but without any interest as the
same was not agreed upon. In their Pre-Trial Brief,[13] they reiterated that the only
remaining issue between the parties is the imposition of interest. They argued that
since the Conditional Deed of Sale provided only for the return of the downpayment in
case of breach, they cannot be held liable to pay legal interest as well.[14]
In its Pre-Trial Order[15] dated June 29, 2001, the RTC noted that the parties agreed
that the principal amount of 3.5 million pesos should be returned to the [respondent-
spouses] by the [petitioner] and the issue remaining [is] whether x x x [respondent-
spouses] are entitled to legal interest thereon, damages and attorneys fees.[16]
Trial ensued thereafter. After the presentation of the respondent-spouses evidence,
the trial court set the presentation of Arias and petitioners evidence on September 3,
2003.[17] However, despite several postponements, petitioner and Arias failed to
appear hence they were deemed to have waived the presentation of their evidence.
Consequently, the case was deemed submitted for decision.[18]
Ruling of the Regional Trial Court
On May 7, 2004, the RTC rendered its Decision[19] finding respondent-spouses
entitled to interest but only at the rate of 6% per annum and not 12% as prayed by
them.[20] It also found respondent-spouses entitled to attorneys fees as they were
compelled to litigate to protect their interest.[21]
The dispositive portion of the RTC Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
[respondent-spouses] and ordering the [petitioner and Roberto Arias] to jointly and
severally:
1. Pay [respondent-spouses] the principal amount of Three Million Five
Hundred Thousand pesos (P3,500,000.00) with an interest of 6% compounded
annually starting October 1, 1993 and attorneys fee in the amount of Fifty Thousand
pesos (P50,000.00) plus 20% of the recoverable amount from the defendants and
cost of the suit.
The Compulsory Counter Claim is hereby dismissed for lack of factual evidence.
SO ORDERED.[22]
Ruling of the Court of Appeals
Aggrieved, petitioner and Arias filed their notice of appeal.[23] The CA noted that the
only issue submitted for its resolution is whether it is proper to impose interest for an
obligation that does not involve a loan or forbearance of money in the absence of
stipulation of the parties.[24]
On May 12, 2006, the CA rendered the assailed Decision affirming the ruling of the
RTC finding the imposition of 6% interest proper.[25] However, the same shall start to
run only from September 27, 2000 when respondent-spouses formally demanded the
return of their money and not from October 1993 when the contract was executed as
held by the RTC. The CA also modified the RTCs ruling as regards the liability of
Arias. It held that Arias could not be held solidarily liable with petitioner because he
merely acted as agent of the latter. Moreover, there was no showing that he expressly
bound himself to be personally liable or that he exceeded the limits of his authority.
More importantly, there was even no showing that Arias was authorized to act as
agent of petitioner.[26] Anent the award of attorneys fees, the CA found the award by
the trial court (P50,000.00 plus 20% of the recoverable amount) excessive[27] and
thus reduced the same to P100,000.00.[28]
The dispositive portion of the CA Decision reads:
WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six
percent (6%) per annum, computed from September 27, 2000 until its full payment
before finality of the judgment. If the adjudged principal and the interest (or any part
thereof) remain[s] unpaid thereafter, the interest rate shall be adjusted to twelve
percent (12%) per annum, computed from the time the judgment becomes final and
executory until it is fully satisfied. The award of attorneys fees is hereby reduced to
P100,000.00. Costs against the [petitioner].
SO ORDERED.[29]
Petitioner moved for reconsideration which was denied in the August 31, 2006
Resolution of the CA.
Hence, this petition raising the sole issue of whether the imposition of interest and
attorneys fees is proper.
Petitioners Arguments
Petitioner insists that she is not bound to pay interest on the P3.5 million because the
Conditional Deed of Sale only provided for the return of the downpayment in case of
failure to comply with her obligations. Petitioner also argues that the award of
attorneys fees in favor of the respondent-spouses is unwarranted because it cannot
be said that the latter won over the former since the CA even sustained her
contention that the imposition of 12% interest compounded annually is totally uncalled
for.
Respondent-spouses Arguments
Respondent-spouses aver that it is only fair that interest be imposed on the amount
they paid considering that petitioner failed to return the amount upon demand and
had been using the P3.5 million for her benefit. Moreover, it is undisputed that
petitioner failed to perform her obligations to relocate the house outside the perimeter
of the subject property and to complete the necessary documents. As regards the
attorneys fees, they claim that they are entitled to the same because they were forced
to litigate when petitioner unjustly withheld the amount. Besides, the amount awarded
by the CA is even smaller compared to the filing fees they paid.
Our Ruling
The petition lacks merit.
Interest may be imposed even in the absence of stipulation in the contract.
We sustain the ruling of both the RTC and the CA that it is proper to impose interest
notwithstanding the absence of stipulation in the contract. Article 2210 of the Civil
Code expressly provides that [i]nterest may, in the discretion of the court, be allowed
upon damages awarded for breach of contract. In this case, there is no question that
petitioner is legally obligated to return the P3.5 million because of her failure to fulfill
the obligation under the Conditional Deed of Sale, despite demand. She has in fact
admitted that the conditions were not fulfilled and that she was willing to return the full
amount of P3.5 million but has not actually done so. Petitioner enjoyed the use of the
money from the time it was given to her[30] until now. Thus, she is already in default
of her obligation from the date of demand, i.e., on September 27, 2000.
The interest at the rate of 12% is applicable in the instant case.
Anent the interest rate, the general rule is that the applicable rate of interest shall be
computed in accordance with the stipulation of the parties.[31]
Absent any stipulation, the applicable rate of interest shall be 12% per annum when
the obligation arises out of a loan or a forbearance of money, goods or credits. In
other cases, it shall be six percent (6%).[32] In this case, the parties did not stipulate
as to the applicable rate of interest. The only question remaining therefore is whether
the 6% as provided under Article 2209 of the Civil Code, or 12% under Central Bank
Circular No. 416, is due.
The contract involved in this case is admittedly not a loan but a Conditional Deed of
Sale. However, the contract provides that the seller (petitioner) must return the
payment made by the buyer (respondent-spouses) if the conditions are not fulfilled.
There is no question that they have in fact, not been fulfilled as the seller (petitioner)
has admitted this. Notwithstanding demand by the buyer (respondent-spouses), the
seller (petitioner) has failed to return the money and should be considered in default
from the time that demand was made on September 27, 2000.
Even if the transaction involved a Conditional Deed of Sale, can the stipulation
governing the return of the money be considered as a forbearance of money which
required payment of interest at the rate of 12%? We believe so.
In Crismina Garments, Inc. v. Court of Appeals,[33] forbearance was defined as a
contractual obligation of lender or creditor to refrain during a given period of time,
from requiring the borrower or debtor to repay a loan or debt then due and payable.
This definition describes a loan where a debtor is given a period within which to pay a
loan or debt. In such case, forbearance of money, goods or credits will have no
distinct definition from a loan. We believe however, that the phrase forbearance of
money, goods or credits is meant to have a separate meaning from a loan, otherwise
there would have been no need to add that phrase as a loan is already sufficiently
defined in the Civil Code.[34] Forbearance of money, goods or credits should
therefore refer to arrangements other than loan agreements, where a person
acquiesces to the temporary use of his money, goods or credits pending happening of
certain events or fulfillment of certain conditions. In this case, the respondent-spouses
parted with their money even before the conditions were fulfilled. They have therefore
allowed or granted forbearance to the seller (petitioner) to use their money pending
fulfillment of the conditions. They were deprived of the use of their money for the
period pending fulfillment of the conditions and when those conditions were breached,
they are entitled not only to the return of the principal amount paid, but also to
compensation for the use of their money. And the compensation for the use of their
money, absent any stipulation, should be the same rate of legal interest applicable to
a loan since the use or deprivation of funds is similar to a loan.
Petitioners unwarranted withholding of the money which rightfully pertains to
respondent-spouses amounts to forbearance of money which can be considered as
an involuntary loan. Thus, the applicable rate of interest is 12% per annum. In
Eastern Shipping Lines, Inc. v. Court of Appeals,[35]cited in Crismina Garments, Inc.
v. Court of Appeals,[36] the Court suggested the following guidelines:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on Damages of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed from default, i.e., from judicial
or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run from the time the claim is
made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made (at which time
the quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.[37]

Eastern Shipping Lines, Inc. v. Court of Appeals[38]and its predecessor case,

Reformina v. Tongol[39] both involved torts cases and hence, there was no
forbearance of money, goods, or credits. Further, the amount claimed (i.e., damages)
could not be established with reasonable certainty at the time the claim was made.
Hence, we arrived at a different ruling in those cases.

Since the date of demand which is September 27, 2000 was satisfactorily established
during trial, then the interest rate of 12% should be reckoned from said date of
demand until the principal amount and the interest thereon is fully satisfied.

The award of attorneys fees is warranted.

Under Article 2208 of the Civil Code, attorneys fees may be recovered:

xxxx
(2) When the defendants act or omission has compelled the plaintiff to litigate with
third persons or to incur expenses to protect his interest;
xxxx

(11) In any other case where the court deems it just and equitable that attorneys
fees and expenses of litigation should be recovered.

In all cases, the attorneys fees and expenses of litigation must be reasonable.

Considering the circumstances of the instant case, we find respondent-spouses

entitled to recover attorneys fees. There is no doubt that they were forced to litigate to
protect their interest, i.e., to recover their money. However, we find the amount of
P50,000.00 more appropriate in line with the policy enunciated in Article 2208 of the
Civil Code that the award of attorneys fees must always be reasonable.

WHEREFORE, the Petition for Review is DENIED. The May 12, 2006 Decision of the
Court of Appeals in CA-G.R. CV No. 83123 is AFFIRMED with MODIFICATIONS that
the rate of interest shall be twelve percent (12%) per annum, computed from
September 27, 2000 until fully satisfied. The award of attorneys fees is further
reduced to P50,000.00.

SO ORDERED.
G.R. No. 200868 November 12, 2012
ANITA A. LEDDA
vs.
BANK OF THE PHILIPPINE ISLANDS
CARPIO, J.:
The Case
This petition for rebiew1 assails the 15 July 2011 Decision2 and 9 February 2012
Resolution3 of the Court of Appeals in CA-G.R. CV No. 93747. The Court of Appeals
partially granted the appeal filed by petitioner Anita A. Ledda (Ledda) and modified
the 4 June 2009 Decision4 of the Regional Trial Court, Makati City, Branch 61. The
Court of Appeals denied the motion for reconsideration.
The Facts
This case arose from a collection suit filed by respondent Bank of the Philippine
Islands (BPI) against Ledda for the latter’s unpaid credit card obligation.
BPI, through its credit card system, extends credit accommodations to its clientele for
the purchase of goods and availment of various services from accredited merchants,
as well as to secure cash advances from authorized bank branches or through
automated teller machines.
As one of BPI’s valued clients, Ledda was issued a pre-approved BPI credit card
under Customer Account Number 020100-9-00-3041167. The BPI Credit Card
Package, which included the Terms and Conditions governing the use of the credit
card, was delivered at Ledda’s residence on 1 July 2005. Thereafter, Ledda used the
credit card for various purchases of goods and services and cash advances.
Ledda defaulted in the payment of her credit card obligation, which BPI claimed in
their complaint amounted to P548,143.73 per Statement of Account dated 9
September 2007.5 Consequently, BPI sent letters6 to Ledda demanding the payment
of such amount, representing the principal obligation with 3.25% finance charge and
6% late payment charge per month.
Despite BPI’s repeated demands, Ledda failed to pay her credit card obligation
constraining BPI to file an action for collection of sum of money with the Regional
Trial Court, Makati City, Branch 61. The trial court declared Ledda in default for failing
to file Answer within the prescribed period, despite receipt of the complaint and
summons. Upon Ledda’s motion for reconsideration, the trial court lifted the default
order and admitted Ledda’s Answer Ad Cautelam.
While she filed a Pre-Trial Brief, Ledda and her counsel failed to appear during the
continuation of the Pre-Trial. Hence, the trial court allowed BPI to present its evidence
ex-parte.
In its Decision of 4 June 2009, the trial court ruled in favor of BPI, thus:
WHEREFORE, premises duly considered, the instant "Complaint" of herein plaintiff
Bank of the Philippine Islands (BPI) is hereby given DUE COURSE/GRANTED.
Accordingly, judgment is hereby rendered against herein defendant ANITA A. LEDDA
and in favor of the plaintiff.
Ensuably, the herein defendant ANITA A. LEDDA is hereby ordered to pay the herein
plaintiff Bank of the Philippine Islands (BPI) the following sums, to wit:
1. Five Hundred Forty-Eight Thousand One Hundred Forty-Three Pesos and
Seventy-Three Centavos (P548,143.73) as and for actual damages, with finance and
late-payment charges at the rate of three and one-fourth percent (3.25%) and six
percent (6%) per month, respectively, to be counted from 19 October 2007 until the
amount is fully paid;
2. Attorney’s fees equivalent to twenty-five percent (25%) of the total obligation due
and demandable, exclusive of appearance fee for every court hearing, and
3. Costs of suit.
SO ORDERED.7 (Emphasis in the original)
The Ruling of the Court of Appeals
The Court of Appeals rejected Ledda’s argument that the document containing the
Terms and Conditions governing the use of the BPI credit card is an actionable
document contemplated in Section 7, Rule 8 of the 1997 Rules of Civil Procedure.
The Court of Appeals held that BPI’s cause of action is based on "Ledda’s availment
of the bank’s credit facilities through the use of her credit/plastic cards, coupled with
her refusal to pay BPI’s outstanding credit for the cost of the goods, services and
cash advances despite lawful demands."
Citing Macalinao v. Bank of the Philippine Islands,8 the Court of Appeals held that the
interest rates and penalty charges imposed by BPI for Ledda’s non-payment of her
credit card obligation, totalling 9.25% per month or 111% per annum, are exorbitant
and unconscionable. Accordingly, the Court of Appeals reduced the monthly finance
charge to 1% and the late payment charge to 1%, or a total of 2% per month or 24%
per annum.
The Court of Appeals recomputed Ledda’s total credit card obligation by deducting
P226,000.15, representing interests and charges, from P548,143.73, leaving a
difference of P322,138.58 as the principal amount, on which the reduced interest
rates should be imposed.
The Court of Appeals awarded BPI P10,000 attorney’s fees, pursuant to the ruling in
Macalinao.
The dispositive portion of the Court of Appeals’ Decision reads:
WHEREFORE, premises considered, the appeal is PARTLY GRANTED, and
accordingly the herein assailed June 4, 2009 Decision of the trial court is hereby
MODIFIED, ordering defendant-appellant Anita Ledda to pay plaintiff-appellee BPI the
amount of Php322,138.58, with 1% monthly finance charges from date of availment of
the plaintiff’s credit facilities, and penalty charge at 1% per month of the amount due
from the date the amount becomes due and payable, until full payment. The award of
attorney’s fees is fixed at Php10,000.00.
SO ORDERED.9 (Emphasis in the original)
The Issues
Ledda raises the following issues:
1. Whether the Court of Appeals erred in holding that the document containing the
Terms and Conditions governing the issuance and use of the credit card is not an
actionable document contemplated in Section 7, Rule 8 of the 1997 Rules of Civil
Procedure.
2. Whether the Court of Appeals erred in applying Macalinao v. Bank of the Philippine
Islands instead of Alcaraz v. Court of Appeals10 as regards the imposition of interest
and penalty charges on the credit card obligation.
3. Whether the Court of Appeals erred in awarding attorney’s fees in favor of BPI.
The Ruling of the Court
The petition is partially meritorious.
I.
Whether the document containing the
Terms and Conditions is an actionable document.
Section 7, Rule 8 of the 1997 Rules of Civil Procedure provides:
SEC. 7. Action or defense based on document. — Whenever an action or defense is
based upon a written instrument or document, the substance of such instrument or
document shall be set forth in the pleading, and the original or a copy thereof shall be
attached to the pleading as an exhibit, which shall be deemed to be a part of the
pleading, or said copy may with like effect be set forth in the pleading.
Clearly, the above provision applies when the action is based on a written instrument
or document.
In this case, the complaint is an action for collection of sum of money arising from
Ledda’s default in her credit card obligation with BPI. BPI’s cause of action is primarily
based on Ledda’s (1) acceptance of the BPI credit card, (2) usage of the BPI credit
card to purchase goods, avail services and secure cash advances, and (3) non-
payment of the amount due for such credit card transactions, despite demands.11 In
other words, BPI’s cause of action is not based only on the document containing the
Terms and Conditions accompanying the issuance of the BPI credit card in favor of
Ledda. Therefore, the document containing the Terms and Conditions governing the
use of the BPI credit card is not an actionable document contemplated in Section 7,
Rule 8 of the 1997 Rules of Civil Procedure. As such, it is not required by the Rules to
be set forth in and attached to the complaint.
At any rate, BPI has sufficiently established a cause of action against Ledda, who
admits having received the BPI credit card, subsequently used the credit card, and
failed to pay her obligation arising from the use of such credit card.12
II.
Whether Alcaraz v. Court of Appeals,
instead of Macalinao v. BPI, is applicable.
Ledda contends that the case of Alcaraz v. Court of Appeals,13 instead of Macalinao
v. Bank of the Philippine Islands14 which the Court of Appeals invoked, is applicable
in the computation of the interest rate on the unpaid credit card obligation. Ledda
claims that similar to Alcaraz, she was a "pre-screened" client who did not sign any
credit card application form or terms and conditions prior to the issuance of the credit
card. Like Alcaraz, Ledda asserts that the provisions of the Terms and Conditions,
particularly on the interests, penalties and other charges for non-payment of any
outstanding obligation, are not binding on her as such Terms and Conditions were
never shown to her nor did she sign it.
We agree with Ledda. The ruling in Alcaraz v. Court of Appeals15 applies squarely to
the present case. In Alcaraz, petitioner there, as a pre-screened client of Equitable
Credit Card Network, Inc., did not submit or sign any application form or document
before the issuance of the credit card. There is no evidence that petitioner Alcaraz
was shown a copy of the terms and conditions before or after the issuance of the
credit card in his name, much less that he has given his consent thereto.
In this case, BPI issued a pre-approved credit card to Ledda who, like Alcaraz, did not
sign any credit card application form prior to the issuance of the credit card. Like the
credit card issuer in Alcaraz, BPI, which has the burden to prove its affirmative
allegations, failed to establish Ledda’s agreement with the Terms and Conditions
governing the use of the credit card. It must be noted that BPI did not present as
evidence the Terms and Conditions which Ledda allegedly received and accepted.16
Clearly, BPI failed to prove Ledda’s conformity and acceptance of the stipulations
contained in the Terms and Conditions. Therefore, as the Court held in Alcaraz, the
Terms and Conditions do not bind petitioner (Ledda in this case) "without a clear
showing that x x x petitioner was aware of and consented to the provisions of such
document."17
On the other hand, Macalinao v. Bank of the Philippine Islands,18 which the Court of
Appeals cited, involves a different set of facts. There, petitioner Macalinao did not
challenge the existence of the Terms and Conditions Governing the Issuance and
Use of the BPI Credit Card and her consent to its provisions, including the imposition
of interests and other charges on her unpaid BPI credit card obligation. Macalinao
simply questioned the legality of the stipulated interest rate and penalty charge,
claiming that such charges are iniquitous. In fact, one of Macalinao’s assigned errors
before this Court reads: "The reduction of interest rate, from 9.25% to 2%, should be
upheld since the stipulated rate of interest was unconscionable and iniquitous, and
thus illegal."19 Therefore, there is evidence that Macalinao was fully aware of the
stipulations contained in the Terms and Conditions Governing the Issuance and Use
of the Credit Card, unlike in this case where there is no evidence that Ledda was
aware of or consented to the Terms and Conditions for the use of the credit card.
Since there is no dispute that Ledda received, accepted and used the BPI credit card
issued to her and that she defaulted in the payment of the total amount arising from
the use of such credit card, Ledda is liable to pay BPI P322,138.58 representing the
principal amount of her unpaid credit card obligation.20
Consistent with Alcaraz, Ledda must also pay interest on the total unpaid credit card
amount at the rate of 12% per annum since her credit card obligation consists of a
loan or forbearance of money.21 In Eastern Shipping Lines, Inc. v. Court of
Appeals,22 the Court explained:
1. When an 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.
We reject Ledda’s contention that, since there was no written agreement to pay a
higher interest rate, the interest rate should only be 6%. Ledda erroneously invokes
Article 2209 of the Civil Code.23 Article 2209 refers to indemnity for damages and not
interest on loan or forbearance of money, which is the case here. In Sunga-Chan v.
Court of Appeals,24 the Court held:
Article 2208 of the New Civil Code enumerates the instances where such may be
awarded and, in all cases, it must be reasonable, just and equitable if the same were
to be granted. Attorney’s fees as part of damages are not meant to enrich the winning
party at the expense of the losing litigant. They are not awarded every time a party
prevails in a suit because of the policy that no premium should be placed on the right
to litigate. The award of attorney’s fees is the exception rather than the general
rule.1âwphi1 As such, it is necessary for the trial court to make findings of facts and
law that would bring the case within the exception and justify the grant of such award.
The matter of attorney’s fees cannot be mentioned only in the dispositive portion of
the decision. They must be clearly explained and justified by the court in the body of
its decision. On appeal, the CA is precluded from supplementing the bases for
awarding attorney’s fees when the trial court failed to discuss in its Decision the
reasons for awarding the same. Consequently, the award of attorney’s fees should be
deleted.1âwphi1
In this case, the trial court failed to state in the body of its decision the factual or legal
reasons for the award of attorney’s fees in favor of BPI. Therefore, the same must be
deleted.

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if WHEREFORE, we GRANT the petition IN PART. Petitioner Anita A. Ledda is
proper, and the applicable rate, as follows: The 12% per annum rate under CB ORDERED to pay respondent Bank of the Philippine Islands the amount of .P322,
Circular No. 416 shall apply only to loans or forbearance of money, goods, or credits, 138.58, representing her unpaid credit card obligation, with interest thereon at the
as well as to judgments involving such loan or forbearance of money, goods, or rate of 12% per annum to be computed from 2 October 2007, until full payment
credit, while the 6% per annum under Art. 2209 of the Civil Code applies "when the thereof. The award of attorney's fees is DELETED for lack of basis.
transaction involves the payment of indemnities in the concept of damage arising
from the breach or a delay in the performance of obligations in general," with the SO ORDERED.
application of both rates reckoned "from the time the complaint was filed until the
adjudged amount is fully paid." In either instance, the reckoning period for the
commencement of the running of the legal interest shall be subject to the condition
"that the courts are vested with discretion, depending on the equities of each case, on
the award of interest. (Emphasis supplied)

In accordance with Eastern Shipping Lines, Inc., the 12% legal interest shall be
reckoned from the date BPI extrajudicially demanded from Ledda the payment of her
overdue credit card obligation. Thus, the 12% legal interest shall be computed from 2
October 2007, when Ledda, through her niece Sally D. Ganceña,25 received BPI’s
letter26 dated 26 September 2007 demanding the payment of the alleged overdue
amount of P548,143.73.

III.
Whether the award of attorney’s fees is proper.

Ledda assails the award of attorney’s fees in favor of BPI on the grounds of (1)
erroneous reliance by the Court of Appeals on the case of Macalinao and (2) failure
by the trial court to state the reasons for the award of attorney’s fees.

Settled is the rule that the trial court must state the factual, legal or equitable
justification for the award of attorney’s fees.27 The matter of attorney’s fees cannot
be stated only in the dispositive portion of the decision.28 The body of the court’s
decision must state the reasons for the award of attorney’s fees.29 In Frias v. San
Diego-Sison,30 the Court held:
G.R. No. 138677. February 12, 2002
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON. COURT
OF APPEALS & SECURITY BANK & TRUST COMPANY, respondents.
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court, assailing the decision and resolutions of the Court of Appeals in CA-G.R. CV
No. 34594, entitled "Security Bank and Trust Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a
loan in the amount of P120,000.00 from respondent Security Bank and Trust
Company. Petitioners executed a promissory note binding themselves, jointly and
severally, to pay the sum borrowed with an interest of 15.189% per annum upon
maturity and to pay a penalty of 5% every month on the outstanding principal and
interest in case of default. In addition, petitioners agreed to pay 10% of the total
amount due by way of attorneys fees if the matter were indorsed to a lawyer for
collection or if a suit were instituted to enforce payment. The obligation matured on 8
September 1981; the bank, however, granted an extension but only up until 29
December 1981.
Despite several demands from the bank, petitioners failed to settle the debt which, as
of 20 May 1982, amounted to P114,416.10. On 30 September 1982, the bank sent a
final demand letter to petitioners informing them that they had five days within which
to make full payment. Since petitioners still defaulted on their obligation, the bank filed
on 3 November 1982, with the Regional Trial Court of Makati, Branch 143, a
complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its
evidence and, on 27 March 1985, rested its case. Petitioners, instead of introducing
their own evidence, had the hearing of the case reset on two consecutive occasions.
In view of the absence of petitioners and their counsel on 28 August 1985, the third
hearing date, the bank moved, and the trial court resolved, to consider the case
submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration
of the order of the trial court declaring them as having waived their right to present
evidence and prayed that they be allowed to prove their case. The court a quo denied
the motion in an order, dated 5 September 1988, and on 20 October 1989, it rendered
its decision,[1] the dispositive portion of which read:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants, ordering the latter to pay, jointly and severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum,
2% service charge and 5% per month penalty charge, commencing on 20 May 1982
until fully paid;
"2. To pay the further sum equivalent to 10% of the total amount of indebtedness for
and as attorneys fees; and
"3. To pay the costs of the suit.[2]
Petitioners interposed an appeal with the Court of Appeals, questioning the rejection
by the trial court of their motion to present evidence and assailing the imposition of
the 2% service charge, the 5% per month penalty charge and 10% attorney's fees. In
its decision[3] of 7 March 1996, the appellate court affirmed the judgment of the trial
court except on the matter of the 2% service charge which was deleted pursuant to
Central Bank Circular No. 783. Not fully satisfied with the decision of the appellate
court, both parties filed their respective motions for reconsideration.[4] Petitioners
prayed for the reduction of the 5% stipulated penalty for being unconscionable. The
bank, on the other hand, asked that the payment of interest and penalty be
commenced not from the date of filing of complaint but from the time of default as so
stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
We find merit in plaintiff-appellees claim that the principal sum of P114,416.00 with
interest thereon must commence not on the date of filing of the complaint as we have
previously held in our decision but on the date when the obligation became due.
Default generally begins from the moment the creditor demands the performance of
the obligation. However, demand is not necessary to render the obligor in default
when the obligation or the law so provides.
In the case at bar, defendants-appellants executed a promissory note where they
undertook to pay the obligation on its maturity date 'without necessity of demand.'
They also agreed to pay the interest in case of non-payment from the date of default.
xxxxxxxxx
While we maintain that defendants-appellants must be bound by the contract which
they acknowledged and signed, we take cognizance of their plea for the application of
the provisions of Article 1229 x x x.
Considering that defendants-appellants partially complied with their obligation under
the promissory note by the reduction of the original amount of P120,000.00 to
P114,416.00 and in order that they will finally settle their obligation, it is our view and
we so hold that in the interest of justice and public policy, a penalty of 3% per month
or 36% per annum would suffice.
xxxxxxxxx
WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The
defendants-appellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered
to pay the plaintiff-appellee Security Bank and Trust Company the following:
1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum
and 3% per month penalty charge commencing May 20, 1982 until fully paid;
2. The sum equivalent to 10% of the total amount of the indebtedness as and for
attorneys fees.[5]
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to
admit newly discovered evidence,[6] alleging that while the case was pending before
the trial court, petitioner Tolomeo Ligutan and his wife Bienvenida Ligutan executed a
real estate mortgage on 18 January 1984 to secure the existing indebtedness of
petitioners Ligutan and dela Llana with the bank. Petitioners contended that the
execution of the real estate mortgage had the effect of novating the contract between
them and the bank. Petitioners further averred that the mortgage was extrajudicially
foreclosed on 26 August 1986, that they were not informed about it, and the bank did
not credit them with the proceeds of the sale. The appellate court denied the omnibus
motion for reconsideration and to admit newly discovered evidence, ratiocinating that
such a second motion for reconsideration cannot be entertained under Section 2,
Rule 52, of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said,
the newly-discovered evidence being invoked by petitioners had actually been known
to them when the case was brought on appeal and when the first motion for
reconsideration was filed.[7]
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners
elevated their case to this Court on 9 July 1999 via a petition for review on certiorari
under Rule 45 of the Rules of Court, submitting thusly -
I. The respondent Court of Appeals seriously erred in not holding that the 15.189%
interest and the penalty of three (3%) percent per month or thirty-six (36%) percent
per annum imposed by private respondent bank on petitioners loan obligation are still
manifestly exorbitant, iniquitous and unconscionable.
II. The respondent Court of Appeals gravely erred in not reducing to a reasonable
level the ten (10%) percent award of attorneys fees which is highly and grossly
excessive, unreasonable and unconscionable.
III. The respondent Court of Appeals gravely erred in not admitting petitioners newly
discovered evidence which could not have been timely produced during the trial of
this case.
IV. The respondent Court of Appeals seriously erred in not holding that there was a
novation of the cause of action of private respondents complaint in the instant case
due to the subsequent execution of the real estate mortgage during the pendency of
this case and the subsequent foreclosure of the mortgage.[8]
Respondent bank, which did not take an appeal, would, however, have it that the
penalty sought to be deleted by petitioners was even insufficient to fully cover and
compensate for the cost of money brought about by the radical devaluation and
decrease in the purchasing power of the peso, particularly vis-a-vis the U.S. dollar,
taking into account the time frame of its occurrence. The Bank would stress that only
the amount of P5,584.00 had been remitted out of the entire loan of P120,000.00.[9]
A penalty clause, expressly recognized by law,[10] is an accessory undertaking to
assume greater liability on the part of an obligor in case of breach of an obligation. It
functions to strengthen the coercive force of the obligation[11] and to provide, in
effect, for what could be the liquidated damages resulting from such a breach. The
obligor would then be bound to pay the stipulated indemnity without the necessity of
proof on the existence and on the measure of damages caused by the breach.[12]
Although a court may not at liberty ignore the freedom of the parties to agree on such
terms and conditions as they see fit that contravene neither law nor morals, good
customs, public order or public policy, a stipulated penalty, nevertheless, may be
equitably reduced by the courts if it is iniquitous or unconscionable or if the principal
obligation has been partly or irregularly complied with.[13]
The question of whether a penalty is reasonable or iniquitous can be partly subjective
and partly objective. Its resolution would depend on such factors as, but not
necessarily confined to, the type, extent and purpose of the penalty, the nature of the
obligation, the mode of breach and its consequences, the supervening realities, the
standing and relationship of the parties, and the like, the application of which, by and
large, is addressed to the sound discretion of the court. In Rizal Commercial Banking
Corp. vs. Court of Appeals,[14] just an example, the Court has tempered the penalty
charges after taking into account the debtors pitiful situation and its offer to settle the
entire obligation with the creditor bank. The stipulated penalty might likewise be
reduced when a partial or irregular performance is made by the debtor.[15] The
stipulated penalty might even be deleted such as when there has been substantial
performance in good faith by the obligor,[16] when the penalty clause itself suffers
from fatal infirmity, or when exceptional circumstances so exist as to warrant it.[17]
The Court of Appeals, exercising its good judgment in the instant case, has reduced
the penalty interest from 5% a month to 3% a month which petitioner still disputes.
Given the circumstances, not to mention the repeated acts of breach by petitioners of
their contractual obligation, the Court sees no cogent ground to modify the ruling of
the appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time,
question its reasonableness and prays that the Court reduce the amount. This
contention is a fresh issue that has not been raised and ventilated before the courts
below. In any event, the interest stipulation, on its face, does not appear as being that
excessive. The essence or rationale for the payment of interest, quite often referred to
as cost of money, is not exactly the same as that of a surcharge or a penalty. A
penalty stipulation is not necessarily preclusive of interest, if there is an agreement to
that effect, the two being distinct concepts which may separately be demanded.[18]
What may justify a court in not allowing the creditor to impose full surcharges and
penalties, despite an express stipulation therefor in a valid agreement, may not
equally justify the non-payment or reduction of interest. Indeed, the interest
prescribed in loan financing arrangements is a fundamental part of the banking
business and the core of a bank's existence.[19]
Petitioners next assail the award of 10% of the total amount of indebtedness by way
of attorney's fees for being grossly excessive, exorbitant and unconscionable vis-a-vis
the time spent and the extent of services rendered by counsel for the bank and the
nature of the case. Bearing in mind that the rate of attorneys fees has been agreed to
by the parties and intended to answer not only for litigation expenses but also for
collection efforts as well, the Court, like the appellate court, deems the award of 10%
attorneys fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a
new trial or to admit newly discovered evidence. As the appellate court so held in its
resolution of 14 May 1999 -
Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for
reconsideration of a judgment or final resolution by the same party shall be
entertained. Considering that the instant motion is already a second motion for
reconsideration, the same must therefore be denied.
Furthermore, it would appear from the records available to this court that the newly-
discovered evidence being invoked by defendants-appellants have actually been
existent when the case was brought on appeal to this court as well as when the first
motion for reconsideration was filed. Hence, it is quite surprising why defendants-
appellants raised the alleged newly-discovered evidence only at this stage when they
could have done so in the earlier pleadings filed before this court.
The propriety or acceptability of such a second motion for reconsideration is not
contingent upon the averment of 'new' grounds to assail the judgment, i.e., grounds
other than those theretofore presented and rejected. Otherwise, attainment of finality
of a judgment might be stayed off indefinitely, depending on the partys
ingenuousness or cleverness in conceiving and formulating 'additional flaws' or 'newly
discovered errors' therein, or thinking up some injury or prejudice to the rights of the
movant for reconsideration.[20]
At any rate, the subsequent execution of the real estate mortgage as security for the
existing loan would not have resulted in the extinguishment of the original contract of
loan because of novation. Petitioners acknowledge that the real estate mortgage
contract does not contain any express stipulation by the parties intending it to
supersede the existing loan agreement between the petitioners and the bank.[21]
Respondent bank has correctly postulated that the mortgage is but an accessory
contract to secure the loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement
of all the parties to the new contract; third, the extinguishment of the obligation; and
fourth, the validity of the new one.[22] In order that an obligation may be extinguished
by another which substitutes the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligation be on every point
incompatible with each other.[23] An obligation to pay a sum of money is not
extinctively novated by a new instrument which merely changes the terms of payment
or adding compatible covenants or where the old contract is merely supplemented by
the new one.[24] When not expressed, incompatibility is required so as to ensure that
the parties have indeed intended such novation despite their failure to express it in
categorical terms. The incompatibility, to be sure, should take place in any of the
essential elements of the obligation, i.e., (1) the juridical relation or tie, such as from a
mere commodatum to lease of things, or from negotiorum gestio to agency, or from a
mortgage to antichresis,[25] or from a sale to one of loan;[26] (2) the object or
principal conditions, such as a change of the nature of the prestation; or (3) the
subjects, such as the substitution of a debtor[27] or the subrogation of the creditor.
Extinctive novation does not necessarily imply that the new agreement should be
complete by itself; certain terms and conditions may be carried, expressly or by
implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.
G.R. No. 128866 April 20, 1998
MALAYAN INSURANCE INC., petitioner, vs. GOYU & SONS, INC. respondent.
MELO, J.:
The issues relevant to the herein three consolidated petitions revolve around the fire
loss claims of respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan
Insurance Company, Inc. (MICO) in connection with the mortgage contracts entered
into by and between Rizal Commercial Banking Corporation (RCBC) and GOYU.
The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of
P74,040,518.58, plus 37% interest per annum commencing July 27, 1992. RCBC was
ordered to pay actual and compensatory damages in the amount of P5,000,000.00.
MICO and RCBC were held solidarily liable to pay GOYU P1,500,000.00 as
exemplary damages and P1,500,000.00 for attorneys fees. GOYUs obligation to
RCBC was fixed at P68,785,069.04 as of April 1992, without any interest, surcharges,
and penalties. RCBC and MICO appealed separately but, in view of the common
facts and issues involved, their individual petitions were consolidated.
The undisputed facts may be summarized as follows:
GOYU applied for credit facilities and accommodations with RCBC at its Binondo
Branch. After due evaluation, RCBC Binondo Branch, through its key officers,
petitioners Uy Chun Bing and Eli D. Lao, recommended GOYUs application for
approval by RCBCs executive committee. A credit facility in the amount of P30 million
was initially granted. Upon GOYUs application and Uys and Laos recommendation,
RCBCs executive committee increased GOYUs credit facility to P50 million, then to
P90 million, and finally to P117 million.
As security for its credit facilities with RCBC, GOYU executed two real estate
mortgages and two chattel mortgages in favor of RCBC, which were registered with
the Registry of Deeds at Valenzuela, Metro Manila. Under each of these four
mortgage contracts, GOYU committed itself to insure the mortgaged property with an
insurance company approved by RCBC, and subsequently, to endorse and deliver
the insurance policies to RCBC.
GOYU obtained in its name a total of ten insurance policies from MICO. In February
1992, Alchester Insurance Agency, Inc., the insurance agent where GOYU obtained
the Malayan insurance policies, issued nine endorsements in favor of RCBC
seemingly upon instructions of GOYU (Exhibits 1-Malayan to 9-Malayan).
On April 27, 1992, one of GOYUs factory buildings in Valenzuela was gutted by fire.
Consequently, GOYU submitted its claim for indemnity on account of the loss insured
against. MICO denied the claim on the ground that the insurance policies were either
attached pursuant to writs of attachments/garnishments issued by various courts or
that the insurance proceeds were also claimed by other creditors of GOYU alleging
better rights to the proceeds than the insured. GOYU filed a complaint for specific
performance and damages which was docketed at the Regional Trial Court of the
National Capital Judicial Region (Manila, Branch 3) as Civil Case No. 93-65442, now
subject of the present G.R. No. 128833 and 128866.
RCBC, one of GOYUs creditors, also filed with MICO its formal claim over the
proceeds of the insurance policies, but said claims were also denied for the same
reasons that MICO denied GOYUs claims.
In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional
Trial Court of Manila (Branch 3), confirmed that GOYUs other creditors, namely,
Urban Bank, Alfredo Sebastian, and Philippine Trust Company obtained their
respective writs of attachments from various courts, covering an aggregate amount of
P14,938,080.23, and ordered that the proceeds of the ten insurance policies be
deposited with the said court minus the aforementioned P14,938,080.23. Accordingly,
on January 7, 1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of
the Manila RTC.
In the meantime, another notice of garnishment was handed down by another Manila
RTC sala (Branch 28) for the amount of P8,696,838.75 (Exhibit 22-Malayan).
After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU,
disposing:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant, Malayan Insurance Company, Inc. and Rizal Commercial Banking
Corporation, ordering the latter as follows:
1. For defendant Malayan Insurance Co., Inc.:
a. To pay the plaintiff its fire loss claims in the total amount of P74,040,518.58 less
the amount of P50,000,000.00 which is deposited with this Court;
b. To pay the plaintiff damages by way of interest for the duration of the delay since
July 27, 1992 (ninety days after defendant insurers receipt of the required proof of
loss and notice of loss) at the rate of twice the ceiling prescribed by the Monetary
Board, on the following amounts:
1) P50,000,000.00 from July 27, 1992 up to the time said amount was deposited with
this Court on January 7, 1994;
2) P24,040,518.58 from July 27, 1992 up to the time when the writs of attachments
were received by defendant Malayan;
2. For defendant Rizal Commercial Banking Corporation:
a. To pay the plaintiff actual and compensatory damages in the amount of
P2,000,000.00;
3. For both defendants Malayan and RCBC:
a. To pay the plaintiff, jointly and severally, the following amounts:
1) P1,000,000.00 as exemplary damages;
2) P1,000,000.00 as, and for, attorneys fees;
3) Costs of suit.
and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its loan
obligations with defendant RCBC in the amount of P68,785,069.04, as of April 27,
1992, with interest thereon at the rate stipulated in the respective promissory notes
(without surcharges and penalties) per computation, pp. 14-A, 14-B & 14-C.
FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered
to release immediately to the plaintiff the amount of P50,000,000.00 deposited with
the Court by defendant Malayan, together with all the interests earned thereon.
(Record, pp. 478-479.)
From this judgment, all parties interposed their respective appeals. GOYU was
unsatisfied with the amounts awarded in its favor. MICO and RCBC disputed the trial
courts findings of liability on their part. The Court of Appeals partly granted GOYUs
appeal, but sustained the findings of the trial court with respect to MICO and RCBCs
liabilities, thusly:
WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby
modified as follows:
1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:
a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58 less the
amount of P50,505,594.60 (per O.R. No. 3649285) plus deposited in court and
damages by way of interest commencing July 27, 1992 until the time Goyu receives
the said amount at the rate of thirty-seven (37%) percent per annum which is twice
the ceiling prescribed by the Monetary Board.
2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION:
a) To pay the plaintiff actual and compensatory damages in the amount of
P5,000,000.00.
3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL
BANKING CORPORATION, UY CHUN BING AND ELI D. LAO:
a) To pay the plaintiff jointly and severally the following amounts:
1. P1,500,000.00 as exemplary damages;
2. P1,500,000.00 as and for attorneys fees.
4. And on RCBCs Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its
loan obligation with RCBC in the amount of P68,785,069.04 as of April 27, 1992
without any interest, surcharges and penalties.
The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to
immediately release to Goyu & Sons, Inc. the amount of P50,505,594.60 (per O.R.
No. 3649285) deposited with it by Malayan Insurance Co., Inc., together with all the
interests thereon.
(Rollo, p. 200.)

RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively,
seeking review and consequent reversal of the above dispositions of the Court of
Appeals.
In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-
48376, which case, by virtue of the Court of Appeals resolution dated August 7, 1996,
was consolidated with C.A. G.R. No. CV-46162 (subject of herein G.R. No. 128833).
At issue in said petition is RCBCs right to intervene in the action between Alfredo C.
Sebastian (the creditor) and GOYU (the debtor), where the subject insurance policies
were attached in favor of Sebastian.
After a careful review of the material facts as found by the two courts below in relation
to the pertinent and applicable laws, we find merit in the submissions of RCBC and
MICO.
The several causes of action pursued below by GOYU gave rise to several related
issues which are now submitted in the petitions before us. This Court, however,
discerns one primary and central issue, and this is, whether or not RCBC, as
mortgagee, has any right over the insurance policies taken by GOYU, the mortgagor,
in case of the occurrence of loss.
As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU,
the latter executed several mortgage contracts in favor of RCBC. It was expressly
stipulated in these mortgage contracts that GOYU shall insure the mortgaged
property with any of the insurance companies acceptable to RCBC. GOYU indeed
insured the mortgaged property with MICO, an insurance company acceptable to
RCBC. Based on their stipulations in the mortgage contracts, GOYU was supposed to
endorse these insurance policies in favor of, and deliver them, to RCBC. Alchester
Insurance Agency, Inc., MICOs underwriter from whom GOYU obtained the subject
insurance policies, prepared the nine endorsements (see Exh. 1-Malayan to 9-
Malayan; also Exh. 51-RCBC to 59-RCBC), copies of which were delivered to GOYU,
RCBC, and MICO. However, because these endorsements do not bear the signature
of any officer of GOYU, the trial court, as well as the Court of Appeals, concluded that
the endorsements are defective.
We do not quite agree.
It is settled that a mortgagor and a mortgagee have separate and distinct insurable
interests in the same mortgaged property, such that each one of them may insure the
same property for his own sole benefit. There is no question that GOYU could insure
the mortgaged property for its own exclusive benefit. In the present case, although it
appears that GOYU obtained the subject insurance policies naming itself as the sole
payee, the intentions of the parties as shown by their contemporaneous acts, must be
given due consideration in order to better serve the interest of justice and equity.
It is to be noted that nine endorsement documents were prepared by Alchester in
favor of RCBC. The Court is in a quandary how Alchester could arrive at the idea of
endorsing any specific insurance policy in favor of any particular beneficiary or payee
other than the insured had not such named payee or beneficiary been specifically
disclosed by the insured itself. It is also significant that GOYU voluntarily and
purposely took the insurance policies from MICO, a sister company of RCBC, and not
just from any other insurance company. Alchester would not have found out that the
subject pieces of property were mortgaged to RCBC had not such information been
voluntarily disclosed by GOYU itself. Had it not been for GOYU, Alchester would not
have known of GOYUs intention of obtaining insurance coverage in compliance with
its undertaking in the mortgage contracts with RCBC, and verily, Alchester would not
have endorsed the policies to RCBC had it not been so directed by GOYU.
On equitable principles, particularly on the ground of estoppel, the Court is
constrained to rule in favor of mortgagor RCBC. The basis and purpose of the
doctrine was explained in Philippine National Bank vs. Court of Appeals (94 SCRA
357 [1979]), to wit:
The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good
faith and justice, and its purpose is to forbid one to speak against his own act,
representations, or commitments to the injury of one to whom they were directed and
who reasonably relied thereon. The doctrine of estoppel springs from equitable
principles and the equities in the case. It is designed to aid the law in the
administration of justice where without its aid injustice might result. It has been
applied by this Court wherever and whenever special circumstances of a case so
demand.
(p. 368.)
Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a
certain Mr. Yam, she prepared in quadruplicate on February 11, 1992 the nine
endorsement documents for GOYUs nine insurance policies in favor of RCBC. The
original copies of each of these nine endorsement documents were sent to GOYU,
and the others were sent to RCBC and MICO, while the fourth copies were retained
for Alchesters file (tsn, February 23, pp. 7-8). GOYU has not denied having received
from Alchester the originals of these endorsements.
RCBC, in good faith, relied upon the endorsement documents sent to it as this was
only pursuant to the stipulation in the mortgage contracts. We find such reliance to be
justified under the circumstances of the case. GOYU failed to seasonably repudiate
the authority of the person or persons who prepared such endorsements. Over and
above this, GOYU continued, in the meantime, to enjoy the benefits of the credit
facilities extended to it by RCBC. After the occurrence of the loss insured against, it
was too late for GOYU to disown the endorsements for any imagined or contrived
lack of authority of Alchester to prepare and issue said endorsements. If there had not
been actually an implied ratification of said endorsements by virtue of GOYUs
inaction in this case, GOYU is at the very least estopped from assailing their
operative effects. To permit GOYU to capitalize on its non-confirmation of these
endorsements while it continued to enjoy the benefits of the credit facilities of RCBC
which believed in good faith that there was due endorsement pursuant to their
mortgage contracts, is to countenance grave contravention of public policy, fair
dealing, good faith, and justice. Such an unjust situation, the Court cannot sanction.
Under the peculiar circumstances obtaining in this case, the Court is bound to
recognize RCBCs right to the proceeds of the insurance policies if not for the actual
endorsement of the policies, at least on the basis of the equitable principle of
estoppel.
GOYU cannot seek relief under Section 53 of the Insurance Code which provides that
the proceeds of insurance shall exclusively apply to the interest of the person in INSURANCE POLICY PARTICULARS ENDORSEMENT
whose name or for whose benefit it is made. The peculiarity of the circumstances
obtaining in the instant case presents a justification to take exception to the strict a. Policy Number : F-114-07795 None
application of said provision, it having been sufficiently established that it was the Issue Date : March 18, 1992
intention of the parties to designate RCBC as the party for whose benefit the Expiry Date : April 5, 1993
insurance policies were taken out. Consider thus the following: Amount : P9,646,224.92

1. It is undisputed that the insured pieces of property were the subject of mortgage b. Policy Number : ACIA/F-174-07660 Exhibit 1-Malayan
contracts entered into between RCBC and GOYU in consideration of and for securing Issue Date : January 18, 1992
GOYUs credit facilities from RCBC. The mortgage contracts contained common Expiry Date : February 9, 1993
provisions whereby GOYU, as mortgagor, undertook to have the mortgaged property Amount : P4,307,217.54
properly covered against any loss by an insurance company acceptable to RCBC.
c. Policy Number : ACIA/F-114-07661 Exhibit 2-Malayan
2. GOYU voluntarily procured insurance policies to cover the mortgaged property Issue Date : January 18, 1992
from MICO, no less than a sister company of RCBC and definitely an acceptable Expiry Date : February 15, 1993
insurance company to RCBC. Amount : P6,603,586.43

3. Endorsement documents were prepared by MICOs underwriter, Alchester d. Policy Number : ACIA/F-114-07662 Exhibit 3-Malayan
Insurance Agency, Inc., and copies thereof were sent to GOYU, MICO, and RCBC. Issue Date : January 18, 1992
GOYU did not assail, until of late, the validity of said endorsements. Expiry Date : (not legible)
Amount : P6,603,586.43
4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit
facilities extended by RCBC which was conditioned upon the endorsement of the e. Policy Number : ACIA/F-114-07663 Exhibit 4-Malayan
insurance policies to be taken by GOYU to cover the mortgaged properties. Issue Date : January 18, 1992
Expiry Date : February 9, 1993
This Court can not over stress the fact that upon receiving its copies of the Amount : P9,457,972.76
endorsement documents prepared by Alchester, GOYU, despite the absence of its
written conformity thereto, obviously considered said endorsement to be sufficient f. Policy Number : ACIA/F-114-07623 Exhibit 7-Malayan
compliance with its obligation under the mortgage contracts since RCBC accordingly Issue Date : January 13, 1992
continued to extend the benefits of its credit facilities and GOYU continued to benefit Expiry Date : January 13, 1993
therefrom. Just as plain too is the intention of the parties to constitute RCBC as the Amount : P24,750,000.00
beneficiary of the various insurance policies obtained by GOYU. The intention of the
parties will have to be given full force and effect in this particular case. The insurance g. Policy Number : ACIA/F-174-07223 Exhibit 6-Malayan
proceeds may, therefore, be exclusively applied to RCBC, which under the factual Issue Date : May 29, 1991
circumstances of the case, is truly the person or entity for whose benefit the policies Expiry Date : June 27, 1992
were clearly intended. Amount : P6,000,000.00

Moreover, the laws evident intention to protect the interests of the mortgagee upon h. Policy Number : CI/F-128-03341 None
the mortgaged property is expressed in Article 2127 of the Civil Code which states: Issue Date : May 3, 1991
Expiry Date : May 3, 1992
ART. 2127. The mortgage extends to the natural accessions, to the improvements, Amount : P10,000,000.00
growing fruits, and the rents or income not yet received when the obligation becomes
due, and to the amount of the indemnity granted or owing to the proprietor from the i. Policy Number : F-114-07402 Exhibit 8-Malayan
insurers of the property mortgaged, or in virtue of expropriation for public use, with the Issue Date : September 16, 1991
declarations, amplifications and limitations established by law, whether the estate Expiry Date : October 19, 1992
remains in the possession of the mortgagor, or it passes into the hands of a third Amount : P32,252,125.20
person.
j. Policy Number : F-114-07525 Exhibit 9-Malayan
Significantly, the Court notes that out of the 10 insurance policies subject of this case, Issue Date : November 20, 1991
only 8 of them appear to have been subject of the endorsements prepared and Expiry Date : December 5, 1992
delivered by Alchester for and upon instructions of GOYU as shown below: Amount : P6,603,586.43
 ordinary course of business had been followed (Metropolitan Bank and Trust
(pp. 456-457, Record; Folder of Exhibits for MICO.) Company vs. Quilts and All, Inc., 222 SCRA 486 [1993]). The obligor and not the
holder of the negotiable instrument has the burden of proof of showing that he no
Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was longer owes the obligee any amount (Travel-On, Inc. vs. Court of Appeals, 210 SCRA
admitted by MICOs witness, Atty. Farolan (tsn, February 16, 1994, p. 25). Likewise, 351 [1992]).
the record shows no endorsement for Policy Number CI/F-128-03341 [(h) above].
Also, one of the endorsement documents, Exhibit 5-Malayan, refers to a certain Even casting aside the presumption of regularity of private transactions, receipt of the
insurance policy number ACIA-F-07066, which is not among the insurance policies loan amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU
involved in the complaint. as indicated in the testimony of Go Song Hiap when he answered the queries of the
trial court:
The proceeds of the 8 insurance policies endorsed to RCBC aggregate to
P89,974,488.36. Being exclusively payable to RCBC by reason of the endorsement ATTY. NATIVIDAD
by Alchester to RCBC, which we already ruled to have the force and effect of an
endorsement by GOYU itself, these 8 policies can not be attached by GOYUs other Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the
creditors up to the extent of the GOYUs outstanding obligation in RCBCs favor. amounts stated therein?
Section 53 of the Insurance Code ordains that the insurance proceeds of the
endorsed policies shall be applied exclusively to the proper interest of the person for A: Yes, sir, I received the amount.
whose benefit it was made. In this case, to the extent of GOYUs obligation with
RCBC, the interest of GOYU in the subject policies had been transferred to RCBC COURT
effective as of the time of the endorsement. These policies may no longer be attached
by the other creditors of GOYU, like Alfredo Sebastian in the present G.R. No. He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?
128834, which may nonetheless forthwith be dismissed for being moot and academic
in view of the results reached herein. Only the two other policies amounting to WITNESS:
P19,646,224.92 may be validly attached, garnished, and levied upon by GOYUs other
creditors. To the extent of GOYUs outstanding obligation with RCBC, all the rest of Yes, Your Honor, I received all the amounts.
the other insurance policies above-listed which were endorsed to RCBC, are,
therefore, to be released from attachment, garnishment, and levy by the other COURT
creditors of GOYU.
Indicated in the Promissory Notes?
This brings us to the next relevant issue to be resolved, which is, the extent of
GOYUs outstanding obligation with RCBC which the proceeds of the 8 insurance WITNESS
policies will discharge and liquidate, or put differently, the actual amount of GOYUs
liability to RCBC. A. The promissory Notes they did not give to me but the amount I asked which is
correct, Your Honor.
The Court of Appeals simply echoed the declaration of the trial court finding that
GOYUS total obligation to RCBC was only P68,785,060.04 as of April 27, 1992, thus COURT
sanctioning the trial courts exclusion of Promissory Note No. 421-92 (renewal of
Promissory Note No. 908-91) and Promissory Note No. 420-92 (renewal of Q: You mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?
Promissory Note No. 952-91) on the ground that their execution is highly questionable
for not only are these dated after the fire, but also because the signatures of either A: Yes, Your Honor.
GOYU or any its representative are conspicuously absent. Accordingly, the Court of
Appeals speculated thusly: (tsn, Jan. 14, 1994, p. 26.)

Hence, this Court is inclined to conclude that said promissory notes were pre-signed Furthermore, aside from its judicial admission of having received all the proceeds of
by plaintiff in blank terms, as averred by plaintiff, in contemplation of the speedy grant the 29 promissory notes as hereinabove quoted, GOYU also offered and admitted to
of future loans, for the same practice of procedure has always been adopted in its RCBC that its obligation be fixed at P116,301,992.60 as shown in its letter dated
previous dealings with the bank. March 9, 1993, which pertinently reads:

(Rollo, pp. 181-182.) We wish to inform you, therefore that we are ready and willing to pay the current past
due account of this company in the amount of P116,301,992.60 as of 21 January
The fact that the promissory notes bear dates posterior to the fire does not 1993, specified in pars. 15, p. 10, and 18, p. 13 of your affidavits of Third Party
necessarily mean that the documents are spurious, for it is presumed that the Claims in the Urban case at Makati, Metro Manila and in the Zamboanga case at
Zamboanga city, respectively, less the total of P8,851,519.71 paid from the Seaboard
and Equitable insurance companies and other legitimate deductions. We accept and
confirm this amount of P116,301,992.60 as stated as true and correct.
(Exhibit BB.)
The Court of Appeals erred in placing much significance on the fact that the excluded
promissory notes are dated after the fire. It failed to consider that said notes had for
their origin transactions consummated prior to the fire. Thus, careful attention must be
paid to the fact that Promissory Notes No. 420-92 and 421-92 are mere renewals of
Promissory Notes No. 908-91 and 952-91, loans already availed of by GOYU.
The two courts below erred in failing to see that the promissory notes which they
ruled should be excluded for bearing dates which are after that of the fire, are mere
renewals of previous ones. The proceeds of the loan represented by these
promissory notes were admittedly received by GOYU. There is ample factual and
legal basis for giving GOYUs judicial admission of liability in the amount of
P116,301,992.60 full force and effect
It should, however, be quickly added that whatever amount RCBC may have
recovered from the other insurers of the mortgaged property will, nonetheless, have
to be applied as payment against GOYUs obligation. But, contrary to the lower courts
findings, payments effected by GOYU prior to January 21, 1993 should no longer be
deducted. Such payments had obviously been duly considered by GOYU, in its
aforequoted letter dated March 9, 1993, wherein it admitted that its past due account
totaled P116,301,992.60 as of January 21, 1993.
The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as
of January 21, 1993, to wit:
Total Obligation as admitted by GOYU as of January 21, 1993: P116,301,992.60
Broken down as follows
Principal[1] Interest
Regular 80,535,946.32
FDU 7,548,025.17
____________ _____________
Total: 108,083,971.49 8,218,021.11[2]
LESS:
1) Proceeds from
Seaboard Eastern
Insurance Company: 6,095,145.81
2) Proceeds from
Equitable Insurance
Company: 2,756,373.00
3) Payment from
foreign department
negotiation: 203,584.89
9,055,104.70[3]
NET AMOUNT as of January 21, 1993: P 107,246,887.90
The need for the payment of interest due upon the principal amount of the obligation,
which is the cost of money to RCBC, the primary end and the ultimate reason for
RCBCs existence and being, was duly recognized by the trial court when it ruled
favorably on RCBCs counterclaim, ordering GOYU to pay its loan obligation with
RCBC in the amount of P68,785,069.04, as of April 27,1992, with interest thereon at
the rate stipulated in the respective promissory notes (without surcharges and
penalties) per computation, pp. 14-A, 14-B, 14-C (Record, p. 479). Inexplicably, the
Court of Appeals, without even laying down the factual or legal justification for its
ruling, modified the trial courts ruling and ordered GOYU to pay the principal amount
of P68,785,069.04 without any interest, surcharges and penalties (Rollo, p. 200).
It is to be noted in this regard that even the trial court hedgingly and with much
uncertainty deleted the payment of additional interest, penalties, and charges, in this
manner:
Regarding defendant RCBCs commitment not to charge additional interest, penalties
and surcharges, the same does not require that it be embodied in a document or
some form of writing to be binding and enforceable. The principle is well known that
generally a verbal agreement or contract is no less binding and effective than a
written one. And the existence of such a verbal agreement has been amply
established by the evidence in this case. In any event, regardless of the existence of
such verbal agreement, it would still be unjust and inequitable for defendant RCBC to
charge the plaintiff with surcharges and penalties considering the latters pitiful
situation. (Emphasis supplied.)
(Record, p. 476)
The essence or rationale for the payment of interest or cost of money is separate and
distinct from that of surcharges and penalties. What may justify a court in not allowing
the creditor to charge surcharges and penalties despite express stipulation therefor in
a valid agreement, may not equally justify non-payment of interest. The charging of
interest for loans forms a very essential and fundamental element of the banking
business, which may truly be considered to be at the very core of its existence or
being. It is inconceivable for a bank to grant loans for which it will not charge any
interest at all. We fail to find justification for the Court of Appeals outright deletion of
the payment of interest as agreed upon in the respective promissory notes. This
constitutes gross error.
For the computation of the interest due to be paid to RCBC, the following rules of
thumb laid down by this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals
(234 SCRA 78 [1994]), shall apply, to wit:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on Damages of the Civil Code govern in determining
the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached,
an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date of the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.
(pp. 95-97.)
There being written stipulations as to the rate of interest owing on each specific
promissory note as summarized and tabulated by the trial court in its decision (pp.470
and 471, Record) such agreed interest rates must be followed. This is very clear from
paragraph II, sub-paragraph 1 quoted above.
On the issue of payment of surcharges and penalties, we partly agree that GOYUs
pitiful situation must be taken into account. We do not agree, however, that payment
of any amount as surcharges and penalties should altogether be deleted. Even
assuming that RCBC, through its responsible officers, herein petitioners Eli Lao and
Uy Chun Bing, may have relayed its assurance for assistance to GOYU immediately
after the occurrence of the fire, we cannot accept the lower courts finding that RCBC
had thereby ipso facto effectively waived collection of any additional interests,
surcharges, and penalties from GOYU. Assurances of assistance are one thing, but
waiver of additional interests, surcharges, and penalties is another.
Surcharges and penalties agreed to be paid by the debtor in case of default partake
of the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of
the Civil Code. Article 2227 thereof provides:
ART. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be
equitably reduced if they are iniquitous and unconscionable.
In exercising this vested power to determine what is iniquitous and unconscionable,
the Court must consider the circumstances of each case. It should be stressed that
the Court will not make any sweeping ruling that surcharges and penalties imposed
by banks for non-payment of the loans extended by them are generally iniquitous and
unconscionable. What may be iniquitous and unconscionable in one case, may be
totally just and equitable in another. This provision of law will have to be applied to the
established facts of any given case. Given the circumstances under which GOYU
found itself after the occurrence of the fire, the Court rules the surcharges rates
ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely
iniquitous and unconscionable. The Court tempers these rates to 2% and 3%,
respectively. Furthermore, in the light of GOYUs offer to pay the amount of
P116,301,992.60 to RCBC as March 1993 (See: Exhibit BB), which RCBC refused,
we find it more in keeping with justice and equity for RCBC not to charge additional
interest, surcharges, and penalties from that time onward.
Given the factual milieu spread hereover, we rule that it was error to hold MICO liable
in damages for denying or withholding the proceeds of the insurance claim to GOYU.
Firstly, by virtue of the mortgage contracts as well as the endorsements of the
insurance policies, RCBC has the right to claim the insurance proceeds, in
substitution of the property lost in the fire. Having assigned its rights, GOYU lost its
standing as the beneficiary of the said insurance policies.
Secondly, for an insurance company to be held liable for unreasonably delaying and
withholding payment of insurance proceeds, the delay must be wanton, oppressive,
or malevolent (Zenith Insurance Corporation vs. CA, 185 SCRA 403 [1990]). It is
generally agreed, however, that an insurer may in good faith and honesty entertain a
difference of opinion as to its liability. Accordingly, the statutory penalty for vexatious
refusal of an insurer to pay a claim should not be inflicted unless the evidence and
circumstances show that such refusal was willful and without reasonable cause as the
facts appear to a reasonable and prudent man (Buffalo Ins. Co. vs. Bommarito [CCA
8th] 42 F [2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853,
65 Am St Rep 307; Kusnetsky vs. Security Ins. Co., 313 Mo. 143, 281 SW 47, 45
ALR 189). The case at bar does not show that MICO wantonly and in bad faith
delayed the release of the proceeds. The problem in the determination of who is the
actual beneficiary of the insurance policies, aggravated by the claim of various
creditors who wanted to partake of the insurance proceeds, not to mention the
importance of the endorsement to RCBC, to our mind, and as now borne out by the (per report of adjuster Toplis & Harding (Far East), Inc., Exhibits 2 and 2-1), less the
outcome herein, justified MICO in withholding payment to GOYU. amount of P50,505,594.60 (per O.R. No. 3649285);

In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC
cannot avail itself of two simultaneous remedies in enforcing the claim of an unpaid
creditor, one for specific performance and the other for foreclosure. In doing so, said
the appellate court, the second action is deemed barred, RCBC having split a single
cause of action (Rollo, pp. 195-199). The Court of Appeals was too accommodating in
giving due consideration to this argument of GOYU, for the foreclosure suit is still
pending appeal before the same Court of Appeals in CA G.R CV No. 46247, the case
having been elevated by RCBC.
In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court
of Appeals pre-empted the resolution of said foreclosure case which is not before it.
This is plain reversible error if not grave abuse of discretion.
3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the
interests earned to Rizal Commercial Banking Corporation;
4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial
Banking Corporation in the principal amount of P107,246,887.90, with interest at the
respective rates stipulated in each promissory note from January 21, 1993 until
finality of this judgment, and surcharges at 2% and penalties at 3% from January 21,
1993 to March 9, 1993, minus payments made by Malayan Insurance Company, Inc.
and the proceeds of the amount deposited with the trial court and its earned interest.
The total amount due RCBC at the time of the finality of this judgment shall earn
interest at the legal rate of 12% in lieu of all other stipulated interests and charges
until fully paid.

As held in Pea vs. Court of Appeals (245 SCRA 691[1995]): The petition of Rizal Commercial Banking Corporation against the respondent Court
in CA-GR CV 48376 is DISMISSED for being moot and academic in view of the
It should have been enough, nonetheless, for the appellate court to merely set aside results herein arrived at. Respondent Sebastians right as attaching creditor must yield
the questioned orders of the trial court for having been issued by the latter with grave to the preferential rights of Rizal Commercial Banking Corporation over the Malayan
abuse of discretion. In likewise enjoining permanently herein petitioner from entering insurance policies as first mortgagee.
in and interfering with the use or occupation and enjoyment of petitioners (now private
respondent) residential house and compound, the appellate court in effect, SO ORDERED.
precipitately resolved with finality the case for injunction that was yet to be heard on
the merits by the lower court. Elevated to the appellate court, it might be stressed,
were mere incidents of the principal case still pending with the trial court. In
Municipality of Bian, Laguna vs. Court of Appeals, 219 SCRA 69, we ruled that the
Court of Appeals would have no jurisdiction in a certiorari proceeding involving an
incident in a case to rule on the merits of the main case itself which was not on
appeal before it.

