Republic of the Philippines Management Services Corporation and its officers.

Petitioner alleged that on

Supreme Court
Manila January 11, 1991, respondent obtained from the former a loan in the amount
of P9,000,000.00, with interest, but for purposes of expediency, said
THIRD DIVISION transaction was denominated as a sale whereby petitioner bought from
respondent various Land Bank bonds originally valued at P11,557,972.60 at
discounted price, as shown in a Confirmation of Agreement; that the bonds
MULTI-VENTURES CAPITAL G.R. No. 157439
and MANAGEMENT serve as a partial collateral for the payment of the loan; that respondent and
CORPORATION, Present: some of its officers, however, have plans of defrauding their creditors by
Petitioner.
YNARES-SANTIAGO, J., absconding and disposing of its properties, thus constraining petitioner to file
- versus - Chairperson, the complaint for reformation in order to express the true intent of the
AUSTRIA-MARTINEZ,
STALWART MANAGEMENT CHICO-NAZARIO, and parties, i.e., that the ostensible sale of the bonds is actually a loan
SERVICES CORPORATION, NACHURA, JJ. agreement.[1]
MARIAN G. TAJO, CESAR
TAJO and ARIANA GALANG, Promulgated:
Respondents. July 4, 2007 Respondent, together with its co-defendants, filed an Answer denying
x------------------------------------------------x petitioner's allegations and claiming, among others, that both petitioner and
respondent are companies engaged in dealing and trading government
DECISION securities. According to respondent, the transaction entered into on January
11, 1991 is really a purchase of Land Bank bonds, and there is no mistake,
AUSTRIA-MARTINEZ, J.: fraud, inequitable conduct or accident in the preparation of the true
agreement of the parties such that reformation is called for.[2]

The sole issue in this case is whether the contract entered into by Multi-
After trial on the merits, the RTC rendered a Decision dated May 11, 1995,
Ventures Capital and Management Corporation (petitioner) and Stalwart
in favor of petitioner. The dispositive portion of the RTC Decision reads:
Management Services Corporation (respondent) is one of loan or sale.
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff and against the defendant:
The facts are as follows:
1. These instruments subject matter of this
On July 10, 1991, Multi-Ventures Capital and Management Corporation filed case are hereby ordered REFORMED as
Contract of Loan and not a Contract of
with the Regional Trial Court (RTC) of Makati, Branch 134, a Complaint for Sale.
Reformation of Instrument with application for attachment against Stalwart

2. To order the defendants, jointly and
severally, to pay the plaintiff the sum
of P11,557,972.60 PESOS from June
11, 1992 as the date of maturity plus
legal interest until fully paid;
3. To order defendants, jointly and severally,
to pay the plaintiff the sum
of P100,000.00 PESOS by way of
attorneys fees;
4. Ordering the dismissal of defendants
counter-claim for being devoid of legal
merit; and
5. To order defendants' jointly and severally,
to pay the costs of suit.
SO ORDERED.[3]
Dissatisfied, respondent and its officers appealed to the Court of Appeals
[4]
(CA). In a Decision dated February 24, 2003, the CA sustained respondents
position that the transaction was, in fact, a sale; reversed the RTC Decision;
and dismissed petitioners complaint and respondents counterclaim.
Hence, the present Petition for Review on Certiorari predicated on the
following grounds:
A. THAT DUE TO MISAPPRECIATION OF FACTS AND
EVIDENCE, THE COURT OF APPEALS ERRED IN
REVERSING THE COURT A QUO'S DECISION
AND IN NOT DECLARING THAT THE INTENDED
AND TRUE TRANSACTION AGREED UPON AND
ENTERED INTO BETWEEN MULTI-VENTURES
AND STALWART WAS THAT OF LOAN, NOT
SALE OF LAND BANK BONDS.
B. THAT THE COURT OF APPEALS ERRED IN NOT
ORDERING THE REFORMATION OF THE
INSTRUMENT OSTENSIBLY APPEARING AS A
PURCHASE AND SALE WITH THE RIGHT TO
REPURCHASE LAND BANK BONDS SO AS TO
REFLECT THE TRUE INTENTION AND
AGREEMENT OF PARTIES THAT THE
TRANSACTION WAS THAT OF LOAN OF P9
MILLION PAYABLE FOR A PERIOD OF ONE (1)
YEAR, JANUARY 11, 1992 IN THE AMOUNT
OF P11,537,972.60 INCLUSIVE OF INTEREST.[5]
Ordinarily, the Court will not dwell on the issues raised in this
petition as it pertains to questions of fact, and under Rule 45 of the Rules of
Court, only questions of law may be raised, the reason being that this Court
is not a trier of facts, and it is not for this Court to re-examine and re-evaluate
the evidence on record.[6] Considering, however, that the CA and the RTC
came up with divergent findings regarding the real nature of the transaction
in question, the Court is now constrained to review the evidence on record so
as to resolve the conflict.[7]
After a careful examination of the evidence on record, the Court sustains the
CAs ruling that the transaction between the parties was one of sale and not of
loan.
An action for reformation of an instrument finds ground in Article 1359 of
the Civil Code, which provides:
ARTICLE 1359. When, there having been a meeting of the
minds of the parties to a contract, their true intention is not
expressed in the instrument purporting to embody the
agreement, by reason of mistake, fraud, inequitable conduct
or accident, one of the parties may ask for the reformation of
the instrument to the end that such true intention may be
expressed.
xxxx

Reformation is a remedy in equity, whereby a written instrument is made or
construed so as to express or conform to the real intention of the parties,
where some error or mistake has been committed. In granting reformation,
the remedy in equity is not making a new contract for the parties, but
establishing and perpetuating the real contract between the parties which,
under the technical rules of law, could not be enforced but for such
reformation.[8]
In order that an action for reformation of instrument may prosper, the
following requisites must concur: (1) there must have been a meeting of the
minds of the parties to the contract; (2) the instrument does not express the
true intention of the parties; and (3) the failure of the instrument to express
the true intention of the parties is due to mistake, fraud, inequitable conduct
or accident.[9]
In the present case, there is no question that there was a meeting of the minds
between the parties. What remains to be resolved is whether the contract
expressed their true intention; and, if not, whether it was due to mistake,
fraud, inequitable conduct or accident.
While intentions involve a state of mind which may sometimes be
difficult to decipher, subsequent and contemporaneous acts of the parties as
well as the evidentiary facts as proved and admitted can be reflective of ones
intention.[10]
The onus probandi is upon the party who insists that the contract
should be reformed.[11] Moreover, the presumption is that an instrument sets
out the true agreement of the parties thereto and that it was executed for
valuable consideration.[12] Unfortunately, petitioner was not able to overturn
the presumption of validity of the contract and it also failed to discharge the
burden of proving that the true intention of the parties has not been
expressed.
In support of its contention that the transaction is one of loan, petitioner
relies principally on the letter dated January 11, 1991, wherein respondent
offered to purchase on January 10, 1992 the Land Bank bonds from
petitioner for the total amount of P11,557,972.60.[13] According to petitioner,
the amount borrowed by respondent was P9,000,000.00, with interest, or a
total of P11,557,972.60, payable within one year.[14] Petitioner insists that the
buy-back letter proves that the transaction was indeed a loan, for if it was a
sale, why would respondent buy back the bonds in the same amount that was
payable under their alleged loan agreement?[15]
There is nothing on record, as well as in the buy-back letter, that clearly and
convincingly proves or substantiates petitioners contention that the real intent
of the parties was to enter into a loan agreement for the amount
of P11,557,972.60, inclusive of interest. In fact, respondents buy-back letter
supports the finding that the agreement entered into by the parties was a sale
transaction. For if the bonds were only to serve as a collateral for the loan,
why would respondent offer to buy them back from petitioner if they were
not sold in the first place? Obviously, ownership of the bonds had been
transferred from respondent to petitioner on January 11, 1991; for if it were
not so and the bonds were merely being held by petitioner as a security for
the payment of the alleged loan, then ownership would have remained with
respondent and there would have been no need to buy it back.
The Court agrees with and adopts the findings of the CA, thus:
The lower court, and the appellee, advance that it
was highly improbable that plaintiff would really purchase
the Land Bank bonds for 9 million pesos, when it would
 have called for only 6.5 million pesos if sold in the
market. Aside from such self-serving statements, however,
there is no direct or substantial proof that the bonds would Finally, petitioner failed to show that mistake, fraud, inequitable conduct or
have demanded a lower actual price when it was sold. In any accident attended the execution of the agreement such that their true intention
case, poor business decisions are not adequate grounds to
nullify the effects of a contract entered into in the course of was not reflected. As admitted by petitioner, the parties agreed to execute a
business operations. x x x purchase and sale agreement for purposes of expediency and
convenience.[18] Expediency and convenience, however, are not grounds for
Furthermore, the fact that the Confirmation of Agreement
(Exhibit 1) and offer to purchase by defendants (Exhibit B) the reformation of an instrument. As such, absent any proof of mistake,
were executed simultaneously and delivered to fraud, inequitable conduct or accident, the Confirmation of Agreement
the plaintiff, is not inconsistent with the conclusion that the
contract between the parties was truly a Sale. In order to dated January 11, 1991 remains the best evidence to ascertain the real intent
hold that the parties' agreement was really a loan, more of the parties.
concrete and convincing evidence must be produced. x x x[16]
The transaction of sale entered into by the parties on January 11,
1991 is accurately expressed in the Confirmation of Agreement. Petitioner,
In addition, and more significantly, what militates against petitioners
therefore, has no cause of action for its reformation.
argument that their agreement was a loan is the fact that subsequent thereto,
petitioner endorsed and transferred the bonds to the AFP Mutual Benefits
WHEREFORE, the petition is DENIED for lack of merit.
Association, Inc., as collateral for an investment. Petitioner did not rebut or
at the very least, offer a plausible explanation for said transfer which is
Costs against petitioner.
unmistakably an act of ownership. It sufficiently established the CA finding
that the transaction is one of sale, thus:
SO ORDERED.
Aside from Exhibit 1, evidence on record, particularly
Exhibits 8 to 9 show that the bonds were indeed delivered to
the plaintiff pursuant to the Contract of Sale. Furthermore,
MA. ALICIA AUSTRIA-MARTINEZ
almost immediately after taking possession of the subject
Associate Justice
bonds, plaintiff corporation through its Vice-President
and incorporator, Natividad Aureola, endorsed and
transferred the same to the AFP Mutual Benefits
WE CONCUR:
Association, Inc., as collateral for an investment made by
the latter. Such endorsement and transfer, to our mind,
amount to an act of ownership, which can only be made
by one who owns a certain property, and not by one who
CONSUELO YNARES-SANTIAGO
holds a property only as security for loan. Defendants'
Associate Justice
position that it had sold the bonds to the plaintiff pursuant to
Chairperson
Exhibit 1 is thus fortified. [17]
 Pursuant to Section 13, Article VIII of the Constitution, and the
Division Chairpersons Attestation, it is hereby certified that the conclusions
in the above Decision had been reached in consultation before the case was
MINITA V. CHICO-NAZARIO assigned to the writer of the opinion of the Courts Division.
ANTONIO EDUARDO B. NACHURA
Associate Justice Associate Justice

REYNATO S. PUNO

Chief Justice

SECOND DIVISION

[G.R. No. 133632. February 15, 2002]

ATTESTATION

I attest that the conclusions in the above Decision had been reached in BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT
consultation before the case was assigned to the writer of the opinion of the OF APPEALS and ALS MANAGEMENT & DEVELOPMENT
Courts Division. CORPORATION, respondents.

DECISION
CONSUELO YNARES-SANTIAGO
Associate Justice QUISUMBING, J.:
Chairperson, Third Division
This petition for certiorari assails the decision dated February 28,
1997, of the Court of Appeals and its resolution dated April 21, 1998,
in CA-G.R. CV No. 38887. The appellate court affirmed the judgment
of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case
No. 11831, for foreclosure of mortgage by petitioner BPI Investment
Corporation (BPIIC for brevity) against private respondents ALS
Management and Development Corporation and Antonio K.
Litonjua,[1] consolidated with (b) Civil Case No. 52093, for damages
CERTIFICATION with prayer for the issuance of a writ of preliminary injunction by the
private respondents against said petitioner.
The trial court had held that private respondents were not in
default in the payment of their monthly amortization, hence, the
extrajudicial foreclosure conducted by BPIIC was premature and
made in bad faith. It awarded private respondents the amount
of P300,000 for moral damages, P50,000 for exemplary damages,
and P50,000 for attorneys fees and expenses for litigation. It likewise
dismissed the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per
annum from Ayala Investment and Development Corporation (AIDC),
the predecessor of petitioner BPIIC, for the construction of a house on
his lot in New Alabang Village, Muntinlupa. Said house and lot were
mortgaged to AIDC to secure the loan. Sometime in 1980, Roa sold
the house and lot to private respondents ALS and Antonio Litonjua
for P850,000. They paid P350,000 in cash and assumed
the P500,000 balance of Roas indebtedness with AIDC. The latter,
however, was not willing to extend the old interest rate to private
respondents and proposed to grant them a new loan of P500,000 to
be applied to Roas debt and secured by the same property, at an
interest rate of 20% per annum and service fee of 1% per annum on
the outstanding principal balance payable within ten years in equal
monthly amortization of P9,996.58 and penalty interest at the rate of
21% per annum per day from the date the amortization became due
and payable.
Consequently, in March 1981, private respondents executed a
mortgage deed containing the above stipulations with the provision
that payment of the monthly amortization shall commence on May 1,
1981.
On August 13, 1982, ALS and Litonjua updated Roas arrearages
by paying BPIIC the sum of P190,601.35. This reduced Roas principal
balance to P457,204.90 which, in turn, was liquidated when BPIIC
applied thereto the proceeds of private respondents loan of P500,000.
On September 13, 1982, BPIIC released to private
respondents P7,146.87, purporting to be what was left of their loan
after full payment of Roas loan.
In June 1984, BPIIC instituted foreclosure proceedings against
private respondents on the ground that they failed to pay the
mortgage indebtedness which from May 1, 1981 to June 30, 1984,
amounted to Four Hundred Seventy Five Thousand Five Hundred
Eighty Five and 31/100 Pesos (P475,585.31). A notice of sheriffs sale
was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No.
52093 against BPIIC. They alleged, among others, that they were not
in arrears in their payment, but in fact made an overpayment as
of June 30, 1984. They maintained that they should not be made to
pay amortization before the actual release of the P500,000 loan in
August and September 1982. Further, out of the P500,000 loan, only
the total amount of P464,351.77 was released to private respondents.
Hence, applying the effects of legal compensation, the balance
of P35,648.23 should be applied to the initial monthly amortization for
the loan.
On August 31, 1988, the trial court rendered its judgment in Civil
Case Nos. 11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management
and Development Corporation and Antonio K. Litonjua and against BPI
Investment Corporation, holding that the amount of loan granted by BPI to
ALS and Litonjua was only in the principal sum of P464,351.77, with
interest at 20% plus service charge of 1% per annum, payable on equal
monthly and successive amortizations at P9,283.83 for ten (10) years or one
hundred twenty (120) months. The amortization schedule attached as Annex
A to the Deed of Mortgage is correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable
damages when BPI caused their publication in a newspaper of general
circulation as defaulting debtors, and therefore orders BPI to pay ALS and
Litonjua the following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorneys fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being
premature.
Costs against BPI.
SO ORDERED.[2]
 Both parties appealed to the Court of Appeals. However, private
respondents appeal was dismissed for non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its
decision, the dispositive portion reads:
WHEREFORE, finding no error in the appealed decision the same is hereby
AFFIRMED in toto.
SO ORDERED.[3]
In its decision, the Court of Appeals reasoned that a simple loan
is perfected only upon the delivery of the object of the contract. The
contract of loan between BPIIC and ALS & Litonjua was perfected
only on September 13, 1982, the date when BPIIC released the
purported balance of the P500,000 loan after deducting therefrom the
value of Roas indebtedness. Thus, payment of the monthly
amortization should commence only a month after the said date, as
can be inferred from the stipulations in the contract. This, despite the
express agreement of the parties that payment shall commence
on May 1, 1981. From October 1982 to June 1984, the total
amortization due was only P194,960.43. Evidence showed that
private respondents had an overpayment, because as of June 1984,
they already paid a total amount of P201,791.96. Therefore, there was
no basis for BPIIC to extrajudicially foreclose the mortgage and cause
the publication in newspapers concerning private respondents
delinquency in the payment of their loan. This fact constituted
sufficient ground for moral damages in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC was
likewise denied, hence this petition, where BPIIC submits for
resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A
CONSENSUAL CONTRACT IN THE LIGHT OF THE
RULE LAID DOWN IN BONNEVIE VS. COURT OF
APPEALS, 125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE
FOR MORAL AND EXEMPLARY DAMAGES AND
ATTORNEYS FEES IN THE FACE OF IRREGULAR
PAYMENTS MADE BY ALS AND OPPOSED TO THE
RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS.
COURT OF APPEALS, 120 SCRA 707.
On the first issue, petitioner contends that the Court of Appeals
erred in ruling that because a simple loan is perfected upon the
delivery of the object of the contract, the loan contract in this case was
perfected only on September 13, 1982. Petitioner claims that a
contract of loan is a consensual contract, and a loan contract is
perfected at the time the contract of mortgage is executed
conformably with our ruling in Bonnevie v. Court of Appeals, 125
SCRA 122. In the present case, the loan contract was perfected
on March 31, 1981, the date when the mortgage deed was executed,
hence, the amortization and interests on the loan should be computed
from said date.
Petitioner also argues that while the documents showed that the
loan was released only on August 1982, the loan was actually
released on March 31, 1981, when BPIIC issued a cancellation of
mortgage of Frank Roas loan. This finds support in the registration
on March 31, 1981 of the Deed of Absolute Sale executed by Roa in
favor of ALS, transferring the title of the property to ALS, and ALS
executing the Mortgage Deed in favor of BPIIC. Moreover, petitioner
claims, the delay in the release of the loan should be attributed to
private respondents. As BPIIC only agreed to extend a P500,000
loan, private respondents were required to reduce Frank Roas loan
below said amount. According to petitioner, private respondents were
only able to do so in August 1982.
In their comment, private respondents assert that based on
Article 1934 of the Civil Code,[4] a simple loan is perfected upon the
delivery of the object of the contract, hence a real contract. In this
case, even though the loan contract was signed on March 31, 1981, it
was perfected only on September 13, 1982, when the full loan was
released to private respondents.They submit that petitioner
misread Bonnevie. To give meaning to Article 1934, according to
private respondents, Bonnevie must be construed to mean that the
contract to extend the loan was perfected on March 31, 1981 but the
contract of loan itself was only perfected upon the delivery of the full
loan to private respondents on September 13, 1982.
Private respondents further maintain that even
granting, arguendo, that the loan contract was perfected on March 31,
1981, and their payment did not start a month thereafter, still no
default took place. According to private respondents, a perfected loan
agreement imposes reciprocal obligations, where the obligation or
promise of each party is the consideration of the other party. In this
case, the consideration for BPIIC in entering into the loan contract is
the promise of private respondents to pay the monthly amortization.
For the latter, it is the promise of BPIIC to deliver the money. In
reciprocal obligations, neither party incurs in delay if the other does
not comply or is not ready to comply in a proper manner with what is
incumbent upon him.Therefore, private respondents conclude, they
did not incur in delay when they did not commence paying the
monthly amortization on May 1, 1981, as it was only on September
13, 1982when petitioner fully complied with its obligation under the
loan contract.
We agree with private respondents. A loan contract is not a
consensual contract but a real contract. It is perfected only upon the
delivery of the object of the contract.[5] Petitioner
misapplied Bonnevie. The contract in Bonnevie declared by this Court
as a perfected consensual contract falls under the first clause of
Article 1934, Civil Code. It is an accepted promise to deliver
something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the
Philippines, 44 SCRA 445, petitioner applied for a loan of P500,000
with respondent bank. The latter approved the application through a
board resolution. Thereafter, the corresponding mortgage was
executed and registered. However, because of acts attributable to
petitioner, the loan was not released. Later, petitioner instituted an
action for damages. We recognized in this case, a perfected
consensual contract which under normal circumstances could have
made the bank liable for not releasing the loan. However, since the
fault was attributable to petitioner therein, the court did not award it
damages.
A perfected consensual contract, as shown above, can give rise
to an action for damages. However, said contract does not constitute
the real contract of loan which requires the delivery of the object of the
contract for its perfection and which gives rise to obligations only on
the part of the borrower.[6]
In the present case, the loan contract between BPI, on the one
hand, and ALS and Litonjua, on the other, was perfected only
on September 13, 1982, the date of the second release of the
loan. Following the intentions of the parties on the commencement of
the monthly amortization, as found by the Court of Appeals, private
respondents obligation to pay commenced only on October 13, 1982,
a month after the perfection of the contract.[7]
We also agree with private respondents that a contract of loan
involves a reciprocal obligation, wherein the obligation or promise of
each party is the consideration for that of the other.[8]As averred by
private respondents, the promise of BPIIC to extend and deliver the
loan is upon the consideration that ALS and Litonjua shall pay the
monthly amortization commencing on May 1, 1981, one month after
the supposed release of the loan. It is a basic principle in reciprocal
obligations that neither party incurs in delay, if the other does not
comply or is not ready to comply in a proper manner with what is
incumbent upon him.[9] Only when a party has performed his part of
the contract can he demand that the other party also fulfills his own
obligation and if the latter fails, default sets in. Consequently,
petitioner could only demand for the payment of the monthly
amortization after September 13, 1982 for it was only then when it
complied with its obligation under the loan contract. Therefore, in
computing the amount due as of the date when BPIIC extrajudicially
caused the foreclosure of the mortgage, the starting date is October
13, 1982 and not May 1, 1981.
Other points raised by petitioner in connection with the first issue,
such as the date of actual release of the loan and whether private
respondents were the cause of the delay in the release of the loan,
are factual. Since petitioner has not shown that the instant case is one
of the exceptions to the basic rule that only questions of law can be
raised in a petition for review under Rule 45 of the Rules of
Court,[10] factual matters need not tarry us now. On these points we
are bound by the findings of the appellate and trial courts.
On the second issue, petitioner claims that it should not be held
liable for moral and exemplary damages for it did not act maliciously
when it initiated the foreclosure proceedings. It merely exercised its
right under the mortgage contract because private respondents were
irregular in their monthly amortization. It invoked our ruling in Social
Security System vs. Court of Appeals, 120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As
concluded by the Court of Appeals the negligence of the appellant is not so
gross as to warrant moral and temperate damages, except that, said Court
reduced those damages by only P5,000.00 instead of eliminating them.
Neither can we agree with the findings of both the Trial Court and
respondent Court that the SSS had acted maliciously or in bad faith. The SSS
was of the belief that it was acting in the legitimate exercise of its right under
the mortgage contract in the face of irregular payments made by private
respondents and placed reliance on the automatic acceleration clause in the
contract. The filing alone of the foreclosure application should not be a Republic of the Philippines
ground for an award of moral damages in the same way that a clearly Supreme Court
unfounded civil action is not among the grounds for moral damages. Baguio City

