Credit Transactions Case Digest

Antonio Tan vs. Court of Appeals/CCP

GR No. 116285
FACTS: TAN OBTAINED 2 LOANS, EACH FOR P2,000,000
FROM CCP.
Executed a promissory note in amount of P3,411,421.32;
payable in 5 installments.
TAN failed to pay any installment on the said restructured
loa.
In a letter, TAN requested and proposed to respondent CCP a
mode of paying the restructured loan
i.
20% of the principal
amount of the loan upon the respondent giving its conformity
to his proposal

i.

Claimed that cannot find

the friend.
TAN filed a Manifestation wherein he proposed to settle his
indebtedness to CCP by down payment of P140,000.00 and
to issue1 2 checks every beginning of the year to cover
installment payments for one year, and every year thereafter
until the balance is fully paid.
i.
CCP did not agree to the
petitioners proposals and so the trial of the case ensued.
TRIAL COURT ORDERED TAN TO PAY CCP P7,996,314.67,
representing defendants outstanding account as of August
28, 1986, with the corresponding stipulated interest and
charges thereof, until fully paid, plus attorneys fees in an
amount equivalent to 25% of said outstanding account, plus
P50,000.00, as exemplary damages, plus costs.
REASONS:

ii.
Balance on the principal
obligation payable 36 monthly installments until fully paid.

i.
Reason of loan for
accommodation of friend was not credible.

TAN requested for a moratorium on his loan obligation until

the following year allegedly due to a substantial deduction in
the volume of his business and on account of the peso
devaluation.

ii.
Assuming, arguendo, that
the TAN did not personally benefit from loan, he should have
filed a 3rd-party complaint against Wilson Lucmen

i.

No favorable response was

made to said letters.

ii.
CCP demanded full
payment, within ten (10) days from receipt of said letter
P6,088,735.03.
CCP FILED COMPLAINT collection of a sum of money
TAN interposed the defense that he accommodated a friend
who asked for help to obtain a loan from CCP.

iii.
3 times the petitioner
offered to settle his loan obligation with CCP.
iv.
TAN may not avoid his
liability to pay his obligation under the promissory note which
he must comply with in good faith.
v.
TAN is estopped from
denying his liability or loan obligation to the private
respondent.

TAN APPEALED TO CA, asked for the reduction of the

penalties and charges on his loan obligation.
Judgment appealed from is hereby AFFIRMED.

imposition of interest on monetary interest but not the

charging of interest on penalty. Penalties should not earn
interest.

1. No alleged partial or irregular performance.

2. However, the appellate court modified the decision of the
trial court by deleting exemplary damages because not
proportionate to actual damage caused by the nonperformance of the contract
ISSUES:
WON there are contractual and legal bases for the imposition
of the penalty, interest on the penalty and attorneys fees.
TAN imputes error on CA in not fully eliminating attorney fees
and in not reducing the penalties considering that he made
partial payments on the loan.
And if penalty is to be awarded, TAN asking for nonimposition of interest on the surcharges because
compounding of these are not included in promissory note.
No basis in law for the charging of interest on the surcharges
for the reason that the New Civil Code is devoid of any
provision allowing the imposition of interest on surcharges.

WON interest may accrue on the penalty or compensatory

interest without violating ART 1959: 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.
TAN- No legal basis for the imposition of interest on the
penalty charge for the reason that the law only allows

WON TAN can file reduction of penalty due to made partial

payments.
Petitioner contends that reduction of the penalty is justifiable
under ART 1229: The judge shall equitably reduce the
penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has
been no performance, the penalty may also be reduced by
the courts if it is iniquitous or unconscionable.
HELD
CA DECISION AFFIRMED with MODIFICATION in that the
penalty charge of two percent (2%) per month on the total
amount due, compounded monthly, is hereby reduced to a
straight twelve percent (12%) per annum starting from
August 28, 1986. With costs against the petitioner.

WON there are contractual and legal bases for the imposition
of the penalty, interest on the penalty and attorneys fees.
YES. WITH LEGAL BASES.
ART 1226: In obligations with a penal clause, the penalty
shall substitute the indemnity for damages and the payment
of interests in case of non-compliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be
paid if the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation.

i.
The penalty may be
enforced only when it is demandable in accordance with the
provisions of this Code.
CASE AT BAR: promissory note expressed the imposition of
both interest and penalties in case of default on the part of
the petitioner in the payment of the subject restructured
loan.
PENALTY IN MANY FORMS:
i.
If the parties stipulate
penalty apart monetary interest, two are different and
distinct from each other and may be demanded separately.
ii.
If stipulation about payment
of an additional interest rate partakes of the nature of a
penalty clause which is sanctioned by law:
1. 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.

Penalty clauses can be in the form of penalty or

compensatory interest.
i.
Thus, the compounding of
the penalty or compensatory interest is sanctioned by and
allowed pursuant to the above-quoted provision of Article
1959 of the New Civil Code considering that:
1. There is an express stipulation in the promissory note
(Exhibit A) permitting the compounding of interest.
a. 5th paragraph of the said promissory note provides that:
Any interest which may be due if not paid shall be added to
the total amount when due and shall become part thereof,
the whole amount to bear interest at the maximum rate
allowed by law..
2. Therefore, any penalty interest not paid, when due, shall
earn the legal interest of twelve percent (12%) per annum, in
the absence of express stipulation on the specific rate of
interest, as in the case at bar.
ART 2212: Interest due shall earn legal interest from the
time it is judicially demanded, although the obligation may
be silent upon this point.

CASE AT BAR: Penalty charge of 2% per month began to

accrue from the time of default by the petitioner.

CASE AT BAR: interest began to run on the penalty interest

upon the filing of the complaint in court by CCP.

i.
No doubt petitioner is liable
for both the stipulated monetary interest and the stipulated
penalty charge.

i.
Hence, the courts did not
err in ruling that the petitioner is bound to pay the interest on
the total amount of the principal, the monetary interest and
the penalty interest.

1. PENALTY CHARGE = penalty or compensatory interest.

WON interest may accrue on the penalty or compensatory

interest without violating ART 1959.

WON TAN can file reduction of penalty due to made partial

payments. YES. BUT NOT 10% REDUCTION AS SUGGESTED
BY PETITIONER.

REDUCED TO 2% REDUCTION:
i.
PARTIAL PAYMENTS showed
his good faith despite difficulty in complying with his loan
obligation due to his financial problems.
1. However, we are not unmindful of the respondents long
overdue deprivation of the use of its money collectible.
The petitioner also imputes error on the part of the appellate
court for not declaring the suspension of the running of the
interest during period when the CCP allegedly failed to assist
the petitioner in applying for relief from liability
Alleges that his obligation to pay the interest and surcharge
should have been suspended because the obligation to pay
such interest and surcharge has become conditional
i.
Dependent on a future and
uncertain event which consists of whether the petitioners
request for condonation of interest and surcharge would be
recommended by the Commission on Audit.
1. Since the condition has not happened due to the private
respondents reneging on its promise, his liability to pay the
interest and surcharge on the loan has not arisen.
COURT ANSWER:
i.
surcharge was not suspended.

Running of the interest and

ii.
CCP correctly asserted that
it was the primary responsibility of petitioner to inform the
Commission on Audit of his application for condonation of
interest and surcharge.

Arwood Industries vs. Consunji

Art. 1956. No interest shall be due when not expressly

stipulated in writing.
ARWOOD INDUSTRIES, INC. vs. D.M. Consunji, Inc.
FACTS: Petitioner and respondent, as owner and contractor,
respectively entered into an Agreement for the construction
of petitioners condominium. Despite the completion of the
project, petitioner was not able to pay respondent the full
amount and left a balance. Repeated demands were left
unheeded prompting respondent to file a civil case against
petitioner, with a prayer among others that the full amount
be paid with interest of 2% per month, from Nov. 1990 up to
the time of payment. RTC ruled in favor of respondent.
Petitioner appealed to the CA, particularly opposing the
imposition of the 2% interest. The CA ruled in favor of the 2%
interest.
Petitioners contention- The imposition of the interest is
without basis because (1) although it was written in the
Agreement, it was not mentioned by the RTC in the
dispositive portion and (2) the interest does not apply to the
respondents claim but to the monthly progress billing.
ISSUE: WON the RTC and Ca is correct in imposing a 2% per
month interest on the monetary award or the balance of the
contract price.
HELD: Yes. The Agreement between the parties is the formal
expression of the parties rights, duties and obligations. It is
the best evidence of the intention of the parties.
Consequently, upon the fulfillment by respondent of its
obligation to complete the construction project, petitioner
had the correlative duty to pay for respondents services.
However, petitioner refused to pay the balance of the
contract price. From the moment respondent completed the
construction of the condominium project and petitioner

refused to pay in full, there was delay on the part of

petitioner.
Delay in the performance of an obligation is looked upon with
disfavor because, when a party to a contract incurs delay,
the other party who performs his part of the contract suffers
damages thereby. Obviously, respondent suffered damages
brought about by the failure of petitioner to comply with its
obligation on time. And, sans elaboration of the matter at
hand, damages take the form of interest. Accordingly, the
appropriate measure of damages in this case is the payment
of interest at the rate agreed upon, which is 2% interest for
every month of delay.
It must be noted that the Agreement provided the contractor,
respondent in this case, two options in case of delay in
monthly payments, to wit: a) suspend work on the project
until payment is remitted by the owner or b) continue the
work but the owner shall be required to pay interest at a rate
of two percent (2%) per month or a fraction thereof.
Evidently, respondent chose the latter option, as the
condominium project was in fact already completed. The
payment of the 2% monthly interest, therefore, cannot be
jettisoned overboard.
Since the Agreement stands as the law between the parties,
this Court cannot ignore the existence of such provision
providing for a penalty for every months delay. Facta legem
facunt inter partes. Neither can petitioner impugn the
Agreement to which it willingly gave its consent. From the
moment petitioner gave its consent, it was bound not only to
fulfill what was expressly stipulated in the Agreement but
also all the consequences which, according to their nature,
may be in keeping with good faith, usage and law.
Petitioners attempt to mitigate its liability to respondent
should thus fail.

As a last-ditch effort to evade liability, petitioner argues that

the amount of P962,434.78 claimed by respondent and later
awarded by the lower courts does not refer to monthly
progress billings, the delayed payment of which would earn
interest at 2% per month.
Petitioner appears confused by a semantics problem.
Monthly progress billings certainly form part of the contract
price. If the amount claimed by respondent is not the
monthly progress billings provided in the contract, what
then does such amount represent? Petitioner has not in point
of fact convincingly supplied an answer to this query. Neither
has petitioner shown any effort to clarify the meaning of
monthly progress billings to support its position. This
leaves us no choice but to agree with respondent that the
phrase monthly progress billings refers to a portion of the
contract price payable by the owner (petitioner) of the
project to the contractor (respondent) based on the
percentage of completion of the project or on work
accomplished at a particular stage. It refers to that portion of
the contract price still to be paid as work progresses, after
the downpayment is made.
This definition is, indeed, not without basis. Articles 6.02 and
6.03 of the Agreement, which respectively provides that the
(b)alance shall be paid in monthly progress payments based
on actual value of the work accomplished and that the
progress payments shall be reduced by a portion of the
downpayment made by the OWNER corresponding to the
value of the work completed give sense to respondents
interpretation of monthly progress billings.

Bobie Rose vs. Frias vs. Diego-Sison

Frias vs San Diego-Sison

G.R. No. 155223

April 4, 2007

Facts

Before the check became stale, Petitioner gave Respondent

the TCT and the Deed of Absolute Sale of the land.