(pp. 701-702.)

Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga
Regional Trial Court, since it has been determined that RCBC has the right to the
insurance proceeds, the subject matter of intervention is rendered moot and
academic. Respondent Sebastian must, however, yield to the preferential right of
RCBC over the MICO insurance policies. It is basic and fundamental that the first
mortgagee has superior rights over junior mortgagees or attaching creditors (Alpha
Insurance & Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of
Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]).

WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of
December 16, 1996 and April 3, 1997 in CA-G.R. CV No. 46162 are hereby
REVERSED and SET ASIDE, and a new one entered:

1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442
before Branch 3 of the Manila Regional Trial Court for lack of merit;

2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking

Corporation the proceeds of the insurance policies in the amount of P51,862,390.94
G.R. No. L-52478October 30, 1986
THE GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner-appellant,
vs.
HONORABLE COURT OF APPEALS, NEMENCIO R. MEDINA and JOSEFINA G.
MEDINA, respondents-appellants.
PARAS, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals in CA-
G.R. No. 62541-R (Nemencio R. Medina and Josefina G. Medina, Plaintiffs-
Appellants vs. The Government Service Insurance System, Defendant-Appellant)
affirming the January 21, 1977 Decision of the trial court, and at the same time
ordering the GSIS to reimburse the amount of P9,580.00 as over-payment and to pay
the spouses Nemencio R. Medina and Josefina G. Medina P3,000.00 and P1,000.00
as attorney's fees and litigation expenses.
In 1961, herein private respondents spouses Nemencio R. Medina and Josefina G.
Medina (Medinas for short) applied with the herein petitioner Government Service
Insurance System (GSIS for short) for a loan of P600,000.00. The GSIS Board of
Trustees, in its Resolution of December 20, 1961, approved under Resolution No.
5041 only the amount of P350,000.00, subject to the following conditions: that the
rate of interest shall be 9% per annum compounded monthly; repayable in ten (10)
years at a monthly amortization of P4,433.65 including principal and interest, and that
any installment or amortization that remains due and unpaid shall bear interest at the
rate of 9%/12% per month. The Office of the Economic Coordinator, in a 2nd
Indorsement dated March 26, 1962, further reduced the approved amount to
P295,000.00. On April 4, 1962, the Medinas accepting the reduced amount, executed
a promissory note and a real estate mortgage in favor of GSIS. On May 29, 1962, the
GSIS, and on June 6, 1962, the Office of the Economic Coordinator, upon request of
the Medinas, both approved the restoration of the amount of P350,000.00
(P295,000.00 + P55,000.00) originally approved by the GSIS. This P350,000.00 loan
was denominated by the GSIS as Account No. 31055.
On July 6, 1962, the Medinas executed in favor of the GSIS an Amendment of Real
Estate Mortgage, the pertinent portion of which reads:
WHEREAS, on the 4th day of April, 1962, the Mortgagor executed signed and
delivered a real estate mortgage to and in favor of the Mortgagee on real estate
properties located in the City of Manila, ... to secure payment to the mortgages of a
loan of Two Hundred Ninety Five Thousand Pesos (P295,000.00) Philippine
Currency, granted by the mortgagee to the Mortgagors, ...;
WHEREAS, the parties herein have agreed as they hereby agree to increase the
aforementioned loan from Two Hundred Ninety Five Thousand Pesos (P295,000.00)
to Three Hundred Fifty Thousand Pesos (P350,000.00), Philippine Currency;
NOW, THEREFORE, for and in consideration of the foregoing premises, the
aforementioned parties have amended and by these presents do hereby amend the
said mortgage dated April 4, 1962, mentioned in the second paragraph hereof by
increasing the loan from Two Hundred Ninety Five Thousand Pesos (P295,000.00) to
Three Hundred Fifty Thousand Pesos (P350,000.00) subject to this additional
condition.
(1) That the mortgagor shall pay to the system P4,433.65 monthly including
principal and interest.
It is hereby expressly understood that with the foregoing amendment, all other terms
and conditions of the said real estate mortgage dated April 4, 1962 insofar as they are
not inconsistent herewith, are hereby confirmed, ratified and continued in full force
and effect and that the parties thereto agree that this amendment be an integral part
of said real estate mortgage. (Rollo, p. 153-154).
Upon application by the Medinas, the GSIS Board of Trustees adopted Resolution
No. 121 on January 18, 1963, as amended by Resolution No. 348 dated February 25,
1963, approving an additional loan of P230,000.00 in favor of the Medinas on the
security of the same mortgaged properties and the additional properties covered by
TCT Nos. 49234, 49235 and 49236, to bear interest at 9% per annum compounded
monthly and repayable in ten years. This additional loan of P230,000.00 was
denominated by the GSIS as Account No. 31442.
On March 18, 1963, the Economic Coordinator thru the Auditor General interposed no
objection thereto, subject to the conditions of Resolution No. 121 as amended by
Resolution No. 348 of the GSIS.
Beginning 1965, the Medinas having defaulted in the payment of the monthly
amortization on their loan, the GSIS imposed 9%/12% interest on an installments due
and unpaid. In 1967, the Medinas began defaulting in the payment of fire insurance
premiums.
On May 3, 1974, the GSIS notified the Medinas that they had arrearages in the
aggregate amount of P575,652.42 as of April 18, 1974 (Exhibit 9, p. 149, Joint
Record on Appeal, Rollo, p. 79), and demanded payment within seven (7) days from
notice thereof, otherwise, it would foreclose the mortgage.
On April 21, 1975, the GSIS filed an Application for Foreclosure of Mortgage with the
Sheriff of the City of Manila (Exhibit "22," pp. 63 and 149; Rollo, p. 79). On June 30,
1975, the Medinas filed with the Court of First Instance of Manila a complaint,
praying, among other things, that a restraining order or writ of preliminary injunction
be issued to prevent the GSIS and the Sheriff of the City of Manila from proceeding
with the extra-judicial foreclosure of their mortgaged properties (CFI Decision, p. 121;
Rollo, p. 79). However, in view of Section 2 of Presidential Decree No. 385, no
restraining order or writ of preliminary injunction was issued by the trial court (CFI
Decision, p. 212; Rollo, p. 79). On April 25, 1975, the Medinas made a last partial
payment in the amount of P209,662.80.
Under a Notice of Sale on Extra-Judicial Foreclosure dated June 18, 1975, the real
properties of the Medinas covered by Transfer Certificates of Title Nos. 32231,
43527, 51394, 58626, 60534, 63304, 67550, 67551 and 67552 of the Registry of
Property of the City of Manila were sold at public auction to the GSIS as the highest
bidder for the total amount of P440,080.00 on January 12, 1976, and the
corresponding Certificate of Sale was executed by the Sheriff of Manila on January
27, 1976 (CFI Decision, pp. 212-213; Rollo, p. 79).
On January 30, 1976, the Medinas filed an Amended Complaint with the trial court,
praying for (a) the declaration of nullity of their two real estate mortgage contracts
with the GSIS as well as of the extra-judicial foreclosure proceedings; and (b) the
refund of excess payments, plus damages and attorney's fees (CFI Decision, p. 213;
Rollo, p. 79).
On March 19, 1976, the GSIS filed its Amended Answer (Joint Record on Appeal, pp.
99-105; Rollo, p. 79). After trial, the trial court rendered a Decision dated January 21,
1977 (Joint Record on Appeal, pp. 210-232), the pertinent dispositive portion of which
reads:
WHEREFORE, judgment is hereby rendered declaring the extra-judicial foreclosure
conducted by the Sheriff of Manila of real estate mortgage contracts executed by
plaintiffs on April 4, 1962, as amended on July 6, 1962, and February 17, 1963, null
and void and the Sheriff's Certificate of Sale dated January 27, 1976, in favor of the
GSIS of no legal force and effect; and directing plaintiffs to pay the GSIS the sum of
P1,611.12 in full payment of their obligation to the latter with interest of 9% per annum
from December 11, 1975, until fully paid.
Dissatisfied with the said judgment, both parties appealed with the Court of Appeals.
The Court of Appeals, in a Decision promulgated on January 18, 1980 (Record, pp.
72-77), ruled in favor of the Medinas —
WHEREFORE, the defendant GSIS is ordered to reimburse the amount of P9,580.00
as overpayment and to pay plaintiffs P3,000.00 and Pl,000.00 as attorney's fees and
litigation expenses, respectively. With these modifications, the judgment appealed
from is AFFIRMED in all other respects, with costs against defendant GSIS."
Hence this petition.
The Second Division of this Court, in a Resolution dated April 25, 1980 (Rollo, p.. 88),
resolved to deny the petition for lack of merit.
Petitioner filed on June 26, 1980 a Motion for Reconsideration dated June 17, 1980
(Rollo, pp. 95-103), of the above-stated Resolution and respondents in a Resolution
dated July 9, 1980 (Rollo, p. 105), were required to comment thereon which comment
they filed on August 6, 1980. (Rollo, pp. 106-116).
The petition was given due course in the Resolution dated July 6, 1981 (Rollo, p.
128). Petitioner filed its brief on November 26, 1981 (Rollo, pp. 147-177); while
private respondents filed their brief on January 27, 1982 (Rollo, pp. 181-224), and the
case was considered submitted for decision in the Resolution of July 19, 1982 (Rollo,
p. 229).
The issues in this case are:
1. WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING
THAT THE AMENDMENT OF REAL ESTATE MORTGAGE DATED JULY 6, 1962
SUPERSEDED THE MORTGAGE CONTRACT DATED APRIL 4, 1962,
PARTICULARLY WITH RESPECT TO COMPOUNDING OF INTEREST;
2. WHETHER OR NOT THE COURT OF APPEALS ERRED IN SUSTAINING
THE RESPONDENT-APPELLEE SPOUSES MEDINA'S CLAIM OR
OVERPAYMENT, BY CREDITING THE FIRE INSURANCE PROCEEDS IN THE
SUM OF P11,152.02 TO THE TOTAL PAYMENT MADE BY SAID SPOUSES AS OF
DECEMBER 11, 1975;
3. WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING
THAT THE INTEREST RATES ON THE LOAN ACCOUNTS OF RESPONDENT-
APPELLEE SPOUSES ARE USURIOUS;
4. WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING
THE ANNULMENT OF THE SUBJECT EXTRAJUDICIAL FORECLOSURE AND
SHERIFF'S CERTIFICATE OF SALE; AND
5. WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING
THE GSIS LIABLE FOR ATTORNEY'S FEES, EXPENSES OF LITIGATION AND
COSTS.
The petition is impressed with merit.
There is no dispute as to the facts of the case. By agreement of the parties the issues
in this case are limited to the loan of P350,000.00 denominated as Account No.
31055 (Rollo, p. 79; Joint Record on Appeal, p. 129) subject of the Amendment of
Real Mortgage dated July 6, 1962, the interpretation of which is the major issue in this
case.
GSIS claims that the amendment of the real estate mortgage did not supersede the
original mortgage contract dated April 4, 1962 which was being amended only with
respect to the amount secured thereby, and the amount of monthly amortizations. All
other provisions of aforesaid mortgage contract including that on compounding of
interest were deemed rewritten and thus binding on and enforceable against the
respondent spouses. (Rollo, pp. 162-166).
Accordingly, payments made by the Medinas in the total amount of P991,845.53 was
applied as follows: the amount of P600,495.51 to Account No. 31055, P466,965.31 of
which to interest and P133,530.20 to principal and P390,845.66 to Account No.
31442, P230,774.29 to interest and P159,971.37 to principal. (Joint Record on
Appeal, p. 216; Rollo, p. 79).
On the other hand the Medinas maintain that there is no express stipulation on
compounded interest in the amendment of mortgage contract of July 6, 1962 so that
the compounded interest stipulation in the original mortgage contract of April 4, 1962
which has been superseded cannot be enforced in the later mortgage. (Rollo, p. 185).
Hence the Medinas claim an overpayment in Account No. 31055. The application of
their total payment in the amount of P991,845.53 as computed by the trial court and
by the Court of Appeals is as follows:
... It appearing and so the parties admit in their own exhibits that as of December 11,
1975, plaintiffs had paid a total of P991,241.17 excluding fire insurance, P532,038.00
of said amount should have been applied to the full payment of Acct. No. 31055 and
the balance of P459,203.17 applied to the payment of Acct. No. 31442.

According to the computation of the GSIS (Exhibit C, also Exhibit 38) the total
amounts, collected on Acct. No. 31442 as of December 11, 1975 total P390,745.66
thus leaving an unpaid balance of P70,028.63. The total amount plaintiffs should pay
on said account should therefore be P460,774.29. Deduct this amount from
P459,163.17 which has been shown to be the difference between the total payments
made by plaintiffs to the G.S.I.S. as of December 11, 1975 and the amount said
plaintiffs should pay under their Acct. No. 31055, there remains an outstanding
balance of P1,611.12. This amount represents the balance of the obligation of the
plaintiffs to the G.S.I.S. on Acct. No. 31442 as of December 11, 1975." (Decision,
Civil Case No. 98390; Joint Record on Appeal, pp. 227-228; Rollo, p. 79).
To recapitulate, the difference in the computation lies in the inclusion of the
compounded interest as demanded by the GSIS on the one hand and the exclusion
thereof, as insisted by the Medinas on the other.
It is a basic and fundamental rule in the interpretation of contract that if the terms
thereof are clear and leave no doubt as to the intention of the contracting parties, the
literal meaning of the stipulations shall control but when the words appear contrary to
the evident intention of the parties, the latter shall prevail over, the former. In order to
judge the intention of the parties, their contemporaneous and subsequent acts shall
be principally considered. (Sy v. Court of Appeals, 131 SCRA 116; July 31, 1984).
There appears no ambiguity whatsoever in the terms and conditions of the
amendment of the mortgage contract herein quoted earlier. On the contrary, an
opposite conclusion cannot be otherwise but absurd.
As correctly stated by the GSIS in its brief (Rollo, pp. 162166), a careful perusal of the
title, preamble and body of the Amendment of Real Estate Mortgage dated July 6,
1962, taking into account the prior, contemporaneous, and subsequent acts of the
parties, ineluctably shows that said Amendment was never intended to completely
supersede the mortgage contract dated April 4, 1962.
First, the title "Amendment of Real Estate Mortgage" recognizes the existence and
effectivity of the previous mortgage contract. Second, nowhere in the aforesaid
Amendment did the parties manifest their intention to supersede the original contract.
On the contrary in the WHEREAS clauses, the existence of the previous mortgage
contract was fully recognized and the fact that the same was just being amended as
to amount and amortization is fully established as to obviate any doubt. Third, the
Amendment of Real Estate Mortgage dated July 6, 1962 does not embody the act of
conveyancing the subject properties by way of mortgage. In fact the intention of the
parties to be bound by the unaffected provisions of the mortgage contract of April 4,
1962 expressed in unmistakable language is clearly evident in the last provision of
the Amendment of Real Estate Mortgage dated July 6, 1962 which reads:
It is hereby expressly understood that with the foregoing amendment, all other terms
and conditions of the said real estate mortgage dated April 4, 1962, insofar as they
are not inconsistent herewith, are hereby confirmed, ratified and continued to be in full
force and effect, and that the parties hereto agree that the amendment be an integral
part of said real estate mortgage. (Emphasis supplied).
A review of prior, contemporaneous, and subsequent acts supports the conclusion
that both contracts are fully subsisting insofar as the latter is not inconsistent with the
former. The fact is the GSIS, as a matter of policy, imposes uniform terms and
conditions for all its real estate loans, particularly with respect to compounding of
interest. As shown in the case at bar, the original mortgage contract embodies the
same terms and conditions as in the additional loan denominated as Account No.
31442 while the amendment carries the provision that it shall be subject to the same
terms and conditions as the real estate mortgage of April 4, 1962 except as to amount
and amortization.
Furthermore, it would be contrary to human experience and to ordinary practice for
the mortgagee to impose less onerous conditions on an increased loan by the
deletion of compound interest exacted on a lesser loan.
II
There is an obvious error in the ruling of the Court of Appeals in its Decision dated
January 18, 1980, which reads:
... We agree that plaintiff should be credited with P11,152.02 of the fire insurance
proceeds as the same is admitted in paragraph (4) of its Answer and should be added
to their payments. (par. 13).
Contrary thereto, paragraph 4 of the Answer of the GSIS states:
That they (GSIS) specifically deny the allegations in Paragraph 11, the truth being
that plaintiffs are not entitled to a credit of P19,381.07 as fire insurance proceeds
since they were only entitled to, and were credited with, the amount of P11,152.02 as
proceeds of their fire insurance policy. (par. 4, Amended Answer).
As can be gleaned from the foregoing, petitioner-appellant GSIS had already credited
the amount of P11,152.02. Thus, when the Court of Appeals made the aforequoted
ruling, it was actually doubly crediting the amount of P11,152.02 which had been
previously credited by petitioner-appellant GSIS (Rollo, pp. 170-171).
III.
As to whether or not the interest rates on the loan accounts of the Medinas are
usurious, it has already been settled that the Usury Law applies only to interest by
way of compensation for the use or forbearance of money (Lopez v. Hernaez, 32 Phil.
631; Bachrach Motor Co. v. Espiritu, 52 Phil. 346; Equitable Banking Corporation v.
Liwanag, 32 SCRA 293, March 30, 1970). Interest by way of damages is governed by
Article 2209 of the Civil Code of the Philippines which 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,...
In the Bachrach case (supra) the Supreme Court ruled that the Civil Code permits the
agreement upon a penalty apart from the interest. Should there be such an
agreement, the penalty does not include the interest, and as such the two are
different and distinct things which may be demanded separately. Reiterating the same
principle in the later case of Equitable Banking Corp. (supra), where this Court held
that the stipulation about payment of such additional rate partakes of the nature of a
penalty clause, which is sanctioned by law.

IV.

Based on the finding that the GSIS had the legal right to impose an interest 9% per
annum, compounded monthly, on the loans of the Medinas and an interest of
9%/12% per annum on all due and unpaid amortizations or installments, there is no
question that the Medinas failed to settle their accounts with the GSIS which as
computed by the latter reached an outstanding balance of P630,130.55 as of April 12,
1975 and that the GSIS had a perfect right to foreclose the mortgage.

In the same manner, there is obvious error in invalidating the extra-judicial foreclosure
on the basis of a typographical error in the Sheriff's Certificate of Sale which stated
that the mortgage was foreclosed on May 17, 1963 instead of February 17, 1963.

There is merit in GSIS' contention that the Sheriff's Certificate of Sale is merely
provisional in character and is not intended to operate as an absolute transfer of the
subject property, but merely to Identify the property, to show the price paid and the
date when the right of redemption expires (Section 27, Rule 39, Rules of Court,
Francisco, The Revised Rules of Court, 1972 Vol., IV-B, Part I, p. 681). Hence the
date of the foreclosed mortgage is not even a material content of the said Certificate.
(Rollo, p. 174).

V.

PREMISES CONSIDERED, the decision of the Court of Appeals, in CA-G.R. No.

62541-R Medina, et al. v. Government Service Insurance System et al., is hereby
REVERSED and SET ASIDE, and a new one is hereby RENDERED, affirming the
validity of the extra-judicial foreclosure of the real estate mortgages of the
respondent-appellee spouses Medina dated April 4, 1962, as amended on July 6,
1962, and February 17, 1963.

SO ORDERED.

G.R. No. 122079 June 27, 1997
SPOUSES ANTONIO E.A. CONCEPCION and MANUELA S. CONCEPCION
vs.
HON. COURT OF APPEALS
VITUG, J.:
The spouses Antonio E.A. Concepcion and Manuela S. Concepcion assail, via the
instant petition for review on certiorari, the decision,[1] dated 15 September 1995, of
the Court of Appeals, affirming with modification the judgment of the Regional Trial
Court ("RTC"),[2] Branch 157, of Pasig City,[3] that dismissed the complaint of herein
petitioners against private respondents.
The facts, hereunder narrated, are culled from the findings of the appellate court.
On 17 January 1979, the Home Savings Bank and Trust Company (now Insular Life
Savings and Trust Company) granted to the Concepcions a loan amounting to
P1,400,000.00. The Concepcions, in turn, executed in favor of the bank a promissory
note and a real estate mortgage over their property located at 11 Albany St.,
Greenhills, San Juan, Metro Manila. The loan was payable in equal quarterly
amortizations for a period of fifteen (15) years and carried an interest rate of sixteen
percent (16%) per annum. The promissory note provided that the Concepcions had
authorized -
"x x x the Bank to correspondingly increase the interest rate presently stipulated in
this transaction without advance notice to me/us in the event the Central Bank of the
Philippines raises its rediscount rate to member banks, and/or the interest rate on
savings and time deposit, and/or the interest rate on such loans and/or advances."[4]
In accordance with the above provision, the bank unilaterally increased the interest
rate from 16% to 21% effective 17 February 1980; from 21% to 30% effective 17
October 1984; and from 30% to 38% effective 17 November 1984, increasing the
quarterly amortizations from P67,830.00 to, respectively, P77,619.72, P104,661.10,
and P123,797.05 for the periods aforestated. The Concepcions paid, under protest,
the increased amortizations of P77,619.72 and P104,661.10 until January 1985 but
thereafter failed to pay the quarterly amortization of P123,797.05 (starting due date of
17 April 1985).
In a letter, dated 15 July 1985, the bank's President made a demand on the
Concepcions for the payment of the arrearages. The Concepcions failed to pay,
constraining the bank's counsel to send a final demand letter, dated 26 August 1985,
for the payment of P393,878.81, covering the spouses' due account for three
quarterly payments plus interest, penalty, and service charges. Still, no payment was
received.
On 14 April 1986, the bank finally filed with the Office of the Provincial Sheriff of Pasig
City a petition for extrajudicial foreclosure of the real estate mortgage executed by the
Concepcions. A notice of sale was issued on 15 May 1986, setting the public auction
sale on 11 June 1986. The notice was published in the newspaper "Mabuhay." A
copy of the notice was sent to the Concepcions at 59 Whitefield St., White Plains
Subdivision, Quezon City and/or at 11 Albany St., Greenhills Subdivision, San Juan,
Metro Manila. The public auction sale went on as scheduled with the bank emerging
as the highest bidder. A Certificate of Sale was issued in favor of the bank.
The Concepcions were unable to exercise their right of redemption within the one-
year period provided under Act No. 3135. The bank thus consolidated its title over the
property and, after the cancellation of the title in the name of the Concepcions, a new
transfer certificate of title (No. 090-R) was issued in the name of Home Savings Bank
and Trust Company.
On 31 July 1987, the bank executed a Deed of Absolute Sale in favor of Asaje Realty
Corporation and a new certificate of title was issued in the latter's name.
Meanwhile, on 29 July 1987, the Concepcions filed an action against Home Savings
Bank and Trust Company, the Sheriff of San Juan, Metro Manila, and the Register of
Deeds of San Juan, Metro Manila, for the cancellation of the foreclosure sale, the
declaration of nullity of the consolidation of title in favor of the bank, and the
declaration of nullity of the unilateral increases of the interest rates on their loan. The
spouses likewise claimed damages against the defendants. The Concepcions, having
learned of the sale of the property to Asaje Realty Corporation, filed an amended
complaint impleading the realty corporation and so praying as well for the cancellation
of the sale executed between said corporation and the bank and the cancellation of
the certificate of title issued in the name of Asaje.
On 31 August 1992, the trial court found for the defendants and ruled:
"In view of all the foregoing premises, this Court finally concludes that the plaintiffs
have no cause of action either against defendant Home Savings Bank & Trust
Company or defendant Asaje Realty Corporation; and under the circumstances of this
case, it deems it just and equitable that attorney's fees and expenses of litigation
should be recovered by said defendants.
"WHEREFORE, judgment is hereby rendered dismissing the amended complaint of
plaintiffs Spouses Antonio E.A. Concepcion and Manuela S. Concepcion against the
defendants for lack of merit, and ordering the said plaintiffs to pay attorney's fees and
expenses of litigation in the sum of P30,000.00 to defendant Home Savings Bank &
Trust Company and in the amount of P25,000.00 to defendant Asaje Realty
Corporation, in addition to their respective costs of suit.
"SO ORDERED."[5]
The Concepcions went to the Court of Appeals.
On 15 September 1995, the appellate court affirmed the trial court's decision, with
modification, as follows:
"Under the facts and circumstances of the case at bench, the award of attorney's
fees, expenses of litigation and costs of suit in favor of defendant-appellee should be
deleted. It is not a sound policy to place a penalty on the right to litigate, nor should
counsel's fees be awarded everytime a party wins a suit (Arenas vs. Court of
Appeals, 169 SCRA 558).
"WHEREFORE, the appealed judgment is AFFIRMED with the modification that the
award of attorneys fees, litigation expenses and costs of suit in favor of defendant-
appellees are deleted from the dispositive portion.
"SO ORDERED."[6]
The Concepcions forthwith filed with this Court a petition for review on certiorari,
contending that they have been denied their contractually stipulated right to be
personally notified of the foreclosure proceedings on the mortgaged property.
There is some merit in the petition.
The three common types of forced sales arising from a failure to pay a mortgage debt
include (a) an extrajudicial foreclosure sale, governed by Act No. 3135; (b) a judicial
foreclosure sale, regulated by Rule 68 of the Rules of Court; and (c) an ordinary
execution sale, covered by Rule 39 of the Rules of Court.[7] Each mode, peculiarly,
has its own requirements.
In an extrajudicial foreclosure, such as here, Section 3 of Act No. 3135[8] is the law
applicable;[9] the provision reads:
"Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty
days in at least three public places of the municipality or city where the property is
situated, and if such property is worth more than four hundred pesos, such notice
shall also be published once a week for at least three consecutive weeks in a
newspaper of general circulation in the municipality or city."
The Act only requires (1) the posting of notices of sale in three public places, and (2)
the publication of the same in a newspaper of general circulation.[10] Personal notice
to the mortgagor is not necessary.[11] Nevertheless, the parties to the mortgage
contract are not precluded from exacting additional requirements.
In the case at bar, the mortgage contract stipulated that -
"All correspondence relative to this Mortgage, including demand letters, summons,
subpoenas, or notifications of any judicial or extrajudicial actions shall be sent to the
Mortgagor at the address given above or at the address that may hereafter be given
in writing by the Mortgagor to the Mortgagee, and the mere act of sending any
correspondence by mail or by personal delivery to the said address shall be valid and
effective notice to the Mortgagor for all legal purposes, and fact that any
communication is not actually received by the Mortgagor, or that it has been returned
unclaimed to the Mortgagee, or that no person was found at the address given, or
that the address is fictitious or cannot be located, shall not excuse or relieve
Mortgagor from the effects of such notice."[12]
The stipulation, not being contrary to law, morals, good customs, public order or
public policy, is the law between the contracting parties and should be faithfully
complied with.[13]
Private respondent bank maintains that the stipulation that "all correspondence
relative to (the) Mortgage x x x shall be sent to the Mortgagor at the address given
above or at the address that may hereafter be given in writing by the Mortgagor to the
Mortgagee"[14] gives the mortgagee an alternative to send its correspondence either
at the old or the new address given.[15] This stand is illogical. It could not have been
the intendment of the parties to defeat the very purpose of the provision referred to
which is obviously to apprise the mortgagors of the bank's action that might affect the
property and to accord to them an opportunity to safeguard their rights. The Court
finds the bank's failure to comply with its agreement with petitioners an inexcusable
breach of the mortgagee's covenant. Neither petitioners' subsequent opportunity to
redeem the property nor their failed negotiations with the bank for a new schedule of
payments,[16] can be a valid justification for the breach.
The foregoing notwithstanding, petitioners may no longer seek the reconveyance of
the property from private respondent Asaje Realty Corporation, the latter having
been, evidently, an innocent purchaser in good faith.[17] The realty corporation
purchased the property when the title was already in the name of the bank. It was
under no obligation to investigate the title of the bank or to look beyond what clearly
appeared to be on the face of the certificate.[18]
Private respondent bank, however, can still be held to account for the bid price of
Asaje Realty Corporation over and above, if any, the amount due the bank on the
basis of the original interest rate, the unilateral increases made by the bank having
been correctly invalidated by the Court of Appeals.
The validity of "escalation" or "escalator" clauses in contracts, in general, was upheld
by the Supreme Court in Banco Filipino Savings and Mortgage Bank vs. Hon.
Navarro and Del Valle.[19] Hence:
"Some contracts contain what is known as an `escalator clause,' which is defined as
one in which the contract fixes a base price but contains a provision that in the event
of specified cost increases, the seller or contractor may raise the price up to a fixed
percentage of the base. Attacks on such a clause have usually been based on the
claim that, because of the open price-provision, the contract was too indefinite to be
enforceable and did not evidence an actual meeting of the minds of the parties, or
that the arrangement left the price to be determined arbitrarily by one party so that the
contract lacked mutuality. In most instances, however, these attacks have been
unsuccessful.
"The Court further finds as a matter of law that the cost of living index adjustment, or
escalator clause, is not substantively unconscionable.
"Cost of living index adjustment clauses are widely used in commercial contracts in
an effort to maintain fiscal stability and to retain `real dollar' value to the price terms of
long term contracts. The provision is a common one, and has been universally upheld
and enforced. Indeed, the Federal government has recognized the efficacy of
escalator clauses in tying Social Security benefits to the cost of living index, 42
U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the major
labor unions are other examples. That inflation, expected or otherwise, will cause a
particular bargain to be more costly in terms of total dollars than originally
contemplated can be of little solace to the plaintiffs."[20]
In Philippine National Bank vs. Court of Appeals,[21] the Court further elucidated, as
follows:
"It is basic that there can be no contract in the true sense in the absence of the 1684[23] amending Act No. 2655. This provision of the decree is reiterated under
element of agreement, or of mutual assent of the parties. If this assent is wanting on paragraph 1 of your Promissory Note. Your quarterly amortization has been increased
the part of one who contracts, his act has no more efficacy than if it had been done to P104,661.10.
under duress or by a person of unsound mind.
"We trust that you will be guided accordingly."[24]
"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 Letter of 14 November 1984:
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 "On account of the prevailing business and economic condition, we are compelled to
make or break a capital venture. Thus, any change must be mutually agreed upon, increase the interest rate of your existing loan from 30% to 38% per annum effective
otherwise, it is bereft of any binding effect. November 17, 1984. This increase is in accordance with your agreement (escalation
clause) in your promissory note/s.
"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 "In view of this increase in the interest rate of your loan, your Quarterly amortization
respondents' loan. That would completely take away from private respondents the correspondingly increased to P123,797.05 commencing on April 17, 1985.
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 "We trust that you will understand our position and please be guided accordingly."[25]
al., 196 SCRA 536, 544-545 (1991) we held -
Given the circumstances, the Court sees no cogent reasons to fault the appellate
"`x x x (T)he unilateral action of the PNB in increasing the interest rate on the private court in its finding that there are no sufficient valid justifications aptly shown for the
respondent's loan violated the mutuality of contracts ordained in Article 1308 of the unilateral increases by private respondent bank of the interest rates on the loan.
Civil Code:
WHEREFORE, the decision of the appellate court is AFFIRMED subject to the
"`ART. 1308. The contract must bind both contracting parties; its validity or MODIFICATION that private respondent Home Savings Bank and Trust Company
compliance cannot be left to the will of one of them.' shall pay to petitioners the excess, if any, of the bid price it received from Asaje
Realty Corporation for the foreclosed property in question over and above the unpaid
"In order that obligations arising from contracts may have the force or law between balance of the loan computed at the original interest rate. This case is REMANDED to
the parties, there must be mutuality between the parties based on their essential the trial court for the above determination. No costs.
equality. A contract containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties, is void x x x. SO ORDERED.
Hence, even assuming that the x x x 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' x x x.
Such a contract is a veritable trap for the weaker party whom the courts of justice
must protect against abuse and imposition. (Citations omitted.)"[22]

Even if we were to consider that petitioners were bound by their agreement allowing
an increase in the interest rate despite the lack of advance notice to them, the
escalation should still be subject, as so contractually stipulated, to a corresponding
increase by the Central Bank of its rediscount rate to member banks, or of the interest
rate on savings and time deposit, or of the interest rate on such loans and advances.
The notices sent to petitioners merely read:

Letter of 19 July 1984:

"Please be informed that the Bank has increased the interest rate of your existing
loan from 21 to 30% per annum beginning October 17, 1984. This increase of interest
rate is in accordance with the provision of Section 2 of Presidential Decree No.
G.R. No. 181045 July 2, 2014
SPOUSES EDUARDO and LYDIA SILOS, Petitioners,
vs.
PHILIPPINE NATIONAL BANK, Respondent.
DEL CASTILLO, J.:
In 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.
This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2 of the
Court of Appeals (CA) in CA-G.R. CV No. 79650, which affirmed with modifications
the February 28, 2003 Decision3 and the June 4, 2003 Order4 of the Regional Trial
Court (RTC), Branch 6 of Kalibo, Aklan in Civil Case No. 5975.
Factual Antecedents
Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two
decades of operating a department store and buying and selling of ready-to-wear
apparel. Respondent Philippine National Bank (PNB) is a banking corporation
organized and existing under Philippine laws.
To secure a one-year revolving credit line of ₱150,000.00 obtained from PNB,
petitioners constituted in August 1987 a Real Estate Mortgage5 over a 370-square
meter lot in Kalibo, Aklan covered by Transfer Certificate of Title No. (TCT) T-14250.
In July 1988,the credit line was increased to ₱1.8 million and the mortgage was
correspondingly increased to ₱1.8 million.6
And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was executed
to cover the same credit line, which was increased to ₱2.5 million, and additional
security was given in the form of a 134-square meter lot covered by TCT T-16208. In
addition, petitioners issued eight Promissory Notes8 and signed a Credit Agreement.9
This July 1989 Credit Agreement contained a stipulation on interest which provides as
follows:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per
annum. Interest shall be payable in advance every one hundred twenty days at the
rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan
depending on whatever policy the Bank may adopt in the future, including without
limitation, the shifting from the floating interest rate system to the fixed interest rate
system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per
annum, which is equal to the Bank’s spread over the current floating interest rate, the
Borrower hereby agrees that the Bank may, without need of notice to the Borrower,
increase or decrease its spread over the floating interest rate at any time depending
on whatever policy it may adopt in the future.10 (Emphases supplied)
The eight Promissory Notes, on the other hand, contained a stipulation granting PNB
the right to increase or reduce interest rates "within the limits allowed by law or by the
Monetary Board."11
The Real Estate Mortgage agreement provided the same right to increase or reduce
interest rates "at any time depending on whatever policy PNB may adopt in the
future."12
Petitioners religiously paid interest on the notes at the following rates:
1. 1st Promissory Note dated July 24, 1989 – 19.5%;
2. 2nd Promissory Note dated November 22, 1989 – 23%;
3. 3rd Promissory Note dated March 21, 1990 – 22%;
4. 4th Promissory Note dated July 19, 1990 – 24%;
5. 5th Promissory Note dated December 17, 1990 – 28%;
6. 6th Promissory Note dated February 14, 1991 – 32%;
7. 7th Promissory Note dated March 1, 1991 – 30%; and
8. 8th Promissory Note dated July 11, 1991 – 24%.13
In August 1991, an Amendment to Credit Agreement14 was executed by the parties,
with the following stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment
thereof at the rate per annum which is determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment.15 (Emphases supplied)
Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the
following 18 Promissory Notes, which petitioners settled – except the last (the note
covering the principal) – at the following interest rates:
1. 9th Promissory Note dated November 8, 1991 – 26%;
2. 10th Promissory Note dated March 19, 1992 – 25%;
3. 11th Promissory Note dated July 11, 1992 – 23%;
4. 12th Promissory Note dated November 10, 1992 – 21%;
5. 13th Promissory Note dated March 15, 1993 – 21%;
6. 14th Promissory Note dated July 12, 1993 – 17.5%;
7. 15th Promissory Note dated November 17, 1993 – 21%;
8. 16th Promissory Note dated March 28, 1994 – 21%;
9. 17th Promissory Note dated July 13, 1994 – 21%;
10. 18th Promissory Note dated November 16, 1994 – 16%;
11. 19th Promissory Note dated April 10, 1995 – 21%;
12. 20th Promissory Note dated July 19, 1995 – 18.5%;
13. 21st Promissory Note dated December 18, 1995 – 18.75%;
14. 22nd Promissory Note dated April 22, 1996 – 18.5%;
15. 23rd Promissory Note dated July 22, 1996 – 18.5%;
16. 24th Promissory Note dated November 25, 1996 – 18%;
17. 25th Promissory Note dated May 30, 1997 – 17.5%; and
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.16

The 9th up to the 17th promissory notes provide for the payment of interest at the
"rate the Bank may at any time without notice, raise within the limits allowed by law x
x x."17
On the other hand, the 18th up to the 26th promissory notes – including PN 9707237,
which is the 26th promissory note – carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be
increased or decreased for the subsequent Interest Periods, with prior notice to the
Borrower in the event of changes in interest rate prescribed by law or the Monetary
Board of the Central Bank of the Philippines, or in the Bank’s overall cost of funds.
I/We hereby agree that in the event I/we are not agreeable to the interest rate fixed
for any Interest Period, I/we shall have the option top repay the loan or credit facility
without penalty within ten (10) calendar days from the Interest Setting Date.18
(Emphasis supplied)
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made
good on the promissory notes, religiously paying the interests without objection or fail.
But in 1997, petitioners faltered when the interest rates soared due to the Asian
financial crisis. Petitioners’ sole outstanding promissory note for ₱2.5 million – PN
9707237 executed in July 1997 and due 120 days later or on October 28, 1997 –
became past due, and despite repeated demands, petitioners failed to make good on
the note.
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in
case of default, as follows:
Without need for notice or demand, failure to pay this note or any installment thereon,
when due, shall constitute default and in such cases or in case of garnishment,
receivership or bankruptcy or suit of any kind filed against me/us by the Bank, the
outstanding principal of this note, at the option of the Bank and without prior notice of
demand, shall immediately become due and payable and shall be subject to a penalty
charge of twenty four percent (24%) per annum based on the defaulted principal
amount. x x x19 (Emphasis supplied)
PNB prepared a Statement of Account20 as of October 12, 1998, detailing the
amount due and demandable from petitioners in the total amount of ₱3,620,541.60,
broken down as follows:
Principal 2,500,000.00
Interest 538,874.94
Penalties 581,666.66
Total 3,620,541.60
Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB
foreclosed on the mortgage, and on January 14, 1999, TCTs T-14250 and T-16208
were sold to it at auction for the amount of ₱4,324,172.96.21 The sheriff’s certificate
of sale was registered on March 11, 1999.
More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975,
seeking annulment of the foreclosure sale and an accounting of the PNB credit.
Petitioners theorized that after the first promissory note where they agreed to pay
19.5% interest, the succeeding stipulations for the payment of interest in their loan
agreements with PNB – which allegedly left to the latter the sole will to determine the
interest rate – became null and void. Petitioners added that because the interest rates
were fixed by respondent without their prior consent or agreement, these rates are
void, and as a result, petitioners should only be made liable for interest at the legal
rate of 12%. They claimed further that they overpaid interests on the credit, and
concluded that due to this overpayment of steep interest charges, their debt should
now be deemed paid, and the foreclosure and sale of TCTs T-14250 and T-16208
became unnecessary and wrongful. As for the imposed penalty of ₱581,666.66,
petitioners alleged that since the Real Estate Mortgage and the Supplement thereto
did not include penalties as part of the secured amount, the same should be excluded
from the foreclosure amount or bid price, even if such penalties are provided for in the
final Promissory Note, or PN 9707237.22
In addition, petitioners sought to be reimbursed an alleged overpayment of
₱848,285.00 made during the period August 21, 1991 to March 5, 1998,resulting from
respondent’s imposition of the alleged illegal and steep interest rates. They also
prayed to be awarded ₱200,000.00 by way of attorney’s fees.23
In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates; that
petitioners agreed that without prior notice, PNB may modify interest rates depending
on future policy adopted by it; and that the imposition of penalties was agreed upon in
the Credit Agreement. It added that the imposition of penalties is supported by the all-
inclusive clause in the Real Estate Mortgage agreement which provides that the
mortgage shall stand as security for any and all other obligations of whatever kind
and nature owing to respondent, which thus includes penalties imposed upon default
or non-payment of the principal and interest on due date.
On pre-trial, the parties mutually agreed to the following material facts, among others:
a) That since 1991 up to 1998, petitioners had paid PNB the total amount of
₱3,484,287.00;25 and
b) That PNB sent, and petitioners received, a March 10, 2000 demand letter.26
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the
Amendment to Credit Agreement, Real Estate Mortgage and the Supplement thereto
were all prepared by respondent PNB and were presented to her and her husband
Eduardo only for signature; that she was told by PNB that the latter alone would
determine the interest rate; that as to the Amendment to Credit Agreement, she was
told that PNB would fill up the interest rate portion thereof; that at the time the parties
executed the said Credit Agreement, she was not informed about the applicable
spread that PNB would impose on her account; that the interest rate portion of all
Promissory Notes she and Eduardo issued were always left in blank when they
executed them, with respondent’s mere assurance that it would be the one to enter or
indicate thereon the prevailing interest rate at the time of availment; and that they
agreed to such arrangement. She further testified that the two Real Estate Mortgage
agreements she signed did not stipulate the payment of penalties; that she and
Eduardo consulted with a lawyer, and were told that PNB’s actions were improper,
and so on March 20, 2000, they wrote to the latter seeking a recomputation of their
outstanding obligation; and when PNB did not oblige, they instituted Civil Case No.
5975.27

On cross-examination, Lydia testified that she has been in business for 20 years; that
she also borrowed from other individuals and another bank; that it was only with
banks that she was asked to sign loan documents with no indicated interest rate; that
she did not bother to read the terms of the loan documents which she signed; and
that she received several PNB statements of account detailing their outstanding
obligations, but she did not complain; that she assumed instead that what was written
therein is correct.28
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole
witness for respondent, stated on cross-examination that as a practice, the
determination of the prime rates of interest was the responsibility solely of PNB’s
Treasury Department which is based in Manila; that these prime rates were simply
communicated to all PNB branches for implementation; that there are a multitude of
considerations which determine the interest rate, such as the cost of money, foreign
currency values, PNB’s spread, bank administrative costs, profitability, and the
practice in the banking industry; that in every repricing of each loan availment, the
borrower has the right to question the rates, but that this was not done by the
petitioners; and that anything that is not found in the Promissory Note may be
supplemented by the Credit Agreement.29
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment dismissing Civil Case No.
5975.30
It ruled that:
1. While the Credit Agreement allows PNB to unilaterally increase its spread over the
floating interest rate at any time depending on whatever policy it may adopt in the
future, it likewise allows for the decrease at any time of the same. Thus, such
stipulation authorizing both the increase and decrease of interest rates as may be
applicable is valid,31 as was held in Consolidated Bank and Trust Corporation
(SOLIDBANK) v. Court of Appeals;32
2. Banks are allowed to stipulate that interest rates on loans need not be fixed and
instead be made dependent on prevailing rates upon which to peg such variable
interest rates;33
3. The Promissory Note, as the principal contract evidencing petitioners’ loan, prevails
over the Credit Agreement and the Real Estate Mortgage.
As such, the rate of interest, penalties and attorney’s fees stipulated in the
Promissory Note prevail over those mentioned in the Credit Agreement and the Real
Estate Mortgage agreements;34
4. Roughly, PNB’s computation of the total amount of petitioners’ obligation is
correct;35
5. Because the loan was admittedly due and demandable, the foreclosure was
regularly made;36
6. By the admission of petitioners during pre-trial, all payments made to PNB were
properly applied to the principal, interest and penalties.37
The dispositive portion of the trial court’s Decision reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the
respondent and against the petitioners by DISMISSING the latter’s petition.
Costs against the petitioners.
SO ORDERED.38
Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the trial
court granted only a modification in the award of attorney’s fees, reducing the same
from 10% to 1%. Thus, PNB was ordered to refund to petitioner the excess in
attorney’s fees in the amount of ₱356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate
charged by the respondent as well as the extra-judicial foreclosure proceedings and
the Certificate of Sale. However, respondent is directed to refund to the petitioner the
amount of ₱356,589.90 representing the excess interest charged against the latter.
No pronouncement as to costs.
SO ORDERED.40
Ruling of the Court of Appeals
Petitioners appealed to the CA, which issued the questioned Decision with the
following decretal portion:
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED.
The modified Decision of the Regional Trial Court per Order dated June 4, 2003 is
hereby AFFIRMED with MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the expiration of the first 30-day interest
period for PN. No. 9707237 should be 12% per annum;
2. [T]hat the attorney’s fees of10% is valid and binding; and
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid price
of ₱377,505.99 which is the difference between the total amount due [PNB] and the
amount of its bid price.
SO ORDERED.41
On the other hand, respondent did not appeal the June 4,2003 Order of the trial court
which reduced its award of attorney’s fees. It simply raised the issue in its appellee’s
brief in the CA, and included a prayer for the reversal of said Order.
In effect, the CA limited petitioners’ appeal to the following issues:
1) Whether x x x the interest rates on petitioners’ outstanding obligation were
unilaterally and arbitrarily imposed by PNB;
2) Whether x x x the penalty charges were secured by the real estate mortgage; and
3) Whether x x x the extrajudicial foreclosure and sale are valid.42
The CA noted that, based on receipts presented by petitioners during trial, the latter
dutifully paid a total of ₱3,027,324.60 in interest for the period August 7, 1991 to
August 6, 1997, over and above the ₱2.5 million principal obligation. And this is
exclusive of payments for insurance premiums, documentary stamp taxes, and
penalty. All the while, petitioners did not complain nor object to the imposition of
interest; they in fact paid the same religiously and without fail for seven years. The
appellate court ruled that petitioners are thus estopped from questioning the same.
The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB
wrongly applied an interest rate of 25.72% instead of the agreed 25%; thus it
overcharged petitioners, and the latter paid, an excess of ₱736.56 in interest.
On the issue of penalties, the CA ruled that the express tenor of the Real Estate
Mortgage agreements contemplated the inclusion of the PN 9707237-stipulated 24%
penalty in the amount to be secured by the mortgaged property, thus –
For and in consideration of certain loans, overdrafts and other credit accommodations
obtained from the MORTGAGEE and to secure the payment of the same and those
others that the MORTGAGEE may extend to the MORTGAGOR, including interest
and expenses, and other obligations owing by the MORTGAGOR to the
MORTGAGEE, whether direct or indirect, principal or secondary, as appearing in the
accounts, books and records of the MORTGAGEE, the MORTGAGOR does hereby
transfer and convey by way of mortgage unto the MORTGAGEE x x x43 (Emphasis
supplied)
The CA believes that the 24% penalty is covered by the phrase "and other obligations
owing by the mortgagor to the mortgagee" and should thus be added to the amount
secured by the mortgages.44
The CA then proceeded to declare valid the foreclosure and sale of properties
covered by TCTs T-14250 and T-16208, which came as a necessary result of
petitioners’ failure to pay the outstanding obligation upon demand.45 The CA saw fit
to increase the trial court’s award of 1% to 10%, finding the latter rate to be
reasonable and citing the Real Estate Mortgage agreement which authorized the
collection of the higher rate.46
Finally, the CA ruled that petitioners are entitled to ₱377,505.09 surplus, which is the
difference between PNB’s bid price of ₱4,324,172.96 and petitioners’ total computed
obligation as of January 14, 1999, or the date of the auction sale, in the amount of
₱3,946,667.87.47
Hence, the present Petition.
Issues
The following issues are raised in this Petition:
I
A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED IN NOT
NULLIFYING THE INTEREST RATE PROVISION IN THE CREDIT AGREEMENT
DATED JULY 24, 1989 X X X AND IN THE AMENDMENT TO CREDIT
AGREEMENT DATEDAUGUST 21, 1991 X X X WHICH LEFT TO THE SOLE
UNILATERAL DETERMINATION OF THE RESPONDENT PNB THE ORIGINAL
FIXING OF INTEREST RATE AND ITS INCREASE, WHICH AGREEMENT IS
CONTRARY TO LAW, ART. 1308 OF THE [NEW CIVIL CODE], AS ENUNCIATED
IN PONCIANO ALMEIDA V. COURT OF APPEALS,G.R. [NO.] 113412, APRIL 17,
1996, AND CONTRARY TO PUBLIC POLICY AND PUBLIC INTEREST, AND IN
APPLYING THE PRINCIPLE OF ESTOPPEL ARISING FROM THE ALLEGED
DELAYED COMPLAINT OF PETITIONER[S], AND [THEIR] PAYMENT OF THE
INTEREST CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT
ERRED IN NOT DECLARING THAT PNB IS NOT AT ALL ENTITLED TO ANY
INTEREST EXCEPT THE LEGAL RATE FROM DATE OF DEMAND, AND IN NOT
APPLYING THE EXCESS OVER THE LEGAL RATE OF THE ADMITTED
PAYMENTS MADE BY PETITIONER[S] FROM 1991-1998 IN THE ADMITTED
TOTAL AMOUNT OF ₱3,484,287.00, TO PAYMENT OF THE PRINCIPAL OF
₱2,500,000.[00] LEAVING AN OVERPAYMENT OF₱984,287.00 REFUNDABLE BY
RESPONDENT TO PETITIONER[S] WITH INTEREST OF 12% PER ANNUM.
II
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT
PENALTIES ARE INCLUDEDIN THE SECURED AMOUNT, SUBJECT TO
FORECLOSURE, WHEN NO PENALTIES ARE MENTIONED [NOR] PROVIDED
FOR IN THE REAL ESTATE MORTGAGE AS A SECURED AMOUNT AND
THEREFORE THE AMOUNT OF PENALTIES SHOULDHAVE BEEN EXCLUDED
FROM [THE] FORECLOSURE AMOUNT.
III
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER
COURT, WHICH REDUCED THE ATTORNEY’S FEES OF 10% OF THE TOTAL
INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL FORECLOSURE
TOONLY 1%, AND [AWARDING] 10% ATTORNEY’S FEES.48
Petitioners’ Arguments
Petitioners insist that the interest rate provision in the Credit Agreement and the
Amendment to Credit Agreement should be declared null and void, for they relegated
to PNB the sole power to fix interest rates based on arbitrary criteria or factors such
as bank policy, profitability, cost of money, foreign currency values, and bank
administrative costs; spaces for interest rates in the two Credit Agreements and the
promissory notes were left blank for PNB to unilaterally fill, and their consent or
agreement to the interest rates imposed thereafter was not obtained; the interest rate,
which consists of the prime rate plus the bank spread, is determined not by
agreement of the parties but by PNB’s Treasury Department in Manila. Petitioners
conclude that by this method of fixing the interest rates, the principle of mutuality of
contracts is violated, and public policy as well as Circular 90549 of the then Central
Bank had been breached.
Petitioners question the CA’s application of the principle of estoppel, saying that no
estoppel can proceed from an illegal act. Though they failed to timely question the
imposition of the alleged illegal interest rates and continued to pay the loan on the
basis of these rates, they cannot be deemed to have acquiesced, and hence could
recover what they erroneously paid.50
Petitioners argue that if the interest rates were nullified, then their obligation to PNB is
deemed extinguished as of July 1997; moreover, it would appear that they even made
an over payment to the bank in the amount of ₱984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage agreements did not
include nor specify, as part of the secured amount, the penalty of 24% authorized in
PN 9707237, such amount of ₱581,666.66 could not be made answerable by or
collected from the mortgages covering TCTs T-14250 and T-16208. Claiming support
from Philippine Bank of Communications [PBCom] v. Court of Appeals,51 petitioners
insist that the phrase "and other obligations owing by the mortgagor to the
mortgagee"52 in the mortgage agreements cannot embrace the ₱581,666.66 penalty,
because, as held in the PBCom case, "[a] penalty charge does not belong to the
species of obligations enumerated in the mortgage, hence, the said contract cannot
be understood to secure the penalty";53 while the mortgages are the accessory
contracts, what items are secured may only be determined from the provisions of the
mortgage contracts, and not from the Credit Agreement or the promissory notes.
Finally, petitioners submit that the trial court’s award of 1% attorney’s fees should be
maintained, given that in foreclosures, a lawyer’s work consists merely in the
preparation and filing of the petition, and involves minimal study.54 To allow the
imposition of a staggering ₱396,211.00 for such work would be contrary to equity.
Petitioners state that the purpose of attorney’s fees in cases of this nature "is not to
give respondent a larger compensation for the loan than the law already allows, but to
protect it against any future loss or damage by being compelled to retain counsel x x
x to institute judicial proceedings for the collection of its credit."55 And because the
instant case involves a simple extrajudicial foreclosure, attorney’s fees may be
equitably tempered.
Respondent’s Arguments
For its part, respondent disputes petitioners’ claim that interest rates were unilaterally
fixed by it, taking relief in the CA pronouncement that petitioners are deemed
estopped by their failure to question the imposed rates and their continued payment
thereof without opposition. It adds that because the Credit Agreement and promissory
notes contained both an escalation clause and a de-escalation clause, it may not be
said that the bank violated the principle of mutuality. Besides, the increase or
decrease in interest rates have been mutually agreed upon by the parties, as shown
by petitioners’ continuous payment without protest. Respondent adds that the alleged
unilateral imposition of interest rates is not a proper subject for review by the Court
because the issue was never raised in the lower court.
As for petitioners’ claim that interest rates imposed by it are null and void for the
reasons that 1) the Credit Agreements and the promissory notes were signed in
blank; 2) interest rates were at short periods; 3) no interest rates could be charged
where no agreement on interest rates was made in writing; 4) PNB fixed interest rates
on the basis of arbitrary policies and standards left to its choosing; and 5) interest
rates based on prime rate plus applicable spread are indeterminate and arbitrary –
PNB counters:
a. That Credit Agreements and promissory notes were signed by petitioner[s] in blank
– Respondent claims that this issue was never raised in the lower court. Besides,
documentary evidence prevails over testimonial evidence; Lydia Silos’ testimony in
this regard is self-serving, unsupported and uncorroborated, and for being the lone
evidence on this issue. The fact remains that these documents are in proper form,
presumed regular, and endure, against arbitrary claims by Silos – who is an
experienced business person – that she signed questionable loan documents whose
provisions for interest rates were left blank, and yet she continued to pay the interests
without protest for a number of years.56
b. That interest rates were at short periods – Respondent argues that the law which
governs and prohibits changes in interest rates made more than once every twelve
months has been removed57 with the issuance of Presidential Decree No. 858.58
c. That no interest rates could be charged where no agreement on interest rates was
made in writing in violation of Article 1956 of the Civil Code, which provides that no
interest shall be due unless it has been expressly stipulated in writing – Respondent
insists that the stipulated 25% per annum as embodied in PN 9707237 should be
imposed during the interim, or the period after the loan became due and while it
remains unpaid, and not the legal interest of 12% as claimed by petitioners.59
d. That PNB fixed interest rates on the basis of arbitrary policies and standards left to
its choosing – According to respondent, interest rates were fixed taking into
consideration increases or decreases as provided by law or by the Monetary Board,
the bank’s overall costs of funds, and upon agreement of the parties.60
e. That interest rates based on prime rate plus applicable spread are indeterminate
and arbitrary – On this score, respondent submits there are various factors that
influence interest rates, from political events to economic developments, etc.; the cost
of money, profitability and foreign currency transactions may not be discounted.61
On the issue of penalties, respondent reiterates the trial court’s finding that during
pre-trial, petitioners admitted that the Statement of Account as of October 12, 1998 –
which detailed and included penalty charges as part of the total outstanding obligation
owing to the bank – was correct. Respondent justifies the imposition and collection of
a penalty as a normal banking practice, and the standard rate per annum for all
commercial banks, at the time, was 24%.
Respondent adds that the purpose of the penalty or a penal clause for that matter is
to ensure the performance of the obligation and substitute for damages and the
payment of interest in the event of non-compliance.62 And the promissory note –
being the principal agreement as opposed to the mortgage, which is a mere
accessory – should prevail. This being the case, its inclusion as part of the secured
amount in the mortgage agreements is valid and necessary.

Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-
empting consolidation of its ownership over TCTs T-14250 and T-16208; that
petitioners filed Civil Case No. 5975 ostensibly to question the foreclosure and sale of
properties covered by TCTs T-14250 and T-16208 in a desperate move to retain
ownership over these properties, because they failed to timely redeem them.
Respondent directs the attention of the Court to its petition in G.R. No. 181046,63
where the propriety of the CA’s ruling on the following issues is squarely raised:
1. That the interest rate to be applied after the expiration of the first 30-day interest
period for PN 9707237 should be 12% per annum; and
2. That PNB should reimburse petitioners the excess in the bid price of ₱377,505.99
which is the difference between the total amount due to PNB and the amount of its
bid price.
Our Ruling
The Court grants the Petition.
Before anything else, it must be said that it is not the function of the Court to re-
examine or re-evaluate evidence adduced by the parties in the proceedings below.
The rule admits of certain well-recognized exceptions, though, as when the lower
courts’ findings are not supported by the evidence on record or are based on a
misapprehension of facts, or when certain relevant and undisputed facts were
manifestly overlooked that, if properly considered, would justify a different conclusion.
This case falls within such exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the Court’s First
Division denying respondent’s petition in G.R. No. 181046, due to late filing, failure to
attach the required affidavit of service of the petition on the trial court and the
petitioners, and submission of a defective verification and certification of non-forum
shopping. On June 25, 2008, the Court issued another Resolution denying with
finality respondent’s motion for reconsideration of the March 5, 2008 Resolution. And
on August 15, 2008, entry of judgment was made. This thus settles the issues, as
above-stated, covering a) the interest rate – or 12% per annum– that applies upon
expiration of the first 30 days interest period provided under PN 9707237, and b)the
CA’s decree that PNB should reimburse petitioner the excess in the bid price of
₱377,505.09.
It appears that respondent’s practice, more than once proscribed by the Court, has
been carried over once more to the petitioners. In a number of decided cases, the
Court struck down provisions in credit documents issued by PNB to, or required of, its
borrowers which allow the bank to increase or decrease interest rates "within the
limits allowed by law at any time depending on whatever policy it may adopt in the
future." Thus, in Philippine National Bank v. Court of Appeals,64 such stipulation and
similar ones were declared in violation of Article 130865 of the Civil Code. In a
second case, Philippine National Bank v. Court of Appeals,66 the very same
stipulations found in the credit agreement and the promissory notes prepared and
issued by the respondent were again invalidated. The Court therein said:
The Credit Agreement provided inter alia, that —
(a) The BANK reserves the right to increase the interest rate within the limits allowed
by law at any time depending on whatever policy it may adopt in the future; Provided,
that the interest rate on this accommodation shall be correspondingly decreased in
the event that the applicable maximum interest is reduced by law or by the Monetary
Board. In either case, the adjustment in the interest rate agreed upon shall take effect
on the effectivity date of the increase or decrease in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any
time without notice, beyond the stipulated rate of 12% but only "within the limits
allowed by law."
The Real Estate Mortgage contract likewise provided that —
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation
secured by this mortgage as well as the interest on the amount which may have been
advanced by the MORTGAGEE, in accordance with the provision hereof, shall be
subject during the life of this contract to such an increase within the rate allowed by
law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors.
xxxx
In making the unilateral increases in interest rates, petitioner bank relied on the
escalation clause contained in their credit agreement which provides, as follows:
The Bank reserves the right to increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may adopt in the future and provided,
that, the interest rate on this accommodation shall be correspondingly decreased in
the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate agreed upon shall
take effect on the effectivity date of the increase or decrease in maximum interest
rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which
further amended Act No. 2655 ("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after Section 7,
to read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money,
goods or credits may stipulate that the rate of interest agreed upon may be increased
in the event that the applicable maximum rate of interest is increased bylaw or by the
Monetary Board; Provided, That such stipulation shall be valid only if there is also a
stipulation in the agreement that the rate of interest agreed upon shall be reduced in
the event that the applicable maximum rate of interest is reduced by law or by the
Monetary Board; Provided further, That the adjustment in the rate of interest agreed
upon shall take effect on or after the effectivity of the increase or decrease in the
maximum rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central Bank’s Monetary Board to
prescribe the maximum rates of interest for loans and certain forbearances. Pursuant
to such authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905,
series of 1982, Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges.
— The rate of interest, including commissions, premiums, fees and other charges, on
any loan, or forbearance of any money, goods or credits, regardless of maturity and
whether secured or unsecured, shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to
stipulate freely regarding any subsequent adjustment in the interest rate that shall
accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to
adjust, upward or downward, the interest previously stipulated. However, contrary to
the stubborn insistence of petitioner bank, the said law and circular did not authorize
either party to unilaterally raise the interest rate without the other’s consent.
It is basic that there can be no contract in the true sense in the absence of the
element of agreement, or of mutual assent of the parties. If this assent is wanting on
the part of the one who contracts, his act has no more efficacy than if it had been
done under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties.
The minds of all the parties must meet as to the proposed modification, especially
when it affects an important aspect of the agreement. In the case of loan contracts, it
cannot be gainsaid that the rate of interest is always a vital component, for it can
make or break a capital venture. Thus, any change must be mutually agreed upon,
otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank’s posturing that the escalation clause at
bench gives it unbridled right to unilaterally upwardly adjust the interest on private
respondents’ loan. That would completely take away from private respondents the
right to assent to an important modification in their agreement, and would negate the
element of mutuality in contracts. In Philippine National Bank v. Court of Appeals, et
al., 196 SCRA 536, 544-545 (1991) we held —
x x x The unilateral action of the PNB in increasing the interest rate on the private
respondent’s loan violated the mutuality of contracts ordained in Article 1308 of the
Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality.
A contract containing a condition which makes its fulfillment dependent exclusively
upon the uncontrolled will of one of the contracting parties, is void . . . . Hence, even
assuming that the . . . loan agreement between the PNB and the private respondent
gave the PNB a license (although in fact there was none) to increase the interest rate
at will during the term of the loan, that license would have been null and void for being
violative of the principle of mutuality essential in contracts. It would have invested the
loan agreement with the character of a contract of adhesion, where the parties do not
bargain on equal footing, the weaker party’s (the debtor) participation being reduced
to the alternative "to take it or leave it" . . . . Such a contract is a veritable trap for the
weaker party whom the courts of justice must protect against abuse and imposition.67
(Emphases supplied)
Then again, in a third case, Spouses Almeda v. Court of Appeals,68 the Court
invalidated the very same provisions in the respondent’s prepared Credit Agreement,
declaring thus:
The binding effect of any agreement between parties to a contract is premised on two
settled principles: (1) that any obligation arising from contract has the force of law
between the parties; and (2) that there must be mutuality between the parties based
on their essential equality. Any contract which appears to be heavily weighed in favor
of one of the parties so as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left solely to the will of
one of the parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that respondent
bank unilaterally altered the terms of its contract with petitioners by increasing the
interest rates on the loan without the prior assent of the latter. In fact, the manner of
agreement is itself explicitly stipulated by the Civil Code when it provides, in Article
1956 that "No interest shall be due unless it has been expressly stipulated in writing."
What has been "stipulated in writing" from a perusal of interest rate provision of the
credit agreement signed between the parties is that petitioners were bound merely to
pay 21% interest, subject to a possible escalation or de-escalation, when 1) the
circumstances warrant such escalation or de-escalation; 2) within the limits allowed
by law; and 3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to
the contract in this case was the 21% rate stipulated in the interest provision. Any
doubt about this is in fact readily resolved by a careful reading of the credit agreement
because the same plainly uses the phrase "interest rate agreed upon," in reference to
the original 21% interest rate. x x x
xxxx
Petitioners never agreed in writing to pay the increased interest rates demanded by
respondent bank in contravention to the tenor of their credit agreement. That an
increase in interest rates from 18% to as much as 68% is excessive and
unconscionable is indisputable. Between 1981 and 1984, petitioners had paid an
amount equivalent to virtually half of the entire principal (₱7,735,004.66) which was
applied to interest alone. By the time the spouses tendered the amount of
₱40,142,518.00 in settlement of their obligations; respondent bank was demanding
₱58,377,487.00 over and above those amounts already previously paid by the
spouses.
Escalation clauses are not basically wrong or legally objectionable so long as they are
not solely potestative but based on reasonable and valid grounds. Here, as clearly
demonstrated above, not only [are] the increases of the interest rates on the basis of
the escalation clause patently unreasonable and unconscionable, but also there are
no valid and reasonable standards upon which the increases are anchored.
xxxx
In the face of the unequivocal interest rate provisions in the credit agreement and in
the law requiring the parties to agree to changes in the interest rate in writing, we hold
that the unilateral and progressive increases imposed by respondent PNB were null
and void. Their effect was to increase the total obligation on an eighteen million peso
loan to an amount way over three times that which was originally granted to the
borrowers. That these increases, occasioned by crafty manipulations in the interest
rates is unconscionable and neutralizes the salutary policies of extending loans to
spur business cannot be disputed.69 (Emphases supplied)
Still, in a fourth case, Philippine National Bank v. Court of Appeals,70 the above
doctrine was reiterated:
The promissory note contained the following stipulation:
For value received, I/we, [private respondents] jointly and severally promise to pay to
the ORDER of the PHILIPPINE NATIONAL BANK, at its office in San Jose City,
Philippines, the sum of FIFTEEN THOUSAND ONLY (₱15,000.00), Philippine
Currency, together with interest thereon at the rate of 12% per annum until paid,
which interest rate the Bank may at any time without notice, raise within the limits
allowed by law, and I/we also agree to pay jointly and severally ____% per annum
penalty charge, by way of liquidated damages should this note be unpaid or is not
renewed on due dated.
Payment of this note shall be as follows:
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made subject to
the condition that any and/or all extensions hereof that will leave any portion of the
amount still unpaid after 730 days shall automatically convert the outstanding balance
into a medium or long-term obligation as the case may be and give the Bank the right
to charge the interest rates prescribed under its policies from the date the account
was originally granted.
To secure payment of the loan the parties executed a real estate mortgage contract
which provided:
(k) INCREASE OF INTEREST RATE:
The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in
accordance with the provision hereof, shall be subject during the life of this contract to
such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
xxxx
To begin with, PNB’s argument rests on a misapprehension of the import of the
appellate court’s ruling. The Court of Appeals nullified the interest rate increases not
because the promissory note did not comply with P.D. No. 1684 by providing for a de-
escalation, but because the absence of such provision made the clause so one-sided
as to make it unreasonable.
That ruling is correct. It is in line with our decision in Banco Filipino Savings &
Mortgage Bank v. Navarro that although P.D. No. 1684 is not to be retroactively
applied to loans granted before its effectivity, there must nevertheless be a de-
escalation clause to mitigate the one-sidedness of the escalation clause. Indeed
because of concern for the unequal status of borrowers vis-à-vis the banks, our cases
after Banco Filipino have fashioned the rule that any increase in the rate of interest
made pursuant to an escalation clause must be the result of agreement between the
parties.
Thus in Philippine National Bank v. Court of Appeals, two promissory notes
authorized PNB to increase the stipulated interest per annum" within the limits
allowed by law at any time depending on whatever policy [PNB] may adopt in the
future; Provided, that the interest rate on this note shall be correspondingly decreased
in the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board." The real estate mortgage likewise provided:
The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in
accordance with the provisions hereof, shall be subject during the life of this contract
to such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
Pursuant to these clauses, PNB successively increased the interest from 18% to
32%, then to 41% and then to 48%. This Court declared the increases unilaterally
imposed by [PNB] to be in violation of the principle of mutuality as embodied in
Art.1308 of the Civil Code, which provides that "[t]he contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of them."
As the Court explained:
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality.
A contract containing a condition which makes its fulfillment dependent exclusively
upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita
Legarda, Inc., 21 SCRA 555). Hence, even assuming that the ₱1.8 million loan
agreement between the PNB and the private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during the term of
the loan, that license would have been null and void for being violative of the principle
of mutuality essential in contracts. It would have invested the loan agreement with the
character of a contract of adhesion, where the parties do not bargain on equal footing,
the weaker party’s (the debtor) participation being reduced to the alternative "to take it
or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is
a veritable trap for the weaker party whom the courts of justice must protect against
abuse and imposition.
A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit
agreement in that case provided:
The BANK reserves the right to increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may adopt in the future: Provided,
that the interest rate on this accommodation shall be correspondingly decreased in
the event that the applicable maximum interest is reduced by law or by the Monetary
Board. . . .
As in the first case, PNB successively increased the stipulated interest so that what
was originally 12% per annum became, after only two years, 42%. In declaring the
increases invalid, we held:
We cannot countenance petitioner bank’s posturing that the escalation clause at
bench gives it unbridled right to unilaterally upwardly adjust the interest on private
respondents’ loan. That would completely take away from private respondents the
right to assent to an important modification in their agreement, and would negate the
element of mutuality in contracts.
Only recently we invalidated another round of interest increases decreed by PNB
pursuant to a similar agreement it had with other borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing
in the said circular could possibly be read as granting respondent bank carte blanche
authority to raise interest rates to levels which would either enslave its borrowers or
lead to a hemorrhaging of their assets.
In this case no attempt was made by PNB to secure the conformity of private
respondents to the successive increases in the interest rate. Private respondents’
assent to the increases can not be implied from their lack of response to the letters
sent by PNB, informing them of the increases. For as stated in one case, no one
receiving a proposal to change a contract is obliged to answer the proposal.71
(Emphasis supplied)
We made the same pronouncement in a fifth case, New Sampaguita Builders
Construction, Inc. v. Philippine National Bank,72 thus –
Courts have the authority to strike down or to modify provisions in promissory notes
that grant the lenders unrestrained power to increase interest rates, penalties and
other charges at the latter’s sole discretion and without giving prior notice to and
securing the consent of the borrowers. This unilateral authority is anathema to the
mutuality of contracts and enable lenders to take undue advantage of borrowers.
Although the Usury Law has been effectively repealed, courts may still reduce
iniquitous or unconscionable rates charged for the use of money. Furthermore,
excessive interests, penalties and other charges not revealed in disclosure
statements issued by banks, even if stipulated in the promissory notes, cannot be
given effect under the Truth in Lending Act.73 (Emphasis supplied)
Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora,74
the above pronouncements were reiterated to debunk PNB’s repeated reliance on its
invalidated contract stipulations:
We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the
1996 case of PNB v. CA and Spouses Basco. Taking no heed of these rulings, the
escalation clause PNB used in the present case to justify the increased interest rates
is no different from the escalation clause assailed in the 1996 PNB case; in both, the
interest rates were increased from the agreed 12% per annum rate to 42%. x x x
xxxx
On the strength of this ruling, PNB’s argument – that the spouses Rocamora’s failure
to contest the increased interest rates that were purportedly reflected in the
statements of account and the demand letters sent by the bank amounted to their
implied acceptance of the increase – should likewise fail.
Evidently, PNB’s failure to secure the spouses Rocamora’s consent to the increased
interest rates prompted the lower courts to declare excessive and illegal the interest
rates imposed. Togo around this lower court finding, PNB alleges that the
₱206,297.47 deficiency claim was computed using only the original 12% per annum
interest rate. We find this unlikely. Our examination of PNB’s own ledgers, included in
the records of the case, clearly indicates that PNB imposed interest rates higher than
the agreed 12% per annum rate. This confirmatory finding, albeit based solely on
ledgers found in the records, reinforces the application in this case of the rule that
findings of the RTC, when affirmed by the CA, are binding upon this Court.75
(Emphases supplied)
Verily, all these cases, including the present one, involve identical or similar
provisions found in respondent’s credit agreements and promissory notes. Thus, the
July 1989 Credit Agreement executed by petitioners and respondent contained the
following stipulation on interest:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per
annum]. Interest shall be payable in advance every one hundred twenty days at the
rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan
depending on whatever policy the Bank may adopt in the future, including without
limitation, the shifting from the floating interest rate system to the fixed interest rate
system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per
annum which is equal to the Bank’s spread over the current floating interest rate, the
Borrower hereby agrees that the Bank may, without need of notice to the Borrower,
increase or decrease its spread over the floating interest rate at any time depending
on whatever policy it may adopt in the future.76 (Emphases supplied)
while the eight promissory notes issued pursuant thereto granted PNB the right to
increase or reduce interest rates "within the limits allowed by law or the Monetary
Board"77 and the Real Estate Mortgage agreement included the same right to
increase or reduce interest rates "at any time depending on whatever policy PNB may
adopt in the future."78
On the basis of the Credit Agreement, petitioners issued promissory notes which they
signed in blank, and respondent later on entered their corresponding interest rates, as
follows:
1st Promissory Note dated July 24, 1989 – 19.5%;
2nd Promissory Note dated November 22, 1989 – 23%;
3rd Promissory Note dated March 21, 1990 – 22%;
4th Promissory Note dated July 19, 1990 – 24%;
5th Promissory Note dated December 17, 1990 – 28%;
6th Promissory Note dated February 14, 1991 – 32%;
7th Promissory Note dated March 1, 1991 – 30%; and
8th Promissory Note dated July 11, 1991 – 24%.79
On the other hand, the August 1991 Amendment to Credit Agreement contains the
following stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment
thereof at the rate per annum which is determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment.80 (Emphases supplied)
and under this Amendment to Credit Agreement, petitioners again executed and
signed the following promissory notes in blank, for the respondent to later on enter
the corresponding interest rates, which it did, as follows:
9th Promissory Note dated November 8, 1991 – 26%;
10th Promissory Note dated March 19, 1992 – 25%;
11th Promissory Note dated July 11, 1992 – 23%;
12th Promissory Note dated November 10, 1992 – 21%;
13th Promissory Note dated March 15, 1993 – 21%;
14th Promissory Note dated July 12, 1993 – 17.5%;
15th Promissory Note dated November 17, 1993 – 21%;
16th Promissory Note dated March 28, 1994 – 21%;
17th Promissory Note dated July 13, 1994 – 21%;
18th Promissory Note dated November 16, 1994 – 16%;
19th Promissory Note dated April 10, 1995 – 21%;
20th Promissory Note dated July 19, 1995 – 18.5%;
21st Promissory Note dated December 18, 1995 – 18.75%;
22nd Promissory Note dated April 22, 1996 – 18.5%;
23rd Promissory Note dated July 22, 1996 – 18.5%;
24th Promissory Note dated November 25, 1996 – 18%;
25th Promissory Note dated May 30, 1997 – 17.5%; and
26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.81
The 9th up to the 17th promissory notes provide for the payment of interest at the
"rate the Bank may at any time without notice, raise within the limits allowed by law x
x x."82 On the other hand, the 18th up to the 26th promissory notes – which includes
PN 9707237 – carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be
increased or decreased for the subsequent Interest Periods, with prior notice to the
Borrower in the event of changes in interest rate prescribed by law or the Monetary
Board of the Central Bank of the Philippines, or in the Bank’s overall cost of funds.
I/We hereby agree that in the event I/we are not agreeable to the interest rate fixed
for any Interest Period, I/we shall have the option to prepay the loan or credit facility
without penalty within ten (10) calendar days from the Interest Setting Date.83
(Emphasis supplied)
These stipulations must be once more invalidated, as was done in previous cases.
The common denominator in these cases is the lack of agreement of the parties to
the imposed interest rates. For this case, this lack of consent by the petitioners has
been made obvious by the fact that they signed the promissory notes in blank for the
respondent to fill. We find credible the testimony of Lydia in this respect. Respondent
failed to discredit her; in fact, its witness PNB Kalibo Branch Manager Aspa admitted
that interest rates were fixed solely by its Treasury Department in Manila, which were
then simply communicated to all PNB branches for implementation. If this were the
case, then this would explain why petitioners had to sign the promissory notes in
blank, since the imposable interest rates have yet to be determined and fixed by
respondent’s Treasury Department in Manila.
Moreover, in Aspa’s enumeration of the factors that determine the interest rates PNB
fixes – such as cost of money, foreign currency values, bank administrative costs,
profitability, and considerations which affect the banking industry – it can be seen that
considerations which affect PNB’s borrowers are ignored. A borrower’s current
financial state, his feedback or opinions, the nature and purpose of his borrowings,
the effect of foreign currency values or fluctuations on his business or borrowing, etc.
– these are not factors which influence the fixing of interest rates to be imposed on
him. Clearly, respondent’s method of fixing interest rates based on one-sided,
indeterminate, and subjective criteria such as profitability, cost of money, bank costs,
etc. is arbitrary for there is no fixed standard or margin above or below these
considerations.
The stipulation in the promissory notes subjecting the interest rate to review does not
render the imposition by UCPB of interest rates on the obligations of the spouses
Beluso valid. According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased by the
LENDER considering among others the prevailing financial and monetary conditions;
or the rate of interest and charges which other banks or financial institutions charge or
offer to charge for similar accommodations; and/or the resulting profitability to the
LENDER after due consideration of all dealings with the BORROWER.
It should be pointed out that the authority to review the interest rate was given [to]
UCPB alone as the lender. Moreover, UCPB may apply the considerations
enumerated in this provision as it wishes. As worded in the above provision, UCPB
may give as much weight as it desires to each of the following considerations: (1) the
prevailing financial and monetary condition;(2) the rate of interest and charges which
other banks or financial institutions charge or offer to charge for similar
accommodations; and/or(3) the resulting profitability to the LENDER (UCPB) after
due consideration of all dealings with the BORROWER (the spouses Beluso). Again,
as in the case of the interest rate provision, there is no fixed margin above or below
these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options
of UCPB as to the interest to be imposed, as both options violate the principle of
mutuality of contracts.84 (Emphases supplied)
To repeat what has been said in the above-cited cases, any modification in the
contract, such as the interest rates, must be made with the consent of the contracting
parties.1âwphi1 The minds of all the parties must meet as to the proposed
modification, especially when it affects an important aspect of the agreement. In the
case of loan agreements, the rate of interest is a principal condition, if not the most
important component. Thus, any modification thereof must be mutually agreed upon;
otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in question no
longer provide that the parties shall agree upon the interest rate to be fixed; -instead,
they are worded in such a way that the borrower shall agree to whatever interest rate
respondent fixes. In credit agreements covered by the above-cited cases, it is
provided that:
The Bank reserves the right to increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may adopt in the future: Provided,
that, the interest rate on this accommodation shall be correspondingly decreased in
the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate agreed upon shall
take effect on the effectivity date of the increase or decrease in maximum interest
rate.85 (Emphasis supplied)
Whereas, in the present credit agreements under scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the interest rate on the Loan
depending on whatever policy the Bank may adopt in the future, including without
limitation, the shifting from the floating interest rate system to the fixed interest rate
system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per
annum, which is equal to the Bank’s spread over the current floating interest rate, the
Borrower hereby agrees that the Bank may, without need of notice to the Borrower,
increase or decrease its spread over the floating interest rate at any time depending
on whatever policy it may adopt in the future.86 (Emphases supplied)
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment
thereof at the rate per annum which is determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment.87 (Emphasis supplied)
Plainly, with the present credit agreement, the element of consent or agreement by
the borrower is now completely lacking, which makes respondent’s unlawful act all
the more reprehensible.
Accordingly, petitioners are correct in arguing that estoppel should not apply to them,
for "[e]stoppel cannot be predicated on an illegal act. As between the parties to a
contract, validity cannot be given to it by estoppel if it is prohibited by law or is against
public policy."88
It appears that by its acts, respondent violated the Truth in Lending Act, or Republic
Act No. 3765, which was enacted "to protect x x x citizens from a lack of awareness
of the true cost of credit to the user by using a full disclosure of such cost with a view
of preventing the uninformed use of credit to the detriment of the national
economy."89 The law "gives a detailed enumeration of the specific information
required to be disclosed, among which are the interest and other charges incident to
the extension of credit."90 Section 4 thereof provides that a disclosure statement
must be furnished prior to the consummation of the transaction, thus:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to
the consummation of the transaction, a clear statement in writing setting forth, to the
extent applicable and in accordance with rules and regulations prescribed by the
Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
Under Section 4(6), "finance charge" represents the amount to be paid by the debtor
incident to the extension of credit such as interest or discounts, collection fees, credit
investigation fees, attorney’s fees, and other service charges. The total finance
charge represents the difference between (1) the aggregate consideration (down
payment plus installments) on the part of the debtor, and (2) the sum of the cash price
and non-finance charges.91
By requiring the petitioners to sign the credit documents and the promissory notes in
blank, and then unilaterally filling them up later on, respondent violated the Truth in
Lending Act, and was remiss in its disclosure obligations. In one case, which the
Court finds applicable here, it was held:
UCPB further argues that since the spouses Beluso were duly given copies of the
subject promissory notes after their execution, then they were duly notified of the
terms thereof, in substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that
the disclosure statement must be furnished prior to the consummation of the
transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to
the consummation of the transaction, a clear statement in writing setting forth, to the
extent applicable and in accordance with rules and regulations prescribed by the
Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
The rationale of this provision is to protect users of credit from a lack of awareness of
the true cost thereof, proceeding from the experience that banks are able to conceal
such true cost by hidden charges, uncertainty of interest rates, deduction of interests
from the loaned amount, and the like. The law thereby seeks to protect debtors by
permitting them to fully appreciate the true cost of their loan, to enable them to give
full consent to the contract, and to properly evaluate their options in arriving at
business decisions. Upholding UCPB’s claim of substantial compliance would defeat
these purposes of the Truth in Lending Act. The belated discovery of the true cost of
credit will too often not be able to reverse the ill effects of an already consummated
business decision.
In addition, the promissory notes, the copies of which were presented to the spouses
Beluso after execution, are not sufficient notification from UCPB. As earlier discussed,
the interest rate provision therein does not sufficiently indicate with particularity the
interest rate to be applied to the loan covered by said promissory notes.92
(Emphases supplied)
However, the one-year period within which an action for violation of the Truth in
Lending Act may be filed evidently prescribed long ago, or sometime in 2001, one
year after petitioners received the March 2000 demand letter which contained the
illegal charges.
The fact that petitioners later received several statements of account detailing its
outstanding obligations does not cure respondent’s breach. To repeat, the belated
discovery of the true cost of credit does not reverse the ill effects of an already
consummated business decision.93
Neither may the statements be considered proposals sent to secure the petitioners’
conformity; they were sent after the imposition and application of the interest rate, and
not before. And even if it were to be presumed that these are proposals or offers,
there was no acceptance by petitioners. "No one receiving a proposal to modify a
loan contract, especially regarding interest, is obliged to answer the proposal."94
Loan and credit arrangements may be made enticing by, or "sweetened" with, offers
of low initial interest rates, but actually accompanied by provisions written in fine print
that allow lenders to later on increase or decrease interest rates unilaterally, without
the consent of the borrower, and depending on complex and subjective factors.
Because they have been lured into these contracts by initially low interest rates,
borrowers get caught and stuck in the web of subsequent steep rates and penalties,
surcharges and the like. Being ordinary individuals or entities, they naturally dread
legal complications and cannot afford court litigation; they succumb to whatever
charges the lenders impose. At the very least, borrowers should be charged rightly;
but then again this is not possible in a one-sided credit system where the temptation
to abuse is strong and the willingness to rectify is made weak by the eternal desire for
profit.
Given the above supposition, the Court cannot subscribe to respondent’s argument
that in every repricing of petitioners’ loan availment, they are given the right to
question the interest rates imposed. The import of respondent’s line of reasoning
cannot be other than that if one out of every hundred borrowers questions
respondent’s practice of unilaterally fixing interest rates, then only the loan
arrangement with that lone complaining borrower will enjoy the benefit of review or re-
negotiation; as to the 99 others, the questionable practice will continue unchecked,
and respondent will continue to reap the profits from such unscrupulous practice. The
Court can no more condone a view so perverse. This is exactly what the Court meant
in the immediately preceding cited case when it said that "the belated discovery of the
true cost of credit does not reverse the ill effects of an already consummated
business decision;"95 as to the 99 borrowers who did not or could not complain, the
illegal act shall have become a fait accompli– to their detriment, they have already
suffered the oppressive rates.
Besides, that petitioners are given the right to question the interest rates imposed is,
under the circumstances, irrelevant; we have a situation where the petitioners do not
stand on equal footing with the respondent. It is doubtful that any borrower who finds
himself in petitioners’ position would dare question respondent’s power to arbitrarily
modify interest rates at any time. In the second place, on what basis could any
borrower question such power, when the criteria or standards – which are really one-
sided, arbitrary and subjective – for the exercise of such power are precisely lost on
him?
For the same reasons, the Court cannot validly consider that, as stipulated in the 18th
up to the 26th promissory notes, petitioners are granted the option to prepay the loan
or credit facility without penalty within 10 calendar days from the Interest Setting Date
if they are not agreeable to the interest rate fixed. It has been shown that the
promissory notes are executed and signed in blank, meaning that by the time
petitioners learn of the interest rate, they are already bound to pay it because they
have already pre-signed the note where the rate is subsequently entered.
Besides, premium may not be placed upon a stipulation in a contract which grants
one party the right to choose whether to continue with or withdraw from the
agreement if it discovers that what the other party has been doing all along is
improper or illegal.

Thus said, respondent’s arguments relative to the credit documents – that
documentary evidence prevails over testimonial evidence; that the credit documents
are in proper form, presumed regular, and endure, against arbitrary claims by
petitioners, experienced business persons that they are, they signed questionable
loan documents whose provisions for interest rates were left blank, and yet they
continued to pay the interests without protest for a number of years – deserve no
consideration.
With regard to interest, the Court finds that since the escalation clause is annulled,
the principal amount of the loan is subject to the original or stipulated rate of interest,
and upon maturity, the amount due shall be subject to legal interest at the rate of 12%
per annum. This is the uniform ruling adopted in previous cases, including those cited
here.96 The interests paid by petitioners should be applied first to the payment of the
stipulated or legal and unpaid interest, as the case may be, and later, to the capital or
principal.97 Respondent should then refund the excess amount of interest that it has
illegally imposed upon petitioners; "[t]he amount to be refunded refers to that paid by
petitioners when they had no obligation to do so."98 Thus, the parties’ original
agreement stipulated the payment of 19.5% interest; however, this rate was intended
to apply only to the first promissory note which expired on November 21, 1989 and
was paid by petitioners; it was not intended to apply to the whole duration of the loan.
Subsequent higher interest rates have been declared illegal; but because only the
rates are found to be improper, the obligation to pay interest subsists, the same to be
fixed at the legal rate of 12% per annum. However, the 12% interest shall apply only
until June 30, 2013. Starting July1, 2013, the prevailing rate of interest shall be 6%
per annum pursuant to our ruling in Nacar v. Gallery Frames99 and Bangko Sentral
ng Pilipinas-Monetary Board Circular No. 799.
Now to the issue of penalty. PN 9707237 provides that failure to pay it or any
installment thereon, when due, shall constitute default, and a penalty charge of 24%
per annum based on the defaulted principal amount shall be imposed. Petitioners
claim that this penalty should be excluded from the foreclosure amount or bid price
because the Real Estate Mortgage and the Supplement thereto did not specifically
include it as part of the secured amount. Respondent justifies its inclusion in the
secured amount, saying that the purpose of the penalty or a penal clause is to ensure
the performance of the obligation and substitute for damages and the payment of
interest in the event of non-compliance.100 Respondent adds that the imposition and
collection of a penalty is a normal banking practice, and the standard rate per annum
for all commercial banks, at the time, was 24%. Its inclusion as part of the secured
amount in the mortgage agreements is thus valid and necessary.
The Court sustains petitioners’ view that the penalty may not be included as part of
the secured amount. Having found the credit agreements and promissory notes to be
tainted, we must accord the same treatment to the mortgages. After all, "[a] mortgage
and a note secured by it are deemed parts of one transaction and are construed
together."101 Being so tainted and having the attributes of a contract of adhesion as
the principal credit documents, we must construe the mortgage contracts strictly, and
against the party who drafted it. An examination of the mortgage agreements reveals
that nowhere is it stated that penalties are to be included in the secured amount.
Construing this silence strictly against the respondent, the Court can only conclude
that the parties did not intend to include the penalty allowed under PN 9707237 as
part of the secured amount. Given its resources, respondent could have – if it truly
wanted to – conveniently prepared and executed an amended mortgage agreement
with the petitioners, thereby including penalties in the amount to be secured by the
encumbered properties. Yet it did not.
With regard to attorney’s fees, it was plain error for the CA to have passed upon the
issue since it was not raised by the petitioners in their appeal; it was the respondent
that improperly brought it up in its appellee’s brief, when it should have interposed an
appeal, since the trial court’s Decision on this issue is adverse to it. It is an
elementary principle in the subject of appeals that an appellee who does not himself
appeal cannot obtain from the appellate court any affirmative relief other than those
granted in the decision of the court below.
x x x [A]n appellee, who is at the same time not an appellant, may on appeal be
permitted to make counter assignments of error in ordinary actions, when the purpose
is merely to defend himself against an appeal in which errors are alleged to have
been committed by the trial court both in the appreciation of facts and in the
interpretation of the law, in order to sustain the judgment in his favor but not when his
purpose is to seek modification or reversal of the judgment, in which case it is
necessary for him to have excepted to and appealed from the judgment.102
Since petitioners did not raise the issue of reduction of attorney’s fees, the CA
possessed no authority to pass upon it at the instance of respondent. The ruling of
the trial court in this respect should remain undisturbed.
For the fixing of the proper amounts due and owing to the parties – to the respondent
as creditor and to the petitioners who are entitled to a refund as a consequence of
overpayment considering that they paid more by way of interest charges than the
12% per annum103 herein allowed – the case should be remanded to the lower court
for proper accounting and computation, applying the following procedure:
1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;
2. All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall
carry an interest rate of only 12% per annum.104 Thus, interest payment made in
excess of 12% on the 2nd promissory note shall immediately be applied to the
principal, and the principal shall be accordingly reduced. The reduced principal shall
then be subjected to the 12%105 interest on the 3rd promissory note, and the excess
over 12% interest payment on the 3rd promissory note shall again be applied to the
principal, which shall again be reduced accordingly. The reduced principal shall then
be subjected to the 12% interest on the 4th promissory note, and the excess over12%
interest payment on the 4th promissory note shall again be applied to the principal,
which shall again be reduced accordingly. And so on and so forth;
3. After the above procedure is carried out, the trial court shall be able to conclude if
petitioners a) still have an OUTSTANDING BALANCE/OBLIGATION or b) MADE
PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION (principal and
interest);
4. Such outstanding balance/obligation, if there be any, shall then be subjected to a
12% per annum interest from October 28, 1997 until January 14, 1999, which is the
date of the auction sale;
5. Such outstanding balance/obligation shall also be charged a 24% per annum
penalty from August 14, 1997 until January 14, 1999. But from this total penalty, the
petitioners’ previous payment of penalties in the amount of ₱202,000.00made on
January 27, 1998106 shall be DEDUCTED;
6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and
executory award of 1% attorney’s fees shall be ADDED;
7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorney’s fees
(6.) shall be DEDUCTED from the bid price of ₱4,324,172.96. The penalties (5.) are
not included because they are not included in the secured amount;
8. The difference in (7.) [₱4,324,172.96 LESS sum total of the outstanding balance
(3.), interest (4.), and 1% attorney’s fees (6.)] shall be DELIVERED TO THE
PETITIONERS;
9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-
16208;
10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that
petitioners made an OVERPAYMENT, the interest (4.), penalties (5.), and the award
of 1% attorney’s fees (6.) shall be DEDUCTED from the overpayment. There is no
outstanding balance/obligation precisely because petitioners have paid beyond the
amount of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and
award of 1% attorney’s fees (6.), the excess shall be RETURNED to the petitioners,
with legal interest, under the principle of solutio indebiti;107
12. Likewise, if the overpayment exceeds the total amount of interest (4.) and award
of 1% attorney’s fees (6.), the trial court shall INVALIDATE THE EXTRAJUDICIAL
FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and award of 1% attorney’s fees
(6.) exceed petitioners’ overpayment, then the excess shall be DEDUCTED from the
bid price of ₱4,324,172.96;
14. The difference in (13.) [₱4,324,172.96 LESS sum total of the interest (4.) and 1%
attorney’s fees (6.)] shall be DELIVERED TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-
16208. The outstanding penalties, if any, shall be collected by other means.
From the above, it will be seen that if, after proper accounting, it turns out that the
petitioners made payments exceeding what they actually owe by way of principal,
interest, and attorney’s fees, then the mortgaged properties need not answer for any
outstanding secured amount, because there is not any; quite the contrary, respondent
must refund the excess to petitioners.1âwphi1 In such case, the extrajudicial
foreclosure and sale of the properties shall be declared null and void for obvious lack
of basis, the case being one of solutio indebiti instead. If, on the other hand, it turns
out that petitioners’ overpayments in interests do not exceed their total obligation,
then the respondent may consolidate its ownership over the properties, since the
period for redemption has expired. Its only obligation will be to return the difference
between its bid price (₱4,324,172.96) and petitioners’ total obligation outstanding –
except penalties – after applying the latter’s overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007
Decision of the Court of Appeals in CA-G.R. CV No. 79650 is ANNULLED and SET
ASIDE. Judgment is hereby rendered as follows:
1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory
Notes are DECLARED NULL AND VOID, and such notes shall instead be subject to
interest at the rate of twelve percent (12%) per annum up to June 30, 2013, and
starting July 1, 2013, six percent (6%) per annum until full satisfaction;
2. The penalty charge imposed in Promissory Note No. 9707237 shall be EXCLUDED
from the amounts secured by the real estate mortgages;
3. The trial court’s award of one per cent (1%) attorney’s fees is REINSTATED;
4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of Kalibo,
Aklan for the computation of overpayments made by petitioners spouses Eduardo
and Lydia Silos to respondent Philippine National Bank, taking into consideration the
foregoing dispositions, and applying the procedure hereinabove set forth;
5. Thereafter, the trial court is ORDERED to make a determination as to the validity of
the extrajudicial foreclosure and sale, declaring the same null and void in case of
overpayment and ordering the release and return of Transfer Certificates of Title Nos.
T-14250 and TCT T-16208 to petitioners, or ordering the delivery to the petitioners of
the difference between the bid price and the total remaining obligation of petitioners, if
any;
6. In the meantime, the respondent Philippine National Bank is ENJOINED from
consolidating title to Transfer Certificates of Title Nos. T-14250 and T-16208 until all
the steps in the procedure above set forth have been taken and applied;
7. The reimbursement of the excess in the bid price of ₱377,505.99, which
respondent Philippine National Bank is ordered to reimburse petitioners, should be
HELD IN ABEYANCE until the true amount owing to or owed by the parties as
against each other is determined;
8. Considering that this case has been pending for such a long time and that further
proceedings, albeit uncomplicated, are required, the trial court is ORDERED to
proceed with dispatch.
SO ORDERED.
G.R. No. 187678               April 10, 2013
SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners,  ₱55,000 representing the difference between the total outstanding obligation of
vs.
CHINA BANKING CORPORATION, Respondent.
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, assailing the February 20, 2009 Decision 1 and April 27,
2009 Resolution2 of the Court of Appeals (CA) in CA G.R. CV No. 80338. The CA
affirmed the April 14, 2003 Decision3 of the Regional Trial Court (RTC) of Makati City,
Branch 147.
The factual antecedents:
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China
Banking Corporation (respondent) as evidenced by two Promissory Notes both dated
October 6, 1998 and numbered 507-001051-34 and 507-001052-0,5 for the sums of !!
6,216,000 and ₱4, 139,000, respectively. The loan was secured by a Real Estate
Mortgage (REM) over petitioners’ property located at 49 Greensville St., White Plains,
Quezon City covered by Transfer Certificate of Title (TCT) No. RT-103568 (167394)
PR-412086 of the Register of Deeds of Quezon City.
contended that should they be held liable for any deficiency, it should be only for
₱10,355,000 and the bid price of ₱10,300,000. Petitioners also argued that even
assuming there is a cause of action, such deficiency cannot be enforced by
respondent because it consists only of the penalty and/or compounded interest on the
accrued interest which is generally not favored under the Civil Code. By way of
counterclaim, petitioners prayed that respondent be ordered to pay ₱100,000 in
attorney’s fees and costs of suit.
At the trial, respondent presented Ms. Annabelle Cokai Yu, its Senior Loans
Assistant, as witness. She testified that she handled the account of petitioners and
assisted them in processing their loan application. She called them monthly to inform
them of the prevailing rates to be used in computing interest due on their loan. As of
the date of the public auction, petitioners’ outstanding balance was
₱19,201,776.6312 based on the following statement of account which she prepared:
STATEMENT OF ACCOUNT
As of FEBRUARY 23, 2001
IGNACIO F. JUICO
PN# 507-0010520 due on 04-07-2004
1âwphi1

When petitioners failed to pay the monthly amortizations due, respondent demanded
the full payment of the outstanding balance with accrued monthly interests. On Principal balance of PN# 5070010520. . . . . . . . . . . . . . 4,139,000.00
September 5, 2000, petitioners received respondent’s last demand letter 7 dated
August 29, 2000.
Interest on ₱4,139,000.00 fr. 04-Nov-99