Private respondents counter that BPIIC was guilty of bad faith FIRST DIVISION
and should be liable for said damages because it insisted on the
payment of amortization on the loan even before it was HERMOJINA ESTORES, G.R. No. 175139
released. Further, it did not make the corresponding deduction in the Petitioner,
monthly amortization to conform to the actual amount of loan Present:
released, and it immediately initiated foreclosure proceedings when
private respondents failed to make timely payment.
CORONA, C.J., Chairperson,
But as admitted by private respondents themselves, they were
irregular in their payment of monthly amortization. Conformably with - versus - LEONARDO-DE CASTRO,
our ruling in SSS, we can not properly declare BPIIC in bad faith. BERSAMIN,
Consequently, we should rule out the award of moral and exemplary DEL CASTILLO, and
damages.[11]
VILLARAMA, JR., JJ.
However, in our view, BPIIC was negligent in relying merely on SPOUSES ARTURO and
the entries found in the deed of mortgage, without checking and
LAURA SUPANGAN, Promulgated:
correspondingly adjusting its records on the amount actually released
to private respondents and the date when it was released. Such Respondents. April 18, 2012
negligence resulted in damage to private respondents, for which an x------------------------------------------------------------
award of nominal damages should be given in recognition of their -------x
rights which were violated by BPIIC.[12] For this purpose, the amount
of P25,000 is sufficient. DECISION
Lastly, as in SSS where we awarded attorneys fees because
private respondents were compelled to litigate, we sustain the award DEL CASTILLO, J.:
of P50,000 in favor of private respondents as attorneys fees.
WHEREFORE, the decision dated February 28, 1997, of the The only issue posed before us is the propriety of the imposition of interest
Court of Appeals and its resolution dated April 21, 1998, are and attorneys fees.
AFFIRMED WITH MODIFICATION as to the award of damages. The
award of moral and exemplary damages in favor of private
respondents is DELETED, but the award to them of attorneys fees in Assailed in this Petition for Review[1] filed under Rule 45 of the Rules of Court is the
the amount of P50,000 is UPHELD. Additionally, petitioner is May 12, 2006 Decision[2] of the Court of Appeals (CA) in CA-G.R. CV No. 83123,
ORDERED to pay private respondents P25,000 as nominal damages.
Costs against petitioner. the dispositive portion of which reads:
SO ORDERED.
WHEREFORE, the appealed decision is MODIFIED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., The rate of interest shall be six percent (6%) per annum, computed
JJ., concur. from September 27, 2000 until its full payment before finality of
 the judgment.If the adjudged principal and the interest (or any part
thereof) remain unpaid thereafter, the interest rate shall be adjusted
to twelve percent (12%) per annum, computed from the time the
judgment becomes final and executory until it is fully
satisfied. The award of attorneys fees is hereby reduced
to P100,000.00. Costs against the defendants-appellants.
SO ORDERED.[3]
Also assailed is the August 31, 2006 Resolution[4] denying the motion for
reconsideration.
Factual Antecedents
On October 3, 1993, petitioner Hermojina Estores and respondent-spouses Arturo
and Laura Supangan entered into a Conditional Deed of Sale[5] whereby petitioner
offered to sell, and respondent-spouses offered to buy, a parcel of land covered by
Transfer Certificate of Title No. TCT No. 98720 located at Naic, Cavite for the sum
of P4.7 million. The parties likewise stipulated, among others, to wit:
xxxx
1. Vendor will secure approved clearance from DAR requirements
of which are (sic):
a) Letter request
b) Title
c) Tax Declaration
d) Affidavit of Aggregate Landholding Vendor/Vendee
e) Certification from the Provl. Assessors as to Landholdings
of Vendor/Vendee
f) Affidavit of Non-Tenancy
g) Deed of Absolute Sale
xxxx
4. Vendee shall be informed as to the status of DAR clearance
within 10 days upon signing of the documents.
xxxx
6. Regarding the house located within the perimeter of the subject
[lot] owned by spouses [Magbago], said house shall be moved
outside the perimeter of this subject property to the 300 sq. m.
area allocated for [it]. Vendor hereby accepts the responsibility
of seeing to it that such agreement is carried out before full
payment of the sale is made by vendee.
7. If and after the vendor has completed all necessary documents
for registration of the title and the vendee fails to complete
payment as per agreement, a forfeiture fee of 25% or
downpayment, shall be applied.However, if the vendor fails to
complete necessary documents within thirty days without any
sufficient reason, or without informing the vendee of its status,
vendee has the right to demand return of full amount of down
payment.
xxxx
9. As to the boundaries and partition of the lots (15,018 sq. m. and
300 sq. m.) Vendee shall be informed immediately of its
approval by the LRC.
10. The vendor assures the vendee of a peaceful transfer of
ownership.
x x x x [6]
After almost seven years from the time of the execution of the contract and
notwithstanding payment of P3.5 million on the part of respondent-spouses,
petitioner still failed to comply with her obligation as expressly provided in
paragraphs 4, 6, 7, 9 and 10 of the contract. Hence, in a letter[7] dated September 27,
2000, respondent-spouses demanded the return of the amount of P3.5 million within
15 days from receipt of the letter. In reply,[8] petitioner acknowledged receipt of
the P3.5 million and promised to return the same within 120 days. Respondent-
spouses were amenable to the proposal provided an interest of 12% compounded
annually shall be imposed on the P3.5 million.[9] When petitioner still failed to return
the amount despite demand, respondent-spouses were constrained to file a
Complaint[10] for sum of money before the Regional Trial Court (RTC) of Malabon
against herein petitioner as well as Roberto U. Arias (Arias) who allegedly acted as
petitioners agent. The case was docketed as Civil Case No. 3201-MN and raffled off
to Branch 170. In their complaint, respondent-spouses prayed that petitioner and
Arias be ordered to:
1. Pay the principal amount of P3,500,000.00 plus
interest of 12% compounded annually starting
October 1, 1993 or an estimated amount
of P8,558,591.65;
2. Pay the following items of damages:
In its Pre-Trial Order[15] dated June 29, 2001, the RTC noted that the parties
agreed that the principal amount of 3.5 million pesos should be returned to the
[respondent-spouses] by the [petitioner] and the issue remaining [is] whether x x x
[respondent-spouses] are entitled to legal interest thereon, damages and attorneys
fees.[16]
Trial ensued thereafter. After the presentation of the respondent-spouses
evidence, the trial court set the presentation of Arias and petitioners evidence on
September 3, 2003.[17]However, despite several postponements, petitioner and Arias
failed to appear hence they were deemed to have waived the presentation of their
evidence. Consequently, the case was deemed submitted for decision.[18]

a) Moral damages in the amount

Ruling of the Regional Trial Court
of P100,000.00;
b) Actual damages in the amount
of P100,000.00; On May 7, 2004, the RTC rendered its Decision[19] finding respondent-spouses
c) Exemplary damages in the amount entitled to interest but only at the rate of 6% per annum and not 12% as prayed by
of P100,000.00; them.[20] It also found respondent-spouses entitled to attorneys fees as they were
d) [Attorneys] fee in the amount of P50,000.00 compelled to litigate to protect their interest.[21]
plus 20% of recoverable amount from the
[petitioner].
e) [C]ost of suit.[11] The dispositive portion of the RTC Decision reads:

WHEREFORE, premises considered, judgment is hereby

In their Answer with Counterclaim,[12] petitioner and Arias averred that they
are willing to return the principal amount of P3.5 million but without any interest as
the same was not agreed upon. In their Pre-Trial Brief,[13] they reiterated that the only
remaining issue between the parties is the imposition of interest. They argued that
since the Conditional Deed of Sale provided only for the return of the downpayment
in case of breach, they cannot be held liable to pay legal interest as well.[14]
rendered in favor of the [respondent-spouses] and ordering the
[petitioner and Roberto Arias] to jointly and severally:
1. Pay [respondent-spouses] the principal amount
of Three Million Five Hundred Thousand pesos (P3,500,000.00)
with an interest of 6% compounded annually starting October 1,
1993 and attorneys fee in the amount of Fifty Thousand pesos
(P50,000.00) plus 20% of the recoverable amount from the
defendants and cost of the suit.
 The Compulsory Counter Claim is hereby dismissed for
lack of factual evidence.
SO ORDERED.[22]
Ruling of the Court of Appeals
Aggrieved, petitioner and Arias filed their notice of appeal.[23] The CA noted that the
only issue submitted for its resolution is whether it is proper to impose interest for an
obligation that does not involve a loan or forbearance of money in the absence of
stipulation of the parties.[24]
On May 12, 2006, the CA rendered the assailed Decision affirming the
ruling of the RTC finding the imposition of 6% interest proper.[25] However, the
same shall start to run only from September 27, 2000 when respondent-spouses
formally demanded the return of their money and not from October 1993 when the
contract was executed as held by the RTC. The CA also modified the RTCs ruling as
regards the liability of Arias. It held that Arias could not be held solidarily liable with
petitioner because he merely acted as agent of the latter. Moreover, there was no
showing that he expressly bound himself to be personally liable or that he exceeded
the limits of his authority. More importantly, there was even no showing that Arias
was authorized to act as agent of petitioner.[26] Anent the award of attorneys fees, the
CA found the award by the trial court (P50,000.00 plus 20% of the recoverable
amount) excessive[27] and thus reduced the same to P100,000.00.[28]
The dispositive portion of the CA Decision reads:
WHEREFORE, the appealed decision is MODIFIED. The rate of
interest shall be six percent (6%) per annum, computed from
September 27, 2000 until its full payment before finality of the
judgment. If the adjudged principal and the interest (or any part
thereof) remain[s] unpaid thereafter, the interest rate shall be
adjusted to twelve percent (12%) per annum, computed from the
time the judgment becomes final and executory until it is fully
satisfied. The award of attorneys fees is hereby reduced
to P100,000.00. Costs against the [petitioner].
SO ORDERED.[29]
Petitioner moved for reconsideration which was denied in the August 31, 2006
Resolution of the CA.
Hence, this petition raising the sole issue of whether the imposition of interest and
attorneys fees is proper.
Petitioners Arguments
Petitioner insists that she is not bound to pay interest on the P3.5 million because the
Conditional Deed of Sale only provided for the return of the downpayment in case of
failure to comply with her obligations. Petitioner also argues that the award of
attorneys fees in favor of the respondent-spouses is unwarranted because it cannot be
said that the latter won over the former since the CA even sustained her contention
that the imposition of 12% interest compounded annually is totally uncalled for.
Respondent-spouses Arguments
Respondent-spouses aver that it is only fair that interest be imposed on the amount
they paid considering that petitioner failed to return the amount upon demand and
had been using the P3.5 million for her benefit. Moreover, it is undisputed that
petitioner failed to perform her obligations to relocate the house outside the perimeter
of the subject property and to complete the necessary documents. As regards the
attorneys fees, they claim that they are entitled to the same because they were forced
to litigate when petitioner unjustly withheld the amount. Besides, the amount
awarded by the CA is even smaller compared to the filing fees they paid.
 obligation arises out of a loan or a forbearance of money, goods or credits. In other
Our Ruling cases, it shall be six percent (6%).[32] In this case, the parties did not stipulate as to the
applicable rate of interest. The only question remaining therefore is whether the 6%
The petition lacks merit. as provided under Article 2209 of the Civil Code, or 12% under Central Bank
Circular No. 416, is due.
Interest may be
imposed even in the
absence of The contract involved in this case is admittedly not a loan but a Conditional
stipulation in the Deed of Sale. However, the contract provides that the seller (petitioner) must return
contract.
the payment made by the buyer (respondent-spouses) if the conditions are not
fulfilled. There is no question that they have in fact, not been fulfilled as the seller
We sustain the ruling of both the RTC and the CA that it is proper to (petitioner) has admitted this. Notwithstanding demand by the buyer (respondent-
impose interest notwithstanding the absence of stipulation in the contract. Article spouses), the seller (petitioner) has failed to return the money and
2210 of the Civil Code expressly provides that [i]nterest may, in the discretion of the
court, be allowed upon damages awarded for breach of contract. In this case, there is should be considered in default from the time that demand was made on September
no question that petitioner is legally obligated to return the P3.5 million because of 27, 2000.
her failure to fulfill the obligation under the Conditional Deed of Sale, despite
demand. She has in fact admitted that the conditions were not fulfilled and that she Even if the transaction involved a Conditional Deed of Sale, can the
was willing to return the full amount of P3.5 million but has not actually done stipulation governing the return of the money be considered as a forbearance of
so. Petitioner enjoyed the use of the money from the time it was given to her[30] until money which required payment of interest at the rate of 12%? We believe so.
now. Thus, she is already in default of her obligation from the date of demand, i.e.,
on September 27, 2000. In Crismina Garments, Inc. v. Court of Appeals,[33] forbearance was defined
as a contractual obligation of lender or creditor to refrain during a given period of
The interest at the time, from requiring the borrower or debtor to repay a loan or debt then due and
rate of 12% is
payable. This definition describes a loan where a debtor is given a period within
applicable in the
instant case. which to pay a loan or debt. In such case, forbearance of money, goods or credits
will have no distinct definition from a loan. We believe however, that the phrase
forbearance of money, goods or credits is meant to have a separate meaning from a
Anent the interest rate, the general rule is that the applicable rate of interest
loan, otherwise there would have been no need to add that phrase as a loan is already
shall be computed in accordance with the stipulation of the parties.[31] Absent any
sufficiently defined in the Civil Code.[34] Forbearance of money, goods or credits
stipulation, the applicable rate of interest shall be 12% per annum when the
should therefore refer to arrangements other than loan agreements, where a person
acquiesces to the temporary use of his money, goods or credits pending happening of
certain events or fulfillment of certain conditions. In this case, the respondent-
spouses parted with their money even before the conditions were fulfilled. They have
therefore allowed or granted forbearance to the seller (petitioner) to use their money
pending fulfillment of the conditions. They were deprived of the use of their money
for the period pending fulfillment of the conditions and when those conditions were
2.
breached, they are entitled not only to the return of the principal amount paid, but
also to compensation for the use of their money. And the compensation for the use of
their money, absent any stipulation, should be the same rate of legal interest
applicable to a loan since the use or deprivation of funds is similar to a loan.
Petitioners unwarranted withholding of the money which rightfully pertains
to respondent-spouses amounts to forbearance of money which can be considered as
an involuntary loan.Thus, the applicable rate of interest is 12% per
annum. In Eastern Shipping Lines, Inc. v. Court of Appeals,[35]cited in Crismina
Garments, Inc. v. Court of Appeals,[36] the Court suggested the following guidelines:
I. When an obligation, regardless of its source,
i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held liable
for damages. The provisions under Title XVIII on
Damages of the Civil Code govern in determining
the measure of recoverable damages.
3.
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.
When an obligation, not constituting a loan
or forbearance of money, is breached, an interest
on the amount of damages awarded may be
imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages
except when or until the demand can be
established with reasonable
certainty. Accordingly, where the demand is
established with reasonable certainty, the interest
shall begin to run from the time the claim is
made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is
made, the interest shall begin to run only from
the date the judgment of the court is made (at
which time the quantification of damages may
be deemed to have been reasonably
ascertained). The actual base for the computation
of legal interest shall, in any case, be on the
amount finally adjudged.
When the judgment of the court awarding a
sum of money becomes final and executory, the
rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12%
per annum from such finality until its
satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of
credit.[37]
 Eastern Shipping Lines, Inc. v. Court of Appeals[38]and its predecessor amount of P50,000.00 more appropriate in line with the policy enunciated in Article
case, Reformina v. Tongol[39] both involved torts cases and hence, there was no 2208 of the Civil Code that the award of attorneys fees must always be reasonable.
forbearance of money, goods, or credits. Further, the amount claimed (i.e., damages)
could not be established with reasonable certainty at the time the claim was
WHEREFORE, the Petition for Review is DENIED. The May 12, 2006
made. Hence, we arrived at a different ruling in those cases.
Decision of the Court of Appeals in CA-G.R. CV No. 83123
is AFFIRMED with MODIFICATIONS that the rate of interest shall be twelve
Since the date of demand which is September 27, 2000 was satisfactorily
percent (12%) per annum, computed from September 27, 2000 until fully
established during trial, then the interest rate of 12% should be reckoned from said
satisfied. The award of attorneys fees is further reduced to P50,000.00.
date of demand until the principal amount and the interest thereon is fully satisfied.
SO ORDERED.
The award of
attorneys fees is
warranted.
MARIANO C. DEL CASTILLO
Associate Justice
Under Article 2208 of the Civil Code, attorneys fees may be recovered:

WE CONCUR:
xxxx

(2) When the defendants act or omission has compelled the

plaintiff to litigate with third persons or to incur expenses to
RENATO C. CORONA
protect his interest;
Chief Justice
Chairperson
xxxx

(11) In any other case where the court deems it just and
equitable that attorneys fees and expenses of litigation should
be recovered.
TERESITA J. LEONARDO-DE CASTRO LUCAS P. BERSAMIN
Associate Justice Associate Justice
In all cases, the attorneys fees and expenses of litigation must be
reasonable.
Considering the circumstances of the instant case, we find respondent-
spouses entitled to recover attorneys fees. There is no doubt that they were forced to
litigate to protect their interest, i.e., to recover their money. However, we find the