Petitioner and Dra. Flora San Diego-Sison (Respondent)

entered into a Memorandum of Agreement (MOA) over the
cited property with the following terms:

Subsequently, Respondent decided not to purchase the

property and notified Petitioner of this reminding the latter
that the amount of P2 million should be considered as a loan
payable within six months as stipulated in the MOA with
interest computed from such notification.

The land is to be sold for P 6.4 million.

Petitioner subsequently failed to return the P2 million pesos.

Petitioner will receive P3 million from respondent as

downpayment.

CA ruled that the P2 million downpayment shall include

interest computed at the time the disputed amount was
considered a loan. Thus, this petition.

In light of the downpayment, respondent had 6 months (1st)

to notify the Petitioner of her intention to purchase the land.
However, the balance is to be paid within another 6 months.

Issue:

Prior to the first six months, the Petitioner may still offer the
cited land to other persons provided that the P3 million
downpayment shall be returned to the Respondent including
interest based on prevailing compounded bank interest.

Ruling:

Petitioner is the owner of a house and lot in Ayala Alabang.

Nevertheless, in case there are no other buyers within the

first 6 months, no interest shall be charged on the P3 million.
However, in the event that on the 6th month the Respondent
does not purchase the land, the Petitioner has a period of
another 6 months (2nd) within which to pay the sum of P3
million with interest for the last six months only. The
downpayment shall be treated as loan granted by the
Respondent.
Petitioner received from Respondent P2 million in cash and
P1 million in a post-dated check which was subsequently
considered as stale. Therefore, only P2 million was received
as downpayment.

Whether or not the interest should be limited to the 1st six

months as contained in the MOA?

No. SC ruled in favour of Respondent.

The SC opined that if the terms of an agreement are clear
and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulations shall prevail.
It is further required that the various stipulations of a
contract shall be interpreted together.
In this case, the phrase "for the last six months only" should
be taken in the context of the entire agreement.
The MOA speaks of 2 periods of six months each.
The 1st six-months was given to Respondent to make up her
mind whether or not to purchase Petitioner's property.
The 2nd six-months was given to Petitioner to pay the P2
million loan (downpayment) in the event that Respondent

decided not to buy the property in which case interest will be

charged "for the last six months only", referring to the 2nd
six-month period.
This means that no interest will be charged for the 1st sixmonths while Respondent contemplating on whether to buy
the property, but only for the 2nd six-months after
Respondent had decided not to buy the property. This is the
meaning of the phrase "for the last six months only".
Certainly, there is nothing in their agreement that suggests
that interest will be charged for 6 months only even if it takes
defendant-appellant an eternity to pay the loan
This does NOT mean that interest will no longer be charged
after the 2nd six-month period since such stipulation was
made on the logical and reasonable expectation that such
amount would be paid within the date stipulated. Therefore,
the monetary interest for the last 6 months continued to
accrue until actual payment of the loaned amount.
It has been held that for a debtor to continue in possession of
the principal of the loan and to continue to use the same
after maturity of the loan without payment of the monetary
interest, would constitute unjust enrichment on the part of
the debtor at the expense of the creditor.

Cu unjieng vs. Mabalacat

CU-UNJIENG V. MABALACAT
Facts: Cu Unjieng e Hijos loaned Mabalacat 163 k, for
security, Mabalacat mortgaged its property.
Mabalacat failed to pay, but Cu Unjieng extended the
payment. Cu Unjieng filed a case against Mabalacat for
foreclosure of property and payment of attorney's fees. It

also claims interest over interest. Mabalacat insisted that the

agreement for the extension of the time of payment had the
effect of abrogating the stipulation of the original contract
with respect to the acceleration of the maturity of the debt
by non-compliance with the terms of the mortgage. The issue
related on this case is the interest over interest.
Issue: WoN Cu-Unjieng is entitled to interest over interest.
Ruling: It is well settled that, under article 1109 of the Civil
Code, as well as under section 5 of the Usury Law (Act No.
2655), the parties may stipulate that interest shall be
compounded; and rests for the computation of compound
interest can certainly be made monthly, as well as quarterly,
semiannually, or annually. But in the absence of express
stipulation for the accumulation of compound interest, no
interest can be collected upon interest until the debt is
judicially claimed, and then the rate at which interest upon
accrued interest must be computed is fixed at 6 per cent per
annum. In this case, there was no compound interest in the
agreement.

Nacar vs. Gallery Frames

FACTS: Dario Nacar filed a labor case against Gallery Frames
and its owner Felipe Bordey, Jr. Nacar alleged that he was
dismissed without cause by Gallery Frames on January 24,
1997. On October 15, 1998, the Labor Arbiter (LA) found
Gallery Frames guilty of illegal dismissal hence the Arbiter
awarded Nacar P158,919.92 in damages consisting of
backwages and separation pay.
Gallery Frames appealed all the way to the Supreme Court
(SC). The Supreme Court affirmed the decision of the Labor
Arbiter and the decision became final on May 27, 2002.

After the finality of the SC decision, Nacar filed a motion

before the LA for recomputation as he alleged that his
backwages should be computed from the time of his illegal
dismissal (January 24, 1997) until the finality of the SC
decision (May 27, 2002) with interest. The LA denied the
motion as he ruled that the reckoning point of the
computation should only be from the time Nacar was illegally
dismissed (January 24, 1997) until the decision of the LA
(October 15, 1998). The LA reasoned that the said date
should be the reckoning point because Nacar did not appeal
hence as to him, that decision became final and executory.
ISSUE: Whether or not the Labor Arbiter is correct.
HELD: No. There are two parts of a decision when it comes
to illegal dismissal cases (referring to cases where the
dismissed employee wins, or loses but wins on appeal). The
first part is the ruling that the employee was illegally
dismissed. This is immediately final even if the employer
appeals but will be reversed if employer wins on appeal.
The second part is the ruling on the award of backwages
and/or separation pay. For backwages, it will be computed
from the date of illegal dismissal until the date of the
decision of the Labor Arbiter. But if the employer appeals,
then the end date shall be extended until the day when the
appellate courts decision shall become final. Hence, as a
consequence, the liability of the employer, if he loses on
appeal, will increase this is just but a risk that the employer
cannot avoid when it continued to seek recourses against the
Labor Arbiters decision. This is also in accordance with
Article 279 of the Labor Code.
Anent the issue of award of interest in the form of actual or
compensatory damages, the Supreme Court ruled that the
old case of Eastern Shipping Lines vs CA is already modified
by the promulgation of the Bangko Sentral ng Pilipinas
Monetary Board Resolution No. 796 which lowered the legal

rate of interest from 12% to 6%. Specifically, the rules on

interest are now as follows:
1. Monetary Obligations ex. Loans:
a. If stipulated in writing:
a.1. shall run from date of judicial demand (filing of the case)
a.2. rate of interest shall be that amount stipulated
b. If not stipulated in writing
b.1. shall run from date of default (either failure to pay upon
extra-judicial demand or upon judicial demand whichever is
appropriate and subject to the provisions of Article 1169 of
the Civil Code)
b.2. rate of interest shall be 6% per annum
2.

Non-Monetary Obligations (such as the case at bar)

a. If already liquidated, rate of interest shall be 6% per

annum, demandable from date of judicial or extra-judicial
demand (Art. 1169, Civil Code)
b. If unliquidated, no interest
Except: When later on established with certainty. Interest
shall still be 6% per annum demandable from the date of
judgment because such on such date, it is already deemed
that the amount of damages is already ascertained.
3. Compounded Interest
This is applicable to both monetary and non-monetary
obligations
6% per annum computed against award of damages
(interest) granted by the court. To be computed from the

date when the courts decision becomes final and executory

until the award is fully satisfied by the losing party.
4. The 6% per annum rate of legal interest shall be applied
prospectively:
Final and executory judgments awarding damages prior to
July 1, 2013 shall apply the 12% rate;
Final and executory judgments awarding damages on or
after July 1, 2013 shall apply the 12% rate for unpaid
obligations until June 30, 2013; unpaid obligations with
respect to said judgments on or after July 1, 2013 shall still
incur the 6% rate.

EASTERN ASSURANCE AND SURETY CORPORATION

(EASCO), vs. Court of Appeals
Facts:
On April 9, 1981, private respondent Vicente Tan insured his
building in Dumaguete City against fire with petitioner
Eastern Assurance and Surety Corporation (EASCO) for
P250,000.00.
On June 26, 1981, the building was destroyed by fire. As his
claim for indemnity was refused, private respondent filed a
complaint for breach of contract with damages against
petitioner. The RTC Court, decided in favour of Vicente Tan. In
its ruling, the RTC court imposed the rate of interest at 12%
per annum, and decided that EASCO to pay immediately to
Vicente Tan the unpaid balance of interest of the principal
amount of P250,000.00 equivalent to 6% per annum from
June 26, 1981 to September 30,1994.

Petitioner EASCO appealed to the Court of Appeals, which, on

July 30, 1993, affirmed the decision of the trial court. The CA,
on the authority of prior case, Eastern Shipping Lines, Inc. v.
Court of Appeals,that the interest rate on the amount due
should be 6% per annum from June 26, 1981 to August 24,
1993, and 12% per annum beginning August 25, 1993 until
the money judgment is paid.
Thereafter, petitioner EASCO tendered payment of the
money judgment in the amount of P250,000.00 plus interest
of 6% per annum from June 26, 1981 to July 30, 1993.
However, private respondent refused to accept payment on
the ground that the applicable legal rate of interest was 12%
per annum. Subsequently, private respondent brought the
matter to the Insurance Commission.
Then in, 1995, the parties agreed before the hearing officer
of the commission that the interest should be computed from
June 26, 1981 to September 30, 1994. Petitioner would file
with the trial court a motion to fix the legal rate of interest
attaching thereto a check in the amount of P250,000.00 with
6% interest per annum.
In its appeal EASCO to the SC, it contended that the CA
wrongfully applied the aforecited paragraph 3 of the
suggested rules of thumb for future guidance [as formulated
in Eastern Shipping Lines, Inc. v. Court of Appeals, and
unlawfully ignored or disregarded the agreed cut-off date for
the payment of the legal rate.
Issue: When the judgment of the court awarding a sum of
money becomes final and executorywhat is the rate to be
imposed?
Held: Petitioner's contentions are without merit.
The prior Eastern Shipping Lines, Inc. v. Court of Appeals, was
held:

I. When an obligation, regardless of its source, i.e., law,

contracts, quasi-contracts, delicts or quasi-delicts, is
breached, the contravener can be held liable for damages.
The provisions under "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:
Par. 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.

FACTS:
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.
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).
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.

Unquestionably, this case falls under the rule stated in

paragraph 3. The question is whether this rule can be applied
to this case.

DECISION OF LOWER COURTS: * trial court: ordered payment

of damages, jointly and severally * CA: affirmed trial court.

The prior Eastern Shipping Lines, case. did not lay down any
new rules because it was just a a comprehensive summary of
existing rules on the computation of legal interest.

ISSUES AND RULING:

As to the "cut-off date" for the payment of legal interest:

The trial court's finding on this point is binding. Hence, the
payment of 12% legal interest per annum should commence
from August 25, 1993, the date the decision of the trial court
became final, up to September 30, 1994, the agreed "cut-offdate" for the payment of legal interest. The decision of the
CA is affirmed.
Eastern Shipping Lines, Inc. v CA (Credit Transactions)
G.R. No. 97412 July 12, 1994

(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;
YES, it is solidary. 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.

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.
(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
FOLLOW THESE VERY IMPORTANT RULES (GUIDANCE BY THE
SUPREME COURT)
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.