As of February 23, 2001, the amount due on the two promissory notes totaled
₱19,201,776.63 representing the principal, interests, penalties and attorney’s fees. 04-Nov-2000 366 days @ 15.00%. . . . . . . . . . . . . . . . . 622,550.96
On the same day, the mortgaged property was sold at public auction, with respondent
as highest bidder for the amount of ₱10,300,000.
Interest on ₱4,139,000.00 fr. 04-Nov-2000
On May 8, 2001, petitioners received  a demand letter  dated May 2, 2001 from
8 9

respondent for the payment of ₱8,901,776.63, the amount of deficiency after applying
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 83,346.99
the proceeds of the foreclosure sale to the mortgage debt. As its demand remained
unheeded, respondent filed a collection suit in the trial court. In its
Complaint,10 respondent prayed that judgment be rendered ordering the petitioners to Interest on ₱4,139,000.00 fr. 04-Dec-2000
pay jointly and severally: (1) ₱8,901,776.63 representing the amount of deficiency,
plus interests at the legal rate, from February 23, 2001 until fully paid; (2) an
additional amount equivalent to 1/10 of 1% per day of the total amount, until fully paid, 04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 75,579.27
as penalty; (3) an amount equivalent to 10% of the foregoing amounts as attorney’s
fees; and (4) expenses of litigation and costs of suit.
Interest on ₱4,139,000.00 fr. 04-Jan-2001
In their Answer,11 petitioners admitted the existence of the debt but interposed, by
way of special and affirmative defense, that the complaint states no cause of action
considering that the principal of the loan was already paid when the mortgaged 04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 68,548.64
property was extrajudicially foreclosed and sold for ₱10,300,000. Petitioners
Interest on ₱4,139,000.00 fr. 04-Feb-2001
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . .
Penalty charge @ 1/10 of 1% of the total amount due
(₱4,139,000.00 from 11-04-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . .
Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PN# 507-0010513 due on 04-07-2004
Principal balance of PN# 5070010513. . . . . . . . . . . . . .
Interest on ₱6,216,000.00 fr. 06-Oct-99
04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . .
Interest on ₱6,216,000.00 fr. 04-Nov-2000
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . .
Interest on ₱6,216,000.00 fr. 04-Dec-2000
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . .
Interest on ₱6,216,000.00 fr. 04-Jan-2001
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . .
Interest on ₱6,216,000.00 fr. 04-Feb-2001
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . .
Penalty charge @ 1/10 of 1% of the total amount due
(₱6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . .
Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: A/P applied to balance of principal
Less: Accounts payable L & D (261,149.39)
Add: 10% Attorney’s Fee
Total amount due
Less: Bid Price 10,300,000.00
TOTAL DEFICIENCY AMOUNT AS OF
38,781.86 FEB. 23, 2001 8,901,776.63 13
Petitioners thereafter received a demand letter 14 dated May 2, 2001 from
1,974,303.00 respondent’s counsel for the deficiency amount of ₱8,901,776.63. Ms. Yu further
testified that based on the Statement of Account 15 dated March 15, 2002 which she
prepared, the outstanding balance of petitioners was ₱15,190,961.48.16
7,002,110.73
On cross-examination, Ms. Yu reiterated that the interest rate changes every month
based on the prevailing market rate and she notified petitioners of the prevailing rate
6,216,000.00 by calling them monthly before their account becomes past due. When asked if there
was any written authority from petitioners for respondent to increase the interest rate
unilaterally, she answered that petitioners signed a promissory note indicating that
1,009,035.62
they agreed to pay interest at the prevailing rate.17
125,171.51 Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was
required to sign a blank promissory note and was informed that the interest rate on
the loan will be based on prevailing market rates. Every month, respondent informs
113,505.86 him by telephone of the rates were unilaterally imposed by the bank and thus violate
the principle of mutuality of contracts. They argue that the escalation clause in the
promissory notes does not give respondent the unbridled authority to increase the
102,947.18 interest rate unilaterally. Any change must be mutually agreed upon.
58,243.07 Respondent, for its part, points out that petitioners failed to show that their case falls
under any of the exceptions wherein findings of fact of the CA may be reviewed by
this Court. It contends that an inquiry as to whether the interest rates imposed on the
loans of petitioners were supported by appropriate regulations from a government
3,145,296.00 agency or the Central Bank requires a reevaluation of the evidence on records. Thus,
the Court would in effect, be confronted with a factual and not a legal issue.
10,770,199.23 The appeal is partly meritorious.
17,772,309.96 The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code,
which provides:
(55,000.00) Article 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them. Article 1956 of the Civil Code
likewise ordains that "no interest shall be due unless it has been expressly stipulated
17,456,160.57 in writing."
1,745,616.06 The binding effect of any agreement between parties to a contract is premised on two
settled principles: (1) that any obligation arising from contract has the force of law
between the parties; and (2) that there must be mutuality between the parties based
19,201,776.63 on their essential equality. Any contract which appears to be heavily weighed in favor
of one of the parties so as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left solely to the will of
one of the parties, is likewise, invalid.21
Escalation clauses refer to stipulations allowing an increase in the interest rate
agreed upon by the contracting parties. This Court has long recognized that there is
nothing inherently wrong with escalation clauses which are valid stipulations in
commercial contracts to maintain fiscal stability and to retain the value of money in
long term contracts.22 Hence, such stipulations are not void per se.23
Nevertheless, an escalation clause "which grants the creditor an unbridled right to
adjust the interest independently and upwardly, completely depriving the debtor of the
right to assent to an important modification in the agreement" is void. A stipulation of
such nature violates the principle of mutuality of contracts.24 Thus, this Court has
previously nullified the unilateral determination and imposition by creditor banks of
increases in the rate of interest provided in loan contracts.25
In Banco Filipino Savings & Mortgage Bank v. Navarro, 26 the escalation clause stated:
"I/We hereby authorize Banco Filipino to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event a law should
be enacted increasing the lawful rates of interest that may be charged on this
particular kind of loan." While escalation clauses in general are considered valid, we
ruled that Banco Filipino may not increase the interest on respondent borrower’s loan,
pursuant to Circular No. 494 issued by the Monetary Board on January 2, 1976,
because said circular is not a law although it has the force and effect of law and the
escalation clause has no provision for reduction of the stipulated interest "in the event
that the applicable maximum rate of interest is reduced by law or by the Monetary
Board" (de-escalation clause).
Subsequently, in Insular Bank of Asia and America v. Spouses Salazar  we 27
reiterated that escalation clauses are valid stipulations but their enforceability are
subject to certain conditions. The increase of interest rate from 19% to 21% per
annum made by petitioner bank was disallowed because it did not comply with the
guidelines adopted by the Monetary Board to govern interest rate adjustments by
banks and non-banks performing quasi-banking functions.
In the 1991 case of Philippine National Bank v. Court of Appeals, 28 the promissory
notes authorized PNB to increase the stipulated interest per annum "within the limits
allowed by law at any time depending on whatever policy PNB may adopt in the
future; Provided, that, the interest rate on this note shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced by law or
by the Monetary Board." This Court declared the increases (from 18% to 32%, then to
41% and then to 48%) unilaterally imposed by PNB to be in violation of the principle
of mutuality essential in contracts.29
A similar ruling was made in a 1994 case 30 also involving PNB where the credit
agreement provided that "PNB reserves the right to increase the interest rate within
the limits allowed by law at any time depending on whatever policy it may adopt in the
future: Provided, that the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest is
reduced by law or by the Monetary Board x x x".
Again, in 1996, the Court invalidated escalation clauses authorizing PNB to raise the
stipulated interest rate at any time without notice, within the limits allowed by law. The
Court observed that there was no attempt made by PNB to secure the conformity of
respondent borrower to the successive increases in the interest rate. The borrower’s
assent to the increases cannot be implied from their lack of response to the letters
sent by PNB, informing them of the increases.31
In the more recent case of Philippine Savings Bank v. Castillo, 32 we sustained the CA
in declaring as unreasonable the following escalation clause: "The rate of interest
and/or bank charges herein stipulated, during the terms of this promissory note, its
extensions, renewals or other modifications, may be increased, decreased or
otherwise changed from time to time within the rate of interest and charges allowed
under present or future law(s) and/or government regulation(s) as the PSBank may
prescribe for its debtors." Clearly, the increase or decrease of interest rates under
such clause hinges solely on the discretion of petitioner as it does not require the
conformity of the maker before a new interest rate could be enforced. We also said
that respondents’ assent to the modifications in the interest rates cannot be implied
from their lack of response to the memos sent by petitioner, informing them of the
amendments, nor from the letters requesting for reduction of the rates. Thus:
… the validity of the escalation clause did not give petitioner the unbridled right to
unilaterally adjust interest rates. The adjustment should have still been subjected to
the mutual agreement of the contracting parties. In light of the absence of consent on
the part of respondents to the modifications in the interest rates, the adjusted rates
cannot bind them notwithstanding the inclusion of a de-escalation clause in the loan
agreement.33
It is now settled that an escalation clause is void where the creditor unilaterally
determines and imposes an increase in the stipulated rate of interest without the
express conformity of the debtor. Such unbridled right given to creditors to adjust the
interest independently and upwardly would completely take away from the debtors the
right to assent to an important modification in their agreement and would also negate
the element of mutuality in their contracts.34While a ceiling on interest rates under the
Usury Law was already lifted under Central Bank Circular No. 905, nothing therein
"grants lenders carte blanche authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets."35
The two promissory notes signed by petitioners provide:
I/We hereby authorize the CHINA BANKING CORPORATION to increase or
decrease as the case may be, the interest rate/service charge presently stipulated in
this note without any advance notice to me/us in the event a law or Central Bank
regulation is passed or promulgated by the Central Bank of the Philippines or
appropriate government entities, increasing or decreasing such interest rate or
service charge.36
Such escalation clause is similar to that involved in the case of Floirendo, Jr. v.
Metropolitan Bank and Trust Company37 where this Court ruled:
The provision in the promissory note authorizing respondent bank to increase,
decrease or otherwise change from time to time the rate of interest and/or bank
charges "without advance notice" to petitioner, "in the event of change in the interest
rate prescribed by law or the Monetary Board of the Central Bank of the Philippines,"
does not give respondent bank unrestrained freedom to charge any rate other than
that which was agreed upon. Here, the monthly upward/downward adjustment of
interest rate is left to the will of respondent bank alone. It violates the essence of
mutuality of the contract.38
More recently in Solidbank Corporation v. Permanent Homes, Incorporated, 39 we
upheld as valid an escalation clause which required a written notice to and conformity
by the borrower to the increased interest rate. Thus:
The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3
December 1982 of the Monetary Board of the Central Bank, and later by Central Bank
Circular No. 905 which took effect on 1 January 1983. These circulars removed the
ceiling on interest rates for secured and unsecured loans regardless of maturity. The
effect of these circulars is to allow the parties to agree on any interest that may be
charged on a loan. The virtual repeal of the Usury Law is within the range of judicial
notice which courts are bound to take into account. Although interest rates are no
longer subject to a ceiling, the lender still does not have an unbridled license to
impose increased interest rates. The lender and the borrower should agree on the
imposed rate, and such imposed rate should be in writing.
The three promissory notes between Solidbank and Permanent all contain the
following provisions:
"5. We/I irrevocably authorize Solidbank to increase or decrease at any time the
interest rate agreed in this Note or Loan on the basis of, among others, prevailing
rates in the local or international capital markets. For this purpose, We/I authorize
Solidbank to debit any deposit or placement account with Solidbank belonging to any
one of us. The adjustment of the interest rate shall be effective from the date
indicated in the written notice sent to us by the bank, or if no date is indicated, from
the time the notice was sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts
due under this Note or Loan within thirty (30) days from the receipt by anyone of us of
the written notice. Otherwise, We/I shall be deemed to have given our consent to the
interest rate adjustment."
The stipulations on interest rate repricing are valid because (1) the parties mutually
agreed on said stipulations; (2) repricing takes effect only upon Solidbank’s written
notice to Permanent of the new interest rate; and (3) Permanent has the option to
prepay its loan if Permanent and Solidbank do not agree on the new interest rate. The
phrases "irrevocably authorize," "at any time" and "adjustment of the interest rate
shall be effective from the date indicated in the written notice sent to us by the bank,
or if no date is indicated, from the time the notice was sent," emphasize that
Permanent should receive a written notice from Solidbank as a condition for the
adjustment of the interest rates. (Emphasis supplied.)
In this case, the trial and appellate courts, in upholding the validity of the escalation
clause, underscored the fact that there was actually no fixed rate of interest stipulated
in the promissory notes as this was made dependent on prevailing rates in the
market. The subject promissory notes contained the following condition written after
the first paragraph:
With one year grace period on principal and thereafter payable in 54 equal monthly
instalments to start on the second year. Interest at the prevailing rates payable
quarterly in arrears.40
In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner cardholder assailed the trial and
appellate courts in ruling for the validity of the escalation clause in the Cardholder’s
Agreement. On petitioner’s contention that the interest rate was unilaterally imposed
and based on the standards and rate formulated solely by respondent credit card
company, we held:
The contractual provision in question states that "if there occurs any change in the
prevailing market rates, the new interest rate shall be the guiding rate in computing
the interest due on the outstanding obligation without need of serving notice to the
Cardholder other than the required posting on the monthly statement served to the
Cardholder." This could not be considered an escalation clause for the reason that it
neither states an increase nor a decrease in interest rate. Said clause simply states
that the interest rate should be based on the prevailing market rate.
Interpreting it differently, while said clause does not expressly stipulate a reduction in
interest rate, it nevertheless provides a leeway for the interest rate to be reduced in
case the prevailing market rates dictate its reduction.
Admittedly, the second paragraph of the questioned proviso which provides that "the
Cardholder hereby authorizes Security Diners to correspondingly increase the rate of
such interest in the event of changes in prevailing market rates x x x" is an escalation
clause. However, it cannot be said to be dependent solely on the will of private
respondent as it is also dependent on the prevailing market rates.
Escalation clauses are not basically wrong or legally objectionable as long as they are
not solely potestative but based on reasonable and valid grounds. Obviously, the
fluctuation in the market rates is beyond the control of private
respondent.42 (Emphasis supplied.)
In interpreting a contract, its provisions should not be read in isolation but in relation
to each other and in their entirety so as to render them effective, having in mind the
intention of the parties and the purpose to be achieved. The various stipulations of a
contract shall be interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken jointly.43
Here, the escalation clause in the promissory notes authorizing the respondent to
adjust the rate of interest on the basis of a law or regulation issued by the Central
Bank of the Philippines, should be read together with the statement after the first
paragraph where no rate of interest was fixed as it would be based on prevailing
market rates. While the latter is not strictly an escalation clause, its clear import was Penalty at 12% per annum 1,623 ,890. 96
that interest rates would vary as determined by prevailing market rates. Evidently, the
parties intended the interest on petitioners’ loan, including any upward or downward ₱10,355,000 x .12 x 477days/365 days
adjustment, to be determined by the prevailing market rates and not dictated by
respondent’s policy. It may also be mentioned that since the deregulation of bank Sub-Total 14,008,754.66
rates in 1983, the Central Bank has shifted to a market-oriented interest rate policy.44
Less: A/P applied to balance of principal (55,000.00)

There is no indication that petitioners were coerced into agreeing with the foregoing Less: Accounts payable L & D (261,149.39)
provisions of the promissory notes. In fact, petitioner Ignacio, a physician engaged in
the medical supply business, admitted having understood his obligations before 13,692,605.27
signing them. At no time did petitioners protest the new rates imposed on their loan Add: Attorney's Fees 1,369,260.53
even when their property was foreclosed by respondent.
Total Amount Due 15,061,865.79
This notwithstanding, we hold that the escalation clause is still void because it grants
Less: Bid Price 10,300,000.00
respondent the power to impose an increased rate of interest without a written notice
to petitioners and their written consent. Respondent’s monthly telephone calls to
petitioners advising them of the prevailing interest rates would not suffice. A detailed
TOTAL DEFICIENCY AMOUNT 4,761,865.79
billing statement based on the new imposed interest with corresponding computation
of the total debt should have been provided by the respondent to enable petitioners to
make an informed decision. An appropriate form must also be signed by the
petitioners to indicate their conformity to the new rates. Compliance with these
WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The
requisites is essential to preserve the mutuality of contracts. For indeed, one-sided
February 20, 2009 · Decision and April 27, 2009 Resolution of the Court of Appeals in
impositions do not have the force of law between the parties, because such
CA G.R. CV No. 80338 are hereby MODIFIED. Petitioners Spouses Ignacio F. Juico
impositions are not based on the parties’ essential equality.45
and Alice P. Juico are hereby ORDERED to pay jointly and severally respondent
China Banking Corporation ₱4, 7 61 ,865. 79 representing the amount of deficiency
Modifications in the rate of interest for loans pursuant to an escalation clause must be inclusive of interest, penalty charge and attorney's fees. Said amount shall bear
the result of an agreement between the parties. Unless such important change in the interest at 12% per annum, reckoned from the time of the filing of the complaint until
contract terms is mutually agreed upon, it has no binding effect. 46 In the absence of its full satisfaction.
consent on the part of the petitioners to the modifications in the interest rates, the
adjusted rates cannot bind them. Hence, we consider as invalid the interest rates in
No pronouncement as to costs.
excess of 15%, the rate charged for the first year.

SO ORDERED.
Based on the August 29, 2000 demand letter of China Bank, petitioners’ total principal
obligation under the two promissory notes which they failed to settle is ₱10,355,000.
However, due to China Bank’s unilateral increases in the interest rates from 15% to
as high as 24.50% and penalty charge of 1/10 of 1% per day or 36.5% per annum for
the period November 4, 1999 to February 23, 2001, petitioners’ balance ballooned to
₱19,201,776.63. Note that the original amount of principal loan almost doubled in only
16 months. The Court also finds the penalty charges imposed excessive and
arbitrary, hence the same is hereby reduced to 1% per month or 12% per
annum.1âwphi1

Petitioners’ Statement of Account, as of February 23, 2001, the date of the

foreclosure proceedings, should thus be modified as follows:

Principal ₱10,355,000.00
Interest at 15% per annum
₱10,355,000 x .15 x 477 days/365 days 2,029,863.70
GR No. 88880 April 30, 1991
PHILIPPINE NATIONAL BANK v. CA
GRINO-AQUINO, J.:
The Philippine National Bank (PNB) has appealed by certiorari from the decision
promulgated on June 27, 1989 by the Court of Appeals in CA-G.R. CV No. 09791
entitled, "AMBROSIO PADILLA, plaintiff-appellant versus PHILIPPINE NATIONAL
BANK, defendant-appellee," reversing the decision of the trial court which had
dismissed the private respondent's complaint "to annul interest increases." (p. 32,
Rollo.) The Court of Appeals rendered judgment:
"x x x declaring the questioned increases of interest as unreasonable, excessive and
arbitrary and ordering the defendant-appellee [PNB] to refund to the plaintiff-appellant
the amount of interest collected from July, 1984 in excess of twenty-four percent
(24%) per annum. Costs against the defendant-appellee." (pp. 14-15, Rollo.)
In July 1982, the private respondent applied for, and was granted by petitioner PNB, a
credit line of P1.8 million, secured by a real estate mortgage, for a term of two (2)
years, with 18% interest per annum. Private respondent executed in favor of the PNB
a Credit Agreement, two (2) promissory notes in the amount of P900,000.00 each,
and a Real Estate Mortgage Contract.
The Credit Agreement provided that
"9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and
regulations of the Central Bank and the current and general policies of the Bank and
those which the Bank may adopt in the future, which may have relation to or in any
way affect the Line, which rules, regulations and policies are incorporated herein by
reference as if set forth herein in full. Promptly upon receipt of a written request from
the Bank, the Borrowers shall execute and deliver such documents and instruments,
in form and substance satisfactory to the Bank, in order to effectuate or otherwise
comply with such rules, regulations and policies." (p. 85, Rollo.)
The Promissory Notes, in turn, uniformly authorized the 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." (pp.
85-86, Rollo; underlining ours.)
The Real Estate Mortgage Contract likewise provided that:
"(k) INCREASE OF INTEREST RATE
"The rate of interest charged on the obligation secured by this mortgage as well as
the interest on the amount which may have been advanced by the MORTGAGEE, in
accordance with the provisions hereof, shall be subject during the life of this contract
to such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors." (p. 86, Rollo; emphasis supplied.)
Four (4) months advance interest and incidental expenses/charges were deducted
from the loan, the net proceeds of which were released to the private respondent by
crediting or transferring the amount to his current account with the bank.
On June 20, 1984, PNB informed the private respondent that (1) his credit line of P1.8
million "will expire on July 4, 1984," (2) "[i]f renewal of the line for another year is
intended, please submit soonest possible your request," and (3) the "present policy of
the Bank requires at least 30% reduction of principal before your line can be
renewed." (pp. 86-87, Rollo.) Complying, private respondent on June 25, 1984, paid
PNB P540,000.00 (30% of P1.8 million) and requested that "the balance of
P1,260,000.00 be renewed for another period of two (2) years under the same
arrangement" and that "the increase of the interest rate of my mortgage loan be from
18% to 21%" (p. 87, Rollo.)
On July 4, 1984, private respondent paid PNB P360,000.00.
On July 18, 1984, private respondent reiterated in writing his request that "the
increase in the rate of interest from 18% be fixed at 21% or 24%. (p. 87, Rollo.)
On July 26, 1984, private respondent made an additional payment of P100,000.
On August 10, 1984, PNB informed private respondent that "we can not give due
course to your request for preferential interest rate in view of the following reason:
Existing Loan Policies of the bank requires 32% for loan of more than one year; Our
present cost of funds has substantially increased." (pp. 87-88, Rollo.)
On August 17, 1984, private respondent further paid PNB P150,000.00.
In a letter dated August 24, 1984 to PNB, private respondent announced that he
would "continue making further payments, and instead of a 'loan of more than one
year,' I shall pay the said loan before the lapse of one year or before July 4, 1985. * *
* I reiterate my request that the increase of my rate of interest from 18% 'be fixed at
21% or 24%.'" (p. 88, Rollo.)
On September 12, 1984, private respondent paid PNB P160,000.00.
In letters dated September 12, 1984 and September 13, 1984, PNB informed private
respondent that "the interest rate on your outstanding line/loan is hereby adjusted
from 32% p.a. to 41% p.a. (35% prime rate + 6%) effective September 6, 1984;" and
further explained "why we can not grant your request for a lower rate of 21% or 24%."
(pp. 88-89, Rollo.)
In a letter dated September 24, 1984 to PNB, private respondent registered his
protest against the increase of interest rate from 18% to 32% on July 4, 1984 and
from 32% to 41% on September 6, 1984.
On October 15, 1984, private respondent reiterated his request that the interest rate
should not be increased from 18% to 32% and from 32% to 41%. He also attached
(as payment) a check for P140,000.00.
Like rubbing salt on the private respondent's wound, the petitioner informed private
respondent on October 29, 1984, that "the interest rate on your outstanding line/loan
is hereby adjusted from 41% p.a. to 48% p.a. (42% prime rate plus 6% spread)
effective 25 October 1984." (p. 89, Rollo.)
In November 1984 private respondent paid PNB P50,000.00 thus reducing his
principal loan obligation to P300,000.00.
On December 18, 1984, private respondent filed in the Regional Trial Court of Manila
a complaint against PNB entitled, "AMBROSIO PADILLA vs. PHILIPPINE NATIONAL
BANK" (Civil Case No. 84-28391), praying that judgment be rendered:
"a. Declaring that the unilateral increase of interest rates from 18% to 32%, then to
41% and again to 48% are illegal, not valid nor binding on plaintiff, and that an
adjustment of his interest rate from 18% to 24% is reasonable, fair and just;
"b. The interest rate on the P900,000.00 released on September 27, 1982 be counted
from said date and not from July 4, 1984;
"c. The excess of interest payment collected by defendant bank by debiting plaintiff's
current account be refunded to plaintiff or credited to his current account;
"d. Pending the determination of the merits of this case, a restraining order and/or a
writ of preliminary injunction be issued (1) to restrain and/or enjoin defendant bank for
[sic] collecting from plaintiff and/or debiting his current account with illegal and
excessive increases of interest rates; and (2) to prevent defendant bank from
declaring plaintiff in default for non-payment and from instituting any foreclosure
proceeding, extrajudicial or judicial, of the valuable commercial property of plaintiff."
(pp. 89-90, Rollo.)
In its answer to the complaint, PNB denied that the increases in interest rates were
illegal, unilateral excessive and arbitrary and recited the reasons justifying said
increases.
On March 31, 1985, the private respondent paid the P300,000-balance of his
obligation to PNB (Exh. 5).
The trial court rendered judgment on April 14, 1986, dismissing the complaint
because the increases of interest were properly made.
The private respondent appealed to the Court of Appeals. On June 27, 1989, the
Court of Appeals reversed the trial court, hence, PNB's recourse to this Court by a
petition for review under Rule 45 of the Rules of Court.
The assignments of error raised in PNB's petition for review can be resolved into a
single legal issue of whether the bank, 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.
The answer to that question is no.
In the first place, although Section 2, P.D. No. 116 of January 29, 1973, authorizes
the Monetary Board to prescribe the maximum rate or rates of interest for loans or
renewal thereof and to change such rate or rates whenever warranted by prevailing
economic and social conditions, it expressly provides that "such changes shall not be
made oftener than once every twelve months."
In this case, PNB, over the objection of the private respondent, and without authority
from the Monetary Board, within a period of only four (4) months, increased the 18%
interest rate on the private respondent's loan obligation three (3) times: (a) to 32% in
July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984. Those
increases were null and void, for if the Monetary Board itself was not authorized to
make such changes oftener than once a year, even less so may a bank which is
subordinate to the Board.
Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor
did agree in the Deed of Real Estate Mortgage (Exh. 5) that the interest rate may be
increased during the life of the contract "to such increase within the rate allowed by
law, as the Board of Directors of the MORTGAGEE may prescribe" (Exh. 5-e-1) or
"within the limits allowed by law" (Promissory Notes. Exhs. 2, 3, and 4), no law was
ever passed in July to November 1984 increasing the interest rates on loans or
renewals thereof to 32%, 41% and 48% (per annum), and no documents were
executed and delivered by the debtor to effectuate the increases. The Court of
Appeals observed.
"x x x We focus Our attention first of all on the agreement between the parties as
embodied in the following instruments, to wit: (1) Exhibit '1' Credit Agreement dated
July 1, 1982; (2) Exhibit '2' Promissory Note dated July 5, 1982; (3) Exhibit '3'
Promissory Note dated January 3, 1983; (4) Exhibit '4' Promissory Note dated
December 13, 1983; and (5) Exhibit '5' Real Estate Mortgage contract dated July 1,
1982.
"Exhibit '1' states in its portion marked Exhibit '1-g-1':
'9.06 Other Conditions. The borrowers hereby agree to be bound by the rules and
regulations of the Central Bank and the current and general policies of the Bank and
those which the Bank may adopt in the future, which may have relation to or in any
way affect the Line, which rules, regulations and policies are incorporated herein by
reference as if set forth herein in full. Promptly upon receipt of a written request from
the Bank, the Borrowers shall execute and deliver such documents and instruments,
in form and substance satisfactory to the Bank, in order to effectuate or otherwise
comply with such rules, regulations and policies.'
"Exhibits '2,' '3,' and '4' in their portions respectively marked Exhibits '2-B', '3-B,' and
'4-B' uniformly authorize the defendant bank to increase the stipulated interest rate of
18% per annum 'within the limits allowed by law at any time depending on whatever
policy it may adopt in the future: Provided, that, the interest rate on this note shall be
correspondingly decreased in the event that the applicable maximum interest rate is
reduced by law or by the Monetary Board.'
"Exhibit '5' in its portion marked Exhibit '5-e-1' stipulates:
'(k) INCREASE OF INTEREST RATE
'The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in
accordance with the provisions hereof, shall be subject during the life of this contract
to such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.'
"Clearly, then, the agreement between the parties authorized the defendant bank to
increase the interest rate beyond the original rate of 18% per annum but 'within the
limits allowed by law' or 'within the rate allowed by law.' it being declared the
obligation of the plaintiff as borrower to execute and deliver the corresponding
documents and instruments to effectuate the increase." (pp. 11-12, Rollo.)
In Banco Filipino Savings and Mortgage Bank vs. Navarro, 152 SCRA 346 (1987),
this Court disauthorized the bank from raising the interest rate on the borrowers' loan
from 12% to 17% despite an escalation clause in the loan agreement signed by the
debtors authorizing Banco Filipino "to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event a law should
be enacted increasing the lawful rates of interest that may be charged on this
particular kind of loan." (Underscoring supplied.)
In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494 dated
July 1, 1976, (72 O.G. No. 3, p. 676-J) which provided that "the maximum rate of
interest, including commissions premiums, fees and other charges on loans with a
maturity of more than 730 days by banking institution x x x shall be 19%."
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."

This Court disallowed the increase for the simple reason that said "Circular No. 494,
although it has the effect of law is not a law." Speaking through Mine Justice
Ameurfina M. Herrera, this Court held:
"It is now clear that from March 17, 1980, escalation clauses to be valid should
specifically provide: (1) that there can be an increase in interest if increased by law or
by the Monetary Board; and (2) 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.'" (p. 111,
Rollo.)
In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10),
PNB Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but
those resolution and circulars are neither laws nor resolutions of the Monetary Board.
The debtor herein never agreed in writing to pay the interest increases fixed by the
PNB beyond 24% per annum, hence, he is not bound to pay a higher rate than that.
That an increase in the interest rate from 18% to 48% within a period of four (4)
months is excessive, as found by the Court of Appeals, is indisputable.
WHEREFORE, finding no reversible error in the decision of the Court of Appeals in
CA-G.R. CV No. 09791, the Court resolved to deny the petition for review for lack of
merit, with costs against the petitioner.
SO ORDERED.

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on
interest rates
"x x x increases in interest rates are not subject to any ceiling prescribed by the Usury
Law."
but 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."

Besides violating P.D. 116, 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 (Garcia vs. Rita
Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan
agreement between the PNB and the private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during the term of
the loan, that license would have been null and void for being violative of the principle
of mutuality essential in contracts. It would have invested the loan agreement with
the character of a contract of adhesion, where the parties do not bargain on equal
footing, the weaker party's (the debtor) participation being reduced to the alternative
"to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a
contract is a veritable trap for the weaker party whom the courts of justice must
protect against abuse and imposition.
G.R. No. 113926 October 23, 1996
SECURITY BANK AND TRUST COMPANY
vs.
REGIONAL TRIAL COURT OF MAKATI, BRANCH 61, MAGTANGGOL EUSEBIO
and LEILA VENTURA
HERMOSISIMA, JR., J.:
Questions of law which are the first impression are sought to be resolved in this case:
Should the rate of interest on a loan or forbearance of money, goods or credits, as
stipulated in a contract, far in excess of the ceiling prescribed under or pursuant to the
Usury Law, prevail over Section 2 of Central Bank Circular No. 905 which prescribes
that the rate of interest thereof shall continue to be 12% per annum? Do the Courts
have the discretion to arbitrarily override stipulated interest rates of promissory notes
and stipulated interest rates of promissory notes and thereby impose a 12% interest
on the loans, in the absence of evidence justifying the impositions of a higher rate?
This is a petition for review on certiorari for the purpose of assailing the decision of
Honorable Judge Fernando V. Gorospe of the Regional Trial Court of Makati, Branch
61, dated March 30, 1993, which found private respondent Eusebio liable to petitioner
for a sum of money. Interest was lowered by the court a quo from 23% per annum as
agreed upon by the parties to 12% per annum.
The undisputed facts are as follows:
On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory
Note No. TL/74/178/83 in favor of petitioner Security Bank and Trust Co. (SBTC) in
the total amount of One Hundred Thousand Pesos (P100,000.00) payable in six
monthly installments with a stipulated interest of 23% per annum up to the fifth
installments.[1]
On July 28, 1983, respondent Eusebio again executed Promissory note No
TL/74/1296/83 in favor of petitioner SBTC. Respondent bound himself to pay the sum
of One Hundred Thousand Pesos (P100.000.00) in six (6) monthly installments plus
23% interest per annum.[2]
Finally, another Promissory Note No. TL74/1491/83 was executed on August 31,
1983 in the amount of Sixty Five Thousand Pesos (P65,000.00). Respondent agreed
to pay this note in six (6) monthly installments plus interest at the rate of 23% per
annum.[3]
On all the abovementioned notes, private respondents Leila Ventura had signed as
co-maker.[4]
Upon maturity which fell on the different dates below, the principal balance remaining
on the notes stood at:
1) PN No. TL/74/748/83 P16,665.00 as of September 1983.
2) PN No. TL/74/1296/83 P83,333.00 as of August 1983
3) PN No. TL/74/1991/83 P65,000.00 as of August 1983.
Upon the failure and refusal of respondent Eusebio to pay the aforestated balance
payable, a collectible case was filed in court by petitioner SBTC.[5] On March 30,
1993, the court a quo rendered a judgment in favor of petitioner SBTC, the dispositive
portion which reads:
WHEREFORE, premises above-considered, and plaintiffs claim having been duly
proven, judgment is hereby rendered in favor of plaintiff and as against defendant
Eusebio who is hereby ordered to:
1. Pay the sum of P16,665.00, plus interest of 12% per annum starting 27
September 1983, until fully paid;
2. Pay the sum of P83,333.00, plus interest of 12% per annum starting 28
August 1983, until fully paid;
3. Pay the sum of P65,000.00, plus interest of 12% per annum starting 31
August 1983, until fully paid;
4. Pay the sum equivalent to 20% of the total amount due and payable to
plaintiff as and by way of attorneys fees; and to
5. Pay the cost of this suit.
SO ORDERED.[6]
On August 6, 1993, a motion for partial reconsideration was filed by petitioner SBTC
contending that:
(1) the interest rate agreed upon by the parties during the signing of the promissory
notes was 23% per annum;
(2) the interests awarded should be compounded quarterly from due date as provided
in three (3) promissory notes;
(3) defendant Leila Ventura should likewise be held liable to pay the balance on the
promissory notes since she has signed as co-maker and as such, is liable jointly and
severally with defendant Eusebio without a need for demand upon her.[7]
Consequently, an Order was issued by the court a quo denying the motion to grant
the rates of interest beyond 12% per annum; and holding defendant Leila Ventura
jointly and severally liable with co-defendant Eusebio.
Hence, this petition.
The sole issue to be settled in this petition is whether or not the 23% rate of interest
per annum agreed upon by petitioner bank and respondents is allowable and not
against the Usury Law.
We find merit in this petition.
From the examination of the records, it appears that indeed the agreed rate of interest
as stipulated on the three (3) promissory notes is 23% per annum.[8] The applicable
provision of law is the Central Bank Circular No. 905 which took effect on December
22, 1982, particularly Sections 1 and 2 which state:[9]
Sec. 1. The rate of interest, including commissions, premiums, fees and other
charges, on a loan or forbearance of any money, goods or credits, regardless of
maturity and whether secured or unsecured, that may be charged or collected by any
person, whether natural or judicial, shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended.
application of the law according to its express terms, interpretation being called for
only when such literal application is impossible. No process of interpretation or
construction need be resorted to where a provision of law peremptorily calls for
application. Where a requirement or condition is made in explicit and unambiguous
terms, no discretion is left to the judiciary. It must see to it that its mandate is obeyed.