MARTIN S. VILLARAMA, JR.
Associate Justice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the
conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.
RENATO C. CORONA
Chief Justice
G.R. No. 115324 February 19, 2003
PRODUCERS BANK OF THE PHILIPPINES (now FIRST
INTERNATIONAL BANK), petitioner,
vs.
HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court
of Appeals dated June 25, 1991 in CA-G.R. CV No. 11791 and of its
Resolution2 dated May 5, 1994, denying the motion for
reconsideration of said decision filed by petitioner Producers Bank of
the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by
his neighbor and friend Angeles Sanchez to help her friend and
townmate, Col. Arturo Doronilla, in incorporating his business, the
Sterela Marketing and Services ("Sterela" for brevity). Specifically,
Sanchez asked private respondent to deposit in a bank a certain
amount of money in the bank account of Sterela for purposes of its
incorporation. She assured private respondent that he could withdraw
his money from said account within a month’s time. Private
respondent asked Sanchez to bring Doronilla to their house so that
they could discuss Sanchez’s request.3
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain
Estrella Dumagpi, Doronilla’s private secretary, met and discussed the
matter. Thereafter, relying on the assurances and representations of
Sanchez and Doronilla, private respondent issued a check in the
amount of Two Hundred Thousand Pesos (₱200,000.00) in favor of
Sterela. Private respondent instructed his wife, Mrs. Inocencia Vives,
to accompany Doronilla and Sanchez in opening a savings account in
the name of Sterela in the Buendia, Makati branch of Producers Bank
of the Philippines. However, only Sanchez, Mrs. Vives and Dumagpi
went to the bank to deposit the check. They had with them an
authorization letter from Doronilla authorizing Sanchez and her
companions, "in coordination with Mr. Rufo Atienza," to open an
account for Sterela Marketing Services in the amount of ₱200,000.00.
In opening the account, the authorized signatories were Inocencia
Vives and/or Angeles Sanchez. A passbook for Savings Account No.
10-1567 was thereafter issued to Mrs. Vives.4
Subsequently, private respondent learned that Sterela was no longer
holding office in the address previously given to him. Alarmed, he and
his wife went to the Bank to verify if their money was still intact. The
bank manager referred them to Mr. Rufo Atienza, the assistant
manager, who informed them that part of the money in Savings
Account No. 10-1567 had been withdrawn by Doronilla, and that only
₱90,000.00 remained therein. He likewise told them that Mrs. Vives
could not withdraw said remaining amount because it had to answer
for some postdated checks issued by Doronilla. According to Atienza,
after Mrs. Vives and Sanchez opened Savings Account No. 10-1567,
Doronilla opened Current Account No. 10-0320 for Sterela and
authorized the Bank to debit Savings Account No. 10-1567 for the
amounts necessary to cover overdrawings in Current Account No. 10-
0320. In opening said current account, Sterela, through Doronilla,
obtained a loan of ₱175,000.00 from the Bank. To cover payment
thereof, Doronilla issued three postdated checks, all of which were
dishonored. Atienza also said that Doronilla could assign or withdraw
the money in Savings Account No. 10-1567 because he was the sole
proprietor of Sterela.5
Private respondent tried to get in touch with Doronilla through (d) the costs of the suit.
Sanchez. On June 29, 1979, he received a letter from Doronilla,
assuring him that his money was intact and would be returned to him. SO ORDERED.8
On August 13, 1979, Doronilla issued a postdated check for Two
Hundred Twelve Thousand Pesos (₱212,000.00) in favor of private Petitioner appealed the trial court’s decision to the Court of Appeals.
respondent. However, upon presentment thereof by private In its Decision dated June 25, 1991, the appellate court affirmed in
respondent to the drawee bank, the check was dishonored. Doronilla toto the decision of the RTC.9 It likewise denied with finality
requested private respondent to present the same check on petitioner’s motion for reconsideration in its Resolution dated May 5,
September 15, 1979 but when the latter presented the check, it was 1994.10
again dishonored.6
On June 30, 1994, petitioner filed the present petition, arguing that –
Private respondent referred the matter to a lawyer, who made a
written demand upon Doronilla for the return of his client’s money. I.
Doronilla issued another check for ₱212,000.00 in private
respondent’s favor but the check was again dishonored for THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING
insufficiency of funds.7 THAT THE TRANSACTION BETWEEN THE DEFENDANT
DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE
Private respondent instituted an action for recovery of sum of money LOAN AND NOT ACCOMMODATION;
in the Regional Trial Court (RTC) in Pasig, Metro Manila against
Doronilla, Sanchez, Dumagpi and petitioner. The case was docketed II.
as Civil Case No. 44485. He also filed criminal actions against
Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING
passed away on March 16, 1985 while the case was pending before
THAT PETITIONER’S BANK MANAGER, MR. RUFO ATIENZA,
the trial court. On October 3, 1995, the RTC of Pasig, Branch 157,
CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING
promulgated its Decision in Civil Case No. 44485, the dispositive
PETITIONER (Sic. Should be PRIVATE RESPONDENT) AND AS A
portion of which reads:
CONSEQUENCE, THE PETITIONER SHOULD BE HELD LIABLE
UNDER THE PRINCIPLE OF NATURAL JUSTICE;
IN VIEW OF THE FOREGOING, judgment is hereby rendered
sentencing defendants Arturo J. Doronila, Estrella Dumagpi and
III.
Producers Bank of the Philippines to pay plaintiff Franklin Vives jointly
and severally –
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING
THE ENTIRE RECORDS OF THE REGIONAL TRIAL COURT AND
(a) the amount of ₱200,000.00, representing the money
AFFIRMING THE JUDGMENT APPEALED FROM, AS THE
deposited, with interest at the legal rate from the filing of the
FINDINGS OF THE REGIONAL TRIAL COURT WERE BASED ON A
complaint until the same is fully paid;
MISAPPREHENSION OF FACTS;
(b) the sum of ₱50,000.00 for moral damages and a similar
IV.
amount for exemplary damages;
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING
(c) the amount of ₱40,000.00 for attorney’s fees; and
THAT THE CITED DECISION IN SALUDARES VS. MARTINEZ, 29
SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR
ACTS COMMITTED BY AN EMPLOYEE IS APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING
THE DECISION OF THE LOWER COURT THAT HEREIN
PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH
THE OTHER DEFENDANTS FOR THE AMOUNT OF P200,000.00
REPRESENTING THE SAVINGS ACCOUNT DEPOSIT, P50,000.00
FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY
DAMAGES, P40,000.00 FOR ATTORNEY’S FEES AND THE COSTS
OF SUIT.11
Private respondent filed his Comment on September 23, 1994.
Petitioner filed its Reply thereto on September 25, 1995. The Court
then required private respondent to submit a rejoinder to the reply.
However, said rejoinder was filed only on April 21, 1997, due to
petitioner’s delay in furnishing private respondent with copy of the
reply12 and several substitutions of counsel on the part of private
respondent.13 On January 17, 2001, the Court resolved to give due
course to the petition and required the parties to submit their
respective memoranda.14 Petitioner filed its memorandum on April 16,
2001 while private respondent submitted his memorandum on March
22, 2001.
Petitioner contends that the transaction between private respondent
and Doronilla is a simple loan (mutuum) since all the elements of a
mutuum are present: first, what was delivered by private respondent
to Doronilla was money, a consumable thing; and second, the
transaction was onerous as Doronilla was obliged to pay interest, as
evidenced by the check issued by Doronilla in the amount of
₱212,000.00, or ₱12,000 more than what private respondent
deposited in Sterela’s bank account.15 Moreover, the fact that private
respondent sued his good friend Sanchez for his failure to recover his
money from Doronilla shows that the transaction was not merely
gratuitous but "had a business angle" to it. Hence, petitioner argues
that it cannot be held liable for the return of private respondent’s
₱200,000.00 because it is not privy to the transaction between the
latter and Doronilla.16
It argues further that petitioner’s Assistant Manager, Mr. Rufo Atienza,
could not be faulted for allowing Doronilla to withdraw from the
savings account of Sterela since the latter was the sole proprietor of
said company. Petitioner asserts that Doronilla’s May 8, 1979 letter
addressed to the bank, authorizing Mrs. Vives and Sanchez to open a
savings account for Sterela, did not contain any authorization for
these two to withdraw from said account. Hence, the authority to
withdraw therefrom remained exclusively with Doronilla, who was the
sole proprietor of Sterela, and who alone had legal title to the savings
account.17 Petitioner points out that no evidence other than the
testimonies of private respondent and Mrs. Vives was presented
during trial to prove that private respondent deposited his
₱200,000.00 in Sterela’s account for purposes of its
incorporation.18 Hence, petitioner should not be held liable for allowing
Doronilla to withdraw from Sterela’s savings account.1a\^/phi1.net
Petitioner also asserts that the Court of Appeals erred in affirming the
trial court’s decision since the findings of fact therein were not accord
with the evidence presented by petitioner during trial to prove that the
transaction between private respondent and Doronilla was a mutuum,
and that it committed no wrong in allowing Doronilla to withdraw from
Sterela’s savings account.19
Finally, petitioner claims that since there is no wrongful act or
omission on its part, it is not liable for the actual damages suffered by
private respondent, and neither may it be held liable for moral and
exemplary damages as well as attorney’s fees.20
Private respondent, on the other hand, argues that the transaction
between him and Doronilla is not a mutuum but an
accommodation,21 since he did not actually part with the ownership of
his ₱200,000.00 and in fact asked his wife to deposit said amount in
the account of Sterela so that a certification can be issued to the
effect that Sterela had sufficient funds for purposes of its incorporation
but at the same time, he retained some degree of control over his
money through his wife who was made a signatory to the savings
account and in whose possession the savings account passbook was
given.22
He likewise asserts that the trial court did not err in finding that
petitioner, Atienza’s employer, is liable for the return of his money. He
insists that Atienza, petitioner’s assistant manager, connived with
Doronilla in defrauding private respondent since it was Atienza who
facilitated the opening of Sterela’s current account three days after
Mrs. Vives and Sanchez opened a savings account with petitioner for
said company, as well as the approval of the authority to debit
Sterela’s savings account to cover any overdrawings in its current
account.23
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law may
be raised in a petition for review filed with this Court. The Court has
repeatedly held that it is not its function to analyze and weigh all over
again the evidence presented by the parties during trial.24 The Court’s
jurisdiction is in principle limited to reviewing errors of law that might
have been committed by the Court of Appeals.25 Moreover, factual
findings of courts, when adopted and confirmed by the Court of
Appeals, are final and conclusive on this Court unless these findings
are not supported by the evidence on record.26 There is no showing of
any misapprehension of facts on the part of the Court of Appeals in
the case at bar that would require this Court to review and overturn
the factual findings of that court, especially since the conclusions of
fact of the Court of Appeals and the trial court are not only consistent
but are also amply supported by the evidence on record.
No error was committed by the Court of Appeals when it ruled that the
transaction between private respondent and Doronilla was a
commodatum and not a mutuum. A circumspect examination of the
records reveals that the transaction between them was a
commodatum. Article 1933 of the Civil Code distinguishes between
the two kinds of loans in this wise:
By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a
certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the
condition that the same amount of the same kind and quality shall be
paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned,
while in simple loan, ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the
contract is a consumable thing, such as money, the contract would be
a mutuum. However, there are some instances where a commodatum
may have for its object a consumable thing. Article 1936 of the Civil
Code provides:
Consumable goods may be the subject of commodatum if the purpose
of the contract is not the consumption of the object, as when it is
merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition,
or when the intention of the parties is to lend consumable goods and
to have the very same goods returned at the end of the period agreed
upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded
primordial consideration in determining the actual character of a
contract.27 In case of doubt, the contemporaneous and subsequent
acts of the parties shall be considered in such determination.28
As correctly pointed out by both the Court of Appeals and the trial
court, the evidence shows that private respondent agreed to deposit
his money in the savings account of Sterela specifically for the
purpose of making it appear "that said firm had sufficient capitalization
for incorporation, with the promise that the amount shall be returned
within thirty (30) days."29 Private respondent merely "accommodated"
Doronilla by lending his money without consideration, as a favor to his
good friend Sanchez. It was however clear to the parties to the
transaction that the money would not be removed from Sterela’s
savings account and would be returned to private respondent after
thirty (30) days.
Doronilla’s attempts to return to private respondent the amount of
₱200,000.00 which the latter deposited in Sterela’s account together
with an additional ₱12,000.00, allegedly representing interest on the
mutuum, did not convert the transaction from a commodatum into a
mutuum because such was not the intent of the parties and because
the additional ₱12,000.00 corresponds to the fruits of the lending of
the ₱200,000.00. Article 1935 of the Civil Code expressly states that
"[t]he bailee in commodatum acquires the use of the thing loaned but
not its fruits." Hence, it was only proper for Doronilla to remit to private
respondent the interest accruing to the latter’s money deposited with
petitioner.
Neither does the Court agree with petitioner’s contention that it is not
solidarily liable for the return of private respondent’s money because it
was not privy to the transaction between Doronilla and private
respondent. The nature of said transaction, that is, whether it is a
mutuum or a commodatum, has no bearing on the question of
petitioner’s liability for the return of private respondent’s money
because the factual circumstances of the case clearly show that
petitioner, through its employee Mr. Atienza, was partly responsible
for the loss of private respondent’s money and is liable for its
restitution.
Petitioner’s rules for savings deposits written on the passbook it
issued Mrs. Vives on behalf of Sterela for Savings Account No. 10-
1567 expressly states that—
"2. Deposits and withdrawals must be made by the depositor
personally or upon his written authority duly authenticated, and neither
a deposit nor a withdrawal will be permitted except upon the
production of the depositor savings bank book in which will be entered
by the Bank the amount deposited or withdrawn."30
Said rule notwithstanding, Doronilla was permitted by petitioner,
through Atienza, the Assistant Branch Manager for the Buendia
Branch of petitioner, to withdraw therefrom even without presenting
the passbook (which Atienza very well knew was in the possession of
Mrs. Vives), not just once, but several times. Both the Court of
Appeals and the trial court found that Atienza allowed said
withdrawals because he was party to Doronilla’s "scheme" of
defrauding private respondent:
XXX
But the scheme could not have been executed successfully without
the knowledge, help and cooperation of Rufo Atienza, assistant
manager and cashier of the Makati (Buendia) branch of the defendant
bank. Indeed, the evidence indicates that Atienza had not only
facilitated the commission of the fraud but he likewise helped in
devising the means by which it can be done in such manner as to
make it appear that the transaction was in accordance with banking
procedure.
To begin with, the deposit was made in defendant’s Buendia branch
precisely because Atienza was a key officer therein. The records
show that plaintiff had suggested that the ₱200,000.00 be deposited
in his bank, the Manila Banking Corporation, but Doronilla and
Dumagpi insisted that it must be in defendant’s branch in Makati for "it
will be easier for them to get a certification". In fact before he was
introduced to plaintiff, Doronilla had already prepared a letter
addressed to the Buendia branch manager authorizing Angeles B.
Sanchez and company to open a savings account for Sterela in the
amount of ₱200,000.00, as "per coordination with Mr. Rufo Atienza,
Assistant Manager of the Bank x x x" (Exh. 1). This is a clear
manifestation that the other defendants had been in consultation with
Atienza from the inception of the scheme. Significantly, there were
testimonies and admission that Atienza is the brother-in-law of a
certain Romeo Mirasol, a friend and business associate of
Doronilla.1awphi1.nét
Then there is the matter of the ownership of the fund. Because of the
"coordination" between Doronilla and Atienza, the latter knew before
hand that the money deposited did not belong to Doronilla nor to
Sterela. Aside from such foreknowledge, he was explicitly told by
Inocencia Vives that the money belonged to her and her husband and
the deposit was merely to accommodate Doronilla. Atienza even
declared that the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank
records disclose that the only ones empowered to withdraw the same
were Inocencia Vives and Angeles B. Sanchez. In the signature card
pertaining to this account (Exh. J), the authorized signatories were
Inocencia Vives &/or Angeles B. Sanchez. Atienza stated that it is the
usual banking procedure that withdrawals of savings deposits could
only be made by persons whose authorized signatures are in the
signature cards on file with the bank. He, however, said that this
procedure was not followed here because Sterela was owned by
Doronilla. He explained that Doronilla had the full authority to
withdraw by virtue of such ownership. The Court is not inclined to
agree with Atienza. In the first place, he was all the time aware that
the money came from Vives and did not belong to Sterela. He was
also told by Mrs. Vives that they were only accommodating Doronilla
so that a certification can be issued to the effect that Sterela had a
deposit of so much amount to be sued in the incorporation of the firm.
In the second place, the signature of Doronilla was not authorized in
so far as that account is concerned inasmuch as he had not signed
the signature card provided by the bank whenever a deposit is
opened. In the third place, neither Mrs. Vives nor Sanchez had given
Doronilla the authority to withdraw.
Moreover, the transfer of fund was done without the passbook having
been presented. It is an accepted practice that whenever a withdrawal
is made in a savings deposit, the bank requires the presentation of the
passbook. In this case, such recognized practice was dispensed with.
The transfer from the savings account to the current account was
without the submission of the passbook which Atienza had given to
Mrs. Vives. Instead, it was made to appear in a certification signed by
Estrella Dumagpi that a duplicate passbook was issued to Sterela
because the original passbook had been surrendered to the Makati
branch in view of a loan accommodation assigning the savings
account (Exh. C). Atienza, who undoubtedly had a hand in the
execution of this certification, was aware that the contents of the same
are not true. He knew that the passbook was in the hands of Mrs.
Vives for he was the one who gave it to her. Besides, as assistant
manager of the branch and the bank official servicing the savings and
current accounts in question, he also was aware that the original
passbook was never surrendered. He was also cognizant that Estrella
Dumagpi was not among those authorized to withdraw so her
certification had no effect whatsoever.
The circumstance surrounding the opening of the current account also
demonstrate that Atienza’s active participation in the perpetration of
the fraud and deception that caused the loss. The records indicate
that this account was opened three days later after the ₱200,000.00
was deposited. In spite of his disclaimer, the Court believes that
Atienza was mindful and posted regarding the opening of the current
account considering that Doronilla was all the while in "coordination"
with him. That it was he who facilitated the approval of the authority to
debit the savings account to cover any overdrawings in the current
account (Exh. 2) is not hard to comprehend.
Clearly Atienza had committed wrongful acts that had resulted to the
loss subject of this case. x x x.31
Under Article 2180 of the Civil Code, employers shall be held primarily
and solidarily liable for damages caused by their employees acting
within the scope of their assigned tasks. To hold the employer liable
under this provision, it must be shown that an employer-employee
relationship exists, and that the employee was acting within the scope
of his assigned task when the act complained of was
committed.32 Case law in the United States of America has it that a
corporation that entrusts a general duty to its employee is responsible
to the injured party for damages flowing from the employee’s wrongful
act done in the course of his general authority, even though in doing
such act, the employee may have failed in its duty to the employer
and disobeyed the latter’s instructions.33
There is no dispute that Atienza was an employee of petitioner.
Furthermore, petitioner did not deny that Atienza was acting within the
scope of his authority as Assistant Branch Manager when he assisted
Doronilla in withdrawing funds from Sterela’s Savings Account No. 10-
1567, in which account private respondent’s money was deposited,
and in transferring the money withdrawn to Sterela’s Current Account
with petitioner. Atienza’s acts of helping Doronilla, a customer of the
petitioner, were obviously done in furtherance of petitioner’s
interests34 even though in the process, Atienza violated some of
petitioner’s rules such as those stipulated in its savings account
passbook.35 It was established that the transfer of funds from Sterela’s
savings account to its current account could not have been
accomplished by Doronilla without the invaluable assistance of
Atienza, and that it was their connivance which was the cause of
private respondent’s loss.
The foregoing shows that the Court of Appeals correctly held that
under Article 2180 of the Civil Code, petitioner is liable for private
respondent’s loss and is solidarily liable with Doronilla and Dumagpi
for the return of the ₱200,000.00 since it is clear that petitioner failed
to prove that it exercised due diligence to prevent the unauthorized
withdrawals from Sterela’s savings account, and that it was not
negligent in the selection and supervision of Atienza. Accordingly, no
error was committed by the appellate court in the award of actual,
moral and exemplary damages, attorney’s fees and costs of suit to
private respondent.
WHEREFORE, the petition is hereby DENIED. The assailed Decision
and Resolution of the Court of Appeals are AFFIRMED.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing and Austria-Martinez,
JJ., concur.
SECOND DIVISION
[G.R. No. 118375. October 3, 2003]
CELESTINA T. NAGUIAT, petitioner, vs. COURT OF APPEALS
and AURORA QUEAO, respondents.
DECISION
TINGA, J.:
Before us is a Petition for Review on Certiorari under Rule 45,
assailing the decision of the Sixteenth Division of the respondent
Court of Appeals promulgated on 21 December 1994[1], which
affirmed in toto the decision handed down by the Regional Trial Court
(RTC) of Pasay City.[2]
The case arose when on 11 August 1981, private respondent
Aurora Queao (Queao) filed a complaint before the Pasay City RTC
for cancellation of a Real Estate Mortgage she had entered into with
petitioner Celestina Naguiat (Naguiat). The RTC rendered a decision,
declaring the questioned Real Estate Mortgage void, which Naguiat
appealed to the Court of Appeals. After the Court of Appeals upheld
the RTC decision, Naguiat instituted the present petition.
The operative facts follow:
Queao applied with Naguiat for a loan in the amount of Two
Hundred Thousand Pesos (P200,000.00), which Naguiat granted. On
11 August 1980, Naguiat indorsed to Queao Associated Bank Check
No. 090990 (dated 11 August 1980) for the amount of Ninety Five
Thousand Pesos (P95,000.00), which was earlier issued to Naguiat
by the Corporate Resources Financing Corporation. She also issued
her own Filmanbank Check No. 065314, to the order of Queao, also
dated 11 August 1980 and for the amount of Ninety Five Thousand
Pesos (P95,000.00). The proceeds of these checks were to constitute
the loan granted by Naguiat to Queao.[3]
To secure the loan, Queao executed a Deed of Real Estate
Mortgage dated 11 August 1980 in favor of Naguiat, and surrendered
to the latter the owners duplicates of the titles covering the mortgaged
properties.[4] On the same day, the mortgage deed was notarized, and
Queao issued to Naguiat a promissory note for the amount of TWO
HUNDRED THOUSAND PESOS (P200,000.00), with interest at 12%
per annum, payable on 11 September 1980.[5] Queao also issued a
Security Bank and Trust Company check, postdated 11 September
1980, for the amount of TWO HUNDRED THOUSAND PESOS
(P200,000.00) and payable to the order of Naguiat.
Upon presentment on its maturity date, the Security Bank check
was dishonored for insufficiency of funds. On the following day, 12
September 1980, Queao requested Security Bank to stop payment of
her postdated check, but the bank rejected the request pursuant to its
policy not to honor such requests if the check is drawn against
insufficient funds.[6]
On 16 October 1980, Queao received a letter from Naguiats
lawyer, demanding settlement of the loan. Shortly thereafter, Queao
and one Ruby Ruebenfeldt (Ruebenfeldt) met with Naguiat. At the
meeting, Queao told Naguiat that she did not receive the proceeds of
the loan, adding that the checks were retained by Ruebenfeldt, who
purportedly was Naguiats agent.[7]
Naguiat applied for the extrajudicial foreclosure of the mortgage
with the Sheriff of Rizal Province, who then scheduled the foreclosure
sale on 14 August 1981. Three days before the scheduled sale,
Queao filed the case before the Pasay City RTC,[8] seeking the
annulment of the mortgage deed. The trial court eventually stopped
the auction sale.[9]
On 8 March 1991, the RTC rendered judgment, declaring
the Deed of Real Estate Mortgage null and void, and ordering Naguiat
to return to Queao the owners duplicates of her titles to the mortgaged
lots.[10] Naguiat appealed the decision before the Court of Appeals,
making no less than eleven assignments of error. The Court of
Appeals promulgated the decision now assailed before us that
affirmed in toto the RTC decision. Hence, the present petition.
Naguiat questions the findings of facts made by the Court of
Appeals, especially on the issue of whether Queao had actually
received the loan proceeds which were supposed to be covered by
the two checks Naguiat had issued or indorsed. Naguiat claims that
being a notarial instrument or public document, the mortgage deed
enjoys the presumption that the recitals therein are true. Naguiat also
questions the admissibility of various representations and
pronouncements of Ruebenfeldt, invoking the rule on the non-binding
effect of the admissions of third persons.[11]
The resolution of the issues presented before this Court by
Naguiat involves the determination of facts, a function which this
Court does not exercise in an appeal by certiorari. Under Rule 45
which governs appeal by certiorari, only questions of law may be
raised[12] as the Supreme Court is not a trier of facts.[13] The resolution
of factual issues is the function of lower courts, whose findings on
these matters are received with respect and are in fact generally
binding on the Supreme Court.[14] A question of law which the Court
may pass upon must not involve an examination of the probative
value of the evidence presented by the litigants.[15] There is a question
of law in a given case when the doubt or difference arises as to what
the law is on a certain state of facts; there is a question of fact when
the doubt or difference arises as to the truth or the falsehood of
alleged facts.[16]
Surely, there are established exceptions to the rule on the
conclusiveness of the findings of facts of the lower courts.[17] But
Naguiats case does not fall under any of the exceptions. In any event,
both the decisions of the appellate and trial courts are supported by
the evidence on record and the applicable laws.
Against the common finding of the courts below, Naguiat
vigorously insists that Queao received the loan proceeds. Capitalizing
on the status of the mortgage deed as a public document, she cites
the rule that a public document enjoys the presumption of validity and
truthfulness of its contents. The Court of Appeals, however, is correct
in ruling that the presumption of truthfulness of the recitals in a public
document was defeated by the clear and convincing evidence in this
case that pointed to the absence of consideration.[18] This Court has
held that the presumption of truthfulness engendered by notarized
documents is rebuttable, yielding as it does to clear and convincing
evidence to the contrary, as in this case.[19]
On the other hand, absolutely no evidence was submitted by
Naguiat that the checks she issued or endorsed were actually
encashed or deposited. The mere issuance of the checks did not
result in the perfection of the contract of loan. For the Civil Code
provides that the delivery of bills of exchange and mercantile
documents such as checks shall produce the effect of payment only
when they have been cashed.[20] It is only after the checks have
produced the effect of payment that the contract of loan may be
deemed perfected. Art. 1934 of the Civil Code provides:
An accepted promise to deliver something by way of commodatum or
simple loan is binding upon the parties, but the commodatum or
simple loan itself shall not be perfected until the delivery of the object
of the contract.
A loan contract is a real contract, not consensual, and, as such, is
perfected only upon the delivery of the object of the contract. [21] In this
case, the objects of the contract are the loan proceeds which Queao
would enjoy only upon the encashment of the checks signed or
indorsed by Naguiat. If indeed the checks were encashed or
deposited, Naguiat would have certainly presented the corresponding
documentary evidence, such as the returned checks and the pertinent
bank records. Since Naguiat presented no such proof, it follows that
the checks were not encashed or credited to Queaos account.
Naguiat questions the admissibility of the various written
representations made by Ruebenfeldt on the ground that they could
not bind her following the res inter alia acta alteri nocere non
debet rule. The Court of Appeals rejected the argument, holding that
since Ruebenfeldt was an authorized representative or agent of
Naguiat the situation falls under a recognized exception to the
rule.[22] Still, Naguiat insists that Ruebenfeldt was not her agent.
Suffice to say, however, the existence of an agency relationship
between Naguiat and Ruebenfeldt is supported by ample
evidence. As correctly pointed out by the Court of Appeals,
Ruebenfeldt was not a stranger or an unauthorized person. Naguiat
instructed Ruebenfeldt to withhold from Queao the checks she issued
or indorsed to Queao, pending delivery by the latter of additional
collateral. Ruebenfeldt served as agent of Naguiat on the loan
application of Queaos friend, Marilou Farralese, and it was in FIRST DIVISION
connection with that transaction that Queao came to know
Naguiat.[23] It was also Ruebenfeldt who accompanied Queao in her
meeting with Naguiat and on that occasion, on her own and without
Queao asking for it, Reubenfeldt actually drew a check for the sum [G.R. No. 146364. June 3, 2004]
of P220,000.00 payable to Naguiat, to cover for Queaos alleged
liability to Naguiat under the loan agreement.[24]
The Court of Appeals recognized the existence of an agency by COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and
estoppel[25] citing Article 1873 of the Civil Code.[26] Apparently, it EDDIE GUEVARRA, respondents.
considered that at the very least, as a consequence of the interaction
between Naguiat and Ruebenfeldt, Queao got the impression that DECISION
Ruebenfeldt was the agent of Naguiat, but Naguiat did nothing to
correct Queaos impression. In that situation, the rule is clear. One CARPIO, J.:
who clothes another with apparent authority as his agent, and holds
him out to the public as such, cannot be permitted to deny the
authority of such person to act as his agent, to the prejudice of The Case
innocent third parties dealing with such person in good faith, and in
the honest belief that he is what he appears to be.[27] The Court of
Appeals is correct in invoking the said rule on agency by estoppel. Before us is a petition for review[1] of the 21 June 2000
Decision[2] and 14 December 2000 Resolution of the Court of Appeals
More fundamentally, whatever was the true relationship between in CA-G.R. SP No. 43129. The Court of Appeals set aside the 11
Naguiat and Ruebenfeldt is irrelevant in the face of the fact that the November 1996 decision[3] of the Regional Trial Court of Quezon City,
checks issued or indorsed to Queao were never encashed or Branch 81,[4] affirming the 15 December 1995 decision[5] of the
deposited to her account of Naguiat. Metropolitan Trial Court of Quezon City, Branch 31.[6]
All told, we find no compelling reason to disturb the finding of the
courts a quo that the lender did not remit and the borrower did not
receive the proceeds of the loan. That being the case, it follows that The Antecedents
the mortgage which is supposed to secure the loan is null and void.
The consideration of the mortgage contract is the same as that of the
principal contract from which it receives life, and without which it In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a
cannot exist as an independent contract.[28] A mortgage contract being certain Pedro Perez for the rights over a 250-square meter lot in
a mere accessory contract, its validity would depend on the validity of Barrio Payatas, Quezon City. Pajuyo then constructed a house made
the loan secured by it.[29] of light materials on the lot. Pajuyo and his family lived in the house
from 1979 to 7 December 1985.
WHEREFORE, the petition is denied and the assailed decision is
affirmed. Costs against petitioner. On 8 December 1985, Pajuyo and private respondent Eddie
Guevarra (Guevarra) executed a Kasunduan or agreement. Pajuyo,
SO ORDERED. as owner of the house, allowed Guevarra to live in the house for free
provided Guevarra would maintain the cleanliness and orderliness of
Bellosillo, (Chairman), Quisumbing, Austria-Martinez, and Callejo,
Sr., JJ., concur.
the house. Guevarra promised that he would voluntarily vacate the
premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of the
house and demanded that Guevarra vacate the house. Guevarra
refused.
Pajuyo filed an ejectment case against Guevarra with the
Metropolitan Trial Court of Quezon City, Branch 31 (MTC).
In his Answer, Guevarra claimed that Pajuyo had no valid title or
right of possession over the lot where the house stands because the
lot is within the 150 hectares set aside by Proclamation No. 137 for
socialized housing. Guevarra pointed out that from December 1985 to
September 1994, Pajuyo did not show up or communicate with him.
Guevarra insisted that neither he nor Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of
Pajuyo. The dispositive portion of the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the
plaintiff and against defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or
any other person or persons claiming any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS
(P300.00) monthly as reasonable compensation for the
use of the premises starting from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of
attorneys fees; and
D) pay the cost of suit.
SO ORDERED. [7]
Aggrieved, Guevarra appealed to the Regional Trial Court of
Quezon City, Branch 81 (RTC).
On 11 November 1996, the RTC affirmed the MTC decision. The
dispositive portion of the RTC decision reads:
WHEREFORE, premises considered, the Court finds no reversible error in
the decision appealed from, being in accord with the law and evidence
presented, and the same is hereby affirmed en toto.
SO ORDERED.[8]
Guevarra received the RTC decision on 29 November
1996. Guevarra had only until 14 December 1996 to file his appeal
with the Court of Appeals. Instead of filing his appeal with the Court of
Appeals, Guevarra filed with the Supreme Court a Motion for
Extension of Time to File Appeal by Certiorari Based on Rule 42
(motion for extension). Guevarra theorized that his appeal raised pure
questions of law. The Receiving Clerk of the Supreme Court received
the motion for extension on 13 December 1996 or one day before the
right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with the
Supreme Court.
On 8 January 1997, the First Division of the Supreme Court
issued a Resolution[9] referring the motion for extension to the Court of
Appeals which has concurrent jurisdiction over the case. The case
presented no special and important matter for the Supreme Court to
take cognizance of at the first instance.
On 28 January 1997, the Thirteenth Division of the Court of
Appeals issued a Resolution[10] granting the motion for extension
conditioned on the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to
comment on Guevaras petition for review. On 11 April 1997, Pajuyo
filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision
reversing the RTC decision. The dispositive portion of the decision
reads:
WHEREFORE, premises considered, the assailed Decision of the court a
quo in Civil Case No. Q-96-26943 is REVERSED and SET ASIDE; and it
is hereby declared that the ejectment case filed against defendant-appellant is
without factual and legal basis.
SO ORDERED.[11]
 Pajuyo filed a motion for reconsideration of the decision. Pajuyo
pointed out that the Court of Appeals should have dismissed outright
Guevarras petition for review because it was filed out of
time. Moreover, it was Guevarras counsel and not Guevarra who
signed the certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution
denying Pajuyos motion for reconsideration. The dispositive portion of
the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is
hereby DENIED. No costs.
SO ORDERED.[12]
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo
and Guevarra is the house and not the lot. Pajuyo is the owner of the
house, and he allowed Guevarra to use the house only by tolerance.
Thus, Guevarras refusal to vacate the house on Pajuyos demand
made Guevarras continued possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord
and tenant relationship between Pajuyo and Guevarra. The terms of
the Kasunduan bound Guevarra to return possession of the house on
demand.
The RTC rejected Guevarras claim of a better right under
Proclamation No. 137, the Revised National Government Center
Housing Project Code of Policies and other pertinent laws. In an
ejectment suit, the RTC has no power to decide Guevarras rights
under these laws. The RTC declared that in an ejectment case, the
only issue for resolution is material or physical possession, not
ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are
squatters. Pajuyo and Guevarra illegally occupied the contested lot
which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was
also a squatter. Perez had no right or title over the lot because it is
public land. The assignment of rights between Perez and Pajuyo, and
the Kasunduan between Pajuyo and Guevarra, did not have any legal
effect. Pajuyo and Guevarra are in pari delicto or in equal fault. The
court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which
held that the Kasunduan between Pajuyo and Guevarra created a
legal tie akin to that of a landlord and tenant relationship. The Court of
Appeals ruled that the Kasunduan is not a lease contract but
a commodatum because the agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim
the property, the appellate court held that Guevarra has a better right
over the property under Proclamation No. 137.President Corazon C.
Aquino (President Aquino) issued Proclamation No. 137 on 7
September 1987. At that time, Guevarra was in physical possession
of the property. Under Article VI of the Code of Policies Beneficiary
Selection and Disposition of Homelots and Structures in the National
Housing Project (the Code), the actual occupant or caretaker of the lot
shall have first priority as beneficiary of the project. The Court of
Appeals concluded that Guevarra is first in the hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate court
debunked Pajuyos claim that Guevarra filed his motion for extension
beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for
extension filed before the Supreme Court was stamped 13 December
1996 at 4:09 PM by the Supreme Courts Receiving Clerk. The Court
of Appeals concluded that the motion for extension bore a date,
contrary to Pajuyos claim that the motion for extension was
undated. Guevarra filed the motion for extension on time on 13
December 1996 since he filed the motion one day before the
expiration of the reglementary period on 14 December 1996. Thus,
the motion for extension properly complied with the condition imposed