(c) whether the applicable rate of interest, referred to above,

is twelve percent (12%) or six percent (6%).
SIX PERCENT (6%) on the amount due computed from the
decision, dated 03 February 1988, of the court a quo (Court

of Appeals) AND A TWELVE PERCENT (12%) interest, in lieu of

SIX PERCENT (6%), shall be imposed on such amount upon
finality of the Supreme Court decision until the payment
thereof.
RATIO: when the judgment awarding a sum of money
becomes final and executory, the monetary award shall earn
interest at 12% per annum from the date of such finality until
its satisfaction, regardless of whether the case involves a
loan or forbearance of money. The reason is that this interim
period is deemed to be by then equivalent to a forbearance
of credit.
NOTES: the Central Bank Circular imposing the 12% interest
per annum applies only to loans or forbearance 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.

EMERITO M. RAMOS, et al., petitioners,

vs.
CENTRAL BANK OF THE PHILIPPINES, respondents;
COMMERCIAL BANK OF MANILA, intervenor.
Facts: This involves question as to applicability of Tapia
ruling wherein the Court held that "the obligation to pay
interest on the deposit ceases the moment the operation of
the bank is completely suspended by the duly constituted
authority, the Central Bank," to loans and advances by the
Central Bank

Held: Respondents have failed to adduce any cogent

argument to persuade the Court to reconsider its Resolution
at bar that the Tapia ruling is fully applicable to the nonpayment of interest, during the period of the bank's forcible
closure, on loans and advances made by respondent Central
Bank.
Respondent Central Bank itself when it was then managing
the Overseas Bank of Manila (now Commercial Bank of
Manila) under a holding trust agreement, held the same
position in Idelfonso D. Yap vs. OBM wherein it argued that
"(I)n a suit against the receiver of a national bank for money
loaned to the Bank while it was a going concern, it was error
to permit plaintiff to recover interest on the loan after the
bank's suspension"
A significant development of the case, the Government
Service Insurance System (GSIS) has acquired ownership of
99.93% of the outstanding capital stock of COMBANK. The
Court's Resolution manifestly redounds to the benefit of
another government institution, the GSIS, and to the
preservation of the banking system.

GIL JARDENIL, plaintiff-appellant,

vs.
HEFTI SOLAS (alias HEPTI SOLAS, JEPTI
SOLAS), defendant-appellee.
Eleuterio J. Gustilo for appellant.
Jose C. Robles for appellee.
MORAN, J.:
This is an action for foreclosure of mortgage. The only
question raised in this appeal is: Is defendant-appellee bound
to pay the stipulated interest only up to the date of maturity
as fixed in the promissory note, or up to the date payment is

effected? This question is, in our opinion controlled by the

express stipulation of the parties.
Paragraph 4 of the mortgage deed recites:
Que en consideracion a dicha suma aun por pagar de DOS
MIL CUATROCIENTOS PESOS (P2,4000.00), moneda filipina,
que el Sr. Hepti Solas se compromete a pagar al Sr. Jardenil
en o antes del dia treintaiuno (31) de marzo de mil
novecientos treintaicuarto (1934), con los intereses de dicha
suma al tipo de doce por ciento (12%) anual a partir desde
fecha hasta el dia de su vencimiento o sea treintaiuno (31)
de marzo de mil novecientos treintaicuatro (1934), por la
presente, el Sr. Hepti Solas cede y traspasa, por via de
primera hipoteca, a favor del Sr. Jardenil, sus herederos y
causahabientes, la parcela de terreno descrita en el parrafo
primero (1.) de esta escritura.
Defendant-appellee has, therefore, clearly agreed to pay
interest only up to the date of maturity, or until March 31,
1934. As the contract is silent as to whether after that date,
in the event of non-payment, the debtor would continue to
pay interest, we cannot in law, indulge in any presumption as
to such interest; otherwise, we would be imposing upon the
debtor an obligation that the parties have not chosen to
agree upon. Article 1755 of the Civil Code provides that
"interest shall be due only when it has been expressly
stipulated." (Emphasis supplied.)
A writing must be interpreted according to the legal meaning
of its language (section 286, Act No. 190, now section 58,
Rule 123), and only when the wording of the written
instrument appears to be contrary to the evident intention of
the parties that such intention must prevail. (Article 1281,
Civil Code.) There is nothing in the mortgage deed to show
that the terms employed by the parties thereto are at war
with their evident intent. On the contrary the act of the
mortgage of granting to the mortgagor on the same date of

execution of the deed of mortgage, an extension of one year

from the date of maturity within which to make payment,
without making any mention of any interest which the
mortgagor should pay during the additional period (see
Exhibit B attached to the complaint), indicates that the true
intention of the parties was that no interest should be paid
during the period of grace. What reason the parties may
have therefor, we need not here seek to explore.
Neither has either of the parties shown that, by mutual
mistake, the deed of mortgage fails to express their
agreement, for if such mistake existed, plaintiff would have
undoubtedly adduced evidence to establish it and asked that
the deed be reformed accordingly, under the parcel-evidence
rule.
We hold therefore, that as the contract is clear and
unmistakable and the terms employed therein have not been
shown to belie or otherwise fail to express the true intention
of the parties and that the deed has not been assailed on the
ground of mutual mistake which would require its
reformation, same should be given its full force and effect.
When a party sues on a written contract and no attempt is
made to show any vice therein, he cannot be allowed to lay
any claim more than what its clear stipulations accord. His
omission, to which the law attaches a definite warning as an
in the instant case, cannot by the courts be arbitrarily
supplied by what their own notions of justice or equity may
dictate.
Plaintiff is, therefore, entitled only to the stipulated interest of
12 per cent on the loan of P2, 400 from November 8, 1932 to
March 31, 1934. And it being a fact that extra judicial
demands have been made which we may assume to have
been so made on the expiration of the year of grace, he shall
be entitled to legal interest upon the principal and the
accrued interest from April 1, 1935, until full payment.

Thus modified judgment is affirmed, with costs against

appellant.
Separate Opinions
PARAS, J., dissenting:
Under the facts stated in the decision of the majority, I come
to the conclusion that interest at the rate of 12 per cent per
annum should be paid up to the date of payment of the
whole indebtedness is made. Payment of such interest is
expressly stipulated. True, it is stated in the mortgage
contract that interest was to be paid up to March 31, 1934,
but this date was inserted merely because it was the date of
maturity. The extension note is silent as regards interest, but
its payment is clearly implied from the nature of the
transaction which is only a renewal of the obligation. In my
opinion, the ruling of the majority is anomalous and at war
with common practice and everyday business usage.
G.R. No. 97240 October 16, 1992
JESUS T. DAVID, petitioner,
vs.
THE COURT OF APPEALS and VALENTIN AFABLE,
JR., respondents.
DAVIDE, JR., J.:
Can the Court of Appeals, in a judgment sustaining the trial
court's denial of the petition for relief from judgment, validly
amend or modify the decision sought to be overturned by
such petition?
This is the basic issue which confronts this Court in the
instant case.
Stripped of unnecessary details, the facts of this case, as
gathered from pleadings, are as follows:

Due to dishonor of five (5) checks with a total value of

P52,800.00 which private respondent issued in favor of the
petitioner after the former failed to deliver 2,500 cavans of
palay deposited with him by the latter or pay the amount of
P54,000.00 representing the value thereof, and to comply
with the obligation in respect to the set of earnings and a
diamond ring delivered by petitioner's wife on 20 May 1964,
petitioner instituted two (2) criminal cases for estafa and
filed an independent civil action for a sum of money with
preliminary attachment against the private respondent
before the then Court of First Instance (now Regional Trial
Court) of Manila. The latter was docketed as Civil Case No.
94781 and was assigned to Branch 26 thereof.
On 8 December 1965, private respondent executed a
document entitled Compromise Agreement which reads:
COMPROMISE AGREEMENT
In consideration of Mr. Jesus T. David consenting to another
postponement of our criminal cases (estafa) now pending
trial before the Court of First Instance of Manila, I hereby
promise to pay him the sum of SIXTY SIX THOUSAND FIVE
HUNDRED (P66,500.00) PESOS on or before January 4th,
1966; and for the purpose of finally settling amicably this
case.
Manila, December 18, 1965. 1
On 27 May 1975, petitioner filed an Amended Complaint
which makes specific reference to this so-called Compromise
Agreement.
On 14 August 1979, the trial court issued an order declaring
the private respondent "as in default" for his failure to appear
at the pre-trial and allowing the petitioner to present his
evidence ex-parte. The latter offered in evidence the
"Compromise Agreement", which was marked as Exhibit "L".

On 31 October 1979, the trial court handed down a

Decision 2 in favor of the petitioner the dispositive portion of
which reads:
WHEREFORE, judgment is hereby rendered against the
defendant, Valentin Afable, Jr., ordering him to pay to the
plaintiff the sum of P66,500.00 plus the legal rate of interest
thereon from July 24, 1974 up to the time the same is fully
paid plus the amount of P5,000.00 as for attorney's fees and
to pay the costs of the suit. 3
Upon petitioner's motion for reconsideration questioning the
date when interest should begin to run, the trial court issued
an Order 4 on 20 June 1980 amending the dispositive portion
of the decision by declaring that the interest shall be
reckoned from 4 January 1966 pursuant to the so-called
Compromise Agreement.
On 10 October 1980, the trial court issued a writ of
execution. Private respondent filed a petition for relief from
judgment which, however, was denied. He then filed a
motion to reconsider the said denial order which was also
subsequently denied. A copy of this last denial order was
received by the private respondent on 1 March 1983. The
following day, private respondent filed a notice of appeal. On
2 August 1984, the trial court elevated the records of the
case to the respondent Court of Appeals. The case was
docketed therein as CA-G.R. CV No. 06532.
As summarized by the respondent Court of Appeals in its 28
July 1989 decision, 5 the issues raised by the private
respondent before it were:
1. Whether or not the defendant-appellant was correctly
declared in default correctly rendered below;
2. Whether or not a Petition for Relief From Judgment is
available to the defendant-appellant;

3. Whether or not the execution of the Decision appealed

from was validly ordered;
4. Whether or not the Amended Complaint dated May 24,
1975 should have been dismissed on the grounds of lack of
cause of action, prescription, and res judicata; and
5. Whether or not granting ex gratia argumenti the validity of
the Decision in question, the same correctly awarded
damages and attorney's fees in favor of the plaintiffappellee. 6
Respondent Court correctly resolved the first four (4) issues
explicitly against respondent. More specifically, anent the
second issue, it declared:
This brings us to the second issue: whether or not a Petition
for Relief is an available remedy. Under Rule 38 of the Rules
of Court, a petition for relief from judgment "must be
accompanied with affidavit showing the fraud, accident,
mistake or excusable negligence relied upon, and the facts
constituting the petitioner's good and substantial cause of
action or defense, as the case may be." Said grounds must
be established in order to be convincing. The alleged
excusable negligence, accident or mistake relied upon by
defendant-appellant could have been avoided with ordinary
prudence. The alleged fraud could not have been committed
by plaintiff-appellee through mere inaction since he is not
duty bound to personally notify the defendant of court
processes. It is not incumbent upon him to search for the
address of defendant so that the latter may be properly
notified by the Court. This is not the kind of fraud
contemplated by law. Bad faith cannot be presumed from
inaction where there is no duty to act. The grounds not
having been clearly established, petition for relief will not
lie. 7