Sec. 2. The rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of express contract as to such rate
of interest, shall continue to be twelve per cent (12%) per annum.
CB Circular 905 was issued by the Central Banks Monetary Board pursuant to P.D.
1684 empowering them to prescribe the maximum rates of interest for loans and
certain forbearances, to wit:
SECTION 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as
follows:
SEC. 1-a The Monetary Board is hereby authorized to prescribed the maximum rate
or rates of interest for the loan or renewal thereof or the forbearance of any money,
goods or credits, and to change such rate or rates whenever warranted by prevailing
economic and social conditions: Provided, That changes in such rates or rates may
be effected gradually on scheduled dates announced in advance.
In the exercise of the authority herein granted, the Monetary Board may prescribed
higher maximum rates for loans of low priority, such as consumer loans or renewals
thereof as well as such loans made by pawnshops, finance companies and other
similar credit institutions although the rates prescribed for these institutions need not
necessarily be uniform. The Monetary Board is also authorized to prescribed different
maximum rate or rates for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries.[10]
The rate of interest was agreed upon by the parties freely. Significantly, respondent
did not question that rate. It is not for respondent court a quo to change the
stipulations in the contract where it is not illegal. Furthermore, Article 1306 of the New
Civil code provides that contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy. We find no valid reason for
the respondent court a quo to impose a 12% rate of interest on the principal balance
owing to petitioner by respondent in the presence of a valid stipulation. 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.[13] Hence, only in the absence of
a stipulation can the court impose the 12% rate of interest.
The promissory notes were signed by both parties voluntarily. Therefore, stipulations
therein are binding between them. Respondent Eusebio, likewise, did not question
any of the stipulations therein. In fact, in the Comment file by respondent Eusebio to
this court, he chose not to question the decision and instead expressed his desire to
negotiate with the petitioner bank for terms within which to settle his obligation.[14]
IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is
hereby AFFIRMED with the MODIFICATION that the rate of interest that should be
imposed be 23% per annum.
SO ORDERED.

This court has ruled in the case of Philippine National Bank v. Court of Appeals[11]
that:

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.

All the promissory notes were signed in 1983 and, therefore, were already covered by
CB Circular No. 905. Contrary to the claim of respondent court, this circular did not
repeal nor in anyway amend the Usury Law but simply suspended the latters
effectivity.

Basic is the rule of statutory construction that when the law is clear and unambiguous,
the court is left with no alternative but to apply the same according to its clear
language. As we have held in the case of Quijano v. Development Bank of the
Philippines:[12]

xxx We cannot see any room for interpretation or construction in the clear and
unambiguous language of the above-quoted provision of law. This Court had
steadfastly adhered to the doctrine that its first and fundamental duty is the
G.R. Nos. 150773 and 153599 September 30, 2005
SPOUSES DAVID B. CARPO and RECHILDA S. CARPO
vs.
LEANOR CHUA and ELMA DY NG
TINGA, J.:
Before this Court are two consolidated petitions for review. The first, docketed as
G.R. No. 150773, assails the Decision[1] of the Regional Trial Court (RTC), Branch
26 of Naga City dated 26 October 2001 in Civil Case No. 99-4376. RTC Judge
Filemon B. Montenegro dismissed the complaint[2] for annulment of real estate
mortgage and consequent foreclosure proceedings filed by the spouses David B.
Carpo and Rechilda S. Carpo (petitioners).
The second, docketed as G.R. No. 153599, seeks to annul the Court of Appeals
Decision[3] dated 30 April 2002 in CA-G.R. SP No. 57297. The Court of Appeals
Third Division annulled and set aside the orders of Judge Corazon A. Tordilla to
suspend the sheriffs enforcement of the writ of possession.
The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they
borrowed from Eleanor Chua and Elma Dy Ng (respondents) the amount of One
Hundred Seventy-Five Thousand Pesos (P175,000.00), payable within six (6) months
with an interest rate of six percent (6%) per month. To secure the payment of the
loan, petitioners mortgaged their residential house and lot situated at San Francisco,
Magarao, Camarines Sur, which lot is covered by Transfer Certificate of Title (TCT)
No. 23180. Petitioners failed to pay the loan upon demand. Consequently, the real
estate mortgage was extrajudicially foreclosed and the mortgaged property sold at a
public auction on 8 July 1996. The house and lot was awarded to respondents, who
were the only bidders, for the amount of Three Hundred Sixty-Seven Thousand Four
Hundred Fifty-Seven Pesos and Eighty Centavos (P367,457.80).
Upon failure of petitioners to exercise their right of redemption, a certificate of sale
was issued on 5 September 1997 by Sheriff Rolando A. Borja. TCT No. 23180 was
cancelled and in its stead, TCT No. 29338 was issued in the name of respondents.
Despite the issuance of the TCT, petitioners continued to occupy the said house and
lot, prompting respondents to file a petition for writ of possession with the RTC
docketed as Special Proceedings (SP) No. 98-1665. On 23 March 1999, RTC Judge
Ernesto A. Miguel issued an Order[4] for the issuance of a writ of possession.
On 23 July 1999, petitioners filed a complaint for annulment of real estate mortgage
and the consequent foreclosure proceedings, docketed as Civil Case No. 99-4376 of
the RTC. Petitioners consigned the amount of Two Hundred Fifty-Seven Thousand
One Hundred Ninety-Seven Pesos and Twenty-Six Centavos (P257,197.26) with the
RTC.
Meanwhile, in SP No. 98-1665, a temporary restraining order was issued upon motion
on 3 August 1999, enjoining the enforcement of the writ of possession. In an Order[5]
dated 6 January 2000, the RTC suspended the enforcement of the writ of possession
pending the final disposition of Civil Case No. 99-4376. Against this Order,
respondents filed a petition for certiorari and mandamus before the Court of Appeals,
docketed as CA-G.R. SP No. 57297.
During the pendency of the case before the Court of Appeals, RTC Judge Filemon B.
Montenegro dismissed the complaint in Civil Case No. 99-4376 on the ground that it
was filed out of time and barred by laches. The RTC proceeded from the premise that
the complaint was one for annulment of a voidable contract and thus barred by the
four-year prescriptive period. Hence, the first petition for review now under
consideration was filed with this Court, assailing the dismissal of the complaint.
The second petition for review was filed with the Court after the Court of Appeals on
30 April 2002 annulled and set aside the RTC orders in SP No. 98-1665 on the
ground that it was the ministerial duty of the lower court to issue the writ of
possession when title over the mortgaged property had been consolidated in the
mortgagee.
This Court ordered the consolidation of the two cases, on motion of petitioners.
n G.R. No. 150773, petitioners claim that following the Courts ruling in Medel v. Court
of Appeals[6] the rate of interest stipulated in the principal loan agreement is clearly
null and void. Consequently, they also argue that the nullity of the agreed interest rate
affects the validity of the real estate mortgage. Notably, while petitioners were silent in
their petition on the issues of prescription and laches on which the RTC grounded the
dismissal of the complaint, they belatedly raised the matters in their Memorandum.
Nonetheless, these points warrant brief comment.
On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not commit
any grave abuse of discretion when it issued the orders dated 3 August 1999 and 6
January 2000, and that these orders could not have been the proper subjects of a
petition for certiorari and mandamus. More accurately, the justiciable issues before us
are whether the Court of Appeals could properly entertain the petition for certiorari
from the timeliness aspect, and whether the appellate court correctly concluded that
the writ of possession could no longer be stayed.
We first resolve the petition in G.R. No. 150773.
Petitioners contend that the agreed rate of interest of 6% per month or 72% per
annum is so excessive, iniquitous, unconscionable and exorbitant that it should have
been declared null and void. Instead of dismissing their complaint, they aver that the
lower court should have declared them liable to respondents for the original amount
of the loan plus 12% interest per annum and 1% monthly penalty charge as liquidated
damages,[7] in view of the ruling in Medel v. Court of Appeals.[8]
In Medel, the Court found that the interest stipulated at 5.5% per month or 66% per
annum was so iniquitous or unconscionable as to render the stipulation void.
Nevertheless, 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 Court shall reduce equitably liquidated damages, whether intended as an
indemnity or a penalty if they are iniquitous or unconscionable.[9]
In a long line of cases, this Court has invalidated similar stipulations on interest rates
for being excessive, iniquitous, unconscionable and exorbitant. In Solangon v.
Salazar,[10] we annulled the stipulation of 6% per month or 72% per annum interest
on a P60,000.00 loan. In Imperial v. Jaucian,[11] we reduced the interest rate from
16% to 1.167% per month or 14% per annum. In Ruiz v. Court of Appeals,[12] we
equitably reduced the agreed 3% per month or 36% per annum interest to 1% per
month or 12% per annum interest. The 10% and 8% interest rates per month on a
P1,000,000.00 loan were reduced to 12% per annum in Cuaton v. Salud.[13]
Recently, this Court, in Arrofo v. Quino,[14] reduced the 7% interest per month on a
P15,000.00 loan amounting to 84% interest per annum to 18% per annum.
There is no need to unsettle the principle affirmed in Medel and like cases. From that
perspective, it is apparent that the stipulated interest in the subject loan is excessive,
iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract
principle embodied in Article 1306 of the Civil Code, contracting parties may establish
such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public
policy. In the ordinary course, the codal provision may be invoked to annul the
excessive stipulated interest.
In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By
the standards set in the above-cited cases, this stipulation is similarly invalid.
However, the RTC refused to apply the principle cited and employed in Medel on the
ground that Medel did not pertain to the annulment of a real estate mortgage,[15] as it
was a case for annulment of the loan contract itself. The question thus sensibly arises
whether the invalidity of the stipulation on interest carries with it the invalidity of the
principal obligation.
The question is crucial to the present petition even if the subject thereof is not the
annulment of the loan contract but that of the mortgage contract. The consideration of
the mortgage contract is the same as that of the principal contract from which it
receives life, and without which it cannot exist as an independent contract. Being a
mere accessory contract, the validity of the mortgage contract would depend on the
validity of the loan secured by it.[16]
Notably in Medel, the Court did not invalidate the entire loan obligation despite the
inequitability of the stipulated interest, but instead reduced the rate of interest to the
more reasonable rate of 12% per annum. The same remedial approach to the
wrongful interest rates involved was employed or affirmed by the Court in Solangon,
Imperial, Ruiz, Cuaton, and Arrofo.
The Courts ultimate affirmation in the cases cited of the validity of the principal loan
obligation side by side with the invalidation of the interest rates thereupon is
congruent with the rule that a usurious loan transaction is not a complete nullity but
defective only with respect to the agreed interest.
We are aware that the Court of Appeals, on certain occasions, had ruled that a
usurious loan is wholly null and void both as to the loan and as to the usurious
interest.[17] However, this Court adopted the contrary rule, as comprehensively
discussed in Briones v. Cammayo:[18]
In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in
any event, the debtor in a usurious contract of loan should pay the creditor the
amount which he justly owes him, citing in support of this ruling its previous decisions
in Go Chioco, Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and Delgado vs. Duque
Valgona, 44 Phil. 739.
....
Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We also held that the
standing jurisprudence of this Court on the question under consideration was clearly
to the effect that the Usury Law, by its letter and spirit, did not deprive the lender of
his right to recover from the borrower the money actually loaned to and enjoyed by
the latter. This Court went further to say that the Usury Law did not provide for the
forfeiture of the capital in favor of the debtor in usurious contracts, and that while the
forfeiture might appear to be convenient as a drastic measure to eradicate the evil of
usury, the legal question involved should not be resolved on the basis of
convenience.
Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and
Pascua vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter
We expressly held that when a contract is found to be tainted with usury "the only
right of the respondent (creditor) . . . was merely to collect the amount of the loan,
plus interest due thereon."
The view has been expressed, however, that the ruling thus consistently adhered to
should now be abandoned because Article 1957 of the new Civil Code a subsequent
law provides that contracts and stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury, shall be void, and that in such cases
"the borrower may recover in accordance with the laws on usury." From this the
conclusion is drawn that the whole contract is void and that, therefore, the creditor
has no right to recover not even his capital.
The meaning and scope of our ruling in the cases mentioned heretofore is clearly
stated, and the view referred to in the preceding paragraph is adequately answered,
in Angel Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On the
question of whether a creditor in a usurious contract may or may not recover the
principal of the loan, and, in the affirmative, whether or not he may also recover
interest thereon at the legal rate, We said the following:
....
Appealing directly to Us, defendants raise two questions of law: (1) In a loan with
usurious interest, may the creditor recover the principal of the loan? (2) Should
attorney's fees be awarded in plaintiff's favor?"
Great reliance is made by appellants on Art. 1411 of the New Civil Code . . . .
Since, according to the appellants, a usurious loan is void due to illegality of cause or
object, the rule of pari delicto expressed in Article 1411, supra, applies, so that neither
party can bring action against each other. Said rule, however, appellants add, is
modified as to the borrower, by express provision of the law (Art. 1413, New Civil
Code), allowing the borrower to recover interest paid in excess of the interest allowed
by the Usury Law. As to the lender, no exception is made to the rule; hence, he
cannot recover on the contract. So they continue the New Civil Code provisions must
be upheld as against the Usury Law, under which a loan with usurious interest is not
totally void, because of Article 1961 of the New Civil Code, that: "Usurious contracts
shall be governed by the Usury Law and other special laws, so far as they are not
inconsistent with this Code."
We do not agree with such reasoning. Article 1411 of the New Civil Code is not new;
it is the same as Article 1305 of the Old Civil Code. Therefore, said provision is no
warrant for departing from previous interpretation that, as provided in the Usury Law
(Act No. 2655, as amended), a loan with usurious interest is not totally void only as to
the interest.
. . . [a]ppellants fail to consider that a contract of loan with usurious interest consists
of principal and accessory stipulations; the principal one is to pay the debt; the
accessory stipulation is to pay interest thereon.
And said two stipulations are divisible in the sense that the former can still stand
without the latter. Article 1273, Civil Code, attests to this: "The renunciation of the
principal debt shall extinguish the accessory obligations; but the waiver of the latter
shall leave the former in force."
The question therefore to resolve is whether the illegal terms as to payment of
interest likewise renders a nullity the legal terms as to payments of the principal debt.
Article 1420 of the New Civil Code provides in this regard: "In case of a divisible
contract, if the illegal terms can be separated from the legal ones, the latter may be
enforced."
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay
the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not
illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence,
being separable, the latter only should be deemed void, since it is the only one that is
illegal.
....
The principal debt remaining without stipulation for payment of interest can thus be
recovered by judicial action. And in case of such demand, and the debtor incurs in
delay, the debt earns interest from the date of the demand (in this case from the filing
of the complaint). Such interest is not due to stipulation, for there was none, the same
being void. Rather, it is due to the general provision of law that in obligations to pay
money, where the debtor incurs in delay, he has to pay interest by way of damages
(Art. 2209, Civil Code). The court a quo therefore, did not err in ordering defendants
to pay the principal debt with interest thereon at the legal rate, from the date of filing
of the complaint."[19]
The Courts wholehearted affirmation of the rule that the principal obligation subsists
despite the nullity of the stipulated interest is evinced by its subsequent rulings, cited
above, in all of which the main obligation was upheld and the offending interest rate
merely corrected. Hence, it is clear and settled that the principal loan obligation still
stands and remains valid. By the same token, since the mortgage contract derives its
vitality from the validity of the principal obligation, the invalid stipulation on interest
rate is similarly insufficient to render void the ancillary mortgage contract.
It should be noted that had the Court declared the loan and mortgage agreements
void for being contrary to public policy, no prescriptive period could have run.[20]
Such benefit is obviously not available to petitioners.
Yet the RTC pronounced that the complaint was barred by the four-year prescriptive
period provided in Article 1391 of the Civil Code, which governs voidable contracts.
This conclusion was derived from the allegation in the complaint that the consent of
petitioners was vitiated through undue influence. While the RTC correctly
acknowledged the rule of prescription for voidable contracts, it erred in applying the
rule in this case. We are hard put to conclude in this case that there was any undue
influence in the first place.
There is ultimately no showing that petitioners consent to the loan and mortgage
agreements was vitiated by undue influence. The financial condition of petitioners
may have motivated them to contract with respondents, but undue influence cannot
be attributed to respondents simply because they had lent money. Article 1391, in
relation to Article 1390 of the Civil Code, grants the aggrieved party the right to obtain
the annulment of contract on account of factors which vitiate consent. Article 1337
defines the concept of undue influence, as follows:
There is undue influence when a person takes improper advantage of his power over
the will of another, depriving the latter of a reasonable freedom of choice. The
following circumstances shall be considered: the confidential, family, spiritual and
other relations between the parties or the fact that the person alleged to have been
unduly influenced was suffering from mental weakness, or was ignorant or in financial
distress.
While petitioners were allegedly financially distressed, it must be proven that there is
deprivation of their free agency. In other words, for undue influence to be present, the
influence exerted must have so overpowered or subjugated the mind of a contracting
party as to destroy his free agency, making him express the will of another rather than
his own.[21] The alleged lingering financial woes of petitioners per se cannot be
equated with the presence of undue influence.
The RTC had likewise concluded that petitioners were barred by laches from
assailing the validity of the real estate mortgage. We wholeheartedly agree. If indeed
petitioners unwillingly gave their consent to the agreement, they should have raised
this issue as early as in the foreclosure proceedings. It was only when the writ of
possession was issued did petitioners challenge the stipulations in the loan contract
in their action for annulment of mortgage. Evidently, petitioners slept on their rights.
The Court of Appeals succinctly made the following observations:
In all these proceedings starting from the foreclosure, followed by the issuance of a
provisional certificate of sale; then the definite certificate of sale; then the issuance of
TCT No. 29338 in favor of the defendants and finally the petition for the issuance of
the writ of possession in favor of the defendants, there is no showing that plaintiffs
questioned the validity of these proceedings. It was only after the issuance of the writ
of possession in favor of the defendants, that plaintiffs allegedly tendered to the
defendants the amount of P260,000.00 which the defendants refused. In all these
proceedings, why did plaintiffs sleep on their rights?[22]
Clearly then, with the absence of undue influence, petitioners have no cause of
action. Even assuming undue influence vitiated their consent to the loan contract,
their action would already be barred by prescription when they filed it. Moreover,
petitioners had clearly slept on their rights as they failed to timely assail the validity of
the mortgage agreement. The denial of the petition in G.R. No. 150773 is warranted.
We now resolve the petition in G.R. No. 153599.
Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January
2000 could no longer be questioned in a special civil action for certiorari and
mandamus as the reglementary period for such action had already elapsed.
It must be noted that the Order dated 3 August 1999 suspending the enforcement of
the writ of possession had a period of effectivity of only twenty (20) days from 3
August 1999, or until 23 August 1999. Thus, upon the expiration of the twenty (20)-
day period, the said Order became functus officio. Thus, there is really no sense in
assailing the validity of this Order, mooted as it was. For the same reason, the validity
of the order need not have been assailed by respondents in their special civil action
before the Court of Appeals.
On the other hand, the Order dated 6 January 2000 is in the nature of a writ of
injunction whose period of efficacy is indefinite. It may be properly assailed by way of
the special civil action for certiorari, as it is interlocutory in nature.
As a rule, the special civil action for certiorari under Rule 65 must be filed not later
than sixty (60) days from notice of the judgment or order.[23] Petitioners argue that
the 3 August 1999 Order could no longer be assailed by respondents in a special civil
action for certiorari before the Court of Appeals, as the petition was filed beyond sixty
(60) days following respondents receipt of the Order. Considering that the 3 August
1999 Order had become functus officio in the first place, this argument deserves
scant consideration.
(60)-day reglementary period for special civil actions under Rule 65 applies, and
respondents petition was filed with the Court of Appeals well within the period.
Accordingly, no error can be attributed to the Court of Appeals in granting the petition
for certiorari and mandamus. As pointed out by respondents, the remedy of
mandamus lies to compel the performance of a ministerial duty. The issuance of a
writ of possession to a purchaser in an extrajudicial foreclosure is merely a ministerial
function.[26]
Thus, we also affirm the Court of Appeals ruling to set aside the RTC orders enjoining
the enforcement of the writ of possession.[27] The purchaser in a foreclosure sale is
entitled as a matter of right to a writ of possession, regardless of whether or not there
is a pending suit for annulment of the mortgage or the foreclosure proceedings. An
injunction to prohibit the issuance or enforcement of the writ is entirely out of place.
[28]
One final note. The issue on the validity of the stipulated interest rates, regrettably for
petitioners, was not raised at the earliest possible opportunity. It should be pointed
out though that since an excessive stipulated interest rate may be void for being
contrary to public policy, an action to annul said interest rate does not prescribe. Such
indeed is the remedy; it is not the action for annulment of the ancillary real estate
mortgage. Despite the nullity of the stipulated interest rate, the principal loan
obligation subsists, and along with it the mortgage that serves as collateral security
for it.
WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against
petitioners.
SO ORDERED.

Petitioners further claim that the 6 January 2000 Order could not have likewise been
the subject of a special civil action for certiorari, as it is according to them a final
order, as opposed to an interlocutory order. That the 6 January 2000 Order is
interlocutory in nature should be beyond doubt. An order is interlocutory if its effects
would only be provisional in character and would still leave substantial proceedings to
be further had by the issuing court in order to put the controversy to rest.[24] The
injunctive relief granted by the order is definitely final, but merely provisional, its
effectivity hinging on the ultimate outcome of the then pending action for annulment of
real estate mortgage. Indeed, an interlocutory order hardly puts to a close, or
disposes of, a case or a disputed issue leaving nothing else to be done by the court in
respect thereto, as is characteristic of a final order.

Since the 6 January 2000 Order is not a final order, but rather interlocutory in nature,
we cannot agree with petitioners who insist that it may be assailed only through an
appeal perfected within fifteen (15) days from receipt thereof by respondents. It is
axiomatic that an interlocutory order cannot be challenged by an appeal, but is
susceptible to review only through the special civil action of certiorari.[25] The sixty
G.R. No. 159912 August 17, 2007 The three promissory notes were renewed several times. On 30 April 1997, the
UNITED COCONUT PLANTERS BANK, payment of the principal and interest of the latter two promissory notes were debited
vs. from the spouses Belusos account with UCPB; yet, a consolidated loan for P1.3
SPOUSES SAMUEL and ODETTE BELUSO, Million was again released to the spouses Beluso under one promissory note with a
CHICO-NAZARIO, J.: due date of 28 February 1998.
  
 
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which
To completely avail themselves of the P2.35 Million credit line extended to them by
seeks to annul the Court of Appeals Decision [1] dated 21 January 2003 and its
UCPB, the spouses Beluso executed two more promissory notes for a total
Resolution[2] dated 9 September 2003 in CA-G.R. CV No. 67318. The assailed Court
of P350,000.00:
of Appeals Decision and Resolution affirmed in turn the Decision [3] dated 23 March
 
2000 and Order[4] dated 8 May 2000 of the Regional Trial Court (RTC), Branch 65 of
PN # Date of PN Maturity Date Amount Secured
Makati City, in Civil Case No. 99-314, declaring void the interest rate provided in the
97-00363-1 11 December 1997 28 February P 200,000
promissory notes executed by the respondents Spouses Samuel and Odette Beluso
1998
(spouses Beluso) in favor of petitioner United Coconut Planters Bank (UCPB).
98-00002-4 2 January 1998 28 February P 150,000
 
1998
The procedural and factual antecedents of this case are as follows:  
  However, the spouses Beluso alleged that the amounts covered by these last two
promissory notes were never released or credited to their account and, thus, claimed
On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under
that the principal indebtedness was only P2 Million.
a Credit Agreement whereby the latter could avail from the former credit of up to a  
maximum amount of P1.2 Million pesos for a term ending on 30 April 1997. The In any case, UCPB applied interest rates on the different promissory notes ranging
spouses Beluso constituted, other than their promissory notes, a real estate mortgage from 18% to 34%. From 1996 to February 1998 the spouses Beluso were able to pay
over parcels of land in Roxas City, covered by Transfer Certificates of Title No. T- the total sum of P763,692.03.
31539 and T-27828, as additional security for the obligation. The Credit Agreement  
was subsequently amended to increase the amount of the Promissory Notes Line to a From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and
maximum of P2.35 Million pesos and to extend the term thereof to 28 February 1998. penalty on the obligations of the spouses Beluso, as follows:
 
The spouses Beluso availed themselves of the credit line under the following
Promissory Notes:
 
PN # Date of PN Maturity Date Amount Secured  
8314-96-00083-3 29 April 1996 27 August P 700,000 PN # Amount Interest Penalty Total
1996 Secured
8314-96-00085-0 2 May 1996 30 August P 500,000 97- P 200,000 31% 36% P 225,313.24
1996 00363-1
97- P 700,000 30.17% 32.786% P 795,294.72
8314-96-000292- 20 November 20 March 1997 P 800,000 00366-6 (7 days) (102 days)
2 1996
 
 97- P 1,300,000 28% 30.41% P 1,462,124.54
00368-2 (2 days) (102 days)
98- P 150,000 33% 36% P 170,034.71
00002-4 (102
days)
The spouses Beluso, however, failed to make any payment of the foregoing amounts.
On 2 September 1998, UCPB demanded that the spouses Beluso pay their total
obligation of P2,932,543.00 plus 25% attorneys fees, but the spouses Beluso failed to
comply therewith. On 28 December 1998, UCPB foreclosed the properties mortgaged
by the spouses Beluso to secure their credit line, which, by that time, already
ballooned to P3,784,603.00.
On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting
and Damages against UCPB with the RTC of Makati City.
 
On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the
case as follows:
 
PREMISES CONSIDERED, judgment is hereby rendered
declaring the interest rate used by [UCPB] void and the foreclosure
and Sheriffs Certificate of Sale void. [UCPB] is hereby ordered to
return to [the spouses Beluso] the properties subject of the
foreclosure; to pay [the spouses Beluso] the amount of P50,000.00
by way of attorneys fees; and to pay the costs of suit.[The spouses
Beluso] are hereby ordered to pay [UCPB] the sum
of P1,560,308.00.[5]
 
On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration, [6] prompting
UCPB to appeal the RTC Decision with the Court of Appeals. The Court of Appeals
affirmed the RTC Decision, to wit:
WHEREFORE, premises considered, the decision
dated March 23, 2000 of the Regional Trial Court, Branch
65, Makati City in Civil Case No. 99-314 is hereby AFFIRMED
subject to the modification that defendant-appellant UCPB is not
liable for attorneys fees or the costs of suit.[7]
On 9 September 2003, the Court of Appeals denied UCPBs Motion for
Reconsideration for lack of merit. UCPB thus filed the present petition, submitting the
following issues for our resolution:
 
I
 WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT
AFFIRMED THE DECISION OF THE TRIAL COURT WHICH
DECLARED VOID THE PROVISION ON INTEREST RATE
AGREED UPON BETWEEN PETITIONER AND RESPONDENTS
II
 WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT
AFFIRMED THE COMPUTATION BY THE TRIAL COURT OF
RESPONDENTS INDEBTEDNESS AND ORDERED
RESPONDENTS TO PAY PETITIONER THE AMOUNT OF ONLY
ONE MILLION FIVE HUNDRED SIXTY THOUSAND THREE
HUNDRED EIGHT PESOS (P1,560,308.00)
III
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT
AFFIRMED THE DECISION OF THE TRIAL COURT WHICH
ANNULLED THE FORECLOSURE BY PETITIONER OF THE
SUBJECT PROPERTIES DUE TO AN ALLEGED INCORRECT
COMPUTATION OF RESPONDENTS INDEBTEDNESS
IV
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT
AFFIRMED THE DECISION OF THE TRIAL COURT WHICH
FOUND PETITIONER LIABLE FOR VIOLATION OF THE TRUTH IN
LENDING ACT
 
V
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT
FAILED TO ORDER THE DISMISSAL OF THE CASE BECAUSE
THE RESPONDENTS ARE GUILTY OF FORUM SHOPPING[8]
  
Validity of the Interest Rates
 
The Court of Appeals held that the imposition of interest in the following
provision found in the promissory notes of the spouses Beluso is void, as the interest
rates and the bases therefor were determined solely by petitioner UCPB:
 FOR VALUE RECEIVED, I, and/or We, on or before due
date, SPS. SAMUEL AND ODETTE BELUSO (BORROWER),
jointly and severally promise to pay to UNITED COCONUT
PLANTERS BANK (LENDER) or order at UCPB Bldg., Makati
Avenue, Makati City, Philippines, the sum of ______________
PESOS, (P_____), Philippine Currency, with interest thereon at the
rate indicative of DBD retail rate or as determined by the Branch
Head.[9]
 
UCPB asserts that this is a reversible error, and claims that while the interest
rate was not numerically quantified in the face of the promissory notes, it was
nonetheless categorically fixed, at the time of execution thereof, at the rate indicative
of the DBD retail rate. UCPB contends that said provision must be read with another
stipulation in the promissory notes subjecting to review the interest rate as fixed:
The interest rate shall be subject to review and may be
increased or decreased by the LENDER considering among others
the prevailing financial and monetary conditions; or the rate of
interest and charges which other banks or financial institutions
charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER.[10]
 
In this regard, UCPB avers that these are valid reference rates akin to a
prevailing rate or prime rate allowed by this Court in Polotan v. Court of Appeals.
[11]
 Furthermore, UCPB argues that even if the proviso as determined by the branch
head is considered void, such a declaration would not ipso facto render the
connecting clause indicative of DBD retail rate void in view of the separability clause
of the Credit Agreement, which reads:
 
Section 9.08 Separability Clause. If any one or more of the
provisions contained in this AGREEMENT, or documents executed
in connection herewith shall be declared invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability
of the remaining provisions hereof shall not in any way be affected
or impaired.[12]
According to UCPB, the imposition of the questioned interest rates did not
infringe on the principle of mutuality of contracts, because the spouses Beluso had
the liberty to choose whether or not to renew their credit line at the new interest rates
pegged by petitioner.[13] UCPB also claims that assuming there was any defect in the
mutuality of the contract at the time of its inception, such defect was cured by the
subsequent conduct of the spouses Beluso in availing themselves of the credit line
from April 1996 to February 1998 without airing any protest with respect to the
interest rates imposed by UCPB. According to UCPB, therefore, the spouses Beluso
are in estoppel.[14]
 
We agree with the Court of Appeals, and find no merit in the contentions of
UCPB.
Article 1308 of the Civil Code provides:
 
Art. 1308. The contract must bind both contracting parties;
its validity or compliance cannot be left to the will of one of them.
We applied this provision in Philippine National Bank v. Court of Appeals,
[15]
 where we held:
 
In order that obligations arising from contracts may have
the force of law between the parties, there must be mutuality
between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting
parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence,
even assuming that the P1.8 million loan agreement between the
PNB and the private respondent gave the PNB a license (although
in fact there was none) to increase the interest rate at will during the
term of the loan, that license would have been null and void for
being violative of the principle of mutuality essential in contracts. It
would have invested the loan agreement with the character of a
contract of adhesion, where the parties do not bargain on equal
footing, the weaker party's (the debtor) participation being reduced
to the alternative "to take it or leave it" (Qua vs. Law Union & Rock
Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the
weaker party whom the courts of justice must protect against abuse
and imposition.
 