by the Court of Appeals in its 28 January 1997 Resolution. The Court
of Appeals explained that the thirty-day extension to file the petition
for review was deemed granted because of such compliance.
The Court of Appeals rejected Pajuyos argument that the
appellate court should have dismissed the petition for review because
it was Guevarras counsel and not Guevarra who signed the
certification against forum-shopping. The Court of Appeals pointed out
that Pajuyo did not raise this issue in his Comment. The Court of
Appeals held that Pajuyo could not now seek the dismissal of the
case after he had extensively argued on the merits of the case. This
technicality, the appellate court opined, was clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS
AUTHORITY AND DISCRETION TANTAMOUNT TO LACK OF
JURISDICTION:
1) in GRANTING, instead of denying, Private
Respondents Motion for an Extension of thirty
days to file petition for review at the time when
there was no more period to extend as the
decision of the Regional Trial Court had already
become final and executory.
2) in giving due course, instead of dismissing,
private respondents Petition for Review even
though the certification against forum-shopping
was signed only by counsel instead of by
petitioner himself.
3) in ruling that the Kasunduan voluntarily entered
into by the parties was in fact a commodatum,
instead of a Contract of Lease as found by the
Metropolitan Trial Court and in holding that the
ejectment case filed against defendant-appellant
is without legal and factual basis.
4) in reversing and setting aside the Decision of the
Regional Trial Court in Civil Case No. Q-96-
26943 and in holding that the parties are in pari
delicto being both squatters, therefore, illegal
occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on
the so-called Code of Policies of the National
Government Center Housing Project instead of
deciding the same under the Kasunduan
voluntarily executed by the parties, the terms
and conditions of which are the laws between
themselves.[13]
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However,
we find merit in the substantive issues Pajuyo is submitting for
resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed
outright Guevarras petition for review because the RTC decision had
already become final and executory when the appellate court acted on
Guevarras motion for extension to file the petition. Pajuyo points out
that Guevarra had only one day before the expiry of his period to
appeal the RTC decision.Instead of filing the petition for review with
the Court of Appeals, Guevarra filed with this Court an undated
motion for extension of 30 days to file a petition for review. This Court
merely referred the motion to the Court of Appeals. Pajuyo believes
that the filing of the motion for extension with this Court did not toll the
running of the period to perfect the appeal. Hence, when the Court of
Appeals received the motion, the period to appeal had already
expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their
appellate jurisdiction are appealable to the Court of Appeals by
petition for review in cases involving questions of fact or mixed
questions of fact and law.[14] Decisions of the regional trial courts
involving pure questions of law are appealable directly to this Court by
petition for review.[15] These modes of appeal are now embodied in
Section 2, Rule 41 of the 1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved
only questions of law. Guevarra thus filed his motion for extension to
file petition for review before this Court on 14 December 1996. On 3
January 1997, Guevarra then filed his petition for review with this
Court. A perusal of Guevarras petition for review gives the impression
that the issues he raised were pure questions of law. There is a
question of law when the doubt or difference is on what the law is on a
certain state of facts.[16] There is a question of fact when the doubt or
difference is on the truth or falsity of the facts alleged.[17]
In his petition for review before this Court, Guevarra no longer
disputed the facts. Guevarras petition for review raised these
questions: (1) Do ejectment cases pertain only to possession of a
structure, and not the lot on which the structure stands? (2) Does a
suit by a squatter against a fellow squatter constitute a valid case for
ejectment? (3) Should a Presidential Proclamation governing the lot
on which a squatters structure stands be considered in an ejectment
suit filed by the owner of the structure?
These questions call for the evaluation of the rights of the parties
under the law on ejectment and the Presidential Proclamation. At first
glance, the questions Guevarra raised appeared purely
legal. However, some factual questions still have to be resolved
because they have a bearing on the legal questions raised in the
petition for review. These factual matters refer to the metes and
bounds of the disputed property and the application of Guevarra as
beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time
to file a petition for review. In Lacsamana v. Second Special Cases
Division of the Intermediate Appellate Court,[18] we declared that
the Court of Appeals could grant extension of time in appeals by
petition for review. In Liboro v. Court of Appeals,[19] we clarified that
the prohibition against granting an extension of time applies only in a
case where ordinary appeal is perfected by a mere notice of
appeal. The prohibition does not apply in a petition for review where
the pleading needs verification. A petition for review, unlike an
ordinary appeal, requires preparation and research to present a
persuasive position.[20] The drafting of the petition for review entails
more time and effort than filing a notice of appeal.[21] Hence, the Court
of Appeals may allow an extension of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue
v. Court of Appeals,[22] we held that Liboros clarification
of Lacsamana is consistent with the Revised Internal Rules of the
Court of Appeals and Supreme Court Circular No. 1-91. They all allow
an extension of time for filing petitions for review with the Court of
Appeals. The extension, however, should be limited to only fifteen
days save in exceptionally meritorious cases where the Court of
Appeals may grant a longer period.
A judgment becomes final and executory by operation of law.
Finality of judgment becomes a fact on the lapse of the reglementary
period to appeal if no appeal is perfected.[23] The RTC decision could
not have gained finality because the Court of Appeals granted the 30-
day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion
when it approved Guevarras motion for extension. The Court of
Appeals gave due course to the motion for extension because it
complied with the condition set by the appellate court in its resolution
dated 28 January 1997. The resolution stated that the Court of
Appeals would only give due course to the motion for extension if filed
on time. The motion for extension met this condition.
The material dates to consider in determining the timeliness of
the filing of the motion for extension are (1) the date of receipt of the
judgment or final order or resolution subject of the petition, and (2) the
date of filing of the motion for extension.[24] It is the date of the filing of
the motion or pleading, and not the date of execution, that determines
the timeliness of the filing of that motion or pleading. Thus, even if the
motion for extension bears no date, the date of filing stamped on it is
the reckoning point for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the
RTC decision. Guevarra filed his motion for extension before this
Court on 13 December 1996, the date stamped by this Courts
Receiving Clerk on the motion for extension. Clearly, Guevarra filed
the motion for extension exactly one day before the lapse of the
reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed
Guevarras appeal on technical grounds, Pajuyo did not ask the
appellate court to deny the motion for extension and dismiss the
petition for review at the earliest opportunity. Instead, Pajuyo
vigorously discussed the merits of the case. It was only when the
Court of Appeals ruled in Guevarras favor that Pajuyo raised the
procedural issues against Guevarras petition for review.
A party who, after voluntarily submitting a dispute for resolution,
receives an adverse decision on the merits, is estopped from
attacking the jurisdiction of the court.[25] Estoppel sets in not because
the judgment of the court is a valid and conclusive adjudication, but
because the practice of attacking the courts jurisdiction after
voluntarily submitting to it is against public policy.[26]
In his Comment before the Court of Appeals, Pajuyo also failed to
discuss Guevarras failure to sign the certification against forum
shopping. Instead, Pajuyo harped on Guevarras counsel signing the
verification, claiming that the counsels verification is insufficient since
it is based only on mere information.
A partys failure to sign the certification against forum shopping is
different from the partys failure to sign personally the verification. The
certificate of non-forum shopping must be signed by the party, and not
by counsel.[27] The certification of counsel renders the petition
defective.[28]
On the other hand, the requirement on verification of a pleading is
a formal and not a jurisdictional requisite.[29] It is intended simply to
secure an assurance that what are alleged in the pleading are true
and correct and not the product of the imagination or a matter of
speculation, and that the pleading is filed in good faith.[30] The party
need not sign the verification. A partys representative, lawyer or any
person who personally knows the truth of the facts alleged in the
pleading may sign the verification.[31]
We agree with the Court of Appeals that the issue on the
certificate against forum shopping was merely an afterthought. Pajuyo
did not call the Court of Appeals attention to this defect at the early
stage of the proceedings. Pajuyo raised this procedural issue too late
in the proceedings.
Absence of Title over the Disputed Property will not Divest the
Courts of Jurisdiction to Resolve the Issue of Possession
Settled is the rule that the defendants claim of ownership of the
disputed property will not divest the inferior court of its jurisdiction over
the ejectment case.[32] Even if the pleadings raise the issue of
ownership, the court may pass on such issue to determine only the
question of possession, especially if the ownership is inseparably
linked with the possession.[33] The adjudication on the issue of
ownership is only provisional and will not bar an action between the
same parties involving title to the land.[34] This doctrine is a necessary
consequence of the nature of the two summary actions of ejectment,
forcible entry and unlawful detainer, where the only issue for
adjudication is the physical or material possession over the real
property.[35]
In this case, what Guevarra raised before the courts was that he
and Pajuyo are not the owners of the contested property and that they
are mere squatters. Will the defense that the parties to the ejectment
case are not the owners of the disputed lot allow the courts to
renounce their jurisdiction over the case? The Court of Appeals
believed so and held that it would just leave the parties where they
are since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at
issue in an action for recovery of possession. The parties cannot
present evidence to prove ownership or right to legal possession
except to prove the nature of the possession when necessary to
resolve the issue of physical possession.[36] The same is true when
the defendant asserts the absence of title over the property. The
absence of title over the contested lot is not a ground for the courts to
withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment
proceedings is - who is entitled to the physical possession of the
premises, that is, to the possession de facto and not to the
possession de jure.[37] It does not even matter if a partys title to the
property is questionable,[38] or when both parties intruded into public
land and their applications to own the land have yet to be approved by
the proper government agency.[39] Regardless of the actual condition
of the title to the property, the party in peaceable quiet possession
shall not be thrown out by a strong hand, violence or terror.[40] Neither
is the unlawful withholding of property allowed. Courts will always
uphold respect for prior possession.
 Thus, a party who can prove prior possession can recover such
possession even against the owner himself.[41] Whatever may be the
character of his possession, if he has in his favor prior possession in
time, he has the security that entitles him to remain on the property
until a person with a better right lawfully ejects him.[42] To repeat, the
only issue that the court has to settle in an ejectment suit is the right
to physical possession.
In Pitargue v. Sorilla,[43] the government owned the land in
dispute. The government did not authorize either the plaintiff or the
defendant in the case of forcible entry case to occupy the land. The
plaintiff had prior possession and had already introduced
improvements on the public land. The plaintiff had a pending
application for the land with the Bureau of Lands when the defendant
ousted him from possession. The plaintiff filed the action of forcible
entry against the defendant. The government was not a party in the
case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle
the issue of possession because while the application of the plaintiff
was still pending, title remained with the government, and the Bureau
of Public Lands had jurisdiction over the case. We disagreed with the
defendant. We ruled that courts have jurisdiction to entertain
ejectment suits even before the resolution of the application. The
plaintiff, by priority of his application and of his entry, acquired prior
physical possession over the public land applied for as against other
private claimants. That prior physical possession enjoys legal
protection against other private claimants because only a court can
take away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the defendant
in Pitargue[44] as squatters, strictly speaking, their entry into the
disputed land was illegal. Both the plaintiff and defendant entered the
public land without the owners permission. Title to the land remained
with the government because it had not awarded to anyone ownership
of the contested public land. Both the plaintiff and the defendant were
in effect squatting on government property. Yet, we upheld the courts
jurisdiction to resolve the issue of possession even if the plaintiff and
the defendant in the ejectment case did not have any title over the
contested land.
Courts must not abdicate their jurisdiction to resolve the issue of
physical possession because of the public need to preserve the basic
policy behind the summary actions of forcible entry and unlawful
detainer. The underlying philosophy behind ejectment suits is to
prevent breach of the peace and criminal disorder and to compel the
party out of possession to respect and resort to the law alone to
obtain what he claims is his.[45] The party deprived of possession must
not take the law into his own hands.[46] Ejectment proceedings are
summary in nature so the authorities can settle speedily actions to
recover possession because of the overriding need to quell social
disturbances.[47]
We further explained in Pitargue the greater interest that is at
stake in actions for recovery of possession. We made the following
pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to
take cognizance of possessory actions involving these public lands before
final award is made by the Lands Department, and before title is given any of
the conflicting claimants? It is one of utmost importance, as there are public
lands everywhere and there are thousands of settlers, especially in newly
opened regions. It also involves a matter of policy, as it requires the
determination of the respective authorities and functions of two coordinate
branches of the Government in connection with public land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in
the old, which was in force in this country before the American occupation,
or in the new, we have a possessory action, the aim and purpose of which is
the recovery of the physical possession of real property, irrespective of the
question as to who has the title thereto. Under the Spanish Civil Code we had
the accion interdictal, a summary proceeding which could be brought within
one year from dispossession (Roman Catholic Bishop of Cebu vs. Mangaron,
6 Phil. 286, 291); and as early as October 1, 1901, upon the enactment of the
Code of Civil Procedure (Act No. 190 of the Philippine Commission) we
implanted the common law action of forcible entry (section 80 of Act No.
190), the object of which has been stated by this Court to be to prevent
breaches of the peace and criminal disorder which would ensue from the
withdrawal of the remedy, and the reasonable hope such withdrawal would
create that some advantage must accrue to those persons who, believing
themselves entitled to the possession of property, resort to force to gain
possession rather than to some appropriate action in the court to assert
their claims. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.)
So before the enactment of the first Public Land Act (Act No. 926) the action
of forcible entry was already available in the courts of the country. So the
question to be resolved is, Did the Legislature intend, when it vested the
power and authority to alienate and dispose of the public lands in the Lands
Department, to exclude the courts from entertaining the possessory action of
forcible entry between rival claimants or occupants of any land before award
thereof to any of the parties? Did Congress intend that the lands applied for,
or all public lands for that matter, be removed from the jurisdiction of the
judicial Branch of the Government, so that any troubles arising therefrom, or
any breaches of the peace or disorders caused by rival claimants, could be
inquired into only by the Lands Department to the exclusion of the courts?
The answer to this question seems to us evident. The Lands Department does
not have the means to police public lands; neither does it have the means to
prevent disorders arising therefrom, or contain breaches of the peace among
settlers; or to pass promptly upon conflicts of possession. Then its power is
clearly limited to disposition and alienation, and while it may decide
conflicts of possession in order to make proper award, the settlement of
conflicts of possession which is recognized in the court herein has another
ultimate purpose, i.e., the protection of actual possessors and occupants
with a view to the prevention of breaches of the peace. The power to
dispose and alienate could not have been intended to include the power to
prevent or settle disorders or breaches of the peace among rival settlers or
claimants prior to the final award. As to this, therefore, the corresponding
branches of the Government must continue to exercise power and jurisdiction
within the limits of their respective functions. The vesting of the Lands
Department with authority to administer, dispose, and alienate public
lands, therefore, must not be understood as depriving the other branches of
the Government of the exercise of the respective functions or powers
thereon, such as the authority to stop disorders and quell breaches of the
peace by the police, the authority on the part of the courts to take
jurisdiction over possessory actions arising therefrom not involving,
directly or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in American courts to
the effect that courts have no jurisdiction to determine the rights of claimants
to public lands, and that until the disposition of the land has passed from the
control of the Federal Government, the courts will not interfere with the
administration of matters concerning the same. (50 C. J. 1093-1094.) We
have no quarrel with this principle. The determination of the respective rights
of rival claimants to public lands is different from the determination of who
has the actual physical possession or occupation with a view to protecting the
same and preventing disorder and breaches of the peace. A judgment of the
court ordering restitution of the possession of a parcel of land to the actual
occupant, who has been deprived thereof by another through the use of force
or in any other illegal manner, can never be prejudicial interference with the
disposition or alienation of public lands. On the other hand, if courts were
deprived of jurisdiction of cases involving conflicts of possession, that
threat of judicial action against breaches of the peace committed on public
lands would be eliminated, and a state of lawlessness would probably be
produced between applicants, occupants or squatters, where force or might,
not right or justice, would rule.
It must be borne in mind that the action that would be used to solve conflicts
of possession between rivals or conflicting applicants or claimants would be
no other than that of forcible entry. This action, both in England and the
United States and in our jurisdiction, is a summary and expeditious remedy
whereby one in peaceful and quiet possession may recover the possession of
which he has been deprived by a stronger hand, by violence or terror; its
ultimate object being to prevent breach of the peace and criminal disorder.
(Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of
the remedy is mere possession as a fact, of physical possession, not a legal
possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or right to
possession is never in issue in an action of forcible entry; as a matter of fact,
evidence thereof is expressly banned, except to prove the nature of the
possession. (Second 4, Rule 72, Rules of Court.) With this nature of the
action in mind, by no stretch of the imagination can conclusion be arrived at
that the use of the remedy in the courts of justice would constitute an
interference with the alienation, disposition, and control of public lands. To
limit ourselves to the case at bar can it be pretended at all that its result
would in any way interfere with the manner of the alienation or disposition of
the land contested? On the contrary, it would facilitate adjudication, for the
question of priority of possession having been decided in a final manner by
the courts, said question need no longer waste the time of the land officers
making the adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari
delicto to this case.
Articles 1411 and 1412 of the Civil Code[48] embody the principle
of pari delicto. We explained the principle of pari delicto in these
words:
The rule of pari delicto is expressed in the maxims ex dolo malo non eritur
actio and in pari delicto potior est conditio defedentis. The law will not aid
either party to an illegal agreement. It leaves the parties where it finds
them.[49]
The application of the pari delicto principle is not absolute, as
there are exceptions to its application. One of these exceptions is
where the application of the pari delicto rule would violate well-
established public policy.[50]
In Drilon v. Gaurana,[51] we reiterated the basic policy behind the
summary actions of forcible entry and unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is
that, regardless of the actual condition of the title to the property, the party in
peaceable quiet possession shall not be turned out by strong hand, violence or
terror. In affording this remedy of restitution the object of the statute is to
prevent breaches of the peace and criminal disorder which would ensue from
the withdrawal of the remedy, and the reasonable hope such withdrawal
would create that some advantage must accrue to those persons who,
believing themselves entitled to the possession of property, resort to force to
gain possession rather than to some appropriate action in the courts to assert
their claims. This is the philosophy at the foundation of all these actions of
forcible entry and detainer which are designed to compel the party out of
possession to respect and resort to the law alone to obtain what he claims is
his.[52]
Clearly, the application of the principle of pari delicto to a case of
ejectment between squatters is fraught with danger. To shut out relief
to squatters on the ground of pari delicto would openly invite mayhem
and lawlessness. A squatter would oust another squatter from
possession of the lot that the latter had illegally occupied, emboldened
by the knowledge that the courts would leave them where they are.
Nothing would then stand in the way of the ousted squatter from re-
claiming his prior possession at all cost.
Petty warfare over possession of properties is precisely what
ejectment cases or actions for recovery of possession seek to
prevent.[53] Even the owner who has title over the disputed property
cannot take the law into his own hands to regain possession of his
property. The owner must go to court.
Courts must resolve the issue of possession even if the parties to
the ejectment suit are squatters. The determination of priority and
superiority of possession is a serious and urgent matter that cannot
be left to the squatters to decide. To do so would make squatters
receive better treatment under the law. The law restrains property
owners from taking the law into their own hands. However, the
principle of pari delicto as applied by the Court of Appeals would give
squatters free rein to dispossess fellow squatters or violently retake
possession of properties usurped from them. Courts should not leave
squatters to their own devices in cases involving recovery of
possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple
case of ejectment. The Court of Appeals refused to rule on the issue
of physical possession. Nevertheless, the appellate court held that the
pivotal issue in this case is who between Pajuyo and Guevarra has
the priority right as beneficiary of the contested land under
Proclamation No. 137.[54] According to the Court of Appeals, Guevarra
enjoys preferential right under Proclamation No. 137 because Article
VI of the Code declares that the actual occupant or caretaker is the
one qualified to apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the
contested lot is part of a relocation site under Proclamation No.
137. Proclamation No. 137 laid down the metes and bounds of the
land that it declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the land
specified by Proclamation No. 137. Guevarra had the burden to prove
that the disputed lot is within the coverage of Proclamation No.
137. He failed to do so.
Second. The Court of Appeals should not have given credence
to Guevarras unsubstantiated claim that he is the beneficiary of
Proclamation No. 137. Guevarra merely alleged that in the survey the
project administrator conducted, he and not Pajuyo appeared as the
actual occupant of the lot.
 There is no proof that Guevarra actually availed of the benefits of
Proclamation No. 137. Pajuyo allowed Guevarra to occupy the
disputed property in 1985. President Aquino signed Proclamation No.
137 into law on 11 March 1986. Pajuyo made his earliest demand for
Guevarra to vacate the property in September 1994.
During the time that Guevarra temporarily held the property up to
the time that Proclamation No. 137 allegedly segregated the disputed
lot, Guevarra never applied as beneficiary of Proclamation No. 137.
Even when Guevarra already knew that Pajuyo was reclaiming
possession of the property, Guevarra did not take any step to comply
with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage
of Proclamation No. 137 and Guevarra has a pending application over
the lot, courts should still assume jurisdiction and resolve the issue of
possession. However, the jurisdiction of the courts would be limited to
the issue of physical possession only.
In Pitargue,[55] we ruled that courts have jurisdiction over
possessory actions involving public land to determine the issue of
physical possession. The determination of the respective rights of rival
claimants to public land is, however, distinct from the determination of
who has the actual physical possession or who has a better right of
physical possession.[56] The administrative disposition and alienation
of public lands should be threshed out in the proper government
agency.[57]
The Court of Appeals determination of Pajuyo and Guevarras
rights under Proclamation No. 137 was premature. Pajuyo and
Guevarra were at most merely potential beneficiaries of the law.
Courts should not preempt the decision of the administrative agency
mandated by law to determine the qualifications of applicants for the
acquisition of public lands. Instead, courts should expeditiously
resolve the issue of physical possession in ejectment cases to prevent
disorder and breaches of peace.[58]
Pajuyo is Entitled to Physical Possession of the Disputed
Property
Guevarra does not dispute Pajuyos prior possession of the lot
and ownership of the house built on it. Guevarra expressly admitted
the existence and due execution of
the Kasunduan.The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas,
Quezon City, ay nagbibigay pahintulot kay G. Eddie Guevarra, na
pansamantalang manirahan sa nasabing bahay at lote ng walang
bayad.Kaugnay nito, kailangang panatilihin nila ang kalinisan at kaayusan ng
bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng
walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in
the house and lot free of rent, but Guevarra was under obligation to
maintain the premises in good condition. Guevarra promised to vacate
the premises on Pajuyos demand but Guevarra broke his promise and
refused to heed Pajuyos demand to vacate.
These facts make out a case for unlawful detainer. Unlawful
detainer involves the withholding by a person from another of the
possession of real property to which the latter is entitled after the
expiration or termination of the formers right to hold possession under
a contract, express or implied.[59]
Where the plaintiff allows the defendant to use his property by
tolerance without any contract, the defendant is necessarily bound by
an implied promise that he will vacate on demand, failing which, an
action for unlawful detainer will lie.[60] The defendants refusal to
comply with the demand makes his continued possession of the
property unlawful.[61] The status of the defendant in such a case is
similar to that of a lessee or tenant whose term of lease has expired
but whose occupancy continues by tolerance of the owner.[62]
This principle should apply with greater force in cases where a
contract embodies the permission or tolerance to use the
property. The Kasunduan expressly articulated Pajuyos forbearance.
Pajuyo did not require Guevarra to pay any rent but only to maintain
the house and lot in good condition. Guevarra expressly vowed in
the Kasunduan that he would vacate the property on demand.
Guevarras refusal to comply with Pajuyos demand to vacate made
Guevarras continued possession of the property unlawful.
We do not subscribe to the Court of Appeals theory that
the Kasunduan is one of commodatum.
 In a contract of commodatum, one of the parties delivers to
another something not consumable so that the latter may use the
same for a certain time and return it.[63] An essential feature
of commodatum is that it is gratuitous. Another feature
of commodatum is that the use of the thing belonging to another is for
a certain period.[64] Thus, the bailor cannot demand the return of the
thing loaned until after expiration of the period stipulated, or after
accomplishment of the use for which
the commodatum is constituted.[65] If the bailor should have urgent
need of the thing, he may demand its return for temporary use. [66] If
the use of the thing is merely tolerated by the bailor, he can demand
the return of the thing at will, in which case the contractual relation is
called a precarium.[67] Under the Civil Code, precarium is a kind
of commodatum.[68]
The Kasunduan reveals that the accommodation accorded by
Pajuyo to Guevarra was not essentially gratuitous. While
the Kasunduan did not require Guevarra to pay rent, it obligated him
to maintain the property in good condition. The imposition of this
obligation makes the Kasunduan a contract different from
a commodatum. The effects of the Kasunduan are also different from
that of a commodatum. Case law on ejectment has treated
relationship based on tolerance as one that is akin to a landlord-
tenant relationship where the withdrawal of permission would result in
the termination of the lease.[69] The tenants withholding of the property
would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and
Guevarra is one of commodatum, Guevarra as bailee would still have
the duty to turn over possession of the property to Pajuyo, the
bailor. The obligation to deliver or to return the thing received attaches
to contracts for safekeeping, or contracts of commission,
administration and commodatum.[70] These contracts certainly involve
the obligation to deliver or return the thing received.[71]
Guevarra turned his back on the Kasunduan on the sole ground
that like him, Pajuyo is also a squatter. Squatters, Guevarra pointed
out, cannot enter into a contract involving the land they illegally
occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between
squatters. Guevarra freely entered into the Kasunduan. Guevarra
cannot now impugn the Kasunduan after he had benefited from
it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who
between Pajuyo and Guevarra has a right to physical possession of
the contested property. The Kasunduan is the undeniable evidence of
Guevarras recognition of Pajuyos better right of physical possession.
Guevarra is clearly a possessor in bad faith. The absence of a
contract would not yield a different result, as there would still be an
implied promise to vacate.
Guevarra contends that there is a pernicious evil that is sought to
be avoided, and that is allowing an absentee squatter who (sic)
makes (sic) a profit out of his illegal act. [72] Guevarra bases his
argument on the preferential right given to the actual occupant or
caretaker under Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra
because Guevarra stayed in the property without paying any
rent. There is also no proof that Pajuyo is a professional squatter who
rents out usurped properties to other squatters. Moreover, it is for the
proper government agency to decide who between Pajuyo and
Guevarra qualifies for socialized housing. The only issue that we are
addressing is physical possession.
Prior possession is not always a condition sine qua non in
ejectment.[73] This is one of the distinctions between forcible entry and
unlawful detainer.[74] In forcible entry, the plaintiff is deprived of
physical possession of his land or building by means of force,
intimidation, threat, strategy or stealth. Thus, he must allege and
prove prior possession.[75] But in unlawful detainer, the defendant
unlawfully withholds possession after the expiration or termination of
his right to possess under any contract, express or implied. In such a
case, prior physical possession is not required.[76]
Pajuyos withdrawal of his permission to Guevarra terminated
the Kasunduan. Guevarras transient right to possess the property
ended as well. Moreover, it was Pajuyo who was in actual possession
of the property because Guevarra had to seek Pajuyos permission to
temporarily hold the property and Guevarra had to follow the
conditions set by Pajuyo in theKasunduan. Control over the property
still rested with Pajuyo and this is evidence of actual possession.
Pajuyos absence did not affect his actual possession of the
disputed property. Possession in the eyes of the law does not mean
that a man has to have his feet on every square meter of the ground
before he is deemed in possession.[77] One may acquire possession
not only by physical occupation, but also by the fact that a thing is
subject to the action of ones will.[78]Actual or physical occupation is not
always necessary.[79]
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared
that squatters and intruders who clandestinely enter into titled
government property cannot, by such act, acquire any legal right to
said property.[80] We made this declaration because the person who
had title or who had the right to legal possession over the disputed
property was a party in the ejectment suit and that party instituted the
case against squatters or usurpers.
In this case, the owner of the land, which is the government, is
not a party to the ejectment case. This case is between
squatters. Had the government participated in this case, the courts
could have evicted the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is
not impleaded in this case, we cannot evict on our own the parties.
Such a ruling would discourage squatters from seeking the aid of the
courts in settling the issue of physical possession. Stripping both the
plaintiff and the defendant of possession just because they are
squatters would have the same dangerous implications as the
application of the principle of pari delicto. Squatters would then rather
settle the issue of physical possession among themselves than seek
relief from the courts if the plaintiff and defendant in the ejectment
case would both stand to lose possession of the disputed
property. This would subvert the policy underlying actions for recovery
of possession.
Since Pajuyo has in his favor priority in time in holding the
property, he is entitled to remain on the property until a person who
has title or a better right lawfully ejects him. Guevarra is certainly not
that person. The ruling in this case, however, does not preclude
Pajuyo and Guevarra from introducing evidence and presenting
arguments before the proper administrative agency to establish any
right to which they may be entitled under the law.[81]
In no way should our ruling in this case be interpreted to condone
squatting. The ruling on the issue of physical possession does not
affect title to the property nor constitute a binding and conclusive
adjudication on the merits on the issue of ownership.[82] The owner
can still go to court to recover lawfully the property from the person
who holds the property without legal title. Our ruling here does not
diminish the power of government agencies, including local
governments, to condemn, abate, remove or demolish illegal or
unauthorized structures in accordance with existing laws.
Attorneys Fees and Rentals
The MTC and RTC failed to justify the award of P3,000 attorneys
fees to Pajuyo. Attorneys fees as part of damages are awarded only
in the instances enumerated in Article 2208 of the Civil Code.[83] Thus,
the award of attorneys fees is the exception rather than the
rule.[84] Attorneys fees are not awarded every time a party prevails in a
suit because of the policy that no premium should be placed on the
right to litigate.[85] We therefore delete the attorneys fees awarded to
Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC
assessed against Guevarra. Guevarra did not dispute this factual
finding of the two courts. We find the amount reasonable
compensation to Pajuyo. The P300 monthly rental is counted from the
last demand to vacate, which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21
June 2000 and Resolution dated 14 December 2000 of the Court of
Appeals in CA-G.R. SP No. 43129 are SET ASIDE.The Decision
dated 11 November 1996 of the Regional Trial Court of Quezon City,
Branch 81 in Civil Case No. Q-96-26943, affirming the Decision dated
15 December 1995 of the Metropolitan Trial Court of Quezon City,
Branch 31 in Civil Case No. 12432, is REINSTATED with
MODIFICATION. The award of attorneys fees is deleted. No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, Ynares-
Santiago, and Azcuna, JJ., concur.
G.R. No. 151890 June 20, 2006
PRUDENTIAL GUARANTEE and ASSURANCE INC., petitioner,
vs.
TRANS-ASIA SHIPPING LINES, INC., Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 151991 June 20, 2006
TRANS-ASIA SHIPPING LINES, INC., petitioner,
vs.
PRUDENTIAL GUARANTEE and ASSURANCE INC., Respondent.
DECISION
CHICO-NAZARIO, J:
This is a consolidation of two separate Petitions for Review on
Certiorari filed by petitioner Prudential Guarantee and Assurance, Inc.
(PRUDENTIAL) in G.R. No. 151890 and Trans-Asia Shipping Lines,
Inc. (TRANS-ASIA) in G.R. No. 151991, assailing the Decision1 dated
6 November 2001 of the Court of Appeals in CA G.R. CV No. 68278,
which reversed the Judgment2 dated 6 June 2000 of the Regional
Trial Court (RTC), Branch 13, Cebu City in Civil Case No. CEB-
20709. The 29 January 2002 Resolution3 of the Court of Appeals,
denying PRUDENTIAL’s Motion for Reconsideration and TRANS-
ASIA’s Partial Motion for Reconsideration of the 6 November 2001
Decision, is likewise sought to be annulled and set aside.
The Facts
The material antecedents as found by the court a quo and adopted by
the appellate court are as follows:
Plaintiff [TRANS-ASIA] is the owner of the vessel M/V Asia Korea. In
consideration of payment of premiums, defendant [PRUDENTIAL]
insured M/V Asia Korea for loss/damage of the hull and machinery
arising from perils, inter alia, of fire and explosion for the sum of P40
Million, beginning [from] the period [of] July 1, 1993 up to July 1, 1994.
This is evidenced by Marine Policy No. MH93/1363 (Exhibits "A" to
"A-11"). On October 25, 1993, while the policy was in force, a fire
broke out while [M/V Asia Korea was] undergoing repairs at the port of
Cebu. On October 26, 1993 plaintiff [TRANS-ASIA] filed its notice of
claim for damage sustained by the vessel. This is evidenced by a
letter/formal claim of even date (Exhibit "B"). Plaintiff [TRANS-ASIA]
reserved its right to subsequently notify defendant [PRUDENTIAL] as
to the full amount of the claim upon final survey and determination by
average adjuster Richard Hogg International (Phil.) of the damage
sustained by reason of fire. An adjuster’s report on the fire in question
was submitted by Richard Hogg International together with the U-
Marine Surveyor Report (Exhibits "4" to "4-115").
On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a document
denominated "Loan and Trust receipt", a portion of which read (sic):
"Received from Prudential Guarantee and Assurance, Inc., the sum of
PESOS THREE MILLION ONLY (P3,000,000.00) as a loan without
interest under Policy No. MH 93/1353 [sic], repayable only in the
event and to the extent that any net recovery is made by Trans-Asia
Shipping Corporation, from any person or persons, corporation or
corporations, or other parties, on account of loss by any casualty for
which they may be liable occasioned by the 25 October 1993: Fire on