As to the fifth issue, the appellate court, amended the

dispositive portion of the decision appealed from by declaring
that the interest should run only from the date of the filing of
the Amended Complaint. In support thereof, it made the
following disquisitions:
Finally, on the question of the validity of the award of
damages and attorney's fees, defendant-appellant further
challenged the amendment of the decision of October 31,
1979 adjusting the date for computing the legal interest to
start from January 4, 1966 instead of July 24, 1974, as per
original decision. The rule is, where a party has been
declared in default, the amount of damages that should be
adjudged against him cannot exceed the amount alleged in
the complaint even if the complainants are able to prove
during the reception of evidence a higher amount of
damages. (Mario vs. Gaddi, L-30860, March 29, 1972). It
appears in this case that the amount of damages awarded is
in accordance with the relief prayed for in the Amended
Complaint except that the legal interest should be computed
from the date of the filing of the complaint, which is from
May 27, 1975. It would be different if the defendant is not in
default, plaintiff may be granted any relief that is supported
by the evidence, although not specified in his pleadings. As
to the propriety of the award of attorney's fees, since
plaintiff-appellee was compelled to litigate in order to protect
his interest, the Court a quocorrectly granted the relief as
prayed for. 8
Accordingly the Court of Appeals decreed as follows:
WHEREFORE, in view of all the foregoing considerations, the
decision of the Court a quo, being substantially in accordance
with law, is hereby affirmed with slight modification to reflect
the date of computing the legal interest to be from May 27,
1975, the date of filing the amended complaint. Costs
against defendant-appellant. 9

On 3 October 1989, petitioner filed a petitioner for relief

(which should have been, more appropriately, a motion for
reconsideration) from judgment to set aside the
aforementioned modification decreed by the respondent
Court of Appeals on the ground that since the trial court's
decision was already final, it could no longer be amended. It
was only on 18 April 1990 that the respondent Court
promulgated a Resolution 10 denying the said petition on the
ground that the interest could not run from 4 January 1966
because the private respondent had not incurred in delay,
there being no proof of extrajudicially demand. Under the
first paragraph of Article 1169 of the Civil Code, the debtor
incurs in delay from the time the creditor judicially or
extrajudicially demands the fulfillment of the obligation. In
the absence of proof of extrajudicial demand, the date of the
filing of the amended complaint based on the so-called
Compromise Agreement, which was 27 May 1975, shall be
the date wherefrom computation of interest shall commence.
Petitioner filed a motion to reconsider this
resolution 11 which the respondent Court of Appeals denied
on 4 February 1991. 12
Hence, this petition for review under Rule 45 of the Rules of
Court wherein petitioner submits the following assignment of
errors:
A. THE RESPONDENT COURT OF APPEALS ERRED IN
MODIFYING THE DECISION OF THE REGIONAL TRIAL COURT IN
A MANNER WHICH CONTRADICTED THE TERMS OF JUDICIAL
(sic) COMPROMISE AGREEMENT WHICH HAS ALREADY LONG
BECOME FINAL AND EXECUTORY.
B. THE RESPONDENT COURT OF APPEALS ERRED IN
IGNORING DOCUMENTARY EVIDENCE ON THE RECORD
WHICH HAS NOT BEEN DENIED NOR (sic) CONTRADICTED.

C. THE RESPONDENT COURT OF APPEALS ERRED IN

AMENDING THE LOWER COURT'S DECISION WITHOUT ITS
HAVING BEEN THE SUBJECT OF ANY ASSIGNMENT OR ERROR
BY THE APPELLANT IN THE CASE.
D. THE RESPONDENT COURT OF APPEALS ERRED IN
COMMITTING A VIRTUAL BUT GROSS VIOLATION OF LAW BY
REFUSING TO ENFORCE A JUDICIAL COMPROMISE
AGREEMENT WHICH IS THE LAW BETWEEN THE PARTIES
THERETO. 13
There is so much circuitry in these assigned errors. It is
obvious that the petitioner does not have a full
understanding of a compromise agreement and a judgment
based thereon.
What the private respondent signed on 18 December 1975 is
not a compromise agreement although it is captioned as
such.
A compromise is a contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put an end to one
already commenced. 14 It is "an agreement between two or
more persons, who, for preventing or putting an end to a
lawsuit, adjust their difficulties by mutual consent in the
manner which they agree on, and which everyone of them
prefers to the hope of gaining, balanced by the danger of
losing." 15 The so-called Compromise Agreement sought
neither to avoid litigation nor explicitly put an end to the
cases already commenced between the parties. Since it was
only the private respondent who signed the agreement, it
may not be considered a bilateral contract. Rather, it is but a
mere promise to pay P66,500.00 on or before 4 January 1966
as a step towards the amicable settlement of the case. It
does not, by itself, settle the case or put an end to it. It
contemplates the execution of a formal act after payment
shall have been made.

The parties did not submit any separate compromise

agreement for approval by the court. What the court received
was the evidence for the petitioner which included the socalled "compromise agreement" (marked as Exhibit "L");
judgment was rendered on the basis of such evidence as thus
adduced. It is precisely for this reason that the trial court
awarded attorney's fees and ordered the private respondent
to pay interest plus the costs of the suit.
Clearly, no judgment based on compromise agreement was
rendered by the trial court. The doctrine relied on by the
petitioner and underscored by numerous case citations
that a compromise agreement constitutes the law between
the parties and that a judgment based thereon is
immediately final and executory is unfortunately
inapplicable in this petition.
To the mind of this Court, the real issue is whether or not the
respondent Court, having sustained and correctly the
trial court's denial of the private respondent's petition for
relief from judgment, could, at the same time modify the
decision sought to be overturned by such a petition. The
answer is in negative. The filing of the petition for relief from
judgment with the trial court was an equivocal admission on
the private respondent's part that his period to appeal from
the decision had already expired. Such was the
incontrovertible fact; besides a petition for relief from
judgment 16 or loss of the right to appeal, the affirmance by
the respondent Court of the denial of the petition is a
confirmation of the existence of a final and executory
judgment. It can neither amend nor modify it. "[N]othing is
more settled in the law than that when a final judgment
becomes executory, it is thereby becomes immutable and
unalterable. The judgment may no longer be modified in any
respect, even if the modification is meant to correct what is
perceived to be an erroneous conclusion of fact or law, and
regardless of whether the modification is attempted to be

made by the court rendering it or by the highest Court of the

land. The only recognized exceptions are the corrections of
clerical errors or the making of the so-called nunc pro
tunc entries which cause no prejudice to any party, and, of
course, where the judgment is void." 17 Respondent Court
may have had in mind the second paragraph of Section 2 of
Rule 41 which allows a party who appeals from an order
denying a petition for relief to assail the judgment on the
merits on the ground that the same is not supported by the
evidence or is contrary to law. Said decision provides as
follows:
Sec. 2 Judgments or orders subject to appeal.
xxx xxx xxx
A judgment denying relief under Rule 38 is subject to appeal,
and in the course thereof, a party may also assail the
judgment on the merits, upon the ground that it is not
supported by the evidence or it is contrary to law.
This provision, however, cannot be construed as allowing the
review of the decision on the specific ground therein
indicated if the denial of the petition for relief by the trial
court is sustained by the appellate court. It may only be done
if the appellate court overturns such denial.
The respondent Court then erred in modifying the decision of
the trial court. Having sustained the trial court's denial of the
petition for relief filed under Rule 38 of the rules of Court, it
had nothing more to do save to dismiss the appeal and make
pronouncement that the decision of the trial court had long
become firm, final and executory.
WHEREFORE, for the reason abovestated, the petition is
GRANTED. That portion of the challenged decision of the
respondent Court of Appeals in C.A.-G.R. CV No. 06532 of 29
July 1989 modifying the decision of the trial court with

respect to the date when interest should commence to run is

hereby SET ASIDE and NULLIFIED.
Costs against the private respondent.
SO ORDERED.
SONCUYA V. AZARRAGA
ROYAL SHIRT FACTORY, INC. v CO
FACTS:
The parties entered into a contract wherein it is stipulated
that 350 pairs of ballet shoes will be sold by Co and that Co
had 9 days from delivery of the shoes to make his choice of 2
alternatives: a) consider the sale for the shoes closed at a flat
rate, or b) return the remaining unsold ones to Royal.
Co failed to return the unsold pairs after 9 days and actually
began making partial payments on account of the purchase
price agreed upon.
Co then contended that there was merely a consignment of
the goods and he wanted to return the unsold shoes. Royal
refused contending that it was an outright sale.
ISSUE: WoN the sale was an outright sale / WoN Co is bound
by the interest stipulated in the invoice.
SC: YES! / NO!
OUTRIGHT SALE
Co accepted the invoice of the ballet shoes and he even
noted down in his own handwriting the partial payments that
he made.
If the sale has been on consignment, a stipulation as to the
period of time for the return of the unsold shoes should have
been made, however, this was not done

NOT BOUND BY THE INTEREST

He did not sign the invoice slip the stipulated interest was
20%, hence, not binding
However, he is bound by the legal interest of 6%
Hence, Co was ordered to pay the balance of the purchase
price for the ballet shoes + legal interest
LIRAG TEXTILE MILLS, INC. VS. SSS
153 SCRA 338
Facts:
SSS (respondent) and Lirag Textile Mills (Petitioner) entered
into a Purchased Agreement which Respondent agreed to
purchase preferred stocks of Petitioner worth P1 million
subject to conditions:
For Petitioner to repurchase the shares of stocks at a regular
interval of one year and to pay dividends.
Failure to redeem and pay the dividend, the entire obligation
shall become due and demandable and it shall be liable for
an amount equivalent to 12% of the amount then
outstanding as liquidated damages.
Basilio Lirag (Basilio) as President of Lirag Textile Mills signed
the Agreement as a surety to guarantee the redemption of
the stocks, the payment of dividends and other obligations.
Pursuant to the Agreement, Respondent paid Petitioner
P500,000 on two occasions and the latter issued 5,000
preferred stocks with a par value of P100 as evidenced by
Stock Certificate Nos. 128 and 139.

After sending Respondent sent demand letters, Petitioner and

Basilio still made no redemption nor made dividend
payments.
Respondent filed an action for specific performance and
damages against Petitioner:
Petitioner contends that there is no obligation on their part to
redeem the stock certificates since Respondent is still a
preferred stock holder of the company and such redemption
is dependent upon the financial ability of the company.
On the part of Basilio, he contends that his liability only
arises only if the company is liable and does not perform its
obligations under the Agreement.
Issue:
Whether or not the Purchase Agreement entered into by the
Parties is a debt instrument?
If so, Is Basilio liable as surety?
Whether or not Lirag is liable for the interest as liquidated
damages?
Held:
YES, the Purchase Agreement is a debt instrument. The terms
and conditions of the Agreement show that parties intended
the repurchase of preferred shares on the respective
scheduled dates to be an absolute obligation, which does not
depend on the financial ability of the corporation.
This absolute obligation on the part of the Petitioner
corporation is made manifest by the fact that a surety was
required to see to it that the obligation is fulfilled in the event
the principal debtors inability to do so.

It cannot be said that SSS is a preferred stockholder. The

rights given by the Purchase Agreement to SSS are not rights
enjoyed by ordinary stockholders. Since there was a
condition that failure to repurchase the stocks on the
scheduled dates renders the entire obligation due and
demandable with interest. These features clearly show that
intent of the parties to be bound therein as debtor and
creditor and not as a corporation and stockholder.
YES, Basilio is liable as surety. Thus it follows that he cannot
deny liability for Lirags default. As surety, he is bound
immediately to pay SSS the amount then outstanding.
The award of liquidated damages represented by 12% of the
amount then outstanding is correct, considering that the
petitioners in the stipulation of facts admitted having failed
to fulfill their obligations under the Agreement. The grant of
liquidated damages is expressly provided for the Purchase
Agreement in case of contractual breach.
Since Lirag did not deny its failure to redeem the preferred
shares and the non-payment of dividends which are overdue,
they are bound to earn legal interest from the time of
demand, in this case, judicial i.e. the time of filing the action.
G.R. No. L-38745 August 6, 1975
LUCIA TAN, plaintiff-appellee,
vs.
ARADOR VALDEHUEZA and REDICULO
VALDEHUEZA, defendants-appellants.
Alaric P. Acosta for plaintiff-appellee.
Lorenzo P. de Guzman for defendants-appellants.
This appeal was certified to this Court by the Court of
Appeals as involving questions purely of law.