 
The provision stating that the interest shall be at the rate indicative of DBD
retail rate or as determined by the Branch Head is indeed dependent solely on the will
of petitioner UCPB. Under such provision, petitioner UCPB has two choices on what
the interest rate shall be: (1) a rate indicative of the DBD retail rate; or (2) a rate as
determined by the Branch Head. As UCPB is given this choice, the rate should be
categorically determinable in both choices. If either of these two choices presents an
opportunity for UCPB to fix the rate at will, the bank can easily choose such an option,
thus making the entire interest rate provision violative of the principle of mutuality of
contracts.
 
Not just one, but rather both, of these choices are dependent solely on the
will of UCPB. Clearly, a rate as determined by the Branch Head gives the latter
unfettered discretion on what the rate may be. The Branch Head may choose any
rate he or she desires. As regards the rate indicative of the DBD retail rate, the same
cannot be considered as valid for being akin to a prevailing rate or prime rate allowed
by this Court in Polotan. The interest rate in Polotan reads:
The Cardholder agrees to pay interest per annum at 3% plus the
prime rate of Security Bank and Trust Company. x x x.[16]
 
In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus,
the parties can easily determine the interest rate by applying simple arithmetic. On
the other hand, the provision in the case at bar does not specify any margin above or
below the DBD retail rate. UCPB can peg the interest at any percentage above or
below the DBD retail rate, again giving it unfettered discretion in determining the
interest rate.
 
The stipulation in the promissory notes subjecting the interest rate to review does not
render the imposition by UCPB of interest rates on the obligations of the spouses
Beluso valid. According to said stipulation:
The interest rate shall be subject to review and may be
increased or decreased by the LENDER considering among others
the prevailing financial and monetary conditions; or the rate of
interest and charges which other banks or financial institutions
charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER.[17]
 
It should be pointed out that the authority to review the interest rate was given UCPB
alone as the lender. Moreover, UCPB may apply the considerations enumerated in
this provision as it wishes. As worded in the above provision, UCPB may give as
much weight as it desires to each of the following considerations: (1) the prevailing
financial and monetary condition; (2) the rate of interest and charges which other
banks or financial institutions charge or offer to charge for similar accommodations;
and/or (3) the resulting profitability to the LENDER (UCPB) after due consideration of
all dealings with the BORROWER (the spouses Beluso). Again, as in the case of the
interest rate provision, there is no fixed margin above or below these considerations.
 
In view of the foregoing, the Separability Clause cannot save either of the
two options of UCPB as to the interest to be imposed, as both options violate the
principle of mutuality of contracts.
 
UCPB likewise failed to convince us that the spouses Beluso were in
estoppel.
 
Estoppel cannot be predicated on an illegal act. As between the parties to a
contract, validity cannot be given to it by estoppel if it is prohibited by law or is against
public policy.[18]
 
The interest rate provisions in the case at bar are illegal not only because of
the provisions of the Civil Code on mutuality of contracts, but also, as shall be
discussed later, because they violate the Truth in Lending Act. Not disclosing the true
finance charges in connection with the extensions of credit is, furthermore, a form of
deception which we cannot countenance. It is against the policy of the State as stated
in the Truth in Lending Act:
 
Sec. 2. Declaration of Policy. It is hereby declared to be
the policy of the State to protect its citizens from a lack of
awareness of the true cost of credit to the user by assuring a full
disclosure of such cost with a view of preventing the uninformed
use of credit to the detriment of the national economy.[19]
Moreover, while the spouses Beluso indeed agreed to renew the credit line,
the offending provisions are found in the promissory notes themselves, not in the
credit line. In fixing the interest rates in the promissory notes to cover the renewed
credit line, UCPB still reserved to itself the same two options (1) a rate indicative of
the DBD retail rate; or (2) a rate as determined by the Branch Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the
interest rates imposed by UCPB, both failed to include in their computation of the

outstanding obligation of the spouses Beluso the legal rate of interest of 12% per
annum. Furthermore, the penalty charges were also deleted in the decisions of the
RTC and the Court of Appeals. Section 2.04, Article II on Interest and other Bank
Charges of the subject Credit Agreement, provides:
 
Section 2.04 Penalty Charges. In addition to the interest
provided for in Section 2.01 of this ARTICLE, any principal
obligation of the CLIENT hereunder which is not paid when due
shall be subject to a penalty charge of one percent (1%) of the
amount of such obligation per month computed from due date until
the obligation is paid in full. If the bank accelerates teh (sic)
payment of availments hereunder pursuant to ARTICLE VIII hereof,
the penalty charge shall be used on the total principal amount
outstanding and unpaid computed from the date of acceleration
until the obligation is paid in full.[20]
 
Paragraph 4 of the promissory notes also states:
 
In case of non-payment of this Promissory Note (Note) at
maturity, I/We, jointly and severally, agree to pay an additional sum
equivalent to twenty-five percent (25%) of the total due on the Note
as attorneys fee, aside from the expenses and costs of collection
whether actually incurred or not, and a penalty charge of one
percent (1%) per month on the total amount due and unpaid from
date of default until fully paid.[21]
 
 
Petitioner further claims that it is likewise entitled to attorneys fees, pursuant
to Section 9.06 of the Credit Agreement, thus:
 
If the BANK shall require the services of counsel for the
enforcement of its rights under this AGREEMENT, the Note(s), the
collaterals and other related documents, the BANK shall be entitled
to recover attorneys fees equivalent to not less than twenty-five
percent (25%) of the total amounts due and outstanding exclusive
of costs and other expenses.[22]
Another alleged computational error pointed out by UCPB is the negation of
the Compounding Interest agreed upon by the parties under Section 2.02 of the
Credit Agreement:
Section 2.02 Compounding Interest. Interest not paid when due
shall form part of the principal and shall be subject to the same
interest rate as herein stipulated.[23]
and paragraph 3 of the subject promissory notes:
Interest not paid when due shall be added to, and become part of
the principal and shall likewise bear interest at the same rate.[24]
 
 
UCPB lastly avers that the application of the spouses Belusos payments in
the disputed computation does not reflect the parties agreement. The RTC deducted
the payment made by the spouses Beluso amounting to P763,693.00 from the
principal of P2,350,000.00. This was allegedly inconsistent with the Credit
Agreement, as well as with the agreement of the parties as to the facts of the case. In
paragraph 7 of the spouses Belusos Manifestation and Motion on Proposed
Stipulation of Facts and Issues vis--vis UCPBs Manifestation, the parties agreed that
the amount of P763,693.00 was applied to the interest and not to the principal, in
accord with Section 3.03, Article II of the Credit Agreement on Order of the
Application of Payments, which provides:
 
Section 3.03 Application of Payment. Payments made by
the CLIENT shall be applied in accordance with the following order
of preference:
 
1.      Accounts receivable and other out-of-pocket
expenses
2.      Front-end Fee, Origination Fee, Attorneys Fee and
other expenses of collection;
3.      Penalty charges;
4.      Past due interest;
5.      Principal amortization/Payment in arrears;
6.      Advance interest;
7.      Outstanding balance; and
8.      All other obligations of CLIENT to the BANK, if any.[25]
 
 
Thus, according to UCPB, the interest charges, penalty charges, and
attorneys fees had been erroneously excluded by the RTC and the Court of Appeals
from the computation of the total amount due and demandable from spouses Beluso.
The spouses Belusos defense as to all these issues is that the demand
made by UCPB is for a considerably bigger amount and, therefore, the demand
should be considered void. There being no valid demand, according to the spouses
Beluso, there would be no default, and therefore the interests and penalties would not
commence to run. As it was likewise improper to foreclose the mortgaged properties
or file a case against the spouses Beluso, attorneys fees were not warranted.
 
We agree with UCPB on this score. Default commences upon judicial or
extrajudicial demand.  The excess amount in such a demand does not nullify the
[26]
demand itself, which is valid with respect to the proper amount. A contrary ruling
would put commercial transactions in disarray, as validity of demands would be
dependent on the exactness of the computations thereof, which are too often
contested.
 
There being a valid demand on the part of UCPB, albeit excessive, the
spouses Beluso are considered in default with respect to the proper amount and,
therefore, the interests and the penalties began to run at that point.
As regards the award of 12% legal interest in favor of petitioner, the RTC
actually recognized that said legal interest should be imposed, thus: There being no
valid stipulation as to interest, the legal rate of interest shall be charged.[27] It seems
that the RTC inadvertently overlooked its non-inclusion in its computation.
 
The spouses Beluso had even originally asked for the RTC to impose this
legal rate of interest in both the body and the prayer of its petition with the RTC:
 
12. Since the provision on the fixing of the rate of interest
by the sole will of the respondent Bank is null and void, only the
legal rate of interest which is 12% per annum can be legally
charged and imposed by the bank, which would amount to only
about P599,000.00 since 1996 up to August 31, 1998.
 
xxxx
WHEREFORE, in view of the foregoing, petiitoners pray for
judgment or order:
xxxx
2. By way of example for the public good against the Banks
taking unfair advantage of the weaker party to their contract,
declaring the legal rate of 12% per annum, as the imposable rate of
interest up to February 28, 1999 on the loan of 2.350 million.[28]
All these show that the spouses Beluso had acknowledged before the RTC their
obligation to pay a 12% legal interest on their loans. When the RTC failed to include
the 12% legal interest in its computation, however, the spouses Beluso merely
defended in the appellate courts this non-inclusion, as the same was beneficial to
them. We see, however, sufficient basis to impose a 12% legal interest in favor of
petitioner in the case at bar, as what we have voided is merely the stipulated rate of
interest and not the stipulation that the loan shall earn interest.
 
We must likewise uphold the contract stipulation providing the compounding
of interest. The provisions in the Credit Agreement and in the promissory notes
providing for the compounding of interest were neither nullified by the RTC or the
Court of Appeals, nor assailed by the spouses Beluso in their petition with the
RTC. The compounding of interests has furthermore been declared by this Court to
be legal. We have held in Tan v. Court of Appeals,[29] that:
Without prejudice to the provisions of Article 2212, interest
due and unpaid shall not earn interest. However, the contracting
parties may by stipulation capitalize the interest due and
unpaid, which as added principal, shall earn new interest.
 
As regards the imposition of penalties, however, although we are likewise
upholding the imposition thereof in the contract, we find the rate iniquitous. Like in the
case of grossly excessive interests, the penalty stipulated in the contract may also be
reduced by the courts if it is iniquitous or unconscionable.[30]
 
We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be
iniquitous considering the fact that this penalty is already over and above the
compounded interest likewise imposed in the contract. If a 36% interest in itself has
been declared unconscionable by this Court,[31] what more a 30.41% to 36% penalty,
over and above the payment of compounded interest? UCPB itself must have
realized this, as it gave us a sample computation of the spouses Belusos obligation if
both the interest and the penalty charge are reduced to 12%.
As regards the attorneys fees, the spouses Beluso can actually be liable
therefor even if there had been no demand. Filing a case in court is the judicial

demand referred to in Article 1169[32] of the Civil Code, which would put the obligor in
delay.
 
The RTC, however, also held UCPB liable for attorneys fees in this case, as
the spouses Beluso were forced to litigate the issue on the illegality of the interest
rate provision of the promissory notes. The award of attorneys fees, it must be
recalled, falls under the sound discretion of the court. [33] Since both parties were
forced to litigate to protect their respective rights, and both are entitled to the award of
attorneys fees from the other, practical reasons dictate that we set off or compensate
both parties liabilities for attorneys fees. Therefore, instead of awarding attorneys fees
in favor of petitioner, we shall merely affirm the deletion of the award of attorneys fees
to the spouses Beluso.
 
In sum, we hold that spouses Beluso should still be held liable for a
compounded legal interest of 12% per annum and a penalty charge of 12% per
annum. We also hold that, instead of awarding attorneys fees in favor of petitioner,
we shall merely affirm the deletion of the award of attorneys fees to the spouses
Beluso.
 
Annulment of the Foreclosure Sale
 
Properties of spouses Beluso had been foreclosed, titles to which had
already been consolidated on 19 February 2001 and 20 March 2001 in the name of
UCPB, as the spouses Beluso failed to exercise their right of redemption which
expired on 25 March 2000. The RTC, however, annulled the foreclosure of mortgage
based on an alleged incorrect computation of the spouses Belusos indebtedness.
UCPB alleges that none of the grounds for the annulment of a foreclosure
sale are present in the case at bar. Furthermore, the annulment of the foreclosure
proceedings and the certificates of sale were mooted by the subsequent issuance of
new certificates of title in the name of said bank. UCPB claims that the spouses
Belusos action for annulment of foreclosure constitutes a collateral attack on its
certificates of title, an act proscribed by Section 48 of Presidential Decree No. 1529,
otherwise known as the Property Registration Decree, which provides:
Section 48. Certificate not subject to collateral attack. A
certificate of title shall not be subject to collateral attack. It cannot
be altered, modified or cancelled except in a direct proceeding in
accordance with law.
 
The spouses Beluso retort that since they had the right to refuse payment of
an excessive demand on their account, they cannot be said to be in default for
refusing to pay the same. Consequently, according to the spouses Beluso, the
enforcement of such illegal and overcharged demand through foreclosure of
mortgage should be voided.
 
We agree with UCPB and affirm the validity of the foreclosure
proceedings. Since we already found that a valid demand was made by UCPB upon
the spouses Beluso, despite being excessive, the spouses Beluso are considered in
default with respect to the proper amount of their obligation to UCPB and, thus, the
property they mortgaged to secure such amounts may be foreclosed. Consequently,
proceeds of the foreclosure sale should be applied to the extent of the amounts to
which UCPB is rightfully entitled.
 
As argued by UCPB, none of the grounds for the annulment of a foreclosure
sale are present in this case. The grounds for the proper annulment of the foreclosure
sale are the following: (1) that there was fraud, collusion, accident, mutual mistake,
breach of trust or misconduct by the purchaser; (2) that the sale had not been fairly
and regularly conducted; or (3) that the price was inadequate and the inadequacy was
so great as to shock the conscience of the court.[34]
 
 
Liability for Violation of Truth in Lending Act
 
The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for
UCPBs alleged violation of Republic Act No. 3765, otherwise known as the Truth in
Lending Act.
 
 disclose in full to [respondents] Spouses Beluso the charges
UCPB challenges this imposition, on the argument that Section 6(a) of the
applicable on their loans.[36]
Truth in Lending Act which mandates the filing of an action to recover such penalty  
must be made under the following circumstances:  

  We agree with the Court of Appeals. The allegations in the complaint, much

Section 6. (a) Any creditor who in connection with any more than the title thereof, are controlling. Other than that stated by the Court of
credit transaction fails to disclose to any person any information in
Appeals, we find that the allegation of violation of the Truth in Lending Act can also be
violation of this Act or any regulation issued thereunder shall be
liable to such person in the amount of P100 or in an amount equal inferred from the same allegation in the complaint we discussed earlier:
to twice the finance charge required by such creditor in connection
 
with such transaction, whichever is greater, except that such liability
b.) In unilaterally imposing an increased interest rates (sic)
shall not exceed P2,000 on any credit transaction. Action to
respondent bank has relied on the provision of their promissory
recover such penalty may be brought by such person within
note granting respondent bank the power to unilaterally fix the
one year from the date of the occurrence of the violation, in
interest rates, which rate was not determined in the promissory
any court of competent jurisdiction. x x x (Emphasis ours.)
note but was left solely to the will of the Branch Head of the
  respondent Bank, x x x.[37]
 
According to UCPB, the Court of Appeals even stated that [a]dmittedly the
 
original complaint did not explicitly allege a violation of the Truth in Lending Act and
The allegation that the promissory notes grant UCPB the power to
no action to formally admit the amended petition [which expressly alleges violation of
unilaterally fix the interest rates certainly also means that the promissory notes do not
the Truth in Lending Act] was made either by [respondents] spouses Beluso and the
contain a clear statement in writing of (6) the finance charge expressed in terms of
lower court. x x x.[35]
pesos and centavos; and (7) the percentage that the finance charge bears to the
 
amount to be financed expressed as a simple annual rate on the outstanding unpaid
UCPB further claims that the action to recover the penalty for the violation of
balance of the obligation.[38] Furthermore, the spouses Belusos prayer for such other
the Truth in Lending Act had been barred by the one-year prescriptive period
reliefs just and equitable in the premises should be deemed to include the civil
provided for in the Act. UCPB asserts that per the records of the case, the latest of
penalty provided for in Section 6(a) of the Truth in Lending Act.
the subject promissory notes had been executed on 2 January 1998, but the original
 
petition of the spouses Beluso was filed before the RTC on 9 February 1999, which
UCPBs contention that this action to recover the penalty for the violation of
was after the expiration of the period to file the same on 2 January 1999.
the Truth in Lending Act has already prescribed is likewise without merit. The penalty
 
for the violation of the act is P100 or an amount equal to twice the finance charge
On the matter of allegation of the violation of the Truth in Lending Act, the
required by such creditor in connection with such transaction, whichever is greater,
Court of Appeals ruled:
except that such liability shall not exceed P2,000.00 on any credit transaction.[39] As
 
this penalty depends on the finance charge required of the borrower, the borrowers
Admittedly the original complaint did not explicitly allege a violation
of the Truth in Lending Act and no action to formally admit the cause of action would only accrue when such finance charge is required. In the case
amended petition was made either by [respondents] spouses
at bar, the date of the demand for payment of the finance charge is 2 September
Beluso and the lower court. In such transactions, the debtor and the
lending institutions do not deal on an equal footing and this law was 1998, while the foreclosure was made on 28 December 1998. The filing of the case
intended to protect the public from hidden or undisclosed charges on 9 February 1999 is therefore within the one-year prescriptive period.
on their loan obligations, requiring a full disclosure thereof by the
lender. We find that its infringement may be inferred or implied from  
allegations that when [respondents] spouses Beluso executed the
promissory notes, the interest rate chargeable thereon were left
blank. Thus, [petitioner] UCPB failed to discharge its duty to
 UCPB argues that a violation of the Truth in Lending Act, being a criminal
offense, cannot be inferred nor implied from the allegations made in the complaint.
[40]
Pertinent provisions of the Act read:
 
Sec. 6. (a) Any creditor who in connection with any credit
transaction fails to disclose to any person any information in
violation of this Act or any regulation issued thereunder shall be
liable to such person in the amount of P100 or in an amount equal
to twice the finance charge required by such creditor in connection
with such transaction, whichever is the greater, except that such
liability shall not exceed P2,000 on any credit transaction. Action to
recover such penalty may be brought by such person within one
year from the date of the occurrence of the violation, in any court of
competent jurisdiction. In any action under this subsection in which
any person is entitled to a recovery, the creditor shall be liable for
reasonable attorneys fees and court costs as determined by the
court.
 
xxxx
 
(c)                Any person who willfully violates any provision
of this Act or any regulation issued thereunder shall be fined by not
less than P1,000 or more than P5,000 or imprisonment for not less
than 6 months, nor more than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation
of the said Act gives rise to both criminal and civil liabilities. Section 6(c) considers a
criminal offense the willful violation of the Act, imposing the penalty therefor of fine,
imprisonment or both. Section 6(a), on the other hand, clearly provides for a civil
cause of action for failure to disclose any information of the required information to
any person in violation of the Act. The penalty therefor is an amount of P100 or in an
amount equal to twice the finance charge required by the creditor in connection with
such transaction, whichever is greater, except that the liability shall not
exceed P2,000.00 on any credit transaction. The action to recover such penalty may
be instituted by the aggrieved private person separately and independently from the
criminal case for the same offense.
In the case at bar, therefore, the civil action to recover the penalty under
Section 6(a) of the Truth in Lending Act had been jointly instituted with (1) the action
to declare the interests in the promissory notes void, and (2) the action to declare the
foreclosure void. This joinder is allowed under Rule 2, Section 5 of the Rules of Court,
which provides:
 
SEC. 5. Joinder of causes of action.A party may in one
pleading assert, in the alternative or otherwise, as many causes of
action as he may have against an opposing party, subject to the
following conditions:
(a) The party joining the causes of action shall comply with
the rules on joinder of parties;
(b) The joinder shall not include special civil actions or
actions governed by special rules;
(c) Where the causes of action are between the same
parties but pertain to different venues or jurisdictions, the joinder
may be allowed in the Regional Trial Court provided one of the
causes of action falls within the jurisdiction of said court and the
venue lies therein; and
(d) Where the claims in all the causes of action are
principally for recovery of money, the aggregate amount claimed
shall be the test of jurisdiction.
 
 
In attacking the RTCs disposition on the violation of the Truth in Lending Act
since the same was not alleged in the complaint, UCPB is actually asserting a
violation of due process. Indeed, due process mandates that a defendant should be
sufficiently apprised of the matters he or she would be defending himself or herself
against. However, in the 1 July 1999 pre-trial brief filed by the spouses Beluso before
the RTC, the claim for civil sanctions for violation of the Truth in Lending Act was
expressly alleged, thus:
Moreover, since from the start, respondent bank violated the Truth
in Lending Act in not informing the borrower in writing before the
execution of the Promissory Notes of the interest rate expressed as
a percentage of the total loan, the respondent bank instead is liable
to pay petitioners double the amount the bank is charging
petitioners by way of sanction for its violation.[41]
In the same pre-trial brief, the spouses Beluso also expressly raised the
following issue:
 
 b.) Does the expression indicative rate of DBD retail (sic)
comply with the Truth in Lending Act provision to express the
interest rate as a simple annual percentage of the loan?[42]
 
These assertions are so clear and unequivocal that any attempt of UCPB to
feign ignorance of the assertion of this issue in this case as to prevent it from putting
up a defense thereto is plainly hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which has
jurisdiction to try and adjudicate the alleged violation of the Truth in Lending Act,
considering that the present action allegedly involved a single credit transaction as
there was only one Promissory Note Line.
We disagree. We have already ruled that the action to recover the penalty
under Section 6(a) of the Truth in Lending Act had been jointly instituted with (1) the
action to declare the interests in the promissory notes void, and (2) the action to
declare the foreclosure void. There had been no question that the above actions
belong to the jurisdiction of the RTC. Subsection (c) of the above-quoted Section 5 of
the Rules of Court on Joinder of Causes of Action provides:
(c) Where the causes of action are between the same
parties but pertain to different venues or jurisdictions, the joinder
may be allowed in the Regional Trial Court provided one of the
causes of action falls within the jurisdiction of said court and the
venue lies therein.
 
Furthermore, opening a credit line does not create a credit transaction of
loan or mutuum, since the former is merely a preparatory contract to the contract of
loan or mutuum. Under such credit line, the bank is merely obliged, for the
considerations specified therefor, to lend to the other party amounts not exceeding
the limit provided. The credit transaction thus occurred not when the credit line was
opened, but rather when the credit line was availed of. In the case at bar, the violation
of the Truth in Lending Act allegedly occurred not when the parties executed the
Credit Agreement, where no interest rate was mentioned, but when the parties
executed the promissory notes, where the allegedly offending interest rate was
stipulated.
 
UCPB further argues that since the spouses Beluso were duly given copies
of the subject promissory notes after their execution, then they were duly notified of
the terms thereof, in substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly
provides that the disclosure statement must be furnished prior to the consummation
of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom
credit is extended, prior to the consummation of the
transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed
by the Board, the following information:
(1)    the cash price or delivered price of the property or
service to be acquired;
 
(2)    the amounts, if any, to be credited as down payment
and/or trade-in;
 
(3)    the difference between the amounts set forth under
clauses (1) and (2)
 
(4)    the charges, individually itemized, which are paid or
to be paid by such person in connection with the
transaction but which are not incident to the extension
of credit;
 
(5)    the total amount to be financed;
(6)    the finance charge expressed in terms of pesos and
centavos; and
 
(7)    the percentage that the finance bears to the total
amount to be financed expressed as a simple annual
rate on the outstanding unpaid balance of the
obligation.
 The rationale of this provision is to protect users of credit from a lack of
awareness of the true cost thereof, proceeding from the experience that
banks are able to conceal such true cost by hidden charges, uncertainty of
interest rates, deduction of interests from the loaned amount, and the
like. The law thereby seeks to protect debtors by permitting them to fully
appreciate the true cost of their loan, to enable them to give full consent to
the contract, and to properly evaluate their options in arriving at business
decisions.Upholding UCPBs claim of substantial compliance would defeat
these purposes of the Truth in Lending Act. The belated discovery of the true
cost of credit will too often not be able to reverse the ill effects of an already
consummated business decision.
  
In addition, the promissory notes, the copies of which were presented to the
spouses Beluso after execution, are not sufficient notification from UCPB. As earlier
discussed, the interest rate provision therein does not sufficiently indicate with
particularity the interest rate to be applied to the loan covered by said promissory
notes.
 
Forum Shopping
 
UCPB had earlier moved to dismiss the petition (originally Case No. 99-314
in RTC, Makati City) on the ground that the spouses Beluso instituted another case
(Civil Case No. V-7227) before the RTC of Roxas City, involving the same parties and
issues. UCPB claims that while Civil Case No. V-7227 initially appears to be a
different action, as it prayed for the issuance of a temporary restraining order and/or
injunction to stop foreclosure of spouses Belusos properties, it poses issues which
are similar to those of the present case.  To prove its point, UCPB cited the spouses
[43]
Belusos Amended Petition in Civil Case No. V-7227, which contains similar
allegations as those in the present case.The RTC of Makati denied UCPBs Motion to
Dismiss Case No. 99-314 for lack of merit. Petitioner UCPB raised the same issue
with the Court of Appeals, and is raising the same issue with us now.
 
The spouses Beluso claim that the issue in Civil Case No. V-7227 before
the RTC of Roxas City, a Petition for Injunction Against Foreclosure, is the propriety
of the foreclosure before the true account of spouses Beluso is determined. On the
other hand, the issue in Case No. 99-314 before the RTC of Makati City is the validity
of the interest rate provision. The spouses Beluso claim that Civil Case No. V-7227
has become moot because, before the RTC of Roxas City could act on the restraining
order, UCPB proceeded with the foreclosure and auction sale. As the act sought to be
restrained by Civil Case No. V-7227 has already been accomplished, the spouses
Beluso had to file a different action, that of Annulment of the Foreclosure Sale, Case
No. 99-314 with the RTC, Makati City.
Even if we assume for the sake of argument, however, that only one cause
of action is involved in the two civil actions, namely, the violation of the right of the
spouses Beluso not to have their property foreclosed for an amount they do not owe,
the Rules of Court nevertheless allows the filing of the second action. Civil Case No.
V-7227 was dismissed by the RTC of Roxas City before the filing of Case No. 99-314
with the RTC of Makati City, since the venue of litigation as provided for in the Credit
Agreement is in Makati City.
 
Rule 16, Section 5 bars the refiling of an action previously dismissed only in
the following instances:
 
SEC. 5. Effect of dismissal.Subject to the right of appeal,
an order granting a motion to dismiss based on paragraphs (f), (h)
and (i) of section 1 hereof shall bar the refiling of the same action
or claim. (n)
 
Improper venue as a ground for the dismissal of an action is found in
paragraph (c) of Section 1, not in paragraphs (f), (h) and (i):
 
SECTION 1. Grounds.Within the time for but before filing
the answer to the complaint or pleading asserting a claim, a
motion to dismiss may be made on any of the following grounds:
(a) That the court has no jurisdiction over the person of
the defending party;
(b) That the court has no jurisdiction over the subject
matter of the claim;
(c) That venue is improperly laid;
 
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the
same parties for the same cause;
(f) That the cause of action is barred by a prior
judgment or by the statute of limitations;
(g) That the pleading asserting the claim states no cause
of action;
(h) That the claim or demand set forth in the plaintiffs
pleading has been paid, waived, abandoned, or otherwise
extinguished;
(i) That the claim on which the action is founded is
unenforceable under the provisions of the statute of
frauds; and
   Given, therefore, the pendency of two actions, the following
(j) That a condition precedent for filing the claim has not are the relevant considerations in determining which action should
been complied with.[44] (Emphases supplied.) be dismissed: (1) the date of filing, with preference generally given
  to the first action filed to be retained; (2) whether the action sought
  to be dismissed was filed merely to preempt the later action or to
anticipate its filing and lay the basis for its dismissal; and (3)
When an action is dismissed on the motion of the other party, it is only when
whether the action is the appropriate vehicle for litigating the issues
the ground for the dismissal of an action is found in paragraphs (f), (h) and (i) that the between the parties.
action cannot be refiled. As regards all the other grounds, the complainant is allowed  
 
to file same action, but should take care that, this time, it is filed with the proper court
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was
or after the accomplishment of the erstwhile absent condition precedent, as the case
an action for injunction against a foreclosure sale that has already been held, while
may be.
Civil Case No. 99-314 before the RTC of Makati City includes an action for the
 
annulment of said foreclosure, an action certainly more proper in view of the
UCPB, however, brings to the attention of this Court a Motion for
execution of the foreclosure sale. The former case was improperly filed in Roxas City,
Reconsideration filed by the spouses Beluso on 15 January 1999 with the RTC of
while the latter was filed in Makati City, the proper venue of the action as mandated
Roxas City, which Motion had not yet been ruled upon when the spouses Beluso filed
by the Credit Agreement. It is evident, therefore, that Civil Case No. 99-314 is the
Civil Case No. 99-314 with the RTC of Makati. Hence, there were allegedly two
more appropriate vehicle for litigating the issues between the parties, as compared to
pending actions between the same parties on the same issue at the time of the filing
Civil Case No. V-7227. Thus, we rule that the RTC of Makati City was not in error in
of Civil Case No. 99-314 on 9 February 1999 with the RTC of Makati. This will still not
not dismissing Civil Case No. 99-314.
change our findings. It is indeed the general rule that in cases where there are two
 
pending actions between the same parties on the same issue, it should be the later
WHEREFORE, the Decision of the Court of Appeals is
case that should be dismissed. However, this rule is not absolute. According to this
hereby AFFIRMED with the following MODIFICATIONS:
Court in Allied Banking Corporation v. Court of Appeals[45]:
 
 
In these cases, it is evident that the first action was filed in 1.                  In addition to the sum of P2,350,000.00 as determined by the
anticipation of the filing of the later action and the purpose is to courts a quo, respondent spouses Samuel and Odette Beluso are
preempt the later suit or provide a basis for seeking the dismissal of
also liable for the following amounts:
the second action.
  a. Penalty of 12% per annum on the amount due [46] from the date of
Even if this is not the purpose for the filing of the first
demand; and
action, it may nevertheless be dismissed if the later action is
the more appropriate vehicle for the ventilation of the issues b. Compounded legal interest of 12% per annum on the amount
between the parties. Thus, in Ramos v. Peralta, it was held: due[47] from date of demand;
 
[T]he rule on litis pendentia does not 2.                  The following amounts shall be deducted from the liability of the
require that the later case should yield to the spouses Samuel and Odette Beluso:
earlier case. What is required merely is that there
be another pending action, not a prior pending a.      Payments made by the spouses in the amount
action. Considering the broader scope of inquiry of P763,692.00. These payments shall be applied to the date
involved in Civil Case No. 4102 and the location
of the property involved, no error was committed of actual payment of the following in the order that they are
by the lower court in deferring to listed, to wit:
the Bataan court's jurisdiction.
                                                                           i.      penalty charges due and
 
demandable as of the time of payment;
                                                                         ii.      interest due and demandable as
of the time of payment;
                                                                       iii.      principal amortization/payment in
arrears as of the time of payment;
                                                                      iv.      outstanding balance.
b.     Penalty under Republic Act No. 3765 in the amount
of P26,000.00. This amount shall be deducted from the liability
of the spouses Samuel and Odette Beluso on 9 February
1999 to the following in the order that they are listed, to wit:
                                                                           i.      penalty charges due and
demandable as of time of payment;
                                                                         ii.      interest due and demandable as
of the time of payment;
                                                                       iii.      principal amortization/payment in
arrears as of the time of payment;
                                                                      iv.      outstanding balance.
3.                  The foreclosure of mortgage is hereby declared
VALID. Consequently, the amounts which the Regional Trial Court
and the Court of Appeals ordered respondents to pay, as modified
in this Decision, shall be deducted from the proceeds of the
foreclosure sale.
 
 
SO ORDERED.