Board." (Exhibit "4")
In a letter dated 21 April 1997 defendant [PRUDENTIAL] denied
plaintiff’s claim (Exhibit "5"). The letter reads:
"After a careful review and evaluation of your claim arising from the
above-captioned incident, it has been ascertained that you are in
breach of policy conditions, among them "WARRANTED VESSEL
CLASSED AND CLASS MAINTAINED". Accordingly, we regret to
advise that your claim is not compensable and hereby DENIED."
This was followed by defendant’s letter dated 21 July 1997 requesting
the return or payment of the P3,000,000.00 within a period of ten (10)
days from receipt of the letter (Exhibit "6").4
Following this development, on 13 August 1997, TRANS-ASIA filed a
Complaint5 for Sum of Money against PRUDENTIAL with the RTC of
Cebu City, docketed as Civil Case No. CEB-20709, wherein TRANS-
ASIA sought the amount of P8,395,072.26 from PRUDENTIAL,
alleging that the same represents the balance of the indemnity due
upon the insurance policy in the total amount of P11,395,072.26.
TRANS-ASIA similarly sought interest at 42% per annum citing
Section 2436 of Presidential Decreee No. 1460, otherwise known as
the "Insurance Code," as amended.
In its Answer,7 PRUDENTIAL denied the material allegations of the
Complaint and interposed the defense that TRANS-ASIA breached
insurance policy conditions, in particular: "WARRANTED VESSEL
CLASSED AND CLASS MAINTAINED." PRUDENTIAL further alleged
that it acted as facts and law require and incurred no liability to
TRANS-ASIA; that TRANS-ASIA has no cause of action; and, that its
claim has been effectively waived and/or abandoned, or it is estopped
from pursuing the same. By way of a counterclaim, PRUDENTIAL
sought a refund of P3,000,000.00, which it allegedly advanced to
TRANS-ASIA by way of a loan without interest and without prejudice
to the final evaluation of the claim, including the amounts of
P500,000.00, for survey fees and P200,000.00, representing
attorney’s fees.
The Ruling of the Trial Court
On 6 June 2000, the court a quo rendered Judgment8 finding for
(therein defendant) PRUDENTIAL. It ruled that a determination of the
parties’ liabilities hinged on whether TRANS-ASIA violated and
breached the policy conditions on WARRANTED VESSEL CLASSED
AND CLASS MAINTAINED. It interpreted the provision to mean that
TRANS-ASIA is required to maintain the vessel at a certain class at all
times pertinent during the life of the policy. According to the court a
quo, TRANS-ASIA failed to prove compliance of the terms of the
warranty, the violation thereof entitled PRUDENTIAL, the insured
party, to rescind the contract.9
Further, citing Section 10710 of the Insurance Code, the court a quo
ratiocinated that the concealment made by TRANS-ASIA that the
vessel was not adequately maintained to preserve its class was a
material concealment sufficient to avoid the policy and, thus, entitled
the injured party to rescind the contract. The court a quo found merit
in PRUDENTIAL’s contention that there was nothing in the adjustment
of the particular average submitted by the adjuster that would show
that TRANS-ASIA was not in breach of the policy. Ruling on the
denominated loan and trust receipt, the court a quo said that in
substance and in form, the same is a receipt for a loan. It held that if
TRANS-ASIA intended to receive the amount of P3,000,000.00 as
advance payment, it should have so clearly stated as such.
The court a quo did not award PRUDENTIAL’s claim for P500,000.00,
representing expert survey fees on the ground of lack of sufficient
basis in support thereof. Neither did it award attorney’s fees on the
rationalization that the instant case does not fall under the exceptions
stated in Article 220811 of the Civil Code. However, the court a quo
granted PRUDENTIAL’s counterclaim stating that there is factual and
legal basis for TRANS-ASIA to return the amount of P3,000,000.00 by
way of loan without interest.
The decretal portion of the Judgment of the RTC reads:
WHEREFORE, judgment is hereby rendered DISMISSING the
complaint for its failure to prove a cause of action.
On defendant’s counterclaim, plaintiff is directed to return the sum of
P3,000,000.00 representing the loan extended to it by the defendant,
within a period of ten (10) days from and after this judgment shall
have become final and executory.12
The Ruling of the Court of Appeals
On appeal by TRANS-ASIA, the Court of Appeals, in its assailed
Decision of 6 November 2001, reversed the 6 June 2000 Judgment of
the RTC.
On the issue of TRANS-ASIA’s alleged breach of warranty of the
policy condition CLASSED AND CLASS MAINTAINED, the Court of
Appeals ruled that PRUDENTIAL, as the party asserting the non-
compensability of the loss had the burden of proof to show that
TRANS-ASIA breached the warranty, which burden it failed to
discharge. PRUDENTIAL cannot rely on the lack of certification to the
effect that TRANS-ASIA was CLASSED AND CLASS MAINTAINED
as its sole basis for reaching the conclusion that the warranty was
breached. The Court of Appeals opined that the lack of a certification
does not necessarily mean that the warranty was breached by
TRANS-ASIA. Instead, the Court of Appeals considered
PRUDENTIAL’s admission that at the time the insurance contract was
entered into between the parties, the vessel was properly classed by
Bureau Veritas, a classification society recognized by the industry.
The Court of Appeals similarly gave weight to the fact that it was the
responsibility of Richards Hogg International (Phils.) Inc., the average
adjuster hired by PRUDENTIAL, to secure a copy of such certification
to support its conclusion that mere absence of a certification does not
warrant denial of TRANS-ASIA’s claim under the insurance policy.
In the same token, the Court of Appeals found the subject warranty
allegedly breached by TRANS-ASIA to be a rider which, while
contained in the policy, was inserted by PRUDENTIAL without the
intervention of TRANS-ASIA. As such, it partakes of a nature of a
contract d’adhesion which should be construed against
PRUDENTIAL, the party which drafted the contract. Likewise,
according to the Court of Appeals, PRUDENTIAL’s renewal of the
insurance policy from noon of 1 July 1994 to noon of 1 July 1995, and
then again, until noon of 1 July 1996 must be deemed a waiver by
PRUDENTIAL of any breach of warranty committed by TRANS-ASIA.
Further, the Court of Appeals, contrary to the ruling of the court a quo,
interpreted the transaction between PRUDENTIAL and TRANS-ASIA
as one of subrogation, instead of a loan. The Court of Appeals
concluded that TRANS-ASIA has no obligation to pay back the
amount of P3,000.000.00 to PRUDENTIAL based on its finding that
the aforesaid amount was PRUDENTIAL’s partial payment to TRANS-
ASIA’s claim under the policy. Finally, the Court of Appeals denied
TRANS-ASIA’s prayer for attorney’s fees, but held TRANS-ASIA
entitled to double interest on the policy for the duration of the delay of
payment of the unpaid balance, citing Section 24413 of the Insurance
Code.
Finding for therein appellant TRANS-ASIA, the Court of Appeals ruled
in this wise:
WHEREFORE, the foregoing consideration, We find for Appellant.
The instant appeal is ALLOWED and the Judgment appealed from
REVERSED. The P3,000,000.00 initially paid by appellee Prudential
Guarantee Assurance Incorporated to appellant Trans-Asia and
covered by a "Loan and Trust Receipt" dated 29 May 1995 is HELD to
be in partial settlement of the loss suffered by appellant and covered
by Marine Policy No. MH93/1363 issued by appellee. Further,
appellee is hereby ORDERED to pay appellant the additional amount
of P8,395,072.26 representing the balance of the loss suffered by the
latter as recommended by the average adjuster Richard Hogg
International (Philippines) in its Report, with double interest starting
from the time Richard Hogg’s Survey Report was completed, or on 13
August 1996, until the same is fully paid.
All other claims and counterclaims are hereby DISMISSED.
All costs against appellee.14
Not satisfied with the judgment, PRUDENTIAL and TRANS-ASIA filed
a Motion for Reconsideration and Partial Motion for Reconsideration
thereon, respectively, which motions were denied by the Court of
Appeals in the Resolution dated 29 January 2002.
The Issues
Aggrieved, PRUDENTIAL filed before this Court a Petition for Review,
docketed as G.R. No. 151890, relying on the following grounds, viz:
I.
THE AWARD IS GROSSLY UNCONSCIONABLE.
II.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE
WAS NO VIOLATION BY TRANS-ASIA OF A MATERIAL
WARRANTY, NAMELY, WARRANTY CLAUSE NO. 5, OF THE
INSURANCE POLICY.
III.
THE COURT OF APPEALS ERRED IN HOLDING THAT
PRUDENTIAL, AS INSURER HAD THE BURDEN OF PROVING
THAT THE ASSURED, TRANS-ASIA, VIOLATED A MATERIAL
WARRANTY.
IV.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
WARRANTY CLAUSE EMBODIED IN THE INSURANCE POLICY
CONTRACT WAS A MERE RIDER.
V.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
ALLEGED RENEWALS OF THE POLICY CONSTITUTED A WAIVER
ON THE PART OF PRUDENTIAL OF THE BREACH OF THE
WARRANTY BY TRANS-ASIA.
VI.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE "LOAN
AND TRUST RECEIPT" EXECUTED BY TRANS-ASIA IS AN
ADVANCE ON THE POLICY, THUS CONSTITUTING PARTIAL
PAYMENT THEREOF.
VII.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
ACCEPTANCE BY PRUDENTIAL OF THE FINDINGS OF
RICHARDS HOGG IS INDICATIVE OF A WAIVER ON THE PART
OF PRUDENTIAL OF ANY VIOLATION BY TRANS-ASIA OF THE
WARRANTY.
VIII.
THE COURT OF APPEALS ERRRED (sic) IN REVERSING THE
TRIAL COURT, IN FINDING THAT PRUDENTIAL "UNJUSTIFIABLY
REFUSED" TO PAY THE CLAIM AND IN ORDERING PRUDENTIAL
TO PAY TRANS-ASIA P8,395,072.26 PLUS DOUBLE INTEREST
FROM 13 AUGUST 1996, UNTIL [THE] SAME IS FULLY PAID.15
Similarly, TRANS-ASIA, disagreeing in the ruling of the Court of
Appeals filed a Petition for Review docketed as G.R. No. 151991,
raising the following grounds for the allowance of the petition, to wit:
I.
THE HONORABLE COURT OF APPEALS ERRED IN NOT
AWARDING ATTORNEY’S FEES TO PETITIONER TRANS-ASIA ON
THE GROUND THAT SUCH CAN ONLY BE AWARDED IN THE
CASES ENUMERATED IN ARTICLE 2208 OF THE CIVIL CODE,
AND THERE BEING NO BAD FAITH ON THE PART OF
RESPONDENT PRUDENTIAL IN DENYING HEREIN PETITIONER
TRANS-ASIA’S INSURANCE CLAIM.
II.
THE "DOUBLE INTEREST" REFERRED TO IN THE DECISION
DATED 06 NOVEMBER 2001 SHOULD BE CONSTRUED TO MEAN
DOUBLE INTEREST BASED ON THE LEGAL INTEREST OF 12%,
OR INTEREST AT THE RATE OF 24% PER ANNUM.16
In our Resolution of 2 December 2002, we granted TRANS-ASIA’s
Motion for Consolidation17 of G.R. Nos. 151890 and 151991;18 hence,
the instant consolidated petitions.
In sum, for our main resolution are: (1) the liability, if any, of
PRUDENTIAL to TRANS-ASIA arising from the subject insurance
contract; (2) the liability, if any, of TRANS-ASIA to PRUDENTIAL
arising from the transaction between the parties as evidenced by a
document denominated as "Loan and Trust Receipt," dated 29 May
1995; and (3) the amount of interest to be imposed on the liability, if
any, of either or both parties.
Ruling of the Court
Prefatorily, it must be emphasized that in a petition for review, only
questions of law, and not questions of fact, may be raised.19 This rule
may be disregarded only when the findings of fact of the Court of
Appeals are contrary to the findings and conclusions of the trial court,
or are not supported by the evidence on record.20 In the case at bar,
we find an incongruence between the findings of fact of the Court of
Appeals and the court a quo, thus, in our determination of the issues,
we are constrained to assess the evidence adduced by the parties to
make appropriate findings of facts as are necessary.
I.
 A. PRUDENTIAL failed to establish that TRANS-ASIA violated
and breached the policy condition on WARRANTED VESSEL
CLASSED AND CLASS MAINTAINED, as contained in the
subject insurance contract.
In resisting the claim of TRANS-ASIA, PRUDENTIAL posits that
TRANS-ASIA violated an express and material warranty in the subject
insurance contract, i.e., Marine Insurance Policy No. MH93/1363,
specifically Warranty Clause No. 5 thereof, which stipulates that the
insured vessel, "M/V ASIA KOREA" is required to be CLASSED AND
CLASS MAINTAINED. According to PRUDENTIAL, on 25 October
1993, or at the time of the occurrence of the fire, "M/V ASIA KOREA"
was in violation of the warranty as it was not CLASSED AND CLASS
MAINTAINED. PRUDENTIAL submits that Warranty Clause No. 5
was a condition precedent to the recovery of TRANS-ASIA under the
policy, the violation of which entitled PRUDENTIAL to rescind the
contract under Sec. 7421 of the Insurance Code.
The warranty condition CLASSED AND CLASS MAINTAINED was
explained by PRUDENTIAL’s Senior Manager of the Marine and
Aviation Division, Lucio Fernandez. The pertinent portions of his
testimony on direct examination is reproduced hereunder, viz:
ATTY. LIM
Q Please tell the court, Mr. Witness, the result of the evaluation of this
claim, what final action was taken?
A It was eventually determined that there was a breach of the policy
condition, and basically there is a breach of policy warranty condition
and on that basis the claim was denied.
Q To refer you (sic) the "policy warranty condition," I am showing to
you a policy here marked as Exhibits "1", "1-A" series, please point to
the warranty in the policy which you said was breached or violated by
the plaintiff which constituted your basis for denying the claim as you
testified.
A Warranted Vessel Classed and Class Maintained.
ATTY. LIM
Witness pointing, Your Honor, to that portion in Exhibit "1-A" which is
the second page of the policy below the printed words: "Clauses,
Endorsements, Special Conditions and Warranties," below this are
several typewritten clauses and the witness pointed out in particular
the clause reading: "Warranted Vessel Classed and Class
Maintained."
COURT
Q Will you explain that particular phrase?
A Yes, a warranty is a condition that has to be complied with by the
insured. When we say a class warranty, it must be entered in the
classification society.
COURT
Slowly.
WITNESS
(continued)
A A classification society is an organization which sets certain
standards for a vessel to maintain in order to maintain their
membership in the classification society. So, if they failed to meet that
standard, they are considered not members of that class, and thus
breaching the warranty, that requires them to maintain membership or
to maintain their class on that classification society. And it is not
sufficient that the member of this classification society at the time of a
loss, their membership must be continuous for the whole length of the
policy such that during the effectivity of the policy, their classification
is suspended, and then thereafter, they get reinstated, that again still
a breach of the warranty that they maintained their class (sic). Our
maintaining team membership in the classification society thereby
maintaining the standards of the vessel (sic).
ATTY. LIM
Q Can you mention some classification societies that you know?
A Well we have the Bureau Veritas, American Bureau of Shipping,
D&V Local Classification Society, The Philippine Registration of Ships
Society, China Classification, NKK and Company Classification
Society, and many others, we have among others, there are over 20
worldwide. 22
At the outset, it must be emphasized that the party which alleges a
fact as a matter of defense has the burden of proving it.
PRUDENTIAL, as the party which asserted the claim that TRANS-
ASIA breached the warranty in the policy, has the burden of evidence
to establish the same. Hence, on the part of PRUDENTIAL lies the
initiative to show proof in support of its defense; otherwise, failing to
establish the same, it remains self-serving. Clearly, if no evidence on
the alleged breach of TRANS-ASIA of the subject warranty is shown,
a fortiori, TRANS-ASIA would be successful in claiming on the policy.
It follows that PRUDENTIAL bears the burden of evidence to establish
the fact of breach.
In our rule on evidence, TRANS-ASIA, as the plaintiff below,
necessarily has the burden of proof to show proof of loss, and the
coverage thereof, in the subject insurance policy. However, in the
course of trial in a civil case, once plaintiff makes out a prima facie
case in his favor, the duty or the burden of evidence shifts to
defendant to controvert plaintiff’s prima facie case, otherwise, a
verdict must be returned in favor of plaintiff.23 TRANS-ASIA was able
to establish proof of loss and the coverage of the loss, i.e., 25 October
1993: Fire on Board. Thereafter, the burden of evidence shifted to
PRUDENTIAL to counter TRANS-ASIA’s case, and to prove its
special and affirmative defense that TRANS-ASIA was in violation of
the particular condition on CLASSED AND CLASS MAINTAINED.
We sustain the findings of the Court of Appeals that PRUDENTIAL
was not successful in discharging the burden of evidence that
TRANS-ASIA breached the subject policy condition on CLASSED
AND CLASS MAINTAINED.
Foremost, PRUDENTIAL, through the Senior Manager of its Marine
and Aviation Division, Lucio Fernandez, made a categorical admission
that at the time of the procurement of the insurance contract in July
1993, TRANS-ASIA’s vessel, "M/V Asia Korea" was properly classed
by Bureau Veritas, thus:
Q Kindly examine the records particularly the policy, please tell us if
you know whether M/V Asia Korea was classed at the time (sic) policy
was procured perthe (sic) insurance was procured that Exhibit "1" on
1st July 1993 (sic).
WITNESS
A I recall that they were classed.
ATTY. LIM
Q With what classification society?
A I believe with Bureau Veritas.24
As found by the Court of Appeals and as supported by the records,
Bureau Veritas is a classification society recognized in the marine
industry. As it is undisputed that TRANS-ASIA was properly classed
at the time the contract of insurance was entered into, thus, it
becomes incumbent upon PRUDENTIAL to show evidence that the
status of TRANS-ASIA as being properly CLASSED by Bureau
Veritas had shifted in violation of the warranty. Unfortunately,
PRUDENTIAL failed to support the allegation.
We are in accord with the ruling of the Court of Appeals that the lack
of a certification in PRUDENTIAL’s records to the effect that TRANS-
ASIA’s "M/V Asia Korea" was CLASSED AND CLASS MAINTAINED
at the time of the occurrence of the fire cannot be tantamount to the
conclusion that TRANS-ASIA in fact breached the warranty contained
in the policy. With more reason must we sustain the findings of the
Court of Appeals on the ground that as admitted by PRUDENTIAL, it
was likewise the responsibility of the average adjuster, Richards Hogg
International (Phils.), Inc., to secure a copy of such certification, and
the alleged breach of TRANS-ASIA cannot be gleaned from the
average adjuster’s survey report, or adjustment of particular average
per "M/V Asia Korea" of the 25 October 1993 fire on board.
We are not unmindful of the clear language of Sec. 74 of the
Insurance Code which provides that, "the violation of a material
warranty, or other material provision of a policy on the part of either
party thereto, entitles the other to rescind." It is generally accepted
that "[a] warranty is a statement or promise set forth in the policy, or
by reference incorporated therein, the untruth or non-fulfillment of
which in any respect, and without reference to whether the insurer
was in fact prejudiced by such untruth or non-fulfillment, renders the
policy voidable by the insurer."25However, it is similarly indubitable
that for the breach of a warranty to avoid a policy, the same must be
duly shown by the party alleging the same. We cannot sustain an
allegation that is unfounded. Consequently, PRUDENTIAL, not having
shown that TRANS-ASIA breached the warranty condition, CLASSED
AND CLASS MAINTAINED, it remains that TRANS-ASIA must be
allowed to recover its rightful claims on the policy.
B. Assuming arguendo that TRANS-ASIA violated the policy condition
on WARRANTED VESSEL CLASSED AND CLASS MAINTAINED,
PRUDENTIAL made a valid waiver of the same.
The Court of Appeals, in reversing the Judgment of the RTC which
held that TRANS-ASIA breached the warranty provision on CLASSED
AND CLASS MAINTAINED, underscored that PRUDENTIAL can be
deemed to have made a valid waiver of TRANS-ASIA’s breach of
warranty as alleged, ratiocinating, thus:
Third, after the loss, Prudential renewed the insurance policy of
Trans-Asia for two (2) consecutive years, from noon of 01 July 1994
to noon of 01 July 1995, and then again until noon of 01 July 1996.
This renewal is deemed a waiver of any breach of warranty.26
PRUDENTIAL finds fault with the ruling of the appellate court when it
ruled that the renewal policies are deemed a waiver of TRANS-ASIA’s
alleged breach, averring herein that the subsequent policies,
designated as MH94/1595 and MH95/1788 show that they were
issued only on 1 July 1994 and 3 July 1995, respectively, prior to the
time it made a request to TRANS-ASIA that it be furnished a copy of
the certification specifying that the insured vessel "M/V Asia Korea"
was CLASSED AND CLASS MAINTAINED. PRUDENTIAL posits that
it came to know of the breach by TRANS-ASIA of the subject warranty
clause only on 21 April 1997. On even date, PRUDENTIAL sent
TRANS-ASIA a letter of denial, advising the latter that their claim is
not compensable. In fine, PRUDENTIAL would have this Court
believe that the issuance of the renewal policies cannot be a waiver
because they were issued without knowledge of the alleged breach of
warranty committed by TRANS-ASIA.27
We are not impressed. We do not find that the Court of Appeals was
in error when it held that PRUDENTIAL, in renewing TRANS-ASIA’s
insurance policy for two consecutive years after the loss covered by
Policy No. MH93/1363, was considered to have waived TRANS-
ASIA’s breach of the subject warranty, if any. Breach of a warranty or
of a condition renders the contract defeasible at the option of the
insurer; but if he so elects, he may waive his privilege and power to
rescind by the mere expression of an intention so to do. In that event
his liability under the policy continues as before.28 There can be no
clearer intention of the waiver of the alleged breach than the renewal
of the policy insurance granted by PRUDENTIAL to TRANS-ASIA in
MH94/1595 and MH95/1788, issued in the years 1994 and 1995,
respectively.
To our mind, the argument is made even more credulous by
PRUDENTIAL’s lack of proof to support its allegation that the
renewals of the policies were taken only after a request was made to
TRANS-ASIA to furnish them a copy of the certificate attesting that
"M/V Asia Korea" was CLASSED AND CLASS MAINTAINED.
Notwithstanding PRUDENTIAL’s claim that no certification was issued
to that effect, it renewed the policy, thereby, evidencing an intention to
waive TRANS-ASIA’s alleged breach. Clearly, by granting the renewal
policies twice and successively after the loss, the intent was to benefit
the insured, TRANS-ASIA, as well as to waive compliance of the
warranty.
The foregoing finding renders a determination of whether the subject
warranty is a rider, moot, as raised by the PRUDENTIAL in its
assignment of errors. Whether it is a rider will not effectively alter the
result for the reasons that: (1) PRUDENTIAL was not able to
discharge the burden of evidence to show that TRANS-ASIA
committed a breach, thereof; and (2) assuming arguendo the
commission of a breach by TRANS-ASIA, the same was shown to
have been waived by PRUDENTIAL.
II.
A. The amount of P3,000,000.00 granted by PRUDENTIAL to
TRANS- ASIA via a transaction between the parties evidenced by a
document denominated as "Loan and Trust Receipt," dated 29 May
1995 constituted partial payment on the policy.
It is undisputed that TRANS-ASIA received from PRUDENTIAL the
amount of P3,000,000.00. The same was evidenced by a transaction
receipt denominated as a "Loan and Trust Receipt," dated 29 May
1995, reproduced hereunder:
LOAN AND TRUST RECEIPT
Claim File No. MH-93-025 May 29, 1995
P3,000,000.00
Check No. PCIB066755
Received FROM PRUDENTIAL GUARANTEE AND ASSURANCE
INC., the sum of PESOS THREE MILLION ONLY (P3,000,000.00) as
a loan without interest, under Policy No. MH93/1353, repayable only
in the event and to the extent that any net recovery is made by
TRANS ASIA SHIPPING CORP., from any person or persons,
corporation or corporations, or other parties, on account of loss by any
casualty for which they may be liable, occasioned by the 25 October
1993: Fire on Board.
As security for such repayment, we hereby pledge to PRUDENTIAL
GUARANTEE AND ASSURANCE INC. whatever recovery we may
make and deliver to it all documents necessary to prove our interest in
said property. We also hereby agree to promptly prosecute suit
against such persons, corporation or corporations through whose
negligence the aforesaid loss was caused or who may otherwise be
responsible therefore, with all due diligence, in our own name, but at
the expense of and under the exclusive direction and control of
PRUDENTIAL GUARANTEE AND ASSURANCE INC.
TRANS-ASIA SHIPPING CORPORATION29
PRUDENTIAL largely contends that the "Loan and Trust Receipt"
executed by the parties evidenced a loan of P3,000,000.00 which it
granted to TRANS-ASIA, and not an advance payment on the policy
or a partial payment for the loss. It further submits that it is a
customary practice for insurance companies in this country to extend
loans gratuitously as part of good business dealing with their assured,
in order to afford their assured the chance to continue business
without embarrassment while awaiting outcome of the settlement of
their claims.30 According to PRUDENTIAL, the "Trust and Loan
Agreement" did not subrogate to it whatever rights and/or actions
TRANS-ASIA may have against third persons, and it cannot by no
means be taken that by virtue thereof, PRUDENTIAL was granted
irrevocable power of attorney by TRANS-ASIA, as the sole power to
prosecute lies solely with the latter.
The Court of Appeals held that the real character of the transaction
between the parties as evidenced by the "Loan and Trust Receipt" is
that of an advance payment by PRUDENTIAL of TRANS-ASIA’s claim
on the insurance, thus:
The Philippine Insurance Code (PD 1460 as amended) was derived
from the old Insurance Law Act No. 2427 of the Philippine Legislature
during the American Regime. The Insurance Act was lifted verbatim
from the law of California, except Chapter V thereof, which was taken
largely from the insurance law of New York. Therefore, ruling case law
in that jurisdiction is to Us persuasive in interpreting provisions of our
own Insurance Code. In addition, the application of the adopted
statute should correspond in fundamental points with the application
in its country of origin x x x.
xxxx
Likewise, it is settled in that jurisdiction that the (sic) notwithstanding
recitals in the Loan Receipt that the money was intended as a loan
does not detract from its real character as payment of claim, thus:
"The receipt of money by the insured employers from a surety
company for losses on account of forgery of drafts by an employee
where no provision or repayment of the money was made except
upon condition that it be recovered from other parties and neither
interest nor security for the asserted debts was provided for, the
money constituted the payment of a liability and not a mere loan,
notwithstanding recitals in the written receipt that the money was
intended as a mere loan."
What is clear from the wordings of the so-called "Loan and Trust
Receipt Agreement" is that appellant is obligated to hand over to
appellee "whatever recovery (Trans Asia) may make and deliver to
(Prudential) all documents necessary to prove its interest in the said
property." For all intents and purposes therefore, the money receipted
is payment under the policy, with Prudential having the right of
subrogation to whatever net recovery Trans-Asia may obtain from
third parties resulting from the fire. In the law on insurance,
subrogation is an equitable assignment to the insurer of all remedies
which the insured may have against third person whose negligence or
wrongful act caused the loss covered by the insurance policy, which is
created as the legal effect of payment by the insurer as an assignee in
equity. The loss in the first instance is that of the insured but after
reimbursement or compensation, it becomes the loss of the insurer. It
has been referred to as the doctrine of substitution and rests on the
principle that substantial justice should be attained regardless of form,
that is, its basis is the doing of complete, essential, and perfect justice
between all the parties without regard to form.31
We agree. Notwithstanding its designation, the tenor of the "Loan and
Trust Receipt" evidences that the real nature of the transaction
between the parties was that the amount of P3,000,000.00 was not
intended as a loan whereby TRANS-ASIA is obligated to pay
PRUDENTIAL, but rather, the same was a partial payment or an
advance on the policy of the claims due to TRANS-ASIA.
First, the amount of P3,000,000.00 constitutes an advance payment
to TRANS-ASIA by PRUDENTIAL, subrogating the former to the
extent of "any net recovery made by TRANS ASIA SHIPPING CORP.,
from any person or persons, corporation or corporations, or other
parties, on account of loss by any casualty for which they may be
liable, occasioned by the 25 October 1993: Fire on Board."32
Second, we find that per the "Loan and Trust Receipt," even as
TRANS-ASIA agreed to "promptly prosecute suit against such
persons, corporation or corporations through whose negligence the
aforesaid loss was caused or who may otherwise be responsible
therefore, with all due diligence" in its name, the prosecution of the
claims against such third persons are to be carried on "at the expense
of and under the exclusive direction and control of PRUDENTIAL
GUARANTEE AND ASSURANCE INC."33 The clear import of the
phrase "at the expense of and under the exclusive direction and
control" as used in the "Loan and Trust Receipt" grants solely to
PRUDENTIAL the power to prosecute, even as the same is carried in
the name of TRANS-ASIA, thereby making TRANS-ASIA merely an
agent of PRUDENTIAL, the principal, in the prosecution of the suit
against parties who may have occasioned the loss.
Third, per the subject "Loan and Trust Receipt," the obligation of
TRANS-ASIA to repay PRUDENTIAL is highly speculative and
contingent, i.e., only in the event and to the extent that any net
recovery is made by TRANS-ASIA from any person on account of loss
occasioned by the fire of 25 October 1993. The transaction, therefore,
was made to benefit TRANS-ASIA, such that, if no recovery from third
parties is made, PRUDENTIAL cannot be repaid the amount. Verily,
we do not think that this is constitutive of a loan.34 The liberality in the
tenor of the "Loan and Trust Receipt" in favor of TRANS-ASIA leads
to the conclusion that the amount of P3,000,000.00 was a form of an
advance payment on TRANS-ASIA’s claim on MH93/1353.
III.
A. PRUDENTIAL is directed to pay TRANS-ASIA the amount of
P8,395,072.26, representing the balance of the loss suffered by
TRANS-ASIA and covered by Marine Policy No. MH93/1363.
Our foregoing discussion supports the conclusion that TRANS-ASIA is
entitled to the unpaid claims covered by Marine Policy No.
MH93/1363, or a total amount of P8,395,072.26.
B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA, damages
in the form of attorney’s fees equivalent to 10% of P8,395,072.26.
The Court of Appeals denied the grant of attorney’s fees. It held that
attorney’s fees cannot be awarded absent a showing of bad faith on
the part of PRUDENTIAL in rejecting TRANS-ASIA’s claim,
notwithstanding that the rejection was erroneous. According to the
Court of Appeals, attorney’s fees can be awarded only in the cases
enumerated in Article 2208 of the Civil Code which finds no
application in the instant case.
We disagree. Sec. 244 of the Insurance Code grants damages
consisting of attorney’s fees and other expenses incurred by the
insured after a finding by the Insurance Commissioner or the Court,
as the case may be, of an unreasonable denial or withholding of the
payment of the claims due. Moreover, the law imposes an interest of
twice the ceiling prescribed by the Monetary Board on the amount of
the claim due the insured from the date following the time prescribed
in Section 24235 or in Section 243,36 as the case may be, until the
claim is fully satisfied. Finally, Section 244 considers the failure to pay
the claims within the time prescribed in Sections 242 or 243, when
applicable, as prima facie evidence of unreasonable delay in
payment.
To the mind of this Court, Section 244 does not require a showing of
bad faith in order that attorney’s fees be granted. As earlier stated,
under Section 244, a prima facie evidence of unreasonable delay in
payment of the claim is created by failure of the insurer to pay the
claim within the time fixed in both Sections 242 and 243 of the
Insurance Code. As established in Section 244, by reason of the
delay and the consequent filing of the suit by the insured, the insurers
shall be adjudged to pay damages which shall consist of attorney’s
fees and other expenses incurred by the insured.37
Section 244 reads:
In case of any litigation for the enforcement of any policy or contract of
insurance, it shall be the duty of the Commissioner or the Court, as
the case may be, to make a finding as to whether the payment of the
claim of the insured has been unreasonably denied or withheld; and in
the affirmative case, the insurance company shall be adjudged to pay
damages which shall consist of attorney’s fees and other expenses
incurred by the insured person by reason of such unreasonable denial
or withholding of payment plus interest of twice the ceiling prescribed
by the Monetary Board of the amount of the claim due the insured,
from the date following the time prescribed in section two hundred
forty-two or in section two hundred forty-three, as the case may be,
until the claim is fully satisfied; Provided, That the failure to pay any
such claim within the time prescribed in said sections shall be
considered prima facie evidence of unreasonable delay in payment.
Sections 243 and 244 of the Insurance Code apply when the court
finds an unreasonable delay or refusal in the payment of the
insurance claims.
In the case at bar, the facts as found by the Court of Appeals, and
confirmed by the records show that there was an unreasonable delay
by PRUDENTIAL in the payment of the unpaid balance of
P8,395,072.26 to TRANS-ASIA. On 26 October 1993, a day after the
occurrence of the fire in "M/V Asia Korea", TRANS-ASIA filed its
notice of claim. On 13 August 1996, the adjuster, Richards Hogg
International (Phils.), Inc., completed its survey report recommending
the amount of P11,395,072.26 as the total indemnity due to TRANS-
ASIA.38 On 21 April 1997, PRUDENTIAL, in a letter39 addressed to
TRANS-ASIA denied the latter’s claim for the amount of
P8,395,072.26 representing the balance of the total indemnity. On 21
July 1997, PRUDENTIAL sent a second letter40 to TRANS-ASIA
seeking a return of the amount of P3,000,000.00. On 13 August 1997,
TRANS-ASIA was constrained to file a complaint for sum of money
against PRUDENTIAL praying, inter alia, for the sum of
P8,395,072.26 representing the balance of the proceeds of the
insurance claim.
As can be gleaned from the foregoing, there was an unreasonable
delay on the part of PRUDENTIAL to pay TRANS-ASIA, as in fact, it
refuted the latter’s right to the insurance claims, from the time proof of
loss was shown and the ascertainment of the loss was made by the
insurance adjuster. Evidently, PRUDENTIAL’s unreasonable delay in
satisfying TRANS-ASIA’s unpaid claims compelled the latter to file a
suit for collection.
Succinctly, an award equivalent to ten percent (10%) of the unpaid
proceeds of the policy as attorney’s fees to TRANS-ASIA is
reasonable under the circumstances, or otherwise stated, ten percent
(10%) of P8,395,072.26. In the case of Cathay Insurance, Co., Inc. v.
Court of Appeals,41 where a finding of an unreasonable delay under
Section 244 of the Insurance Code was made by this Court, we grant
an award of attorney’s fees equivalent to ten percent (10%) of the
total proceeds. We find no reason to deviate from this judicial
precedent in the case at bar.
C. Further, the aggregate amount (P8,395,072.26 plus 10% thereof as
attorney’s fees) shall be imposed double interest in accordance with
Section 244 of the Insurance Code.
Section 244 of the Insurance Code is categorical in imposing an
interest twice the ceiling prescribed by the Monetary Board due the
insured, from the date following the time prescribed in Section 242 or
in Section 243, as the case may be, until the claim is fully satisfied. In
the case at bar, we find Section 243 to be applicable as what is
involved herein is a marine insurance, clearly, a policy other than life
insurance.
Section 243 is hereunder reproduced:
SEC. 243. The amount of any loss or damage for which an insurer
may be liable, under any policy other than life insurance policy, shall
be paid within thirty days after proof of loss is received by the insurer
and ascertainment of the loss or damage is made either by agreement
between the insured and the insurer or by arbitration; but if such
ascertainment is not had or made within sixty days after such receipt
by the insurer of the proof of loss, then the loss or damage shall be
paid within ninety days after such receipt. Refusal or failure to pay the
loss or damage within the time prescribed herein will entitle the
assured to collect interest on the proceeds of the policy for the
duration of the delay at the rate of twice the ceiling prescribed by the
Monetary Board, unless such failure or refusal to pay is based on the
ground that the claim is fraudulent.
As specified, the assured is entitled to interest on the proceeds for the
duration of the delay at the rate of twice the ceiling prescribed by the
Monetary Board except when the failure or refusal of the insurer to
pay was founded on the ground that the claim is fraudulent.
D. The term "double interest" as used in the Decision of the Court of
Appeals must be interpreted to mean 24% per annum.
PRUDENTIAL assails the award of interest, granted by the Court of
Appeals, in favor of TRANS-ASIA in the assailed Decision of 6
November 2001. It is PRUDENTIAL’s stance that the award is
extortionate and grossly unsconscionable. In support thereto,
PRUDENTIAL makes a reference to TRANS-ASIA’s prayer in the
Complaint filed with the court a quo wherein the latter sought, "interest
double the prevailing rate of interest of 21% per annum now obtaining
in the banking business or plus 42% per annum pursuant to Article
243 of the Insurance Code x x x."42
The contention fails to persuade. It is settled that an award of double
interest is lawful and justified under Sections 243 and 244 of the
Insurance Code.43 In Finman General Assurance Corporation v. Court
of Appeals,44 this Court held that the payment of 24% interest per
annum is authorized by the Insurance Code.45 There is no gainsaying
that the term "double interest" as used in Sections 243 and 244 can
only be interpreted to mean twice 12% per annum or 24% per annum
interest, thus:
The term "ceiling prescribed by the Monetary Board" means the legal
rate of interest of twelve per centum per annum (12%) as prescribed
by the Monetary Board in C.B. Circular No. 416, pursuant to P.D. No.
116, amending the Usury Law; so that when Sections 242, 243 and
244 of the Insurance Code provide that the insurer shall be liable to
pay interest "twice the ceiling prescribed by the Monetary Board", it
means twice 12% per annum or 24% per annum interest on the
proceeds of the insurance.46
E. The payment of double interest should be counted from 13
September 1996.
The Court of Appeals, in imposing double interest for the duration of
the delay of the payment of the unpaid balance due TRANS-ASIA,
computed the same from 13 August 1996 until such time when the
amount is fully paid. Although not raised by the parties, we find the
computation of the duration of the delay made by the appellate court
to be patently erroneous.
To be sure, Section 243 imposes interest on the proceeds of the
policy for the duration of the delay at the rate of twice the ceiling
prescribed by the Monetary Board. Significantly, Section 243
mandates the payment of any loss or damage for which an insurer
may be liable, under any policy other than life insurance policy, within
thirty days after proof of loss is received by the insurer and
ascertainment of the loss or damage is made either by agreement
between the insured and the insurer or by arbitration. It is clear that
under Section 243, the insurer has until the 30th day after proof of
loss and ascertainment of the loss or damage to pay its liability under
the insurance, and only after such time can the insurer be held to be
in delay, thereby necessitating the imposition of double interest.
In the case at bar, it was not disputed that the survey report on the
ascertainment of the loss was completed by the adjuster, Richard
Hoggs International (Phils.), Inc. on 13 August 1996. PRUDENTIAL
had thirty days from 13 August 1996 within which to pay its liability to
TRANS-ASIA under the insurance policy, or until 13 September 1996.
Therefore, the double interest can begin to run from 13 September
1996 only.
IV.
A. An interest of 12% per annum is similarly imposed on the TOTAL
amount of liability adjudged in section III herein, computed from the
time of finality of judgment until the full satisfaction thereof in
conformity with this Court’s ruling in Eastern Shipping Lines, Inc. v.
Court of Appeals.
This Court in Eastern Shipping Lines, Inc. v. Court of
Appeals,47 inscribed the rule of thumb48 in the application of interest to
be imposed on obligations, regardless of their source. Eastern
emphasized beyond cavil that when the judgment of the court
awarding a sum of money becomes final and executory, the rate of
legal interest, regardless of whether the obligation involves a loan or
forbearance of money, shall be 12% per annum from such finality until
its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance49 of credit.
2. PRUDENTIAL is DIRECTED further to PAY TRANS-ASIA
damages in the form of attorney’s fees equivalent to 10% of
the amount of P8,395,072.26;
3. The aggregate amount (P8,395,072.26 plus 10% thereof as
attorney’s fees) shall be imposed double interest at the rate of
24% per annum to be computed from 13 September 1996 until
fully paid; and
4. An interest of 12% per annum is similarly imposed on the
TOTAL amount of liability adjudged as abovestated in
paragraphs (1), (2), and (3) herein, computed from the time of
finality of judgment until the full satisfaction thereof.
No costs.