The decision a quo was rendered by the Court of First

Instance of Misamis Occidental (Branch I) in an action
instituted by the plaintiff-appellee Lucia Tan against the
defendants-appellants Arador Valdehueza and Rediculo
Valdehueza (docketed as civil case 2574) for (a) declaration
of ownership and recovery of possession of the parcel of land
described in the first cause of action of the complaint, and (b)
consolidation of ownership of two portions of another parcel
of (unregistered) land described in the second cause of
action of the complaint, purportedly sold to the plaintiff in
two separate deeds of pacto de retro.
After the issues were joined, the parties submitted the
following stipulation of facts:
1. That parties admit the legal capacity of plaintiff to sue;
that defendants herein, Arador, Rediculo, Pacita, Concepcion
and Rosario, all surnamed Valdehueza, are brothers and
sisters; that the answer filed by Arador and Rediculo stand as
the answer of Pacita, Concepcion and Rosario.
2. That the parties admit the identity of the land in the first
cause of action.
3. That the parcel of land described in the first cause of
action was the subject matter of the public auction sale held
on May 6, 1955 at the Capitol Building in Oroquieta, Misamis
Occidental, wherein the plaintiff was the highest bidder and
as such a Certificate of Sale was executed by MR. VICENTE D.
ROA who was then the Ex-Officio Provincial Sheriff in favor of
LUCIA TAN the herein plaintiff. Due to the failure of defendant
Arador Valdehueza to redeem the said land within the period
of one year as being provided by law, MR. VICENTE D. ROA
who was then the Ex-Officio Provincial Sheriff executed an
ABSOLUTE DEED OF SALE in favor of the plaintiff LUCIA TAN.
A copy of the NOTICE OF SHERIFFS SALE is hereby marked as
'Annex A', the CERTIFICATE OF SALE is marked as 'Annex B'

and the ABSOLUTE DEED OF SALE is hereby marked as Annex

C and all of which are made as integral parts of this
stipulation of facts.
4. That the party-plaintiff is the same plaintiff in Civil Case
No. 2002; that the parties defendants Arador, Rediculo and
Pacita, all Valdehueza were the same parties-defendants in
the same said Civil Case No. 2002; the complaint in Civil
Case No. 2002 to be marked as Exhibit 1; the answer as
Exhibit 2 and the order dated May 22, 1963 as Exhibit 3, and
said exhibits are made integral part of this stipulation.
5. That defendants ARADOR VALDEHUEZA and REDICULO
VALDEHUEZA have executed two documents of DEED OF
PACTO DE RETRO SALE in favor of the plaintiff herein, LUCIA
TAN of two portions of a parcel of land which is described in
the second cause of action with the total amount of ONE
THOUSAND FIVE HUNDRED PESOS (P1,500.00), Philippine
Currency, copies of said documents are marked as 'Annex D'
and Annex E', respectively and made as integral parts of this
stipulation of facts.
6. That from the execution of the Deed of Sale with right to
repurchase mentioned in the second cause of action,
defendants Arador Valdehueza and Rediculo Valdehueza
remained in the possession of the land; that land taxes to the
said land were paid by the same said defendants.
Civil case 2002 referred to in stipulation of fact no. 4 was a
complaint for injunction filed by Tan on July 24, 1957 against
the Valdehuezas, to enjoin them "from entering the abovedescribed parcel of land and gathering the nuts therein ...."
This complaint and the counterclaim were subsequently
dismissed for failure of the parties "to seek for the immediate
trial thereof, thus evincing lack of interest on their part to
proceed with the case. 1

The Deed of Pacto de Retro referred to in stipulation of fact

no. 5 as "Annex D" (dated August 5, 1955) was not registered
in the Registry of Deeds, while the Deed of Pacto de Retro
referred to as "Annex E" (dated March 15, 1955) was
registered.
On the basis of the stipulation of facts and the annexes, the
trial court rendered judgment, as follows:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff:
1. Declaring Lucia Tan the absolute owner of the property
described in the first cause of action of the amended
complaint; and ordering the herein defendants not to
encroach and molest her in the exercise of her proprietary
rights; and, from which property they must be dispossessed;
2. Ordering the defendants, Arador Valdehueza and Rediculo
Valdehueza jointly and severally to pay to the plaintiff, Lucia
Tan, on Annex 'E' the amount of P1,200, with legal interest of
6% as of August 15, 1966, within 90 days to be deposited
with the Office of the Court within 90 days from the date of
service of this decision, and that in default of such payment
the property shall be sold in accordance with the Rules of
Court for the release of the mortgage debt, plus costs;
3. And as regards the land covered by deed of pacto de retro
annex 'D', the herein defendants Arador Valdehueza and
Rediculo Valdehueza are hereby ordered to pay the plaintiff
the amount of P300 with legal interest of 6% from August 15,
1966, the said land serving as guaranty of the said amount of
payment;
4. Sentencing the defendants Arador Valdehueza and
Rediculo Valdehueza to pay jointly and severally to the herein
plaintiff Lucia Tan the amount of 1,000.00 as attorney's fees;
and .

5. To pay the costs of the proceedings.

The Valdehuezas appealed, assigning the following errors:
That the lower court erred in failing to adjudge on the first
cause of action that there exists res judicata; and
That the lower court erred in making a finding on the second
cause of action that the transactions between the parties
were simple loan, instead, it should be declared as equitable
mortgage.
We affirm in part and modify in part.
1. Relying on Section 3 of Rule 17 of the Rules of Court which
pertinently provides that a dismissal for failure to prosecute
"shall have the effect of an adjudication upon the merits," the
Valdehuezas submit that the dismissal of civil case 2002
operated, upon the principle of res judicata, as a bar to the
first cause of action in civil case 2574. We rule that this
contention is untenable as the causes of action in the two
cases are not identical. Case 2002 was for injunction against
the entry into and the gathering of nuts from the land, while
case 2574 seeks to "remove any doubt or cloud of the
plaintiff's ownership ..." (Amended complaint, Rec. on App.,
p. 27), with a prayer for declaration of ownership and
recovery of possession.
Applying the test of absence of inconsistency between prior
and subsequent judgments, 2 we hold that the failure of Tan,
in case 2002, to secure an injunction against the Valdehuezas
to prevent them from entering the land and gathering nuts is
not inconsistent with her being adjudged, in case 2574, as
owner of the land with right to recover possession thereof.
Case 2002 involved only the possession of the land and the
fruits thereof, while case 2574 involves ownership of the
land, with possession as a mere attribute of ownership. The
judgment in the first case could not and did not encompass

the judgment in the second, although the second judgment

would encompass the first. Moreover, the new Civil Code
provides that suitors in actions to quiet title "need not be in
possession of said property. 3
2. The trial court treated the registered deed of pacto de
retro as an equitable mortgage but considered the
unregistered deed of pacto de retro "as a mere case of
simple loan, secured by the property thus sold underpacto de
retro," on the ground that no suit lies to foreclose an
unregistered mortgage. It would appear that the trial judge
had not updated himself on law and jurisprudence; he cited,
in support of his ruling, article 1875 of the old Civil Code and
decisions of this Court circa 1910 and 1912.
Under article 1875 of the Civil Code of 1889, registration was
a necessary requisite for the validity of a mortgage even as
between the parties, but under article 2125 of the new Civil
Code (in effect since August 30,1950), this is no longer so. 4
If the instrument is not recorded, the mortgage is
nonetheless binding between the parties. (Article 2125, 2nd
sentence).
The Valdehuezas having remained in possession of the land
and the realty taxes having been paid by them, the contracts
which purported to be pacto de retro transactions are
presumed to be equitable mortgages, 5 whether registered
or not, there being no third parties involved.
3. The Valdehuezas claim that their answer to the complaint
of the plaintiff affirmed that they remained in possession of
the land and gave the proceeds of the harvest to the plaintiff;
it is thus argued that they would suffer double prejudice if
they are to pay legal interest on the amounts stated in
the pacto de retro contracts, as the lower court has directed,
and that therefore the court should have ordered evidence to
be adduced on the harvest.

The record does not support this claim. Nowhere in the

original and the amended complaints is an allegation of
delivery to the plaintiff of the harvest from the land involved
in the second cause of action. Hence, the defendants' answer
had none to affirm.
In submitting their stipulation of facts, the parties prayed "for
its approval and maybe made the basis of the decision of this
Honorable Court. " (emphasis supplied) This, the court did. It
cannot therefore be faulted for not receiving evidence on
who profited from the harvest.
4. The imposition of legal interest on the amounts subject of
the equitable mortgages, P1,200 and P300, respectively, is
without legal basis, for, "No interest shall be due unless it has
been expressly stipulated in writing." (Article 1956, new Civil
Code) Furthermore, the plaintiff did not pray for such interest;
her thesis was a consolidation of ownership, which was
properly rejected, the contracts being equitable mortgages.
With the definitive resolution of the rights of the parties as
discussed above, we find it needless to pass upon the
plaintiffs petition for receivership. Should the circumstances
so warrant, she may address the said petition to the court a
quo.
ACCORDINGLY, the judgment a quo is hereby modified, as
follows: (a) the amounts of P1,200 and P300 mentioned in
Annexes E and D shall bear interest at six percent per annum
from the finality of this decision; and (b) the parcel of land
covered by Annex D shall be treated in the same manner as
that covered by Annex E, should the defendants fail to pay to
the plaintiff the sum of P300 within 90 days from the finality
of this decision. In all other respects the judgment is
affirmed. No costs.

G.R. No. L-38745 August 6, 1975

LUCIA TAN, plaintiff-appellee,
vs.
ARADOR VALDEHUEZA and REDICULO
VALDEHUEZA, defendants-appellants.
Alaric P. Acosta for plaintiff-appellee.
Lorenzo P. de Guzman for defendants-appellants.

CASTRO, J.:
This appeal was certified to this Court by the Court of
Appeals as involving questions purely of law.
The decision a quo was rendered by the Court of First
Instance of Misamis Occidental (Branch I) in an action
instituted by the plaintiff-appellee Lucia Tan against the
defendants-appellants Arador Valdehueza and Rediculo
Valdehueza (docketed as civil case 2574) for (a) declaration
of ownership and recovery of possession of the parcel of land
described in the first cause of action of the complaint, and (b)
consolidation of ownership of two portions of another parcel
of (unregistered) land described in the second cause of
action of the complaint, purportedly sold to the plaintiff in
two separate deeds of pacto de retro.
After the issues were joined, the parties submitted the
following stipulation of facts:
1. That parties admit the legal capacity of plaintiff to sue;
that defendants herein, Arador, Rediculo, Pacita, Concepcion
and Rosario, all surnamed Valdehueza, are brothers and
sisters; that the answer filed by Arador and Rediculo stand as
the answer of Pacita, Concepcion and Rosario.

2. That the parties admit the identity of the land in the first
cause of action.
3. That the parcel of land described in the first cause of
action was the subject matter of the public auction sale held
on May 6, 1955 at the Capitol Building in Oroquieta, Misamis
Occidental, wherein the plaintiff was the highest bidder and
as such a Certificate of Sale was executed by MR. VICENTE D.
ROA who was then the Ex-Officio Provincial Sheriff in favor of
LUCIA TAN the herein plaintiff. Due to the failure of defendant
Arador Valdehueza to redeem the said land within the period
of one year as being provided by law, MR. VICENTE D. ROA
who was then the Ex-Officio Provincial Sheriff executed an
ABSOLUTE DEED OF SALE in favor of the plaintiff LUCIA TAN.

6. That from the execution of the Deed of Sale with right to

repurchase mentioned in the second cause of action,
defendants Arador Valdehueza and Rediculo Valdehueza
remained in the possession of the land; that land taxes to the
said land were paid by the same said defendants.
Civil case 2002 referred to in stipulation of fact no. 4 was a
complaint for injunction filed by Tan on July 24, 1957 against
the Valdehuezas, to enjoin them "from entering the abovedescribed parcel of land and gathering the nuts therein ...."
This complaint and the counterclaim were subsequently
dismissed for failure of the parties "to seek for the immediate
trial thereof, thus evincing lack of interest on their part to
proceed with the case. 1

A copy of the NOTICE OF SHERIFFS SALE is hereby marked as

'Annex A', the CERTIFICATE OF SALE is marked as 'Annex B'
and the ABSOLUTE DEED OF SALE is hereby marked as Annex
C and all of which are made as integral parts of this
stipulation of facts.

The Deed of Pacto de Retro referred to in stipulation of fact

no. 5 as "Annex D" (dated August 5, 1955) was not registered
in the Registry of Deeds, while the Deed of Pacto de Retro
referred to as "Annex E" (dated March 15, 1955) was
registered.

4. That the party-plaintiff is the same plaintiff in Civil Case

No. 2002; that the parties defendants Arador, Rediculo and
Pacita, all Valdehueza were the same parties-defendants in
the same said Civil Case No. 2002; the complaint in Civil
Case No. 2002 to be marked as Exhibit 1; the answer as
Exhibit 2 and the order dated May 22, 1963 as Exhibit 3, and
said exhibits are made integral part of this stipulation.

On the basis of the stipulation of facts and the annexes, the

trial court rendered judgment, as follows:

5. That defendants ARADOR VALDEHUEZA and REDICULO

VALDEHUEZA have executed two documents of DEED OF
PACTO DE RETRO SALE in favor of the plaintiff herein, LUCIA
TAN of two portions of a parcel of land which is described in
the second cause of action with the total amount of ONE
THOUSAND FIVE HUNDRED PESOS (P1,500.00), Philippine
Currency, copies of said documents are marked as 'Annex D'
and Annex E', respectively and made as integral parts of this
stipulation of facts.

WHEREFORE, judgment is hereby rendered in favor of the

plaintiff:
1. Declaring Lucia Tan the absolute owner of the property
described in the first cause of action of the amended
complaint; and ordering the herein defendants not to
encroach and molest her in the exercise of her proprietary
rights; and, from which property they must be dispossessed;
2. Ordering the defendants, Arador Valdehueza and Rediculo
Valdehueza jointly and severally to pay to the plaintiff, Lucia
Tan, on Annex 'E' the amount of P1,200, with legal interest of
6% as of August 15, 1966, within 90 days to be deposited
with the Office of the Court within 90 days from the date of

service of this decision, and that in default of such payment

the property shall be sold in accordance with the Rules of
Court for the release of the mortgage debt, plus costs;
3. And as regards the land covered by deed of pacto de retro
annex 'D', the herein defendants Arador Valdehueza and
Rediculo Valdehueza are hereby ordered to pay the plaintiff
the amount of P300 with legal interest of 6% from August 15,
1966, the said land serving as guaranty of the said amount of
payment;
4. Sentencing the defendants Arador Valdehueza and
Rediculo Valdehueza to pay jointly and severally to the herein
plaintiff Lucia Tan the amount of 1,000.00 as attorney's fees;
and .
5. To pay the costs of the proceedings.
The Valdehuezas appealed, assigning the following errors:
That the lower court erred in failing to adjudge on the first
cause of action that there exists res judicata; and
That the lower court erred in making a finding on the second
cause of action that the transactions between the parties
were simple loan, instead, it should be declared as equitable
mortgage.
We affirm in part and modify in part.
1. Relying on Section 3 of Rule 17 of the Rules of Court which
pertinently provides that a dismissal for failure to prosecute
"shall have the effect of an adjudication upon the merits," the
Valdehuezas submit that the dismissal of civil case 2002
operated, upon the principle of res judicata, as a bar to the
first cause of action in civil case 2574. We rule that this
contention is untenable as the causes of action in the two
cases are not identical. Case 2002 was for injunction against
the entry into and the gathering of nuts from the land, while

case 2574 seeks to "remove any doubt or cloud of the

plaintiff's ownership ..." (Amended complaint, Rec. on App.,
p. 27), with a prayer for declaration of ownership and
recovery of possession.
Applying the test of absence of inconsistency between prior
and subsequent judgments, 2 we hold that the failure of Tan,
in case 2002, to secure an injunction against the Valdehuezas
to prevent them from entering the land and gathering nuts is
not inconsistent with her being adjudged, in case 2574, as
owner of the land with right to recover possession thereof.
Case 2002 involved only the possession of the land and the
fruits thereof, while case 2574 involves ownership of the
land, with possession as a mere attribute of ownership. The
judgment in the first case could not and did not encompass
the judgment in the second, although the second judgment
would encompass the first. Moreover, the new Civil Code
provides that suitors in actions to quiet title "need not be in
possession of said property. 3
2. The trial court treated the registered deed of pacto de
retro as an equitable mortgage but considered the
unregistered deed of pacto de retro "as a mere case of
simple loan, secured by the property thus sold underpacto de
retro," on the ground that no suit lies to foreclose an
unregistered mortgage. It would appear that the trial judge
had not updated himself on law and jurisprudence; he cited,
in support of his ruling, article 1875 of the old Civil Code and
decisions of this Court circa 1910 and 1912.
Under article 1875 of the Civil Code of 1889, registration was
a necessary requisite for the validity of a mortgage even as
between the parties, but under article 2125 of the new Civil
Code (in effect since August 30,1950), this is no longer so. 4
If the instrument is not recorded, the mortgage is
nonetheless binding between the parties. (Article 2125, 2nd
sentence).

The Valdehuezas having remained in possession of the land

and the realty taxes having been paid by them, the contracts
which purported to be pacto de retro transactions are
presumed to be equitable mortgages, 5 whether registered
or not, there being no third parties involved.
3. The Valdehuezas claim that their answer to the complaint
of the plaintiff affirmed that they remained in possession of
the land and gave the proceeds of the harvest to the plaintiff;
it is thus argued that they would suffer double prejudice if
they are to pay legal interest on the amounts stated in
the pacto de retro contracts, as the lower court has directed,
and that therefore the court should have ordered evidence to
be adduced on the harvest.
The record does not support this claim. Nowhere in the
original and the amended complaints is an allegation of
delivery to the plaintiff of the harvest from the land involved
in the second cause of action. Hence, the defendants' answer
had none to affirm.
In submitting their stipulation of facts, the parties prayed "for
its approval and maybe made the basis of the decision of this
Honorable Court. " (emphasis supplied) This, the court did. It
cannot therefore be faulted for not receiving evidence on
who profited from the harvest.
4. The imposition of legal interest on the amounts subject of
the equitable mortgages, P1,200 and P300, respectively, is
without legal basis, for, "No interest shall be due unless it has
been expressly stipulated in writing." (Article 1956, new Civil
Code) Furthermore, the plaintiff did not pray for such interest;
her thesis was a consolidation of ownership, which was
properly rejected, the contracts being equitable mortgages.
With the definitive resolution of the rights of the parties as
discussed above, we find it needless to pass upon the
plaintiffs petition for receivership. Should the circumstances

so warrant, she may address the said petition to the court a

quo.
ACCORDINGLY, the judgment a quo is hereby modified, as
follows: (a) the amounts of P1,200 and P300 mentioned in
Annexes E and D shall bear interest at six percent per annum
from the finality of this decision; and (b) the parcel of land
covered by Annex D shall be treated in the same manner as
that covered by Annex E, should the defendants fail to pay to
the plaintiff the sum of P300 within 90 days from the finality
of this decision. In all other respects the judgment is
affirmed. No costs.
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF
APPEALS and DR. ERLINDA G. IBARROLA, respondents.
RESOLUTION
FRANCISCO, J.:
As payments for the purchase of medicines,
the Province of Isabela issued several checks drawn against
its accounts with petitioner Philippine National Bank (PNB) in
favor of the seller, Lyndon Pharmaceuticals Laboratories, a
business operated by private respondent Ibarrola. The checks
were delivered to the sellers agents[1] who turned them over
to Ibarrola, except 23 checks amounting to P98,691.90,
which the agents appropriated after negotiating them with
PNB. For her failure to receive the full payment for the
medicines, Ibarrola filed on November 6, 1974 before the
Regional Trial Court (RTC) an action for a sum of money and
damages, docketed as Civil Case 4226-P,[2] against
the Province of Isabela, its Treasurer, the two agents and
PNB.
In its decision dated September 29, 1987, the trial court
ordered all the defendants in said civil case, except the

treasurer who died in the meantime, to jointly and solidarily

pay Ibarrola several amounts, among which is:
(1) P98,691.90 with interest thereon at the legal rate from
the date of the filing of the complaint until the entire amount
is fully paid;[3] (Italics supplied.)
PNBs appeal to the Court of Appeals (CA)[4] and later to the
Supreme Court[5] were denied and dismissed,
respectively. All the three courts, however, did not specify
whether the legal rate of interest referred to in the judgment
is 6% or 12%. The judgment in Civil Case 4226-P became
final and executory on November 26, 1993. At the execution
stage, the sheriff computed the interest mentioned in the
judgment at the rate of 12% which PNB opposed insisting
that the rate should only be 6%. Ibarrola sought clarification
from the same RTC which promulgated the
decision. On August 4, 1994 said court issued an order
clarifying that the rate is 12%. PNBs direct appeal to this
court from that order was referred to the CA which affirmed
the RTC order. Hence, this petition for review under Rule 45
where two legal issues are raised: (1) whether in an action for
damages, the legal rate of interest is 6% as provided by
Article 2209[6] of the New Civil Code or 12% as provided by
CB Circular 416 series of 1974,[7] and (2) whether such rate
shall be computed from the filing of the complaint until fully
paid?
The issues are not new. In the case of Eastern Shipping Lines,
Inc. v. CA,[8] this Court had provided a rule of thumb for
future guidance,"[9] to wit:
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.[10] (Italics ours.)
The case at bench does not involve a loan. Forbearance of
money or judgment involving a loan or forbearance of money
as it arose from a contract of sale whereby Ibarrola did not
receive full payment for her merchandise. When an
obligation arises from a contract of purchase and sale and
not from a contract of loan or mutuum, the applicable rate is
6% per annum as provided in Article 2209 of the NCC and not
the rate of 12% per annum as provided in (CB) Cir. No. 416.
[11] Indeed, PNBs liability is based only on the RTCs
judgment where it was held solidarily liable with the other
defendants due to its negligence when it failed to assure
itself if the Provincial Treasurer was properly authorized by
Ibarrola to make endorsements of said checks.[12]
The rate of 12% interest referred to in Cir. 416 applies only
to:
[L]oan or forbearance of money, or to cases where money is
transferred from one person to another and the obligation to
return the same or a portion thereof is adjudged. Any other
monetary judgment which does not involve or which has
nothing to do with loans or forbearance of any money, goods
or credit does not fall within its coverage for such imposition
is not within the ambit of the authority granted to the Central
Bank. When an obligation not constituting a loan or
forbearance of money is breached then an interest on the

amount of damages awarded may be imposed at the

discretion of the court at the rate of 6% per annum in
accordance with Art. 2209 of the Civil Code. Indeed, the
monetary judgment in favor of private respondent does not
involve a loan or forbearance of money, hence the proper
imposable rate of interest is six (6%) per cent.[13] (Italics
ours.)

PHILIPPINE NATIONAL BANK

Applying the aforequoted rule, therefore , the proper rate of

interest referred to in the judgment under execution is only
6%. This interest according to Eastern Shipping shall be
computed from the time of the filing of the complaint
considering that the amount adjudged (P98,691.90) can be
established with reasonable certainty. Said amount being
merely the uncollected balance of the purchase price covered
by the 23 checks encashed and appropriated by Ibarrolas
agents. However, once the judgment becomes final and
executory, the "interim period from the finality of judgment
awarding a monetary claim and until payment thereof, is
deemed to be equivalent to a forbearance of credit.[14] Thus,
in accordance with the pronouncement in Eastern
Shipping the rate of 12% p.a. should be imposed, and to be
computed from the time the judgment became final and
executory until fully satisfied. The actual base for the
computation of this 12% interest after the judgment in this
damage suit became final shall be the amount adjudged
(P98,691.90).

FACTS:

ACCORDINGLY, the appealed decision is REVERSED. The rate

of interest shall be 6% p.a. computed from the time of the
filing of the complaint until its full payment before finality of
judgment. Thereafter, if the amount adjudged remains
unpaid, the interest rate shall be 12% p.a. computed from
the time the judgment became final and executory
on November 26, 1993 until fully satisfied.
SO ORDERED.

petitioner vs, THE HON. COURT OF "PEALS and

AMBROSIOPADILLA,
respondents GR# 88880. April 30, 1991.
GRIRO-AQUINO, J

Private respondent (PR) Ambrosio Padilla, applied for and was

granted a credit line of 321.8million, by petitioner PNB. This
was for a term of 2 years at 18% interest per annum and was
secured byreal estate mortgage and 2 promissory notes
executed in favor of Petitioner by PR. The credit
agreementand the promissory notes, in effect, provide that
PR agrees to be bound by increases to the interest
ratestipulated, provided it is within the limits provided for by
law.Conflict in this case arose when Petitioner unilaterally
increased the interest rate from 18% to: (1) 32%[July 1984];
(2) 41% [October 1984]; and (3) 48% [November 1984], or 3
times within the span of a singleyear. This was done despite
the numerous letters of request made by PR that the interest
rate beincreased only to 21% or 24%.PR filed a complaint
against Petitioner with the RTC. The latter dismissed the case
for lack of merit. Appeal by PR to CA resulted in his favor.
Hence the petition for certiorari under Rule 45 of ROC filed
byPNB with SC.
ISSUE:
Despite the removal of the Usury Law ceiling on interest, may
the bank validly increase thestipulated interest rate on loans
contracted with third persons as often as necessary and
against theprotest of such persons.
HELD:

NO
RATIO:
Although under Sec. 2 of PD 116, the Monetary Board
is authorized to prescribe the maximumrate of interest for
loans and to change such rates whenever warranted by
prevailing economic and socialconditions, by express
provision, it may not do so oftener than once every
12 months. If the MonetaryBoard cannot, much less can
PNB, effect increases on the interest rates more than once a
year.Based on the credit agreement and promissory notes
executed between the parties, although PR didagree to
increase on the interest rates allowed by law, no law was
passed warranting Petitioner to effectincrease on the interest
rates on the existing loan of PR for the months of July to
November of 1984.Neither there being any document
executed and delivered by PR to effect such increase.For
escalation clauses to be valid and warrant the increase of the
interest rates on loans, there must be:(1) increase was made
by law or by the Monetary Board; (2) stipulation must include
a clause for thereduction of the stipulated interest rate in the
event that the maximum interest is lowered by law or by
theMonetary board. In this case, PNB merely relied on its own
Board Resolutions, which are not laws nor resolutions of the
Monetary Board.Despite the suspension of the Usury Law,
imposing a ceiling on interest rates, this does not
authorizebanks to unilaterally and successively increase
interest rates in violation of Sec. 2 PD 116.Increases
unilaterally effected by PNB was in violation of the Mutuality
of Contracts under Art. 1308. Thisprovides that the validity
and compliance of the parties to the contract cannot be left
to the will of one of the contracting parties. Increases made
are therefore void.Increase on the stipulated interest rates
made by PNB also contravenes Art. 1956. It provides that,
nointerest shall be due unless it has been expressly
stipulated in writing. PR never agreed in writing to

payinterest imposed by PNB in excess of 24% per annum.

Interest rate imposed by PNB, as correctly foundby CA, is
indubitably excessive.
RODZSSEN SUPPLY V. FAR EAST
Facts: On January 15, 1979, defendant Rodzssen Supply, Inc.
opened with plaintiff Far East Bank and Trust Co. a 30-day
domestic letter of credit, in the amount of P190,000.00 in
favor of Ekman and Company, Inc. (Ekman) for the purchase
from the latter of five units of hydraulic loaders, to expire on
February 15, 1979. The three loaders were delivered to
defendant for which plaintiff paid Ekman and which
defendant paid plaintiff before expiry date of LC. The
remaining two loaders were delivered to defendant but the
latter refused to pay. Ekman pressed payment to plaintiff.
Plaintiff paid Ekman for the two loaders and later demanded
from defendant such amount as it paid Ekman. Defendant
refused payment contending that there was a breach of
contract by plaintiff who in bad faith paid Ekman, knowing
that the two units of hydraulic loaders had been delivered to
defendant after the expiry date of subject LC.
Issue: WON petitioner is liable to respondent.
Ruling: The SC agrees with the CA that petitioner should pay
respondent bank the amount the latter expended for the
equipment belatedly delivered by Ekman and voluntarily
received and kept by petitioner. Equitable considerations
behoove us to allow recovery by respondent. True, it erred in
paying Ekman, but petitioner itself was not without fault in
the transaction. It must be noted that the latter had
voluntarily received and kept the loaders since October 1979.
When both parties to a transaction are mutually negligent in
the performance of their obligations, the fault of one cancels
the negligence of the other and, as in this case, their rights

and obligations may be determined equitably under the law

proscribing unjust enrichment.

Case Digest: G.R. No. 173227. January 20, 2009

Sebastian Siga-an, petitioner, vs. Alicia Villanueva,
respondent.
Facts: Respondent filed a complaint for sum of money
against petitioner. Respondent claimed that petitioner
approached her inside the PNO and offered to loan her the
amount of P540,000.00 of which the loan agreement was not
reduced in writing and there was no stipulation as to the
payment of interest for the loan. Respondent issued a check
worth P500,000.00 to petitioner as partial payment of the
loan. She then issued another check in the amount
of P200,000.00 to petitioner as payment of the remaining
balance of the loan of which 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 and threatened to
block or disapprove her transactions with the PNO if she
would not comply with his demand. Thus, she paid additional
amounts in cash and checks as interests for the loan. She
asked petitioner for receipt for the payments but was told
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.
The RTC rendered a Decision 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. Also, 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.
Issue: (1) Whether or not interest was due to petitioner; and
(2) whether the principle of solutio indebiti applies to the
case at bar.
Ruling: (1) No. Compensatory interest is not chargeable in
the instant case because it was not duly proven that
respondent defaulted in paying the loan and no interest was
due on the loan because there was no written agreement as
regards payment of interest. Article 1956 of the Civil Code,
which refers to monetary interest, 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.
(2) Petitioner cannot be compelled to return the alleged
excess amount paid by respondent as interest. 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. 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. We have held that the principle of solutio
indebiti applies in case of erroneous payment of undue
interest.

THE HONORABLE COURT OF APPEALS, HON.

FLORELIANA CASTRO-BARTOLOME, Presiding Judge,
Court of First Instance of Rizal, Seventh Judicial
District, Branch XV, THE PROVINCIAL SHERIFF OF
RIZAL, and ROSE INDUSTRIES, INC., respondents.

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 so as to deter
petitioner and other lenders from committing similar and
other serious wrongdoings.

While not involving the main issues in the case threshed out
in the court a quo, the judgment in which had already
become final and executory, the factual backdrop of the
present petition is summarized by respondent court as
follows:

G.R. No. L-52482 February 23, 1990

SENTINEL INSURANCE CO., INC., petitioner,
vs.

Jesus I. Santos Law Office for petitioner.

Quasha, Asperilla, Ancheta, Valmonte, Pea & Marcos
for private respondent.

REGALADO, J.:
Before us is a petition seeking the amendment and
modification of the dispositive portion of respondent court's
decision in CA-G.R. No. SP-09331, 1 allegedly to make it
conform with the findings, arguments and observations
embodied in said decision which relief was denied by
respondent court in its resolution, dated January 15,
1980, 2 rejecting petitioner's ex parte motion filed for that
purpose. 3

Petitioner Sentinel Insurance Co., Inc., was the surety in a

contract of suretyship entered into on November 15, 1974
with Nemesio Azcueta, Sr., who is doing business under the
name and style of 'Malayan Trading as reflected in SICO Bond
No. G(16)00278 where both of them bound themselves,
'jointly and severally, to fully and religiously guarantee the
compliance with the terms and stipulations of the credit line
granted by private respondent Rose Industries, Inc., in favor
of Nemesio Azcueta, Sr., in the amount of P180,00.00.'

Between November 23 to December 23, 1974, Azcueta made

various purchases of tires, batteries and tire tubes from the
private respondent but failed to pay therefor, prompting the
latter to demand payment but because Azcueta failed to
settle his accounts, the case was referred to the Insurance
Commissioner who invited the attention of the petitioner on
the matter and the latter cancelled the Suretyship
Agreement on May 13, 1975 with due notice to the private
respondent. Meanwhile, private respondent filed with the
respondent court of Makati a complaint for collection of sum
of money against herein petitioner and Azcueta, docketed as
Civil Case No. 21248 alleging the foregoing antecedents and
praying that said defendants be ordered to pay jointly and
severally unto the plaintiff.

the petitioner. On the same day, however, the latter filed a

motion for 'clarification of the judgment as to its real and true
import because on its face, it would appear that aside from
the 14% interest imposed on the principal obligation, an
additional 2% every 45 days corresponding to the additional
penalty has been imposed against the petitioner which
imposition would be usurious and could not have been the
intention of respondent Judge.' But the move did nor prosper
because oil May 22, 1971, the judge denied the motion on
the theory that the judgment, having become final and
executory, it can no longer be amended or corrected. 4

a) The amount of P198,602.41 as its principal obligation,

including interest and damage dues as of April 29, 1975;

Contending that the order was issued with grave abuse of

discretion, petitioner went to respondent court on a petition
for certiorari and mandamus to compel the court below to
clarify its decision, particularly Paragraph l(a) of the
dispositive portion thereof.

b) To pay interest at 14% per annum and damage dues at the

rate of 2% every 45 days commencing from April 30, 1975 up
to the time the full amount is fully paid:

Respondent court granted tile petition in its decision dated

December 3, 1979, the disquisition and dispositive portion
whereof read:

xxx xxx xxx

While it is an elementary rule of procedure that after a

decision, order or ruling has become final, the court loses its
jurisdiction orderover the same and can no longer be
subjected to any modification or alteration, it is likewise wellsettled that courts are empowered even after such finality, to
correct clerical errors or mistakes in the decisions
(Potenciano vs. CA, L-11569, 55 O.G. 2895). A clerical error is
one that is visible to the eyes or obvious to the
understanding (Black vs. Republic, 104 Phil. 849).

After petitioner filed its answer with counterclaim, the case,

upon agreement of the parties, was submitted for summary
judgment and on December 29, 1975, respondent court
rendered its decision with the following dispositive portion:
xxx xxx xxx
a) To pay interest on the principal obligation at the rate of
14% per annum at the rate of 2% every 45 days commencing
from April 30, 1975 until the amount is fully paid.
The decision having become final and executory, the
prevailing party moved for its execution which respondent
judge granted and pursuant thereto, a notice of attachment
and levy was served by respondent Provincial Sheriff upon

That there was a mistake in the dispositive portion of the

decision cannot be denied considering that in the complaint
filed against the petitioner, the prayer as specifically stated
in paragraph (b) was to 'order the latter, to pay interest at
14% per annum and damage dues at the rate of 2% every 45
days commencing from April 30, 1975 up to the time the

amount is fully paid.' But this notwithstanding the respondent

court in its questioned decision decreed the petitioner to pay
the interest on the principal obligation at the rate of 14% per
annum and 2% every 45 days commencing from April 30,
1975 until the amount is fully paid,' so that, as petitioner
correctly observes, it would appear that on top of the 14%
per annum on the principal obligation, another 2% interest
every 45 days commencing from April 30, 1975 until the
amount is fully paid has been imposed against him
(petitioner). In other words, 365 days in one year divided by
45 days equals 8-1/9 which, multiplied by 2% as ordered by
respondent-judge would amount to a little more than 16%.
Adding 16% per annum to the 14% interest imposed on the
principal obligation would be 30% which is veritably usurious
and this cannot be countenanced, much less sanctioned by
any court of justice.
We agree with this observation and what is more, it is
likewise a settled rule that although a court may grant any
relief allowed by law, such prerogative is delimited by the
cardinal principle that it cannot grant anything more than
what is prayed for, for certainly, the relief to be dispensed
cannot rise above its source. (Potenciano vs. CA, supra.)

As earlier stated, petitioner filed an ex parte motion seeking

to amend the above-quoted decretal portion which
respondent court denied, hence the petition at bar.
The amendment sought, ostensibly in order that the
dispositive portion of said decision would conform with the
body thereof, is the sole issue for resolution by the Court.
Petitioner itself cites authorities in support of its contention
that it is entitled to a correct and clear expression of a
judgment to avoid substantial injustice. 6 In amplification of
its plaint, petitioner further asseverates that respondent
court should not have made an award for "damage dues" at
such late stage of the proceeding since said dues were not
the subject of the award made by the trial court. 7
We disagree with petitioner.
To clarify an ambiguity or correct a clerical error in the
judgment, the court may resort to the pleadings filed by the
parties, the findings of fact and the conclusions of law
expressed in the text or body of the decision. 8

xxx xxx xxx

Indeed, this was what respondent court did in resolving the

original petition. It examined the complaint filed against the
petitioner and noted that the prayer as stated in Paragraph
(b) thereof was to "order defendant to pay interest at 14 per
centum and damage dues at the rate of 2% every 45 days
commencing from April 30, 1975 up to the time the full
amount is fully paid." 9

a) to pay interest at 14% per annum on the principal

obligation and damage dues at the rate of 2% every 45 days
commencing from April 30, 1975 up to the time the full
amount is fully paid; 5

Insofar as the findings and the dispositive portion set forth in

respondent court's decision are concerned, there is really no
inconsistency as wittingly or unwittingly asserted by
petitioner.

xxx xxx xxx

The findings made by respondent court did not actually

nullify the judgment of the trial court. More specifically, the
statement that the imposition of 2% interest every 45 days

WHEREFORE, the writ of certiorari is hereby granted and the

respondent judge is ordered to clarify its judgment
complained of in the following manner:

commencing from April 30, 1975 on top of the 14% per

annum (as would be the impression from a superficial
reading of the dispositive portion of the trial court's decision)
would be usurious is a sound observation. It should, however,
be stressed that such observation was on the theoretical
assumption that the rate of 2% is being imposed
as interest, not as damage dues which was the intendment of
the trial court.
Certainly, the damage dues in this case do not include and
are not included in the computation of interest as the two are
of different categories and are distinct claims which may be
demanded separately, in the same manner that
commissions, fines and penalties are excluded in the
computation of interest where the loan or forbearance is not
secured in whole or in part by real estate or an interest
therein. 10

Significantly, it bears mention that on several occasions

before petitioner moved for a clarificatory judgment, it
offered to settle its account with private respondent without
assailing the imposition of the aforementioned damage
dues. 14 As ramified by private respondent:
2. ... the then counsel of record for the petitioner, Atty.
Porfirio Bautista, and Atty. Teodulfo L. Reyes, petitioner's
Assistant Vice- President for Operations, had a conference
with the undersigned attorneys as to how petitioner will
settle its account to avoid execution. During the conference,
both parties arrived at almost the same computation and the
amount due from petitioner, which includes 2% damage dues
every 45 days from 30 April 1975 until the amount is fully
paid, under the judgment. No question was ever raised as
regards same.
xxx xxx xxx

While interest forms part of the consideration of the contract

itself, damage dues (penalties, and so forth) are usually
made payable only in case of default or non-performance of
the contract. 11 Also, although interest is subject to the
provisions of the Usury Law, 12 there is no policy or provision
in such law preventing the enforcement of damage dues
although the effect may be to increase the sum payable
beyond the prescribed ceiling rates.

5. The very face of Annex 'D' shows that the '2%' damage
dues being questioned by the present counsel of petitioner
had been mentioned no less than TEN (10) TIMES and was
clearly and distinctly defined by petitioner and included in
the computation of its obligation to herein petitioner as '2%
penalty for every 45 days.'

Petitioner's assertion that respondent court acted without

authority in appending the award of damage dues to the
judgment of the trial court should be rejected. As correctly
pointed out by private respondent, the opening sentence of
Paragraph l(a) of the dispositive portion of the lower court's
decision explicitly ordered petitioner to pay private
respondent the amount of P198,602.41 as principal
obligation including interest and damage dues, which is a
clear and unequivocal indication of the lower court's intent to
award both interest and damage dues. 13

Petitioner's pretense that it was not the intent of the court to

award the damage dues of 2% every 45 days commencing
30 April 1975 is belied by the fact (and this is admitted by
petitioner) that upon agreement of the parties, the case
before the lower court was submitted for summary judgment;
in other words, the case was submitted upon the facts as
appear in the pleadings with no other evidence presented
and a fact that appears clearly in the pleadings is that the
defendants in the case before the lower court were under
contract to pay private respondent, among others, the

xxx xxx xxx

damage dues of 2% every 45 days commencing on 30 April

1975 until the obligation is fully paid; .... 15
Respondent court demonstrably did not err in ordering the
clarification of the decision of the trial court by amending the
questioned part of its dispositive portion to include therein
the phrase damage dues to modify the stated rate of 2%, and
thereby obviate any misconception that it is being imposed
as interest.
ACCORDINGLY, certiorari is hereby DENIED and the decision
of respondent Court of Appeals is hereby AFFIRMED.
SO ORDERED.

OUTRIGHT SALE
Co accepted the invoice of the ballet shoes and he even
noted down in his own handwriting the partial payments that
he made.
If the sale has been on consignment, a stipulation as to the
period of time for the return of the unsold shoes should have
been made, however, this was not done
NOT BOUND BY THE INTEREST
He did not sign the invoice slip the stipulated interest was
20%, hence, not binding
However, he is bound by the legal interest of 6%

ROYAL SHIRT FACTORY, INC. v CO

Hence, Co was ordered to pay the balance of the purchase

price for the ballet shoes + legal interest

FACTS:
The parties entered into a contract wherein it is stipulated
that 350 pairs of ballet shoes will be sold by Co and that Co
had 9 days from delivery of the shoes to make his choice of 2
alternatives: a) consider the sale for the shoes closed at a flat
rate, or b) return the remaining unsold ones to Royal.
Co failed to return the unsold pairs after 9 days and actually
began making partial payments on account of the purchase
price agreed upon.
Co then contended that there was merely a consignment of
the goods and he wanted to return the unsold shoes. Royal
refused contending that it was an outright sale.
ISSUE: WoN the sale was an outright sale / WoN Co is bound
by the interest stipulated in the invoice.
SC: YES! / NO!

Ligutan vs. CA G.R#138677

Facts: Petitioners Tolomeo Ligutan and Leonidas dela Llana o
btained a loan in the amount of P120,000.00 from
respondent Security Bank and Trust Company. Petitioners
executed a promissorynote binding themselves, jointly and
severally, with an interest of 15.189% per annum upon
maturityand to pay a penalty of 5% every month on
the outstanding principal and interest in case of default and
also a 10% attorneys fees if the matter were indorsed to a
lawyer for collection.
The obligation matured, the petitioners were not able to
settle the obligation; The bank gave anextension, still the

same happened. Since the petitioners still defaulted, the

former filed a complaint forrecovery of the due amount.
Issue: Whether the interest and penalty charge imposed
by private respondent bank on petitioners loan are
manifestly exorbitant, iniquitous and unconscionable?Ruling:
The obligor would then be bound to pay the stipulated
indemnity without the necessity of proof on the existence
and on the measure of damages caused by the breach.
Although a court may not atliberty ignore the freedom of the
parties to agree on such terms and conditions as they see fit
thatcontravene 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 theprincipal obligation has been partly
or irregularly complied with.The question of whether a
penalty is reasonable or iniquitous can be partly subjective
and partlyobjective. 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 itsconsequences, the supervening
realities, the standing and relationship of the parties, and the
like, theapplication of which, by and large, is addressed to
the sound discretion of the court.The CA exercised good
judgment in reducing the stipulated penalty interest from 5%
to 3% a month. It
was also been held that the 15.189% per annum stipulated
interest and the 10% attorneys is reasonable
and not excessive. The interest prescribed in loan financing
arrangements is a fundamental part of thebanking business
and the core of a bank's existence.

UCPB vs Spouses Beluso

GR No. 159912, August 17, 2007

Ponente: Chico-Nazario, J.
Facts:
Petition for Review on Certiorari declaring void the interest
rate provided in the promissory notes executed by the
respondents Spouses Samuel and Odette Beluso (spouses
Beluso) in favor of petitioner United Coconut Planters Bank
(UCPB)
UCPB granted the spouses Beluso a Promissory Notes Line
under 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 spouses
Beluso constituted, other than their promissory notes, a real
estate mortgage over parcels of land in Roxas City, covered
by Transfer Certificates of Title No. T-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 maximum of P2.35 Million pesos
and to extend the term thereof to 28 February 1998.
On 30 April 1997, the payment of the principal and interest of
the latter two promissory notes were debited from the
spouses Belusos account with UCPB; yet, a consolidated loan
for P1.3 Million was again released to the spouses Beluso
under one promissory note with a due date of 28 February
1998. To completely avail themselves of the P2.35 Million
credit line extended to them by UCPB, the spouses Beluso
executed two more promissory notes for a total
of P350,000.00. 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 that the principal indebtedness was only P2 Million.

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.
Trial court declared in its judgment that:
the interest rate used by [UCPB] void
the foreclosure and Sheriffs Certificate of Sale void
UCPB is ordered to return to [the spouses Beluso] the
properties subject of the foreclosure
UCPB to pay [the spouses Beluso] the amount of P50,000.00
by way of attorneys fees
UCPB to pay the costs of suit.
Spouses Beluso] are hereby ordered to pay [UCPB] the sum
of P1,560,308.00.
8. Court of Appeals affirmed Trial court's decision subject to
the modification that defendant-appellant UCPB is not liable
for attorneys fees or the costs of suit.
ISSUES:
1. Whether or not interest rate stipulated was void

Yes, stipulated interest rate is void because it contravenes on

the principle of mutuality of contracts and it violates the
Truth in lending Act.
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.
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 which is required in TRuth
in Lending Act
2. Whether or not Spouses Beluso are subject to 12% interest
and compounding interest stipulations even if declared
amount by UCPB was excessive.
Yes. Default commences upon judicial or extrajudicial
demand.[26] The excess amount in such a demand does not
nullify the demand itself, which is valid with respect to the
proper amount. 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. It 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.

3. Whether or not foreclosure was void

No. The foreclosure proceedings are valid since there was a
valid demand 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.