We find application of the rule in the case at bar proper, thus, a rate of SO ORDERED.
12% per annum from the finality of judgment until the full satisfaction
thereof must be imposed on the total amount of liability adjudged to MINITA V. CHICO-NAZARIO
PRUDENTIAL. It is clear that the interim period from the finality of Associate Justice
judgment until the satisfaction of the same is deemed equivalent to a
forbearance of credit, hence, the imposition of the aforesaid interest. WE CONCUR:
Fallo ARTEMIO V. PANGANIBAN
Chief Justice
WHEREFORE, the Petition in G.R. No. 151890 is DENIED. However, Chairperson
the Petition in G.R. No. 151991 is GRANTED, thus, we award the
grant of attorney’s fees and make a clarification that the term "double
interest" as used in the 6 November 2001 Decision of the Court of CONSUELO YNARES- MA. ALICIA AUSTRIA-
Appeals in CA GR CV No. 68278 should be construed to mean SANTIAGO MARTINEZ
interest at the rate of 24% per annum, with a further clarification, that Associate Justice Asscociate Justice
the same should be computed from 13 September 1996 until fully
paid. The Decision and Resolution of the Court of Appeals, in CA- ROMEO J. CALLEJO, SR.
G.R. CV No. 68278, dated 6 November 2001 and 29 January 2002, Associate Justice
respectively, are, thus, MODIFIED in the following manner, to wit:
CERTIFICATION
1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the
amount of P8,395,072.26, representing the balance of the loss Pursuant to Article VIII, Section 13 of the Constitution, it is hereby
suffered by TRANS-ASIA and covered by Marine Policy No. certified that the conclusions in the above Decision were reached in
MH93/1363; consultation before the case was assigned to the writer of the opinion
of the Court’s Division.
ARTEMIO V. PANGANIBAN Bank (PNB) seeks against the respondents the spouses Agustin and Pilar
Chief Justice
Rocamora (spouses Rocamora).
Republic of the Philippines
Supreme Court
THE FACTUAL ANTECEDENTS
Manila

On September 25, 1981, the spouses Rocamora obtained a loan from PNB
SECOND DIVISION in the aggregate amount of P100,000.00 under the Cottage Industry
Guarantee and Loan Fund (CIGLF). The loan was payable in five years,
PHILIPPINE NATIONAL BANK, G.R. No. 164549 under the following terms: P35,000 payable semi-annually and P65,000
Petitioner, payable annually. In addition to the principal amount, the spouses Rocamora
Present:
agreed to pay interest at the rate of 12% per annum, plus a penalty fee of 5%
*
YNARES-SANTIAGO, per annum in case of delayed payments. The spouses Rocamora signed two
**
- versus - CARPIO-MORALES, promissory notes[2] evidencing the loan.
Acting Chairperson,
BRION,
DEL CASTILLO, and To secure their loan obligations, the spouses Rocamora executed two
ABAD, JJ. mortgages: a real estate mortgage[3] over a property covered by Transfer
SPOUSES AGUSTIN and PILAR Certificate of Title No. 7160 in the amount of P10,000, and a chattel
ROCAMORA,
Respondents. Promulgated: mortgage[4] over various machineries in the amount of P25,000. Payment of
the remaining P65,000 was under the CIGLF guarantee, with the spouses
September 18, 2009 Rocamora paying the required guarantee fee.
x ------------------------------------------------------------------------------------------x

Both the promissory note and the real estate mortgage deed contained
an escalation clause that allowed PNB to increase the 12% interest rate at
DECISION
anytime without notice, within the limits allowed by law. The pertinent
portion of the promissory note stated:

For value received, we, jointly and severally, promise to pay

BRION, J.:
We resolve in this petition for review on certiorari[1] the legal
propriety of the deficiency judgment that the petitioner Philippine National
to the ORDER of the PHILIPPINE NATIONAL BANK, at
its office in Pto. Princesa City, Philippines, the sum of xxx
together with interest thereon at the rate of 12% per annum
until paid, which interest rate the Bank may at any time,
without notice, raise within the limits allowed by law, and
I/we also agree to pay jointly and severally, 5% per annum
 penalty charge, by way of liquidated damages, should this Total penalty due up to 01-07-94.. 75,583.47
note be unpaid or is not renewed on due date. [Emphasis TOTAL AMOUNT DUE AND PAYABLE P 206,297.47[7]
supplied.]

The PNB claimed that the outstanding principal balance as of

While paragraph (k) of the real estate mortgage deed provided:
(k) INCREASE OF INTEREST RATE foreclosure date (September 19, 1990) was P79,484.65, plus interest and
penalties, for a total due and demandable obligation
The MORTGAGEE reserves the right to increase
the interest rate charged on the obligation secured by this of P250,812.10. Allegedly, after deducting the P75,500 proceeds of the
mortgage including any amount which it may have foreclosure sale, the spouses Rocamora still owed the bank P206,297.47.
advanced within the limits allowed by law at any time
depending on whatever policy it may adopt in the
future; Provided, that the interest rate on the The spouses Rocamora refused to pay the amount claimed as
accommodation/s secured by the mortgage shall be deficiency. They alleged that the PNB practically created the deficiency by
correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary (a) increasing the interest rates from 12% to 42% per annum, and (b) failing
Board. In either case, the adjustment in the interest rate to immediately foreclose the mortgage pursuant to Presidential Decree No.
agreed upon shall take effect on the effectivity date of the
385 (PD 385 or the Mandatory Foreclosure Law) to prevent the interest and
increase or decrease in that maximum interest rate.
[Emphasis supplied.] penalty charges from accruing.

The spouses Rocamora only paid a total of P32,383.65[5] on the The RTC dismissed PNBs complaint in its decision dated November
loan. Hence, the PNB commenced foreclosure proceedings in August and 10, 1999.[8] The trial court invalidated the escalation clause in the promissory
October 1990. The foreclosure of the mortgaged properties note and the resulting increased interest rates. The court also rejected PNBs
yielded P75,500.00 as total proceeds. reason for the delay in commencing foreclosure proceedings, ruling that the
delay was contrary to the immediate and mandatory foreclosure that PD 385
After the foreclosure, PNB found that the recovered proceeds and the required. The finding that the banks actions were contrary to law, justice, and
amounts the spouses Rocamora previously paid were not sufficient to satisfy morals justified the award of actual, moral, and exemplary damages to the
the loan obligations.PNB thus filed, on January 18, 1994, a complaint for spouses Rocamora. Attorneys fees and costs of suit were also ordered paid.[9]
deficiency judgment[6] before the Regional Trial Court (RTC)
of Puerto Princesa City, Branch 48. The PNB alleged that as of January 7, Except for modifications in the awarded damages, the Court of
1994, the outstanding balance of the spouses Rocamoras loan (including Appeals (CA) decision of March 23, 2004 affirmed the RTC ruling.[10] The
interests and penalties) was P206,297.47, broken down as follows: CA held that the PNB effectively negated the principle of mutuality of
contracts when it increased the interest rates without the spouses Rocamoras
Principal............. P 79,484.65
Total interest due up to 01-07-94.. 51,229.35 conformity. The CA also found the long delay in the foreclosure of the
mortgage, apparently a management lapse, prejudicial to the spouses
Rocamoras interests and contrary as well to law and justice. More
importantly, the CA found insufficient evidence to support the P206,297.47
deficiency claim; the banks testimonial and documentary evidence did not
support the deficiency claim that, moreover, was computed based on bloated
interest rates. The CA maintained these rulings despite the motion for
reconsideration PNB filed;[11] hence, PNBs present recourse to this Court.
THE PETITION
In insisting that it is entitled to a deficiency judgment of P206,297.47, PNB
argues that the RTC and the CA erred in invalidating the escalation clause in
the parties agreement because it fully complied with the requirements for a
valid escalation clause under this Courts following pronouncement in Banco
Filipino Savings and Mortgage Bank v. Navarro:[12]
It is now clear that from March 17, 1980 [the
effectivity date of Presidential Decree No. 1684 allowing the
increase in the stipulated rate of interest], escalation clauses,
to be valid, should specifically provide: (1) that there can
be an increase in interest if increased by law or by the
Monetary Board; and (2) in order for such stipulation to
be valid, it must include a provision for reduction of the
stipulated interest "in the event that the applicable
maximum rate of interest is reduced by law or by the
Monetary Board. [Emphasis supplied.]
The PNB posits that the presence of a de-escalation clause (referring to the
second of the above requirements, which was designed to prevent a resulting
one-sided situation on the part of the lender-bank) in the real estate mortgage
deed rules out any violation of the principle of mutuality of contracts.
The PNB also contends that it did not unreasonably delay the institution of
foreclosure proceedings by acting three years after the spouses Rocamora
defaulted on their obligation.Under Article 1142 of the Civil Code, a
mortgage action prescribes in 10 years; the same 10-year period is provided
in Article 1144 (1) for actions based on written contracts.Thus, the PNB
alleges that it had 10 years from 1987 (the time when the spouses Rocamora
allegedly defaulted from paying their loan obligation) to institute the
foreclosure proceedings. Its decision to foreclose in 1990 three years after the
default should not be taken against it, especially since the delay was
prompted by the banks sincere desire to assist the spouses Rocamora.
Additionally, the PNB claims that the decision to foreclose is entirely
the banks prerogative. The provisions of PD 385 should not be read as a
limitation affecting the right of banks to foreclose within the 10-year period
granted under the Civil Code. While PD 385 requires government banks to
immediately foreclose mortgages under specified conditions, the provision
does not limit the period within which the bank can foreclose; to hold
otherwise would be contrary to the stated objectives of PD 385 to enhance
the resources of government financial institutions and to facilitate the
financing of essential development programs and projects.
On the basis of these arguments, the PNB contests the damages awarded to
the spouses Rocamora, as the PNB had no malice, nor any furtive design:
when it increased the interest rates pursuant to the escalation clause; when it
decided to foreclose the mortgages only in 1990; and when it sought to claim
the deficiency. PNB claimed all these to be proper acts made in the exercise
of its rights.
Opposing the PNBs arguments, the spouses Rocamora allege the following:
a. The PNB failed to sufficiently and satisfactorily prove the
amount of P250,812.10, claimed to be the total obligation due at
the time of foreclosure, against which the proceeds of the
 foreclosure sale (P75,500.00) were deducted and which became
the basis of the banks deficiency claim (P206,297.47);
b. The ballooning of the spouses Rocamoras loan obligation was
the PNBs own doing when it increased the interest rates
and failed to immediately foreclose the mortgages;
c. The PNBs unilateral increase of interest rates violated the
principle of mutuality of contracts;
d. The PNB failed to comply with the immediate and mandatory
foreclosure required under PD 385; and
e. The PNB failed to call on the CIGLF which secured the
payment of P65,000.00 of the loan.
THE COURTS RULING
We find no basis to reverse the CAs decision and, consequently, deny the
petition.
Proof of Deficiency Claim
Necessary
The foreclosure of chattel and real estate mortgages is governed by Act Nos.
1508 and 3135, respectively. Although both laws do not contain a provision
expressly or impliedly authorizing the mortgagee to recover the deficiency
resulting after the foreclosure proceeds are deducted from the principal
obligation, the Court has construed the laws silence as a grant to the
mortgagee of the right to maintain an action for the deficiency; the mortgages
are given merely as security, not as settlement or satisfaction of the
indebtedness.[13]
As in any claim for payment of money, a mortgagee must be able to prove
the basis for the deficiency judgment it seeks. The right of the mortgagee to
pursue the debtor arises only when the proceeds of the foreclosure sale are
ascertained to be insufficient to cover the obligation and the other costs at the
time of the sale.[14] Thus, the amount of the obligation prior to foreclosure
and the proceeds of the foreclosure are material in a claim for deficiency.
In this case, both the RTC and the CA found that PNB failed to prove the
claimed deficiency; its own testimonial and documentary evidence in fact
contradicted one another. The PNB alleged that the spouses Rocamoras
obligation at the time of foreclosure (September 19, 1990) amounted
to P250,812.10, yet its own documentary evidence[15] showed that, as of that
date, the total obligation was only P206,664.34; the PNBs own witness, Mr.
Reynaldo Caso, testified that the amount due from the spouses Rocamora
was only P206,664.34.
At any rate, whether the total obligation due at the time of foreclosure
was P250,812.10 as PNB insisted or P206,664.34 as its own record
disclosed, our own computation of the amounts involved does not add up to
the P206,297.47 PNB claimed as deficiency.[16] We find it significant that
PNB has been consistently unable to provide a detailed and credible
accounting of the claimed deficiency. What appears clear is that after adding
up the spouses Rocamoras partial payments and the proceeds of the
foreclosure, the PNB has already received a total of P107,883.68 as payment
for the spouses Rocamoras P100,000.00 loan; the claimed P206,297.47
deficiency consisted mainly of interests and penalty charges (or about 61.5%
of the amount claimed). The spouses Rocamora posit that their loan would
not have bloated to more than double the original amount if PNB had not
increased the interest rates and had it immediately foreclosed the mortgages.
Escalation clauses do not
authorize the unilateral
increase of interest rates
Escalation clauses are valid and do not contravene public policy.[17] These
clauses are common in credit agreements as means of maintaining fiscal
stability and retaining the value of money on long-term contracts. To avoid
any resulting one-sided situation that escalation clauses may bring, we the PNB and private respondent gave the PNB a license
(although in fact there was none) to increase the interest
required in Banco Filipino[18] the inclusion in the parties agreement of a de- rate at will during the term of the loan, that license
escalation clause that would authorize a reduction in the interest rates would have been null and void for being violative of the
corresponding to downward changes made by law or by the Monetary Board. principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract
of adhesion, where the parties do not bargain on equal
The validity of escalation clauses notwithstanding, we cautioned that these footing, the weaker partys (the debtor) participation being
clauses do not give creditors the unbridled right to adjust interest reduced to the alternative to take it or leave it. Such a
contract is a veritable trap for the weaker party whom the
rates unilaterally.[19] As we said in the same Banco Filipino case, any courts of justice must protect against abuse and imposition.
increase in the rate of interest made pursuant to an escalation clause
must be the result of an agreement between the parties.[20] The minds of
We repeated this rule in the 1994 case of PNB v. CA and Jayme-
all the parties must meet on the proposed modification as this modification
Fernandez[24] and the 1996 case of PNB v. CA and Spouses Basco. [25] Taking
affects an important aspect of the agreement. There can be no contract in the
no heed of these rulings, the escalation clause PNB used in the present case
true sense in the absence of the element of an agreement, i.e., the parties
to justify the increased interest rates is no different from the escalation clause
mutual consent. Thus, any change must be mutually agreed upon,
assailed in the 1996 PNB case;[26] in both, the interest rates were increased
otherwise, the change carries no binding effect.[21] A stipulation on the
from the agreed 12% per annum rate to 42%. We held:
validity or compliance with the contract that is left solely to the will of one of
PNB successively increased the stipulated interest so
the parties is void; the stipulation goes against the principle of mutuality of
that what was originally 12% per annum became, after only
contract under Article 1308 of the Civil Code.[22] As correctly found by the two years, 42%. In declaring the increases invalid, we held:
appellate court, even with a de-escalation clause, no matter how elaborately We cannot countenance petitioner
worded, an unconsented increase in interest rates is ineffective if it bank's posturing that the escalation
clause at bench gives it unbridled right
transgresses the principle of mutuality of contracts. to unilaterally upwardly adjust the
Precisely for this reason, we struck down in several cases many of them interest on private respondents'
loan. That would completely take away
involving PNB the increase of interest rates unilaterally imposed by
from private respondents the right to
creditors. In the 1991 case of PNB v. CA and Ambrosio Padilla,[23] we assent to an important modification in
declared: their agreement, and would negate the
element of mutuality in contracts.
In order that obligations arising from contracts may
have the force of law between the parties, there must be xxxx
mutuality between the parties based on their essential In this case no attempt was made by PNB to
equality. A contract containing a condition which makes its secure the conformity of private respondents to the
fulfillment dependent exclusively upon the uncontrolled will successive increases in the interest rate. Private
of one of the contracting parties, is void. Hence, even respondents' assent to the increases cannot be implied
assuming that the P1.8 million loan agreement between
 from their lack of response to the letters sent by PNB,
informing them of the increases. For as stated in one
case, no one receiving a proposal to change a contract is
obliged to answer the proposal.[27] [Emphasis supplied.]
On the strength of this ruling, PNBs argument that the spouses
Rocamoras failure to contest the increased interest rates that were
purportedly reflected in the statements of account and the demand letters sent
by the bank amounted to their implied acceptance of the increase should
likewise fail.
Evidently, PNBs failure to secure the spouses Rocamoras consent to
the increased interest rates prompted the lower courts to declare excessive
and illegal the interest rates imposed. To go around this lower court finding,
PNB alleges that the P206,297.47 deficiency claim was computed using only
the original 12% per annum interest rate. We find this unlikely. Our
examination of PNBs own ledgers, included in the records of the case,
clearly indicates that PNB imposed interest rates higher than the agreed 12%
per annum rate.[28] This confirmatory finding, albeit based solely on ledgers
found in the records, reinforces the application in this case of the rule that
findings of the RTC, when affirmed by the CA, are binding upon this Court.
PD 385 mandates
immediate foreclosure of
collaterals and securities
when the arrearages
amount to at least 20% of
the
total outstanding obligation
Another reason that militates against the deficiency claim is PNBs own
admitted delay in instituting the foreclosure proceedings.[29]
Section 1 of PD 385 states:
Section 1. It shall be mandatory for government
financial institutions, after the lapse of sixty (60) days from
the issuance of this Decree, to foreclose the collaterals
and/or securities for any loan, credit, accommodation,
and/or guarantees granted by them whenever the
arrearages on such account, including accrued interest
and other charges, amount to at least twenty percent
(20%) of the total outstanding obligations, including
interest and other charges, as appearing in the books of
account and/or related records of the financial institution
concerned. This shall be without prejudice to the exercise by
the government financial institutions of such rights and/or
remedies available to them under their respective contracts
with their debtors, including the right to foreclose on loans,
credits, accommodations and/or guarantees on which the
arrearages are less than twenty percent (20%). [Emphasis
supplied.]
Under PD 385, government financial institutions which was PNBs status
prior to its full privatization in 1996 are mandated to immediately foreclose
the securities given for any loan when the arrearages amount to at least 20%
of the total outstanding obligation.[30]
As stated in the narrated facts, PNB commenced foreclosure proceedings in
1990 or three years after the spouses defaulted on their obligation in 1987.
On this factual premise, the PNB now insists as a legal argument that its right
to foreclose should not be affected by the mandatory tenor of PD 385, since it
exercised its right still within the 10-year prescription period allowed under
Articles 1142 and 1144 (1) of the Civil Code.
PNBs argument completely misses the point. The issue before us is the effect
of the delay in commencing foreclosure proceedings on PNBs right to
recover the deficiency, not on its right to foreclose. The delay in commencing
foreclosure proceedings bears a significant function in the deficiency amount
being claimed, as the amount undoubtedly includes interest and penalty
charges which accrued during the period covered by the delay. The
depreciation of the mortgaged properties during the period of delay must also
be factored in, as this affects the proceeds that the mortgagee can recover in WHEREFORE, we DENY the petitioners petition for review
the foreclosure sale, which in turn affects its deficiency claim. There was on certiorari, and MODIFY the March 23, 2004 decision of the Court of
also, in this case, the four-year gap between the foreclosure proceedings and Appeals in CA-G.R. CV No. 66088 by DELETING the moral and
the filing of the complaint for deficiency judgment during which time exemplary damages, attorneys fees, and litigation costs awarded to the
interest, whether at the 12% per annum rate or higher, and penalty charges respondents. All other aspects of the assailed decision
also accrued. For the Court to grant the PNBs deficiency claim would be to are AFFIRMED. Costs against the petitioner.
award it for its delay and its undisputed disregard of PD 385.
SO ORDERED.
The Award for Damages
ARTURO D. BRION
Moral damages are not recoverable simply because a contract has Associate Justice
been breached. They are recoverable only if the defendant acted fraudulently
or in bad faith or in wanton disregard of his contractual obligations.[31] The
breach must be wanton, reckless, malicious or in bad faith, and oppressive or WE CONCUR:
abusive. Likewise, a breach of contract may give rise to exemplary damages
only if the guilty party acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner.[32]
CONCHITA CARPIO-MORALES
Associate Justice
We are not sufficiently convinced that PNB acted fraudulently, in Acting Chairperson
bad faith, or in wanton disregard of its contractual obligations, simply
because it increased the interest rates and delayed the foreclosure of the
mortgages. Bad faith cannot be imputed simply because the defendant acted
with bad judgment or with attendant negligence. Bad faith is more than these;
it pertains to a dishonest purpose, to some moral obliquity, or to the
conscious doing of a wrong, a breach of a known duty attributable to a
motive, interest or ill will that partakes of the nature of fraud.[33] Proof of CONSUELO YNARES- MARIANO C. DEL CASTILLO
actions of this character is undisputably lacking in this case. Consequently, SANTIAGO Associate Justice
Associate Justice
we do not find the spouses Rocamora entitled to an award of moral and
exemplary damages. Under these circumstances, neither should they recover
attorneys fees and litigation expense.[34] These awards are accordingly
deleted.
 ROBERTO A. ABAD
Associate Justice
ATTESTATION

I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the
Courts Division.

CONCHITA CARPIO-MORALES
Associate Justice
Acting Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the

Acting Division Chairpersons Attestation, it is hereby certified that the
conclusions in the above Decision were reached in consultation before the
case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice