LOANS
in the amount of P626.17 with interest on
1. REPUBLIC VS BAGTAS
The Court of Appeals certified this case to this
Court because only questions of law are raised.
On 8 May 1948 Jose V. Bagtas borrowed from
the Republic of the Philippines through the
Bureau of Animal Industry three bulls: a Red
Sindhi with a book value of P1,176.46, a
Bhagnari, of P1,320.56 and a Sahiniwal, of
P744.46, for a period of one year from 8 May
1948 to 7 May 1949 for breeding purposes
subject to a government charge of breeding fee
of 10% of the book value of the bulls. Upon the
expiration on 7 May 1949 of the contract, the
borrower asked for a renewal for another period
of one year. However, the Secretary of
Agriculture and Natural Resources approved a
renewal thereof of only one bull for another year
from 8 May 1949 to 7 May 1950 and requested
the return of the other two. On 25 March 1950
Jose V. Bagtas wrote to the Director of Animal
Industry that he would pay the value of the three
bulls. On 17 October 1950 he reiterated his
desire to buy them at a value with a deduction
of yearly depreciation to be approved by the
Auditor General. On 19 October 1950 the
Director of Animal Industry advised him that the
book value of the three bulls could not be
reduced and that they either be returned or their
book value paid not later than 31 October 1950.
Jose V. Bagtas failed to pay the book value of
the three bulls or to return them. So, on 20
December 1950 in the Court of First Instance of
Manila the Republic of the Philippines
commenced an action against him praying that
he be ordered to return the three bulls loaned to
him or to pay their book value in the total sum of
P3,241.45 and the unpaid breeding fee in the
sum of P199.62, both with interests, and costs;
and that other just and equitable relief be
granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel
Navarro, Rosete and Manalo, answered that
because of the bad peace and order situation in
Cagayan Valley, particularly in the barrio of
Baggao, and of the pending appeal he had
taken to the Secretary of Agriculture and Natural
Resources and the President of the Philippines
from the refusal by the Director of Animal
Industry to deduct from the book value of the
bulls corresponding yearly depreciation of 8%
from the date of acquisition, to which
depreciation the Auditor General did not object,
he could not return the animals nor pay their
value and prayed for the dismissal of the
complaint.
After hearing, on 30 July 1956 the trial court
render judgment —
. . . sentencing the latter (defendant) to
pay the sum of P3,625.09 the total value
of the three bulls plus the breeding fees
both sums of (at) the legal rate from the
filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte
for a writ of execution which the court granted
on 18 October and issued on 11 November
1958. On 2 December 1958 granted an ex-parte
motion filed by the plaintiff on November 1958
for the appointment of a special sheriff to serve
the writ outside Manila. Of this order appointing
a special sheriff, on 6 December 1958, Felicidad
M. Bagtas, the surviving spouse of the
defendant Jose Bagtas who died on 23 October
1951 and as administratrix of his estate, was
notified. On 7 January 1959 she file a motion
alleging that on 26 June 1952 the two bull Sindhi
and Bhagnari were returned to the Bureau
Animal of Industry and that sometime in
November 1958 the third bull, the Sahiniwal,
died from gunshot wound inflicted during a Huk
raid on Hacienda Felicidad Intal, and praying
that the writ of execution be quashed and that a
writ of preliminary injunction be issued. On 31
January 1959 the plaintiff objected to her
motion. On 6 February 1959 she filed a reply
thereto. On the same day, 6 February, the Court
denied her motion. Hence, this appeal certified
by the Court of Appeals to this Court as stated
at the beginning of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas,
Jr., son of the appellant by the late defendant,
returned the Sindhi and Bhagnari bulls to
Roman Remorin, Superintendent of the NVB
Station, Bureau of Animal Industry, Bayombong,
Nueva Vizcaya, as evidenced by a
memorandum receipt signed by the latter
(Exhibit 2). That is why in its objection of 31
January 1959 to the appellant's motion to quash
the writ of execution the appellee prays "that
another writ of execution in the sum of P859.53
be issued against the estate of defendant
deceased Jose V. Bagtas." She cannot be held
liable for the two bulls which already had been
returned to and received by the appellee.
The appellant contends that the Sahiniwal bull
was accidentally killed during a raid by the Huk
in November 1953 upon the surrounding barrios
of Hacienda Felicidad Intal, Baggao, Cagayan,
where the animal was kept, and that as such
death was due to force majeure she is relieved
from the duty of returning the bull or paying its
value to the appellee. The contention is without
merit. The loan by the appellee to the late
defendant Jose V. Bagtas of the three bulls for
breeding purposes for a period of one year from
8 May 1948 to 7 May 1949, later on renewed for
another year as regards one bull, was subject to
the payment by the borrower of breeding fee of
10% of the book value of the bulls. The appellant
contends that the contract
was commodatum and that, for that reason, as
the appellee retained ownership or title to the
bull it should suffer its loss due to force majeure.
A contract of commodatum is essentially
gratuitous.1 If the breeding fee be considered a
compensation, then the contract would be a
lease of the bull. Under article 1671 of the Civil
Code the lessee would be subject to the
responsibilities of a possessor in bad faith,
because she had continued possession of the
bull after the expiry of the contract. And even if
the contract be commodatum, still the appellant
is liable, because article 1942 of the Civil Code
provides that a bailee in a contract
of commodatum —
. . . is liable for loss of the things, even if
it should be through a fortuitous event:
(2) If he keeps it longer than the period
stipulated . . .
(3) If the thing loaned has been delivered
with appraisal of its value, unless there is
a stipulation exempting the bailee from
responsibility in case of a fortuitous
event;
The original period of the loan was from 8 May
1948 to 7 May 1949. The loan of one bull was
renewed for another period of one year to end
on 8 May 1950. But the appellant kept and used
the bull until November 1953 when during a Huk
raid it was killed by stray bullets. Furthermore,
when lent and delivered to the deceased
husband of the appellant the bulls had each an
appraised book value, to with: the Sindhi, at
P1,176.46, the Bhagnari at P1,320.56 and the
Sahiniwal at P744.46. It was not stipulated that
in case of loss of the bull due to fortuitous event
the late husband of the appellant would be
exempt from liability.
The appellant's contention that the demand or
prayer by the appellee for the return of the bull
or the payment of its value being a money claim
should be presented or filed in the intestate
proceedings of the defendant who died on 23
October 1951, is not altogether without merit.
However, the claim that his civil personality
having ceased to exist the trial court lost
jurisdiction over the case against him, is
untenable, because section 17 of Rule 3 of the
Rules of Court provides that —
After a party dies and the claim is not
thereby extinguished, the court shall
order, upon proper notice, the legal
representative of the deceased to appear
and to be substituted for the deceased,
within a period of thirty (30) days, or
within such time as may be granted. . . .
and after the defendant's death on 23 October
1951 his counsel failed to comply with section
16 of Rule 3 which provides that —
Whenever a party to a pending case dies
. . . it shall be the duty of his attorney to
inform the court promptly of such death .
. . and to give the name and residence of
the executory administrator, guardian, or
other legal representative of the
deceased . . . .
The notice by the probate court and its
publication in the Voz de Manila that Felicidad
M. Bagtas had been issue letters of
administration of the estate of the late Jose
Bagtas and that "all persons having claims for
monopoly against the deceased Jose V. Bagtas,
arising from contract express or implied,
whether the same be due, not due, or
contingent, for funeral expenses and expenses
of the last sickness of the said decedent, and
judgment for monopoly against him, to file said
claims with the Clerk of this Court at the City Hall
Bldg., Highway 54, Quezon City, within six (6)
months from the date of the first publication of
this order, serving a copy thereof upon the
aforementioned Felicidad M. Bagtas, the
appointed administratrix of the estate of the said
deceased," is not a notice to the court and the
appellee who were to be notified of the
defendant's death in accordance with the
above-quoted rule, and there was no reason for
such failure to notify, because the attorney who
appeared for the defendant was the same who
represented the administratrix in the special
proceedings instituted for the administration and
settlement of his estate. The appellee or its
attorney or representative could not be
expected to know of the death of the defendant
or of the administration proceedings of his
estate instituted in another court that if the
attorney for the deceased defendant did not
notify the plaintiff or its attorney of such death as
required by the rule.
As the appellant already had returned the two
bulls to the appellee, the estate of the late
defendant is only liable for the sum of P859.63,
the value of the bull which has not been returned
to the appellee, because it was killed while in the
custody of the administratrix of his estate. This
is the amount prayed for by the appellee in its
objection on 31 January 1959 to the motion filed
on 7 January 1959 by the appellant for the
quashing of the writ of execution.
Special proceedings for the administration and
settlement of the estate of the deceased Jose V.
Bagtas having been instituted in the Court of
First Instance of Rizal (Q-200), the money
judgment rendered in favor of the appellee
cannot be enforced by means of a writ of
execution but must be presented to the probate
court for payment by the appellant, the
administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed
from is set aside, without pronouncement as to
costs.
Bengzon, C.J., Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L., Paredes, Dizon,
Regala and Makalintal, JJ., concur.
Barrera, J., concurs in the result.
2. PAJUYO VS CA
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 in CA-G.R.
SP No. 43129. The Court of Appeals set aside
the 11 November 1996 decision[3] of the
Regional Trial Court of Quezon City, Branch
81,[4] affirming the 15 December 1995
decision[5] of the Metropolitan Trial Court of
Quezon City, Branch 31.[6]
The Antecedents
In June 1979, petitioner Colito T. Pajuyo
(Pajuyo) paid P400 to a certain Pedro Perez for
the rights over a 250-square meter lot in Barrio
Payatas, Quezon City. Pajuyo then constructed
a house made of light materials on the
lot. Pajuyo and his family lived in the house from
1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private
respondent Eddie Guevarra (Guevarra)
executed a Kasunduan or agreement. Pajuyo,
as owner of the house, allowed Guevarra to live
in the house for free provided Guevarra would
maintain the cleanliness and orderliness of 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 The Ruling of the Court
opined, was clearly an afterthought.
The procedural issues Pajuyo is raising are
baseless. However, we find merit in the
The Issues
substantive issues Pajuyo is submitting for
resolution.
Pajuyo raises the following issues for
resolution:
Procedural Issues
WHETHER THE COURT OF APPEALS
ERRED OR ABUSED ITS AUTHORITY AND
Pajuyo insists that the Court of Appeals
DISCRETION TANTAMOUNT TO LACK OF
should have dismissed outright Guevarras
JURISDICTION:
petition for review because the RTC decision
had already become final and executory when
1) in GRANTING, instead of
the appellate court acted on Guevarras motion
denying, Private
for extension to file the petition. Pajuyo points
Respondents Motion for an
out that Guevarra had only one day before the
Extension of thirty days to
expiry of his period to appeal the RTC
file petition for review at the
decision.Instead of filing the petition for review
time when there was no
with the Court of Appeals, Guevarra filed with
more period to extend as the
this Court an undated motion for extension of 30
decision of the Regional
days to file a petition for review. This Court
Trial Court had already
merely referred the motion to the Court of
become final and executory.
Appeals. Pajuyo believes that the filing of the
2) in giving due course, instead motion for extension with this Court did not toll
of dismissing, private the running of the period to perfect the
respondents Petition for appeal. Hence, when the Court of Appeals
Review even though the received the motion, the period to appeal had
certification against forum- already expired.
shopping was signed only
We are not persuaded.
by counsel instead of by
petitioner himself. Decisions of the regional trial courts in the
exercise of their appellate jurisdiction are
3) in ruling that the Kasunduan
appealable to the Court of Appeals by petition
voluntarily entered into by
for review in cases involving questions of fact or
the parties was in fact a
mixed questions of fact and law.[14] Decisions of
commodatum, instead of a
the regional trial courts involving pure questions
Contract of Lease as found
of law are appealable directly to this Court by
by the Metropolitan Trial
petition for review.[15] These modes of appeal
Court and in holding that the
are now embodied in Section 2, Rule 41 of the
ejectment case filed against
1997 Rules of Civil Procedure.
defendant-appellant is
without legal and factual Guevarra believed that his appeal of the
basis. RTC decision involved only questions of
law. Guevarra thus filed his motion for extension
4) in reversing and setting
to file petition for review before this Court on 14
aside the Decision of the
December 1996. On 3 January 1997, Guevarra
Regional Trial Court in Civil
then filed his petition for review with this Court. A
Case No. Q-96-26943 and
perusal of Guevarras petition for review gives
in holding that the parties
the impression that the issues he raised were
are in pari delicto being both
pure questions of law. There is a question of law
squatters, therefore, illegal
when the doubt or difference is on what the law
occupants of the contested
is on a certain state of facts.[16] There is a
parcel of land.
question of fact when the doubt or difference is
5) in deciding the unlawful on the truth or falsity of the facts alleged.[17]
detainer case based on the
In his petition for review before this Court,
so-called Code of Policies of
Guevarra no longer disputed the
the National Government
facts. Guevarras petition for review raised these
Center Housing Project
questions: (1) Do ejectment cases pertain only
instead of deciding the same
to possession of a structure, and not the lot on
under the Kasunduan
which the structure stands? (2) Does a suit by a
voluntarily executed by the
squatter against a fellow squatter constitute a
parties, the terms and
valid case for ejectment? (3) Should a
conditions of which are the
Presidential Proclamation governing the lot on
laws between
which a squatters structure stands be
themselves.[13]
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 lands applied for, or all public lands for that
claims is his.[45] The party deprived of matter, be removed from the jurisdiction of the
possession must not take the law into his own judicial Branch of the Government, so that any
hands.[46] Ejectment proceedings are summary troubles arising therefrom, or any breaches of
in nature so the authorities can settle speedily the peace or disorders caused by rival
actions to recover possession because of the claimants, could be inquired into only by the
overriding need to quell social disturbances.[47] Lands Department to the exclusion of the
courts? The answer to this question seems to us
We further explained in Pitargue the
evident. The Lands Department does not have
greater interest that is at stake in actions for
the means to police public lands; neither does it
recovery of possession. We made the following
have the means to prevent disorders arising
pronouncements in Pitargue:
therefrom, or contain breaches of the peace
among settlers; or to pass promptly upon
The question that is before this Court is: Are
conflicts of possession. Then its power is
courts without jurisdiction to take cognizance of
clearly limited to disposition and alienation,
possessory actions involving these public lands
and while it may decide conflicts of
before final award is made by the Lands
possession in order to make proper award,
Department, and before title is given any of the
the settlement of conflicts of possession
conflicting claimants? It is one of utmost
which is recognized in the court herein has
importance, as there are public lands
another ultimate purpose, i.e., the protection
everywhere and there are thousands of settlers,
of actual possessors and occupants with a
especially in newly opened regions. It also
view to the prevention of breaches of the
involves a matter of policy, as it requires the
peace. The power to dispose and alienate
determination of the respective authorities and
could not have been intended to include the
functions of two coordinate branches of the
power to prevent or settle disorders or
Government in connection with public land
breaches of the peace among rival settlers
conflicts.
or claimants prior to the final award. As to
this, therefore, the corresponding branches of
Our problem is made simple by the fact that
the Government must continue to exercise
under the Civil Code, either in the old, which was
power and jurisdiction within the limits of their
in force in this country before the American
respective functions. The vesting of the Lands
occupation, or in the new, we have a possessory
Department with authority to administer,
action, the aim and purpose of which is the
dispose, and alienate public lands,
recovery of the physical possession of real
therefore, must not be understood as
property, irrespective of the question as to who
depriving the other branches of the
has the title thereto. Under the Spanish Civil
Government of the exercise of the respective
Code we had the accion interdictal, a summary
functions or powers thereon, such as the
proceeding which could be brought within one
authority to stop disorders and quell
year from dispossession (Roman Catholic
breaches of the peace by the police, the
Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291);
authority on the part of the courts to take
and as early as October 1, 1901, upon the
jurisdiction over possessory actions arising
enactment of the Code of Civil Procedure (Act
therefrom not involving, directly or
No. 190 of the Philippine Commission) we
indirectly, alienation and disposition.
implanted the common law action of forcible
entry (section 80 of Act No. 190), the object of
Our attention has been called to a principle
which has been stated by this Court to be to
enunciated in American courts to the effect that
prevent breaches of the peace and criminal
courts have no jurisdiction to determine the
disorder which would ensue from the
rights of claimants to public lands, and that until
withdrawal of the remedy, and the
the disposition of the land has passed from the
reasonable hope such withdrawal would
control of the Federal Government, the courts
create that some advantage must accrue to
will not interfere with the administration of
those persons who, believing themselves
matters concerning the same. (50 C. J. 1093-
entitled to the possession of property, resort
1094.) We have no quarrel with this principle.
to force to gain possession rather than to
The determination of the respective rights of
some appropriate action in the court to
rival claimants to public lands is different from
assert their claims. (Supia and Batioco vs.
the determination of who has the actual physical
Quintero and Ayala, 59 Phil. 312, 314.) So
possession or occupation with a view to
before the enactment of the first Public Land Act
protecting the same and preventing disorder
(Act No. 926) the action of forcible entry was
and breaches of the peace. A judgment of the
already available in the courts of the country. So
court ordering restitution of the possession of a
the question to be resolved is, Did the
parcel of land to the actual occupant, who has
Legislature intend, when it vested the power and
been deprived thereof by another through the
authority to alienate and dispose of the public
use of force or in any other illegal manner, can
lands in the Lands Department, to exclude the
never be prejudicial interference with the
courts from entertaining the possessory action
disposition or alienation of public lands. On the
of forcible entry between rival claimants or
other hand, if courts were deprived of
occupants of any land before award thereof to
jurisdiction of cases involving conflicts of
any of the parties? Did Congress intend that the
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
the Kasunduan.Control over the property still
rested with Pajuyo and this is evidence of actual conclusive adjudication on the merits on the
possession. issue of ownership.[82] The owner can still go to
court to recover lawfully the property from the
Pajuyos absence did not affect his actual
person who holds the property without legal
possession of the disputed property.
title.Our ruling here does not diminish the power
Possession in the eyes of the law does not
of government agencies, including local
mean that a man has to have his feet on every
governments, to condemn, abate, remove or
square meter of the ground before he is deemed
demolish illegal or unauthorized structures in
in possession.[77] One may acquire possession
accordance with existing laws.
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
Attorneys Fees and Rentals
always necessary.[79]

The MTC and RTC failed to justify the award

Ruling on Possession Does not Bind Title to of P3,000 attorneys fees to Pajuyo. Attorneys
the Land in Dispute 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
We are aware of our pronouncement in
the exception rather than the rule.[84] Attorneys
cases where we declared that squatters and
fees are not awarded every time a party prevails
intruders who clandestinely enter into titled
in a suit because of the policy that no premium
government property cannot, by such act,
should be placed on the right to litigate.[85] We
acquire any legal right to said property.[80] We
therefore delete the attorneys fees awarded to
made this declaration because the person who
Pajuyo.
had title or who had the right to legal possession
over the disputed property was a party in the We sustain the P300 monthly rentals the
ejectment suit and that party instituted the case MTC and RTC assessed against
against squatters or usurpers. Guevarra. Guevarra did not dispute this factual
finding of the two courts. We find the amount
In this case, the owner of the land, which is
reasonable compensation to Pajuyo. The P300
the government, is not a party to the ejectment
monthly rental is counted from the last demand
case. This case is between squatters. Had the
to vacate, which was on 16 February 1995.
government participated in this case, the courts
could have evicted the contending squatters, WHEREFORE, we GRANT the
Pajuyo and Guevarra. petition. The Decision dated 21 June 2000 and
Resolution dated 14 December 2000 of the
Since the party that has title or a better right
Court of Appeals in CA-G.R. SP No. 43129 are
over the property is not impleaded in this case,
SET ASIDE.The Decision dated 11 November
we cannot evict on our own the parties. Such a
1996 of the Regional Trial Court of Quezon City,
ruling would discourage squatters from seeking
Branch 81 in Civil Case No. Q-96-26943,
the aid of the courts in settling the issue of
affirming the Decision dated 15 December 1995
physical possession. Stripping both the plaintiff
of the Metropolitan Trial Court of Quezon City,
and the defendant of possession just because
Branch 31 in Civil Case No. 12432, is
they are squatters would have the same
REINSTATED with MODIFICATION. The award
dangerous implications as the application of the
of attorneys fees is deleted. No costs.
principle of pari delicto. Squatters would then
rather settle the issue of physical possession SO ORDERED.
among themselves than seek relief from the
Davide, Jr., C.J., (Chairman), Panganiban,
courts if the plaintiff and defendant in the
Ynares-Santiago, and Azcuna, JJ., concur.
ejectment case would both stand to lose
possession of the disputed property. This would
subvert the policy underlying actions for
3. DE LA PAZ VS L&J DEVT CO.
recovery of possession.
Since Pajuyo has in his favor priority in time "No interest shall be due unless it has been
in holding the property, he is entitled to remain expressly stipulated in writing."1
on the property until a person who has title or a
better right lawfully ejects him. Guevarra is This is a Petition for Review on
certainly not that person. The ruling in this case, Certiorari2 assailing the February 27, 2008
however, does not preclude Pajuyo and Decision3 of the Court of Appeals (CA) in CA-
Guevarra from introducing evidence and G.R. SP No. 100094, which reversed and set
presenting arguments before the proper aside the Decision4 dated April 19, 2007 of the
administrative agency to establish any right to Regional Trial Court (RTC), Branch 192,
which they may be entitled under the law.[81] Marikina City in Civil Case No. 06-1145-MK. The
said RTC Decision affirmed in all respects the
In no way should our ruling in this case be
Decision5 dated June 30, 2006 of the
interpreted to condone squatting. The ruling on
Metropolitan Trial Court (MeTC), Branch 75,
the issue of physical possession does not affect
Marikina City in Civil Case No. 05-7755, which
title to the property nor constitute a binding and
ordered respondent L & J Development
Company (L&J) to pay petitioner Architect
Rolando C. De La Paz (Rolando) its principal
obligation of ₱350,000.00, plus 12% interest per
annumreckoned from the filing of the Complaint
until full payment of the obligation.
Likewise assailed is the CA’s June 6, 2008
Resolution6 which denied Rolando’s Motion for
Reconsideration.
Factual Antecedents
On December 27, 2000, Rolando lent
₱350,000.00 without any security to L&J, a
property developer with Atty. Esteban Salonga
(Atty. Salonga) as its President and General
Manager. The loan, with no specified maturity
date, carried a 6% monthly interest, i.e.,
₱21,000.00. From December 2000 to August
2003, L&J paid Rolando a total of
₱576,000.007 representing interest charges.
As L&J failed to pay despite repeated demands,
Rolando filed a Complaint8 for Collection of Sum
of Money with Damages against L&J and Atty.
Salonga in his personal capacity before the
MeTC, docketed as Civil Case No. 05-7755.
Rolando alleged, amongothers, that L&J’s
debtas of January 2005, inclusive of the monthly
interest, stood at ₱772,000.00; that the 6%
monthly interest was upon Atty. Salonga’s
suggestion; and, that the latter tricked him into
parting with his money without the loan
transaction being reduced into writing.
In their Answer,9 L&J and Atty. Salonga denied
Rolando’s allegations. While they
acknowledged the loan as a corporate debt,
they claimed that the failure to pay the same
was due to a fortuitous event, that is, the
financial difficulties brought about by the
economic crisis. They further argued that
Rolando cannot enforce the 6% monthly interest
for being unconscionable and shocking to the
morals. Hence, the payments already made
should be applied to the ₱350,000.00 principal
loan.
During trial, Rolando testified that he had no
communication with Atty. Salonga prior to the
loan transaction but knew him as a lawyer, a son
of a former Senator, and the owner of L&J which
developed Brentwood Subdivision in Antipolo
where his associate Nilo Velasco (Nilo) lives.
When Nilo told him that Atty. Salonga and L&J
needed money to finish their projects, heagreed
to lend them money. He personally met withAtty.
Salonga and their meeting was cordial.
He narrated that when L&J was in the process
of borrowing the ₱350,000.00 from him, it was
Arlene San Juan (Arlene), the
secretary/treasurer of L&J, who negotiated the
terms and conditions thereof.She said that the
money was to finance L&J’s housing project.
Rolando claimed that it was not he who
demanded for the 6% monthly interest. It was
L&J and Atty. Salonga, through Arlene, who
insisted on paying the said interest as they
asserted that the loan was only a short-term
one.
Ruling of the Metropolitan Trial Court
The MeTC, in its Decision10 of June 30, 2006,
upheld the 6% monthly interest. In so ruling, it
ratiocinated that since L&J agreed thereto and
voluntarily paid the interest at suchrate from
2000 to 2003, it isalready estopped from
impugning the same. Nonetheless, for reasons
of equity, the saidcourt reduced the interest rate
to 12% per annumon the remaining principal
obligation of ₱350,000.00. With regard to
Rolando’s prayer for moral damages, the MeTC
denied the same as it found no malice or bad
faith on the part ofL&J in not paying the
obligation. It likewise relieved Atty. Salonga of
any liability as it found that he merely acted in
his official capacity in obtaining the loan. The
MeTC disposed of the case as follows:
WHEREFORE, premises considered, judgment
is hereby rendered in favor of the plaintiff, Arch.
Rolando C. Dela Paz, and against the
defendant, L & J Development Co., Inc., as
follows:
a) ordering the defendant L & J
Development Co., Inc. to pay plaintiff the
amount of Three Hundred Fifty Thousand
Pesos (₱350,000.00) representing the
principal obligation, plus interest at the
legal rate of 12% per annum to be
computed from January 20, 2005, the
date of the filing of the complaint, until the
whole obligation is fully paid;
b) ordering the defendant L & J
Development Co., Inc. to pay plaintiff the
amount of Five Thousand Pesos
(₱5,000.00) as and for attorney’s fees;
and
c) to pay the costs of this suit.
SO ORDERED.11
Ruling of the Regional Trial Court
L&J appealed to the RTC. It asserted in its
appeal memorandum12 that from December
2000 to March 2003, it paid monthly interest of
₱21,000.00 based on the agreed-upon interest
rate of 6%monthly and from April 2003 to August
2003, interest paymentsin various
13
amounts. The total of interest payments made
amounts to ₱576,000.00 – an amount which is
even more than the principal obligation of
₱350,000.00
L&J insisted that the 6% monthly interest rate is
unconscionable and immoral. Hence, the 12%
per annumlegal interest should have been
applied from the time of the constitution of the
obligation. At 12% per annum interest rate, it
asserted that the amount of interestit ought to
pay from December 2000 to March 2003 and
from April 2003 to August 2003, only amounts to
₱105,000.00. If this amount is deducted from
the total interest paymentsalready made, which
is ₱576,000.00, the amount of ₱471,000.00
appears to have beenpaid over and above what
is due. Applying the rule on compensation, the
principal loan of ₱350,000.00 should be set-off
against the ₱471,000.00, resulting in the
complete payment of the principal loan.
Unconvinced, the RTC, inits April 19, 2007
Decision,14 affirmed the MeTC Decision, viz:
WHEREFORE, premises considered, the
Decision appealed from is hereby AFFIRMED in
all respects, with costs against the appellant.
SO ORDERED.15
Ruling of the Court of Appeals
Undaunted, L&J went to the CA and echoed its
arguments and proposed computation as
proffered before the RTC.
In a Decision16 dated February 27, 2008, the
CAreversed and set aside the RTC Decision.
The CA stressed that the parties failedto
stipulate in writing the imposition of interest on
the loan. Hence, no interest shall be due thereon
pursuant to Article 1956 of the Civil Code.17 And
even if payment of interest has been stipulated
in writing, the 6% monthly interest is still
outrightly illegal and unconscionable because it
is contrary to morals, if not against the law.
Being void, this cannot be ratified and may be
set up by the debtor as defense. For these
reasons, Rolando cannot collect any interest
even if L&J offered to pay interest.
Consequently, he has to return all the interest
payments of ₱576,000.00 to L&J.
Considering further that Rolando and L&J
thereby became creditor and debtor of each
other, the CA applied the principle of legal
compensation under Article 1279 of the Civil
Code.18 Accordingly, it set off the principal loan
of ₱350,000.00 against the ₱576,000.00 total
interest payments made, leaving an excess of
₱226,000.00, which the CA ordered Rolando to
pay L&J plus interest. Thus:
WHEREFORE, the DECISION DATED APRIL
19, 2007 is REVERSED and SET ASIDE.
CONSEQUENT TO THE FOREGOING,
respondent Rolando C. Dela Paz is ordered to
pay to the petitioner the amount of
₱226,000.00,plus interest of 12% per
annumfrom the finality of this decision.
Costs of suit to be paid by respondent Dela Paz.
SO ORDERED.19
In his Motion for Reconsideration,20 Rolando
argued thatthe circumstances exempt both the
application of Article 1956 and of jurisprudence
holding that a 6% monthly interest is
unconscionable, unreasonable, and exorbitant.
He alleged that Atty. Salonga, a lawyer, should
have taken it upon himself to have the loan and
the stipulated rate of interest documented but,
by way of legal maneuver, Atty. Salonga, whom
he fully trusted and relied upon, tricked him into
believing that the undocumented and
uncollateralized loan was withinlegal bounds.
Had Atty. Salonga told him that the stipulated
interest should be in writing, he would have
readily assented. Furthermore, Rolando insisted
that the 6% monthly interest ratecould not be
unconscionable as in the first place, the interest
was not imposed by the creditor but was in fact
offered by the borrower, who also dictated all the
terms of the loan. He stressed that in cases
where interest rates were declared
unconscionable, those meant to be protected by
such declaration are helpless borrowers which
is not the case here.
Still, the CA denied Rolando’s motion in its
Resolution21 of June 6, 2008.
Hence, this Petition.
The Parties’ Arguments
Rolando argues that the 6%monthly interest
rateshould not have been invalidated because
Atty. Salonga took advantage of his legal
knowledge to hoodwink him into believing that
no document was necessaryto reflect the
interest rate. Moreover, the cases anent
unconscionable interest rates that the CA relied
upon involve lenders who imposed the
excessive rates,which are totally different from
the case at bench where it is the borrower who
decided on the high interest rate. This case does
not fall under a scenariothat ‘enslaves the
borrower or that leads to the hemorrhaging of
his assets’ that the courts seek to prevent.
L&J, in controverting Rolando’s arguments,
contends that the interest rate is subject of
negotiation and is agreedupon by both parties,
not by the borrower alone. Furthermore,
jurisprudence has nullified interestrates on
loans of 3% per month and higher as these rates
are contrary to moralsand public interest. And
while Rolando raises bad faithon Atty. Salonga’s
part, L&J avers thatsuch issue is a question of
fact, a matter that cannot be raised under Rule
45.
Issue
The Court’s determination of whether to uphold
the judgment of the CA that the principal loan is
deemed paid isdependent on the validity of the
monthly interest rate imposed. And in
determining such validity, the Court must
necessarily delve into matters regarding a) the
form of the agreement of interest under the law
and b) the alleged unconscionability of the
interest rate. Our Ruling
The Petition is devoid of merit.
The lack of a written stipulation to pay interest
on the loaned amount disallows a creditor from
charging monetary interest.
Under Article 1956 of the Civil Code, no interest
shall bedue unless it has been expressly
stipulated in writing. Jurisprudence on the
matter also holds that for interest to be due and
payable, two conditions must concur: a) express
stipulation for the payment of interest; and b) the
agreement to pay interest is reduced in writing.
Here, it is undisputed that the parties did not put
down in writing their agreement. Thus, no
interest is due. The collection of interest without
any stipulation in writing is prohibited by law.22
But Rolando asserts that his situation deserves
an exception to the application of Article 1956.
He blames Atty. Salonga for the lack of a written
document, claiming that said lawyer used his
legal knowledge to dupe him. Rolando thus
imputes bad faith on the part of L&J and Atty.
Salonga. The Court, however, finds no
deception on the partof L&J and Atty. Salonga.
For one, despite the lack of a document
stipulating the payment of interest, L&J
nevertheless devotedly paid interests on the
loan. It only stopped when it suffered from
financial difficulties that prevented it from
continuously paying the 6% monthly rate. For
another,regardless of Atty. Salonga’s
profession, Rolando who is an architect and an
educated man himself could have been a more
reasonably prudent person under the
circumstances. To top it all, he admitted that he
had no prior communication with Atty. Salonga.
Despite Atty. Salonga being a complete
stranger, he immediately trusted him and lent
his company ₱350,000.00, a significant amount.
Moreover, as the creditor,he could have
requested or required that all the terms and
conditions of the loan agreement, which include
the payment of interest, be put down in writing
to ensure that he and L&J are on the same
page. Rolando had a choice of not acceding and
to insist that their contract be put in written form
as this will favor and safeguard him as a lender.
Unfortunately, he did not. It must be stressed
that "[c]ourts cannot follow one every step of his
life and extricate him from bad bargains, protect
him from unwise investments, relieve him from
one-sided contracts,or annul the effects of
foolish acts. Courts cannotconstitute
themselves guardians of persons who are not
legally incompetent."23
It may be raised that L&J is estopped from
questioning the interest rate considering that it
has been paying Rolando interest at such
ratefor more than two and a half years. In fact,
in its pleadings before the MeTCand the RTC,
L&J merely prayed for the reduction of interest
from 6% monthly to 1% monthly or 12% per
annum. However, in Ching v. Nicdao,24 the daily
payments of the debtor to the lender were
considered as payment of the principal amount
of the loan because Article 1956 was not
complied with. This was notwithstanding the
debtor’s admission that the payments made
were for the interests due. The Court
categorically stated therein that "[e]stoppel
cannot give validity to an act that is prohibited
by law or one thatis against public policy."
Even if the payment of interest has been
reduced in writing, a 6% monthly interest rate on
a loan is unconscionable, regardless of who
between the parties proposed the rate.
Indeed at present, usury has been legally non-
existent in view of the suspension of the Usury
Law25 by Central Bank Circular No. 905 s.
1982.26 Even so, not all interest rates levied
upon loans are permitted by the courts as they
have the power to equitably reduce
unreasonable interest rates. In Trade &
Investment Development Corporation of the
Philippines v. Roblett Industrial Construction
Corporation,27 we said:
While the Court recognizes the right of the
parties to enter into contracts and who are
expectedto comply with their terms and
obligations, this rule is not absolute. Stipulated
interest rates are illegal if they are
unconscionable and the Court is allowed to
temper interest rates when necessary. In
exercising this vested power to determine what
is iniquitous and unconscionable, the Court
must consider the circumstances of each case.
What may be iniquitous and unconscionable in
onecase, may be just in another. x x x28
Time and again, it has been ruled in a plethora
of cases that stipulated interest rates of 3% per
month and higher, are excessive, iniquitous,
unconscionable and exorbitant. Such
stipulations are void for being contrary to
morals, if not against the law.29 The Court,
however, stresses that these rates shall be
invalidated and shall be reduced only in cases
where the terms of the loans are open-ended,
and where the interest rates are applied for an
indefinite period. Hence, the imposition of a
specific sum of ₱40,000.00 a month for six
months on a ₱1,000,000.00 loan is not
considered unconscionable.30
In the case at bench, there is no specified period
as to the payment of the loan. Hence, levying
6% monthly or 72% interest per annumis
"definitely outrageous and inordinate." 31 The
situation that it was the debtor who insisted on
the interest rate will not exempt Rolando from a
ruling that the rate is void. As this Court cited in
Asian Cathay Finance and Leasing Corporation
v. Gravador,32 "[t]he imposition of an
unconscionable rate of interest on a money 4. PHILIPPINE NATIONAL BANK, v. HEIRS
debt, even if knowingly and voluntarily OF BENEDICTO AND AZUCENA ALONDAY
assumed, is immoral and unjust. It is tantamount
to a repugnant spoliation and an iniquitous DECISION
deprivation of property, repulsive to the common
sense of man."33 Indeed, "voluntariness does BERSAMIN, J.:
notmake the stipulation on [an unconscionable]
interest valid."34 The issue is whether the all-embracing or
dragnet clause contained in the first mortgage
As exhaustibly discussed,no monetary interest contract executed between the parties for the
isdue Rolando pursuant to Article security of the first loan could authorize the
1956.1âwphi1 The CA thus correctly adjudged foreclosure of the property under the mortgage
that the excess interest payments made by L&J to secure a second loan despite the full payment
should be applied to its principal loan. As of the second loan.
computed by the CA, Rolando is bound to return
the excess payment of ₱226,000.00 to L&J Antecedents
following the principle of solutio indebiti.35
On September 26, 1974, the Spouses
However, pursuant to Central Bank Circular No. Benedicto and Azucena Alonday (Spouses
799 s. 2013 which took effect on July 1, Alonday) obtained an agricultural loan of
2013,36 the interest imposed by the CA must be P28,000.00 from the petitioner at its Digos,
accordingly modified. The ₱226,000.00 which Davao del Sur Branch, and secured the
Rolando is ordered to pay L&J shall earn an obligation by constituting a real estate mortgage
interest of 6% per annumfrom the finality of this on their parcel of land situated in Sta. Cruz,
Decision. Davao del Sur registered under Original
Certificate of Title (OCT) No. P-3599 of the
WHEREFORE, the Decision dated February 27, Registry of Deeds of Davao del
2008 of the Court of Appeals in CA-G.R. SP No. Sur.1chanrobleslaw
100094 is hereby AFFIRMED with modification
that petitioner Rolando C. De La Paz is ordered On June 11, 1980, the Spouses Alonday
to pay respondent L&J Development Company obtained a commercial loan for P16,700.00 from
the amount of ,₱226,000.00, plus interest of the petitioner's Davao City Branch, and
6o/o per annum from the finality of this Decision constituted a real estate mortgage over their
until fully paid. 598 square meter residential lot situated in Ulas,
Davao City registered under Transfer Certificate
SO ORDERED. of Title (TCT) No. T-66139 of the Registry of
Deeds of Davao City.
MARIANO C. DEL CASTILLO
Associate Justice It is noted that the mortgage contracts contained
the following identical provision, to
WE CONCUR: wit:ChanRoblesVirtualawlibrary
That for and in consideration of certain loans,
ANTONIO T. CARPIO** overdrafts, and other credit accommodations,
Associate Justice obtained from the Mortgagee, which is hereby
fixed at _________, Philippine Currency, and to
MARTIN S. secure the payment of the same and those
ARTURO D. BRION others that the Mortgagee may extend to the
VILLARAMA, JR.***
Associate Justice Mortgagor, including interests and expenses,
Associate Justice
and other obligations owing by the Mortgagor to
the Mortgagee, whether direct or indirect,
MARVIC MARIO VICTOR F. LEONEN
principal or secondary, as appearing in the
Associate Justice
accounts, books and records of the Mortgagee,
the Mortgagor does hereby transfer and convey
CERTIFICATION
by way of mortgage unto the Mortgagee, its
successors or assigns, the parcel of land which
Pursuant to Section 13, Article VIII of the is/are described in the list inserted at the back of
Constitution, I certify that the conclusions in the this document xxx. In case the Mortgagor
above Decision had been reached in executes subsequent promissory note or notes
consultation before the case was assigned to either as renewal of the former note, as an
the writer of the opinion of the Court's Division. extension thereof, or as a new loan, or is given
any other kind of accommodation, xxx, this
ANTONIO T. CARPIO mortgage shall also stand as security for the
Associate Justice payment of the said promissory note or notes
Acting Chief Justice and/or accommodations without the necessity of
executing a new contract and this mortgage
shall have the same force and effect as if the
said promissory note or notes and/or
accommodations were existing on the date
thereof, notwithstanding full payments of any or
all obligations of the Mortgagors. This mortgage
shall also stand as security for said obligations
and any and all other obligations of the
Mortgagor to the Mortgagee of whatever kind
and nature, whether such obligations have been
contracted before, during or after the
constitution of this mortgage. However, if the
Mortgagor shall pay the Mortgagee, its
successors or assigns, the obligations secured
by this mortgage, together with interests, costs
and other expenses, on or before the date they
are due, and shall keep and perform all the
covenants and agreements herein contained for
the Mortgagor to keep and perform, then this
mortgage shall be null and void, otherwise, it
shall remain in full force and
effect.2chanroblesvirtuallawlibrary
The Spouses Alonday made partial payments
on the commercial loan, which they renewed on
December 23, 1983 for the balance of
P15,950.00. The renewed commercial loan,
although due on December 25, 1984, was fully
paid on July 5, 1984.3chanrobleslaw
On August 6, 1984, respondents Mercy and
Alberto Alonday, the children of the Spouses
Alonday, demanded the release of the mortgage
over the property covered by TCT No. T-66139.
The petitioner informed them, however, that the
mortgage could not be released because the
agricultural loan had not yet been fully paid, and
that as the consequence of the failure to pay, it
had foreclosed the mortgage over the property
covered by OCT No. P-3599 on August 17,
1984.
It appeared that notwithstanding such
foreclosure, a deficiency balance of P91,525.22
remained.4 Hence, the petitioner applied for the
extrajudicial foreclosure of the mortgage on the
property covered by TCT No. T-66139. A notice
of extra-judicial sale was issued on August 20,
1984, and the property covered by TCT No. T-
66139 was sold on September 28, 1984 to the
petitioner in the amount of P29,900.00. Since
the Alondays were unable to redeem the
property, the petitioner consolidated its
ownership. Later on, the property was sold for
P48,000.00 to one Felix Malmis on November
10, 1989.5chanrobleslaw
According to the petitioner, the deed of
mortgage relating to the property covered by
TCT No. T-66139 included an "all-embracing
clause" whereby the mortgage secured not only
the commercial loan contracted with its Davao
City Branch but also the earlier agricultural loan
contracted with its Digos Branch.
Judgment of the RTC
On July 8, 1994, therefore, the respondents
instituted a complaint against the petitioner in
the Regional Trial Court (RTC) in Davao City to
recover damages and attorney's fees (Civil
Case No. 23,021-94), averring that the
foreclosure and sale of the property covered by
TCT No. T-66139 was illegal.
On November 28, 1997, the RTC rendered
judgment finding in favor of the
respondents,6 and disposed as
follows:ChanRoblesVirtualawlibrary
WHEREFORE, judgment is hereby rendered in
favor of the plaintiffs and against defendant
bank, ordering said defendant
bank:ChanRoblesVirtualawlibrary
1. To pay plaintiffs the sum of One Million
Seven Hundred Thousand
(P1,700,000.00) Pesos, representing the
value of the land covered by TCT No. T-
66139;
2. To pay plaintiffs the sum of P20,000.00
as attorney's fees; and cralawlawlibrary
3. To pay the costs of this suit.
SO ORDERED.7chanroblesvirtuallawlibrary
The RTC observed that if the petitioner had
intended to have the second mortgage secure
the pre-existing agricultural loan, it should have
made an express reservation to that effect; that
based on the all-embracing clause, the
mortgage was a contract of adhesion, and the
ambiguities therein should be construed strictly
against the petitioner; that the last sentence of
the all-embracing clause provided that the
mortgage would be null and void upon the
payment of the obligations secured by the
mortgage; and that the petitioner was guilty of
bad faith in refusing to nullify the mortgage
despite full payment of the commercial loan prior
to its maturity.
The RTC also ruled that because the property
had already been sold to Malmis, a third party
not brought within the trial court's jurisdiction, it
could not order the return of the property; and
that it was ordering the petitioner instead to pay
the respondents the value of the property under
its present market valuation.
Decision of the CA
Dissatisfied, the petitioner appealed to the Court
of Appeals (CA). The appeal was docketed as
C.A.-G.R. CV No. 60625.
On August 31, 2005, the CA affirmed the
RTC,8 observing that the mortgage, being a
contract of adhesion, should be construed
strictly against the petitioner as the patty who
had drafted the same; and that although the
petitioner had argued, citing Mojica v. Court of
Appeals,9 that all-embracing clauses were valid
to secure past, present and future loans, Mojica
v. Court of Appeals was not in point inasmuch
as the facts therein were different from the facts
herein.
The petitioner filed a motion for reconsideration,
but the CA denied the motion on February 27,
2006.10chanrobleslaw
Hence, this appeal by petition for review
on certiorari.
Issues
The petitioner assigns the following errors to the
CA, to wit:ChanRoblesVirtualawlibrary
I. The Court of Appeals grievously erred in
restricting and delimiting the scope and
validity of the standard "all-embracing
clause" in real estate mortgage contracts
solely to future indebtedness and not to
prior ones, contrary to leading Supreme
Court decisions on the matter.
II. Even assuming arguendo that the xxx
decisions are inapplicable to the case at
bar, the Court of Appeals grievously
erred in awarding the unsubstantiated
amount of P1.7 million in damages and
P20,000.00 as attorney's fees against
PNB without factual and legal basis.11
The petitioner submits that Mojica v. Court of
Appeals validates the use of an all-embracing
clause in a mortgage agreement to secure not
only the amount indicated on the mortgage
instrument, but also the mortgagor's future and
past obligations; that by denying the applicability
to the case of Mojica v. Court of Appeals and
other similar rulings, the CA disregarded the
principle of stare decisis; and that the CA in
effect thereby regarded allembracing clauses
invalid as to prior obligations.
Ruling of the Court
The appeal lacks merit.
The CA opined as
follows:ChanRoblesVirtualawlibrary
The real estate mortgage on the property
covered by TCT No. T-66139 was specifically
constituted to secure the payment of the
commercial loan of the Spouses ALONDAY. In
the same manner, the real estate mortgage on
the property covered by OCT No. P-3599 was
constituted to secure the payment of their
agricultural loan with the PNB. With the
execution of separate mortgage contracts for
the two (2) loans, it is clear that the intention of
the parties was to limit the mortgage to the loan
for which it was constituted.
xxxx
The [Mojica] case is not in point since the facts
therein are different from the case at bench.
In Mojica vs. Court of Appeals, the mortgaged
real estate property was made to answer for
future advancement or renewal of the loan,
whereas in the instant case, the foreclosure sale
included a property which was used as a
security for a commercial loan which was
obtained after the agricultural loan.
The mortgage provision relied upon by appellant
is known in American jurisprudence as a
"dragnet" clause, which is specifically phrased
to subsume all debts of past or future origin.
Such clauses pursuant to the pronouncement of
the Supreme Court in DBP vs. Mirang must be
"carefully scrutinized and strictly
construed."12chanrobleslaw
The petitioner wrongly insists that the CA, thr
ough the foregoing ratiocination, held that the
all-embracing or dragnet clauses were
altogether invalid as to prior obligations. What
the CA, although reiterating that the Court
upheld the validity of using real estate
mortgages to secure future advancements, only
thereby pointed out that it could not find similar
rulings as to mortgages executed to secure prior
loans.
There is no question, indeed, that all-embracing
or dragnet clauses have been recognized as
valid means to secure debts of both future and
past origins.13 Even so, we have likewise
emphasized that such clauses were an
exceptional mode of securing obligations, and
have held that obligations could only be deemed
secured by the mortgage if they came fairly
within the terms of the mortgage contract.14 For
the all-embracing or dragnet clauses to secure
future loans, therefore, such loans must be
sufficiently described in the mortgage
contract.15 If the requirement could be imposed
on a future loan that was uncertain to
materialize, there is a greater reason that it
should be applicable to a past loan, which is
already subsisting and known to the parties.
Nonetheless, it was undeniable that the
petitioner had the opportunity to include some
form of acknowledgement of the previously
subsisting agricultural loan in the terms of the
second mortgage contract The mere fact that
the mortgage constituted on the property
covered by TCT No. T-66139 made no mention
of the pre-existing loan could only strongly
indicate that each of the loans of the Spouses
Alonday had been treated separately by the
parties themselves, and this sufficiently
explained why the loans had been secured
by different mortgages.
Another indication that the second mortgage did
not extend to the agricultural loan was the fact
that the second mortgage was entered into in
connection only with the commercial loan. Our
ruling in Prudential Bank v. Alviar16 is then
relevant, to wit:ChanRoblesVirtualawlibrary
xxx The parties having conformed to the
"blanket mortgage clause" or "dragnet clause,"
it is reasonable to conclude that they also
agreed to an implied understanding that
subsequent loans need not be secured by other
securities, as the subsequent loans will be
secured by the first mortgage. In other words,
the sufficiency of the first security is a corollary
component of the "dragnet clause." But of
course, there is no prohibition, as in the
mortgage contract in issue, against
contractually requiring other securities for the
subsequent loans. Thus, when the mortgagor
takes another loan for which another security
was given it could not be inferred that such loan
was made in reliance solely on the original
security with the "dragnet clause," but rather, on
the new security given. This is the "reliance on
the security test."
xxx Accordingly, finding a different security was
taken for the second loan no intent that the
parties relied on the security of the first loan
could be inferred, so it was held. The rationale
involved, the court said, was that the "dragnet
clause" in the first security instrument
constituted a continuing offer by the borrower to
secure further loans under the security of the
first security instrument, and that when the
lender accepted a different security he did not
accept the offer.17chanroblesvirtuallawlibrary
Although the facts in Prudential Bank were not
entirely on all fours with those of this case
because the prior mortgage in Prudential
Bank was sought to be enforced against a
subsequent loan already secured by other
securities, the logic in Prudential Bank is
applicable here. The execution of the
subsequent mortgage by the parties herein to
secure the subsequenlloan was an indication
that they had intended to treat each loan as
distinct from the other, and that they had
intended to secure each of the loans individually
and separately.
We further concur with the CA and the RTC in
their holding that the mortgage contracts
executed by the Spouses Alonday were
contracts of adhesion exclusively prep red by
the petitioner. Under Article 1306 of the Civil
Code, the contracting parties "may establish
such stipulations, clauses, terms and conditions
as they may deem convenient, provided they
are not contrary to law, morals, good customs,
public order or public policy." This is an express
recognition by the law of the right of the people
to enter into all manner of lawful conventions as
part of their safeguarded liberties. The objection
against a contract of adhesion lies most often in
its negation of the autonomy of the will of the
parties in contracts. A contract of adhesion,
albeit valid, becomes objectionable only when it
takes undue advantage of one of the parties the
weaker party- by having such party just adhere
to the terms of the contract. In such situation, the
courts go to the succor of the weaker party by
construing any obscurity in the contract against
the party who prepared the contract, the latter
being presumed as the stronger party to the
agreement, and as the party who caused the
obscurity.18chanrobleslaw
To reiterate, in order for the all-embracing or
dragnet clauses to secure future and other
loans, the loans thereby secured must be
sufficiently described in the mortgage contract.
Considering that the agricultural loan had been
pre-existing when the mortgage was constituted
on the property covered by TCT No. T-66139, it
would have been easy for the petitioner to have
expressly incorporated the reference to such
agricultural loan in the mortgage contract
covering the commercial loan. But the petitioner
did not. Being the party that had prepared the
contract of mortgage, its failure to do so should
be construed that it did not at all contemplate the
earlier loan when it entered into the subsequent
mortgage.
Anent the value of the property covered by TCT
No. T-66139, the findings of the RTC on the
valuation were as
follows:ChanRoblesVirtualawlibrary
Considering that the property is located at the
junction of the roads leading to Toril and Calinan
districts with big establishments all around,
plaintiffs claim that at the time of the filing of this
case which was in 1994, the reasonable market
value of the land was P1,200.00 per square
meter. To date, the value could reasonably be
P3,000.00 per square
meter.19chanroblesvirtuallawlibrary
Opining that the respondents should be
indemnified the value of the loss suffered from
the illegal foreclosure of the property covered by
TCT No. T-66139, theCA adopted the valuation
by the RTC on the established fair market value
of the property being P3,000.00/square meter,
for a total of P1,700,000.00 as damages to be
awarded.20chanrobleslaw
The petitioner challenges the valuation as
devoid of basis. It points out that the complaint
of the Spouses Alonday had placed the value of
the property at P1,200.00/square meter; and
that respondent Alberto Alonday had testified
during the trial that the value of the property had
been only P1,200.00/square meter.
We uphold the challenge by the petitioner.
We are at a loss at how the RTC had computed
and determined the valuation at
P3,000.00/square meter. Such determination
was easily the product of guesswork on the part
of the trial court, for the language employed in
its judgment in reference to such value was
"could reasonably be."21 On its part, the CA
adverted to the valuation as "approximately
P3,000.00,"22 indicating that its own
determination of the fair market value was of
similar tenor as that by the RTC. Accordingly,
the valuation by both lower courts cannot be
upheld, for it is basic enough that in their
determination of actual damages, the comis
should eschew mere assertions, speculations,
conjectures or guesswork;23 otherwise, they
would be guilty of arbitrariness and whimsicality.
Moreover, the courts cannot grant reliefs not
prayed for in the pleadings or in excess of what
is being sought by the party.24chanrobleslaw
To accord with what is fair, based on the
records, we reduce the basis of the actual
damages to P1,200.00/square meter. Such
valuation is insulated from arbitrariness
because it was made by the Spouses Alonday
themselves in their complaint, rendering a total
of P717,600.00 as actual damages.
The lower courts did not impose interest on the
judgment obligation to be paid by the petitioner.
Such interest is in the nature of compensatory
interest, as distinguished from monetary
interest. It is relevant to elucidate on the
distinctions between these kinds of interest. In
this regard, the Court has expounded in Siga-an
v. Villanueva:25cralawredcralawred
Interest is a compensation fixed by the parties
for the use or forbearance of money. This is
referred to as monetary interest. Interest may
also be imposed by law or by courts as penalty
or indemnity for damages. This is called
compensatory interest. The right to interest
arises only by virtue of a contract or by virtue of
damages for delay or failure to pay the principal
loan on which interest is demanded.
Article 1956 of the Civil Code, which refers to
monetary interest, specifically mandates that no
interest shall be due unless it has been
expressly stipulated in writing. As can be
gleaned from the foregoing provision, payment
of monetary interest is allowed only if: (1) there
was an express stipulation for the payment of
interest; and (2) the agreement for the payment
of interest was reduced in writing. The
concurrence of the two conditions is required for
the payment of monetary interest. Thus, we
have held that collection of interest without any
stipulation therefor in writing is prohibited by law.
xxxx
There are instances in which an interest may be
imposed even in the absence of express
stipulation, verbal or written, regarding payment
of interest. Article 2209 of the Civil Code states
that if the obligation consists in the payment of
a sum of money, and the debtor incurs delay, a
legal interest of 12% per annum may be
imposed as indemnity for damages if no
stipulation on the payment of interest was
agreed upon. Likewise, Article 2212 of the Civil
Code provides that interest due shall earn legal
interest from the time it is judicially demanded,
although the obligation may be silent on this
point.
All the same, the interest under these two
instances may be imposed only as a penalty or
damages for breach of contractual obligations.
It cannot be charged as a compensation for the
use or forbearance of money. In other words,
the two instances apply only to compensatory
interest and not to monetary interest.26 xxx
The petitioner should be held liable for interest
on the actual damages of P717,600.00
representing the value of the propetiy with an
area 598 square meters that was lost to them
through the unwarranted foreclosure, the same
to be reckoned from the date of judicial demand
(i.e., the filing of the action by the Spouses
Alonday). At the time thereof, the rate was
12% per annum, and such rate shall run until
June 30, 2013. Thereafter, or starting on July 1,
2013, the rate of interest shall be 6% per
annum until full payment of the obligation,
pursuant to the ruling in Nacar v. Gallery
Frames,27 which took into consideration the
lowering of interest rates by the Monetary
Board.
In addition, Article 221228 of the Civil
Code requires that interest due shall earn legal
interest from the time it is judicially demanded,
although the obligation may be silent upon this
point. Accordingly, the interest due shall itself
earn legal interest of 6% per annum from the
date of finality of the judgment until its full
satisfaction, the interim period being deemed to
be an equivalent to a forbearance of
credit.29chanrobleslaw
WHEREFORE, the Court AFFIRMS the
decision promulgated in C.A.-G.R. CV No.
60625 on August 31, 2005 in all respects subject
to the following MODIFICATIONS, namely: (1)
the award of P1,700,000.00 representing the
value of the land covered by Transfer Certificate
of Title No. T-66139 of the Registry of Deeds of
Davao City is REDUCED to P717,600.00, the
same to be paid by petitioner Philippine National
Bank; (2) the principal amount of P717,600.00
shall earn interest of 12% per annum from the
filing of the complaint until June 30, 2013, and
interest of 6% per annum from July 1, 2013 until
full payment; and (3) the interests thus earned
shall also earn interest of 6% per annum from
the finality of this decision until full payment.
SO ORDERED.chanRoblesvirtualLawlibrary
5. G.R. No. 195166
SPOUSES SALVADOR ABELLA AND ALMA
ABELLA, Petitioners,
vs.
SPOUSES ROMEO ABELLA AND ANNIE
ABELLA, Respondents.
DECISION
LEONEN, J.:
This resolves a Petition for Review on Certiorari
under Rule 45 of the Rules of Court praying that
judgment be rendered reversing and setting
aside the September 30, 2010 Decision1 and
the January 4, 2011 Resolution2 of the Court of
Appeals Nineteenth Division in CA-G.R. CV No.
01388. The Petition also prays that respondents
Spouses Romeo and Annie Abella be ordered
to pay petitioners Spouses Salvador and Alma
Abella 2.5% monthly interest plus the remaining
balance of the amount loaned.
The assailed September 30, 2010 Decision of
the Court of Appeals reversed and set aside the
December 28, 2005 Decision3 of the Regional
Trial Court, Branch 8, Kalibo, Aklan in Civil Case
No. 6627. It directed petitioners to pay
respondents P148,500.00 (plus interest), which
was the amount respondents supposedly
overpaid. The assailed January 4, 2011
Resolution of the Court of Appeals denied
petitioners’ Motion for Reconsideration.
The Regional Trial Court’s December 28, 2005
Decision ordered respondents to pay petitioners
the supposedly unpaid loan balance of
P300,000.00 plus the allegedly stipulated
interest rate of 30% per annum, as well as
litigation expenses and attorney’s fees.4
On July 31, 2002, petitioners Spouses Salvador
and Alma Abella filed a Complaint5 for sum of
money and damages with prayer for preliminary
attachment against respondents Spouses
Romeo and Annie Abella before the Regional
Trial Court, Branch 8, Kalibo, Aklan. The case
was docketed as Civil Case No. 6627.6
In their Complaint, petitioners alleged that
respondents obtained a loan from them in the
amount of P500,000.00. The loan was
evidenced by an acknowledgment receipt dated
March 22, 1999 and was payable within one (1)
year. Petitioners added that respondents were
able to pay a total of P200,000.00—
P100,000.00 paid on two separate occasions—
leaving an unpaid balance of P300,000.00.7
In their Answer8 (with counterclaim and motion
to dismiss), respondents alleged that the
amount involved did not pertain to a loan they
obtained from petitioners but was part of the
capital for a joint venture involving the lending of
money.9
Specifically, respondents claimed that they were
approached by petitioners, who proposed that if
respondents were to "undertake the
management of whatever money [petitioners]
would give them, [petitioners] would get 2.5% a
month with a 2.5% service fee to
[respondents]."10 The 2.5% that each party
would be receiving represented their sharing of
the 5% interest that the joint venture was
supposedly going to charge against its debtors.
Respondents further alleged that the one year
averred by petitioners was not a deadline for
payment but the term within which they were to
return the money placed by petitioners should
the joint venture prove to be not lucrative.
Moreover, they claimed that the entire amount
of P500,000.00 was disposed of in accordance
with their agreed terms and conditions and that
petitioners terminated the joint venture,
prompting them to collect from the joint
venture’s borrowers. They were, however, able
to collect only to the extent of P200,000.00;
hence, the P300,000.00 balance remained
unpaid.11
In the Decision12 dated December 28, 2005, the
Regional Trial Court ruled in favor of petitioners.
It noted that the terms of the acknowledgment
receipt executed by respondents clearly showed
that: (a) respondents were indebted to the
extent of P500,000.00; (b) this indebtedness
was to be paid within one (1) year; and (c) the
indebtedness was subject to interest. Thus, the
trial court concluded that respondents obtained
a simple loan, although they later invested its
proceeds in a lending enterprise.13 The
Regional Trial Court adjudged respondents
solidarily liable to petitioners. The dispositive
portion of its Decision reads:
WHEREFORE, premises considered, judgment
is hereby rendered:
1. Ordering the defendants jointly and
severally to pay the plaintiffs the sum of
P300,000.00 with interest at the rate of
30% per annum from the time the
complaint was filed on July 31, 2002 until
fully paid;
2. Ordering the defendants to pay the
plaintiffs the sum of P2,227.50 as
reimbursement for litigation expenses,
and another sum of P5,000.00 as
attorney’s fees.
For lack of legal basis, plaintiffs’ claim for moral
and exemplary damages has to be denied, and
for lack of merit the counter-claim is ordered
dismissed.14
In the Order dated March 13, 2006,15 the
Regional Trial Court denied respondents’
Motion for Reconsideration.
On respondents’ appeal, the Court of Appeals
ruled that while respondents had indeed entered
into a simple loan with petitioners, respondents
were no longer liable to pay the outstanding
amount of P300,000.00.16
The Court of Appeals reasoned that the loan
could not have earned interest, whether as
contractually stipulated interest or as interest in
the concept of actual or compensatory
damages. As to the loan’s not having earned
stipulated interest, the Court of Appeals
anchored its ruling on Article 1956 of the Civil
Code, which requires interest to be stipulated in
writing for it to be due.17 The Court of Appeals
noted that while the acknowledgement receipt
showed that interest was to be charged, no
particular interest rate was specified.18 Thus, at
the time respondents were making interest
payments of 2.5% per month, these interest
payments were invalid for not being properly
stipulated by the parties. As to the loan’s not
having earned interest in the concept of actual
or compensatory damages, the Court of
Appeals, citing Eusebio-Calderon v.
People,19 noted that interest in the concept of
actual or compensatory damages accrues only
from the time that demand (whether judicial or
extrajudicial) is made. It reasoned that since
respondents received petitioners’ demand letter
only on July 12, 2002, any interest in the
concept of actual or compensatory damages
due should be reckoned only from then. Thus,
the payments for the 2.5% monthly interest
made after the perfection of the loan in 1999 but
before the demand was made in 2002 were
invalid.20
Since petitioners’ charging of interest was
invalid, the Court of Appeals reasoned that all
payments respondents made by way of interest
should be deemed payments for the principal
amount of P500,000.00.21
The Court of Appeals further noted that
respondents made a total payment of
P648,500.00, which, as against the principal
amount of P500,000.00, entailed an
overpayment of P148,500.00. Applying the
principle of solutio indebiti, the Court of Appeals
concluded that petitioners were liable to
reimburse respondents for the overpaid amount
of P148,500.00.22 The dispositive portion of the
assailed Court of Appeals Decision reads:
WHEREFORE, the Decision of the Regional
Trial Court is hereby REVERSED and SET
ASIDE, and a new one issued, finding that the
Spouses Salvador and Alma Abella
are DIRECTED to jointly and severally pay
Spouses Romeo and Annie Abella the amount
of P148,500.00, with interest of 6% interest
(sic) per annum to be computed upon receipt of
this decision, until full satisfaction thereof. Upon
finality of this judgment, an interest as the rate
of 12% per annum, instead of 6%, shall be
imposed on the amount due, until full payment
thereof.23
In the Resolution24 dated January 4, 2011, the
Court of Appeals denied petitioners’ Motion for
Reconsideration.
Aggrieved, petitioners filed the present
appeal25 where they claim that the Court of
Appeals erred in completely striking off interest
despite the parties’ written agreement
stipulating it, as well as in ordering them to
reimburse and pay interest to respondents.
In support of their contentions, petitioners cite
Article 1371 of the Civil Code,26 which calls for
the consideration of the contracting parties’
contemporaneous and subsequent acts in
determining their true intention. Petitioners insist
that respondents’ consistent payment of interest
in the year following the perfection of the loan
showed that interest at 2.5% per month was
properly agreed upon despite its not having
been expressly stated in the acknowledgment
receipt. They add that during the proceedings
before the Regional Trial Court, respondents
admitted that interest was due on the loan.27
In their Comment,28 respondents reiterate the
Court of Appeals’ findings that no interest rate
was ever stipulated by the parties and that
interest was not due and demandable at the
time they were making interest payments.29
In their Reply,30 petitioners argue that even
though no interest rate was stipulated in the
acknowledgment receipt, the case fell under the
exception to the Parol Evidence Rule. They also
argue that there exists convincing and
sufficiently credible evidence to supplement the
imperfection of the acknowledgment receipt.31
For resolution are the following issues:
First, whether interest accrued on respondents’
loan from petitioners. If so, at what rate?
Second, whether petitioners are liable to
reimburse respondents for the latter’s supposed
excess payments and for interest.
I
As noted by the Court of Appeals and the
Regional Trial Court, respondents entered into
a simple loan or mutuum, rather than a joint
venture, with petitioners.
Respondents’ claims, as articulated in their
testimonies before the trial court, cannot prevail
over the clear terms of the document attesting
to the relation of the parties. "If the terms of a
contract are clear and leave no doubt upon the
intention of the contracting parties, the literal
meaning of its stipulations shall control."32
Articles 1933 and 1953 of the Civil Code provide
the guideposts that determine if a contractual
relation is one of simple loan or mutuum:
Art. 1933. 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.
....
Art. 1953. A person who receives a loan of
money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the
creditor an equal amount of the same kind and
quality. (Emphasis supplied)
On March 22, 1999, respondents executed an
acknowledgment receipt to petitioners, which
states:
Batan, Aklan
March 22, 1999
This is to acknowledge receipt of the Amount of
Five Hundred Thousand (P500,000.00) Pesos
from Mrs. Alma R. Abella, payable within one (1)
year from date hereof with interest.
Annie C. Abella (sgd.) Romeo M. Abella
(sgd.)33 (Emphasis supplied)
The text of the acknowledgment receipt is
uncomplicated and straightforward. It attests to:
first, respondents’ receipt of the sum of
P500,000.00 from petitioner Alma Abella;
second, respondents’ duty to pay back this
amount within one (1) year from March 22,
1999; and third, respondents’ duty to pay
interest. Consistent with what typifies a simple
loan, petitioners delivered to respondents with
the corresponding condition that respondents
shall pay the same amount to petitioners within
one (1) year.
II
Although we have settled the nature of the
contractual relation between petitioners and
respondents, controversy persists over
respondents’ duty to pay conventional interest,
i.e., interest as the cost of borrowing money.34
Article 1956 of the Civil Code spells out the
basic rule that "[n]o interest shall be due unless
it has been expressly stipulated in writing."
On the matter of interest, the text of the
acknowledgment receipt is simple, plain, and
unequivocal. It attests to the contracting parties’
intent to subject to interest the loan extended by
petitioners to respondents. The controversy,
however, stems from the acknowledgment
receipt’s failure to state the exact rate of interest.
Jurisprudence is clear about the applicable
interest rate if a written instrument fails to
specify a rate. In Spouses Toring v. Spouses
Olan,35 this court clarified the effect of Article
1956 of the Civil Code and noted that the legal
rate of interest (then at 12%) is to apply: "In a
loan or forbearance of money, according to the
Civil Code, the interest due should be that
stipulated in writing, and in the absence thereof,
the rate shall be 12% per annum."36
Spouses Toring cites and restates (practically
verbatim) what this court settled in Security
Bank and Trust Company v. Regional Trial
Court of Makati, Branch 61: "In a loan or
forbearance of money, the interest due should
be that stipulated in writing, and in the absence
thereof, the rate shall be 12% per annum."37
Security Bank also refers to Eastern Shipping
Lines, Inc. v. Court of Appeals, which, in turn,
stated:38
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.39 (Emphasis supplied)
The rule is not only definite; it is cast in
mandatory language. From Eastern
Shipping to Security Bank to Spouses
Toring, jurisprudence has repeatedly used the
word "shall," a term that has long been settled
to denote something imperative or operating to
impose a duty.40 Thus, the rule leaves no room
for alternatives or otherwise does not allow for
discretion. It requires the application of the legal
rate of interest.
Our intervening Decision in Nacar v. Gallery
Frames41 recognized that the legal rate of
interest has been reduced to 6% per annum:
Recently, however, the Bangko Sentral ng
Pilipinas Monetary Board (BSP-MB), in its
Resolution No. 796 dated May 16, 2013,
approved the amendment of Section 2 of
Circular No. 905, Series of 1982 and,
accordingly, issued Circular No. 799, Series of
2013, effective July 1, 2013, the pertinent
portion of which reads:
The Monetary Board, in its Resolution No. 796
dated 16 May 2013, approved the following
revisions governing the rate of interest in the
absence of stipulation in loan contracts, thereby
amending Section 2 of Circular No. 905, Series
of 1982:
Section 1. The rate of interest for the loan or
forbearance of any money, goods or credits and
the rate allowed in judgments, in the absence of
an express contract as to such rate of
interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection
X305.1 of the Manual of Regulations for Banks
and Sections 4305Q.1, 4305S.3 and 4303P.1 of
the Manual of Regulations for
Non-Bank Financial Institutions are hereby
amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an
express stipulation as to the rate of interest that
would govern the parties, the rate of legal
interest for loans or forbearance of any money,
goods or credits and the rate allowed in
judgments shall no longer be twelve percent
(12%) per annum — as reflected in the case of
Eastern Shipping Lines and Subsection X305.1
of the Manual of Regulations for Banks and
Sections 4305Q.1,= 4305S.3 and 4303P.1 of
the Manual of Regulations for Non- Bank
Financial Institutions, before its amendment by
BSP-MB Circular No. 799 — but will now be six
percent (6%) per annum effective July 1, 2013.
It should be noted, nonetheless, that the new
rate could only be applied prospectively and not
retroactively. Consequently, the twelve percent
(12%) per annum legal interest shall apply only
until June 30, 2013. Come July 1, 2013 the new
rate of six percent (6%) per annum shall be the
prevailing rate of interest when
applicable.42 (Emphasis supplied, citations
omitted)
Nevertheless, both Bangko Sentral ng Pilipinas
Circular No. 799, Series of 2013
and Nacar retain the definite and mandatory
framing of the rule articulated in Eastern
Shipping, Security Bank, and Spouses
Toring. Nacar even restates Eastern Shipping:
To recapitulate and for future guidance, the
guidelines laid down in the case of Eastern
Shipping Lines are accordingly modified to
embody BSP-MB Circular No. 799, 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 6% per
annum to be computed from default, i.e., from
judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the
Civil Code.43 (Emphasis supplied, citations
omitted)
Thus, it remains that where interest was
stipulated in writing by the debtor and creditor in
a simple loan or mutuum, but no exact interest
rate was mentioned, the legal rate of interest
shall apply. At present, this is 6% per annum,
subject to Nacar’s qualification on prospective
application.
Applying this, the loan obtained by respondents
from petitioners is deemed subjected to
conventional interest at the rate of 12% per
annum, the legal rate of interest at the time the
parties executed their agreement.
Moreover, should conventional interest still be
due as of July 1, 2013, the rate of 12% per
annum shall persist as the rate of conventional
interest.
This is so because interest in this respect is
used as a surrogate for the parties’ intent, as
expressed as of the time of the execution of their
contract. In this sense, the legal rate of interest
is an affirmation of the contracting parties’
intent; that is, by their contract’s silence on a
specific rate, the then prevailing legal rate of
interest shall be the cost of borrowing money.
This rate, which by their contract the parties
have settled on, is deemed to persist regardless
of shifts in the legal rate of interest. Stated
otherwise, the legal rate of interest, when
applied as conventional interest, shall always be
the legal rate at the time the agreement was
executed and shall not be susceptible to shifts
in rate.
Petitioners, however, insist on conventional
interest at the rate of 2.5% per month or 30%
per annum. They argue that the
acknowledgment receipt fails to show the
complete and accurate intention of the
contracting parties. They rely on Article 1371 of
the Civil Code, which provides that the
contemporaneous and subsequent acts of the
contracting parties shall be considered should
there be a need to ascertain their intent.44 In
addition, they claim that this case falls under the
exceptions to the Parol Evidence Rule, as
spelled out in Rule 130, Section 9 of the Revised
Rules on Evidence.45
It is a basic precept in legal interpretation and
construction that a rule or provision that treats a
subject with specificity prevails over a rule or
provision that treats a subject in general terms.46
The rule spelled out in Security
Bank and Spouses Toring is anchored on
Article 1956 of the Civil Code and specifically
governs simple loans or mutuum. Mutuum is a
type of nominate contract that is specifically
recognized by the Civil Code and for which the
Civil Code provides a specific set of governing
rules: Articles 1953 to 1961. In contrast, Article
1371 is among the Civil Code provisions
generally dealing with contracts. As this case
particularly involves a simple loan, the specific
rule spelled out in Security Bank and Spouses
Toring finds preferential application as against
Article 1371.
Contrary to petitioners’ assertions, there is no
room for entertaining extraneous (or parol)
evidence. In Spouses Bonifacio and Lucia
Paras v. Kimwa Construction and Development
Corporation,47 we spelled out the requisites for
the admission of parol evidence:
In sum, two (2) things must be established for
parol evidence to be admitted: first, that the
existence of any of the four (4) exceptions has
been put in issue in a party’s pleading or has not
been objected to by the adverse party; and
second, that the parol evidence sought to be
presented serves to form the basis of the
conclusion proposed by the presenting party.48
The issue of admitting parol evidence is a matter
that is proper to the trial, not the appellate, stage
of a case. Petitioners raised the issue of
applying the exceptions to the Parol Evidence
Rule only in the Reply they filed before this
court. This is the last pleading that either of the
parties has filed in the entire string of
proceedings culminating in this Decision. It is,
therefore, too late for petitioners to harp on this
rule. In any case, what is at issue is not
admission of evidence per se, but the
appreciation given to the evidence adduced by
the parties. In the Petition they filed before this
court, petitioners themselves acknowledged
that checks supposedly attesting to payment of
monthly interest at the rate of 2.5% were
admitted by the trial court (and marked as
Exhibits "2," "3," "4," "5," "6," "7," and
"8").49 What petitioners have an issue with is not
the admission of these pieces of evidence but
how these have not been appreciated in a
manner consistent with the conclusions they
advance.
Even if it can be shown that the parties have
agreed to monthly interest at the rate of 2.5%,
this is unconscionable. As emphasized
in Castro v. Tan,50 the willingness of the parties
to enter into a relation involving an
unconscionable interest rate is inconsequential
to the validity of the stipulated rate:
The imposition of an unconscionable rate of
interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is
tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to
the common sense of man. It has no support in
law, in principles of justice, or in the human
conscience nor is there any reason whatsoever
which may justify such imposition as righteous
and as one that may be sustained within the
sphere of public or private morals.51
The imposition of an unconscionable interest
rate is void ab initio for being "contrary to morals,
and the law."52
In determining whether the rate of interest is
unconscionable, the mechanical application of
pre-established floors would be wanting. The
lowest rates that have previously been
considered unconscionable need not be an
impenetrable minimum. What is more crucial is
a consideration of the parties’ contexts.
Moreover, interest rates must be appreciated in
light of the fundamental nature of interest as
compensation to the creditor for money lent to
another, which he or she could otherwise have
used for his or her own purposes at the time it
was lent. It is not the default vehicle for
predatory gain. As such, interest need only be
reasonable. It ought not be a supine mechanism
for the creditor’s unjust enrichment at the
expense of another.
Petitioners here insist upon the imposition of
2.5% monthly or 30% annual interest.
Compounded at this rate, respondents’
obligation would have more than doubled—
increased to 219.7% of the principal—by the
end of the third year after which the loan was
contracted if the entire principal remained
unpaid. By the end of the ninth year, it would
have multiplied more than tenfold (or increased
to 1,060.45%). In 2015, this would have
multiplied by more than 66 times (or increased
to 6,654.17%). Thus, from an initial loan of only
P500,000.00, respondents would be obliged to
pay more than P33 million. This is grossly unfair,
especially since up to the fourth year from when
the loan was obtained, respondents had been
assiduously delivering payment. This reduces
their best efforts to satisfy their obligation into a
protracted servicing of a rapacious loan.
The legal rate of interest is the presumptive
reasonable compensation for borrowed money.
While parties are free to deviate from this, any
deviation must be reasonable and fair. Any
deviation that is far-removed is suspect. Thus,
in cases where stipulated interest is more than
twice the prevailing legal rate of interest, it is for
the creditor to prove that this rate is required by
prevailing market conditions. Here, petitioners
have articulated no such justification.
In sum, Article 1956 of the Civil Code, read in
light of established jurisprudence, prevents the
application of any interest rate other than that
specifically provided for by the parties in their
loan document or, in lieu of it, the legal rate.
Here, as the contracting parties failed to make a
specific stipulation, the legal rate must apply.
Moreover, the rate that petitioners adverted to is
unconscionable. The conventional interest due
on the principal amount loaned by respondents
from petitioners is held to be 12% per annum.
III
Apart from respondents’ liability for conventional
interest at the rate of 12% per annum,
outstanding conventional interest—if any is due
from respondents—shall itself earn legal
interest from the time judicial demand was made
by petitioners, i.e., on July 31, 2002, when they
filed their Complaint. This is consistent with
Article 2212 of the Civil Code, which provides:
Art. 2212. Interest due shall earn legal interest
from the time it is judicially demanded, although
the obligation may be silent upon this point.
So, too, Nacar states that "the interest due shall
itself earn legal interest from the time it is
judicially demanded."53
Consistent with Nacar, as well as with our ruling
in Rivera v. Spouses Chua,54 the interest due on
conventional interest shall be at the rate of 12%
per annum from July 31, 2002 to June 30, 2013.
Thereafter, or starting July 1, 2013, this shall be
at the rate of 6% per annum.
IV
Proceeding from these premises, we find that
respondents made an overpayment in the
amount of P3,379.17.
As acknowledged by petitioner Salvador Abella,
respondents paid a total of P200,000.00, which
was charged against the principal amount of
P500,000.00. The first payment of P100,000.00
was made on June 30, 2001,55 while the second
payment of P100,000.00 was made on
December 30, 2001.56
The Court of Appeals’ September 30, 2010
Decision stated that respondents paid
P6,000.00 in March 1999.57
The Pre-Trial Order dated December 2, 2002,58
stated that the parties admitted that "from the
time the principal sum of P500,000.00 was
borrowed from [petitioners], [respondents] ha[d]
been religiously paying"59 what was supposedly
interest "at the rate of 2.5% per month."60
From March 22, 1999 (after the loan was
perfected) to June 22, 2001 (before
respondents’ payment of P100,000.00 on June
30, 2001, which was deducted from the principal
amount of P500,000.00), the 2.5% monthly
"interest" was pegged to the principal amount of
P500,000.00. These monthly interests, thus,
amounted to P12,500.00 per month.
Considering that the period from March 1999 to
June 2001 spanned twenty seven (27) months,
respondents paid a total of P337,500.00.61
From June 22, 2001 up to December 22, 2001
(before respondents’ payment of another
P100,000.00 on December 30, 2001, which was
deducted from the remaining principal amount
of P400,000.00), the 2.5% monthly "interest"
was pegged to the remaining principal amount
of P400,000.00. These monthly interests, thus,
amounted to P10,000.00 per month.
Considering that this period spanned six (6)
months, respondents paid a total of
P60,000.00.62
From after December 22, 2001 up to June 2002
(when petitioners filed their Complaint), the
2.5% monthly "interest" was pegged to the
remaining principal amount of P300,000.00.
These monthly interests, thus, amounted to
P7,500.00 per month. Considering that this
period spanned six (6) months, respondents
paid a total of P45,000.00.63
Applying these facts and the properly applicable
interest rate (for conventional interest, 12% per
annum; for interest on conventional interest,
12% per annum from July 31, 2002 up to June
30, 2013 and 6% per annum henceforth), the
following conclusions may be drawn:
By the end of the first year following the
perfection of the loan, or as of March 21, 2000,
P560,000.00 was due from respondents. This
consisted of the principal of P500,000.00 and
conventional interest of P60,000.00.
Within this first year, respondents made twelve
(12) monthly payments totalling P150,000.00
(P12,500.00 each from April 1999 to March
2000). This was in addition to their initial
payment of P6,000.00 in March 1999.
Application of payments must be in accordance
with Article 1253 of the Civil Code, which reads:
Art. 1253. If the debt produces interest, payment
of the principal shall not be deemed to have
been made until the interests have been
covered.
Thus, the payments respondents made must
first be reckoned as interest payments.
Thereafter, any excess payments shall be
charged against the principal. As respondents
paid a total of P156,000.00 within the first year,
the conventional interest of P60,000.00 must be
deemed fully paid and the remaining amount
that respondents paid (i.e., P96,000.00) is to be
charged against the principal. This yields a
balance of P404,000.00. By the end of the
second year following the perfection of the loan,
or as of March 21, 2001, P452,480.00 was due
from respondents. This consisted of the
outstanding principal of P404,000.00 and
conventional interest of P48,480.00.
Within this second year, respondents completed
another round of twelve (12) monthly payments
totaling P150,000.00.
Consistent with Article 1253 of the Civil Code,
as respondents paid a total of P156,000.00
within the second year, the conventional interest
of P48,480.00 must be deemed fully paid and
the remaining amount that respondents paid
(i.e., P101,520.00) is to be charged against the
principal. This yields a balance of P302,480.00.
By the end of the third year following the
perfection of the loan, or as of March 21, 2002,
P338,777.60 was due from respondents. This
consists of the outstanding principal of
P302,480.00 and conventional interest of
P36,297.60.
Within this third year, respondents paid a total of
P320,000.00, as follows:
 (a) Between March 22, 2001 and June
30, 2001, respondents completed three
(3) monthly payments of P12,500.00
each, totaling P37,500.00.
(b) On June 30, 2001, respondents paid
P100,000.00, which was charged as
principal payment.
(c) Between June 30, 2001 and
December 30, 2001, respondents
delivered monthly payments of
P10,000.00 each. At this point, the
monthly payments no longer amounted
to P12,500.00 each because the
supposed monthly interest payments
were pegged to the supposedly
remaining principal of P400,000.00.
Thus, during this period, they paid a total
of six (6) monthly payments totaling
P60,000.00.
(d) On December 30, 2001, respondents
paid P100,000.00, which, like the June
30, 2001 payment, was charged against
the principal.
(e) From the end of December 2002 to
the end of February 2002, respondents
delivered monthly payments of
P7,500.00 each. At this point, the
supposed monthly interest payments
were now pegged to the supposedly
remaining principal of P300,000.00.
Thus, during this period, they delivered
three (3) monthly payments totaling
P22,500.00.
Consistent with Article 1253 of the Civil Code,
as respondents paid a total of P320,000.00
within the third year, the conventional interest of
P36,927.50 must be deemed fully paid and the
remaining amount that respondents paid (i.e.,
P283,702.40) is to be charged against the
principal. This yields a balance of P18,777.60.
By the end of the fourth year following the
perfection of the loan, or as of March 21, 2003,
P21,203.51 would have been due from
respondents. This consists of: (a) the
outstanding principal of P18,777.60, (b)
conventional interest of P2,253.31, and (c)
interest due on conventional interest starting
from July 31, 2002, the date of judicial demand,
in the amount of P172.60. The last (i.e., interest
on interest) must be pro-rated. There were only
233 days from July 31, 2002 (the date of judicial
demand) to March 21, 2003 (the end of the
fourth year); this left 63.83% of the fourth year,
within which interest on interest might have
accrued. Thus, the full annual interest on
interest of 12% per annum could not have been
completed, and only the proportional amount of
7.66% per annum may be properly imposed for
the remainder of the fourth year.
From the end of March 2002 to June 2002,
respondents delivered three (3) more monthly
payments of P7,500.00 each. Thus, during this
period, they delivered three (3) monthly
payments totalling P22,500.00.
At this rate, however, payment would have been
completed by respondents even before the end
of the fourth year. Thus, for precision, it is
more appropriate to reckon the amounts due
as against payments made on a monthly,
rather than an annual, basis.
By April 21, 2002, _18,965.38 (i.e., remaining
principal of P18,777.60 plus pro-rated monthly
conventional interest at 1%, amounting to
P187.78) would have been due from
respondents. Deducting the monthly payment of
P7,500.00 for the preceding month in a manner
consistent with Article 1253 of the Civil Code
would yield a balance of P11,465.38.
By May 21, 2002, _11,580.03 (i.e., remaining
principal of P11,465.38 plus pro-rated monthly
conventional interest at 1%, amounting to
P114.65) would have been due from
respondents. Deducting the monthly payment of
P7,500.00 for the preceding month in a manner
consistent with Article 1253 of the Civil Code
would yield a balance of P4,080.03.
By June 21, 2002, P4,120.83 (i.e., remaining
principal of P4,080.03 plus pro-rated monthly
conventional interest at 1%, amounting to
P40.80) would have been due from
respondents. Deducting the monthly payment of
P7,500.00 for the preceding month in a manner
consistent with Article 1253 of the Civil Code
would yield a negative balance of P3,379.17.
Thus, by June 21, 2002, respondents had not
only fully paid the principal and all the
conventional interest that had accrued on their
loan. By this date, they also overpaid P3,379.17.
Moreover, while hypothetically, interest on
conventional interest would not have run from
July 31, 2002, no such interest accrued since
there was no longer any conventional interest
due from respondents by then.
V
As respondents made an overpayment, the
principle of solutio indebiti as provided by Article
2154 of the Civil Code64 applies. Article 2154
reads:
Article 2154. If something is received when
there is no right to demand it, and it was unduly
delivered through mistake, the obligation to
return it arises.
In Moreno-Lentfer v. Wolff,65 this court
explained the application of solutio indebiti:
The quasi-contract of solutio indebiti harks back
to the ancient principle that no one shall enrich
himself unjustly at the expense of another. It
applies where (1) a payment is made when
there exists no binding relation between the
payor, who has no duty to pay, and the person
who received the payment, and (2) the payment
is made through mistake, and not through
liberality or some other cause.66
As respondents had already fully paid the
principal and all conventional interest that had
accrued, they were no longer obliged to make
further payments.1awp++i1 Any further
payment they made was only because of a
mistaken impression that they were still due.
Accordingly, petitioners are now bound by a
quasi-contractual obligation to return any and all
excess payments delivered by respondents.
Nacar provides that "[w]hen 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."67This applies to obligations arising
from quasi-contracts such as solutio indebiti.
Further, Article 2159 of the Civil Code provides:
Art. 2159. Whoever in bad faith accepts an
undue payment, shall pay legal interest if a sum
of money is involved, or shall be liable for fruits
received or which should have been received if
the thing produces fruits.
He shall furthermore be answerable for any loss
or impairment of the thing from any cause, and
for damages to the person who delivered the
thing, until it is recovered.
Consistent however, with our finding that the
excess payment made by respondents were
borne out of a mere mistake that it was due, we
find it in the better interest of equity to no longer
hold petitioners liable for interest arising from
their quasi-contractual obligation.
Nevertheless, Nacar also provides:
3. When the judgment of the court awarding a
sum of money becomes final and executory, the
rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall
be 6% per annum from such finality until its
satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of
credit.68
Thus, interest at the rate of 6% per annum may
be properly imposed on the total judgment
award. This shall be reckoned from the finality
of this Decision until its full satisfaction.
WHEREFORE, the assailed September 30,
2010 Decision and the January 4, 2011
Resolution of the Court of Appeals Nineteenth
Division in CA-G.R. CV No. 01388 are SET
ASIDE. Petitioners Spouses Salvador and Alma
Abella are DIRECTED to jointly and severally
reimburse respondents Spouses Romeo and
Annie Abella the amount of P3,379.17, which
respondents have overpaid.
A legal interest of 6% per annum shall likewise
be imposed on the total judgment award from
the finality of this Decision until its full
satisfaction.
SO ORDERED.
6. G.R. No. 206459
SPOUSES FLORANTE E. JONSAY and
LUZVIMINDA L. JONSAY and MOMARCO
IMPORT CO., INC., Petitioners,
vs.
SOLIDBANK CORPORATION (now
METROPOLITAN BANK AND TRUST
COMPANY), Respondent.
DECISION
REYES, J.:
Before this Court is a Petition for Review1 from
the Amended Decision2 dated November 26,
2012 of the Court of Appeals (CA) in CA-G.R.
CV No. 94012, which reconsidered its earlier
Decision3 therein dated April 27, 2012, and
granted in part the appeal of herein respondent
Solidbank Corporation (Solidbank) from the
Amended Decision4dated July 7, 2009 of the
Regional Trial Court (RTC) of Calamba City,
Branch 35, in Civil Case No. 2912-2000-C,
which annulled the extrajudicial foreclosure
proceedings instituted by Solidbank against the
Spouses Florante E. Jonsay (Florante) and
Luzviminda L. Jonsay (Luzviminda) (Spouses
Jonsay) and Momarco Import Co., Inc.
(Momarco) (petitioners) over the mortgaged
properties.
Factual Antecedents
Momarco, controlled and owned by the Spouses
Jonsay, is an importer, manufacturer and
distributor of animal health and feedmill
products catering to cattle, hog and poultry
producers. On November 9, 1995, and again on
April 28, 1997, Momarco obtained loans of
P40,000,000.00 and P20,000,000.00,
respectively, from Solidbank for which the
Spouses Jonsay executed a blanket mortgage
over three parcels of land they owned in
Calamba City, Laguna registered in their names
under Transfer Certificates of Title Nos. T-
224751, T-210327 and T-269668 containing a
total of 23,733 square meters.5 On November 3,
1997,6 the loans were consolidated under one
promissory note7 for the combined amount of
P60,000,000.00, signed by Florante as
President of Momarco, with his wife Luzviminda
also signing as co-maker.8 The stipulated rate of
interest was 18.75% per annum, along with an
escalation clause tied to increases in pertinent
Central Bank-declared interest rates, by which
Solidbank was eventually able to unilaterally
increase the interest charges up to 30% per
annum. 9
Momarco religiously paid the monthly interests
charged by Solidbank from November 199510
until January 1998, when it paid Pl,370,321.09.
Claiming business reverses brought on by the
1997 Asian financial crisis, Momarco tried
unsuccessfully to negotiate a moratorium or
suspension in its interest payments. Due to
persistent demands by Solidbank, Momarco
made its next, and its last, monthly interest
payment in April 1998 in the amount of
Pl,000,000.00. Solidbank applied the said
payment to Momarco's accrued interest for
February 1998. Momarco sought a loan from
Landbank of the Philippines to pay off its
aforesaid debt but its application fell through.
The anticipated expropriation by the
Department of Public Works and Highways of
the mortgaged lots for the extension of the
South Luzon Expressway (SLEX) also did not
materialize. 11
Solidbank proceeded to extrajudicially foreclose
on the mortgage, and at the auction sale held on
March 5, 1999, it submitted the winning bid of
P82,327,249.54, 12 representing Momarco's
outstanding loans, interests and penalties, plus
attorney's fees of P3,600,000.00. But Momarco
now claims that on the date of the auction the
fair market value of their mortgaged lots had
increased sevenfold to P441,750,000.00. 13 On
March 22, 1999, Sheriff Adelio Perocho (Sheriff
Perocho) issued a certificate of sale to
Solidbank, duly annotated on April 15, 1999 on
the lots' titles. 14
On March 9, 2000, a month before the expiration
of the period to redeem the lots, the petitioners
filed a Complaint15against Solidbank, Sheriff
Perocho and the Register of Deeds of Calamba,
Laguna, docketed as Civil Case No. 2912-2000-
C, for Annulment of the Extrajudicial
Foreclosure of Mortgage, Injunction, Accounting
and Damages with Prayer for the Immediate
Issuance of a Writ of Preliminary Prohibitory
Injunction. They averred that: (a) the amount
claimed by Solidbank as Momarco's total loan
indebtedness is bloated; (b) Solidbank's interest
charges are illegal for exceeding the legal rate
of 12% per annum; (c) the filing fee it charged
has no legal .and factual basis; (d) the attorney's
fees of P3,600,000.00 it billed the petitioners is
excessive and unconscionable; (e) their
previous payments from 1995 to 1997 were not
taken into account in computing their principal
indebtedness; (t) Sheriff Perocho's certificate of
posting was invalid; and (g) the publication of
the notice of the auction sale was defective
because the Morning Chronicle which
published the said notice was not a newspaper
of general circulation in Calamba, Laguna. 16
After Solidbank filed its Answer with
Counterclaim 17 on April 12, 2000, the RTC
heard and granted the petitioners' application for
temporary restraining order on April 13,
2000, 18 followed on May 2, 200019 by issuance
of a writ of preliminary prohibitory injunction,
thus suspending the consolidation of
Solidbank's titles to the subject lots.
The petitioners' principal witness was Florante,
whose testimony was summarized by the RTC
in its amended decision, as follows:
[Florante] signed the loan documents in blank
and the signing took place at his office in
Quezon City; he asserted that they were able to
pay more than Twenty-Four Million Pesos but
the same were not deducted by the bank to
arrive at the correct amount of indebtedness. He
said that his accountant prepared statement of
payments showing the payments made to the
bank. He further claimed that there are still other
payments, the receipts of which are being
retrieved by his accountant. He also asserted
that the newspaper where the notice of
foreclosure sale was published is not a
newspaper of general circulation.
The same cannot be found in a newspaper
stand in the place where the mortgaged
properties are located; he further claimed that
[he] suffered moral, emotional and mental injury;
he is a graduate of Doctor of Veterinary
Medicine; a permanent member of the
Philippine Veterinary Medical Association;
graduated and passed the Board; he is the
President of [Momarco] and the President of
Momarco Resort; he has been engaged in this
line of business for 31 years now; his wife is a
graduate of Dental Medicine and partner of
[Momarco]; he has four (4) children three of
them had already graduated and one still in
college; x x x he is also claiming for exemplary
damages of Five Million Pesos to set an
example for other banks like Solidbank, to
refrain from filing acts which are irregular and
affect borrowers like him, he claimed also for
attorney[']s fees of Three
Million Pesos.20
Solidbank's witnesses, Lela Quijano, head of its
collection division, and Benjamin Apan, its
senior manager for retail operations, admitted
that the monthly interests it collected from 1995
to 1998 ranged from 18.75% to 30%, and that
for 1998, Momarco paid P2,370,321.09 in
interest.21
Ruling of the RTC
On July 7, 2009, the RTC issued its Amended
Decision, the fallo of which reads, as follows:
Wherefore, premises considered, judgment is
rendered in favor of the [petitioners] and against
the defendant[s] by:
 1) Declaring the extra-judicial foreclosure
proceedings NULL and VOID and without
any legal effect and the defendants are
prohibited to consolidate the titles in the
name of [Solidbank] without prejudice to
the filing of the action for collection or
recovery of the sum of money secured by
the real estate mortgage in the proper
forum;
2) Ordering that the interest rates on the
[petitioners'] indebtedness be reduced to
12% per annum;
3) Declaring that the attorney's fees and
filing fee being collected by [Solidbank] to
be devoid of any legal basis;
4) Ordering [Solidbank] to pay the
[petitioners] the following sums, to wit:
a) Php20,000,000.00 - moral
damages;
b) Php2,500,000.00 - exemplary
damages;
c) Phpl,[500],000.00 - for
attorney's fees.
5) Ordering the dismissal of the
counterclaim for lack of merit.
SO ORDERED.22
The RTC ruled that the mortgage contract and
the promissory notes prepared by Solidbank,
which the Spouses Jonsay signed in blank,
were contracts of adhesion; that Solidbank
failed to take into account Momarco’s payments
in the two years preceding 1998 totaling
P24,277,293.22 (this amount was not disputed
by Solidbank); that the interest rates, ranging
from 19% to 30%, as well as the penalties,
charges and attorney's fees imposed by
Solidbank, were excessive, unconscionable and
immoral, and that Solidbank has no carte
blanche authority under the Usury Law to
unilaterally raise the interest rates to levels as to
enslave the borrower and hemorrhage its
assets; that Solidbank's verification in its
application for foreclosure of mortgage was
defective because it was signed not by its
President but only by a vice-president; that
the Morning Chronicle, in which the notice of
auction was published, was not a newspaper of
general circulation because it had no bona
fide list of paying subscribers; that Solidbank
manipulated the foreclosure sale through a
defective publication of the notice of auction and
by submitting an unconscionably low bid of
P82,327,000.00, whereas the value of the lots
had risen sevenfold since the rehabilitation of
the SLEX. 23
Ruling of the CA
On appeal to the CA, Solidbank interposed the
following errors of the RTC, to wit:
THE [RTC] GRAVELY ERRED IN NULLIFYING
THE FORECLOSURE PROCEEDINGS
CONDUCTED AGAINST [THE PETITIONERS']
PROPERTIES ON THE GROUND THAT THE
REAL ESTATE MORTGAGE EXECUTED BY
THE PARTIES WAS A CONTRACT OF
ADHESION;
THE [RTC] GRAVELY ERRED IN NULLIFYING
THE FORECLOSURE PROCEEDINGS
CONDUCTED AGAINST [THE PETITIONERS']
PROPERTIES ON THE GROUND THAT THE
NEWSPAPER WHERE THE NOTICE OF
FORECLOSURE WAS PUBLISHED IS NOT A
NEWSPAPER OF GENERAL CIRCULATION;
THE [RTC] GRAVELY ERRED IN NULLIFYING
THE FORECLO[S]URE PROCEEDINGS
CONDUCTED AGAINST [THE PETITIONERS']
PROPERTIES ON THE GROUNDS THAT THE
INTEREST RATES, PENALTIES,
ATTORNEY'S FEES CHARGED ARE
EXCESSIVE, UNCONSCIONABLE AND
IMMORAL AND THAT THE [SOLIDBANK] DID
NOT TAKE INTO ACCOUNT [THE
PETITIONERS'] PREVIOUS PAYMENT[S] IN
THE AMOUNT OF P24,277,293.27;
THE [RTC] GRAVELY ERRED IN AWARDING
MORAL DAMAGES, EXEMPLARY DAMAGES
AND ATTORNEY'S FEES IN FAVOR OF THE
[PETITIONERS];
THE [RTC] GRAVE[LY] ERRED IN FAILING TO
REGARD [THE PETITIONERS] [IN]
ESTOPPEL WHEN THE LATTER DID NOT
IMPUGN THE VALIDITY OF THE LOAN AND
MORTGAGE DOCUMENTS· WITHIN A
REASONABLE TIME.24
On April 27, 2012, the CA rendered judgment
affirming the RTC in toto. It agreed that
Solidbank did not comply with the publication
requirements under Section 3, Act No. 3135,
which provides:
Sec. 3. Notice shall be given by posting notices
of the sale for not less than twenty days in at
least three public places of the municipality or
city where the property is situated, and if such
property is worth more than four hundred pesos,
such notice shall also be published once a week
for at least three consecutive weeks in a
newspaper of general circulation in the
municipality or city.25 (Emphasis ours)
According to the CA, the Morning Chronicle was
not a newspaper of general circulation,
notwithstanding the affidavit of publication
issued by its publisher, Turing R. Crisostomo
(Crisostomo), to that effect as well as the
certification of the Clerk of Court of RTC-
Calamba City that it was duly accredited by the
court since May 28, 1997 to publish legal
notices. The CA ruled that it was not enough for
Crisostomo to merely state in his affidavit that
the Morning Chronicle was published and
edited in the province of Laguna and in San
Pablo City without a showing that it was
published to disseminate local news and
general information, that it had a bona fide list of
paying subscribers, that it was published at
regular intervals, and that it was in general
circulation in Calamba City where the subject
properties are located.26
In Metropolitan Bank and Trust Company, Inc.
v. Peñafiel, 27 cited by the CA, the Court
explained that: (1) the object of a notice of sale
is to achieve a reasonably wide publicity of the
auction by informing the public of the nature and
condition of the property to be auctioned, and of
the time, place and terms of the sale, and
thereby secure bidders and prevent a sacrifice
of the property; (2) a newspaper to be
considered one of general circulation need not
have the largest circulation but must be able to
appeal to the public in general and thus ensure
a wide readership, and must not be devoted
solely to entertainment or the interest of a
particular class, profession, trade, calling, race,
or religious denomination; and (3) Section 3 of
Act No. 3135, as amended by Act No. 4118,
does not only require the newspaper to be of
general circulation but also that it is circulated in
the municipality or city where the property is
located. 28
The CA held that the accreditation of
the Morning Chronicle by the Clerk of Court of
the RTC to publish legal notices is not
determinative of whether it is a newspaper of
general circulation in Calamba City. 29
Concerning the loans due from the petitioners,
the CA noted that under
the proforma promissory note which Solidbank
prepared and which the Spouses Jonsay signed
in blank, Solidbank enjoyed unrestrained
freedom to unilaterally increase the interest rate
in any month. The note gave it authority to
increase or decrease the interest rate from time
to time, "without any advance notice" and "in the
event the Monetary Board of the Central Bank
of the Philippines raises or lowers the interest
rates on loans." According to the CA, this
provision violated the principle of mutuality of
contracts embodied in Article 130830 of the Civil
Code.31
The CA also held that the herein petitioners
were not in estoppel for failing to seasonably
question the validity of the mortgage loan since
the prescriptive period is reckoned from their
notice of the statements of account issued by
Solidbank showing the unilateral increases in
the interest, for only by then would their cause
of action have accrued. Since only three years
had elapsed from the execution of the mortgage
contract to the filing of the complaint on March
15, 2000, the action was brought within the 10-
year prescriptive period.32
Solidbank moved for reconsideration33 of the
decision, which the CA granted in part on
November 26, 2012, via its Amended Decision,
to wit:
WHEREFORE, premises considered, the
Motion is GRANTED IN PART. Our Decision
promulgated on April 27, 2012 is hereby
amended. Paragraphs 2 and 5 of the dispositive
portion of the July 7, 2009 Decision of the [RTC]
of Calamba City, Branch 35 remain affirmed.
Paragraphs 1, 3 and 4 thereof are hereby
reversed and set aside.
SO ORDERED.34
Thus, in a complete reversal of its decision, the
CA now not only found the parties' mortgage
contract valid, but also declared that Solidbank's
extrajudicial foreclosure of the mortgage
enjoyed the presumption of regularity. It took
into account the (a) Affidavit of Publication
issued by Crisostomo that it duly published the
notice of auction sale on February 8, 15, and 22,
1999, (b) the Certification by the Clerk of Court
of the RTC-Calamba City that the Morning
Chronicle was duly accredited by the court to
publish legal notices, and (c) the Raffle of
Publication dated February 1, 1999 showing
that the said newspaper participated in and won
the raffle on February 1, 1999 to publish the
subject notice. The CA stressed that since the
selection of Morning Chronicle to publish the
notice was through a court-supervised raffle,
Solidbank was fully justified in relying on the
regularity of the publication of its notice in the
aforesaid newspaper, in the choice of which it
had no hand whatsoever. 35
The CA further held that no malice can be
imputed on Solidbank's refusal to accept the
petitioners' offer of dacion en pago, since it was
duly authorized under the parties' mortgage
contract to extra judicially foreclose on the
mortgage in the event that Momarco defaulted
in its interest payments. Thus, when Solidbank
opted to foreclose on the mortgage, it was
merely exercising its contractual right to protept
its interest, and Solidbank's supposed
insensitivity or lack of sympathy toward
Momarco's financial plight is irrelevant and is not
indemnifiable as bad faith. 36
On the other hand, the CA pointed out that other
than Florante's bare testimonial allegations, the
petitioners failed to adduce evidence to debunk
Solidbank's compliance with the publication of
its auction notice. They were unable to show
that the Morning Chronicle was not a
newspaper of general circulation in Calamba
City, that it was not published once a week, or
that it could not be found in newsstands. 37
Thus, the CA in its amended decision: (a)
upheld the validity of the extrajudicial
foreclosure proceedings, the consolidation of
the titles of Solidbank in the foreclosed
properties, and the dismissal of Solidbank's
counterclaim; (b) ordered the reduction of the
interest rates on the petitioners' indebtedness to
the legal rate of 12% per annum, thereby
affirming that the unilateral increases in the
monthly interest rates, which averaged 2.19%
per month or 26.25% per annum, "without
notice to the mortgagors," are void for being
iniquitous, excessive and unconscionable; and
(c) upheld the collection by the Solidbank of
attorney's fees and filing fee. Nonetheless, the
CA invalidated for lack of basis the award by the
RTC to the petitioners of P20,000,000.00 as
moral damages, P2,500,000.00 as exemplary
damages, and Pl,500,000.00 as attorney's
fees. 38
The petitioners moved for partial
reconsideration39 of the CA's Amended
Decision dated November 26, 2012, but the CA
denied the same in its Resolution40 dated March
19, 2013.
Petition for Review in the Supreme Court
In this petition for review, the petitioners
interpose the following assignment of errors, to
wit:
1. WITH ALL DUE RESPECT, THE [CA]
GRAVELY ERRED BY RENDERJNG
TWO (2) CONFLICTING DECISIONS
ON THE SAME SET OF FACTS AND
EVIDENCE. THE AMENDED DECISION
IS NOT IN ACCORD WITH LAW AND
EXISTING JURJSPRUDENCE[; AND]
2. WITH ALL DUE RESPECT, THE [CA]
GRAVELY ERRED IN NOT
CORRECTLY APPLYING THE LAW
AND JURJSPRUDENCE ON
EXTRAJUDICIAL FORECLOSURE OF
REAL ESTATE MORTGAGE,
DAMAGES AND CONTRACT OF
ADHESION IN THE AMENDED
DECISION. 41
The petitioners decry how, after first declaring
that "[a]ll told, we find no reason to disturb, much
less reverse, the assailed decision of the RTC,"
the CA could now be permitted to make a
complete turn-around from its previous decision
over the same set of facts, and declare that the
subject foreclosure is valid, order the
consolidation of Solidbank's titles, and delete
the award of moral and exemplary damages,
attorney's fees and costs of suit.42
Ruling of the Court
There is merit in the petition.
There is no legal proscription
against an adjudicating court
adopting on motion for
reconsideration by a party a
position that is completely contrary
to one it had previously taken in a case.
The petitioners' dismay over how the same
division of the CA could make two opposite and
conflicting decisions over exactly the same facts
is understandable. Yet, what the CA simply did
was to admit that it had committed an error of
judgment, one which it was nonetheless fully
authorized to correct upon a timely motion for
reconsideration. Sections 1, 2 and 3 of Rule 3 7
of the Rules of Court are pertinent:
Sec. 1. Grounds of and period for filing motion
for new trial or reconsideration. - x x x.
Within the same period, the aggrieved party may
move for reconsideration upon the grounds that
the damages awarded are excessive, that the
evidence is insufficient to justify the decision or
final order, or that the decision or final order is
contrary to law.
Sec. 2. Contents of motion for new trial or
reconsideration and notice thereof - x x x.
xxxx
A motion for reconsideration shall point out
specifically the findings or conclusions of the
judgment or final order which are not supported
by the evidence or which are contrary to law[,]
making express reference to the testimonial or
documentary evidence or to the provisions of
law alleged to be contrary to such findings or
conclusions.
xxxx
Sec. 3. Action upon motion for new trial or
reconsideration. - x x x If the court finds that
excessive damages have been awarded or that
the judgment or final order is contrary to the
evidence or law, it may amend such judgment
or final order accordingly.
The rule is that while the decision of a court
becomes final upon the lapse of the period to
appeal by any party, 43 but the filing of a motion
for reconsideration or new trial interrupts or
suspends the running of the said period, and
prevents the finality of the decision or order from
setting in.44 A motion for reconsideration allows
a party to request the adjudicating court or
quasi-judicial body to take a second look at its
earlier judgment and correct any errors it may
have committed.45 As explained in Salcedo II v.
COMELEC,46 a motion for reconsideration
allows the adjudicator or judge to take a second
opportunity to review the case and to grapple
anew with the issues therein, and to decide
again a question previously raised, there being
no legal proscription imposed against the
deciding body adopting thereby a new position
contrary to one it had previously taken.47
Solidbank has sufficiently complied
with the requirement of publication
under Section 3 of Act No. 3135.
In Philippine Savings Bank v. Spouses
Geronimo, 48 the Court stressed that the right of
a bank to extrajudicially foreclose on a real
estate mortgage is well-recognized, provided it
faithfully complies with the statutory
requirements of foreclosure:
While the law recognizes the right of a bank to
foreclose a mortgage upon the mortgagor's
failure to pay his obligation, it is imperative that
such right be exercised according to its clear
mandate. Each and every requirement of the
law must be complied with, lest, the valid
exercise of the right would end. It must be
remembered that the exercise of a right ends
when the right disappears, and it disappears
when it is abused especially to the prejudice of
others. 49
In Cristobal v. CA, 50 the Court explicitly held
that foreclosure proceedings enjoy the
presumption of regularity and the mortgagor
who alleges the absence of a requisite has the
burden of proving such fact:
Further, as respondent bank asserts, a
mortgagor who alleges absence of a requisite
has the burden of establishing that fact.
Petitioners failed in this regard. Foreclosure
proceedings have in their favor the presumption
of regularility and the burden of evidence to
rebut the same is on the petitioners.x x
x. 51 (Citation omitted)
The petitioners insist that the CA was correct
when it first ruled in its Decision dated April 27,
2012 that there was no valid publication of the
notice of auction, since the Morning
Chronicle was not shown to be a newspaper of
general circulation in Calamba City. The CA
disregarded the affidavit of publication executed
by its publisher to that effect, as well as the
certification by the Clerk of Court of RTC-
Calamba City that the said paper was duly
accredited by the court to publish legal notices.
It ruled that there was no showing by the
Solidbank that the Morning Chronicle was
published to disseminate local news and
general information, that it had a bona fide list of
paying subscribers, that it was published at
regular intervals, and that it was in circulation in
Calamba City where the subject properties are
located.
But in its Amended Decision on November 26,
2012, the CA now ruled that the questioned
foreclosure proceedings enjoy the presumption
of regularity, and it is the burden of the
petitioners to overcome this presumption. The
CA stated:
It is an elementary rule that the burden of proof
is the duty of a party to present evidence on the
facts in issue necessary to establish his claim or
defense as required by law. The Court has
likewise ruled in previous cases that foreclosure
proceedings enjoy the presumption of regularity
and that the mortgagor who alleges absence of
a requisite has the burden of proving such
fact. 52 (Citation omitted)
In Fortune Motors (Phils.) Inc. v. Metropolitan
Bank and Trust Co., 53 it was stressed that in
order for publication to serve its intended
purpose, the newspaper should be in general
circulation in the place where the foreclosed
properties to be auctioned are located.54 But
in Metropolitan Bank and Trust Co. v. Spouses
Miranda, 55 the Court also clarified that the
matter of compliance with the notice and
publication requirements is a factual issue which
need not be resolved by the high court:
It has been our consistent ruling that the
question of compliance or non-compliance with
notice and publication requirements of an
extrajudicial foreclosure sale is a factual issue,
and the resolution thereof by the trial court is
generally binding on this Court. The matter of
sufficiency of posting and publication of a notice
of foreclosure sale need not be resolved by this
Court, especially when the findings of the RTC
were sustained by the CA. Well-established is
the rule that factual findings of the CA are
conclusive on the parties and carry even more
weight when the said court affirms the factual
findings of the trial court. 56 (Citation omitted)
In Spouses Miranda, the Court ruled that the
foreclosing bank could not invoke the
presumption of regularity of the publication of
the notice of auction absent any proof
whatsoever of the fact of publication. 57 In the
case at bar, there is no dispute that there was
publication of the auction notice, which the CA
in its amended decision now held to have
sufficiently complied with the requirement of
publication under Section 3 of Act No. 3135.
Unfortunately, against the fact of publication and
the presumption of regularity of the foreclosure
proceedings, the petitioners' only contrary
evidence is Florante's testimonial assertion that
the Morning Chronicle was not a newspaper of
general circulation in Calamba City and that it
could not be found in the local newsstands.
Admittedly, the records are sparse as to the
details of the publication. In his Affidavit of
Publication, publisher Crisostomo stated
concerning the circulation of his paper, as
follows:
I, [CRISOSTOMO], legal age, Filipino, resident
of Brgy. III-D, San Pablo City with postal
address at San Pablo City, after having been
duly sworn in accordance to law, depose and
say[:]
That I am the Publisher of The Morning
Chronicle Weekly newspaper of Luzon Province
and Greater Manila Area, Cavite, [p ]ublished
and edited in the Province of Laguna and San
Pablo City.
x x x x58
In Spouses Geronimo,59 it was held that the
affidavit of publication executed by the account
executive of the newspaper is prima facie proof
that the newspaper is generally circulated in the
place where the properties are located.60 But in
substance, all that Crisostomo stated is that his
newspaper was ''published and edited in the
province of Laguna and San Pablo City." He did
not particularly mention, as the CA seemed to
demand in its initial decision, that the Morning
Chronicle was published and circulated to
disseminate local news and general information
in Calamba City where the foreclosed properties
are located.
Nonetheless, when the RTC accredited
the Morning Chronicle to publish legal notices in
Calamba City, it can be presumed that the RTC
had made a prior determination that the said
newspaper had met the requisites for valid
publication of legal notices in the said locality,
guided by the understanding that for the
publication of legal notices in Calamba City to
serve its intended purpose, it must be in general
circulation therein. This presumption lays the
burden upon the petitioners to show otherwise,
contrary to the CA's first ruling.
It is true that the Court also held
in Peñafiel,61 concerning the evidentiary weight
of the publisher's affidavit of publication, that the
accreditation by the RTC executive judge is not
decisive on the issue of whether a newspaper is
of general circulation:
The accreditation of Maharlika Pilipinas by the
Presiding Judge of the RTC is not decisive of
whether it is a newspaper of general circulation
in Mandaluyong City. This Court is not bound to
adopt the Presiding Judge's determination, in
connection with the said accreditation,
that Maharlika Pilipinas is a newspaper of
general circulation. The court before which a
case is pending is bound to make a resolution of
the issues based on the evidence on record. 62
way of dacion en pago does not
novate the mortgage contract.
On the question of the petitioners' failed
proposal to extinguish their loan obligations by
way of dacion en pago, no bad faith can be
imputed to Solidbank for refusing the offered
settlement as to render itself liable for moral and
exemplary damages after opting to
extrajudicially foreclose on the
mortgage. 66 In Tecnogas Philippines
Manufacturing Corporation v. Philippine
National Bank,67 the Court held:
Dacion en pago is a special mode of payment
whereby the debtor offers another thing to the
creditor who accepts it as equivalent of payment
of an outstanding obligation. The undertaking is
really one of sale, that is, the creditor is really
buying the thing or property of the debtor,
payment for which is to be charged against the
debtor's debt. As such, the essential elements
of a contract of sale, namely, consent, object
certain, and cause or consideration must be
present. It is only when the thing offered as an
equivalent is accepted by the creditor that
novation takes place, thereby, totally
extinguishing the debt.
On the first issue, the Court of Appeals did not
err in ruling that Tecnogas has no clear legal
right to an injunctive relief because its proposal
to pay by way of dacion en pago did not
extinguish its obligation. Undeniably, Tecnogas'
proposal to pay by way of dacion en pago was
not accepted by PNB. Thus, the unaccepted
proposal neither novates the parties' mortgage
contract nor suspends its execution as there
was no meeting of the minds between the
parties on whether the loan will be extinguished
by way of dacion en pago. Necessarily, upon
Tecnogas' default in its obligations, the
foreclosure of the REM becomes a matter of
right on the part of PNB, for such is the purpose
of requiring security for the loans.68 (Citation
omitted)
An escalation clause in a loan
agreement granting the lending
bank authority to unilaterally
increase the interest rate without
prior notice to and consent of the
borrower is void.

But as the Court has seen, the petitioners failed
to present proof to overcome the presumption of
regularity created by the publisher's affidavit of
publication and the accreditation of the Morning
Chronicle by the RTC.63 Significantly, in A.M.
No. 01-1-07-SC,64 the Court now requires all
courts beginning in 2001 to accredit local
newspapers authorized to publish legal
notices.65
The petitioners' mere proposal
extinguish their loan obligations
After annulling the foreclosure of mortgage, the
RTC reduced the interest imposable on the
petitioners' loans to 12%, the legal interest
allowed for a loan or forbearance of credit,
citing Medel v. CA.69 In effect, the RTC voided
not just the unilateral increases in the monthly
interest, but also the contracted interest of
18.75%. The implication is to allow the
petitioners to recover what they may have paid
in excess of what was validly due to Solidbank,
to if any.
by
In Floirendo, Jr. v. Metropolitan Bank and Trust
Co., 70 the promissory note provided for interest
at 15.446% per annum for the first 30 days,
subject to upward/downward adjustment every
30 days thereafter.71 It was further provided
that:
The rate of interest and/or bank charges herein
stipulated, during the term of this Promissory
Note, its extension, renewals or other
modifications, may be increased, decreased, or
otherwise changed from time to time by the
Bank without advance notice to me/us in the
event of changes in the interest rate prescribed
by law or the Monetary Board of the Central
Bank of the Philippines, in the rediscount rate of
member banks with the Central Bank of the
Philippines, in the interest rates on savings and
time deposits, in the interest rates on the banks
borrowings, in the reserve requirements, or in
the overall costs of funding or money[.]72 (Italics
ours)
The Court ordered the "reformation" of the real
estate mortgage contract and the promissory
note, in that any increases in the interest rate
beyond 15.446% per annum could not be
collected by respondent bank since it was
devoid of prior consent of the petitioner, as well
as ordered that the interest paid by the debtor in
excess of 15.446% be applied to the payment of
the principal obligation. 73
In Philippine National Bank v. CA, 74 the Court
declared void the escalation clause in a credit
agreement whereby the "bank reserves the right
to increase the interest rate within the limits
allowed by law at any time depending on
whatever policy it may adopt in the future x x
x."75 The Court said:
It is basic that there can be no contract in the
true sense in the absence of the element of
agreement, or of mutual assent of the parties. If
this assent is wanting on the part of one who
contracts, his act has no more efficacy than if it
had been done under duress or by a person of
unsound mind.
Similarly, contract changes must be made with
the consent of the contracting parties. The
minds of all the parties must meet as to the
proposed modification, especially when it
affects an important aspect of the agreement. In
the case of loan contracts, it cannot be gainsaid
that the rate of interest is always a vital
component, for it can make or break a capital
venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft
of any binding effect.
We cannot countenance petitioner bank's
posturing that the escalation clause at bench
gives it unbridled right to unilaterally upwardly
adjust the interest on private respondents' loan.
That would completely take away from private
respondents the right to assent to an important
modification in their agreement, and would
negate the element of mutuality in contracts. x x
x. 76 (Citation omitted and italics in the original)
In New Sampaguita Builders Construction, Inc.
(NSBCJ) v. PNB,77 the Court condemned as the
"zenith of farcicality" a mortgage contract
whereby the parties "specify and agree upon
rates that could be subsequently upgraded at
whim by only one party to the agreement."78 The
Court declared as a contract of adhesion a pro
forma promissory note which creates a "take it
or leave it" dilemma for borrower and gives the
mortgagee bank an unbridled right to adjust the
interest independently and upwardly, thereby
completely taking away from the borrower the
"right to assent to an important modification in
their agreement," thus negating the element of
mutuality in their contracts.79The Court quotes:
Increases in Interest Baseless
Promissorv Notes. In each drawdown, the
Promissory Notes specified the interest rate to
be charged: 19.5 percent in the first, and 21.5
percent in the second and again in the third.
However, a uniform clause therein permitted
respondent to increase the rate "within the
limits allowed by law at any time depending
on whatever policy it may adopt in the future
x x x," without even giving prior notice to
petitioners. The Court holds that petitioners'
accessory duty to pay interest did not give
respondent unrestrained freedom to charge any
rate other than that which was agreed upon. No
interest shall be due, unless expressly
stipulated in writing. It would be the zenith of
farcicality to specify and agree upon rates that
could be subsequently upgraded at whim by
only one party to the agreement.
The "unilateral detennination and imposition" of
increased rates is "violative of the principle of
mutuality of contracts ordained in Article 1308 of
the Civil Code." One-sided impositions do not
have the force of law between the parties,
because such impositions are not based on the
parties' essential equality.
Although escalation clauses are valid in
maintaining fiscal stability and retaining the
value of money on long-term contracts, giving
respondent an unbridled right to adjust the
interest independently and upwardly would
completely take away from petitioners the "right
to assent to an important modification in their
agreement" and would also negate the element
of mutuality in their contracts. The clause cited
earlier made the fulfillment of the contracts
"dependent exclusively upon the uncontrolled
will" of respondent and was therefore void.
Besides, the pro forma promissory notes have
the character of a contract d'adhesion, "where
the parties do not bargain on equal footing, the
weaker party's [the debtor's] participation being
reduced to the alternative 'to take it or leave it."'
"While the Usury Law ceiling on interest rates
was lifted by [Central Bank] Circular No. 905,
nothing in the said Circular grants lenders carte
blanche authority to raise interest rates to levels
which will either enslave their borrowers or lead
to a hemorrhaging of their assets." In fact, we
have declared nearly ten years ago that neither
this Circular nor PD 1684, which further
amended the Usury Law, "authorized either
party to unilaterally raise the interest rate without
the other's consent."
Moreover, a similar case eight years ago
pointed out to the same respondent (PNB) that
borrowing signified a capital transfusion from
lending institutions to businesses and industries
and was done for the purpose of stimulating
their growth; yet respondent's continued
"unilateral and lopsided policy" of increasing
interest rates "without the prior assent" of the
borrower not only defeats this purpose, but also
deviates from this pronouncement. Although
such increases are not usurious, since the
"Usury Law is now legally inexistent" - the
interest ranging from 26 percent to 35 percent in
the statements of account - "must be equitably
reduced for being iniquitous, unconscionable
and exorbitant." Rates found to be iniquitous or
unconscionable are void, as if it there were no
express contract thereon. Above all, it is
undoubtedly against public policy to charge
excessively for the use of money. 80 (Citations
omitted and emphasis ours)
In New Sampaguita, the Court invoked Article
131081 of the Civil Code which grants courts
authority to reduce or increase interest rates
equitably. It eliminated the escalated rates,
insurance and penalties and imposed only the
stipulated interest rates of 19.5% and 21.5% on
the notes, to be reduced to the legal rate of 12%
upon their automatic conversion into medium-
term loans after maturity: 82
[T]o give full force to the Truth in Lending Act,
only the interest rates of 19.5 percent and 21.5
percent stipulated in the Promissory Notes may
be imposed by respondent on the respective
availments. After 730 days, the portions
remaining unpaid are automatically converted
into medium-term loans at the legal rate of 12
percent. In all instances, the simple method of
interest computation is followed.x x x.83
Thus, all payments made by the petitioners were
applied pro-rated to the notes, and after
eliminating the charges, penalties and
insurance, the result of the recomputation was
an overcollection by the bank of P3,686, 101.52,
which the Court ordered refunded to the
petitioners with straight interest at 6% per
annum from the filing of the complaint until
Finality.84
In Equitable PCI Bank v. Ng Sheung
Ngor, 85 the Court annulled the escalation
clause and imposed the original stipulated rate
of interest on the loan, until maturity, and
thereafter, the legal interest of 12% per
annum was imposed on the outstanding loans.
Thus, the Court ordered the borrower to pay
Equitable the stipulated interest rate of
12.66% per annum for the dollar denominated
loans, and the stipulated 20% per annum for the
peso denominated loans, up to maturity, and
afterwards Equitable was to collect legal interest
of 12% per annum on all loans
86
due. Incidentally, under Monetary Board
Circular No. 799, the rate of interest for the loan
or forbearance of money, in the absence of
stipulation, shall now be 6% per annum starting
July 1, 2013.87
Thus, the Court disregarded the unilaterally
escalated interest rates and imposed the
mutually stipulated rates, which it applied up to
the maturity of the loans. Thereafter, the Court
imposed the legal rate of 12% per annum on the
outstanding loans, or 6% per annum legal rate
on the excess of the borrower's payments.
Attorney's fees do not form an
integral part of the cost of
borrowing, but arise only when
collecting upon the notes or loans
becomes necessary. Courts have
the power to determine their
reasonableness based on quantum
meruit and to reduce the amount
thereof if excessive.
Concerning the P3,000,000.00 attorney's fees
charged by Solidbank and added to the amount
of its auction bid, as part of the cost of collecting
the loans by way of extrajudicial foreclosure, the
Court finds no factual basis to justify such an
excessive amount. The Court has not hesitated
to delete or equitably reduce attorney's fees
which are baseless or excessive. In New
Sampaguita, the Court reduced from 10% to 1%
the attorney's fees, holding that they are not an
integral part of the cost of borrowing but arise
only on the basis of quantum meruit when the
lender collects upon the notes. 88
Mortgagee institutions are reminded that
extrajudicial foreclosure proceedings are not
adversarial suits filed before a court. It is not
commenced by filing a complaint but an ex-
parte application for extra judicial foreclosure of
mortgage before the executive judge, pursuant
to Act No. 3135, as amended, and special
administrative orders issued by this Court,
particularly Administrative Matter No. 99-10-05-
0 (Re: Procedure in Extra-Judicial Foreclosure
of Mortgage). The executive judge receives the
application neither in a judicial capacity nor on
behalf of the court; the conduct of extrajudicial
foreclosure proceedings is not governed by the
rules on ordinary or special civil actions. The
executive judge performs therein an
administrative function to ensure that all
requirements for the extrajudicial foreclosure of
a mortgage are satisfied before the clerk of
court, as the ex-officio sheriff, goes ahead with
the public auction of the mortgaged property.
Necessarily, the orders of the executive judge in
such proceedings, whether they be to allow or
disallow the extrajudicial foreclosure of the
mortgage, are not issued in the exercise of a
judicial function but in the exercise of his
administrative function to supervise the
ministerial duty of the Clerk of Court as Ex-
Officio Sheriff in the conduct of an extrajudicial
foreclosure sale.89
The recomputation of the
petitioners' total loan indebtedness
based on the stipulated interest, and
the exclusion of the penalties and
reduction of the attorney's fees
results in an excess of the auction
proceeds which must be paid to the
petitioners.
Coming now to the question of whether
Solidbank must refund any excess interest to
the petitioners, the CA agreed with the RTC that
the loans should earn only 12% for Solidbank,
which would result in a drastic reduction in the
interest which the petitioners would be obliged
to pay to Solidbank. Notwithstanding what this
Court has said concerning the invalidity of the
unilateral increases in the interest rates, the
ruling nonetheless violates the contractual
agreement of the parties imposing an interest of
18.75% per annum, besides the fact that an
interest of 18.75% per annum cannot per se be
deemed as unconscionable back in 1995 or in
1997.
In the recent cases of Mallari v. Prudential Bank
(now Bank of the Philippine
90
Islands) and Spouses Villanueva v. The CA, et
al.,91 the Court did not consider unconscionable
the contractual interest rates of 23% or 24% per
annum. In Mallari, the Court upheld the loans
obtained between 1984 and 1989 which bore
interest from 21 % to 23% per year; in Spouses
Villanueva, the loans secured in 1994 carried
interest of 24% per year were upheld.
In Advocates for Truth in Lending, Inc. v.
Bangko Sentral Monetary Board,92 the Court
noted that in the later 1990s, the banks' prime
lending rates which they charged to their best
borrowers ranged from 26% to 31%.93
To answer, then, the question of whether
Solidbank must refund anything to the
petitioners, the contracted rate of 18.75%, not
the legal rate of 12%, will be applied to the
petitioners' loans. Any excess either in the
interest payments of the petitioners or in the
auction proceeds, over what is validly due to
Solidbank on the loans, will be refunded or paid
to the petitioners. Thus:
(1) The first loan of P40,000.000.00
carried a stipulated interest of Solidbank’s Winning Bid
18.75% per annum, and from November
Less:
9, 1995 to March 5, 1999, which Amount Due from Petitioners, as March 5, 1999
is the
auction date and the date the mortgage
was terminated, a period of 3 years and
116 days, or 3.3178 years, and total
interest earned by the bank thereon
is P24,883,500.00; the second loan, for
P20,000,000.00, was also agreed to earn
18. 75% per annum, and from April 28,
1997 to March 5, 1999, a period of 1 year
and 311 days, or 1.8520 years, it
earned P6,945,000.00 in interest. In all,
Solidbank earned P31,828,500.00 in
interest up to March 5, 1999 from both
loans.1âwphi1
(2) From November 9, 1995 to April 1998,
the petitioners paid monthly interests
totaling P24,277,283.22. Deducting
P24,277,283.22 from the sum of the total
loan principal of P60,000,000.00 and the
total interest due of P31,828,500.00,
which is P91,828,500.00, leaves the
amount of P67,551,216.78 in interest
owed by the petitioners as of March 5,
1999.
(3) As in New Sampaguita Builders, the
Court shall exclude all the penalties or
surcharges charged by the bank, and
shall allow the bank to recover only 1%
as attorney's fees, or P675,512.17, not
the P3,600,000.00 awarded by the RTC.
Thus, all in all, the petitioners owed the
bank P68,226,728.95 (P67,551,216.78
plus P675,512.17) as of March 5,
1999.1âwphi1
(4) Deducting P68,226,728.95 from
Solidbank's winning bid
of P82,327,000.00 leaves an excess
of P14,100,271.05 in the proceeds of the
auction over the outstanding loan
obligation of the petitioners. This amount
must be paid by Solidbank to the
petitioners.
(5) Since the P14,100,271.05 is the
excess in the auction proceeds, thus an
ordinary monetary obligation and not a
loan or a forbearance of credit, it shall
earn simple interest at six percent
(6%) per annum from judicial demand up
to finality, following Eastern Shipping
Lines, Inc. v. Court of
Appeals; 94 thereafter, both the said
amount and the accumulated interest
shall together earn six percent (6%) per
annum, pursuant to Monetary Board
Circular No. 799, until full satisfaction.
Thus:
Particulars
oan No. 1 Principal DECISION
P40,000,000.00
oan No. 2 Principal LEONEN, J.:chanRoblesvirtualLawlibrary
20,000,000.00
Total 60,000,000.00
Parties who have validly executed a contract
and have availed themselves of its benefits may
Add: Interest Due
not, to escape their contractual obligations,
invoke irregularities in its execution to seek its
November 9, 1995 invalidation.
to March 5, 1999
0x18.75%p.a. x 3.3178) This is a Petition for Review on Certiorari under
P24,883,500.00
Rule 45 assailing the Court of Appeals' October
April 28, 1997 to 26, 2011 Decision and its March 8, 2012
March 5, 1999 or Resolution. The Court of Appeals affirmed the
x 18.75% p.a. x 1.8520) 6,945,000.00 Regional Trial Court's December 19, 2008
31,828,500.00
Decision upholding the validity of the mortgage
contract executed by petitioner Florante Vitug
91,828,500.00
(Vitug) and respondent Evangeline A. Abuda
from November 1995 to April 1998 24,277,283.22
(Abuda).
unt Due from Petitioners 67,551,216.78
On March 17, 1997, Abuda loaned P250,000.00
’s fees (1% of P67,551,216.78) to Vitug and
675,512.17 his wife, Narcisa Vitug.1 As security
68,226,728.95
for the loan, Vitug mortgaged to Abuda his
Balance Payable to Petitioners property inP14,100,271.05
Tondo Foreshore along R-10, Block
A-50-3, Del Pan to Kagitingan Streets, Tondo,
Manila.2 The property was then subject of a
conditional Contract to Sell between the
WHEREFORE, premises considered, the National Housing Authority and Vitug. Pertinent
Amended Decision dated November 26, 2012 of portions of the mortgage deed reads
the Court of Appeals in CA-G.R. CV No. 94012
is AFFIRMED with MODIFICATION in that the
stipulated interest rate on the loan obligation of
That, Mortgagor, is the owner, holder of a
18.75% shall be applied, resulting in
Conditional Contract to Sell of the National
P67,551,216.78 as the amount due from the
Housing Authority (NHA) over a piece of
Spouses Florante E. Jonsay and Luzviminda L.
property located at the Tondo Foreshore along
Jonsay and Momarco Import Co., Inc. to
R-10, Block "A-50-3, Delpan to Kagitingan
Solidbank Corporation (now Metropolitan Bank
Streets in the district of Tondo, Manila;
and Trust Company). In addition, the Spouses
Florante E. Jonsay and Luzviminda L. Jonsay
That, with the full consent of wife Narcisa Vitug,
and Momarco Import Co., Inc. are ORDERED
hereby mortgage to Evangeline A. Abuda, with
to PAY atton1ey's fees in the amount of
full consent of husband Paulino Abuda, said
P675,512.17, which is one percent (1%) of the
property for TWO HUNDRED FIFTY
loan obligation.
THOUSAND PESOS ONLY (P250,000.00), in
hand paid by Mortgagee and in hand received
Thus, Solidbank Corporation (now Metropolitan
to full satisfaction by Mortgagor, for SIX
Bank and Trust Company) is ORDERED to
MONTHS (6) within which to pay back the full
PAY to the petitioners the amount
amount plus TEN PERCENT (10%) agreed
of P14,100,271.05, representing the excess of
interest per month counted from the date stated
its auction bid over the total loan obligation due
hereon;
from the petitioners, plus interest at six percent
(6%) per annum computed from the date of
That, upon consummation and completion of the
filing of the complaint or March 15, 2000 up to
sale by the NHA of said property, the title-award
finality; and thereafter, both the excess of the
thereof, shall be received by the Mortgagee by
auction proceeds and the cumulative interest
virtue of a Special Power of Attorney, executed
shall earn six percent (6%) per annum until fully
by Mortgagor in her favor, authorizing
paid.
Mortgagee to expedite, follow-up, cause the
release and to received [sic] and take
SO ORDERED.
possession of the title award of the said property
from the NHA, until the mortgage amount is fully
paid for and
settled[.]3ChanRoblesVirtualawlibrary
7. G.R. No. 201264, January 11, 2016 cralawlawlibrary
FLORANTE On November 17, 1997, the parties executed a
VITUG, Petitioner, v. EVANGELINE A. "restructured"4 mortgage contract on the
ABUDA, Respondent. property to secure the amount of P600,000.00
representing the original P250,000.00 loan,
additional loans,5 and subsequent credit
accommodations6 given by Abuda to Vitug with
an interest of five (5) percent per month.7 By
then, the property was covered by Transfer
Certificate of Title No. 234246 under Vitug's
name.8
Spouses Vitug failed to pay their loans despite
Abuda's demands.9
On November 21, 2003, Abuda filed a
Complaint for Foreclosure of Property before
the Regional Trial Court of Manila.10
On December 19, 2008, the Regional Trial
Court promulgated a Decision in favor of
Abuda.11The dispositive portion of the Decision
reads
WHEREFORE, judgment is rendered in favor of
the plaintiffs [sic] and against the defendant
1. Ordering the defendant to pay unto the court
and/or to the judgment debtor within the
reglementary period of Ninety (90) days the
principal sum of P600,000.00 with interest at 5%
per month from May 31, 2002 to actual date of
payment plus P20,000.00 as and for attorney's
fees;
2. Upon default of the defendant to fully pay the
aforesaid sums, the subject mortgaged property
shall be sold at public auction to pay off the
mortgage debt and its accumulated interest plus
attorney's fees, expenses and costs; and
3. After the confirmation of the sale, ordering the
defendant and all persons claiming rights under
her [sic] to immediately vacate the subject
premises.
SO ORDERED.12cralawlawlibrary
Vitug appealed the December 19, 2008
Regional Trial Court Decision before the Court
of Appeals.13 He contended that the real estate
mortgage contract he and Abuda entered into
was void on the grounds of fraud and lack of
consent under Articles 1318, 1319, and 1332 of
the Civil Code.14 He alleged that he was only
tricked into signing the mortgage contract,
whose terms he did not really understand.
Hence, his consent to the mortgage contract
was vitiated.15
On October 26, 2011, the Court of Appeals
promulgated a Decision,16 the dispositive
portion of which reads
WHEREFORE, the instant appeal
is PARTIALLY GRANTED. The Decision of the
RTC dated December 19, 2008 in Civil Case No.
03-108470 in favor of the appellee and against
the appellant is AFFIRMED with
the MODIFICATION that an interest rate of 1%
per month or 12% per annum shall be applied to
the principal loan of P600,000.00, computed
from the date of judicial demand, i.e., November
21, 2003; and 12% interest per annum on the
amount due from the date of the finality of the
Decision until fully paid.
SO ORDERED.17ChanRoblesVirtualawlibrary
cralawlawlibrary
The Court of Appeals found that Vitug failed to
pay his obligation within the stipulated six-month
period under the March 17, 1997 mortgage
contract.18 As a result of this failure, the parties
entered into a restructured mortgage contract
on November 17, 1997.19 The new mortgage
contract was signed before a notary public by
Vitug, his wife Narcisa, and witnesses Rolando
Vitug, Ferdinand Vitug, and Emily Vitug.20
The Court of Appeals also found that all the
elements of a valid mortgage contract were
present in the parties' mortgage contract.21 The
mortgage contract was also clear in its terms—
that failure to pay the P600,000.00 loan amount,
with a 5% interest rate per month from
November 17, 1997 to November 17, 1998,
shall result in the foreclosure of Vitug's
mortgaged property.22 No evidence on record
showed that Vitug was defrauded when he
entered into the agreement with Abuda.23
However, the Court of Appeals found that the
interest rates imposed on Vitug's loan were
"iniquitous, unconscionable[,] and
24
exorbitant." It instead ruled that a legal interest
of 1% per month or 12% per annum should
apply from the judicial demand on November
21, 2003.25cralawred
On November 23, 2011, Vitug moved for the
reconsideration of the Court of Appeals' October
26, 2011 Decision.26 He pointed out that not all
the requisites of a valid mortgage contract were
present since he did not have free disposal of
his property when he mortgaged it to Abuda. His
transfer certificate of title had an annotation by
the National Housing Authority, which restricted
his right to dispose or encumber the
property.27 The restriction clause provided that
the National Housing Authority's consent must
first be obtained before he may dispose or
encumber his property.28
Abuda, according to Vitug, failed to get the
National Housing Authority's consent before the
property was mortgaged to him.
Vitug also argued in his Motion for
Reconsideration that the property was exempt
from execution because it was constituted as a
family home before its mortgage.
In the Resolution promulgated on March 8,
2012,29 the Court of Appeals denied Vitug's
Motion for Reconsideration.
Vitug filed this Petition for Review on Certiorari
under Rule 45 to assail the Court of Appeals'
October 26, 2011 Decision and its March 8,
2012 Resolution.
Vitug raises the following
issues:chanRoblesvirtualLawlibrary
First, whether petitioner Florante Vitug may
raise in this Petition issues regarding the
National Housing Authority's alleged lack of
consent to the mortgage, as well as the
exemption of his property from execution;
Second, whether the restriction clause in
petitioner's title rendered invalid the real estate
mortgage he and respondent Evangeline Abuda
executed; and
Lastly, whether petitioner's property is a family
home that is free from execution, forced sale, or
attachment under the Family Code.30
We deny the Petition.
Petitioner argues that not all the requisites of a
valid mortgage are present.31 A mortgagor must
have free disposal of the mortgaged
property.32 The existence of a restriction
clause33 in his title means that he does not have
free disposal of his property.34 The restriction
clause does not allow him to mortgage the
property without the National Housing
Authority's approval.35 Since the National
Housing Authority never gave its consent to the
mortgage,36 the mortgage contract between him
and respondent is invalid.37
On the other hand, respondent argues that the
only issue in this case should be the validity of
the real estate mortgage executed by petitioner
in her favor.38 Petitioner raised other issues,
such as the alleged lack of written consent by
the National Housing Authority (and the
property's exemption from execution), only in his
Motion for Reconsideration before the Court of
Appeals.39
Respondent also argues that the National
Housing Authority issued a Permit to Mortgage
the property. This was formally offered in
evidence before the Regional Trial Court as
Exhibit "E."40 The National Housing Authority
even accepted respondent's personal checks to
settle petitioner's mortgage obligations to the
National Housing Authority.41 The National
Housing Authority would have already
foreclosed petitioner's property if not for the loan
that respondent extended to petitioner.42
Petitioner counters that the Permit to Mortgage
cited by respondent was only valid for 90 days
and was subject to the conditions that
respondent failed to fulfill. These conditions are
(1) The Mortgage Contract must provide that
"In the event of foreclosure, the NHA shall be
notified of the date, time and place of the auction
sale so that it can participate in the foreclosure
sale of the property."
(2) The mortgage contract must be submitted to
NHA for verification and final approval[.]43
Thus, according to petitioner, there was neither
written consent nor approval by the National
Housing Authority of the mortgage
44
contracts. cralawlawlibrary
Petitioner further contends that the alleged lack
of NHA consent on the mortgage (and, being a
family home, his property's exemption from
execution) was raised in his Answer to
respondent's complaint for foreclosure filed
before the Regional Trial Court, thus
20. Similarly, defendant has constituted their
family home over said mortgage property and
should that property be sold, defendant and his
family will be left with no place to reside with [sic]
within Metro Manila, hence, for humanitarian
reason[s], the defendant prayed that he be
given ample time within which to settle his
obligation with the plaintiff;
21. Lastly, the Memorandum of Encumbrances
contained at the back of defendant's title
prohibits her from selling, encumbering,
mortgaging, leasing, sub-leasing or in any
manner altering or disposing the lot or right
thereon, in whole or in part within the period
often (10) years from the time of issuance of
said title without first obtaining the consent of the
NHA. As reflected in the title, the same was
issued on 25 June 1997 hence, the mortgage
executed even prior to the issuance of said title
should be declared
45
void. ChanRoblesVirtualawlibrary
cralawlawlibrary
I
Due process46 dictates that arguments not
raised in the trial court may not be considered
by the reviewing court.47
Petitioner may raise in his Petition the issues of
lack of the National Housing Authority's consent
to the mortgage and his property's alleged
exemption from execution.
The records show that petitioner mentioned
these issues as early as in his Answer to
respondent's Complaint48 and Pre-trial
Brief.49 The trial court acknowledged these property to respondent to secure the payment of
issues, but found that his defenses based on his loan of P600,000.00.
these grounds could not be given credence
Petitioner claims that he only borrowed
P250,000.00 and that he was only made to sign
another mortgage contract whose terms he did
The defendant further stated that he is willing to not agree to.
pay the obligation is unconscionable. Further,
the said property constituted their family home. These claims were already found by the trial
The defendant claimed that Memorandum of court and the Court of Appeals to be
Encumbrance prohibits her from selling, unsupported by evidence. Petitioner's consent
encumbering, mortgaging, leasing, subleasing to the mortgage contract dated November 17,
or in any manner altering or disposing the lot or 1997 was not vitiated. He voluntarily signed it in
right thereon in whole or in part within ten (10) the presence of a notary public, his wife, and
years from the time of issuance of the said title other witnesses.53
without obtaining the consent of the NHA.
Further, the amount of P600,000.00 under the
. . . The court opines that the defendant has November 17, 1997 mortgage contract
failed to raise a legitimate and lawful ground in represented the initial loan of P250,000.00 and
order to bar the herein plaintiff from asserting its the subsequent loan amounts, which were
lawful right under the law. found to have been actually released to
petitioner. The November 17, 1997 mortgage
The contention of the defendant that the subject contract reflected the changes in the parties'
mortgaged property is their family home is obligations after they executed the March 17,
irrelevant as the debt secured by mortgages on 1997 mortgage contract.
the premises before or after the constitution of
the family home does not exempt the same from This court is not a trier of facts. As a general rule,
execution (Rule 106 of the Rules of findings of fact of the lower court and of the
Court).50cralawlawlibrary Court of Appeals are not reviewable and are
binding upon this court54 unless the
Whether these arguments seasonably raised circumstances of the case are shown to be
are valid is, however, a different matter. covered by the exceptions.55 Petitioner failed to
show any ground for this court to review the trial
II court's and the Court of Appeals' finding that
petitioner mortgaged his property in
All the elements of a valid mortgage contract consideration of a loan amounting to
were present. For a mortgage contract to be P600,000.00.
valid, the absolute owner of a property must
have free disposal of the property.51 That Petitioner's undisputed title to and ownership of
property must be used to secure the fulfillment the property is sufficient to give him free
of an obligation.52 Article 2085 of the Civil Code disposal of it. As owner of the property, he has
provides the right to enjoy all attributes of ownership
including jus disponendi or the right
to encumber, alienate, or
dispose his property "without other limitations
Art. 2085. The following requisites are essential than those established by law."56
to contracts of pledge and mortgage
Petitioner's claim that he lacks free disposal of
the property stems from the existence of the
restrictions imposed on his title by the National
(1) That they be constituted to secure the Housing Authority. These restrictions were
fulfillment of a principal obligation; annotated on his title, thus
(2) That the pledgor or mortgagor be the
absolute owner of the thing pledged or
mortgaged; Entry No. 4519/V-013/T-234246 -
RESTRICTION-that the Vendee shall not sell,
(3) encumber, mortgage, lease, sub-let or in any
That the persons constituting the pledge or manner, alter or dispose the lot or right therein
mortgage have the free disposal of their at any time, in whole or in part without obtaining
property, and in the absence thereof, that they the written consent of the Vendor. Other
be legally authorized for the purpose. restrictions set forth in Doc. No. 287; Page No.
59; Book No. 250; SERIES of 1997 of Notary
. . . . Public for Quezon City, Liberty S. Perez.
cralawlawlibrary
Date of instrument - June 24, 1997
Petitioner, who held under his name a transfer Date of inscription- June 25, 1997- 11:39
certificate of title to the property, mortgaged the
a.m.57ChanRoblesVirtualawlibrary
cralawlawlibrary
The National Housing Authority's restrictions
were provisions in a contract it executed with
petitioner. This contract bound petitioner to
certain conditions before transferring or
encumbering the property. Specifically, when
the National Housing Authority sold the property
to petitioner, petitioner became obligated not to
sell, encumber, mortgage, lease, sublease,
alter, or dispose the property without the
National Housing Authority's consent.
These restrictions do not divest petitioner of his
ownership rights. They are mere burdens or
limitations on petitioner's jus disponendi. Thus,
petitioner may dispose or encumber his
property. However, the disposition or
encumbrance of his property is subject to the
limitations and to the rights that may accrue to
the National Housing Authority. When
annotated to the title, these restrictions serve as
notice to the whole world that the National
Housing Authority has claims over the property,
which it may enforce against others.
Contracts entered into in violation of restrictions
on a property owner's rights do not always have
the effect of making them void ab initio.58 This
has been clarified as early as 1956
in Municipality of Camiling v. Lopez.59
The Municipality of Camiling sought to collect
from Diego Z. Lopez payments for the lease of
"certain fisheries." As. a defense, Diego Z.
Lopez invoked the alleged nullity of the lease
contract he entered into with the Municipality of
Camiling.
Citing Municipality of Hagonoy v.
60
Evangelista, the trial court ruled that the lease
contract between the Municipality of Camiling
and Diego Z. Lopez was void since it "was not
approved by the provincial governor in violation
of section 2196 of the Revised Administrative
Code."61 This court reversed the trial court's
Decision and noted the incorrect interpretation
in Municipality of Hagonoy of the term "nulos"
under Article 4 of the then Civil Code: "Son nulos
los actos ejecutados contra lo dispuesto en la
ley, salvo los casos en que la naisma ley or
dene su validez."62
In Municipality of Camiling, this court explained
that void acts declared in Article 4 of the Old
Civil Code63refer to those made in violation of
the law. Not all those acts are void from the
beginning. Void acts may be "those that are ipso
facto void and those which are merely
voidable."64
The lease contract executed by the Municipality
of Camiling and Diego Z. Lopez was not treated
as ipso facto void. Section 2196 of the
Administrative Code required the provincial
governor's approval before the municipal
council entered into contracts. However, the
same provision did not prohibit the municipal
council from entering into contracts involving the
properties of the municipality.65 The municipal
council's exercise of power to enter into these
contracts might have been limited, but its power
was recognized. This court found that aside
from the lack of approval, the contract had no
badge of illegality that would make it ipso
facto void. The execution of the contract was not
tainted with violation of public order, morality, or
public policy. The contract could have been
ratified. Hence, this court said that it was
"merely voidable at the option of the party who
in law is granted the right to invoke its
invalidity."66
The same doctrine was repeated in Sarmiento
v. Salud,67 which involved a property in
Kamuning, Quezon City. The property was sold
by Philippine Homesite and Housing Corp. to
Spouses Francisco and Marcelina Sarmiento.
The transfer certificate of title that covered the
property contained an annotation stating that
the property was sold on the condition that it
could not be resold within 25 years from contract
date. Sale could be made within the period only
to People's Homesite and Housing
68
Corporation. Spouses Sarmiento later
mortgaged the property to Jorge Salud.
Because Spouses Sarmiento failed to redeem
the property, the sheriff auctioned and sold the
property to Jorge Salud, who was issued a
certificate of sale.
Spouses Sarmiento sought to prevent the
foreclosure of the property by filing an action for
annulment of the foreclosure proceedings, sale,
and certificate of sale on the ground that the
prohibition against sale of the property within 25
years was violated.
This court did not declare the contract void for
violating the condition that the property could
not be resold within 25 years. Instead, it
recognized People's Homesite and Housing
Corporation's right to cause the annulment of
the contract. Since the condition was made in
favor of People's Homesite and Housing
Corporation, it was the Corporation, not
Spouses Sarmiento, who had a cause of action
for annulment.69In effect, this court considered
the contract between Spouses Sarmiento and
Jorge Salud as merely voidable at the option of
People's Homesite and Housing Corporation.
Thus, contracts that contain provisions in favor
of one party may be void ab initio or
voidable.70 Contracts that lack
71
consideration, those that are against public
order or public policy,72 and those that are
attended by illegality73 or immorality74 are
void ab initio.
Contracts that only subject a property owner's
property rights to conditions or limitations but
otherwise contain all the elements of a valid
contract are merely voidable by the person in
whose favor the conditions or limitations are
made.75
The mortgage contract entered into by petitioner
and respondent contains all the elements of a
valid contract of mortgage. The trial court and
the Court of Appeals found no irregularity in its
execution. There was no showing that it was
attended by fraud, illegality, immorality, force or
intimidation, and lack of consideration.
At most, therefore, the restrictions made the
contract entered into by the parties
voidable76 by the person in whose favor they
were made—in this case, by the National
Housing Authority.77 Petitioner has no
actionable right or cause of action based on
those restrictions.78
Having the right to assail the validity of the
mortgage contract based on violation of the
restrictions, the National Housing Authority may
seek the annulment of the mortgage
contract.79 Without any action from the National
Housing Authority, rights and obligations,
including the right to foreclose the property in
case of non-payment of the secured loan, are
still enforceable between the parties that
executed the mortgage contract.
The voidable nature of contracts entered into in
violation of restrictions or conditions necessarily
implies that the person in whose favor the
restrictions were made has two (2) options. It
may either: (1) waive80its rights accruing from
such restrictions, in which case, the duly
executed subsequent contract remains valid; or
(2) assail the subsequent contract based on the
breach of restrictions imposed in its favor.
In Sarmiento, this court recognized that the right
to waive follows from the right to invoke any
violation of conditions under the contract. Only
the person who has the right to invoke this
violation has the cause of action for annulment
of contract. The validity or invalidity of the
contract on the ground of the violation is
dependent on whether that person will invoke
this right. Hence, there was effectively a waiver
on the part of People's Homesite and Housing
Corporation when it did not assail the validity of
the mortgage in that case
It follows that on the assumption that the
mortgage to appellee Salud and the foreclosure
sale violated the condition in the Sarmiento
contract, only the PHHC was entitled to invoke
the condition aforementioned, and not the
Sarmientos. The validity or invalidity of the
sheriffs foreclosure sale to appellant Salud thus
depended exclusively on the PHHC; the latter
could attack the sale as violative of its right of
exclusive reacquisition; but it (PHHC) also could
waive the condition and treat the sale as good,
in which event, the sale can not be assailed [for]
breach of the condition aforestated. Since it
does not appear anywhere in the record that the
PHHC treated the mortgage and foreclosure
sale as an infringement of the condition, the
validity of the mortgage, with all its
consequences, including its foreclosure and
sale thereat, can not be an issue between the
parties to the present case. In the last analysis,
the appellant, as purchaser at the foreclosure
sale, should be regarded as the owner of the lot,
subject only to the right of PHHC to have his
acquisition of the land set aside if it so
desires.81cralawlawlibrary
There is no showing that the National Housing
Authority assailed the validity of the mortgage
contract on the ground of violation of restrictions
on petitioner's title. The validity of the mortgage
contract based on the restrictions is not an issue
between the parties. Petitioner has no cause of
action against respondent based on those
restrictions. The mortgage contract remains
binding upon petitioner and respondent.
In any case, there was at least substantial
compliance with the consent requirement given
the National Housing Authority's issuance of a
Permit to Mortgage. The Permit reads
25 November 1997
MR. FLORANTE VITUG
901 Del Pan Street
Tondo, Manila
PERMIT TO MORTGAGE
Dear Mr. Vitug,
Please be informed that your request dated 20
November 1997 for permission to mortgage
Commercial Lot 5, Block 1, Super Block 3, Area
I, Tondo Foreshore Estate Management Project
covered by TCT No. 234246 is hereby
GRANTED subject to the following terms and
conditions
1. The Mortgage Contract must provide that
"In the event of foreclosure, the NHA shall be
notified of the date, time and place of the auction
sale so that it can participate in the foreclosure
sale of the property."
2. The mortgage contract must be submitted to
NHA for verification and final approval; and
3. This permit shall be good only for a period of
ninety (90) days from date of receipt hereof.
Very truly yours,
(Signed)
Mariano M. Pineda
General Manager82
cralawlawlibrary
Petitioner insists that the Permit cannot be
treated as consent by the National Housing
Authority because of respondent's failure to
comply with its conditions.
However, a reading of the mortgage contract
executed by the parties on November 17, 1997
shows otherwise. The November 17, 1997
mortgage contract had references to the above
conditions imposed by the National Housing
Authority, thus
It is the essence of this Contract, that if and
should the Mortgagor fails to comply and pay the
principal obligations hereon within the period of
the Contract, the Mortgage shall be foreclosed
according to law and in which case the NHA
shall be duly notified of the matter.
That this mortgage contract shall be submitted
to the NHA for verifixation [sic] and final
approval in accordance with NHA permit to
mortgage the property.83(Emphasis
supplied)cralawlawlibrary
Assuming there was non-compliance with the
conditions set forth in the Permit, petitioner
cannot blame respondent. The restrictions were
part of the contract between the National
Housing Authority and petitioner. It was
petitioner, not respondent, who had the
obligation to notify and obtain the National
Housing Authority's consent within the
prescribed period before sale or encumbrance
of the property.
Petitioner cannot invoke his own mistake to
assail the validity of a contract he voluntarily
entered into.84
III
Even if the mortgage contract were illegal or
wrongful, neither of the parties may assail the
contract's validity as against the other because
they were equally at fault.85 This is the principle
of in pari delicto (or in delicto) as embodied in
Articles 1411 and 1412 of the Civil Code
Art. 1411. When the nullity proceeds from the
illegality of the cause or object of the contract,
and the act constitutes a criminal offense, both
parties being in pari delicto, they shall have no
action against each other, and both shall be
prosecuted. Moreover, the provisions of the
Penal Code relative to the disposal of effects or
instruments of a crime shall be applicable to the
things or the price of the contract.
This rule shall be applicable when only one of
the parties is guilty; but the innocent one may
claim what he has given, and shall not be bound
to comply with his promise.
Art. 1412. If the act in which the unlawful or
forbidden cause consists does not constitute a
criminal offense, the following rules shall be
observed
(1) When the fault is on the part of both
contracting parties, neither may recover what he
has given by virtue of the contract, or demand
the performance of the other's undertaking;
(2) When only one of the contracting parties is
at fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment
of what has been promised him. The other, who
is not at fault, may demand the return of what he
has given without any obligation to comply his
promise.cralawlawlibrary
Under this principle, courts shall not aid parties
in their illegal acts.86 The court shall leave them
as they are.87 It is an equitable principle that
bars parties from enforcing their illegal acts,
assailing the validity of their acts, or using its
invalidity as a defense.88
In the 1906 case of Batarra v. Marcos,89 this
court declared that a person cannot enforce a
promise to marry based on the consideration of
"carnal connection." This court ruled that
whether or not such consideration was a crime,
neither of the parties can recover because the
acts "were common to both parties."90
In Bough v. Cantiveros,91 this court refused to
enforce in favor of the guilty parties a contract of
sale that was not only simulated but also
executed to defeat any attempt by a husband to
recover properties from his wife.
Another case, Liguez v. Court of
92
Appeals, involves a party's claim over a
property based on a deed of donation executed
in her favor when she was 16 years old. The
heirs of the donor assailed the donation on the
ground of having an illicit causa.
The donor in that case was found to have had
sexual relations with the claimant. The donation
was done to secure the claimant's continuous
cohabitation with the donor, as well as to gratify
the donor's sexual impulses. At the time of the
donation, the donor was married to another
woman. The donated property was part of their
conjugal property.
This court held that the donation was founded
on an illicit causa. While this court found the
principle of in pari delicto inapplicable in that
case given the claimant's minority at the time of
donation, it had the occasion to say that the
parties were barred "from pleading the illegality
of the bargain either as a cause of action or as
a defense."93 The claimant was declared
entitled to the donated property, without
prejudice to the share and legitimes of the
donor's forced heirs.
In the later case of Villegas v. Rural Bank of
Tanjay, Inc.,94 this court ruled that the
petitioners in that case were not entitled to relief
because they did not come to court with clean
hands.
This court found that they "readily participated in
a ploy to circumvent the Rural Banks Act and
offered no objection when their original loan of
P350,000.00 was divided into small separate
loans not exceeding P50,000.00 each."95 They
and respondent bank were in pari delicto. They
could not be given affirmative relief against each
other.96 Hence, Spouses Villegas may not seek
the annulment of the loan and mortgage
contracts they voluntarily executed with
respondent bank on the ground that these
contracts were simulated to make it appear that
the loans were sugar crop loans, allowing
respondent bank to approve it pursuant to
Republic Act No. 720, otherwise known as the
Rural Banks Act.
The principle of in pari delicto admits
exceptions. It does not apply when the result of
its application is clearly against statutory law,
morals, good customs, and public policy.97
In Philippine Banking Corporation, representing
the Estate of Justina Santos v. Lui She,98 this
court refused to apply the principle of in pari
delicto. Applying the principle meant that this
court had to declare as valid between the parties
a 50-year lease contract with option to buy,
which was executed by a Filipino and a Chinese
citizen. This court ruled that the policy to
conserve land in favor of Filipinos would be
defeated if the principle of in pari delicto was
applied instead of setting aside the contracts
executed by the parties.99
Petitioner in this case did not come to this court
with clean hands. He was aware of the
restrictions in his title when he executed the loan
and mortgage contracts with respondent. He
voluntarily executed the contracts with
respondent despite this knowledge. He also
availed himself of the benefits of the loan and
mortgage contract. He cannot now assail the
validity of the mortgage contract to escape the
obligations incurred because of it.100
Petitioner also failed to show that upholding the
validity of the mortgage contract would be
contrary to law, morals, good customs, and
public policy.
Petitioner's contract with the National Housing
Authority is not a law prohibiting the transfer or
encumbrance of his property. It does not render
subsequent transactions involving the property
a violation of morals, good customs, and public
policy. Violation of its terms does not render
subsequent transactions involving the property
void ab initio.101 It merely provides the National
Housing Authority with a cause of action to
annul subsequent transactions involving the
property.
IV
Petitioner argues that the property should be
exempt from forced sale, attachment, and
execution, based on Article 155 of the Family
Code.102 Petitioner and his family have been
neighbors with respondent since 1992, before
the execution of the mortgage contract.103
Even though petitioner's property has been
constituted as a family home, it is not exempt
from execution. Article 155 of the Family Code
explicitly provides that debts secured by
mortgages are exempted from the rule against
execution, forced sale, or attachment of family
home
Art. 155. The family home shall be exempt from
execution, forced sale or attachment except
(3) For debts secured by mortgages on the
premises before or after such
constitution[.]cralawlawlibrary
Since petitioner's property was voluntarily used
by him as security for a loan he obtained from
respondent, it may be subject to execution and
attachment.
V
The Court of Appeals correctly found that the
interest rates of 5% or 10% per month imposed
on petitioner's loan were unconscionable.
Parties are free to stipulate interest rates in their
loan contracts in view of the suspension of the
implementation of the Usury Law ceiling on
interest effective January 1, 1983.104
The freedom to stipulate interest rates is
granted under the assumption that we have a
perfectly competitive market for loans where a
borrower has many options from whom to
borrow. It assumes that parties are on equal
footing during bargaining and that neither of the
parties has a relatively greater bargaining power
to command a higher or lower interest rate. It
assumes that the parties are equally in control
of the interest rate and equally have options to
accept or deny the other party's proposals. In
other words, the freedom is granted based on
the premise that parties arrive at interest rates
that they are willing but are not compelled to
take either by force of another person or by force
of circumstances.105

However, the premise is not always true. There
are imperfections in the loan market. One party
may have more bargaining power than the
other. A borrower may be in need of funds more
than a lender is in need of lending them. In that
case, the lender has more commanding power
to set the price of borrowing than the borrower
has the freedom to negotiate for a lower interest
rate.
Hence, there are instances when the state must
step in to correct market imperfections resulting
from unequal bargaining positions of the parties.
Article 1306 of the Civil Code limits the freedom
to contract to promote public morals, safety, and
welfare106chanroblesvirtuallawlibrary
Art. 1306. The contracting parties may establish
such stipulations, clauses, terms and conditions
as they may deem convenient, provided they
are not contrary to law, morals, good customs,
public order, or public policy.cralawlawlibrary
In stipulating interest rates, parties must ensure
that the rates are neither iniquitous nor
unconscionable. Iniquitous or unconscionable
interest rates are illegal and, therefore, void for
being against public morals.107 The lifting of the
ceiling on interest rates may not be read as
"grant[ing] lenders carte blanche[authority] to
raise interest rates to levels which will either
enslave their borrowers or lead to a
hemorrhaging of their assets."108
Voluntariness of stipulations on interest rates is
not sufficient to make the interest rates
valid.109 In Castro v. Tan
110chanroblesvirtuallawlibrary
The imposition of an unconscionable rate of
interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is
tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to
the common sense of man. It has no support in
law, in principles of justice, or in the human
conscience nor is there any reason whatsoever
which may justify such imposition as righteous
and as one that may be sustained within the
sphere of public or private
morals.111cralawlawlibrary
Thus, even if the parties voluntarily agree to an
interest rate, courts are given the discretionary
power to equitably reduce it if it is later found to
be iniquitous or unconscionable.112 Courts
approximate what the prevailing market rate
would have been under the circumstances had
the parties had equal bargaining power.
An interest rate is not inherently conscionable or
unconscionable. Interest rates become
unconscionable in light of the context in which
they were imposed or applied. In Medel v. Court
of Appeals,113 this Court ruled that the stipulated
interest of 5.5% or 66% per annum was
unconscionable and contrary to morals. It was
declared void. This court reduced the interest
rate to 1% per month or 12% per annum.114
This court also ruled that the interest rates of
3%, 5%, and 10% per month were
unconscionable, thus justifying the need to
reduce the interest rates to 12% per annum.115
On the other hand, despite rulings that interest
rates of 3% and 5% per month are
unconscionable, this court in Toledo v.
Hydenu116 found that the interest rate of 6% to
7% per month was not unconscionable. This
court noted circumstances that differentiated
that case from Medel and found that the
borrower in Toledo was not in dire need of
money when she obtained a loan; this implied
that the interest rates were agreed upon by the
parties on equal footing. This court also found
that it was the borrower in Toledo who was
guilty of inequitable acts
Noteworthy is the fact that in Medel, the
defendant-spouses were never able to pay their
indebtedness from the very beginning and when
their obligations ballooned into a staggering
sum, the creditors filed a collection case against
them. In this case, there was no urgency of the
need for money on the part of Jocelyn, the
debtor, which compelled her to enter into said
loan transactions. She used the money from the
loans to make advance payments for
prospective clients of educational plans offered
by her employer. In this way, her sales
production would increase, thereby entitling her
to 50% rebate on her sales. This is the reason
why she did not mind the 6% to 7% monthly
interest. Notably too, a business transaction of
this nature between Jocelyn and Marilou
continued for more than five years. Jocelyn
religiously paid the agreed amount of interest
until she ordered for stop payment on some of
the checks issued to Marilou. The checks were
in fact sufficiently funded when she ordered the
stop payment and then filed a case questioning
the imposition of a 6% to 7% interest rate for
being allegedly iniquitous or unconscionable
and, hence, contrary to morals.
It was clearly shown that before Jocelyn availed
of said loans, she knew fully well that the same
carried with it an interest rate of 6% to 7% per
month, yet she did not complain. In fact, when
she availed of said loans, an advance interest of
6% to 7% was already deducted from the loan
amount, yet she never uttered a word of protest.
After years of benefiting from the proceeds of
the loans bearing an interest rate of 6% to 7%
per month and paying for the same, Jocelyn
cannot now go to court to have the said interest
rate annulled on the ground that it is excessive,
iniquitous, unconscionable, exorbitant, and
absolutely revolting to the conscience of man.
"This is so because among the maxims of equity
are (1) he who seeks equity must do equity, and
(2) he who comes into equity must come with
clean hands. The latter is a frequently stated
maxim which is also expressed in the principle
that he who has done inequity shall not have
equity. It signifies that a litigant may be denied
relief by a court of equity on the ground that his
conduct has been inequitable, unfair and
dishonest, or fraudulent, or deceitful as to the
controversy in issue."
We are convinced that Jocelyn did not come to
court for equitable relief with equity or with clean
hands. It is patently clear from the above
summary of the facts that the conduct of Jocelyn
can by no means be characterized as nobly fair,
just, and reasonable. This Court likewise notes
certain acts of Jocelyn before filing the case with
the RTC. In September 1998, she requested
Marilou not to deposit her checks as she can
cover the checks only the following month. On
the next month, Jocelyn again requested for
another extension of one month. It turned out
that she was only sweet-talking Marilou into
believing that she had no money at that time.
But as testified by Serapio Romarate, an
employee of the Bank of Commerce where
Jocelyn is one of their clients, there was an
available balance of P276,203.03 in the latter's
account and yet she ordered for the stop
payments of the seven checks which can
actually be covered by the available funds in
said account. She then caught Marilou by
surprise when she surreptitiously filed a case for
declaration of nullity of the document and for
damages.117 (Emphases supplied, citations
omitted)cralawlawlibrary
Under the circumstances of this case, we find no
reason to uphold the stipulated interest rates of
5% to 10% per month on petitioner's loan.
Petitioner obtained the loan out of extreme
necessity. As pointed out by respondent, the
property would have been earlier foreclosed by
the National Housing Authority if not for the loan.
Moreover, it would be unjust to impose a heavier
burden upon petitioner, who would already be
losing his and his family's home. Respondent
would not be unjustly deprived if the interest rate
is reduced. After all, respondent still has the
right to foreclose the property. Thus, we affirm
the Court of Appeals Decision to reduce the
interest rate to 1% per month or 12% per
annum.
However, we modify the rates in accordance
with the guidelines set forth in Nacar v. Gallery
Frames
118chanroblesvirtuallawlibrary
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 6% per annum to be computed
from default, i.e., from judicial or
extrajudicial demand under and subject
to the provisions of Article 1169 of the
Civil Code.
2. When an obligation, not constituting a
loan or forbearance of money, is
breached, an interest on the amount of
damages awarded may be imposed at
the discretion of the court at the rate of
6% per annum. No interest, however,
shall be adjudged on unliquidated claims
or damages, except when or until the
demand can be established with
reasonable
certainty. Accordingly, where the dem
and is established with reasonable
certainty, the interest
shall begin to run from the time the claim
is made judicially or extrajudicially (Art.
1169, Civil Code), but when such
certainty cannot be so reasonably
established at the time the demand is
made, the interest shall begin to run only
from the date the judgment of the court is
made (at which time the quantification of
damages may be deemed to have been
reasonably ascertained). The actual
base for the computation of legal interest
shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding
a sum of money becomes final and
executory, the rate of legal interest,
whether the case falls under paragraph 1
or paragraph 2, above, shall be 6% per
annum from such finality until its
satisfaction, this interim period being
deemed to be by then an equivalent to a
forbearance of credit.
And, in addition to the above, judgments that
have become final and executory prior to July 1,
2013, shall not be disturbed and shall continue
to be implemented applying the rate of interest
fixed therein.119cralawlawlibrary
Thus, the interest rate for petitioner's loan
should be further reduced to 6% per annum from
July 1, 2013 until full satisfaction.
WHEREFORE, the Petition is DENIED. The
Court of Appeals Decision dated October 26,
2011 and its Resolution dated March 8, 2012
are AFFIRMED. The interest rate for the loan of
P600,000.00 is further reduced to 6% per
annum from July 1, 2013 until fully paid.
SO ORDERED.
DEPOSIT
1. CA AGRO- V CA
DAVIDE, JR., J.:
Is the contractual relation between a
commercial bank and another party in a contract
of rent of a safety deposit box with respect to its
contents placed by the latter one of bailor and
bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President,
Sergio Aguirre) and the spouses Ramon and
Paula Pugao entered into an agreement
whereby the former purchased from the latter
two (2) parcels of land for a consideration of
P350,625.00. Of this amount, P75,725.00 was
paid as downpayment while the balance was
covered by three (3) postdated checks. Among
the terms and conditions of the agreement
embodied in a Memorandum of True and Actual
Agreement of Sale of Land were that the titles to
the lots shall be transferred to the petitioner
upon full payment of the purchase price and that
the owner's copies of the certificates of titles
thereto, Transfer Certificates of Title (TCT) Nos.
284655 and 292434, shall be deposited in a
safety deposit box of any bank. The same could
be withdrawn only upon the joint signatures of a
representative of the petitioner and the Pugaos
upon full payment of the purchase price.
Petitioner, through Sergio Aguirre, and the
Pugaos then rented Safety Deposit Box No.
1448 of private respondent Security Bank and
Trust Company, a domestic banking corporation
hereinafter referred to as the respondent Bank.
For this purpose, both signed a contract of lease
(Exhibit "2") which contains, inter alia, the
following conditions:
13. The bank is not a depositary of
the contents of the safe and it has
neither the possession nor control
of the same.
14. The bank has no interest
whatsoever in said contents,
except herein expressly provided,
and it assumes absolutely no
liability in connection therewith.1
After the execution of the contract, two (2)
renter's keys were given to the renters — one to
Aguirre (for the petitioner) and the other to the
Pugaos. A guard key remained in the
possession of the respondent Bank. The safety
deposit box has two (2) keyholes, one for the
guard key and the other for the renter's key, and
can be opened only with the use of both keys.
Petitioner claims that the certificates of title were
placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos
offered to buy from the petitioner the two (2) lots
at a price of P225.00 per square meter which,
as petitioner alleged in its complaint, translates
to a profit of P100.00 per square meter or a total
of P280,500.00 for the entire property. Mrs.
Ramos demanded the execution of a deed of
sale which necessarily entailed the production
of the certificates of title. In view thereof,
Aguirre, accompanied by the Pugaos, then
proceeded to the respondent Bank on 4 October
1979 to open the safety deposit box and get the
certificates of title. However, when opened in
the presence of the Bank's representative, the
box yielded no such certificates. Because of the
delay in the reconstitution of the title, Mrs.
Ramos withdrew her earlier offer to purchase
the lots; as a consequence thereof, the
petitioner allegedly failed to realize the expected
profit of P280,500.00. Hence, the latter filed on
1 September 1980 a complaint2 for damages
against the respondent Bank with the Court of
First Instance (now Regional Trial Court) of
Pasig, Metro Manila which docketed the same
as Civil Case No. 38382.
In its Answer with Counterclaim,3 respondent
Bank alleged that the petitioner has no cause of
action because of paragraphs 13 and 14 of the
contract of lease (Exhibit "2"); corollarily, loss of
any of the items or articles contained in the box
could not give rise to an action against it. It then
interposed a counterclaim for exemplary
damages as well as attorney's fees in the
amount of P20,000.00. Petitioner subsequently
filed an answer to the counterclaim.4
In due course, the trial court, now designated as
Branch 161 of the Regional Trial Court (RTC) of
Pasig, Metro Manila, rendered a
decision5 adverse to the petitioner on 8
December 1986, the dispositive portion of which
reads:
WHEREFORE, premises
considered, judgment is hereby
rendered dismissing plaintiff's
complaint.
On defendant's counterclaim,
judgment is hereby rendered
ordering plaintiff to pay defendant
the amount of FIVE THOUSAND
(P5,000.00) PESOS as attorney's
fees.
With costs against plaintiff.6
The unfavorable verdict is based on the trial
court's conclusion that under paragraphs 13 and
14 of the contract of lease, the Bank has no
liability for the loss of the certificates of title. The
court declared that the said provisions are
binding on the parties.
Its motion for reconsideration7 having been
denied, petitioner appealed from the adverse
decision to the respondent Court of Appeals
which docketed the appeal as CA-G.R. CV No.
15150. Petitioner urged the respondent Court to
reverse the challenged decision because the
trial court erred in (a) absolving the respondent
Bank from liability from the loss, (b) not
declaring as null and void, for being contrary to
law, public order and public policy, the
provisions in the contract for lease of the safety
deposit box absolving the Bank from any liability
for loss, (c) not concluding that in this
jurisdiction, as well as under American
jurisprudence, the liability of the Bank is settled
and (d) awarding attorney's fees to the Bank and
denying the petitioner's prayer for nominal and
exemplary damages and attorney's fees.8
In its Decision promulgated on 4 July
1989,9 respondent Court affirmed the appealed
decision principally on the theory that the
contract (Exhibit "2") executed by the petitioner
and respondent Bank is in the nature of a
contract of lease by virtue of which the petitioner
and its co-renter were given control over the
safety deposit box and its contents while the
Bank retained no right to open the said box
because it had neither the possession nor
control over it and its contents. As such, the
contract is governed by Article 1643 of the Civil
Code 10 which provides:
Art. 1643. In the lease of things,
one of the parties binds himself to
give to another the enjoyment or
use of a thing for a price certain,
and for a period which may be
definite or indefinite. However, no
lease for more than ninety-nine
years shall be valid.
It invoked Tolentino vs.
Gonzales — which held that the owner
11
of the property loses his control over the
property leased during the period of the
contract — and Article 1975 of the Civil
Code which provides:
Art. 1975. The depositary holding
certificates, bonds, securities or
instruments which earn interest
shall be bound to collect the latter
when it becomes due, and to take
such steps as may be necessary
in order that the securities may
preserve their value and the rights
corresponding to them according
to law.
The above provision shall not
apply to contracts for the rent of
safety deposit boxes.
and then concluded that "[c]learly, the
defendant-appellee is not under any duty
to maintain the contents of the box. The
stipulation absolving the defendant-
appellee from liability is in accordance
with the nature of the contract of lease
and cannot be regarded as contrary to
law, public order and public
12
policy." The appellate court was quick
to add, however, that under the contract
of lease of the safety deposit box,
respondent Bank is not completely free
from liability as it may still be made
answerable in case unauthorized
persons enter into the vault area or when
the rented box is forced open. Thus, as
expressly provided for in stipulation
number 8 of the contract in question:
8. The Bank shall use due
diligence that no unauthorized
person shall be admitted to any
rented safe and beyond this, the
Bank will not be responsible for
the contents of any safe rented
from it. 13
Its motion for reconsideration 14 having been
denied in the respondent Court's Resolution of
28 August 1989, 15petitioner took this recourse
under Rule 45 of the Rules of Court and urges
Us to review and set aside the respondent
Court's ruling. Petitioner avers that both the
respondent Court and the trial court (a) did not
properly and legally apply the correct law in this
case, (b) acted with grave abuse of discretion or
in excess of jurisdiction amounting to lack
thereof and (c) set a precedent that is contrary
to, or is a departure from precedents adhered to
and affirmed by decisions of this Court and
precepts in American jurisprudence adopted in
the Philippines. It reiterates the arguments it had
raised in its motion to reconsider the trial court's
decision, the brief submitted to the respondent
Court and the motion to reconsider the latter's
decision. In a nutshell, petitioner maintains that
regardless of nomenclature, the contract for the
rent of the safety deposit box (Exhibit "2") is
actually a contract of deposit governed by Title
XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the
respondent Bank is liable for the loss of the
certificates of title pursuant to Article 1972 of the
said Code which provides:
Art. 1972. The depositary is
obliged to keep the thing safely
and to return it, when required, to
the depositor, or to his heirs and
successors, or to the person who
may have been designated in the
contract. His responsibility, with
regard to the safekeeping and the
 loss of the thing, shall be
governed by the provisions of Title
I of this Book.
If the deposit is gratuitous, this fact
shall be taken into account in
determining the degree of care
that the depositary must observe.
Petitioner then quotes a passage from
American Jurisprudence 17 which is
supposed to expound on the prevailing
rule in the United States, to wit:
The prevailing rule appears to be
that where a safe-deposit
company leases a safe-deposit
box or safe and the lessee takes
possession of the box or safe and
places therein his securities or
other valuables, the relation of
bailee and bail or is created
between the parties to the
transaction as to such securities
or other valuables; the fact that the
safe-deposit company does not
know, and that it is not expected
that it shall know, the character or
description of the property which
is deposited in such safe-deposit
box or safe does not change that
relation. That access to the
contents of the safe-deposit box
can be had only by the use of a
key retained by the lessee (
whether it is the sole key or one to
be used in connection with one
retained by the lessor) does not
operate to alter the foregoing rule.
The argument that there is not, in
such a case, a delivery of
exclusive possession and control
to the deposit company, and that
therefore the situation is entirely
different from that of ordinary
bailment, has been generally
rejected by the courts, usually on
the ground that as possession
must be either in the depositor or
in the company, it should
reasonably be considered as in
the latter rather than in the former,
since the company is, by the
nature of the contract, given
absolute control of access to the
property, and the depositor cannot
gain access thereto without the
consent and active participation of
the company. . . . (citations
omitted).
and a segment from Words and
Phrases 18 which states that a contract
for the rental of a bank safety deposit box
in consideration of a fixed amount at
stated periods is a bailment for hire.
Petitioner further argues that conditions 13 and
14 of the questioned contract are contrary to law
and public policy and should be declared null
and void. In support thereof, it cites Article 1306
of the Civil Code which provides that parties to
a contract may establish such stipulations,
clauses, terms and conditions as they may
deem convenient, provided they are not
contrary to law, morals, good customs, public
order or public policy.
After the respondent Bank filed its comment, this
Court gave due course to the petition and
required the parties to simultaneously submit
their respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that
the contract for the rent of the safety deposit box
is not an ordinary contract of lease as defined in
Article 1643 of the Civil Code. However, We do
not fully subscribe to its view that the same is a
contract of deposit that is to be strictly governed
by the provisions in the Civil Code on
deposit; 19 the contract in the case at bar is a
special kind of deposit. It cannot be
characterized as an ordinary contract of lease
under Article 1643 because the full and absolute
possession and control of the safety deposit box
was not given to the joint renters — the
petitioner and the Pugaos. The guard key of the
box remained with the respondent Bank; without
this key, neither of the renters could open the
box. On the other hand, the respondent Bank
could not likewise open the box without the
renter's key. In this case, the said key had a
duplicate which was made so that both renters
could have access to the box.
Hence, the authorities cited by the respondent
Court 20 on this point do not apply. Neither could
Article 1975, also relied upon by the respondent
Court, be invoked as an argument against the
deposit theory. Obviously, the first paragraph of
such provision cannot apply to a depositary of
certificates, bonds, securities or instruments
which earn interest if such documents are kept
in a rented safety deposit box. It is clear that the
depositary cannot open the box without the
renter being present.
We observe, however, that the deposit theory
itself does not altogether find unanimous
support even in American jurisprudence. We
agree with the petitioner that under the latter, the
prevailing rule is that the relation between a
bank renting out safe-deposit boxes and its
customer with respect to the contents of the box
is that of a bail or and bailee, the bailment being
for hire and mutual benefit. 21 This is just the
prevailing view because:
There is, however, some support
for the view that the relationship in
question might be more properly
characterized as that of landlord
 and tenant, or lessor and lessee.
It has also been suggested that it
should be characterized as that of
licensor and licensee. The relation
between a bank, safe-deposit
company, or storage company,
and the renter of a safe-deposit
box therein, is often described as
contractual, express or implied,
oral or written, in whole or in part.
But there is apparently no
jurisdiction in which any rule other
than that applicable to bailments
governs questions of the liability
and rights of the parties in respect
of loss of the contents of safe-
deposit boxes. 22 (citations
omitted)
In the context of our laws which authorize
banking institutions to rent out safety deposit
boxes, it is clear that in this jurisdiction, the
prevailing rule in the United States has been
adopted. Section 72 of the General Banking
Act 23pertinently provides:
Sec. 72. In addition to the
operations specifically authorized
elsewhere in this Act, banking
institutions other than building and
loan associations may perform the
following services:
(a) Receive in
custody funds,
documents, and
valuable objects,
and rent safety
deposit boxes for
the safeguarding of
such effects.
xxx xxx xxx
The banks shall perform the
services permitted under
subsections (a), (b) and (c) of this
section as depositories or as
agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within
the parameters of a contract of deposit, i.e., the
receiving in custody of funds, documents and
other valuable objects for safekeeping. The
renting out of the safety deposit boxes is not
independent from, but related to or in
conjunction with, this principal function. A
contract of deposit may be entered into orally or
in writing 25 and, pursuant to Article 1306 of the
Civil Code, the parties thereto may establish
such stipulations, clauses, terms and conditions
as they may deem convenient, provided they
are not contrary to law, morals, good customs,
public order or public policy. The depositary's
responsibility for the safekeeping of the objects
deposited in the case at bar is governed by Title
I, Book IV of the Civil Code. Accordingly, the
depositary would be liable if, in performing its
obligation, it is found guilty of fraud, negligence,
delay or contravention of the tenor of the
agreement. 26 In the absence of any stipulation
prescribing the degree of diligence required,
that of a good father of a family is to be
observed. 27 Hence, any stipulation exempting
the depositary from any liability arising from the
loss of the thing deposited on account of fraud,
negligence or delay would be void for being
contrary to law and public policy. In the instant
case, petitioner maintains that conditions 13 and
14 of the questioned contract of lease of the
safety deposit box, which read:
13. The bank is not a depositary of
the contents of the safe and it has
neither the possession nor control
of the same.
14. The bank has no interest
whatsoever in said contents,
except herein expressly provided,
and it assumes absolutely no
liability in connection therewith. 28
are void as they are contrary to law and
public policy. We find Ourselves in
agreement with this proposition for
indeed, said provisions are inconsistent
with the respondent Bank's responsibility
as a depositary under Section 72(a) of
the General Banking Act. Both exempt
the latter from any liability except as
contemplated in condition 8 thereof
which limits its duty to exercise
reasonable diligence only with respect to
who shall be admitted to any rented safe,
to wit:
8. The Bank shall use due
diligence that no unauthorized
person shall be admitted to any
rented safe and beyond this, the
Bank will not be responsible for
the contents of any safe rented
from it. 29
Furthermore, condition 13 stands on a
wrong premise and is contrary to the
actual practice of the Bank. It is not
correct to assert that the Bank has
neither the possession nor control of the
contents of the box since in fact, the
safety deposit box itself is located in its
premises and is under its absolute
control; moreover, the respondent Bank
keeps the guard key to the said box. As
stated earlier, renters cannot open their
respective boxes unless the Bank
cooperates by presenting and using this
guard key. Clearly then, to the extent
above stated, the foregoing conditions in
the contract in question are void and
ineffective. It has been said:
 With respect to property deposited
in a safe-deposit box by a
customer of a safe-deposit
company, the parties, since the
relation is a contractual one, may
by special contract define their
respective duties or provide for
increasing or limiting the liability of
the deposit company, provided
such contract is not in violation of
law or public policy. It must clearly
appear that there actually was
such a special contract, however,
in order to vary the ordinary
obligations implied by law from the
relationship of the parties; liability
of the deposit company will not be
enlarged or restricted by words of
doubtful meaning. The company,
in renting
safe-deposit boxes, cannot
exempt itself from liability for loss
of the contents by its own fraud or
negligence or that of its agents or
servants, and if a provision of the
contract may be construed as an
attempt to do so, it will be held
ineffective for the purpose.
Although it has been held that the
lessor of a safe-deposit box
cannot limit its liability for loss of
the contents thereof through its
own negligence, the view has
been taken that such a lessor may
limits its liability to some extent by
agreement or
stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the
Court of Appeals arrived at, that is, that the
petition should be dismissed, but on grounds
quite different from those relied upon by the
Court of Appeals. In the instant case, the
respondent Bank's exoneration cannot, contrary
to the holding of the Court of Appeals, be based
on or proceed from a characterization of the
impugned contract as a contract of lease, but
rather on the fact that no competent proof was
presented to show that respondent Bank was
aware of the agreement between the petitioner
and the Pugaos to the effect that the certificates
of title were withdrawable from the safety
deposit box only upon both parties' joint
signatures, and that no evidence was submitted
to reveal that the loss of the certificates of title
was due to the fraud or negligence of the
respondent Bank. This in turn flows from this
Court's determination that the contract involved
was one of deposit. Since both the petitioner
and the Pugaos agreed that each should have
one (1) renter's key, it was obvious that either of
them could ask the Bank for access to the safety
deposit box and, with the use of such key and
the Bank's own guard key, could open the said
box, without the other renter being present.
Since, however, the petitioner cannot be blamed
for the filing of the complaint and no bad faith on
its part had been established, the trial court
erred in condemning the petitioner to pay the
respondent Bank attorney's fees. To this extent,
the Decision (dispositive portion) of public
respondent Court of Appeals must be modified.
WHEREFORE, the Petition for Review is
partially GRANTED by deleting the award for
attorney's fees from the 4 July 1989 Decision of
the respondent Court of Appeals in CA-G.R. CV
No. 15150. As modified, and subject to the
pronouncement We made above on the nature
of the relationship between the parties in a
contract of lease of safety deposit boxes, the
dispositive portion of the said Decision is hereby
AFFIRMED and the instant Petition for Review
is otherwise DENIED for lack of merit.
No pronouncement as to costs.
SO ORDERED.
2.SIA vs.
COURT OF APPEALS and SECURITY BANK
and TRUST COMPANY
DAVIDE, JR., J.:
The Decision of public respondent Court of
Appeals in CA-G.R. CV No. 26737, promulgated
on 21 August 1991,1reversing and setting aside
the Decision, dated 19 February 1990, 2 of
Branch 47 of the Regional Trial Court (RTC) of
Manila in Civil Case No. 87-42601, entitled
"LUZAN SIA vs. SECURITY BANK and TRUST
CO.," is challenged in this petition for review
on certiorari under Rule 45 of the Rules Court.
Civil Case No. 87-42601 is an action for
damages arising out of the destruction or loss of
the stamp collection of the plaintiff (petitioner
herein) contained in Safety Deposit Box No. 54
which had been rented from the defendant
pursuant to a contract denominated as a Lease
Agreement. 3 Judgment therein was rendered in
favor of the dispositive portion of which reads:
WHEREFORE, premises
considered, judgment is hereby
rendered in favor of the plaintiff
and against the defendant,
Security Bank & Trust Company,
ordering the defendant bank to
pay the plaintiff the sum of —
a) Twenty Thousand Pesos
(P20,000.00), Philippine
Currency, as actual damages;
b) One Hundred Thousand Pesos
(P100,000.00), Philippine
 Currency, as moral damages; "13. The Bank is not a depository
and of the contents of the safe and it
has neither the possession nor the
c) Five Thousand Pesos control of the same. The Bank has
(P5,000.00), Philippine Currency, no interest whatsoever in said
as attorney's fees and legal contents, except as herein
expenses. provided, and it assumes
absolutely no liability in
The counterclaim set up by the connection therewith."
defendant are hereby dismissed
for lack of merit. The defendant bank also
contended that its contract with
No costs. the plaintiff over safety deposit
box No. 54 was one of lease and
SO ORDERED.4 not of deposit and, therefore,
governed by the lease agreement
The antecedent facts of the present controversy (Exhs. "A", "L") which should be
are summarized by the public respondent in its the applicable law; that the
challenged decision as follows: destruction of the plaintiff's
stamps collection was due to a
The plaintiff rented on March 22, calamity beyond obligation on its
1985 the Safety Deposit Box No. part to notify the plaintiff about the
54 of the defendant bank at its floodwaters that inundated its
Binondo Branch located at the premises at Binondo branch which
Fookien Times Building, Soler St., allegedly seeped into the safety
Binondo, Manila wherein he deposit box leased to the plaintiff.
placed his collection of stamps.
The said safety deposit box The trial court then directed that
leased by the plaintiff was at the an ocular inspection on (sic) the
bottom or at the lowest level of the contents of the safety deposit box
safety deposit boxes of the be conducted, which was done on
defendant bank at its aforesaid December 8, 1988 by its clerk of
Binondo Branch. court in the presence of the parties
and their counsels. A report
During the floods that took place in thereon was then submitted on
1985 and 1986, floodwater December 12, 1988 (Records, p.
entered into the defendant bank's 98-A) and confirmed in open court
premises, seeped into the safety by both parties thru counsel during
deposit box leased by the plaintiff the hearing on the same date
and caused, according to the (Ibid., p. 102) stating:
plaintiff, damage to his stamps
collection. The defendant bank "That the Safety Box
rejected the plaintiff's claim for Deposit No. 54 was
compensation for his damaged opened by both
stamps collection, so, the plaintiff plaintiff Luzan Sia
instituted an action for damages and the Acting
against the defendant bank. Branch Manager
Jimmy B. Ynion in
The defendant bank denied the presence of the
liability for the damaged stamps undersigned,
collection of the plaintiff on the plaintiff's and
basis of the "Rules and defendant's
Regulations Governing the Lease counsel. Said Safety
of Safe Deposit Boxes" (Exhs. "A- Box when opened
1", "1-A"), particularly paragraphs contains two albums
9 and 13, which reads (sic): of different sizes and
thickness, length
"9. The liability of the Bank by and width and a tin
reason of the lease, is limited to box with printed
the exercise of the diligence to word 'Tai Ping
prevent the opening of the safe by Shiang Roast Pork
any person other than the Renter, in pieces with
his authorized agent or legal Chinese designs
representative; and character."

xxx xxx xxx Condition of the above-stated Items —

 "Both albums are wet, moldy and
badly damaged.
1. The first album measures 10
1/8 inches in length, 8 inches in
width and 3/4 in thick. The leaves
of the album are attached to every
page and cannot be lifted without
destroying it, hence the stamps
contained therein are no longer
visible.
2. The second album measure 12
1/2 inches in length, 9 3/4 in width
1 inch thick. Some of its pages can
still be lifted. The stamps therein
can still be distinguished but
beyond restoration. Others have
lost its original form.
3. The tin box is rusty inside. It
contains an album with several
pieces of papers stuck up to the
cover of the box. The condition of
the album is the second
abovementioned album."5
The SECURITY BANK AND TRUST
COMPANY, hereinafter referred to as SBTC,
appealed the trial court's decision to the public
respondent Court of Appeals. The appeal was
docketed as CA-G.R. CV No. 26737.
In urging the public respondent to reverse the
decision of the trial court, SBTC contended that
the latter erred in (a) holding that the lease
agreement is a contract of adhesion; (b) finding
that the defendant had failed to exercise the
required diligence expected of a bank in
maintaining the safety deposit box; (c) awarding
to the plaintiff actual damages in the amount of
P20,000.00, moral damages in the amount of
P100,000.00 and attorney's fees and legal
expenses in the amount of P5,000.00; and (d)
dismissing the counterclaim.
On 21 August 1991, the respondent
promulgated its decision the dispositive portion
of which reads:
WHEREFORE, the decision
appealed from is hereby
REVERSED and instead the
appellee's complaint is hereby
DISMISSED. The appellant
bank's counterclaim is likewise
DISMISSED. No costs.6
In reversing the trial court's decision and
absolving SBTC from liability, the public
respondent found and ruled that:
a) the fine print in the "Lease Agreement "
(Exhibits "A" and "1" ) constitutes the terms and
conditions of the contract of lease which the
appellee (now petitioner) had voluntarily and
knowingly executed with SBTC;
b) the contract entered into by the parties
regarding Safe Deposit Box No. 54 was not a
contract of deposit wherein the bank became a
depositary of the subject stamp collection;
hence, as contended by SBTC, the provisions of
Book IV, Title XII of the Civil Code on deposits
do not apply;
c) The following provisions of the questioned
lease agreement of the safety deposit box
limiting SBTC's liability:
9. The liability of the bank by
reason of the lease, is limited to
the exercise of the diligence to
prevent the opening of the Safe by
any person other than the Renter,
his authorized agent or legal
representative.
xxx xxx xxx
13. The bank is not a depository of
the contents of the Safe and it has
neither the possession nor the
control of the same. The Bank has
no interest whatsoever in said
contents, except as herein
provided, and it assumes
absolutely no liability in
connection therewith.
are valid since said stipulations are not contrary
to law, morals, good customs, public order or
public policy; and
d) there is no concrete evidence to show that
SBTC failed to exercise the required diligence in
maintaining the safety deposit box; what was
proven was that the floods of 1985 and 1986,
which were beyond the control of SBTC, caused
the damage to the stamp collection; said floods
were fortuitous events which SBTC should not
be held liable for since it was not shown to have
participated in the aggravation of the damage to
the stamp collection; on the contrary, it offered
its services to secure the assistance of an expert
in order to save most of the stamps, but the
appellee refused; appellee must then bear the
lose under the principle of "res perit domino."
Unsuccessful in his bid to have the above
decision reconsidered by the public
respondent, 7 petitioner filed the instant petition
wherein he contends that:
I
IT WAS A GRAVE ERROR OR
AN ABUSE OF DISCRETION ON
THE PART OF THE
RESPONDENT COURT WHEN
IT RULED THAT RESPONDENT
SBTC DID NOT FAIL TO
EXERCISE THE REQUIRED
DILIGENCE IN MAINTAINING
THE SAFETY DEPOSIT BOX OF
 THE PETITIONER
CONSIDERING THAT
SUBSTANTIAL EVIDENCE
EXIST (sic) PROVING THE
CONTRARY.
II
THE RESPONDENT COURT
SERIOUSLY ERRED IN
EXCULPATING PRIVATE
RESPONDENT FROM ANY
LIABILITY WHATSOEVER BY
REASON OF THE PROVISIONS
OF PARAGRAPHS 9 AND 13 OF
THE AGREEMENT (EXHS. "A"
AND "A-1").
III
THE RESPONDENT COURT
SERIOUSLY ERRED IN NOT
UPHOLDING THE AWARDS OF
THE TRIAL COURT FOR
ACTUAL AND MORAL
DAMAGES, INCLUDING
ATTORNEY'S FEES AND LEGAL
EXPENSES, IN FAVOR OF THE
PETITIONER.8
We subsequently gave due course the petition
and required both parties to submit their
respective memoranda, which they complied
with.9
Petitioner insists that the trial court correctly
ruled that SBTC had failed "to exercise the
required diligence expected of a bank
maintaining such safety deposit box . . . in the
light of the environmental circumstance of said
safety deposit box after the floods of 1985 and
1986." He argues that such a conclusion is
supported by the evidence on record, to wit:
SBTC was fully cognizant of the exact location
of the safety deposit box in question; it knew that
the premises were inundated by floodwaters in
1985 and 1986 and considering that the bank is
guarded twenty-four (24) hours a day , it is safe
to conclude that it was also aware of the
inundation of the premises where the safety
deposit box was located; despite such
knowledge, however, it never bothered to inform
the petitioner of the flooding or take any
appropriate measures to insure the safety and
good maintenance of the safety deposit box in
question.
SBTC does not squarely dispute these facts;
rather, it relies on the rule that findings of facts
of the Court of Appeals, when supported by
substantial exidence, are not reviewable on
appeal by certiorari. 10
The foregoing rule is, of course, subject to
certain exceptions such as when there exists a
disparity between the factual findings and
conclusions of the Court of Appeals and the trial
court. 11 Such a disparity obtains in the present
case.
As We see it, SBTC's theory, which was upheld
by the public respondent, is that the "Lease
Agreement " covering Safe Deposit Box No. 54
(Exhibit "A and "1") is just that — a contract of
lease — and not a contract of deposit, and that
paragraphs 9 and 13 thereof, which expressly
limit the bank's liability as follows:
9. The liability of the bank by
reason of the lease, is limited to
the exercise of the diligence to
prevent the opening of the Safe by
any person other than the Renter,
his autliorized agent or legal
representative;
xxx xxx xxx
13. The bank is not a depository of
the contents of the Safe and it has
neither the possession nor the
control of the same. The Bank has
no interest whatsoever said
contents, except as herein
provided, and it assumes
absolutely no liability in
connection therewith. 12
are valid and binding upon the parties. In the
challenged decision, the public respondent
further avers that even without such a limitation
of liability, SBTC should still be absolved from
any responsibility for the damage sustained by
the petitioner as it appears that such damage
was occasioned by a fortuitous event and that
the respondent bank was free from any
participation in the aggravation of the injury.
We cannot accept this theory and ratiocination.
Consequently, this Court finds the petition to be
impressed with merit.
In the recent case CA Agro-Industrial
Development Corp. vs. Court of Appeals, 13 this
Court explicitly rejected the contention that a
contract for the use of a safety deposit box is a
contract of lease governed by Title VII, Book IV
of the Civil Code. Nor did We fully subscribe to
the view that it is a contract of deposit to be
strictly governed by the Civil Code provision on
deposit; 14 it is, as We declared, a special kind
of deposit. The prevailing rule in American
jurisprudence — that the relation between a
bank renting out safe deposit boxes and its
customer with respect to the contents of the box
is that of a bailor and bailee, the bailment for hire
and mutual benefit 15 — has been adopted in
this jurisdiction, thus:
In the context of our laws which
authorize banking institutions to
rent out safety deposit boxes, it is
clear that in this jurisdiction, the
prevailing rule in the United States
has been adopted. Section 72 of
the General Banking Act [R.A.
337, as amended] pertinently
provides:
"Sec. 72. In addition to the
operations specifically authorized
elsewhere in this Act, banking
institutions other than building and
loan associations may perform the
following services:
(a) Receive in
custody funds,
documents, and
valuable objects,
and rent safety
deposit boxes for
the safequarding of
such effects.
xxx xxx xxx
The banks shall perform the
services permitted under
subsections (a), (b) and (c) of this
section as depositories or as
agents. . . ."(emphasis supplied)
Note that the primary function is
still found within the parameters of
a contract of deposit, i.e., the
receiving in custody of funds,
documents and other valuable
objects for safekeeping. The
renting out of the safety deposit
boxes is not independent from, but
related to or in conjunction with,
this principal function. A contract
of deposit may be entered into
orally or in writing (Art. 1969, Civil
Code] and, pursuant to Article
1306 of the Civil Code, the parties
thereto may establish such
stipulations, clauses, terms and
conditions as they may deem
convenient, provided they are not
contrary to law, morals, good
customs, public order or public
policy. The depositary's
responsibility for the safekeeping
of the objects deposited in the
case at bar is governed by Title I,
Book IV of the Civil Code.
Accordingly, the depositary would
be liable if, in performing its
obligation, it is found guilty of
fraud, negligence, delay or
contravention of the tenor of the
agreement [Art. 1170, id.]. In the
absence of any stipulation
prescribing the degree of diligence
required, that of a good father of a
family is to be observed [Art.
1173, id.]. Hence, any stipulation
exempting the depositary from
any liability arising from the loss of
the thing deposited on account of
fraud, negligence or delay would
be void for being contrary to law
and public policy. In the instant
case, petitioner maintains that
conditions 13 and l4 of the
questioned contract of lease of the
safety deposit box, which read:
"13. The bank is a depositary of
the contents of the safe and it has
neither the possession nor control
of the same.
"14. The bank has no interest
whatsoever in said contents,
except as herein expressly
provided, and it assumes
absolutely no liability in
connection therewith."
are void as they are contrary to
law and public policy. We find
Ourselves in agreement with this
proposition for indeed, said
provisions are inconsistent with
the respondent Bank's
responsibility as a depositary
under Section 72 (a) of the
General Banking Act. Both
exempt the latter from any liability
except as contemplated in
condition 8 thereof which limits its
duty to exercise reasonable
diligence only with respect to who
shall be admitted to any rented
safe, to wit:
"8. The Bank shall
use due diligence
that no unauthorized
person shall be
admitted to any
rented safe and
beyond this, the
Bank will not be
responsible for the
contents of any safe
rented from it."
Furthermore condition 13 stands
on a wrong premise and is
contrary to the actual practice of
the Bank. It is not correct to assert
that the Bank has neither the
possession nor control of the
contents of the box since in fact,
the safety deposit box itself is
located in its premises and is
under its absolute control;
moreover, the respondent Bank
keeps the guard key to the said
box. As stated earlier, renters
cannot open their respective
boxes unless the Bank cooperates
by presenting and using this guard
key. Clearly then, to the extent
above stated, the foregoing stipulation ."[10 AM
conditions in the contract in JUR 2d., 466].
question are void and ineffective. (citations omitted)
It has been said: 16

"With respect to It must be noted that conditions No. 13 and No.

property deposited 14 in the Contract of Lease of Safety Deposit
in a safe-deposit box Box in CA Agro-Industrial Development
by a customer of a Corp. are strikingly similar to condition No. 13 in
safe-deposit the instant case. On the other hand, both
company, the condition No. 8 in CA Agro-Industrial
parties, since the Development Corp. and condition No. 9 in the
relation is a present case limit the scope of the exercise of
contractual one, due diligence by the banks involved to merely
may by special seeing to it that only the renter, his authorized
contract define their agent or his legal representative should open or
respective duties or have access to the safety deposit box. In short,
provide for in all other situations, it would seem that SBTC
increasing or limiting is not bound to exercise diligence of any kind at
the liability of the all. Assayed in the light of Our aforementioned
deposit company, pronouncements in CA Agro-lndustrial
provided such Development Corp., it is not at all difficult to
contract is not in conclude that both conditions No. 9 and No. 13
violation of law or of the "Lease Agreement" covering the safety
public policy. It must deposit box in question (Exhibits "A" and "1")
clearly appear that must be stricken down for being contrary to law
there actually was and public policy as they are meant to exempt
such a special SBTC from any liability for damage, loss or
contract, however, destruction of the contents of the safety deposit
in order to vary the box which may arise from its own or its agents'
ordinary obligations fraud, negligence or delay. Accordingly, SBTC
implied by law from cannot take refuge under the said conditions.
the relationship of
the parties; liability Public respondent further postulates that SBTC
of the deposit cannot be held responsible for the destruction or
company will not be loss of the stamp collection because the
enlarged or flooding was a fortuitous event and there was no
restricted by words showing of SBTC's participation in the
of doubtful meaning. aggravation of the loss or injury. It states:
The company, in
renting safe-deposit Article 1174 of the Civil Code
boxes, cannot provides:
exempt itself from
liability for loss of the "Except in cases
contents by its own expressly specified
fraud or negligence by the law, or when
or that, of its agents it is otherwise
or servants, and if a declared by
provision of the stipulation, or when
contract may be the nature of the
construed as an obligation requires
attempt to do so, it the assumption of
will be held risk, no person shall
ineffective for the be responsible for
purpose. Although it those events which
has been held that could not be
the lessor of a safe- foreseen, or which,
deposit box cannot though foreseen,
limit its liability for were inevitable.'
loss of the contents
thereof through its In its dissertation of the
own negligence, the phrase "caso
view has been taken fortuito" the Enciclopedia
that such a lessor Jurisdicada Española 17 says: "In
may limit its liability a legal sense and, consequently,
to some extent by also in relation to contracts,
agreement or a "caso fortuito" prevents
 (sic) 18 the following essential
characteristics: (1) the cause of
the unforeseen ands unexpected
occurrence, or of the failure of the
debtor to comply with his
obligation, must be independent of
the human will; (2) it must be
impossible to foresee the event
which constitutes the "caso
fortuito," or if it can be foreseen, it
must be impossible to avoid; (3)
the occurrence must be such as to
render it impossible for one debtor
to fulfill his obligation in a normal
manner; and (4) the obligor must
be free from any participation in
the aggravation of the injury
resulting to the creditor." (cited in
Servando vs. Phil., Steam
Navigation Co., supra). 19
Here, the unforeseen or
unexpected inundating floods
were independent of the will of the
appellant bank and the latter was
not shown to have participated in
aggravating damage (sic) to the
stamps collection of the appellee.
In fact, the appellant bank offered
its services to secure the
assistance of an expert to save
most of the then good stamps but
the appelle refused and let (sic)
these recoverable stamps inside
the safety deposit box until they
were ruined. 20
Both the law and authority cited are clear
enough and require no further elucidation.
Unfortunately, however, the public respondent
failed to consider that in the instant case, as
correctly held by the trial court, SBTC was guilty
of negligence. The facts constituting negligence
are enumerated in the petition and have been
summarized in thisponencia. SBTC's
negligence aggravated the injury or damage to
the stamp collection. SBTC was aware of the
floods of 1985 and 1986; it also knew that the
floodwaters inundated the room where Safe
Deposit Box No. 54 was located. In view thereof,
it should have lost no time in notifying the
petitioner in order that the box could have been
opened to retrieve the stamps, thus saving the
same from further deterioration and loss. In this
respect, it failed to exercise the reasonable care
and prudence expected of a good father of a
family, thereby becoming a party to the
aggravation of the injury or loss. Accordingly,
the aforementioned fourth characteristic of a
fortuitous event is absent Article 1170 of the
Civil Code, which reads:
Those who in the performance of
their obligation are guilty of fraud,
negligence, or delay, and those
who in any manner contravene the
tenor thereof, are liable for
damages,
thus comes to the succor of the petitioner. The
destruction or loss of the stamp collection which
was, in the language of the trial court, the
"product of 27 years of patience and
diligence" 21 caused the petitioner pecuniary
loss; hence, he must be compensated therefor.
We cannot, however, place Our imprimatur on
the trial court's award of moral damages. Since
the relationship between the petitioner and
SBTC is based on a contract, either of them may
be held liable for moral damages for breach
thereof only if said party had acted fraudulently
or in bad faith. 22 There is here no proof of fraud
or bad faith on the part of SBTC.
WHEREFORE, the instant petition is hereby
GRANTED. The challenged Decision and
Resolution of the public respondent Court of
Appeals of 21 August 1991 and 21 November
1991, respectively, in CA-G.R. CV No. 26737,
are hereby SET ASIDE and the Decision of 19
February 1990 of Branch 47 of the Regional
Trial Court of Manila in Civil Case No. 87-42601
is hereby REINSTATED in full, except as to the
award of moral damages which is hereby set
aside.
Costs against the private respondent.
SO ORDERED.
3. DURBAN APARTMENTS CORPORATION
V PIONEER INSURANCE
NACHURA, J.:
For review is the Decision1 of the Court of
Appeals (CA) in CA-G.R. CV No. 86869, which
affirmed the decision2 of the Regional Trial
Court (RTC), Branch 66, Makati City, in Civil
Case No. 03-857, holding petitioner Durban
Apartments Corporation solely liable to
respondent Pioneer Insurance and Surety
Corporation for the loss of Jeffrey See’s (See’s)
vehicle.
The facts, as found by the CA, are simple.
On July 22, 2003, [respondent] Pioneer
Insurance and Surety Corporation x x x, by right
of subrogation, filed [with the RTC of Makati
City] a Complaint for Recovery of Damages
against [petitioner] Durban Apartments
Corporation, doing business under the name
and style of City Garden Hotel, and [defendant
before the RTC] Vicente Justimbaste x x x.
[Respondent averred] that: it is the insurer for
loss and damage of Jeffrey S. See’s [the
insured’s] 2001 Suzuki Grand Vitara x x x with
Plate No. XBH-510 under Policy No. MC-CV-
HO-01-0003846-00-D in the amount of
₱1,175,000.00; on April 30, 2002, See arrived
and checked in at the City Garden Hotel in
Makati corner Kalayaan Avenues, Makati City
before midnight, and its parking attendant,
defendant x x x Justimbaste got the key to said
Vitara from See to park it[. O]n May 1, 2002, at
about 1:00 o’clock in the morning, See was
awakened in his room by [a] telephone call from
the Hotel Chief Security Officer who informed
him that his Vitara was carnapped while it was
parked unattended at the parking area of
Equitable PCI Bank along Makati Avenue
between the hours of 12:00 [a.m.] and 1:00
[a.m.]; See went to see the Hotel Chief Security
Officer, thereafter reported the incident to the
Operations Division of the Makati City Police
Anti-Carnapping Unit, and a flash alarm was
issued; the Makati City Police Anti-Carnapping
Unit investigated Hotel Security Officer, Ernesto
T. Horlador, Jr. x x x and defendant x x x
Justimbaste; See gave his Sinumpaang
Salaysay to the police investigator, and filed a
Complaint Sheet with the PNP Traffic
Management Group in Camp Crame, Quezon
City; the Vitara has not yet been recovered since
July 23, 2002 as evidenced by a Certification of
Non- Recovery issued by the PNP TMG; it paid
the ₱1,163,250.00 money claim of See and
mortgagee ABN AMRO Savings Bank, Inc. as
indemnity for the loss of the Vitara; the Vitara
was lost due to the negligence of [petitioner]
Durban Apartments and [defendant]
Justimbaste because it was discovered during
the investigation that this was the second time
that a similar incident of carnapping happened
in the valet parking service of [petitioner] Durban
Apartments and no necessary precautions were
taken to prevent its repetition; [petitioner]
Durban Apartments was wanting in due
diligence in the selection and supervision of its
employees particularly defendant x x x
Justimbaste; and defendant x x x Justimbaste
and [petitioner] Durban Apartments failed and
refused to pay its valid, just, and lawful claim
despite written demands.
Upon service of Summons, [petitioner] Durban
Apartments and [defendant] Justimbaste filed
their Answer with Compulsory Counterclaim
alleging that: See did not check in at its hotel, on
the contrary, he was a guest of a certain Ching
Montero x x x; defendant x x x Justimbaste did
not get the ignition key of See’s Vitara, on the
contrary, it was See who requested a parking
attendant to park the Vitara at any available
parking space, and it was parked at the
Equitable Bank parking area, which was within
See’s view, while he and Montero were waiting
in front of the hotel; they made a written denial
of the demand of [respondent] Pioneer
Insurance for want of legal basis; valet parking
services are provided by the hotel for the
convenience of its customers looking for a
parking space near the hotel premises; it is a
special privilege that it gave to Montero and
See; it does not include responsibility for any
losses or damages to motor vehicles and its
accessories in the parking area; and the same
holds true even if it was See himself who parked
his Vitara within the premises of the hotel as
evidenced by the valet parking customer’s claim
stub issued to him; the carnapper was able to
open the Vitara without using the key given
earlier to the parking attendant and
subsequently turned over to See after the Vitara
was stolen; defendant x x x Justimbaste saw the
Vitara speeding away from the place where it
was parked; he tried to run after it, and blocked
its possible path but to no avail; and See was
duly and immediately informed of the
carnapping of his Vitara; the matter was
reported to the nearest police precinct; and
defendant x x x Justimbaste, and Horlador
submitted themselves to police investigation.
During the pre-trial conference on November
28, 2003, counsel for [respondent] Pioneer
Insurance was present. Atty. Monina Lee x x x,
counsel of record of [petitioner] Durban
Apartments and Justimbaste was absent,
instead, a certain Atty. Nestor Mejia appeared
for [petitioner] Durban Apartments and
Justimbaste, but did not file their pre-trial brief.
On November 5, 2004, the lower court granted
the motion of [respondent] Pioneer Insurance,
despite the opposition of [petitioner] Durban
Apartments and Justimbaste, and allowed
[respondent] Pioneer Insurance to present its
evidence ex parte before the Branch Clerk of
Court.
See testified that: on April 30, 2002, at about
11:30 in the evening, he drove his Vitara and
stopped in front of City Garden Hotel in Makati
Avenue, Makati City; a parking attendant, whom
he had later known to be defendant x x x
Justimbaste, approached and asked for his
ignition key, told him that the latter would park
the Vitara for him in front of the hotel, and issued
him a valet parking customer’s claim stub; he
and Montero, thereafter, checked in at the said
hotel; on May 1, 2002, at around 1:00 in the
morning, the Hotel Security Officer whom he
later knew to be Horlador called his attention to
the fact that his Vitara was carnapped while it
was parked at the parking lot of Equitable PCI
Bank which is in front of the hotel; his Vitara was
insured with [respondent] Pioneer Insurance; he
together with Horlador and defendant x x x
Justimbaste went to Precinct 19 of the Makati
City Police to report the carnapping incident,
and a police officer came accompanied them to
the Anti-Carnapping Unit of the said station for
investigation, taking of their sworn statements,
and flashing of a voice alarm; he likewise
reported the said incident in PNP TMG in Camp
Crame where another alarm was issued; he filed
his claim with [respondent] Pioneer Insurance,
and a representative of the latter, who is also an
adjuster of Vesper Insurance Adjusters-
Appraisers [Vesper], investigated the incident;
and [respondent] Pioneer Insurance required
him to sign a Release of Claim and Subrogation
Receipt, and finally paid him the sum of
₱1,163,250.00 for his claim.
Ricardo F. Red testified that: he is a claims
evaluator of [petitioner] Pioneer Insurance
tasked, among others, with the receipt of claims
and documents from the insured, investigation
of the said claim, inspection of damages, taking
of pictures of insured unit, and monitoring of the
processing of the claim until its payment; he
monitored the processing of See’s claim when
the latter reported the incident to [respondent]
Pioneer Insurance; [respondent] Pioneer
Insurance assigned the case to Vesper who
verified See’s report, conducted an
investigation, obtained the necessary
documents for the processing of the claim, and
tendered a settlement check to See; they
evaluated the case upon receipt of the
subrogation documents and the adjuster’s
report, and eventually recommended for its
settlement for the sum of ₱1,163,250.00 which
was accepted by See; the matter was referred
and forwarded to their counsel, R.B. Sarajan &
Associates, who prepared and sent demand
letters to [petitioner] Durban Apartments and
[defendant] Justimbaste, who did not pay
[respondent] Pioneer Insurance notwithstanding
their receipt of the demand letters; and the
services of R.B. Sarajan & Associates were
engaged, for ₱100,000.00 as attorney’s fees
plus ₱3,000.00 per court appearance, to
prosecute the claims of [respondent] Pioneer
Insurance against [petitioner] Durban
Apartments and Justimbaste before the lower
court.
Ferdinand Cacnio testified that: he is an adjuster
of Vesper; [respondent] Pioneer Insurance
assigned to Vesper the investigation of See’s
case, and he was the one actually assigned to
investigate it; he conducted his investigation of
the matter by interviewing See, going to the City
Garden Hotel, required subrogation documents
from See, and verified the authenticity of the
same; he learned that it is the standard
procedure of the said hotel as regards its valet
parking service to assist their guests as soon as
they get to the lobby entrance, park the cars for
their guests, and place the ignition keys in their
safety key box; considering that the hotel has
only twelve (12) available parking slots, it has an
agreement with Equitable PCI Bank permitting
the hotel to use the parking space of the bank at
night; he also learned that a Hyundai Starex van
was carnapped at the said place barely a month
before the occurrence of this incident because
Liberty Insurance assigned the said incident to
Vespers, and Horlador and defendant x x x
Justimbaste admitted the occurrence of the
same in their sworn statements before the Anti-
Carnapping Unit of the Makati City Police; upon
verification with the PNP TMG [Unit] in Camp
Crame, he learned that See’s Vitara has not yet
been recovered; upon evaluation, Vesper
recommended to [respondent] Pioneer
Insurance to settle See’s claim for
₱1,045,750.00; See contested the
recommendation of Vesper by reasoning out
that the 10% depreciation should not be applied
in this case considering the fact that the Vitara
was used for barely eight (8) months prior to its
loss; and [respondent] Pioneer Insurance
acceded to See’s contention, tendered the sum
of ₱1,163,250.00 as settlement, the former
accepted it, and signed a release of claim and
subrogation receipt.
The lower court denied the Motion to Admit Pre-
Trial Brief and Motion for Reconsideration field
by [petitioner] Durban Apartments and
Justimbaste in its Orders dated May 4, 2005 and
October 20, 2005, respectively, for being devoid
of merit.3
Thereafter, on January 27, 2006, the RTC
rendered a decision, disposing, as follows:
WHEREFORE, judgment is hereby rendered
ordering [petitioner Durban Apartments
Corporation] to pay [respondent Pioneer
Insurance and Surety Corporation] the sum of
₱1,163,250.00 with legal interest thereon from
July 22, 2003 until the obligation is fully paid and
attorney’s fees and litigation expenses
amounting to ₱120,000.00.
SO ORDERED.4
On appeal, the appellate court affirmed the
decision of the trial court, viz.:
WHEREFORE, premises considered, the
Decision dated January 27, 2006 of the RTC,
Branch 66, Makati City in Civil Case No. 03-857
is hereby AFFIRMED insofar as it holds
[petitioner] Durban Apartments Corporation
solely liable to [respondent] Pioneer Insurance
and Surety Corporation for the loss of Jeffrey
See’s Suzuki Grand Vitara.
SO ORDERED.5
Hence, this recourse by petitioner.
The issues for our resolution are:
1. Whether the lower courts erred in
declaring petitioner as in default for
failure to appear at the pre-trial
conference and to file a pre-trial brief;
2. Corollary thereto, whether the trial
court correctly allowed respondent to
present evidence ex-parte;
3. Whether petitioner is liable to
respondent for attorney’s fees in the
amount of ₱120,000.00; and
4. Ultimately, whether petitioner is liable
to respondent for the loss of See’s
vehicle.
The petition must fail.
We are in complete accord with the common
ruling of the lower courts that petitioner was in
default for failure to appear at the pre-trial
conference and to file a pre-trial brief, and thus,
correctly allowed respondent to present
evidence ex-parte. Likewise, the lower courts
did not err in holding petitioner liable for the loss
of See’s vehicle.
Well-entrenched in jurisprudence is the rule that
factual findings of the trial court, especially when
affirmed by the appellate court, are accorded
the highest degree of respect and are
considered conclusive between the parties.6 A
review of such findings by this Court is not
warranted except upon a showing of highly
meritorious circumstances, such as: (1) when
the findings of a trial court are grounded entirely
on speculation, surmises, or conjectures; (2)
when a lower court’s inference from its factual
findings is manifestly mistaken, absurd, or
impossible; (3) when there is grave abuse of
discretion in the appreciation of facts; (4) when
the findings of the appellate court go beyond the
issues of the case, or fail to notice certain
relevant facts which, if properly considered, will
justify a different conclusion; (5) when there is a
misappreciation of facts; (6) when the findings
of fact are conclusions without mention of the
specific evidence on which they are based, are
premised on the absence of evidence, or are
contradicted by evidence on record.7 None of
the foregoing exceptions permitting a reversal of
the assailed decision exists in this instance.
Petitioner urges us, however, that "strong [and]
compelling reason[s]" such as the prevention of
miscarriage of justice warrant a suspension of
the rules and excuse its and its counsel’s non-
appearance during the pre-trial conference and
their failure to file a pre-trial brief.
We are not persuaded.
Rule 18 of the Rules of Court leaves no room for
equivocation; appearance of parties and their
counsel at the pre-trial conference, along with
the filing of a corresponding pre-trial brief, is
mandatory, nay, their duty. Thus, Section 4 and
Section 6 thereof provide:
SEC. 4. Appearance of parties.–It shall be the
duty of the parties and their counsel to appear
at the pre-trial. The non-appearance of a party
may be excused only if a valid cause is shown
therefor or if a representative shall appear in his
behalf fully authorized in writing to enter into an
amicable settlement, to submit to alternative
modes of dispute resolution, and to enter into
stipulations or admissions of facts and
documents.
SEC. 6. Pre-trial brief.–The parties shall file with
the court and serve on the adverse party, in
such manner as shall ensure their receipt
thereof at least three (3) days before the date of
the pre-trial, their respective pre-trial briefs
which shall contain, among others:
xxxx
Failure to file the pre-trial brief shall have the
same effect as failure to appear at the pre-trial.
Contrary to the foregoing rules, petitioner and its
counsel of record were not present at the
scheduled pre-trial conference. Worse, they did
not file a pre-trial brief. Their non-appearance
cannot be excused as Section 4, in relation to
Section 6, allows only two exceptions: (1) a valid
excuse; and (2) appearance of a representative
on behalf of a party who is fully authorized in
writing to enter into an amicable settlement, to
submit to alternative modes of dispute
resolution, and to enter into stipulations or
admissions of facts and documents.
Petitioner is adamant and harps on the fact that
November 28, 2003 was merely the first
scheduled date for the pre-trial conference, and
a certain Atty. Mejia appeared on its behalf.
However, its assertion is belied by its own
admission that, on said date, this Atty. Mejia "did
not have in his possession the Special Power of
Attorney issued by petitioner’s Board of
Directors."
As pointed out by the CA, petitioner, through
Atty. Lee, received the notice of pre-trial on
October 27, 2003, thirty-two (32) days prior to
the scheduled conference. In that span of time,
Atty. Lee, who was charged with the duty of
notifying petitioner of the scheduled pre-trial
conference,8 petitioner, and Atty. Mejia should
have discussed which lawyer would appear at
the pre-trial conference with petitioner, armed
with the appropriate authority therefor. Sadly,
petitioner failed to comply with not just one rule;
it also did not proffer a reason why it likewise
failed to file a pre-trial brief. In all, petitioner has
not shown any persuasive reason why it should
be exempt from abiding by the rules.
The appearance of Atty. Mejia at the pre-trial
conference, without a pre-trial brief and with
only his bare allegation that he is counsel for
petitioner, was correctly rejected by the trial
court. Accordingly, the trial court, as affirmed by
the appellate court, did not err in allowing
respondent to present evidence ex-parte.
Former Chief Justice Andres R. Narvasa’s
words continue to resonate, thus:
Everyone knows that a pre-trial in civil actions is
mandatory, and has been so since January 1,
1964. Yet to this day its place in the scheme of
things is not fully appreciated, and it receives but
perfunctory treatment in many courts. Some
courts consider it a mere technicality, serving no
useful purpose save perhaps, occasionally to
furnish ground for non-suiting the plaintiff, or
declaring a defendant in default, or, wistfully, to
bring about a compromise. The pre-trial device
is not thus put to full use. Hence, it has failed in
the main to accomplish the chief objective for it:
the simplification, abbreviation and expedition of
the trial, if not indeed its dispensation. This is a
great pity, because the objective is attainable,
and with not much difficulty, if the device were
more intelligently and extensively handled.
xxxx
Consistently with the mandatory character of the
pre-trial, the Rules oblige not only the lawyers
but the parties as well to appear for this purpose
before the Court, and when a party "fails to
appear at a pre-trial conference (he) may be
non-suited or considered as in default." The
obligation "to appear" denotes not simply the
personal appearance, or the mere physical
presentation by a party of one’s self, but
connotes as importantly, preparedness to go
into the different subject assigned by law to a
pre-trial. And in those instances where a party
may not himself be present at the pre-trial, and
another person substitutes for him, or his lawyer
undertakes to appear not only as an attorney but
in substitution of the client’s person, it is
imperative for that representative of the lawyer
to have "special authority" to make such
substantive agreements as only the client
otherwise has capacity to make. That "special
authority" should ordinarily be in writing or at the
very least be "duly established by evidence
other than the self-serving assertion of counsel
(or the proclaimed representative) himself."
Without that special authority, the lawyer or
representative cannot be deemed capacitated
to appear in place of the party; hence, it will be
considered that the latter has failed to put in an
appearance at all, and he [must] therefore "be
non-suited or considered as in default,"
notwithstanding his lawyer’s or delegate’s
presence.9
We are not unmindful that defendant’s
(petitioner’s) preclusion from presenting
evidence during trial does not automatically
result in a judgment in favor of plaintiff
(respondent). The plaintiff must still substantiate
the allegations in its complaint.10 Otherwise, it
would be inutile to continue with the plaintiff’s
presentation of evidence each time the
defendant is declared in default.
In this case, respondent substantiated the
allegations in its complaint, i.e., a contract of
necessary deposit existed between the insured
See and petitioner. On this score, we find no
error in the following disquisition of the appellate
court:
[The] records also reveal that upon arrival at the
City Garden Hotel, See gave notice to the
doorman and parking attendant of the said
hotel, x x x Justimbaste, about his Vitara when
he entrusted its ignition key to the latter. x x x
Justimbaste issued a valet parking customer
claim stub to See, parked the Vitara at the
Equitable PCI Bank parking area, and placed
the ignition key inside a safety key box while
See proceeded to the hotel lobby to check in.
The Equitable PCI Bank parking area became
an annex of City Garden Hotel when the
management of the said bank allowed the
parking of the vehicles of hotel guests thereat in
the evening after banking hours.11
Article 1962, in relation to Article 1998, of the
Civil Code defines a contract of deposit and a
necessary deposit made by persons in hotels or
inns:
Art. 1962. A deposit is constituted from the
moment a person receives a thing belonging to
another, with the obligation of safely keeping it
and returning the same. If the safekeeping of the
thing delivered is not the principal purpose of the
contract, there is no deposit but some other
contract.
Art. 1998. The deposit of effects made by
travelers in hotels or inns shall also be regarded
as necessary.1avvphi1 The keepers of hotels or
inns shall be responsible for them as
depositaries, provided that notice was given to
them, or to their employees, of the effects
brought by the guests and that, on the part of
the latter, they take the precautions which said
hotel-keepers or their substitutes advised
relative to the care and vigilance of their effects.
Plainly, from the facts found by the lower courts,
the insured See deposited his vehicle for
safekeeping with petitioner, through the latter’s
employee, Justimbaste. In turn, Justimbaste
issued a claim stub to See. Thus, the contract of
deposit was perfected from See’s delivery,
when he handed over to Justimbaste the keys
to his vehicle, which Justimbaste received with
the obligation of safely keeping and returning it.
Ultimately, petitioner is liable for the loss of
See’s vehicle.
Lastly, petitioner assails the lower courts’ award
of attorney’s fees to respondent in the amount
of ₱120,000.00. Petitioner claims that the award
is not substantiated by the evidence on record.
We disagree.
While it is a sound policy not to set a premium
on the right to litigate,12 we find that respondent
is entitled to reasonable attorney’s fees.
Attorney’s fees may be awarded when a party is
compelled to litigate or incur expenses to protect
its interest,13 or when the court deems it just and
equitable.14 In this case, petitioner refused to
answer for the loss of See’s vehicle, which was
deposited with it for safekeeping. This refusal
constrained respondent, the insurer of See, and
subrogated to the latter’s right, to litigate and
incur expenses. However, we reduce the award
of ₱120,000.00 to ₱60,000.00 in view of the
simplicity of the issues involved in this case.
WHEREFORE, the petition is DENIED. The
Decision of the Court of Appeals in CA-G.R. CV
No. 86869 is AFFIRMED with the
MODIFICATION that the award of attorney’s
fees is reduced to ₱60,000.00. Costs against
petitioner.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice
4. [G.R. No. 160544. February 21, 2005]
TRIPLE-V vs. FILIPINO MERCHANTS
Gentlemen:
Quoted hereunder, for your information, is a
resolution of this Court dated FEB 21 2005.
G.R. No. 160544 (Triple-V Food Services, Inc.
vs. Filipino Merchants Insurance Company,
Inc.)
Assailed in this petition for review on certiorari is
the decision[1]cralaw dated October 21, 2003 of
the Court of Appeals in CA-G.R. CV No. 71223,
affirming an earlier decision of the Regional Trial
Court at Makati City, Branch 148, in its Civil
Case No. 98-838, an action for damages thereat
filed by respondent Filipino Merchants
Insurance, Company, Inc., against the herein
petitioner, Triple-V Food Services, Inc.
On March 2, 1997, at around 2:15 o'clock in the
afternoon, a certain Mary Jo-Anne De Asis (De
Asis) dined at petitioner's Kamayan
Restaurant at 15 West Avenue, Quezon City.
De Asis was using a Mitsubishi Galant Super
Saloon Model 1995 with plate number UBU 955,
assigned to her by her employer Crispa Textile
Inc. (Crispa). On said date, De Asis availed of
the valet parking service of petitioner and
entrusted her car key to petitioner's valet
counter. A corresponding parking ticket was
issued as receipt for the car. The car was then
parked by petitioner's valet attendant, a certain
Madridano, at the designated parking area. Few
minutes later, Madridano noticed that the car
was not in its parking slot and its key no longer
in the box where valet attendants usually keep
the keys of cars entrusted to them. The car was
never recovered. Thereafter, Crispa filed a claim
against its insurer, herein respondent Filipino
Merchants Insurance Company, Inc. (FMICI).
Having indemnified Crispa in the amount of
P669.500 for the loss of the subject vehicle,
FMICI, as subrogee to Crispa's rights, filed with
the RTC at Makati City an action for damages
against petitioner Triple-V Food Services, Inc.,
thereat docketed as Civil Case No. 98-838
which was raffled to Branch 148.
In its answer, petitioner argued that the
complaint failed to aver facts to support the
allegations of recklessness and negligence
committed in the safekeeping and custody of the
subject vehicle, claiming that it and its
employees wasted no time in ascertaining the
loss of the car and in informing De Asis of the
discovery of the loss. Petitioner further argued
that in accepting the complimentary valet
parking service, De Asis received a parking
ticket whereunder it is so provided that
"[Management and staff will not be responsible
for any loss of or damage incurred on the vehicle
nor of valuables contained therein", a provision
which, to petitioner's mind, is an explicit waiver
of any right to claim indemnity for the loss of the
car; and that De Asis knowingly assumed the
risk of loss when she allowed petitioner to park
her vehicle, adding that its valet parking service
did not include extending a contract of insurance
or warranty for the loss of the vehicle.
During trial, petitioner challenged FMICI's
subrogation to Crispa's right to file a claim for
the loss of the car, arguing that theft is not a risk
insured against under FMICI's Insurance Policy
No. PC-5975 for the subject vehicle.
In a decision dated June 22, 2001, the trial court
rendered judgment for respondent FMICI, thus:
WHEREFORE, premises considered, judgment
is hereby rendered in favor of the plaintiff
(FMICI) and against the defendant Triple V
(herein petitioner) and the latter is hereby
ordered to pay plaintiff the following:
1. The amount of P669,500.00, representing
actual damages plus compounded (sic);
2. The amount of P30,000.00 as acceptance
fee plus the amount equal to 25% of the total
amount due as attorney's fees;
3. The amount of P50,000.00 as exemplary
damages;
4. Plus, cost of suit.
Defendant Triple V is not therefore precluded
from taking appropriate action against
defendant Armando Madridano.
SO ORDERED.
Obviously displeased, petitioner appealed to the
Court of Appeals reiterating its argument that it
was not a depositary of the subject car and that
it exercised due diligence and prudence in the
safe keeping of the vehicle, in handling the car-
napping incident and in the supervision of its
employees. It further argued that there was no
valid subrogation of rights between Crispa and
respondent FMICI.
In a decision dated October 21,
[2]
2003, cralaw the Court of Appeals dismissed
petitioner's appeal and affirmed the appealed
decision of the trial court, thus:
WHEREFORE, based on the foregoing
premises, the instant appeal is hereby
DISMISSED. Accordingly, the assailed June 22,
2001 Decision of the RTC of Makati City -
Branch 148 in Civil Case No. 98-838 is
AFFIRMED.
SO ORDERED.
In so dismissing the appeal and affirming the
appealed decision, the appellate court agreed
with the findings and conclusions of the trial
court that: (a) petitioner was a depositary of the
subject vehicle; (b) petitioner was negligent in its
duties as a depositary thereof and as an
employer of the valet attendant; and (c) there
was a valid subrogation of rights between
Crispa and respondent FMICI.
Hence, petitioner's present recourse.
We agree with the two (2) courts below.
When De Asis entrusted the car in question to
petitioners valet attendant while eating at
petitioner's Kamayan Restaurant, the former
expected the car's safe return at the end of her
meal. Thus, petitioner was constituted as a
depositary of the same car. Petitioner cannot
evade liability by arguing that neither a contract
of deposit nor that of insurance, guaranty or
surety for the loss of the car was constituted
when De Asis availed of its free valet parking
service.
In a contract of deposit, a person receives an
object belonging to another with the obligation
of safely keeping it and returning the
same.[3]cralaw A deposit may be constituted
even without any consideration. It is not
necessary that the depositary receives a fee
before it becomes obligated to keep the item
entrusted for safekeeping and to return it later to
the depositor.
Specious is petitioner's insistence that the valet
parking claim stub it issued to De Asis contains
a clear exclusion of its liability and operates as
an explicit waiver by the customer of any right to
claim indemnity for any loss of or damage to the
vehicle.
The parking claim stub embodying the terms
and conditions of the parking, including that of
relieving petitioner from any loss or damage to
the car, is essentially a contract of adhesion,
drafted and prepared as it is by the petitioner
alone with no participation whatsoever on the
part of the customers, like De Asis, who merely
adheres to the printed stipulations therein
appearing. While contracts of adhesion are not
void in themselves, yet this Court will not
hesitate to rule out blind adherence thereto if
they prove to be one-sided under the attendant
facts and circumstances.[4]cralaw
Hence, and as aptly pointed out by the Court of
Appeals, petitioner must not be allowed to use
its parking claim stub's exclusionary stipulation
as a shield from any responsibility for any loss
or damage to vehicles or to the valuables
contained therein. Here, it is evident that De
Asis deposited the car in question with the
petitioner as part of the latter's enticement for
customers by providing them a safe parking
space within the vicinity of its restaurant. In a
very real sense, a safe parking space is an
added attraction to petitioner's restaurant
business because customers are thereby
somehow assured that their vehicle are safely
kept, rather than parking them elsewhere at
their own risk. Having entrusted the subject car
to petitioner's valet attendant, customer De Asis,
like all of petitioner's customers, fully expects
the security of her car while at petitioner's
premises/designated parking areas and its safe
return at the end of her visit at petitioner's
restaurant.
Petitioner's argument that there was no valid
subrogation of rights between Crispa and FMICI
because theft was not a risk insured against
under FMICI's Insurance Policy No. PC-5975
holds no water.
Insurance Policy No. PC-5975 which
respondent FMICI issued to Crispa contains,
among others things, the following item:
"Insured's Estimate of Value of Scheduled
Vehicle- P800.000".[5]cralaw On the basis of
such item, the trial court concluded that the
coverage includes a full comprehensive
insurance of the vehicle in case of damage or
loss. Besides, Crispa paid a premium
of P10,304 to cover theft. This is clearly shown
in the breakdown of premiums in the same
policy.[6]cralaw Thus, having indemnified
CRISPA for the stolen car, FMICI, as correctly
ruled by the trial court and the Court of Appeals,
was properly subrogated to Crispa's rights
against petitioner, pursuant to Article 2207 of
the New Civil Code[7].
Anent the trial court's findings of negligence on
the part of the petitioner, which findings were
affirmed by the appellate court, we have
consistently ruled that findings of facts of trial
courts, more so when affirmed, as here, by the
Court of Appeals, are conclusive on this Court
unless the trial court itself ignored, overlooked
or misconstrued facts and circumstances which,
if considered, warrant a reversal of the outcome
of the case.[8]cralaw This is not so in the case at
bar. For, we have ourselves reviewed the
records and find no justification to deviate from
the trial court's findings.
WHEREFORE, petition is hereby DENIED DUE
COURSE.

GUARANTY AND SURETYSHIP
1. E. Zobel vs Court of Appeals
This petition for review on certiorari seeks the
reversal of the decision[1] of the Court of
Appeals dated July 13, 1993 which affirmed the
Order of the Regional Trial Court of Manila,
Branch 51, denying petitioner's Motion to
Dismiss the complaint, as well as the
Resolution[2] dated February 15, 1994 denying
the motion for reconsideration thereto.
The facts are as follows:
Respondent spouses Raul and Elea Claveria,
doing business under the name "Agro Brokers,"
applied for a loan with respondent Consolidated
Bank and Trust Corporation (now SOLIDBANK)
in the amount of Two Million Eight Hundred
Seventy Five Thousand Pesos (P2, 875,000.00)
to finance the purchase of two (2) maritime
barges and one tugboat[3] which would be used
in their molasses business. The loan was
granted subject to the condition that respondent
spouses execute a chattel mortgage over the
three (3) vessels to be acquired and that a
continuing guarantee be executed by Ayala
International Philippines, Inc., now herein
petitioner E. Zobel, Inc. in favor of SOLIDBANK.
The respondent spouses agreed to the
arrangement. Consequently, a chattel mortgage
and a Continuing Guaranty[4] were executed.
Respondent spouses defaulted in the payment
of the entire obligation upon maturity. Hence, on
January 31,1991, SOLIDBANK filed a complaint
for sum of money with a prayer for a writ of
preliminary attachment, against respondents
spouses and petitioner. The case was docketed
as Civil Case No. 91-55909 in the Regional Trial
Court of Manila.
Petitioner moved to dismiss the complaint on the
ground that its liability as guarantor of the loan
was extinguished pursuant to Article 2080 of the
Civil Code of the Philippines. It argued that it has
lost its right to be subrogated to the first chattel
mortgage in view of SOLIDBANK's failure to
register the chattel mortgage with the
appropriate government agency.
SOLIDBANK opposed the motion contending
that Article 2080 is not applicable because
petitioner is not a guarantor but a surety.
On February 18, 1993, the trial court issued an
Order, portions of which reads:
"After a careful consideration of the matter on
hand, the Court finds the ground of the motion
to dismiss without merit. The document referred
to as 'Continuing Guaranty' dated August
21,1985 (Exh. 7) states as follows:
'For and in consideration of any existing
indebtedness to you of Agro Brokers, a single
proprietorship owned by Mr. Raul Claveria for
the payment of which the undersigned is now
obligated to you as surety and in order to induce
you, in your discretion, at any other manner, to,
or at the request or for the account of the
borrower, x x x '
"The provisions of the document are clear, plain
and explicit.
"Clearly therefore, defendant E. Zobel, Inc.
signed as surety. Even though the title of the
document is 'Continuing Guaranty', the Court's
interpretation is not limited to the title alone but
to the contents and intention of the parties more
specifically if the language is clear and positive.
The obligation of the defendant Zobel being that
of a surety, Art. 2080 New Civil Code will not
apply as it is only for those acting as guarantor.
In fact, in the letter of January 31, 1986 of the
defendants (spouses and Zobel) to the plaintiff
it is requesting that the chattel mortgage on the
vessels and tugboat be waived and/or rescinded
by the bank inasmuch as the said loan is
covered by the Continuing Guaranty by Zobel in
favor of the plaintiff thus thwarting the claim of
the defendant now that the chattel mortgage is
an essential condition of the guaranty. In its
letter, it said that because of the Continuing
Guaranty in favor of the plaintiff the chattel
mortgage is rendered unnecessary and
redundant.
"With regard to the claim that the failure of the
plaintiff to register the chattel mortgage with the
proper government agency, i.e. with the Office
of the Collector of Customs or with the Register
of Deeds makes the obligation a guaranty, the
same merits a scant consideration and could not
be taken by this Court as the basis of the
extinguishment of the obligation of the
defendant corporation to the plaintiff as surety.
The chattel mortgage is an additional security
and should not be considered as payment of the
debt in case of failure of payment. The same is
true with the failure to register, extinction of the
liability would not lie.
"WHEREFORE, the Motion to Dismiss is hereby
denied and defendant E. Zobel, Inc., is ordered
to file its answer to the complaint within ten (10)
days from receipt of a copy of this Order."[5]
Petitioner moved for reconsideration but was
denied on April 26,1993.[6]
Thereafter, petitioner questioned said Orders
before the respondent Court of Appeals,
through a petition for certiorari, alleging that the
trial court committed grave abuse of discretion
in denying the motion to dismiss.
On July 13,1993, the Court of Appeals rendered
the assailed decision the dispositive portion of
which reads:
"WHEREFORE, finding that respondent Judge
has not committed any grave abuse of
discretion in issuing the herein assailed orders,
We hereby DISMISS the petition."
A motion for reconsideration filed by petitioner
was denied for lack of merit on February
15,1994.
Petitioner now comes to us via this petition
arguing that the respondent Court of Appeals
erred in its finding: (1) that Article 2080 of the
New Civil Code which provides: "The
guarantors, even though they be solidary, are
released from their obligation whenever by
some act of the creditor they cannot be
subrogated to the rights, mortgages, and
preferences of the latter," is not applicable to
petitioner; (2) that petitioner's obligation to
respondent SOLIDBANK under the continuing
guaranty is that of a
; and (3) that the failure of respondent
SOLIDBANK to register the chattel mortgage
did not extinguish petitioner's liability to
respondent SOLIDBANK.
We shall first resolve the issue of whether or not
petitioner under the "Continuing Guaranty"
obligated itself to SOLIDBANK as a guarantor or
a surety.
A contract of surety is an accessory promise by
which a person binds himself for another
already bound, and agrees with the creditor to
satisfy the obligation if the debtor does not.[7] A
contract of guaranty, on the other hand, is a
collateral undertaking to pay the debt of another
in case the latter does not pay the debt.[8]
Strictly speaking, guaranty and surety are nearly
related, and many of the principles are common
to both. However, under our civil law, they may
be distinguished thus: A surety is usually bound
with his principal by the same instrument,
executed at the same time, and on the same
consideration. He is an original promissor and
debtor from the beginning, and is held,
ordinarily, to know every default of his principal.
Usually, he will not be discharged, either by the
mere indulgence of the creditor to the principal,
or by want of notice of the default of the
principal, no matter how much he may be injured
thereby. On the other hand, the contract of
guaranty is the guarantor's own separate
undertaking, in which the principal does not join.
It is usually entered into before or after that of
the principal, and is often supported on a
separate consideration from that supporting the
contract of the principal. The original contract of
his principal is not his contract, and he is not
bound to take notice of its non-performance. He
is often discharged by the mere indulgence of
the creditor to the principal, and is usually not
liable unless notified of the default of the
principal.[9]
Simply put, a surety is distinguished from a
guaranty in that a guarantor is the insurer of the
solvency of the debtor and thus binds himself to
pay if the principal is unable to pay while a
surety is the insurer of the debt, and he obligates
himself to pay if the principal does not pay.[10]
Based on the aforementioned definitions, it
appears that the contract executed by petitioner
in favor of SOLIDBANK, albeit denominated as
a "Continuing Guaranty," is a contract of surety.
The terms of the contract categorically obligates
petitioner as "surety" to induce SOLIDBANK to
extend credit to respondent spouses. This can
be seen in the following stipulations.
"For and in consideration of any existing
indebtedness to you of AGRO BROKERS, a
single proprietorship owned by MR. RAUL P.
CLAVERIA, of legal age, married and with
business address x x x (hereinafter called the
Borrower), for the payment of which the
undersigned is now obligated to you as surety
and in order to induce you, in your discretion, at
any time or from time to time hereafter, to make
loans or advances or to extend credit in any
other manner to, or at the request or for the
account of the Borrower, either with or without
purchase or discount, or to make any loans or
advances evidenced or secured by any notes,
bills receivable, drafts, acceptances, checks or
other instruments or evidences of indebtedness
x x upon which the Borrower is or may become
liable as maker, endorser, acceptor, or
otherwise, the undersigned agrees to
guarantee, and does hereby guarantee, the
punctual payment, at maturity or upon demand,
to you of any and all such instruments, loans,
advances, credits and/or other obligations
herein before referred to, and also any and all
other indebtedness of every kind which is now
or may hereafter become due or owing to you
by the Borrower, together with any and all
expenses which may be incurred by you in
collecting all or any such instruments or other
indebtedness or obligations hereinbefore
referred to, and or in enforcing any rights
hereunder, and also to make or cause any and
all such payments to be made strictly in
accordance with the terms and provisions of any
agreement (g), express or implied, which has
(have) been or may hereafter be made or
entered into by the Borrower in reference
thereto, regardless of any law, regulation or
decree, now or hereafter in effect which might in
any manner affect any of the terms or provisions
of any such agreements(s) or your right with
respect thereto as against the Borrower, or
cause or permit to be invoked any alteration in
the time, amount or manner of payment by the
Borrower of any such instruments, obligations or
indebtedness; x x x " (Italics Ours)
One need not look too deeply at the contract to
determine the nature of the undertaking and the
intention of the parties. The contract clearly
disclose that petitioner assumed liability to
SOLIDBANK, as a regular party to the
undertaking and obligated itself as an original
promissor. It bound itself jointly and severally to
the obligation with the respondent spouses. In
fact, SOLIDBANK need not resort to all other
legal remedies or exhaust respondent spouses'
properties before it can hold petitioner liable for
the obligation. This can be gleaned from a
reading of the stipulations in the contract, to wit:
'x x x If default be made in the payment of any
of the instruments, indebtedness or other
obligation hereby guaranteed by the
undersigned, or if the Borrower, or the
undersigned should die, dissolve, fail in
business, or become insolvent, x x x , or if any
funds or other property of the Borrower, or of the
undersigned which may be or come into your
possession or control or that of any third party
acting in your behalf as aforesaid should be
attached of distrained, or should be or become
subject to any mandatory order of court or other
legal process, then, or any time after the
happening of any such event any or all of the
instruments of indebtedness or other obligations
hereby guaranteed shall, at your option become
(for the purpose of this guaranty) due and
payable by the undersigned forthwith without
demand of notice, and full power and authority
are hereby given you, in your discretion, to sell,
assign and deliver all or any part of the property
upon which you may then have a lien hereunder
at any broker's board, or at public or private sale
at your option, either for cash or for credit or for
future delivery without assumption by you of
credit risk, and without either the demand,
advertisement or notice of any kind, all of which
are hereby expressly waived. At any sale
hereunder, you may, at your option, purchase
the whole or any part of the property so sold,
free from any right of redemption on the part of
the undersigned, all such rights being also
hereby waived and released. In case of any sale
and other disposition of any of the property
aforesaid, after deducting all costs and
expenses of every kind for care, safekeeping,
collection, sale, delivery or otherwise, you may
apply the residue of the proceeds of the sale and
other disposition thereof, to the payment or
reduction, either in whole or in part, of any one
or more of the obligations or liabilities hereunder
of the undersigned whether or not except for
disagreement such liabilities or obligations
would then be due, making proper allowance or
interest on the obligations and liabilities not
otherwise then due, and returning the overplus,
if any, to the undersigned; all without prejudice
to your rights as against the undersigned with
respect to any and all amounts which may be or
remain unpaid on any of the obligations or
liabilities aforesaid at any time (s)"
xxx xxx xxx
'Should the Borrower at this or at any future time
furnish, or should be heretofore have furnished,
another surety or sureties to guarantee the
payment of his obligations to you, the
undersigned hereby expressly waives all
benefits to which the undersigned might be
entitled under the provisions of Article 1837 of
the Civil Code (beneficio division), the liability of
the undersigned under any and all
circumstances being joint and several;" (Italics
Ours)
The use of the term "guarantee" does not ipso
facto mean that the contract is one of guaranty.
Authorities recognize that the word "guarantee"
is frequently employed in business transactions
to describe not the security of the debt but an
intention to be bound by a primary or
independent obligation.[11] As aptly observed
by the trial court, the interpretation of a contract
is not limited to the title alone but to the contents
and intention of the parties.
Having thus established that petitioner is a
surety, Article 2080 of the Civil Code, relied
upon by petitioner, finds no application to the
case at bar. In Bicol Savings and Loan
Association vs. Guinhawa,[12] we have ruled
that Article 2080 of the New Civil Code does not
apply where the liability is as a surety, not as a
guarantor.
But even assuming that Article 2080 is
applicable, SOLIDBANK's failure to register the
chattel mortgage did not release petitioner from
the obligation. In the Continuing Guaranty
executed in favor of SOLIDBANK, petitioner
bound itself to the contract irrespective of the
existence of any collateral. It even released
SOLIDBANK from any fault or negligence that
may impair the contract. The pertinent portions
of the contract so provides:
"x x x the undersigned (petitioner) who hereby
agrees to be and remain bound upon this
guaranty, irrespective of the existence, value or
condition of any collateral, and notwithstanding
any such change, exchange, settlement,
compromise, surrender, release, sale,
application, renewal or extension, and
notwithstanding also that all obligations of the
Borrower to you outstanding and unpaid at any
time (s) may exceed the aggregate principal
sum herein above prescribed.
'This is a Continuing Guaranty and shall remain
in full force and effect until written notice shall
have been received by you that it has been
revoked by the undersigned, but any such
notice shall not be released the undersigned
from any liability as to any instruments, loans,
advances or other obligations hereby
guaranteed, which may be held by you, or in
which you may have any interest, at the time of
the receipt of such notice. No act or omission of
any kind on your part in the premises shall in any
event affect or impair this guaranty, nor shall
same be affected by any change which may
arise by reason of the death of the undersigned,
of any partner (s) of the undersigned, or of the
Borrower, or of the accession to any such
partnership of any one or more new partners."
(Italics supplied)
In fine, we find the petition to be without merit as
no reversible error was committed by
respondent Court of Appeals in rendering the
assailed decision.
WHEREFORE, the decision of the respondent
Court of Appeals is hereby AFFIRMED. Costs
against the petitioner.
SO ORDERED
2 Palmares vs CA
Where a party signs a promissory note as a co-
maker and binds herself to be jointly and
severally liable with the principal debtor in case
the latter defaults in the payment of the loan, is
such undertaking of the former deemed to be
that of a surety as an insurer of the debt, or of a
guarantor who warrants the solvency of the
debtor?
Pursuant to a promissory note dated March 13,
1990, private respondent M.B. Lending
Corporation extended a loan to the spouses
Osmeña and Merlyn Azarraga, together with
petitioner Estrella Palmares, in the amount of
P30,000.00 payable on or before May 12, 1990,
with compounded interest at the rate of 6% per
annum to be computed every 30 days from the
date thereof.1 On four occasions after the
execution of the promissory note and even after
the loan matured, petitioner and the Azarraga
spouses were able to pay a total of P16,300.00,
thereby leaving a balance of P13,700.00. No
payments were made after the last payment on
September 26, 1991.2
Consequently, on the basis of petitioner's
solidary liability under the promissory note,
respondent corporation filed a complaint3
against petitioner Palmares as the lone party-
defendant, to the exclusion of the principal
debtors, allegedly by reason of the insolvency of
the latter.
In her Amended Answer with Counterclaim,4
petitioner alleged that sometime in August 1990,
immediately after the loan matured, she offered
to settle the obligation with respondent
corporation but the latter informed her that they
would try to collect from the spouses Azarraga
and that she need not worry about it; that there
has already been a partial payment in the
amount of P17,010.00; that the interest of 6%
per month compounded at the same rate per
month, as well as the penalty charges of 3% per
month, are usurious and unconscionable; and
that while she agrees to be liable on the note but
only upon default of the principal debtor,
respondent corporation acted in bad faith in
suing her alone without including the Azarragas
when they were the only ones who benefited
from the proceeds of the loan.
During the pre-trial conference, the parties
submitted the following issues for the resolution
of the trial court: (1) what the rate of interest,
penalty and damages should be; (2) whether the
liability of the defendant (herein petitioner) is
primary or subsidiary; and (3) whether the
defendant Estrella Palmares is only a guarantor
with a subsidiary liability and not a co-maker
with primary liability.5
Thereafter, the parties agreed to submit the
case for decision based on the pleadings filed
and the memoranda to be submitted by them.
On November 26, 1992, the Regional Trial
Court of Iloilo City, Branch 23, rendered
judgment dismissing the complaint without
prejudice to the filing of a separate action for a
sum of money against the spouses Osmeña and
Merlyn Azarraga who are primarily liable on the
instrument.6 This was based on the findings of
the court a quo that the filing of the complaint
against herein petitioner Estrella Palmares, to
the exclusion of the Azarraga spouses,
amounted to a discharge of a prior party; that the
offer made by petitioner to pay the obligation is
considered a valid tender of payment sufficient
to discharge a person's secondary liability on
the instrument; as co-maker, is only secondarily
liable on the instrument; and that the promissory
note is a contract of adhesion.
Respondent Court of Appeals, however,
reversed the decision of the trial court, and
rendered judgment declaring herein petitioner
Palmares liable to pay respondent corporation:
1. The sum of P13,700.00 representing the
outstanding balance still due and owing with
interest at six percent (6%) per month computed
from the date the loan was contracted until fully
paid;
2. The sum equivalent to the stipulated
penalty of three percent (3%) per month, of the
outstanding balance;
3. Attorney's fees at 25% of the total
amount due per stipulations;
4. Plus costs of suit.7

Contrary to the findings of the trial court,
respondent appellate court declared that
petitioner Palmares is a surety since she bound
herself to be jointly and severally or solidarily
liable with the principal debtors, the Azarraga
spouses, when she signed as a co-maker. As
such, petitioner is primarily liable on the note
and hence may be sued by the creditor
corporation for the entire obligation. It also
adverted to the fact that petitioner admitted her
liability in her Answer although she claims that
the Azarraga spouses should have been
impleaded. Respondent court ordered the
imposition of the stipulated 6% interest and 3%
penalty charges on the ground that the Usury
Law is no longer enforceable pursuant to
Central Bank Circular No. 905. Finally, it
rationalized that even if the promissory note
were to be considered as a contract of adhesion,
the same is not entirely prohibited because the
one who adheres to the contract is free to reject
it entirely; if he adheres, he gives his consent.
Hence this petition for review on certiorari
wherein it is asserted that:
A. The Court of Appeals erred in ruling that
Palmares acted as surety and is therefore
solidarily liable to pay the promissory note.
1. The terms of the promissory note are
vague. Its conflicting provisions do not establish
Palmares' solidary liability.
2. The promissory note contains provisions
which establish the co-maker's liability as that of
a guarantor.
3. There is no sufficient basis for concluding
that Palmares' liability is solidary.
4. The promissory note is a contract of
adhesion and should be construed against M. B.
Lending Corporation.
5. Palmares cannot be compelled to pay the
loan at this point.
B. Assuming that Palmares' liability is
solidary, the Court of Appeals erred in strictly
imposing the interests and penalty charges on
the outstanding balance of the promissory note.
The foregoing contentions of petitioner are
denied and contradicted in their material points
by respondent corporation. They are further
refuted by accepted doctrines in the American
jurisdiction after which we patterned our
statutory law on surety and guaranty. This case
then affords us the opportunity to make an
extended exposition on the ramifications of
these two specialized contracts, for such
guidance as may be taken therefrom in similar
local controversies in the future.
The basis of petitioner Palmares' liability under
the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE
READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of
the above-quoted loan, have fully understood
the contents of this Promissory Note for Short-
Term Loan:
That as Co-maker, I am fully aware that I shall
be jointly and severally or solidarily liable with
the above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING
CORPORATION may demand payment of the
above loan from me in case the principal maker,
Mrs. Merlyn Azarraga defaults in the payment of
the note subject to the same conditions above-
contained.8
Petitioner contends that the provisions of the
second and third paragraph are conflicting in
that while the second paragraph seems to
define her liability as that of a surety which is
joint and solidary with the principal maker, on
the other hand, under the third paragraph her
liability is actually that of a mere guarantor
because she bound herself to fulfill the
obligation only in case the principal debtor
should fail to do so, which is the essence of a
contract of guaranty. More simply stated,
although the second paragraph says that she is
liable as a surety, the third paragraph defines
the nature of her liability as that of a guarantor.
According to petitioner, these are two conflicting
provisions in the promissory note and the rule is
that clauses in the contract should be
interpreted in relation to one another and not by
parts. In other words, the second paragraph
should not be taken in isolation, but should be
read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict
between the two provisions, petitioner avers that
she could be held liable only as a guarantor for
several reasons. First, the words "jointly and
severally or solidarily liable" used in the second
paragraph are technical and legal terms which
are not fully appreciated by an ordinary layman
like herein petitioner, a 65-year old housewife
who is likely to enter into such transactions
without fully realizing the nature and extent of
her liability. On the contrary, the wordings used
in the third paragraph are easier to comprehend.
Second, the law looks upon the contract of
suretyship with a jealous eye and the rule is that
the obligation of the surety cannot be extended
by implication beyond specified limits, taking
into consideration the peculiar nature of a surety
agreement which holds the surety liable despite
the absence of any direct consideration
received from either the principal obligor or the
creditor. Third, the promissory note is a contract
of adhesion since it was prepared by
respondent M.B. Lending Corporation. The note
was brought to petitioner partially filled up, the
contents thereof were never explained to her,
and her only participation was to sign thereon.
Thus, any apparent ambiguity in the contract
should be strictly construed against private
respondent pursuant to Art. 1377 of the Civil
Code.9
Petitioner accordingly concludes that her liability
should be deemed restricted by the clause in the
third paragraph of the promissory note to be that
of a guarantor.
Moreover, petitioner submits that she cannot as
yet be compelled to pay the loan because the
principal debtors cannot be considered in
default in the absence of a judicial or
extrajudicial demand. It is true that the complaint
alleges the fact of demand, but the purported
demand letters were never attached to the
pleadings filed by private respondent before the
trial court. And, while petitioner may have
admitted in her Amended Answer that she
received a demand letter from respondent
corporation sometime in 1990, the same did not
effectively put her or the principal debtors in
default for the simple reason that the latter
subsequently made a partial payment on the
loan in September, 1991, a fact which was never
controverted by herein private respondent.
Finally, it is argued that the Court of Appeals
gravely erred in awarding the amount of
P2,745,483.39 in favor of private respondent
when, in truth and in fact, the outstanding
balance of the loan is only P13,700.00. Where
the interest charged on the loan is exorbitant,
iniquitous or unconscionable, and the obligation
has been partially complied with, the court may
equitably reduce the penalty10 on grounds of
substantial justice. More importantly,
respondent corporation never refuted
petitioner's allegation that immediately after the
loan matured, she informed said respondent of
her desire to settle the obligation. The court
should, therefore, mitigate the damages to be
paid since petitioner has shown a sincere desire
for a compromise.11
After a judicious evaluation of the arguments of
the parties, we are constrained to dismiss the
petition for lack of merit, but to except therefrom
the issue anent the propriety of the monetary
award adjudged to herein respondent
corporation.
At the outset, let it here be stressed that even
assuming arguendo that the promissory note
executed between the parties is a contract of
adhesion, it has been the consistent holding of
the Court that contracts of adhesion are not
invalid per se and that on numerous occasions
the binding effects thereof have been upheld.
The peculiar nature of such contracts
necessitate a close scrutiny of the factual milieu
to which the provisions are intended to apply.
Hence, just as consistently and unhesitatingly,
but without categorically invalidating such
contracts, the Court has construed obscurities
and ambiguities in the restrictive provisions of
contracts of adhesion strictly albeit not
unreasonably against the drafter thereof when
justified in light of the operative facts and
surrounding circumstances.12 The factual
scenario obtaining in the case before us
warrants a liberal application of the rule in favor
of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the
guarantor binds himself to the creditor to fulfill
the obligation of the principal debtor in case the
latter should fail to do so.
If a person binds himself solidarily with the
principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed.
In such case the contract is called a suretyship.
It is a cardinal rule in the interpretation of
contracts that if the terms of a contract are clear
and leave no doubt upon the intention of the
contracting parties, the literal meaning of its
stipulation shall control.13 In the case at bar,
petitioner expressly bound herself to be jointly
and severally or solidarily liable with the
principal maker of the note. The terms of the
contract are clear, explicit and unequivocal that
petitioner's liability is that of a surety.
Her pretension that the terms "jointly and
severally or solidarily liable" contained in the
second paragraph of her contract are technical
and legal terms which could not be easily
understood by an ordinary layman like her is
diametrically opposed to her manifestation in
the contract that she "fully understood the
contents" of the promissory note and that she is
"fully aware" of her solidary liability with the
principal maker. Petitioner admits that she
voluntarily affixed her signature thereto; ergo,
she cannot now be heard to claim otherwise.
Any reference to the existence of fraud is
unavailing. Fraud must be established by clear
and convincing evidence, mere preponderance
of evidence not even being adequate.
Petitioner's attempt to prove fraud must,
therefore, fail as it was evidenced only by her
own uncorroborated and, expectedly, self-
serving allegations.14
Having entered into the contract with full
knowledge of its terms and conditions, petitioner
is estopped to assert that she did so under a
misapprehension or in ignorance of their legal
effect, or as to the legal effect of the
undertaking.15 The rule that ignorance of the
contents of an instrument does not ordinarily
affect the liability of one who signs it also applies
to contracts of suretyship. And the mistake of a
surety as to the legal effect of her obligation is
ordinarily no reason for relieving her of
liability.16

Petitioner would like to make capital of the fact
that although she obligated herself to be jointly
and severally liable with the principal maker, her
liability is deemed restricted by the provisions of
the third paragraph of her contract wherein she
agreed "that M.B. Lending Corporation may
demand payment of the above loan from me in
case the principal maker, Mrs. Merlyn Azarraga
defaults in the payment of the note," which
makes her contract one of guaranty and not
suretyship. The purported discordance is more
apparent than real.
A surety is an insurer of the debt, whereas a
guarantor is an insurer of the solvency of the
debtor.17 A suretyship is an undertaking that
the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay.18 Stated
differently, a surety promises to pay the
principal's debt if the principal will not pay, while
a guarantor agrees that the creditor, after
proceeding against the principal, may proceed
against the guarantor if the principal is unable to
pay.19 A surety binds himself to perform if the
principal does not, without regard to his ability to
do so. A guarantor, on the other hand, does not
contract that the principal will pay, but simply
that he is able to do so.20 In other words, a
surety undertakes directly for the payment and
is so responsible at once if the principal debtor
makes default, while a guarantor contracts to
pay if, by the use of due diligence, the debt
cannot be made out of the principal debtor.21
Quintessentially, the undertaking to pay upon
default of the principal debtor does not
automatically remove it from the ambit of a
contract of suretyship. The second and third
paragraphs of the aforequoted portion of the
promissory note do not contain any other
condition for the enforcement of respondent
corporation's right against petitioner. It has not
been shown, either in the contract or the
pleadings, that respondent corporation agreed
to proceed against herein petitioner only if and
when the defaulting principal has become
insolvent. A contract of suretyship, to repeat, is
that wherein one lends his credit by joining in the
principal debtor's obligation, so as to render
himself directly and primarily responsible with
him, and without reference to the solvency of the
principal.22
In a desperate effort to exonerate herself from
liability, petitioner erroneously invokes the rule
on strictissimi juris, which holds that when the
meaning of a contract of indemnity or guaranty
has once been judicially determined under the
rule of reasonable construction applicable to all
written contracts, then the liability of the surety,
under his contract, as thus interpreted and
construed, is not to be extended beyond its strict
meaning.23 The rule, however, will apply only
after it has been definitely ascertained that the
contract is one of suretyship and not a contract
of guaranty. It cannot be used as an aid in
determining whether a party's undertaking is
that of a surety or a guarantor.
Prescinding from these jurisprudential
authorities, there can be no doubt that the
stipulation contained in the third paragraph of
the controverted suretyship contract merely
elucidated on and made more specific the
obligation of petitioner as generally defined in
the second paragraph thereof. Resultantly, the
theory advanced by petitioner, that she is
merely a guarantor because her liability
attaches only upon default of the principal
debtor, must necessarily fail for being
incongruent with the judicial pronouncements
adverted to above.
It is a well-entrenched rule that in order to judge
the intention of the contracting parties, their
contemporaneous and subsequent acts shall
also be principally considered.24 Several
attendant factors in that genre lend support to
our finding that petitioner is a surety. For one,
when petitioner was informed about the failure
of the principal debtor to pay the loan, she
immediately offered to settle the account with
respondent corporation. Obviously, in her mind,
she knew that she was directly and primarily
liable upon default of her principal. For another,
and this is most revealing, petitioner presented
the receipts of the payments already made, from
the time of initial payment up to the last, which
were all issued in her name and of the Azarraga
spouses.25 This can only be construed to mean
that the payments made by the principal debtors
were considered by respondent corporation as
creditable directly upon the account and inuring
to the benefit of petitioner. The concomitant and
simultaneous compliance of petitioner's
obligation with that of her principals only goes to
show that, from the very start, petitioner
considered herself equally bound by the
contract of the principal makers.
In this regard, we need only to reiterate the rule
that a surety is bound equally and absolutely
with the principal,26 and as such is deemed an
original promisor and debtor from the
beginning.27 This is because in suretyship there
is but one contract, and the surety is bound by
the same agreement which binds the
principal.28 In essence, the contract of a surety
starts with the agreement,29 which is precisely
the situation obtaining in this case before the
Court.
It will further be observed that petitioner's
undertaking as co-maker immediately follows
the terms and conditions stipulated between
respondent corporation, as creditor, and the
principal obligors. A surety is usually bound with
his principal by the same instrument, executed
at the same time and upon the same
consideration; he is an original debtor, and his
liability is immediate and direct.30 Thus, it has
been held that where a written agreement on the
same sheet of paper with and immediately
following the principal contract between the
buyer and seller is executed simultaneously
therewith, providing that the signers of the
agreement agreed to the terms of the principal
contract, the signers were "sureties" jointly liable
with the buyer.31 A surety usually enters into the
same obligation as that of his principal, and the
signatures of both usually appear upon the
same instrument, and the same consideration
usually supports the obligation for both the
principal and the surety.32
There is no merit in petitioner's contention that
the complaint was prematurely filed because the
principal debtors cannot as yet be considered in
default, there having been no judicial or
extrajudicial demand made by respondent
corporation. Petitioner has agreed that
respondent corporation may demand payment
of the loan from her in case the principal maker
defaults, subject to the same conditions
expressed in the promissory note. Significantly,
paragraph (G) of the note states that "should I
fail to pay in accordance with the above
schedule of payment, I hereby waive my right to
notice and demand." Hence, demand by the
creditor is no longer necessary in order that
delay may exist since the contract itself already
expressly so declares.33 As a surety, petitioner
is equally bound by such waiver.
Even if it were otherwise, demand on the
sureties is not necessary before bringing suit
against them, since the commencement of the
suit is a sufficient demand.34 On this point, it
may be worth mentioning that a surety is not
even entitled, as a matter of right, to be given
notice of the principal's default. Inasmuch as the
creditor owes no duty of active diligence to take
care of the interest of the surety, his mere failure
to voluntarily give information to the surety of the
default of the principal cannot have the effect of
discharging the surety. The surety is bound to
take notice of the principal's default and to
perform the obligation. He cannot complain that
the creditor has not notified
him in the absence of a special agreement to
that effect in the contract of suretyship.35
The alleged failure of respondent corporation to
prove the fact of demand on the principal
debtors, by not attaching copies thereof to its
pleadings, is likewise immaterial. In the absence
of a statutory or contractual requirement, it is not
necessary that payment or performance of his
obligation be first demanded of the principal,
especially where demand would have been
useless; nor is it a requisite, before proceeding
against the sureties, that the principal be called
on to account.36 The underlying principle
therefor is that a suretyship is a direct contract
to pay the debt of another. A surety is liable as
much as his principal is liable, and absolutely
liable as soon as default is made, without any
demand upon the principal whatsoever or any
notice of default.37 As an original promisor and
debtor from the beginning, he is held ordinarily
to know every default of his principal.38
Petitioner questions the propriety of the filing of
a complaint solely against her to the exclusion
of the principal debtors who allegedly were the
only ones who benefited from the proceeds of
the loan. What petitioner is trying to imply is that
the creditor, herein respondent corporation,
should have proceeded first against the
principal before suing on her obligation as
surety. We disagree.
A creditor's right to proceed against the surety
exists independently of his right to proceed
against the principal.39 Under Article 1216 of
the Civil Code, the creditor may proceed against
any one of the solidary debtors or some or all of
them simultaneously. The rule, therefore, is that
if the obligation is joint and several, the creditor
has the right to proceed even against the surety
alone.40 Since, generally, it is not necessary for
the creditor to proceed against a principal in
order to hold the surety liable, where, by the
terms of the contract, the obligation of the surety
is the same that of the principal, then soon as
the principal is in default, the surety is likewise
in default, and may be sued immediately and
before any proceedings are had against the
principal.41 Perforce, in accordance with the
rule that, in the absence of statute or agreement
otherwise, a surety is primarily liable, and with
the rule that his proper remedy is to pay the debt
and pursue the principal for reimbursement, the
surety cannot at law, unless permitted by statute
and in the absence of any agreement limiting the
application of the security, require the creditor or
obligee, before proceeding against the surety, to
resort to and exhaust his remedies against the
principal, particularly where both principal and
surety are equally bound.42
We agree with respondent corporation that its
mere failure to immediately sue petitioner on her
obligation does not release her from liability.
Where a creditor refrains from proceeding
against the principal, the surety is not
exonerated. In other words, mere want of
diligence or forbearance does not affect the
creditor's rights vis-a-vis the surety, unless the
surety requires him by appropriate notice to sue
on the obligation. Such gratuitous indulgence of
the principal does not discharge the surety
whether given at the principal's request or
without it, and whether it is yielded by the
creditor through sympathy or from an inclination
to favor the principal, or is only the result of
passiveness. The neglect of the creditor to sue
the principal at the time the debt falls due does
not discharge the surety, even if such delay
continues until the principal becomes
insolvent.43 And, in the absence of proof of
resultant injury, a surety is not discharged by the
creditor's mere statement that the creditor will
not look to the surety,44 or that he need not
trouble himself.45 The consequences of the
delay, such as the subsequent insolvency of the
principal,46 or the fact that the remedies against
the principal may be lost by lapse of time, are
immaterial.47
The raison d'être for the rule is that there is
nothing to prevent the creditor from proceeding
against the principal at any time.48 At any rate,
if the surety is dissatisfied with the degree of
activity displayed by the creditor in the pursuit of
his principal, he may pay the debt himself and
become subrogated to all the rights and
remedies of the creditor.49
It may not be amiss to add that leniency shown
to a debtor in default, by delay permitted by the
creditor without change in the time when the
debt might be demanded, does not constitute an
extension of the time of payment, which would
release the surety.50 In order to constitute an
extension discharging the surety, it should
appear that the extension was for a definite
period, pursuant to an enforceable agreement
between the principal and the creditor, and that
it was made without the consent of the surety or
with a reservation of rights with respect to him.
The contract must be one which precludes the
creditor from, or at least hinders him in,
enforcing the principal contract within the period
during which he could otherwise have enforced
it, and which precludes the surety from paying
the debt.51
None of these elements are present in the
instant case. Verily, the mere fact that
respondent corporation gave the principal
debtors an extended period of time within which
to comply with their obligation did not effectively
absolve here in petitioner from the
consequences of her undertaking. Besides, the
burden is on the surety, herein petitioner, to
show that she has been discharged by some act
of the creditor,52 herein respondent
corporation, failing in which we cannot grant the
relief prayed for.
As a final issue, petitioner claims that assuming
that her liability is solidary, the interests and
penalty charges on the outstanding balance of
the loan cannot be imposed for being illegal and
unconscionable. Petitioner additionally
theorizes that respondent corporation
intentionally delayed the collection of the loan in
order that the interests and penalty charges
would accumulate. The statement, likewise
traversed by said respondent, is misleading.
In an affidavit53 executed by petitioner, which
was attached to her petition, she stated, among
others, that:
8. During the latter part of 1990, I was
surprised to learn that Merlyn Azarraga's loan
has been released and that she has not paid the
same upon its maturity. I received a telephone
call from Mr. Augusto Banusing of MB Lending
informing me of this fact and of my liability
arising from the promissory note which I signed.
9. I requested Mr. Banusing to try to collect
first from Merlyn and Osmeña Azarraga. At the
same time, I offered to pay MB Lending the
outstanding balance of the principal obligation
should he fail to collect from Merlyn and
Osmeña Azarraga. Mr. Banusing advised me
not to worry because he will try to collect first
from Merlyn and Osmeña Azarraga.
10. A year thereafter, I received a telephone
call from the secretary of Mr. Banusing who
reminded that the loan of Merlyn and Osmeña
Azarraga, together with interest and penalties
thereon, has not been paid. Since I had no
available funds at that time, I offered to pay MB
Lending by delivering to them a parcel of land
which I own. Mr. Banusing's secretary, however,
refused my offer for the reason that they are not
interested in real estate.
11. In March 1992, I received a copy of the
summons and of the complaint filed against me
by MB Lending before the RTC-Iloilo. After
learning that a complaint was filed against me, I
instructed Sheila Gatia to go to MB Lending and
reiterate my first offer to pay the outstanding
balance of the principal obligation of Merlyn
Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr.
Banusing who referred her to Atty. Venus,
counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he
will consult Mr. Banusing if my offer to pay the
outstanding balance of the principal obligation
loan (sic) of Merlyn and Osmeña Azarraga is
acceptable. Later, Atty. Venus informed Ms.
Gatia that my offer is not acceptable to Mr.
Banusing.
The purported offer to pay made by petitioner
can not be deemed sufficient and substantial in
order to effectively discharge her from liability.
There are a number of circumstances which
conjointly inveigh against her aforesaid theory.
1. Respondent corporation cannot be
faulted for not immediately demanding payment
from petitioner. It was petitioner who initially
requested that the creditor try to collect from her
principal first, and she offered to pay only in
case the creditor fails to collect. The delay, if
any, was occasioned by the fact that respondent
corporation merely acquiesced to the request of
petitioner. At any rate, there was here no actual
offer of payment to speak of but only a
commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to
settle the obligation by offering a parcel of land
which she owned. Respondent corporation was
acting well within its rights when it refused to
accept the offer. The debtor of a thing cannot
compel the creditor to receive a different one,
although the latter may be of the same value, or
more valuable than that which is due.54 The
obligee is entitled to demand fulfillment of the
obligation or performance as stipulated. A
change of the object of the obligation would
constitute novation requiring the express
consent of the parties.55
3. After the complaint was filed against her,
petitioner reiterated her offer to pay the
outstanding balance of the obligation in the
amount of P30,000.00 but the same was
likewise rejected. Again, respondent corporation
cannot be blamed for refusing the amount being
offered because it fell way below the amount it
had computed, based on the stipulated interests
and penalty charges, as owing and due from
herein petitioner. A debt shall not be understood
to have been paid unless the thing or service in
which the obligation consists has been
completely delivered or rendered, as the case
may be.56 In other words, the prestation must
be fulfilled completely. A person entering into a
contract has a right to insist on its performance
in all particulars.57
Petitioner cannot compel respondent
corporation to accept the amount she is willing
to pay because the moment the latter accepts
the performance, knowing its incompleteness or
irregularity, and without expressing any protest
or objection, then the obligation shall be
deemed fully complied with.58 Precisely, this is
what respondent corporation wanted to avoid
when it continually refused to settle with
petitioner at less than what was actually due
under their contract.
This notwithstanding, however, we find and so
hold that the penalty charge of 3% per month
and attorney's fees equivalent to 25% of the
total amount due are highly inequitable and
unreasonable.
It must be remembered that from the principal
loan of P30,000.00, the amount of P16,300.00
had already been paid even before the filing of
the present case. Article 1229 of the Civil Code
provides that the court shall equitably reduce
the penalty when the principal obligation has
been partly or irregularly complied with by the
debtor. And, even if there has been no
performance, the penalty may also be reduced
if it is iniquitous or leonine.
In a case previously decided by this Court which
likewise involved private respondent M.B.
Lending Corporation, and which is substantially
on all fours with the one at bar, we decided to
eliminate altogether the penalty interest for
being excessive and unwarranted under the
following rationalization:
Upon the matter of penalty interest, we agree
with the Court of Appeals that the economic
impact of the penalty interest of three percent (3
%) per month on total amount due but unpaid
should be equitably reduced. The purpose for
which the penalty interest is intended — that is,
to punish the obligor — will have been
sufficiently served by the effects of compounded
interest. Under the exceptional circumstances in
the case at bar, e.g., the original amount loaned
was only P15,000.00; partial payment of
P8,600.00 was made on due date; and the
heavy (albeit still lawful) regular compensatory
interest, the penalty interest stipulated in the
parties' promissory note is iniquitous and
unconscionable and may be equitably reduced
further by eliminating such penalty interest
altogether.59
Accordingly, the penalty interest of 3% per
month being imposed on petitioner should
similarly be eliminated.
Finally, with respect to the award of attorney's
fees, this Court has previously ruled that even
with an agreement thereon between the parties,
the court may nevertheless reduce such
attorney's fees fixed in the contract when the
amount thereof appears to be unconscionable
or unreasonable.60 To that end, it is not even
necessary to show, as in other contracts, that it
is contrary to morals or public policy.61 The
grant of attorney's fees equivalent to 25% of the
total amount due is, in our opinion,
unreasonable and immoderate, considering the
minimal unpaid amount involved and the extent
of the work involved in this simple action for
collection of a sum of money. We, therefore,
hold that the amount of P10,000.00 as and for
attorney's fee would be sufficient in this case.62
WHEREFORE, the judgment appealed from is
hereby AFFIRMED, subject to the
MODIFICATION that the penalty interest of 3%
per month is hereby deleted and the award of
attorney's fees is reduced to P10,000.00.
SO ORDERED
3.Spouse Toh vs Solidbank
RESPONDENT SOLID BANK CORPORATION
AGREED TO EXTEND an omnibus line credit
facility worth P10 million in favor of respondent
First Business Paper Corporation (FBPC). The
terms and conditions of the agreement as well
as the checklist of documents necessary to
open the credit line were stipulated in a letter-
advise of the Bank dated 16 May 1993
addressed to FBPC and to its President,
respondent Kenneth Ng Li.[1] The letter-
advise[2] was effective upon compliance with
the documentary requirements.[3]
The documents essential for the credit facility
and submitted for this purpose were the (a)
Board Resolution or excerpts of the Board of
Directors Meeting, duly ratified by a Notary
Public, authorizing the loan and security
arrangement as well as designating the officers
to negotiate and sign for FBPC specifically
stating authority to mortgage, pledge and/or
assign the properties of the corporation; (b)
agreement to purchase Domestic Bills; and, (c)
Continuing Guaranty for any and all amounts
signed by petitioner-spouses Luis Toh and
Vicky Tan Toh, and respondent-spouses
Kenneth and Ma. Victoria Ng Li.[4] The spouses
Luis Toh and Vicky Tan Toh were then
Chairman of the Board and Vice-President,
respectively, of FBPC, while respondent-
spouses Kenneth Ng Li and Ma. Victoria Ng Li
were President and General Manager,
respectively, of the same corporation.[5]
It is not disputed that the credit facility as well as
its terms and conditions was not cancelled or
terminated, and that there was no prior notice of
such fact as required in the letter-advise, if any
was done.
On 10 May 1993, more than thirty (30) days from
date of the letter-advise, petitioner-spouses Luis
Toh and Vicky Tan Toh and respondent-
spouses Kenneth Ng Li and Ma. Victoria Ng Li
signed the required Continuing Guaranty, which
was embodied in a public document prepared
solely by respondent Bank.[6] The terms of the
instrument defined the contract arising
therefrom as a surety agreement and provided
for the solidary liability of the signatories thereto
for and in consideration of loans or advances
and credit in any other manner to, or at the
request or for the account of FBPC.
The Continuing Guaranty set forth no maximum
limit on the indebtedness that respondent FBPC
may incur and for which the sureties may be
liable, stating that the credit facility covers any
and all existing indebtedness of, and such other
loans and credit facilities which may hereafter
be granted to FIRST BUSINESS PAPER
CORPORATION. The surety also contained a
de facto acceleration clause if default be made
in the payment of any of the instruments,
indebtedness, or other obligation guaranteed by
petitioners and respondents. So as to
strengthen this security, the Continuing
Guaranty waived rights of the sureties against
delay or absence of notice or demand on the
part of respondent Bank, and gave future
consent to the Banks action to extend or change
the time payment, and/or the manner, place or
terms of payment, including renewal, of the
credit facility or any part thereof in such manner
and upon such terms as the Bank may deem
proper without notice to or further assent from
the sureties.
The effectivity of the Continuing Guaranty was
not contingent upon any event or cause other
than the written revocation thereof with notice to
the Bank that may be executed by the sureties.
On 16 June 1993 respondent FBPC started to
avail of the credit facility and procure letters of
credit.[7] On 17 November 1993 FBPC opened
thirteen (13) letters of credit and obtained loans
totaling P15,227,510.00.[8] As the letters of
credit were secured, FBPC through its officers
Kenneth Ng Li, Ma. Victoria Ng Li and Redentor
Padilla as signatories executed a series of trust
receipts over the goods allegedly purchased
from the proceeds of the loans.[9]
On 13 January 1994 respondent Bank received
information that respondent-spouses Kenneth
Ng Li and Ma. Victoria Ng Li had fraudulently
departed from their conjugal home.[10] On 14
January 1994 the Bank served a demand letter
upon FBPC and petitioner Luis Toh invoking the
acceleration clause[11] in the trust receipts of
FBPC and claimed payment for P10,539,758.68
as unpaid overdue accounts on the letters of
credit plus interests and penalties within twenty-
four (24) hours from receipt thereof.[12] The
Bank also invoked the Continuing Guaranty
executed by petitioner-spouses Luis Toh and
Vicky Tan Toh who were the only parties known
to be within national jurisdiction to answer as
sureties for the credit facility of FBPC.[13]
On 17 January 1994 respondent Bank filed a
complaint for sum of money with ex parte
application for a writ of preliminary attachment
against FBPC, spouses Kenneth Ng Li and Ma.
Victoria Ng Li, and spouses Luis Toh and Vicky
Tan Toh, docketed as Civil Case No. 64047 of
RTC-Br. 161, Pasig City.[14] Alias summonses
were served upon FBPC and spouses Luis Toh
and Vicky Tan Toh but not upon Kenneth Ng Li
and Ma. Victoria Ng Li who had apparently
absconded.[15]
Meanwhile, with the implementation of the writ
of preliminary attachment resulting in the
impounding of purported properties of FBPC,
the trial court was deluged with third-party
claims contesting the propriety of the
attachment.[16] In the end, the Bank
relinquished possession of all the attached
properties to the third-party claimants except for
two (2) insignificant items as it allegedly could
barely cope with the yearly premiums on the
attachment bonds.[17]
Petitioner-spouses Luis Toh and Vicky Tan Toh
filed a joint answer to the complaint where they
admitted being part of FBPC from its
incorporation on 29 August 1991, which was
then known as MNL Paper, Inc., until its
corporate name was changed to First Business
Paper Corporation.[18] They also
acknowledged that on 6 March 1992 Luis Toh
was designated as one of the authorized
corporate signatories for transactions in relation
to FBPCs checking account with respondent
Bank.[19] Meanwhile, for failing to file an
answer, respondent FBPC was declared in
default.[20]
Petitioner-spouses however could not be certain
whether to deny or admit the due execution and
authenticity of the Continuing Guaranty.[21]
They could only allege that they were made to
sign papers in blank and the Continuing
Guaranty could have been one of them.
Still, as petitioners asserted, it was impossible
and absurd for them to have freely and
consciously executed the surety on 10 May
1993, the date appearing on its face[22] since
beginning March of that year they had already
divested their shares in FBPC and assigned
them in favor of respondent Kenneth Ng Li
although the deeds of assignment were
notarized only on 14 June 1993.[23] Petitioners
also contended that through FBPC Board
Resolution dated 12 May 1993 petitioner Luis
Toh was removed as an authorized signatory for
FBPC and replaced by respondent-spouses
Kenneth Ng Li and Ma. Victoria Ng Li and
Redentor Padilla for all the transactions of FBPC
with respondent Bank.[24] They even resigned
from their respective positions in FBPC as
reflected in the 12 June 1993 Secretarys
Certificate submitted to the Securities and
Exchange Commission[25] as petitioner Luis
Toh was succeeded as Chairman by
respondent Ma. Victoria Ng Li, while one Mylene
C. Padilla took the place of petitioner Vicky Tan
Toh as Vice-President.[26]
Finally, petitioners averred that sometime in
June 1993 they obtained from respondent
Kenneth Ng Li their exclusion from the several
surety agreements they had entered into with
different banks, i.e., Hongkong and Shanghai
Bank, China Banking Corporation, Far East
Bank and Trust Company, and herein
respondent Bank.[27] As a matter of record,
these other banks executed written surety
agreements that showed respondent Kenneth
Ng Li as the only surety of FBPCs
indebtedness.[28]
On 16 May 1996 the trial court promulgated its
Decision in Civil Case No. 64047 finding
respondent FBPC liable to pay respondent Solid
Bank Corporation the principal of
P10,539,758.68 plus twelve percent (12%)
interest per annum from finality of the Decision
until fully paid, but absolving petitioner-spouses
Luis Toh and Vicky Tan Toh of any liability to
respondent Bank.[29] The court a quo found
that petitioners voluntarily affixed their
signature[s] on the Continuing Guaranty and
were thus at some given point in time willing to
be liable under those forms,[30] although it held
that petitioners were not bound by the surety
contract since the letters of credit it was
supposed to secure were opened long after
petitioners had ceased to be part of FBPC.[31]
The trial court described the Continuing
Guaranty as effective only while petitioner-
spouses were stockholders and officers of
FBPC since respondent Bank compelled
petitioners to underwrite FBPCs indebtedness
as sureties without the requisite investigation of
their personal solvency and capability to
undertake such risk.[32] The lower court also
believed that the Bank knew of petitioners
divestment of their shares in FBPC and their
subsequent resignation as officers thereof as
these facts were obvious from the numerous
public documents that detailed the changes and
substitutions in the list of authorized signatories
for transactions between FBPC and the Bank,
including the many trust receipts being signed
by persons other than petitioners,[33] as well as
the designation of new FBPC officers which
came to the notice of the Banks Vice-President
Jose Chan Jr. and other officers.[34]
On 26 September 1996 the RTC-Br. 161 of
Pasig City denied reconsideration of its
Decision.[35]
On 9 October 1996 respondent Bank appealed
the Decision to the Court of Appeals, docketed
as CA-G.R. CV No. 55957.[36] Petitioner-
spouses did not move for reconsideration nor
appeal the finding of the trial court that they
voluntarily executed the Continuing Guaranty.
The appellate court modified the Decision of the
trial court and held that by signing the
Continuing Guaranty, petitioner-spouses
became solidarily liable with FBPC to pay
respondent Bank the amount of P10,539,758.68
as principal with twelve percent (12%) interest
per annum from finality of the judgment until
completely paid.[37] The Court of Appeals
ratiocinated that the provisions of the surety
agreement did not indicate that Spouses Luis
and Vicky Toh x x x signed the instrument in
their capacities as Chairman of the Board and
Vice-President, respectively, of FBPC only.[38]
Hence, the court a quo deduced, [a]bsent any
such indication, it was error for the trial court to
have presumed that the appellees indeed
signed the same not in their personal
capacities.[39] The appellate court also ruled
that as petitioners failed to execute any written
revocation of the Continuing Guaranty with
notice to respondent Bank, the instrument
remained in full force and effect when the letters
of credit were availed of by respondent
FBPC.[40]
Finally, the Court of Appeals rejected petitioners
argument that there were material alterations in
the provisions of the letter-advise, i.e., that only
domestic letters of credit were opened when the
credit facility was for importation of papers and
other materials, and that marginal deposits were
not paid, contrary to the requirements stated in
the letter-advise.[41] The simple response of the
appellate court to this challenge was, first, the
letter-advise itself authorized the issuance of
domestic letters of credit, and second, the
several waivers extended by petitioners in the
Continuing Guaranty, which included changing
the time and manner of payment of the
indebtedness, justified the action of respondent
Bank not to charge marginal deposits.[42]
Petitioner-spouses moved for reconsideration of
the Decision, and after respondent Banks
comment, filed a lengthy Reply with Motion for
Oral Argument.[43] On 2 July 2002
reconsideration of the Decision was denied on
the ground that no new matter was raised to
warrant the reversal or modification thereof.[44]
Hence, this Petition for Review.
Petitioner-spouses Luis Toh and Vicky Tan Toh
argue that the Court of Appeals denied them
due process when it did not grant their motion
for reconsideration and without bother[ing] to
consider [their] Reply with Motion for Oral
Argument. They maintain that the Continuing
Guaranty is not legally valid and binding against
them for having been executed long after they
had withdrawn from FBPC. Lastly, they claim
that the surety agreement has been
extinguished by the material alterations thereof
and of the letter-advise which were allegedly
brought about by (a) the provision of an
acceleration clause in the trust receipts; (b) the
flight of their co-sureties, respondent-spouses
Kenneth Ng Li and Ma. Victoria Ng Li; (c) the
grant of credit facility despite the non-payment
of marginal deposits in an amount beyond the
credit limit of P10 million pesos; (d) the
inordinate delay of the Bank in demanding the
payment of the indebtedness; (e) the presence
of ghost deliveries and fictitious purchases
using the Banks letters of credit and trust
receipts; (f) the extension of the due dates of the
letters of credit without the required 25% partial
payment per extension; (g) the approval of
another letter of credit, L/C 93-0042, even after
respondent-spouses Kenneth Ng Li and Ma.
Victoria Ng Li had defaulted on their previous
obligations; and, (h) the unmistakable pattern of
fraud.
Respondent Solid Bank maintains on the other
hand that the appellate court is presumed to
have passed upon all points raised by
petitioners Reply with Motion for Oral Argument
as this pleading formed part of the records of the
appellate court. It also debunks the claim of
petitioners that they were inexperienced and
ignorant parties who were taken advantage of in
the Continuing Guaranty since petitioners are
astute businessmen who are very familiar with
the ins and outs of banking practice. The Bank
further argues that the notarization of the
Continuing Guaranty discredits the
uncorroborated assertions against the
authenticity and due execution thereof, and that
the Decision of the trial court in the civil case
finding the surety agreement to be valid and
binding is now res judicata for failure of
petitioners to appeal therefrom. As a final point,
the Bank refers to the various waivers made by
petitioner-spouses in the Continuing Guaranty
to justify the extension of the due dates of the
letters of credit.
To begin with, we find no merit in petitioners
claim that the Court of Appeals deprived them of
their right to due process when the court a quo
did not address specifically and explicitly their
Reply with Motion for Oral Argument. While the
Resolution of the appellate court of 2 July 2002
made no mention thereof in disposing of their
arguments on reconsideration, it is presumed
that all matters within an issue raised in a case
were laid before the court and passed upon
it.[45] In the absence of evidence to the
contrary, we must rule that the court a quo
discharged its task properly. Moreover, a
reading of the assailed Resolution clearly
makes reference to a careful review of the
records, which undeniably includes the Reply
with Motion for Oral Argument, hence there is no
reason for petitioners to asseverate otherwise.
This Court holds that the Continuing Guaranty is
a valid and binding contract of petitioner-
spouses as it is a public document that enjoys
the presumption of authenticity and due
execution. Although petitioners as appellees
may raise issues that have not been assigned
as errors by respondent Bank as party-
appellant, i.e., unenforceability of the surety
contract, we are bound by the consistent finding
of the courts a quo that petitioner-spouses Luis
Toh and Vicky Tan Toh voluntarily affixed their
signature[s] on the surety agreement and were
thus at some given point in time willing to be
liable under those forms.[46] In the absence of
clear, convincing and more than preponderant
evidence to the contrary, our ruling cannot be
otherwise.
Similarly, there is no basis for petitioners to limit
their responsibility thereon so long as they were
corporate officers and stockholders of FBPC.
Nothing in the Continuing Guaranty restricts
their contractual undertaking to such condition
or eventuality. In fact the obligations assumed
by them therein subsist upon the undersigned,
the heirs, executors, administrators, successors
and assigns of the undersigned, and shall inure
to the benefit of, and be enforceable by you,
your successors, transferees and assigns, and
that their commitment shall remain in full force
and effect until written notice shall have been
received by [the Bank] that it has been revoked
by the undersigned. Verily, if petitioners
intended not to be charged as sureties after their
withdrawal from FBPC, they could have simply
terminated the agreement by serving the
required notice of revocation upon the Bank as
expressly allowed therein.[47] In Garcia v. Court
of Appeals[48] we ruled
Regarding the petitioners claim that he is liable
only as a corporate officer of WMC, the surety
agreement shows that he signed the same not
in representation of WMC or as its president but
in his personal capacity. He is therefore
personally bound. There is no law that prohibits
a corporate officer from binding himself
personally to answer for a corporate debt. While
the limited liability doctrine is intended to protect
the stockholder by immunizing him from
personal liability for the corporate debts, he may
nevertheless divest himself of this protection by
voluntarily binding himself to the payment of the
corporate debts. The petitioner cannot therefore
take refuge in this doctrine that he has by his
own acts effectively waived.
But as we bind the spouses Luis Toh and Vicky
Tan Toh to the surety agreement they signed so
must we also hold respondent Bank to its
representations in the letter-advise of 16 May
1993. Particularly, as to the extension of the due
dates of the letters of credit, we cannot exclude
from the Continuing Guaranty the preconditions
of the Bank that were plainly stipulated in the
letter-advise. Fairness and justice dictate our
doing so, for the Bank itself liberally applies the
provisions of cognate agreements whenever
convenient to enforce its contractual rights, such
as, when it harnessed a provision in the trust
receipts executed by respondent FBPC to
declare its entire indebtedness as due and
demandable and thereafter to exact payment
thereof from petitioners as sureties.[49] In the
same manner, we cannot disregard the
provisions of the letter-advise in sizing up the
panoply of commercial obligations between the
parties herein.
Insofar as petitioners stipulate in the Continuing
Guaranty that respondent Bank may at any
time, or from time to time, in [its] discretion x x x
extend or change the time payment, this
provision even if understood as a waiver is
confined per se to the grant of an extension and
does not surrender the prerequisites therefor as
mandated in the letter-advise. In other words,
the authority of the Bank to defer collection
contemplates only authorized extensions, that
is, those that meet the terms of the letter-advise.
Certainly, while the Bank may extend the due
date at its discretion pursuant to the Continuing
Guaranty, it should nonetheless comply with the
requirements that domestic letters of credit be
supported by fifteen percent (15%) marginal
deposit extendible three (3) times for a period of
thirty (30) days for each extension, subject to
twenty-five percent (25%) partial payment per
extension. This reading of the Continuing
Guaranty is consistent with Philippine National
Bank v. Court of Appeals[50] that any doubt on
the terms and conditions of the surety
agreement should be resolved in favor of the
surety.
Furthermore, the assurance of the sureties in
the Continuing Guaranty that [n]o act or
omission of any kind on [the Banks] part in the
premises shall in any event affect or impair this
guaranty[51] must also be read strictissimi juris
for the reason that petitioners are only
accommodation sureties, i.e., they received
nothing out of the security contract they
signed.[52] Thus said, the acts or omissions of
the Bank conceded by petitioners as not
affecting nor impairing the surety contract refer
only to those occurring in the premises, or those
that have been the subject of the waiver in the
Continuing Guaranty, and stretch to no other.
Stated otherwise, an extension of the period for
enforcing the indebtedness does not by itself
bring about the discharge of the sureties unless
the extra time is not permitted within the terms
of the waiver, i.e., where there is no payment or
there is deficient settlement of the marginal
deposit and the twenty-five percent (25%)
consideration, in which case the illicit extension
releases the sureties. Under Art. 2055 of the
Civil Code, the liability of a surety is measured
by the terms of his contract, and while he is
liable to the full extent thereof, his accountability
is strictly limited to that assumed by its terms.
It is admitted in the Complaint of respondent
Bank before the trial court that several letters of
credit were irrevocably extended for ninety (90)
days with alarmingly flawed and inadequate
consideration - the indispensable marginal
deposit of fifteen percent (15%) and the twenty-
five percent (25%) prerequisite for each
extension of thirty (30) days. It bears stressing
that the requisite marginal deposit and security
for every thirty (30) - day extension specified in
the letter-advise were not set aside or abrogated
nor was there any prior notice of such fact, if any
was done.
Moreover, these irregular extensions were
candidly admitted by Victor Ruben L. Tuazon,
an account officer and manager of respondent
Bank and its lone witness in the civil case
Q: You extended it even if there was no marginal
deposit?
A: Yes.
Q: And even if partial payment is less than 25%?
A: Yes x x x x
Q: You have repeatedly extended despite the
insufficiency partial payment requirement?
A: I would say yes.[53]
The foregoing extensions of the letters of credit
made by respondent Bank without observing the
rigid restrictions for exercising the privilege are
not covered by the waiver stipulated in the
Continuing Guaranty. Evidently, they constitute
illicit extensions prohibited under Art. 2079 of
the Civil Code, [a]n extension granted to the
debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. This act of
the Bank is not mere failure or delay on its part
to demand payment after the debt has become
due, as was the case in unpaid five (5) letters of
credit which the Bank did not extend, defer or
put off,[54] but comprises conscious, separate
and binding agreements to extend the due date,
as was admitted by the Bank itself
Q: How much was supposed to be paid on 14
September 1993, the original LC of
P1,655,675.13?
A: Under LC 93-0017 first matured on 14
September 1993. We rolled it over, extended it
to December 13, 1993 but they made partial
payment that is why we extended it.
Q: The question to you now is how much was
paid? How much is supposed to be paid on
September 14, 1993 on the basis of the original
amount of P1,655,675.13?
A: Whenever this obligation becomes due and
demandable except when you roll it over so
there is novation there on the original
obligations[55] (underscoring supplied).
As a result of these illicit extensions, petitioner-
spouses Luis Toh and Vicky Tan Toh are
relieved of their obligations as sureties of
respondent FBPC under Art. 2079 of the Civil
Code.
Further, we note several suspicious
circumstances that militate against the
enforcement of the Continuing Guaranty against
the accommodation sureties. Firstly, the
guaranty was executed more than thirty (30)
days from the original acceptance period as
required in the letter-advise. Thereafter, barely
two (2) days after the Continuing Guaranty was
signed, corporate agents of FBPC were
replaced on 12 May 1993 and other adjustments
in the corporate structure of FBPC ensued in the
month of June 1993, which the Bank did not
investigate although such were made known to
it.
By the same token, there is no explanation on
record for the utter worthlessness of the trust
receipts in favor of the Bank when these
documents ought to have added more security
to the indebtedness of FBPC. The Bank has in
fact no information whether the trust receipts
were indeed used for the purpose for which they
were obtained.[56] To be sure, the goods
subject of the trust receipts were not entirely lost
since the security officer of respondent Bank
who conducted surveillance of FBPC even had
the chance to intercept the surreptitious transfer
of the items under trust: We saw two (2) delivery
vans with Plates Nos. TGH 257 and PAZ 928
coming out of the compound x x x [which were]
taking out the last supplies stored in the
compound.[57] In addition, the attached
properties of FBPC, except for two (2) of them,
were perfunctorily abandoned by respondent
Bank although the bonds therefor were
considerably reduced by the trial court.[58]
The consequence of these omissions is to
discharge the surety, petitioners herein, under
Art. 2080 of the Civil Code,[59] or at the very
least, mitigate the liability of the surety up to the
value of the property or lien released
If the creditor x x x has acquired a lien upon the
property of a principal, the creditor at once
becomes charged with the duty of retaining such
security, or maintaining such lien in the interest
of the surety, and any release or impairment of
this security as a primary resource for the
payment of a debt, will discharge the surety to
the extent of the value of the property or lien
released x x x x [for] there immediately arises a
trust relation between the parties, and the
creditor as trustee is bound to account to the
surety for the value of the security in his
hands.[60]
For the same reason, the grace period granted
by respondent Bank represents unceremonious
abandonment and forfeiture of the fifteen
percent (15%) marginal deposit and the twenty-
five percent (25%) partial payment as fixed in
the letter-advise. These payments are
unmistakably additional securities intended to
protect both respondent Bank and the sureties
in the event that the principal debtor FBPC
becomes insolvent during the extension period.
Compliance with these requisites was not
waived by petitioners in the Continuing
Guaranty. For this unwarranted exercise of
discretion, respondent Bank bears the loss; due
to its unauthorized extensions to pay granted to
FBPC, petitioner-spouses Luis Toh and Vicky
Tan Toh are discharged as sureties under the
Continuing Guaranty.
Finally, the foregoing omission or negligence of
respondent Bank in failing to safe-keep the
security provided by the marginal deposit and
the twenty-five percent (25%) requirement
results in the material alteration of the principal
contract, i.e., the letter-advise, and
consequently releases the surety.[61] This
inference was admitted by the Bank through the
testimony of its lone witness that [w]henever this
obligation becomes due and demandable,
except when you roll it over, (so) there is
novation there on the original obligations. As
has been said, if the suretyship contract was
made upon the condition that the principal shall
furnish the creditor additional security, and the
security being furnished under these conditions
is afterwards released by the creditor, the surety
is wholly discharged, without regard to the value
of the securities released, for such a transaction
amounts to an alteration of the main
contract.[62]
WHEREFORE, the instant Petition for Review is
GRANTED. The Decision of the Court of
Appeals dated 12 December 2001 in CA-G.R.
CV No. 55957, Solid Bank Corporation v. First
Business Paper Corporation, Kenneth Ng Li,
Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh,
holding petitioner-spouses Luis Toh and Vicky
Tan Toh solidarily liable with First Business
Paper Corporation to pay Solid Bank
Corporation the amount of P10,539,758.68 as
principal with twelve percent (12%) interest per
annum until fully paid, and its Resolution of 2
July 2002 denying reconsideration thereof are
REVERSED and SET ASIDE.
The Decision dated 16 May 1996 of RTC-Br.
161 of Pasig City in Civil Case No. 64047, Solid
Bank Corporation v. First Business Paper
Corporation, Kenneth Ng Li, Ma. Victoria Ng Li,
Luis Toh and Vicky Tan Toh, finding First
Business Paper Corporation liable to pay
respondent Solid Bank Corporation the principal
of P10,539,758.68 plus twelve percent (12%)
interest per annum until fully paid, but absolving
petitioner-spouses Luis Toh and Vicky Tan Toh
of any liability to respondent Solid Bank
Corporation is REINSTATED and AFFIRMED.
No costs.
SO ORDERED.
4. Aglibot vs Santia
Before the Court is a Petition for Review on
Certiorari under Rule 45 of the 1997 Rules of
Civil Procedure seeking to annul and set aside
the Decision[1] dated March 18, 2008 of the
Court of Appeals (CA) in CA-G.R. SP No.
100021, which reversed the Decision[2] dated
April 3, 2007 of the Regional Trial Court (RTC)
of Dagupan City, Branch 40, in Criminal Case
Nos. 2006-0559-D to 2006-0569-D and entered
a new judgment. The fallo reads as follows:
WHEREFORE, the instant petition is GRANTED
and the assailed Joint Decision dated April 3,
2007 of the RTC of Dagupan City, Branch 40,
and its Order dated June 12, 2007 are
REVERSED AND SET ASIDE and a new one is
entered ordering private respondent Fideliza J.
Aglibot to pay petitioner the total amount of
[P]3,000,000.00 with 12% interest per annum
from the filing of the Informations until the finality
of this Decision, the sum of which, inclusive of
interest, shall be subject thereafter to 12%
annual interest until fully paid.
SO ORDERED.[3]
On December 23, 2008, the appellate court
denied herein petitioner's motion for
reconsideration.
Antecedent Facts
Private respondent-complainant Engr. Ingersol
L. Santia (Santia) loaned the amount of
P2,500,000.00 to Pacific Lending & Capital
Corporation (PLCC), through its Manager,
petitioner Fideliza J. Aglibot (Aglibot). The loan
was evidenced by a Promissory Note dated July
1, 2003, issued by Aglibot in behalf of PLCC,
payable in one year subject to interest at 24%
per annum. Allegedly as a guaranty or security
for the payment of the note, Aglibot also issued
and delivered to Santia eleven (11) post-dated
personal checks drawn from her own demand
account maintained at Metrobank, Camiling
Branch. Aglibot is a major stockholder of PLCC,
with headquarters at 27 Casimiro Townhouse,
Casimiro Avenue, Zapote, Las Piñas, Metro
Manila, where most of the stockholders also
reside.[4]
Upon presentment of the aforesaid checks for
payment, they were dishonored by the bank for
having been drawn against insufficient funds or
closed account. Santia thus demanded
payment from PLCC and Aglibot of the face
value of the checks, but neither of them heeded
his demand. Consequently, eleven (11)
Informations for violation of Batas Pambansa
Bilang 22 (B.P. 22), corresponding to the
number of dishonored checks, were filed
against Aglibot before the Municipal Trial Court
in Cities (MTCC), Dagupan City, Branch 3,
docketed as Criminal Case Nos. 47664 to
47674. Each Information, except as to the
amount, number and date of the checks, and the
reason for the dishonor, uniformly alleged, as
follows:
That sometime in the month of September, 2003
in the City of Dagupan, Philippines and within
the jurisdiction of this Honorable Court, the
above-named accused, FIDELIZA J. AGLIBOT,
did then and there, willfully, unlawfully and
criminally, draw, issue and deliver to one Engr.
Ingersol L. Santia, a METROBANK Check No.
0006766, Camiling Tarlac Branch, postdated
November 1, 2003, in the amount of
[P]50,000.00, Philippine Currency, payable to
and in payment of an obligation with the
complainant, although the said accused knew
full[y] well that she did not have sufficient funds
in or credit with the said bank for the payment of
such check in full upon its presentment, such
[t]hat when the said check was presented to the
drawee bank for payment within ninety (90)
days from the date thereof, the same was
dishonored for reason "DAIF", and returned to
the complainant, and despite notice of dishonor,
accused failed and/or refused to pay and/or
make good the amount of said check within five
(5) days banking days [sic], to the damage and
prejudice of one Engr. Ingersol L. Santia in the
aforesaid amount of [P]50,000.00 and other
consequential damages.[5]
Aglibot, in her counter-affidavit, admitted that
she did obtain a loan from Santia, but claimed
that she did so in behalf of PLCC; that before
granting the loan, Santia demanded and
obtained from her a security for the repayment
thereof in the form of the aforesaid checks, but
with the understanding that upon remittance in
cash of the face amount of the checks, Santia
would correspondingly return to her each check
so paid; but despite having already paid the said
checks, Santia refused to return them to her,
although he gave her assurance that he would
not deposit them; that in breach of his promise,
Santia deposited her checks, resulting in their
dishonor; that she did not receive any notice of
dishonor of the checks; that for want of notice,
she could not be held criminally liable under B.P.
22 over the said checks; and that the reason
Santia filed the criminal cases against her was
because she refused to agree to his demand for
higher interest.
On August 18, 2006, the MTCC in its Joint
Decision decreed as follows:
WHEREFORE, in view of the foregoing, the
accused, FIDELIZA J. AGLIBOT, is hereby
ACQUITTED of all counts of the crime of
violation of the bouncing checks law on
reasonable doubt. However, the said accused
is ordered to pay the private complainant the
sum of [P]3,000,000.00 representing the total
face value of the eleven checks plus interest of
12% per annum from the filing of the cases on
November 2, 2004 until fully paid, attorney's
fees of [P]30,000.00 as well as the cost of suit.
SO ORDERED.[6]
On appeal, the RTC rendered a Decision dated
April 3, 2007 in Criminal Case Nos. 2006-0559-
D to 2006-0569-D, which further absolved
Aglibot of any civil liability towards Santia, to wit:
WHEREFORE, premises considered, the Joint
Decision of the court a quo regarding the civil
aspect of these cases is reversed and set aside
and a new one is entered dismissing the said
civil aspect on the ground of failure to fulfill, a
condition precedent of exhausting all means to
collect from the principal debtor.
SO ORDERED.[7]
Santia's motion for reconsideration was denied
in the RTC's Order dated June 12, 2007.[8] On
petition for review to the CA docketed as CA-
G.R. SP No. 100021, Santia interposed the
following assignment of errors, to wit:
"In brushing aside the law and jurisprudence on
the matter, the Regional Trial Court seriously
erred:
In reversing the joint decision of the trial court by
dismissing the civil aspect of these cases;
In concluding that it is the Pacific Lending and
Capital Corporation and not the private
respondent which is principally responsible for
the amount of the checks being claimed by the
petitioner;
In finding that the petitioner failed to exhaust all
available legal remedies against the principal
debtor Pacific Lending and Capital Corporation;
In finding that the private respondent is a mere
guarantor and not an accommodation party, and
thus, cannot be compelled to pay the petitioner
unless all legal remedies against the Pacific
Lending and Capital Corporation have been
exhausted by the petitioner;
In denying the motion for reconsideration filed
by the petitioner."[9]
In its now assailed decision, the appellate court
rejected the RTC's dismissal of the civil aspect
of the aforesaid B.P. 22 cases based on the
ground it cited, which is that the "failure to fulfill
a condition precedent of exhausting all means
to collect from the principal debtor." The
appellate court held that since Aglibot's acquittal
by the MTCC in Criminal Case Nos. 47664 to
47674 was upon a reasonable doubt[10] on
whether the prosecution was able to
satisfactorily establish that she did receive a
notice of dishonor, a requisite to hold her
criminally liable under B.P. 22, her acquittal did
not operate to bar Santia's recovery of civil
indemnity.
It is axiomatic that the "extinction of penal action
does not carry with it the eradication of civil
liability, unless the extinction proceeds from a
declaration in the final judgment that the fact
from which the civil liability might arise did not
exist. Acquittal will not bar a civil action in the
following cases: (1) where the acquittal is based
on reasonable doubt as only preponderance of
evidence is required in civil cases; (2) where the
court declared the accused's liability is not
criminal but only civil in nature[;] and (3) where
the civil liability does not arise from or is not
based upon the criminal act of which the
accused was acquitted."[11] (Citation omitted)
The CA therefore ordered Aglibot to personally
pay Santia P3,000,000.00 with interest at 12%
per annum, from the filing of the Informations
until the finality of its decision. Thereafter, the
sum due, to be compounded with the accrued
interest, will in turn be subject to annual interest
of 12% from the finality of its judgment until full
payment. It thus modified the MTCC judgment,
which simply imposed a straight interest of 12%
per annum from the filing of the cases on
November 2, 2004 until the P3,000,000.00 due
is fully paid, plus attorney's fees of P30,000.00
and the costs of the suit.
Issue
Now before the Court, Aglibot maintains that it
was error for the appellate court to adjudge her
personally liable for issuing her own eleven (11)
post-dated checks to Santia, since she did so in
behalf of her employer, PLCC, the true borrower
and beneficiary of the loan. Still maintaining that
she was a mere guarantor of the said debt of
PLCC when she agreed to issue her own
checks, Aglibot insists that Santia failed to
exhaust all means to collect the debt from
PLCC, the principal debtor, and therefore he
cannot now be permitted to go after her
subsidiary liability.
Ruling of the Court
The petition is bereft of merit.
Aglibot cannot invoke the benefit of excussion
The RTC in its decision held that, "It is obvious,
from the face of the Promissory Note x x x that
the accused-appellant signed the same on
behalf of PLCC as Manager thereof and
nowhere does it appear therein that she signed
as an accommodation party."[12] The RTC
further ruled that what Aglibot agreed to do by
issuing her personal checks was merely to
guarantee the indebtedness of PLCC. So now
petitioner Aglibot reasserts that as a guarantor
she must be accorded the benefit of excussion
prior exhaustion of the property of the debtor as
provided under Article 2058 of the Civil Code, to
wit:
Art. 2058. The guarantor cannot be compelled
to pay the creditor unless the latter has
exhausted all the property of the debtor, and has
resorted to all the legal remedies against the
debtor.
It is settled that the liability of the guarantor is
only subsidiary, and all the properties of the
principal debtor, the PLCC in this case, must
first be exhausted before the guarantor may be
held answerable for the debt.[13] Thus, the
creditor may hold the guarantor liable only after
judgment has been obtained against the
principal debtor and the latter is unable to pay,
"for obviously the 'exhaustion of the principal's
property' the benefit of which the guarantor
claims cannot even begin to take place before
judgment has been obtained."[14] This rule is
contained in Article 2062[15] of the Civil Code,
which provides that the action brought by the
creditor must be filed against the principal
debtor alone, except in some instances
mentioned in Article 2059[16] when the action
may be brought against both the guarantor and
the principal debtor.
The Court must, however, reject Aglibot's claim
as a mere guarantor of the indebtedness of
PLCC to Santia for want of proof, in view of
Article 1403(2) of the Civil Code, embodying the
Statute of Frauds, which provides:
Art. 1403. The following contracts are
unenforceable, unless they are ratified:
xxxx
(2) Those that do not comply with the Statute of
Frauds as set forth in this number. In the
following cases an agreement hereafter made
shall be unenforceable by action, unless the
same, or some note or memorandum thereof, be
in writing, and subscribed by the party charged,
or by his agent; evidence, therefore, of the
agreement cannot be received without the
writing, or a secondary evidence of its contents:
a)
An agreement that by its terms is not to be
performed within a year from the making
thereof;
b)
A special promise to answer for the debt,
default, or miscarriage of another;
c)
An agreement made in consideration of
marriage, other than a mutual promise to marry;
d)
An agreement for the sale of goods, chattels or
things in action, at a price not less than five
hundred pesos, unless the buyer accept and
receive part of such goods and chattels, or the
evidences, or some of them, or such things in
action, or pay at the time some part of the
purchase money; but when a sale is made by
auction and entry is made by the auctioneer in
his sales book, at the time of the sale, of the
amount and kind of property sold, terms of sale,
price, names of purchasers and person on
whose account the sale is made, it is a sufficient
memorandum;
e)
An agreement for the leasing of a longer period
than one year, or for the sale of real property or
of an interest therein;
f)
A representation to the credit of a third person.
(Italics ours)
Under the above provision, concerning a
guaranty agreement, which is a promise to
answer for the debt or default of another,[17] the
law clearly requires that it, or some note or
memorandum thereof, be in writing. Otherwise,
it would be unenforceable unless ratified,[18]
although under Article 1358[19] of the Civil
Code, a contract of guaranty does not have to
appear in a public document.[20] Contracts are
generally obligatory in whatever form they may
have been entered into, provided all the
essential requisites for their validity are present,
and the Statute of Frauds simply provides the
method by which the contracts enumerated in
Article 1403(2) may be proved, but it does not
declare them invalid just because they are not
reduced to writing. Thus, the form required
under the Statute is for convenience or
evidentiary purposes only.[21]
On the other hand, Article 2055 of the Civil Code
also provides that a guaranty is not presumed,
but must be express, and cannot extend to more
than what is stipulated therein. This is the
obvious rationale why a contract of guarantee is
unenforceable unless made in writing or
evidenced by some writing. For as pointed out
by Santia, Aglibot has not shown any proof,
such as a contract, a secretary's certificate or a
board resolution, nor even a note or
memorandum thereof, whereby it was agreed
that she would issue her personal checks in
behalf of the company to guarantee the
payment of its debt to Santia. Certainly, there is
nothing shown in the Promissory Note signed by
Aglibot herself remotely containing an
agreement between her and PLCC resembling
her guaranteeing its debt to Santia. And neither
is there a showing that PLCC thereafter ratified
her act of "guaranteeing" its indebtedness by
issuing her own checks to Santia.
Thus did the CA reject the RTC's ruling that
Aglibot was a mere guarantor of the
indebtedness of PLCC, and as such could not
"be compelled to pay [Santia], unless the latter
has exhausted all the property of PLCC, and has
resorted to all the legal remedies against PLCC
x x x."[22]
Aglibot is an accommodation party
and therefore liable to Santia
Section 185 of the Negotiable Instruments Law
defines a check as "a bill of exchange drawn on
a bank payable on demand," while Section 126
of the said law defines a bill of exchange as "an
unconditional order in writing addressed by one
person to another, signed by the person giving
it, requiring the person to whom it is addressed
to pay on demand or at a fixed or determinable
future time a sum certain in money to order or to
bearer."
The appellate court ruled that by issuing her own
post-dated checks, Aglibot thereby bound
herself personally and solidarily to pay Santia,
and dismissed her claim that she issued her said
checks in her official capacity as PLCC's
manager merely to guarantee the investment of
Santia. It noted that she could have issued
PLCC's checks, but instead she chose to issue
her own checks, drawn against her personal
account with Metrobank. It concluded that
Aglibot intended to personally assume the
repayment of the loan, pointing out that in her
Counter-Affidavit, she even admitted that she
was personally indebted to Santia, and only
raised payment as her defense, a clear
admission of her liability for the said loan.
The appellate court refused to give credence to
Aglibot's claim that she had an understanding
with Santia that the checks would not be
presented to the bank for payment, but were to
be returned to her once she had made cash
payments for their face values on maturity. It
noted that Aglibot failed to present any proof that
she had indeed paid cash on the above checks
as she claimed. This is precisely why Santia
decided to deposit the checks in order to obtain
payment of his loan.
The facts below present a clear situation where
Aglibot, as the manager of PLCC, agreed to
accommodate its loan to Santia by issuing her
own post-dated checks in payment thereof. She
is what the Negotiable Instruments Law calls an
accommodation party.[23] Concerning the
liability of an accommodation party, Section 29
of the said law provides:
Sec. 29. Liability of an accommodation party. An
accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and
for the purpose of lending his name to some
other person. Such a person is liable on the
instrument to a holder for value notwithstanding
such holder at the time of taking the instrument
knew him to be only an accommodation party.
As elaborated in The Phil. Bank of Commerce v.
Aruego:[24]
An accommodation party is one who has signed
the instrument as maker, drawer, indorser,
without receiving value therefor and for the
purpose of lending his name to some other
person. Such person is liable on the instrument
to a holder for value, notwithstanding such
holder, at the time of the taking of the instrument
knew him to be only an accommodation party.
In lending his name to the accommodated party,
the accommodation party is in effect a surety for
the latter. He lends his name to enable the
accommodated party to obtain credit or to raise
money. He receives no part of the consideration
for the instrument but assumes liability to the
other parties thereto because he wants to
accommodate another. x x x.[25] (Citation
omitted)
The relation between an accommodation party
and the party accommodated is, in effect, one of
principal and surety the accommodation party
being the surety. It is a settled rule that a surety
is bound equally and absolutely with the
principal and is deemed an original promisor
and debtor from the beginning. The liability is
immediate and direct.[26] It is not a valid
defense that the accommodation party did not
receive any valuable consideration when he
executed the instrument; nor is it correct to say
that the holder for value is not a holder in due
course merely because at the time he acquired
the instrument, he knew that the indorser was
only an accommodation party.[27]
Moreover, it was held in Aruego that unlike in a
contract of suretyship, the liability of the
accommodation party remains not only primary
but also unconditional to a holder for value, such
that even if the accommodated party receives
an extension of the period for payment without
the consent of the accommodation party, the
latter is still liable for the whole obligation and
such extension does not release him because
as far as a holder for value is concerned, he is a
solidary co-debtor.
The mere fact, then, that Aglibot issued her own
checks to Santia made her personally liable to
the latter on her checks without the need for
Santia to first go after PLCC for the payment of
its loan.[28] It would have been otherwise had
it been shown that Aglibot was a mere
guarantor, except that since checks were issued
ostensibly in payment for the loan, the
provisions of the Negotiable Instruments Law
must take primacy in application.
WHEREFORE, premises considered, the
Petition for Review on Certiorari is DENIED and
the Decision dated March 18, 2008 of the Court
of Appeals in CA-G.R. SP No. 100021 is hereby
AFFIRMED.
SO ORDERED.
5. CCC Insurance vs Kawasaki
Steel
Assailed in this Petition for Review on Certiorari
are: (1) the Decision1 dated May 30, 2002 of the
Court of Appeals in CA-G.R. CV No. 54066,
which reversed and set aside the Decision2
dated May 2, 1996 of the Regional Trial Court
(RTC), Makati City, Branch 66, and held
petitioner CCC Insurance Corporation (CCCIC)
liable under its Surety and Performance Bonds
to respondent Kawasaki Steel Corporation
(Kawasaki); and (2) the Resolution3 dated
November 14, 2002 of the appellate court in the
same case which denied the Motion for
Reconsideration of CCCIC.
The antecedents of this case are as follows:
On August 16, 1988, Kawasaki, represented by
its Manager, Yoshimitsu Hosoya, and F.F.
Mañacop Construction Company, Inc.
(FFMCCI), represented by its President,
Florante F. Mañacop (Mañacop), executed a
Consortium Agreement for Pangasinan Fishing
Port Network Project (Consortium Agreement).4
Kawasaki and FFMCCI formed a consortium
(Kawasaki-FFMCCI Consortium) for the
purpose of contracting with the Philippine
Government for the construction of a fishing port
network in Pangasinan (Project). According to
their Consortium Agreement, Kawasaki and
FFMCCI undertook to perform and accomplish
their respective and specific portions of work in
the intended contract with the Philippine
Government.5ChanRoblesVirtualawlibrary
The Project was awarded to the Kawasaki-
FFMCCI Consortium for the contract price of
P62,000,441.00, 33.37% of which or
P20,692,026.00 was the price of work of
FFMCCI. On October 4, 1988, the Republic of
the Philippines (Republic), through the
Department of Public Works and Highways
(DPWH), represented by former Secretary
Romulo M. del Rosario, as owner, and the
Kawasaki-FFMCCI Consortium, represented by
Shigeru Kohda, as contractor, entered into a
Contract Agreement entitled Stage I-A
Construction of Pangasinan Fishing Port
Network (Construction
Contract).6ChanRoblesVirtualawlibrary
In accordance with Article 10 of the Consortium
Agreement,7 "Consortium Leader" Kawasaki,
on behalf of the Consortium, secured from the
Philippine Commercial International Bank
(PCIB) Letter of Credit No. 38-001-1836178 in
the amount of P6,200,044.10 in favor of DPWH,
available from September 9, 1988 to November
19, 1990. Said Letter of Credit guaranteed the
faithful performance by Kawasaki-FFMCCI
Consortium of its obligation under the
Construction Contract.
The Republic made an advance payment for the
Project to the Kawasaki-FFMCCI Consortium in
the amount of P9,300,066.15, representing 15%
of the contract price of P62,000,441.00.
For the release of its share in the advance
payment made by the Republic, and also
pursuant to Article 10 of the Consortium
Agreement, FFMCCI secured from CCCIC the
following bonds in favor of Kawasaki: (a) Surety
Bond No. B-88/111919 in the amount of
P3,103,803.90 (equivalent to 15% of the price of
work of FFMCCI), effective from October 26,
1988 to October 26, 1989, to counter-guarantee
the amount of advance payment FFMCCI would
receive from Kawasaki; and (b) Performance
Bond B-88/1119310 in the amount of
P2,069,202.60 (equivalent to 10% of the price of
work of FFMCCI), effective from October 27,
1988 to October 27, 1989, to guarantee
completion by FFMCCI of its scope of work in
the Project. In turn, FFMCCI and Mañacop
executed two Indemnity Agreements11
promising to compensate CCCIC for any
damages the insurance company might incur
from issuing the Surety and Performance
Bonds.
In two letters dated October 27, 1998,12
FFMCCI submitted the Surety and Performance
Bonds to Kawasaki and requested Kawasaki to
release the advance payment in the amount of
P3,103,803.90. FFMCCI eventually received
the amount of advance payment it requested on
a staggered
basis.13ChanRoblesVirtualawlibrary
The Project commenced in November 1988.14
Sometime in April 1989, FFMCCI ceased
performing its work in the Project after suffering
financial problems and/or business reverses.
After discussions, Kawasaki and FFMCCI then
executed a new Agreement15 on August 24,
1989 wherein Kawasaki recognized the
"Completed Portion of Work" of FFMCCI as of
April 25, 1989, and agreed to take over the
unfinished portion of work of FFMCCI, referred
to as "Transferred Portion of Work." Kawasaki
and FFMCCI further agreed that "[a]ny profit or
benefit arising from the performance by
[Kawasaki] of the Transferred Portion of Work
shall accrue to [Kawasaki]."

In a letter dated September 14, 1989,16
Kawasaki informed CCCIC about the cessation
of operations of FFMCCI, and the failure of
FFMCCI to perform its obligations in the Project
and repay the advance payment made by
Kawasaki. Consequently, Kawasaki formally
demanded that CCCIC, as surety, pay
Kawasaki the amounts covered by the Surety
and Performance Bonds. Because CCCIC did
not act upon its demand, Kawasaki filed on
November 6, 1989 before the RTC a
Complaint17 against CCCIC to collect on Surety
Bond No. B-88/11191 and Performance Bond
No. B-88/11193.
In its Answer with Counterclaims,18 CCCIC
denied any liability on its Surety and
Performance Bonds on the following grounds:
(a) the rights of Kawasaki under the Surety and
Performance Bonds had not yet accrued since
the said Bonds were mere counter-guarantees,
for which CCCIC could only be held liable upon
the filing of a claim by the Republic against the
Kawasaki-FFMCCI Consortium; (b) Kawasaki
and FFMCCI, without the consent of CCCIC,
executed a new Agreement dated August 24,
1989 novating the terms of the Consortium
Agreement, which prevented CCCIC from being
subrogated to the right of Kawasaki against
FFMCCI; (c) Kawasaki, in completing the
Transferred Portion of Work was
correspondingly compensated, which negated
any allegation of loss on the part of Kawasaki;
and (d) the obligation of CCCIC was
extinguished when the Republic granted the
Kawasaki-FFMCCI Consortium an extension of
time to complete the Project, without the
consent of CCCIC.
CCCIC subsequently filed on August 19, 1991
before the RTC a Third-Party Complaint19
against FFMCCI and its President Mafiacop
based on the two Indemnity Agreements which
FFMCCI and Mañacop executed in favor of
CCCIC. The RTC issued summonses but
FFMCCI and Mañacop failed to file any
responsive pleading to the Third-Party
Complaint of CCCIC. Upon motion of CCCIC,
the RTC issued an Order20 dated December 2,
1991 declaring FFMCCI and Mañacop in
default.
After trial, the RTC rendered a Decision on May
2, 1996 dismissing the Complaint of Kawasaki
and the counterclaim of CCCIC. The RTC
agreed with CCCIC that the Surety and
Performance Bonds issued by the insurance
company were mere counter-guarantees and
the cause of action of Kawasaki based on said
Bonds had not yet accrued. Since the Republic
did not exercise its right to claim against the
PCIB Letter of Credit No. 38-001-183617, nor
compelled Kawasaki to perform the unfinished
work of FFMCCI, Kawasaki could not claim
indemnification from CCCIC. Moreover, the
RTC, citing Article 2079 of the Civil Code, ruled
that the obligations of CCCIC under the Surety
and Performance Bonds were extinguished
when the Republic granted the Kawasaki-
FFMCCI Consortium a 43-day extension to
finish the Project, absent the consent of CCCIC.
The RTC found no deliberate intent on the part
of Kawasaki to cause prejudice to CCCIC, so it
did not grant the counterclaims for moral and
exemplary damages and attorney's fees of
CCCIC against Kawasaki.
Kawasaki appealed before the Court of Appeals
assigning the following errors on the part of the
RTC:
chanRoblesvirtualLawlibrary
I. THE COURT A QUO GROSSLY ERRED IN
HOLDING THAT [CCCIC] CAN BE HELD
LIABLE TO [Kawasaki] UNDER THE SUBJECT
BONDS ONLY "IF THE GOVERNMENT
EXERCISES ITS RIGHTS AGAINST THE
GUARANTEE-BONDS ISSUED TO IT BY
[Kawasaki]" ON THE THEORY ADVANCED BY
[CCCIC], WHICH THE COURT A QUO FULLY
EMBRACED AND ADOPTED, THAT THE
BONDS ARE MERE "COUNTER-
GUARANTEES."
II. THE COURT A QUO GROSSLY ERRED IN
HOLDING THAT THE EXTENSION GRANTED
BY THE GOVERNMENT TO THE
CONSORTIUM FOR THE CONSTRUCTION
OF THE PANGASINAN FISHING PORT
NETWORK PROJECT EXTINGUISHED THE
LIABILITY OF [CCCIC].
III. THE COURT A QUO GROSSLY ERRED IN
HOLDING THAT ARTICLE 2079 OF THE CIVIL
CODE OF THE PHILIPPINES APPLIES TO
THE CASE AT BAR. IN A LONG LINE OF
DECISIONS, THE SUPREME COURT HAS
HELD THAT THE RULE OF "STRICTISSIMI
JURIS" DOES NOT APPLY TO SURETY
COMPANIES SUCH AS [CCCIC] HEREIN.
IV. THE SUBJECT BONDS ARE FIXED UNTIL
OCTOBER 26 AND 27, 1989 RESPECTIVELY
WHILE THE ORIGINAL PERIOD OF THE
CONTRACT WITH THE GOVERNMENT, THE
PERFORMANCE OF WHICH BY [CCCIC] ARE
PRECISELY GUARANTEED BY THESE
BONDS, IS UNTIL DECEMBER 30, 1989. ON
THE OTHER HAND, THE DEFAULT BY
[FFMCCI] WHICH THE BONDS
GUARANTEED AGAINST OCCURRED ON
[OR] ABOUT AUGUST 24, 1989.
THEREFORE, IRRESPECTIVE OF WHETHER
THERE WAS AN EXTENSION OR NOT AT
THE END OF THE ORIGINAL CONTRACT
PERIOD AND IRRESPECTIVE OF WHETHER
THIS EXTENSION IS KNOWN OR UNKNOWN
TO [CCCIC], THE LIABILITY THAT IT BOUND
ITSELF UNTO UNDER THE BONDS IS VERY
CLEARLY AND UNEQUIVOCALLY FIXED
UNTIL OCTOBER 26 AND 27, 1989
RESPECTIVELY. THEREFORE, ARTICLE
2079 WILL NOT APPLY. HENCE, THE COURT
A QUO GROSSLY ERRED IN HOLDING
OTHERWISE.21
chanroblesvirtuallawlibrary
The Court of Appeals, in its Decision dated May
30, 2002, reversed the appealed RTC Decision,
reasoning as follows:
chanRoblesvirtualLawlibrary
From the language of the aforesaid bonds, it is
clear that, in the case of the surety bond, the
same was posted, jointly and severally, by
[FFMCCI] and CCCIC "to fully and faithfully
guarantee the repayment of the downpayment
made by the principal ([FFMCCI]) to the obligee
(KAWASAKI) in connection with the
construction of the Pangasinan Fishing Port
Network Project at Pangasinan" subject only to
the condition that "the liability of the [herein]
surety shall in no case exceed the amount of
Pesos: THREE MILLION ONE HUNDRED
THREE THOUSAND EIGHT HUNDRED
THREE & 90/100 (P3,103,803.90) Philippine
currency; and in the case of the performance
bond, the same was posted, jointly and
severally by [FFMCCI] and CCCIC "to
guarantee the full and faithful performance of
the principal ([FFMCCI]) of its obligation in
connection with the project for the construction
of the Pangasinan Fishing Port Network located
at Pangasinan in accordance with the plans and
specifications of the contract" subject only to the
condition that "the liability of the [herein] surety
shall in no case exceed the amount of Pesos:
TWO MILLION SIXTY-NINE THOUSAND TWO
HUNDRED TWO & 60/100 (P2,069,202.60)
Philippine currency."
The right of KAWASAKI as the obligee/creditor
of the said bonds was not made subject to any
other condition expressly so provided in the
Consortium Agreement, which was the reason
for the bonds posted by [FFMCCI] and CCCIC,
or in the subject bonds themselves.
It is not provided, neither in the Consortium
Agreement nor in the subject bonds themselves
that before KAWASAKI may proceed against
the bonds posted by [FFMCCI] and CCCIC, the
Philippine government as employer must first
exercise its rights against the bond issued in its
favor by the consortium.
Hence, this Court finds that the court a quo did
err in ruling that "[u]nder the Consortium
Agreement, the bonds are counter-guarantees
which only guarantee the plaintiff KAWASAKI
for reimbursement to the extent of the value of
the bonds in case the employer (government)
successfully exercised its rights under the
bonds issued to it by plaintiff KAWASAKI;" and
that "[considering that the government did not
exercise its rights against the bond issued to it
by the Consortium Leader, it follows that the
Consortium Leader cannot collect from the
counter-guarantees furnished by [FFMCCI]."
Time and again, the Supreme Court has
stressed the rule that a contract is the law
between the parties, and courts have no choice
but to enforce such contract so long as they are
not contrary to law, morals, good customs or
public policy.
With respect to the second, third and fourth
issues raised, suffice it to say that this Court
finds Article 2079 of the Civil Code of the
Philippines not applicable.
[Kawasaki] claims that since the issue in this
case is the liability of CCCIC to KAWASAKI, the
extension of forty-three (43) days within which
to complete the Pangasinan Fishing Port
Network Project granted by the Philippine
government, who is not a party to the two (2)
bonds posted by [FFMCCI] and CCCIC, to the
consortium, does not absolve CCCIC's liabilities
to KAWASAKI under the subject bonds.
We agree.
As stated earlier, the parties insofar as the
surety bond and performance bond are
concerned are: KAWASAKI, as obligee,
[FFMCCI], as principal; and CCCIC, as surety.
Considering therefore that the extension of time
within which to complete the construction of the
Pangasinan Fishing Port Network Project was
granted by the Philippine government, who is
not the creditor of the bonds, this Court finds that
Article 2079 of the Civil Code of the Philippines
does not apply and the extension of time
granted by the Philippine government, contrary
to the ruling of the trial court, does not absolve
the surety of its liabilities to KAWASAKI under
the subject bonds.
The principle of relativity of contracts provides
that contracts can only bind the parties who
entered into it.
Finally, this Court finds the award of attorney's
fees in favor of the appellant warranted under
the circumstance, pursuant to paragraph (2) of
Article 2208 of the Civil Code of the
Philippines.22
chanroblesvirtuallawlibrary
In the end, the Court of Appeals decreed:
chanRoblesvirtualLawlibrary
WHEREFORE, the instant appeal is hereby
GRANTED. Accordingly, the assailed decision
of the Regional Trial Court of Makati City,
Branch 66, is hereby REVERSED and SET
ASIDE.
CCC Insurance Corporation is hereby ordered
to pay KAWASAKI the following:
1. The amount of P3,103,803.90 representing
its liability to Kawasaki Steel Corporation under
Surety Bond No. B-88/11191, plus legal interest
at the rate of 12% per annum computed from 15
September 1989, until fully paid;
2. The amount of P2,069,202.80 representing
its liability to Kawasaki Steel Corporation under
Performance Bond No. B- 88/11193, plus legal
interest at the rate of 12% per annum computed
from 15 September 1989, until fully paid; and
3. 15% of the total amount due as and for
attorney's fees.23
chanroblesvirtuallawlibrary
In its Resolution dated November 14, 2002, the
Court of Appeals denied the Motion for
Reconsideration of CCCIC. However, in the
same Resolution, the appellate court partially
granted the Third-Party Complaint of CCCIC by
holding Mafiacop liable under the Indemnity
Agreements he executed in favor of the
insurance company, while declaring the RTC
was without jurisdiction over FFMCCI due to
invalid service of summons. The Court of
Appeals ultimately resolved:
chanRoblesvirtualLawlibrary
WHEREFORE, judgment is hereby rendered in
favor of third-party plaintiff CCC Insurance
Corporation and against third-party defendant
Florante F. Mafiacop, ordering the latter to
indemnify the former the total amount paid by
the former to Kawasaki Steel Corporation
representing CCC Insurance Corporation's
liabilities under Surety Bond No. B-88/11191
and Performance Bond No. B-88/11193 and to
pay CCC Insurance Corporation 25% of the total
amount due, as and for attorney's fees.24
chanroblesvirtuallawlibrary
In the instant Petition for Review on Certiorari,
CCCIC assails the aforementioned Decision
and Resolution of the Court of Appeals on six
grounds, viz.:
chanRoblesvirtualLawlibrary
A.
THE COURT OF APPEALS, CONTRARY TO
LAW, FAILED TO CONSIDER THE TRUE
NATURE OF THE TRANSACTION BETWEEN
THE PARTIES AND THE TRUE NATURE OF A
COUNTER-GUARANTEE.
B.
THE COURT OF APPEALS, CONTRARY TO
LAW, FAILED TO APPRECIATE THE
APPLICABILITY OF ARTICLE 2079 OF THE
CIVIL CODE, WHICH PROVIDES THAT AN
EXTENSION GRANTED TO THE DEBTOR BY
THE CREDITOR WITHOUT THE CONSENT
OF THE GUARANTOR EXTINGUISHES THE
GUARANTY.
C.
THE COURT OF APPEALS, CONTRARY TO
LAW, ERRONEOUSLY FAILED TO
CONSIDER THE FACT THAT KAWASAKI AND
FFMCCI HAVE NOVATED THEIR ORIGINAL
AGREEMENT WITHOUT THE KNOWLEDGE
AND CONSENT OF CCCIC, THEREBY
RELEASING THE LATTER FROM ANY
OBLIGATION UNDER THE BONDS IT
ISSUED.
D.
THE COURT OF APPEALS, CONTRARY TO
LAW, ERRONEOUSLY RENDERED CCCIC
LIABLE TO PAY THE FULL AMOUNT OF THE
SURETY AND PERFORMANCE BONDS
DESPITE THE FACT THAT FFMCCI WAS
ABLE TO PARTIALLY EXECUTE ITS
PORTION OF THE WORK AND THAT
KAWASAKI HAD BEEN FULLY
COMPENSATED FOR TAKING OVER THE
UNFINISHED PORTION.
E.
THE COURT OF APPEALS, CONTRARY TO
LAW, ERRONEOUSLY AWARDED
ATTORNEY'S FEES TO KAWASAKI UNDER
PARAGRAPH 2 OF ARTICLE 2208 OF THE
CIVIL CODE.
F.
THE COURT OF APPEALS, CONTRARY TO
LAW, ERRONEOUSLY RULED THAT THERE
WAS NO VALID SERVICE OF SUMMONS
UPON FFMCCI.25
chanroblesvirtuallawlibrary
CCCIC avers that its liabilities under the Surety
and Performance Bonds are directly linked with
the obligation of the Kawasaki-FFMCCI
Consortium to finish the Project for the Republic,
so that its liability as surety of FFMCCI will only
arise if the Republic made a claim on the PCIB
Letter of Credit furnished by Kawasaki, on
behalf of the Consortium. Since the Republic
has not exercised its right against said Letter of
Credit, Kawasaki does not have a cause of
action against CCCIC.
CCCIC also maintains that its obligations under
the Surety and Performance Bonds had been
extinguished when (a) the Republic extended
the completion period for the Project upon the
request of Kawasaki but without the knowledge
or consent of CCCIC, based on Article 2079 of
the Civil Code; and (b) when Kawasaki and
FFMCCI executed the Agreement dated August
24, 1989, without the consent of CCCIC, there
being a novation of the Consortium Agreement.
CCCIC further argues that when Kawasaki,
under the Agreement dated August 24, 1989,
voluntarily took over the Transferred Portion of
Work from FFMCCI, it resulted in the reduction
of revenue of FFMCCI on which CCCIC relied
upon as a source of indemnification. CCCIC
additionally posits that Kawasaki already
received compensation for doing the
Transferred Portion of Work, so the Court of
Appeals had no basis for still ordering Kawasaki
to pay the full value of the Surety and
Performance Bonds, plus interest.
Moreover, CCCIC contends that the Court of
Appeals erred in awarding attorney's fees in
favor of Kawasaki based on paragraph 2 of
Article 2208 of the Civil Code as it is not a sound
policy to place a penalty on the right to litigate.
Lastly, CCCIC insists that there was proper
service of summons upon FFMCCI, through one
of its directors, as authorized by the Rules of
Court.
The Petition is partly meritorious.
The liability of CCCIC under the Surety and
Performance Bonds is dependent on the
fulfillment and/or non-fulfillment of the obligation
of FFMCCI to KAWASAKI under the Consortium
Agreement.
The statutory definition of suretyship is found in
Article 2047 of the Civil Code, thus:
chanRoblesvirtualLawlibrary
Art. 2047. By guaranty a person, called the
guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the
latter should fail to do so.
If a person binds himself solidarity with the
principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed.
In such case the contract is called a suretyship.
(Emphasis supplied.)
chanroblesvirtuallawlibrary
Jurisprudence also defines a contract of
suretyship as "an agreement where a party
called the surety guarantees the performance
by another party called the principal or obligor of
an obligation or undertaking in favor of a third
person called the obligee. Specifically,
suretyship is a contractual relation resulting
from an agreement whereby one person, the
surety, engages to be answerable for the debt,
default or miscarriage of another, known as the
principal."26 The Court expounds that "a
surety's liability is joint and several, limited to the
amount of the bond, and determined strictly by
the terms of contract of suretyship in relation to
the principal contract between the obligor and
the obligee. It bears stressing, however, that
although the contract of suretyship is secondary
to the principal contract, the surety's liability to
the obligee is nevertheless direct, primary, and
absolute."27ChanRoblesVirtualawlibrary
At the outset, the Court ascertains that there are
two principal contracts in this case: (1) the
Consortium Agreement wherein Kawasaki and
FFMCCI agreed to jointly enter into a contract
with the Republic for the Project, each assuming
the performance of specific scopes of work in
said Project; and (2) the Construction Contract
whereby the Republic awards the Project to the
Kawasaki-FFMCCI Consortium. While there is a
connection between these two contracts, they
are each distinguishable from and enforceable
independently of one another: the first governs
the rights and obligations between Kawasaki
and FFMCCI, while the second covers
contractual relations between the Republic and
the Kawasaki-FFMCCI Consortium. The Surety
and Performance Bonds from CCCIC
guaranteed the performance by FFMCCI of its
obligations under the Consortium Agreement;
whereas the Letter of Credit from PCIB
warranted the completion of the Project by the
Kawasaki-FFMCCI Consortium. At the crux of
the instant controversy are the Surety and
Performance Bonds issued by CCCIC in relation
to the Consortium Agreement.
FFMCCI secured the Surety and Performance
Bonds from CCCIC in compliance with Article 10
of the Consortium Agreement which provided:
chanRoblesvirtualLawlibrary
ARTICLE 10-BONDS
10.1
The CONSORTIUM LEADER [Kawasaki] shall
arrange, at [its] own cost, all necessary bonds
or guarantees as required under the
CONTRACT on behalf of the CONSORTIUM.
[FFMCCI] shall, at its own cost, furnish the
CONSORTIUM LEADER [Kawasaki] with a
suitable counter guarantees of its advance
payment under the CONTRACT and the
performance of its PORTION OF WORK in the
amount of fifteen (15%) percent (in the case of
the repayment guarantee for the advance) and
ten (10%) percent (in the case of the
performance guarantee) of the price of its
PORTION OF THE WORK.
10.2
If the EMPLOYER [Republic] exercises its right
on the bonds or guarantees furnished by the
CONSORTIUM LEADER, the PARTIES shall
decide the respective responsibilities according
to the provisions of this AGREEMENT and the
necessary reimbursement or compensation
shall be made also according to the provisions
of this AGREEMENT.28
Pertinent portions of Surety Bond No. B-
88/11191 read:
chanRoblesvirtualLawlibrary
SURETY BOND
KNOW ALL MEN BY THESE PRESENTS:
That we, F.F. MAÑACOP CONSTRUCTION
CO., INC., x x x, as principal, and CCC
Insurance Corporation, x x x, as SURETY, are
held and firmly bound unto KAWASAKI STEEL
CORPORATION, hereinafter referred to as the
OBLIGEE: in the sum of PESOS: THREE
MILLION ONE HUNDRED THREE THOUSAND
EIGHT HUNDRED THREE & 90/100 ONLY
(P3,103,803.90), Philippine currency, for the
payment of which, well and truly to be made, we
bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly
and severally, firmly bound from notice of
acceptance, by these presents.
THE CONDITIONS OF THIS OBLIGATION
ARE AS FOLLOWS:
chanRoblesvirtualLawlibrary
TO FULLY AND FAITHFULLY GUARANTEE
THE REPAYMENT OF THE DOWNPAYMENT
MADE BY THE PRINCIPAL TO THE OBLIGEE
IN CONNECTION WITH THE
CONSTRUCTION OF THE PANGASINAN
FISHING PORT NETWORK PROJECT AT
PANGASINAN; AND
PROVIDED HOWEVER, THAT THE LIABILITY
OF THE HEREIN SURETY SHALL IN NO
CASE EXCEED THE AMOUNT OF PESOS:
THREE MILLION ONE HUNDRED THREE
THOUSAND EIGHT HUNDRED THREE &
90/100 ONLY (P3,103,803.90) PHILIPPINE
CURRENCY.
xxxx
chanroblesvirtuallawlibrary
WHEREAS, the said OBLIGEE requires said
Principal to give a good and sufficient bond in
the above-stated sum to secure the full and
faithful performance on his part of said
UNDERTAKING.
NOW, THEREFORE, if the above bounden
principal shall in all respects duly and fully
observe and perform all and singular the
aforesaid covenants, conditions and
agreements to the true intent and meaning
thereof, then this obligation shall be null and
void, otherwise to remain in full force and effect.
The liability of the Surety under this bond shall
expire on October 26, 1989 and the Surety does
not assume responsibility for any liability
incurred or created after said date. Any claims
against this bond must be presented to the
Surety in writing not later than ten (10) days after
said expiry date; otherwise, failure to do so shall
forthwith release the Surety from all liabilities
under this bond and shall be a bar to any court
action against it and which right to sue is hereby
waived by the Obligee after the lapse of said
period often (10) days above cited.29
(Emphases supplied.)
chanroblesvirtuallawlibrary
Performance Bond No. B-88/11193 contains the
following terms and conditions:
chanRoblesvirtualLawlibrary
PERFORMANCE BOND
KNOW ALL MEN BY THESE PRESENTS:
That we, F.F. MAÑACOP CONSTRUCTION
CO., INC., x x x, as principal, and CCC
Insurance Corporation, x x x, as SURETY, are
held and firmly bound unto KAWASAKI STEEL
CORPORATION, hereinafter referred to as the
OBLIGEE: in the sum of PESOS: TWO
MILLION SIXTY-NINE THOUSAND TWO
HUNDRED TWO & 60/100 ONLY
(P2,069,202.60), Philippine currency, for the
payment of which, well and truly to be made, we
bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly
and severally, firmly bound from notice of
acceptance, by these presents.
THE CONDITIONS OF THIS OBLIGATION
ARE AS FOLLOWS:
TO GUARANTEE THE FULL AND FAITHFUL
PERFORMANCE OF THE PRINCIPAL OF ITS
OBLIGATION IN CONNECTION WITH THE
PROJECT FOR THE CONSTRUCTION OF
PANGASINAN FISHING PORT NETWORK
LOCATED AT PANGASINAN IN
ACCORDANCE WITH THE PLANS AND
SPECIFICATION OF THE CONTRACT, AND;
PROVIDED HOWEVER, THAT THE LIABILITY
OF THE HEREIN SURETY SHALL IN NO
CASE EXCEED THE AMOUNT OF PESOS:
TWO MILLION SIXTY-NINE THOUSAND TWO
HUNDRED TWO & 60/100 ONLY
(P2,069,202.60) PHILIPPINE CURRENCY.
xxxx
WHEREAS, the said OBLIGEE requires said
Principal to give a good and sufficient bond in
the above-stated sum to secure the full and
faithful performance on his part of said
UNDERTAKING.
NOW, THEREFORE, if the above bounden
principal shall in all respects duly and fully
observe and perform all and singular the
aforesaid covenants, conditions and
agreements to the true intent and meaning
thereof, then this obligation shall be null and
void, otherwise to remain in full force and effect.
The liability of the Surety under this bond shall
expire on October 27, 1989 and the Surety does
not assume responsibility for any liability
incurred or created after said date. Any claims
against this bond must be presented to the
Surety in writing not later than ten (10) days after
said expiry date; otherwise, failure to do so shall
forthwith release the Surety from all liabilities
under this bond and shall be a bar to any court
action against it and which right to sue is hereby
waived by the Obligee after the lapse of said
period often (10) days above cited.30
(Emphasis supplied.)
chanroblesvirtuallawlibrary
The Court reiterates that a surety's liability is
determined strictly by the terms of contract of
suretyship, in relation to the principal contract
between the obligor and the obligee. Hence, the
Court looks at the Surety and Performance
Bonds, in relation to the Consortium Agreement.
According to the principle of relativity of
contracts in Article 1311 of the Civil Code,31 a
contract takes effect only between the parties,
their assigns, and heirs; except when the
contract contains a stipulation in favor of a third
person, which gives said person the right to
demand fulfillment of said stipulation. In this
case, the Surety and Performance Bonds are
enforceable by and against the parties FFMCCI
(the obligor) and CCCIC (the surety), as well as
the third person Kawasaki (the obligee) in
whose favor said bonds had been explicitly
constituted; while the related Consortium
Agreement binds the parties Kawasaki and
FFMCCI. Since the Republic is neither a party
to the Surety and Performance Bonds nor the
Consortium Agreement, any action or omission
on its part has no effect on the liability of CCCIC
under said bonds.
The Surety and Performance Bonds state that
their purpose was "to secure the Ml and faithful
performance on [FFMCCI's] part of said
undertaking," particularly, the repayment by
FFMCCI of the downpayment advanced to it by
Kawasaki (in the case of the Surety Bond) and
the full and faithful performance by FFMCCI of
its portion of work in the Project (in the case of
the Performance Bond). These are the only
undertakings expressly guaranteed by the
bonds, the fulfillment of which by FFMCCI would
release CCCIC from its obligations as surety; or
conversely, the non-performance of which
would give rise to the liabilities of CCCIC as a
surety.
The Surety and Performance Bonds do not
contain any condition that CCCIC would be
liable only if, in addition to the default on its
undertakings by FFMCCI, the Republic also
made a claim against the PCIB Letter of Credit
furnished by Kawasaki, on behalf of the
Kawasaki-FFMCCI Consortium. The Court
agrees with the observation of the Court of
Appeals that "it is not provided, neither in the
Consortium Agreement nor in the subject bonds
themselves that before KAWASAKI may
proceed against the bonds posted by [FFMCCI]
and CCCIC, the Philippine government as
employer must first exercise its rights against
the bond issued in its favor by the
consortium."32ChanRoblesVirtualawlibrary
The Court cannot give any additional meaning
to the plain language of the undertakings in the
Surety and Performance Bonds. The extent of a
surety's liability is determined by the language
of the suretyship contract or bond itself. Article
1370 of the Civil Code provides that "[i]f the
terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the
literal meaning of its stipulations shall
control."33ChanRoblesVirtualawlibrary
There is no basis for the interpretation by
CCCIC of the word "counter-guarantee" in
Article 10 of the Consortium Agreement. The
first paragraph of Article 10 of the Consortium
Agreement provides that Kawasaki, as the
Consortium Leader, shall arrange, at its own
cost but on behalf of the Kawasaki-FFMCCI
Consortium, for all necessary bonds and
guarantees under the Construction Contract
with the Republic. The same paragraph
requires, in turn, that FFMCCI, at its own cost,
to furnish Kawasaki with suitable counter-
guarantees for the repayment by FFMCCI for
the advance payment from Kawasaki and
performance by FFMCCI of its portion of work in
the Project. Clearly, the "guarantees" and
"counter-guarantees" were securities for the
fulfillment of the obligations of the Kawasaki-
FFMCCI Consortium to the Republic under the
Construction Contract and of FFMCCI to the
Consortium Leader Kawasaki under the
Consortium Agreement, respectively. The
CCCIC Surety and Performance Bonds were
not counter-guarantees to the PCIB Letter of
Credit. In fact, in the event that the Republic did
make a claim on the PCIB Letter of Credit, the
second paragraph of Article 10 of the
Consortium Agreement stipulates that Kawasaki
and FFMCCI would still have to determine their
respective responsibilities, reimbursements,
and/or compensations according to the
provisions of the Consortium Agreement,
instead of simply allowing Kawasaki to recover
on the "counter-guarantees" of FFMCCI.
It is not disputed that FFMCCI, due to financial
difficulties, was unable to repay the advance
payment it received from Kawasaki and to finish
its scope of work in the Project, thus, FFMCCI
defaulted on its obligations to Kawasaki. Given
the default of FFMCCI, CCCIC as surety
became directly, primarily, and absolutely liable
to Kawasaki as the obligee under the Surety and
Performance Bonds. The following
pronouncements of the Court in Asset Builders
Corporation v. Stronghold Insurance Company,
Inc.34 are relevant herein:
chanRoblesvirtualLawlibrary
Respondent, along with its principal, Lucky Star,
bound itself to the petitioner when it executed in
its favor surety and performance bonds. The
contents of the said contracts clearly establish
that the parties entered into a surety agreement
as defined under Article 2047 of the New Civil
Code. x x x.
xxxx
As provided in Article 2047, the surety
undertakes to be bound solidarily with the
principal obligor. That undertaking makes a
surety agreement an ancillary contract as it
presupposes the existence of a principal
contract. Although the contract of a surety is in
essence secondary only to a valid principal
obligation, the surety becomes liable for the
debt or duty of another although it possesses no
direct or personal interest over the obligations
nor does it receive any benefit therefrom. Let it
be stressed that notwithstanding the fact that
the surety contract is secondary to the principal
obligation, the surety assumes liability as a
regular party to the undertaking.
Stronghold Insurance Company, Inc. v.
Republic-Asahi Glass Corporation, reiterating
the ruling in Garcia v. Court of Appeals,
expounds on the nature of the surety's liability:
chanRoblesvirtualLawlibrary
xxx. The surety's obligation is not an original and
direct one for the performance of his own act,
but merely accessory or collateral to the
obligation contracted by the principal.
Nevertheless, although the contract of a surety
is in essence secondary only to a valid principal
obligation, his liability to the creditor or promisee
of the principal is said to be direct, primary and
absolute; in other words, he is directly and
equally bound with the principal.
chanroblesvirtuallawlibrary
Suretyship, in essence, contains two types of
relationship - the principal relationship between
the obligee (petitioner) and the obligor (Lucky
Star), and the accessory surety relationship
between the principal (Lucky Star) and the
surety (respondent). In this arrangement, the
obligee accepts the surety's solidary
undertaking to pay if the obligor does not pay.
Such acceptance, however, does not change in
any material way the obligee's relationship with
the principal obligor. Neither does it make the
surety an active party to the principal obligee-
obligor relationship. Thus, the acceptance does
not give the surety the right to intervene in the
principal contract. The surety's role arises only
upon the obligor's default, at which time, it can
be directly held liable by the obligee for payment
as a solidary obligor.
In the case at bench, when Lucky Star failed to
finish the drilling work within the agreed time
frame despite petitioner's demand for
completion, it was already in delay. Due to this
default, Lucky Star's liability attached and, as a
necessary consequence, respondent's liability
under the surety agreement arose.
Undeniably, when Lucky Star reneged on its
undertaking with the petitioner and further failed
to return the P575,000.00 downpayment that
was already advanced to it, respondent, as
surety, became solidarily bound with Lucky Star
for the repayment of the said amount to
petitioner. The clause, "this bond is callable on
demand," strongly speaks of respondent's
primary and direct responsibility to the
petitioner.
Accordingly, after liability has attached to the
principal, the obligee or, in this case, the
petitioner, can exercise the right to proceed
against Lucky Star or respondent or both. xxx.
(Emphases supplied, citations omitted.)
chanroblesvirtuallawlibrary
Article 2079 of the New Civil Code is not
applicable to the instant case.
To free itself from its liabilities under the Surety
and Performance Bonds, CCCIC cites Article
2079 of the Civil Code, which reads:
chanRoblesvirtualLawlibrary
Art. 2079. An extension granted to the debtor by
the creditor without the consent of the guarantor
extinguishes the guaranty. The mere failure on
the part of the creditor to demand payment after
the debt has become due does not of itself
constitute any extension of time referred to
herein.
chanroblesvirtuallawlibrary
The aforequoted provision clearly speaks of an
extension for the payment of a debt granted by
the creditor to a debtor without the consent of
the surety. The theory behind Article 2079 was
further explained by the Court in Trade and
Investment Development Corporation of the
Philippines (Formerly Philippine Export and
Foreign Loan Guarantee Corporation) v. Asia
Paces Corporation,35 thus:
chanRoblesvirtualLawlibrary
Comparing a surety's obligations with that of a
guarantor, the Court, in the case of Palmares v.
CA, illumined that a surety is responsible for the
debt's payment at once if the principal debtor
makes default, whereas a guarantor pays only if
the principal debtor is unable to pay, viz.:
chanRoblesvirtualLawlibrary
A surety is an insurer of the debt, whereas a
guarantor is an insurer of the solvency of the
debtor. A suretyship is an undertaking that the
debt shall be paid; a guaranty, an undertaking
that the debtor shall pay. Stated differently, a
surety promises to pay the principal's debt if the
principal will not pay, while a guarantor agrees
that the creditor, after proceeding against the
principal, may proceed against the guarantor if
the principal is unable to pay. A surety binds
himself to perform if the principal does not,
without regard to his ability to do so. A
guarantor, on the other hand, does not contract
that the principal will pay, but simply that he is
able to do so. In other words, a surety
undertakes directly for the payment and is so
responsible at once if the principal debtor makes
default, while a guarantor contracts to pay if, by
the use of due diligence, the debt cannot be
made out of the principal debtor. x x x.
chanroblesvirtuallawlibrary
Despite these distinctions, the Court in
Cochingyan, Jr. v. R&B Surety & Insurance Co.,
Inc., and later in the case of Security Bank, held
that Article 2079 of the Civil Code, which
pertinently provides that "[a]n extension granted
to the debtor by the creditor without the consent
of the guarantor extinguishes the guaranty,"
equally applies to both contracts of guaranty
and suretyship. The rationale therefor was
explained by the Court as follows:
chanRoblesvirtualLawlibrary
The theory behind Article 2079 is that an
extension of time given to the principal debtor by
the creditor without the surety's consent would
deprive the surety of his right to pay the creditor
and to be immediately subrogated to the
creditor's remedies against the principal debtor
upon the maturity date. The surety is said to be
entitled to protect himself against the
contingency of the principal debtor or the
indemnitors becoming insolvent during the
extended period. x x x.
chanroblesvirtuallawlibrary
Applying these principles, the Court finds that
the payment extensions granted by Banque
Indosuez and PCI Capital to TIDCORP under
the Restructuring Agreement did not have the
effect of extinguishing the bonding companies'
obligations to TIDCORP under the Surety
Bonds, notwithstanding the fact that said
extensions were made without their consent.
This is because Article 2079 of the Civil Code
refers to a payment extension granted by the
creditor to the principal debtor without the
consent of the guarantor or surety. In this case,
the Surety Bonds are suretyship contracts which
secure the debt of ASP AC, the principal debtor,
under the Deeds of Undertaking to pay
TIDCORP, the creditor, the damages and
liabilities it may incur under the Letters of
Guarantee, within the bounds of the bonds'
respective coverage periods and amounts. No
payment extension was, however, granted by
TIDCORP in favor of ASPAC in this regard;
hence. Article 2079 of the Civil Code should not
be applied with respect to the bonding
companies' liabilities to TIDCORP under the
Surety Bonds.
The payment extensions granted by Banque
Indosuez and PCI Capital pertain to TIDCORP's
own debt under the Letters of Guarantee
wherein it (TIDCORP) irrevocably and
unconditionally guaranteed full payment of
ASPAC s loan obligations to the banks in the
event of its (ASPAC) default. In other words, the
Letters of Guarantee secured ASPACs loan
agreements to the banks. Under this
arrangement, TIDCORP therefore acted as a
guarantor, with ASPAC as the principal debtor,
and the banks as creditors.
Proceeding from the foregoing discussion, it is
quite clear that there are two sets of transactions
that should be treated separately and distinctly
from one another following the civil law principle
of relativity of contracts "which provides that
contracts can only bind the parties who entered
into it, and it cannot favor or prejudice a third
person, even if he is aware of such contract and
has acted with knowledge thereof." Verily, as
the Surety Bonds concern ASPAC's debt to
TIDCORP and not TIDCORP's debt to the
banks, the payments extensions (which
conversely concern TIDCORP's debt to the
banks and not ASPAC's debt to TIDCORP)
would not deprive the bonding companies of
their right to pay their creditor (TIDCORP) and
to be immediately subrogated to the latter's
remedies against the principal debtor (ASPAC)
upon the maturity date. It must be stressed that
these payment extensions did not modify the
terms of the Letters of Guarantee but only
provided for a new payment scheme covering
TIDCORP's liability to the banks. In fine,
considering the inoperability of Article 2079 of
the Civil Code in this case, the bonding
companies' liabilities to TIDCORP under the
Surety Bonds - except those issued by
Paramount and covered by its Compromise
Agreement with TIDCORP - have not been
extinguished. Since these obligations arose and
have been duly demanded within the coverage
periods of all the Surety Bonds, TIDCORP's
claim is hereby granted. x x x. (Emphases
supplied, citations omitted.)
chanroblesvirtuallawlibrary
Similarly, there are two sets of transactions in
the present case covered by two different
contracts: the Consortium Agreement between
Kawasaki and FFMCCI and the Construction
Contract between the Republic and the
Kawasaki-FFMCCI Consortium. The Surety and
Performance Bonds guaranteed the
performance of the obligations of FFMCCI to
Kawasaki under the Consortium Agreement.
The Republic was not a party in either the Surety
and Performance Bonds or the Consortium
Agreement. Under these circumstances, there
was no creditor-debtor relationship between the
Republic and FFMCCI and Article 2079 of the
Civil Code did not apply. The extension granted
by the Republic to Kawasaki modified the
deadline for the completion of the Project under
the Construction Contract, but had no effect on
the obligations of FFMCCI to Kawasaki under
the Consortium Agreement, much less, on the
liabilities of CCCIC under the Surety and
Performance Bonds.
CCCIC failed to discharge the burden of proving
the novation of the Consortium Agreement
which would have extinguished its obligations
under the Surety and Performance Bonds.
CCCIC argues that it was released from its
obligations as surety under the Surety and
Performance Bonds because of the novation of
the Consortium Agreement by the subsequent
Agreement dated August 24, 1989 executed
between Kawasaki and FFMCCI, without the
consent of CCCIC.
The Court first notes that the default of FFMCCI
preceded the execution of the Agreement on
August 24, 1989 which purportedly novated the
Consortium Agreement and, in effect,
extinguished the Surety and Performance
Bonds. As early as his letter dated July 20,
1989, Mañacop, FFMCCI President, already
admitted the inability of FFMCCI to continue with
its portion of work in the Project and authorized
Kawasaki to continue the same. It was precisely
because FFMCCI defaulted on its obligations
under the Consortium Agreement that
necessitated the execution of the Agreement
dated August 24, 1989 between Kawasaki and
FFMCCI, and this is evident from one of the
"whereas" clauses in the said Agreement which
says that "due to some financial reverses[,
FFMCCI] can no longer do its portion of the work
under the Contract." The liabilities of CCCIC as
surety to Kawasaki under the Surety and
Performance Bonds had already attached upon
the default of FFMCCI while the said bonds
were still in effect and prior to the alleged
novation of the Consortium Agreement by the
Agreement dated August 24, 1989 which
resulted in the extinguishment of the bonds.

The Court expounded on the concept of
novation in Reyes v. BPI Family Savings Bank,
Inc.36:
chanRoblesvirtualLawlibrary
Novation is defined as the extinguishment of an
obligation by the substitution or change of the
obligation by a subsequent one which
terminates the first, either by changing the
object or principal conditions, or by substituting
the person of the debtor, or subrogating a third
person in the rights of the creditor.
Article 1292 of the Civil Code on novation further
provides:
chanRoblesvirtualLawlibrary
Article 1292. In order that an obligation may be
extinguished by another which substitute the
same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new
obligations be on every point incompatible with
each other.
chanroblesvirtuallawlibrary
The cancellation of the old obligation by the new
one is a necessary element of novation which
may be effected either expressly or impliedly.
While there is really no hard and fast rule to
determine what might constitute sufficient
change resulting in novation, the touchstone,
however, is irreconcilable incompatibility
between the old and the new obligations.
In Garcia, Jr. v. Court of Appeals, we held that:
chanRoblesvirtualLawlibrary
In every novation there are four essential
requisites: (1) a previous valid obligation; (2) the
agreement of all the parties to the new contract;
(3) the extinguishment of the old contract; and
(4) validity of the new one. There must be
consent of all the parties to the substitution,
resulting in the extinction of the old obligation
and the creation of a valid new one. x x x.
(Citations omitted.)
chanroblesvirtuallawlibrary
It is well-settled that novation is never presumed
- novatio non praesumitur. As the party alleging
novation, the onus of showing clearly and
unequivocally that novation had indeed taken
place rests on CCCIC.37 The Court laid down
guidelines in establishing novation, viz.:
chanRoblesvirtualLawlibrary
Novation is never presumed, and the animus
novandi, whether totally or partially, must
appear by express agreement of the parties, or
by their acts that are too clear and unequivocal
to be mistaken.
The extinguishment of the old obligation by the
new one is a necessary element of novation
which may be effected either expressly or
impliedly. The term "expressly" means that the
contracting parties incontrovertibly disclose that
their object in executing the new contract is to
extinguish the old one. Upon the other hand, no
specific form is required for an implied novation,
and all that is prescribed by law would be an
incompatibility between the two contracts. While
there is really no hard and fast rule to determine
what might constitute to be a sufficient change
that can bring about novation, the touchstone for
contrariety, however, would be an irreconcilable
incompatibility between the old and the new
obligations.
There are two ways which could indicate, in fine,
the presence of novation and thereby produce
the effect of extinguishing an obligation by
another which substitutes the same. The first is
when novation has been explicitly stated and
declared in unequivocal terms. The second is
when the old and the new obligations are
incompatible on every point. The test of
incompatibility is whether or not the two
obligations can stand together, each one having
its independent existence. If they cannot, they
are incompatible and the latter obligation
novates the first. Corollarily, changes that breed
incompatibility must be essential in nature and
not merely accidental. The incompatibility must
take place in any of the essential elements of the
obligation, such as its object, cause or principal
conditions thereof; otherwise, the change would
be merely modificatory in nature and insufficient
to extinguish the original obligation.38 (Citations
omitted.)
chanroblesvirtuallawlibrary
CCCIC failed to discharge the burden of proving
novation of the Consortium Agreement by the
Agreement dated August 24, 1989. The Court
failed to see the presence of the essential
requisites for a novation of contract, specifically,
the irreconcilable incompatibility between the
old and new contracts. Indeed, Kawasaki and
FFMCCI executed the Agreement dated August
24, 1989 pursuant to Article 8.3 of the
Consortium Agreement:
chanRoblesvirtualLawlibrary
8.3
If, for any reason, any PARTY should fail in the
performance of its PORTION OF WORK or
contractual obligations and if such defaulting
PARTY refuses to cure or makes no remedial
action, without presenting any valid cause,
within fifteen (15) days following demand of
rectification by registered letter sent by the other
PARTY, the defaulting PARTY'S PORTION OF
WORK may be performed at the account and
responsibility of the defaulting PARTY, by the
non-defaulting PARTY or by any other
contractor selected by the non-defaulting
PARTY and approved by the EMPLOYER. In
such event, the defaulting PARTY or its
representative shall, in no way, interfere with the
performance of the CONTRACT or impede the
progress thereof, on any ground, and shall allow
such performing PARTY or the said contractor
to use the materials and equipment of such
defaulting PARTY, for the purpose of remedial
action.
FFMCCI was unable to finish its portion of work
in the Project because of business reverses,
and by the Agreement dated August 24, 1989,
Kawasaki assumed the Transferred Portion of
Work from FFMCCI and was accorded the right
to receive the profits and benefits corresponding
to said portion. Although the Agreement dated
August 24, 1989 resulted in the reallocation of
the respective portions of work of Kawasaki and
FFMCCI, as well as their corresponding shares
in the profits and benefits under the Consortium
Agreement, such changes were not
incompatible with the object, cause, and
principal conditions of the Consortium
Agreement. Consequently, the changes under
the Agreement dated August 24, 1989 were only
modificatory and did not extinguish the original
obligations under the Consortium Agreement.
Even granting that there is novation, the Court
in Stronghold Insurance Company, Incorporated
v. Tokyu Construction Company, Ltd.,39 held
that to release the surety, the material change in
the principal contract must make the obligation
of the surety more onerous. The Court
ratiocinated in Stronghold as follows:
chanRoblesvirtualLawlibrary
Petitioner's liability was not affected by the
revision of the contract price, scope of work, and
contract schedule. Neither was it extinguished
because of the issuance of new bonds procured
from Tico.
As early as February 10, 1997, respondent
already sent a letter to Gabriel informing the
latter of the delay incurred in the performance of
the work, and of the former's intention to
terminate the subcontract agreement to prevent
further losses. Apparently, Gabriel had already
been in default even prior to the aforesaid letter;
and demands had been previously made but to
no avail. By reason of said default, Gabriel's
liability had arisen; as a consequence, so also
did the liability of petitioner as a surety arise.
xxxx
By the language of the bonds issued by
petitioner, it guaranteed the full and faithful
compliance by Gabriel of its obligations in the
construction of the SDS and STP specifically set
forth in the subcontract agreement, and the
repayment of the 15% advance payment given
by respondent. These guarantees made by
petitioner gave respondent the right to proceed
against the former following Gabriel's non-
compliance with her obligation.
Confusion, however, transpired when Gabriel
and respondent agreed, on February 26, 1997,
to reduce the scope of work and, consequently,
the contract price. Petitioner viewed such
revision as novation of the original subcontract
agreement; and since no notice was given to it
as a surety, it resulted in the extinguishment of
its obligation.
We wish to stress herein the nature of
suretyship, which actually involves two types of
relationship — the underlying principal
relationship between the creditor (respondent)
and the debtor (Gabriel), and the accessory
surety relationship between the principal
(Gabriel) and the surety (petitioner). The
creditor accepts the surety's solidary
undertaking to pay if the debtor does not pay.
Such acceptance, however, does not change in
any material way the creditor's relationship with
the principal debtor nor does it make the surety
an active party to the principal creditor-debtor
relationship. In other words, the acceptance
does not give the surety the right to intervene in
the principal contract. The surety's role arises
only upon the debtor's default, at which time, it
can be directly held liable by the creditor for
payment as a solidary obligor.
The surety is considered in law as possessed of
the identity of the debtor in relation to whatever
is adjudged touching upon the obligation of the
latter. Their liabilities are so interwoven as to be
inseparable. Although the contract of a surety is,
in essence, secondary only to a valid principal
obligation, the surety's liability to the creditor is
direct, primary, and absolute; he becomes liable
for the debt and duty of another although he
possesses no direct or personal interest over
the obligations nor does he receive any benefit
therefrom.
Indeed, a surety is released from its obligation
when there is a material alteration of the
principal contract in connection with which the
bond is given, such as a change which imposes
a new obligation on the promising party, or
which takes away some obligation already
imposed, or one which changes the legal effect
of the original contract and not merely its form.
However, a surety is not released by a change
in the contract, which does not have the effect
of making its obligation more onerous.
In the instant case, the revision of the
subcontract agreement did not in any way make
the obligations of both the principal and the
surety more onerous. To be sure, petitioner
never assumed added obligations, nor were
there any additional obligations imposed, due to
the modification of the terms of the contract.
Failure to receive any notice of such change did
not, therefore, exonerate petitioner from its
liabilities as surety. (Emphasis supplied,
citations omitted.)
chanroblesvirtuallawlibrary
There is no showing herein that the obligations
of CCCIC as surety had become more onerous
with the execution of the Agreement dated
August 24, 1989 between Kawasaki and
FFMCCI. The Agreement dated August 24,
1989 did not alter in any way the original
coverage and the terms and conditions of the
Surety and Performance Bonds of CCCIC. If
truth be told, the Agreement dated August 24,
1989 made it more onerous for Kawasaki which
had to take over the Transferred Portion of Work
from FFMCCI.
That Kawasaki was to receive the profits and
benefits corresponding to the Transferred
Portion of Work would not extinguish the
liabilities of CCCIC under the Surety and
Performance Bonds. The right of Kawasaki to
the profits and benefits corresponding to the
Transferred Portion of Work was granted under
the Agreement dated August 24, 1989 because
Kawasaki was the one that would actually
perform the remaining portion of work and
complete the Project and should be duly
compensated for the same. It is separate and
distinct from the right of Kawasaki to demand
payment of the amounts guaranteed by CCCIC
as surety upon the default of FFMCCI on its
undertakings under the Surety and Performance
Bonds. CCCIC cannot standby passively and be
benefitted by payments made by the Republic,
as owner of the Project, to Kawasaki, as
contractor, for the Transferred Portion of Work.
The only way CCCIC can extinguish its liabilities
as surety, which already attached upon the
default of FFMCCI, is to make its own payments
to Kawasaki of the amounts guaranteed under
the Surety and Performance Bonds.
Equally without merit is the averment of CCCIC
that by executing the Agreement dated August
24, 1989, which gave Kawasaki the right to the
profits and benefits corresponding to the
Transferred Portion of Work, Kawasaki and
FFMCCI colluded or connived to deprive CCCIC
of its source of indemnification. Other than its
allegation, CCCIC failed to present any
evidence of collusion or connivance between
Kawasaki and FFMCCI to intentionally prejudice
CCCIC. The Court reiterates that the execution
of the Agreement dated August 24, 1989 was
actually authorized under Article 8.3 of the
Consortium Agreement. Kawasaki was given
the right to the profits and benefits
corresponding to the Transferred Portion of
Work because it would be the one to perform the
same. It would be the height of inequity to allow
FFMCCI to continue collecting payments for
work it was not able to do. Besides, there is utter
lack of basis for the claim of CCCIC that without
the compensation for the Transferred Portion of
Work, FFMCCI would have no means to
indemnify CCCIC for any payments the latter
would have to make to Kawasaki under the
Surety and Performance Bonds. As the
succeeding discussion will show, it is premature
for CCCIC to question the capacity of FFMCCI
to indemnify it.
CCCIC must first pay its liabilities to Kawasaki
under the Surety and Performance Bonds
before it could be indemnified and subrogated to
the rights of Kawasaki against FFMCCI.
The rights of a guarantor who pays for the debt
of the debtor are governed by the following
provisions of the Civil Code:
chanRoblesvirtualLawlibrary
Art. 2066. The guarantor who pays for a debtor
must be indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the
payment was made known to the debtor, even
though it did not earn interest for the creditor;
(3) The expenses incurred by the guarantor
after having notified the debtor that payment
had been demanded of him;
(4) Damages, if they are due.
Art. 2067. The guarantor who pays is
subrogated by virtue thereof to all the rights
which the creditor had against the debtor.
If the guarantor has compromised with the
creditor, he cannot demand of the debtor more
than what he has really paid.
chanroblesvirtuallawlibrary
Although the foregoing provisions only speak of
a guarantor, they also apply to a surety, as the
Court held in Escaño v. Ortigas, Jr.40:
chanRoblesvirtualLawlibrary
What is the source of this right to full
reimbursement by the surety? We find the right
under Article 2066 of the Civil Code, which
assures that "[t]he guarantor who pays for a
debtor must be indemnified by the latter," such
indemnity comprising of, among others, "the
total amount of the debt." Further, Article 2067
of the Civil Code likewise establishes that "[t]he
guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had
against the debtor."
Articles 2066 and 2067 explicitly pertain to
guarantors, and one might argue that the
provisions should not extend to sureties,
especially in light of the qualifier in Article 2047
that the provisions on joint and several
obligations should apply to sureties. We reject
that argument, and instead adopt Dr. Tolentino's
observation that "[t]he reference in the second
paragraph of [Article 2047] to the provisions of
Section 4, Chapter 3, Title I, Book IV, on solidary
or several obligations, however, does not mean
that suretyship is withdrawn from the applicable
provisions governing guaranty." For if that were
not the implication, there would be no material
difference between the surety as defined under
Article 2047 and the joint and several debtors,
for both classes of obligors would be governed
by exactly the same rules and limitations.
Accordingly, the rights to indemnification and
subrogation as established and granted to the
guarantor by Articles 2066 and 2067 extend as
well to sureties as defined under Article 2047. x
x x. (Citations omitted.)
chanroblesvirtuallawlibrary
Pursuant to Articles 2066 and 2067, the rights of
CCCIC as surety to indemnification and
subrogation will arise only after it has paid its
obligations to Kawasaki as the debtor-obligee.
In Autocorp Group v. Intra Strata Assurance
Corporation,41 the Court ruled that:
chanRoblesvirtualLawlibrary
The benefit of subrogation, an extinctive
subjective novation by a change of creditor,
which "transfers to the person subrogated, the
credit and all the rights thereto appertaining,
either against the debtor or against third
persons," is granted by the Article 2067 of the
Civil Code only to the "guarantor (or surety) who
pays." (Emphases supplied, citations omitted.)
chanroblesvirtuallawlibrary
In the present case, CCCIC has yet to pay
Kawasaki.
While summons was validly served upon
FFMCCI, the Third-Party Complaint of CCCIC
against FFMCCI is dismissed on the ground of
lack of cause of action.
The Court disagrees with the ruling of the Court
of Appeals that there was no proper service of
summons upon FFMCCI. The appellate court
overlooked the fact that the service of summons
on FFMCCI at its principal address at #86 West
Avenue, Quezon City failed because FFMCCI
had already vacated said premises without
notifying anyone as to where it transferred. For
this reason, the RTC, upon the motion of
CCCIC, issued an Order42 dated September 4,
1991, directing the issuance and service of Alias
Summons to the individual directors of FFMCCI.
Eventually, the Alias Summons was personally
served upon FFMCCI director Vicente
Concepcion on September 25,
1991.43ChanRoblesVirtualawlibrary
Rule 14, Section 13 of the 1964 Rules of Court,
which was then in force, allowed the service of
summons upon a director of a private domestic
corporation:
chanRoblesvirtualLawlibrary
Sec. 13. Service upon private domestic
corporation or partnership. - If the defendant is
a corporation organized under the laws of the
Philippines or a partnership duly registered,
service may be made on the president,
manager, secretary, cashier, agent, or any of its
directors.
chanroblesvirtuallawlibrary
The aforementioned rule does not require that
service on the private domestic corporation be
served at its principal office in order for the court
to acquire jurisdiction over the same. The Court,
in Talsan Enterprises, Inc. vs. Baliwag Transit,
Inc.,44 citing Baltazar v. Court ofAppeals,45
affirmed that:
chanRoblesvirtualLawlibrary
[S]ervice on respondent's bus terminal at the
address stated in the summons and not in its
main office in Baliwag do not render the service
of summons invalid. In Artemio Baltazar v. Court
of Appeals, we held:
chanRoblesvirtualLawlibrary
"The regular mode, in other words, of serving
summons upon a private Philippine Corporation
is by personal service upon one of the officers
of such corporation identified in Section 13.
Ordinarily, such personal service may be
expected to be made at the principal office of the
corporation. Section 13, does not, however,
impose such requirement, and so personal
service upon the corporation may be effected
through service upon, for instance, the president
of the corporation at his office or residential
address." x x x.
chanroblesvirtuallawlibrary
In fine, the service of summons upon
respondent Baliwag Transit is proper.
Consequently, the trial court validly acquired
jurisdiction over respondent Baliwag. (Citation
omitted.)
chanroblesvirtuallawlibrary
Hence, the personal service of the Alias
Summons on an FFMCCI director was sufficient
for the RTC to acquire jurisdiction over FFMCCI
itself.
Nevertheless, the Third-Party Complaint filed by
CCCIC against FFMCCI and Mañacop must be
dismissed on the ground of lack of cause of
action.
A cause of action is defined as the act or
omission by which a party violates a right of
another. The essential elements of a cause of
action are: (a) the existence of a legal right in
favor of the plaintiff; (b) a correlative legal duty
of the defendant to respect such right; and (c)
an act or omission by such defendant in violation
of the right of the plaintiff with a resulting injury
or damage to the plaintiff for which the latter may
maintain an action for the recovery of relief from
the defendant.46ChanRoblesVirtualawlibrary
As discussed earlier, the rights to
indemnification and subrogation of a surety only
arise upon its payment of the obligation to the
obligee. In the case at bar, since CCCIC up to
this point refuses to acknowledge and pay its
obligation to Kawasaki under the Surety and
Performance Bonds, it has not yet acquired the
rights to seek indemnification from FFMCCI and
subrogation to Kawasaki as against FFMCCI. In
the same vein, the corresponding obligation of
FFMCCI to indemnify CCCIC under the
Indemnity Agreements has yet to accrue. Thus
far, there is no act or omission on the part of
FFMCCI which violated the right of CCCIC and
for which CCCIC may seek relief from the
courts. In the absence of these elements,
CCCIC has no cause of action against FFMCCI
and/or FFMCCI President Mañacop.
Resultantly, the Third-Party Complaint of
CCCIC should be dismissed.
There is no basis for awarding attorney's fees in
favor of Kawasaki. In addition, the rate of legal
interest imposed shall conform with latest
jurisprudence.
Article 2208(2) of the Civil Code allows the
award of attorney's fees "[w]hen the defendant's
act or omission has compelled the plaintiff to
litigate with third persons or to incur expenses to
protect his interest[.]" In Servicewide
Specialists, Incorporated v. Court of Appeals,47
the Court declared that:
chanRoblesvirtualLawlibrary
Article 2208 of the Civil Code allows attorney's
fees to be awarded by a court when its claimant
is compelled to litigate with third persons or to
incur expenses to protect his interest by reason
of an unjustified act or omission on the part of
the party from whom it is sought. To be sure,
private respondents were forced to litigate to
protect their rights but as we have previously
held: "where no sufficient showing of bad faith
would be reflected in a party's persistence in a
case other than an erroneous conviction of the
righteousness of his cause, attorney's fee shall
not be recovered as cost." (Citation omitted.)
chanroblesvirtuallawlibrary
Bad faith has been defined as "a breach of a
known duty through some motive of interest or
ill will. It must, however, be substantiated by
evidence. Bad faith under the law cannot be
presumed, it must be established by clear and
convincing evidence."48 There is no evidence in
this case to show bad faith on the part of CCCIC.
CCCIC, in refusing the claim of Kawasaki, was
merely acting based on its belief in the
righteousness of its defense. Hence, even
though Kawasaki was compelled to litigate to
enforce its claim against CCCIC, the award of
attorney's fees is not proper.
Finally, the Court, in Nacar v. Gallery Frames,49
modified the guidelines in imposing interests,
taking into account Bangko Sentral ng Pilipinas-
Monetary Board Resolution No. 796 dated May
16, 2013 and Circular No. 799, series of 2013,
which fixed the legal rate at 6% per annum
effective July 1, 2013. In the absence of
stipulated interest in the present case, the Court
imposes upon the amounts covered by the
Surety and Performance Bonds the legal rate of
12% per annum from September 15, 1989, the
date of demand, until June 30, 2013; and then
the legal rate of 6% per annum from July 1, 2013
until full payment of the same.
WHEREFORE, premises considered, the
instant Petition for Review on Certiorari is
PARTLY GRANTED. The Decision dated May
30, 2002 and Resolution dated November 14,
2002 of the Court of Appeals are AFFIRMED
with the following MODIFICATIONS:
1) The Third-Party Complaint filed by CCC
Insurance Corporation against F.F. Mañacop
Construction Company, Inc. and Mr. Florante F.
Mañacop is DISMISSED on the ground of lack
of cause of action;
2) The award of attorney's fees in favor of
Kawasaki Steel Corporation is DELETED; and
3) In addition to the amounts CCC Insurance
Corporation is ordered to pay Kawasaki Steel
Corporation under Surety Bond No. B- 88/11191
and Performance Bond No. B-88/11193, CCC
Insurance Corporation is further ORDERED to
pay Kawasaki Steel Corporation legal interest
on said amounts at the rates of 12% per annum
from September 15, 1989 to June 30, 2013 and
6% per annum from July 1, 2013 until full
payment thereof.
SO ORDERED.
6. Gilat Sattelite v. United
Cocounut Planters
This is an appeal via a Petition for Review on
Certiorari1 filed 6 November 2009 assailing the
Decision2 and Resolution3 of the Court of
Appeals (CA) in CA-G.R. CV No. 89263, which
reversed the Decision4 of the Regional Trial
Court (RTC), Branch 141, Makati City in Civil
Case No. 02-461, ordering respondent to pay
petitioner a sum of money.
The antecedent facts, as culled from the CA, are
as follows:
On September 15, 1999, One Virtual placed
with GILAT a purchase order for various
telecommunications equipment (sic),
accessories, spares, services and software, at a
total purchase price of Two Million One Hundred
Twenty Eight Thousand Two Hundred Fifty
Dollars (US$2,128,250.00). Of the said
purchase price for the goods delivered, One
Virtual promised to pay a portion thereof
totalling US$1.2 Million in accordance with the
payment schedule dated 22 November 1999. To
ensure the prompt payment of this amount, it
obtained defendant UCPB General Insurance
Co., Inc.’s surety bond dated 3 December 1999,
in favor of GILAT.
During the period between [sic] September
1999 and June 2000, GILAT shipped and
delivered to One Virtual the purchased products
and equipment, as evidenced by airway bills/Bill
of Lading (Exhibits "F", "F-1" to "F-8"). All of the
equipment (including the software components
for which payment was secured by the surety
bond, was shipped by GILAT and duly received
by One Virtual. Under an endorsement dated
December 23, 1999 (Exhibit "E"), the surety
issued, with One Virtual’s conformity, an
amendment to the surety bond, Annex "A"
thereof, correcting its expiry date from May 30,
2001 to July 30, 2001.
One Virtual failed to pay GILAT the amount of
Four Hundred Thousand Dollars
(US$400,000.00) on the due date of May 30,
2000 in accordance with the payment schedule
attached as Annex "A" to the surety bond,
prompting GILAT to write the surety defendant
UCPB on June 5, 2000, a demand letter (Exhibit
"G") for payment of the said amount of
US$400,000.00. No part of the amount set forth
in this demand has been paid to date by either
One Virtual or defendant UCPB. One Virtual
likewise failed to pay on the succeeding
payment instalment date of 30 November 2000
as set out in Annex "A" of the surety bond,
prompting GILAT to send a second demand
letter dated January 24, 2001, for the payment
of the full amount of US$1,200,000.00
guaranteed under the surety bond, plus
interests and expenses (Exhibits "H") and which
letter was received by the defendant surety on
January 25, 2001. However, defendant UCPB
failed to settle the amount of US$1,200,000.00
or a part thereof, hence, the instant complaint."5
(Emphases in the original)
On 24 April 2002, petitioner Gilat Satellite
Networks, Ltd., filed a Complaint6 against
respondent UCPB General Insurance Co., Inc.,
to recover the amounts supposedly covered by
the surety bond, plus interests and expenses.
After due hearing, the RTC rendered its
Decision,7 the dispositive portion of which is
herein quoted:
WHEREFORE, premises considered, the Court
hereby renders judgment for the plaintiff, and
against the defendant, ordering, to wit:
1. The defendant surety to pay the plaintiff the
amount of One Million Two Hundred Thousand
Dollars (US$1,200,000.00) representing the
principal debt under the Surety Bond, with legal
interest thereon at the rate of 12% per annum
computed from the time the judgment becomes
final and executory until the obligation is fully
settled; and
2. The defendant surety to pay the plaintiff the
amount of Forty Four Thousand Four Dollars
and Four Cents (US$44,004.04) representing
attorney’s fees and litigation expenses.
Accordingly, defendant’s counterclaim is hereby
dismissed for want of merit.
SO ORDERED. (Emphasis in the original)
In so ruling, the RTC reasoned that there is "no
dispute that plaintiff [petitioner] delivered all the
subject equipments [sic] and the same was
installed. Even with the delivery and installation
made, One Virtual failed to pay any of the
payments agreed upon. Demand
notwithstanding, defendant failed and refused
and continued to fail and refused to settle the
obligation."8
Considering that its liability was indeed that of a
surety, as "spelled out in the Surety Bond
executed by and between One Virtual as
Principal, UCPB as Surety and GILAT as
Creditor/Bond Obligee,"9 respondent agreed
and bound itself to pay in accordance with the
Payment Milestones. This obligation was not
made dependent on any condition outside the
terms and conditions of the Surety Bond and
Payment Milestones.10
Insofar as the interests were concerned, the
RTC denied petitioner’s claim on the premise
that while a surety can be held liable for interest
even if it becomes more onerous than the
principal obligation, the surety shall only accrue
when the delay or refusal to pay the principal
obligation is without any justifiable cause.11
Here, respondent failed to pay its surety
obligation because of the advice of its principal
(One Virtual) not to pay.12 The RTC then
obligated respondent to pay petitioner the
amount of USD1,200,000.00 representing the
principal debt under the Surety Bond, with legal
interest at the rate of 12% per annum computed
from the time the judgment becomes final and
executory, and USD44,004.04 representing
attorney’s fees and litigation expenses.
On 18 October 2007, respondent appealed to
the CA.13 The appellate court rendered a
Decision14 in the following manner:
WHEREFORE, this appealed case is
DISMISSED for lack of jurisdiction. The trial
court’s Decision dated December 28, 2006 is
VACATED. Plaintiff-appellant Gilat Satellite
Networks Ltd., and One Virtual are ordered to
proceed to arbitration, the outcome of which
shall necessary bind the parties, including the
surety, defendant-appellant United Coconut
Planters Bank General Insurance Co., Inc.
SO ORDERED. (Emphasis in the original)
The CA ruled that in "enforcing a surety
contract, the ‘complementary-contracts-
construed-together’ doctrine finds application."
According to this doctrine, the accessory
contract must be construed with the principal
agreement.15 In this case, the appellate court
considered the Purchase Agreement entered
into between petitioner and One Virtual as the
principal contract,16 whose stipulations are also
binding on the parties to the suretyship.17
Bearing in mind the arbitration clause contained
in the Purchase Agreement18 and pursuant to
the policy of the courts to encourage alternative
dispute resolution methods,19 the trial court’s
Decision was vacated; petitioner and One
Virtual were ordered to proceed to arbitration.
On 9 September 2008, petitioner filed a Motion
for Reconsideration with Motion for Oral
Argument. The motion was denied for lack of
merit in a Resolution20 issued by the CA on 16
September 2009.
Hence, the instant Petition.
On 31 August 2010, respondent filed a
Comment21 on the Petition for Review. On 24
November 2010, petitioner filed a Reply.22
ISSUES
From the foregoing, we reduce the issues to the
following:
1. Whether or not the CA erred in dismissing the
case and ordering petitioner and One Virtual to
arbitrate; and
2. Whether or not petitioner is entitled to legal
interest due to the delay in the fulfilment by
respondent of its obligation under the
Suretyship Agreement.
THE COURT’S RULING
The existence of a suretyship agreement does
not give the surety the right to intervene in the
principal contract, nor can an arbitration clause
between the buyer and the seller be invoked by
a non-party such as the surety.
Petitioner alleges that arbitration laws mandate
that no court can compel arbitration, unless a
party entitled to it applies for this relief.23 This
referral, however, can only be demanded by one
who is a party to the arbitration agreement.24
Considering that neither petitioner nor One
Virtual has asked for a referral, there is no basis
for the CA’s order to arbitrate.
Moreover, Articles 1216 and 2047 of the Civil
Code25 clearly provide that the creditor may
proceed against the surety without having first
sued the principal debtor.26 Even the Surety
Agreement itself states that respondent
becomes liable upon "mere failure of the
Principal to make such prompt payment."27
Thus, petitioner should not be ordered to make
a separate claim against One Virtual (via
arbitration) before proceeding against
respondent.28
On the other hand, respondent maintains that a
surety contract is merely an accessory contract,
which cannot exist without a valid obligation.29
Thus, the surety may avail itself of all the
defenses available to the principal debtor and
inherent in the debt30 – that is, the right to
invoke the arbitration clause in the Purchase
Agreement.
We agree with petitioner.
In suretyship, the oft-repeated rule is that a
surety’s liability is joint and solidary with that of
the principal debtor. This undertaking makes a
surety agreement an ancillary contract, as it
presupposes the existence of a principal
contract.31 Nevertheless, although the contract
of a surety is in essence secondary only to a
valid principal obligation, its liability to the
creditor or "promise" of the principal is said to be
direct, primary and absolute; in other words, a
surety is directly and equally bound with the
principal.32 He becomes liable for the debt and
duty of the principal obligor, even without
possessing a direct or personal interest in the
obligations constituted by the latter.33 Thus, a
surety is not entitled to a separate notice of
default or to the benefit of excussion.34 It may
in fact be sued separately or together with the
principal debtor.35
After a thorough examination of the pieces of
evidence presented by both parties,36 the RTC
found that petitioner had delivered all the goods
to One Virtual and installed them. Despite these
compliances, One Virtual still failed to pay its
obligation,37 triggering respondent’s liability to
petitioner as the former’s surety.1âwphi1 In
other words, the failure of One Virtual, as the
principal debtor, to fulfill its monetary obligation
to petitioner gave the latter an immediate right
to pursue respondent as the surety.
Consequently, we cannot sustain respondent’s
claim that the Purchase Agreement, being the
principal contract to which the Suretyship
Agreement is accessory, must take precedence
over arbitration as the preferred mode of settling
disputes.
First, we have held in Stronghold Insurance Co.
Inc. v. Tokyu Construction Co. Ltd.,38 that "[the]
acceptance [of a surety agreement], however,
does not change in any material way the
creditor’s relationship with the principal debtor
nor does it make the surety an active party to
the principal creditor-debtor relationship. In
other words, the acceptance does not give the
surety the right to intervene in the principal
contract. The surety’s role arises only upon the
debtor’s default, at which time, it can be directly
held liable by the creditor for payment as a
solidary obligor." Hence, the surety remains a
stranger to the Purchase Agreement. We agree
with petitioner that respondent cannot invoke in
its favor the arbitration clause in the Purchase
Agreement, because it is not a party to that
contract.39 An arbitration agreement being
contractual in nature,40 it is binding only on the
parties thereto, as well as their assigns and
heirs.41
Second, Section 24 of Republic Act No. 928542
is clear in stating that a referral to arbitration
may only take place "if at least one party so
requests not later than the pre-trial conference,
or upon the request of both parties thereafter."
Respondent has not presented even an iota of
evidence to show that either petitioner or One
Virtual submitted its contesting claim for
arbitration.
Third, sureties do not insure the solvency of the
debtor, but rather the debt itself.43 They are
contracted precisely to mitigate risks of non-
performance on the part of the obligor. This
responsibility necessarily places a surety on the
same level as that of the principal debtor.44 The
effect is that the creditor is given the right to
directly proceed against either principal debtor
or surety. This is the reason why excussion
cannot be invoked.45 To require the creditor to
proceed to arbitration would render the very
essence of suretyship nugatory and diminish its
value in commerce. At any rate, as we have held
in Palmares v. Court of Appeals,46 "if the surety
is dissatisfied with the degree of activity
displayed by the creditor in the pursuit of his
principal, he may pay the debt himself and
become subrogated to all the rights and
remedies of the creditor."
Interest, as a form of indemnity, may be
awarded to a creditor for the delay incurred by a
debtor in the payment of the latter’s obligation,
provided that the delay is inexcusable.
Anent the issue of interests, petitioner alleges
that it deserves to be paid legal interest of 12%
per annum from the time of its first demand on
respondent on 5 June 2000 or at most, from the
second demand on 24 January 2001 because of
the latter’s delay in discharging its monetary
obligation.47 Citing Article 1169 of the Civil
Code, petitioner insists that the delay started to
run from the time it demanded the fulfilment of
respondent’s obligation under the suretyship
contract. Significantly, respondent does not
contest this point, but instead argues that it is
only liable for legal interest of 6% per annum
from the date of petitioner’s last demand on 24
January 2001.
In rejecting petitioner’s position, the RTC stated
that interests may only accrue when the delay
or the refusal of a party to pay is without any
justifiable cause.48 In this case, respondent’s
failure to heed the demand was due to the
advice of One Virtual that petitioner allegedly
breached its undertakings as stated in the
Purchase Agreement.49 The CA, however,
made no pronouncement on this matter.
We sustain petitioner.
Article 2209 of the Civil Code is clear: "[i]f an
obligation consists in the payment of a sum of
money, and the debtor incurs a delay, the
indemnity for damages, there being no
stipulation to the contrary, shall be the payment
of the interest agreed upon, and in the absence
of stipulation, the legal interest."
Delay arises from the time the obligee judicially
or extrajudicially demands from the obligor the
performance of the obligation, and the latter fails
to comply.50 Delay, as used in Article 1169, is
synonymous with default or mora, which means
delay in the fulfilment of obligations.51 It is the
nonfulfillment of an obligation with respect to
time.52 In order for the debtor (in this case, the
surety) to be in default, it is necessary that the
following requisites be present: (1) that the
obligation be demandable and already
liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires
the performance judicially or extrajudicially.53
Having held that a surety upon demand fails to
pay, it can be held liable for interest, even if in
thus paying, its liability becomes more than the
principal obligation.54 The increased liability is
not because of the contract, but because of the
default and the necessity of judicial collection.55
However, for delay to merit interest, it must be
inexcusable in nature. In Guanio v. Makati-
Shangri-la Hotel,56 citing RCPI v. Verchez,57
we held thus:
In culpa contractual x x x the mere proof of the
existence of the contract and the failure of its
compliance justify, prima facie, a corresponding
right of relief. The law, recognizing the
obligatory force of contracts, will not permit a
party to be set free from liability for any kind of
misperformance of the contractual undertaking
or a contravention of the tenor thereof. A breach
upon the contract confers upon the injured party
a valid cause for recovering that which may
have been lost or suffered. The remedy serves
to preserve the interests of the promissee that
may include his "expectation interest," which is
his interest in having the benefit of his bargain
by being put in as good a position as he would
have been in had the contract been performed,
or his "reliance interest," which is his interest in
being reimbursed for loss caused by reliance on
the contract by being put in as good a position
as he would have been in had the contract not
been made; or his "restitution interest," which is
his interest in having restored to him any benefit
that he has conferred on the other party. Indeed,
agreements can accomplish little, either for their
makers or for society, unless they are made the
basis for action. The effect of every infraction is
to create a new duty, that is, to make
RECOMPENSE to the one who has been
injured by the failure of another to observe his
contractual obligation unless he can show
extenuating circumstances, like proof of his
exercise of due diligence x x x or of the
attendance of fortuitous event, to excuse him
from his ensuing liability. (Emphasis ours)
We agree with petitioner that records are bereft
of proof to show that respondent’s delay was
indeed justified by the circumstances – that is,
One Virtual’s advice regarding petitioner’s
alleged breach of obligations. The lower court’s
Decision itself belied this contention when it said
that "plaintiff is not disputing that it did not
complete commissioning work on one of the two
systems because One Virtual at that time is
already in default and has not paid GILAT."58
Assuming arguendo that the commissioning
work was not completed, respondent has no
one to blame but its principal, One Virtual; if only
it had paid its obligation on time, petitioner would
not have been forced to stop operations.
Moreover, the deposition of Mr. Erez Antebi,
vice president of Gilat, repeatedly stated that
petitioner had delivered all equipment, including
the licensed software; and that the equipment
had been installed and in fact, gone into
operation.59 Notwithstanding these
compliances, respondent still failed to pay.

As to the issue of when interest must accrue, our
Civil Code is explicit in stating that it accrues
from the time judicial or extrajudicial demand is
made on the surety. This ruling is in accordance
with the provisions of Article 1169 of the Civil
Code and of the settled rule that where there
has been an extra-judicial demand before an
action for performance was filed, interest on the
amount due begins to run, not from the date of
the filing of the complaint, but from the date of
that extra-judicial demand.60 Considering that
respondent failed to pay its obligation on 30 May
2000 in accordance with the Purchase
Agreement, and that the extrajudicial demand of
petitioner was sent on 5 June 2000,61 we agree
with the latter that interest must start to run from
the time petitioner sent its first demand letter (5
June 2000), because the obligation was already
due and demandable at that time.
With regard to the interest rate to be imposed,
we take cue from Nacar v. Gallery Frames,62
which modified the guidelines established in
Eastern Shipping Lines v. CA63 in relation to
Bangko Sentral-Monetary Board Circular No.
799 (Series of 2013), to wit:
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.1âwphi1 In the absence of
stipulation, the rate of interest shall be 6% per
annum to be computed from default, i.e., from
judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the
Civil Code.
xxxx
3. When the judgment of the court awarding a
sum of money becomes final and executory, the
rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall
be 6% per annum from such finality until its
satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of
credit.
Applying the above-discussed concepts and in
the absence of an agreement as to interests, we
are hereby compelled to award petitioner legal
interest at the rate of 6% per annum from 5 June
2000, its first date of extra judicial demand, until
the satisfaction of the debt in accordance with
the revised guidelines enunciated in Nacar.
WHEREFORE, the Petition for Review on
Certiorari is hereby GRANTED. The assailed
Decision and Resolution of the Court of Appeals
in CA-G.R. CV No. 89263 are REVERSED. The
Decision of the Regional Trial Court, Branch
141, Makati City is REINSTATED, with
MODIFICATION insofar as the award of legal
interest is concerned. Respondent is hereby
ordered to pay legal interest at the rate of 6%
per annum from 5 June 2000 until the
satisfaction of its obligation under the
Suretyship Contract and Purchase Agreement.
SO ORDERED.
7. Carodan vs China Banking
Coroporation
Resolution3 dated 29 November 2013 rendered
by the Court of Appeals (CA), Ninth Division,
Manila, in CA-G.R. CV No. 95835. The CA
denied petitioner's appeal assailing the
Decision4 dated 23 June 2010 issued by the
Regional Trial Court (RTC) of Tuguegarao City,
Branch 2, in Civil Case No. 5692.
THE ANTECEDENT FACTS
The records reveal that on 6 June 2000, China
Banking Corporation (China Bank) instituted a
Complaint5 for a sum of money against Barbara
Perez (Barbara), Rebecca Perez-Viloria
(Rebecca), Rosalina Carodan (Rosalina) and
Madeline Carodan (Madeline). China Bank
claimed that on 15 January 1998, Barbara and
Rebecca, for value received, executed and
delivered Promissory Note No. TLS-98/0076 to
respondent bank under which they promised
therein to jointly and severally pay the amount
of P2.8 million.7 China Bank further claimed that
as security for the payment of the loan, Barbara,
Rebecca and Rosalina also executed a Real
Estate Mortgage8 over a property registered in
the name of Rosalina and covered by Transfer
Certificate Title (TCT) No. T-10216.9
Respondent alleged that a Surety Agreement10
in favor of China Bank as creditor was also
executed by Barbara and Rebecca as principals
and Rosalina and her niece Madeline as
sureties. Through that agreement, the principals
and sureties warranted the payment of the loan
obligation amounting to F2.8 million including
interests, penalties, costs, expenses, and
attorney's fees.11
Barbara and Rebecca failed to pay their loan
obligation despite repeated demands from
China Bank. Their failure to pay prompted the
bank institute extrajudicial foreclosure
proceedings on the mortgaged property on 26
November 1999.12 From the extrajudicial sale,
it realized only PI.5 million as evidenced by a
Certificate of Sale.13 This amount, when
applied to the total outstanding loan obligation
of PI,865,345.77, would still leave a deficiency
of P365,345.77. For that reason, the bank
prayed that the court order the payment of the
deficiency amount with interest at 12% per
annum computed from 13 January 2000;
attorney's fees equal to 10% of the deficiency
amount; and litigation expenses and costs of
suit.14

Barbara and Rebecca filed their Answer. They
interposed the defense that although they both
stood as principal borrowers, they had entered
into an oral agreement with Madeline and
Rosalina. Under that agreement which was
witnessed by China Bank's loan officer and
branch manager, they would equally split both
the proceeds of the loan and the corresponding
obligation and interest pertaining thereto, and
they would secure the loan with the properties
belonging to them.15 Barbara and Rebecca
used as security their real properties covered by
TCT Nos. T-93177, T-93176, T-93174, T-
93167, T-93169, T-93170, T-93171 and T-
93172; while Rosalina and Madeline used for
the same purpose the former's property covered
by TCT No. T-10216.16
Barbara and Rebecca further alleged that while
Rosalina and Madeline obtained their share of
P1.4 million of the loan amount, the latter two
never complied with their obligation to pay
interest. It was only Rebecca's account with
China Bank that was automatically debited in
the total amount of P1,002,735.54.17 Barbara
and Rebecca asked China Bank for the
computation of their total obligation, for which
they paid P1.5 million aside from the interest
payments, and respondent bank thereafter
released the Real Estate Mortgage over their
properties.18
By way of crossclaim, Barbara and Rebecca
asked Rosalina and Madeline to pay half of
P1,002,735.54 as interest payments, as well as
the deficiency amount plus 12% interest per
annum and attorney's fees, the total amount of
which pertained to the loan obligation of the
latter two.19 By way of counterclaim, Barbara
and Rebecca also asked China Bank to pay
P1million as moral damages, P500,000 as
exemplary damages, plus attorney's fees and
costs of suit.20
China Bank filed its Reply and Answer to
Counterclaim clarifying that it was suing Barbara
and Rebecca as debtors under the Promissory
Note and as principals in the Surety Agreement,
as well as Rosalina and Madeline as sureties in
the Surety Agreement.21 It claimed that equal
sharing of the proceeds of the loan was "a bat
at misrepresentation" and "a self-serving
prevarication," because what was clearly written
on the note was that Rebecca and Barbara were
the principal debtors.22 It reiterated that the two
were liable for the full payment of the principal
amount plus the agreed interest, charges,
penalties and attorney's fees, with recourse to
reimbursement from Rosalina and Madeline.23
China Bank also disputed the claim of Rebecca
and Barbara that upon their payment to the bank
of P1.5 million, the Real Estate Mortgage over
their properties was cancelled. Their claim was
disputed because, even after their payment of
P1.5 million, Rebecca and Barbara were still
indebted in the amount of P1.3 million exclusive
of interest, charges, penalties and other
legitimate fees.24 Furthermore, respondent
stated that if there was a cancellation of
mortgage, it referred to other mortgages
securing other separate loan obligations of
Barbara and Rebecca; more particularly, that of
Barbara.25cralawred
Rosalina filed her Answer with Counterclaim
and Crossclaim.26 She alleged that on 2 July
1997, she and Barbara executed (1) a Real
Estate Mortgage covering Rosalina's lot and
ancestral house, as well as Barbara's eight
residential apartments, annotated as an
encumbrance at the back of the TCTs
corresponding to the properties as evidenced by
the Annexes to the Answer; and (2) a Surety
Agreement to secure the credit facility granted
by the bank to Barbara and Rebecca up to the
principal amount of P2.8 million.27 Rosalina
further stated that the execution of the contracts
was "made in consideration of the long-time
friendship" between Barbara and Rebecca, and
Madeline, and that "no monetary or material
consideration whatsoever passed between
[Barbara and Rebecca], on the one hand, and
[Rosalina], on the other hand.28
Rosalina acknowledged that on 15 January
1998, Barbara and Rebecca executed a
Promissory Note for the purpose of evidencing
a loan charged against the loan facility secured
by the mortgage.29 She averred, though, that
when Barbara and Rebecca paid half of the loan
under the Promissory Note, the properties of
Barbara covered by the mortgage were
released by the bank from liability. The
cancellation of the mortgage lien was effected
by an instrument dated 27 May 1999 and
reflected on the TCTs evidenced by the
Annexes to the Answer.30
This cancellation, according to Rosalina,
illegally and unjustly caused her property to
absorb the singular risk of foreclosure.31 The
result, according to her, was the extinguishment
of the indivisible obligation contained in the
mortgage pursuant to Article 121632 of the Civil
Code.33
Rosalina further averred that when the bank
instituted the foreclosure proceedings, it
misrepresented that her property was the only
one that was covered by the mortgage; omitted
from the schedule of mortgaged properties
those of Barbara; and misrepresented that "the
terms and condition of the aforesaid mortgage
have never been changed or modified whether
tacitly or expressly, by any agreement made
after the execution thereof."34
Finally, Rosalina stated that she had made
demands on Barbara and Rebecca to cause the
rectification of the illegal and unjust deprivation
of her property in payment of the indemnity.
Allegedly, Barbara and Rebecca simply ignored
her demands, so, she prayed that the two be
held solidarily liable for the total amount of
damages and for the deficiency judgment
sought in this Complaint.35
China Bank filed its Reply and Answer to
Counterclaim.36 It alleged that the issue of
whether Rosalina obtained material benefit from
the loan was not material, since she had
voluntarily and willingly encumbered her
property;37 that the indivisibility of mortgage
does not apply to the case at bar, since Article
208938 of the Civil Code presupposes several
heirs, a condition that is not present in this
case;39 that nothing short of payment of the
debt or an express release would operate to
discharge a mortgage;40 and that, as surety,
Rosalina was equally liable as principal debtor
to pay the deficiency obligation in the sum of
P365,345.77.41 The bank also filed its
Comment/Opposition42 to the Entry of
Appearance of Atty. Edwin V. Pascua as
counsel for Rosalina. It said that Atty. Pascua
had once been its retained lawyer pursuant to a
Retainer Agreement dated 5 September
1997.43 Because of its Opposition, Rosalina
was subsequently represented by Atty.
Reynaldo A. Deray.
All the parties submitted their Pre-Trial Briefs
with the exception of Madeline, whose case had
been archived by the RTC upon motion of China
Bank for the court's failure to acquire jurisdiction
over her person. The issues of the case were
thereafter limited to the following: (1) whether
the defendants were jointly and severally liable
to pay the deficiency claim; (2) whether the
surety was still liable to the bank despite the
release of the mortgage of the principal
borrower; (3) whether there was a previous
agreement among the defendants that Barbara
and Rebecca would receive half and Rosalina
and Madeline, the other half; and (4) whether
respondent bank still had a cause of action
against the surety after the mortgage of the
principal borrower had been released by the
bank.44
THE RULING OF THE RTC
The RTC ruled that although no sufficient proof
was adduced to show that Rosalina had
obtained any pecuniary benefit from the loan
agreement between Rebecca and Barbara and
China Bank, the mortgage between Rosalina
and China Bank was still valid.45 The trial court
declared that respondent bank had therefore
lawfully foreclosed the mortgage over the
property of Rosalina, even if she was a mere
accommodation mortgagor.46 The RTC also
declared Rosalina's claim to be without merit
and without basis in law and jurisprudence. She
claimed that because the Real Estate Mortgage
covering her property was a single and
indivisible contract, China Bank's act of
releasing the principal debtors' properties
resulted in the extinguishment of the
obligation.47 The trial court held that the creditor
had the right to proceed against any one of the
solidary debtors, or some or all of them
simultaneously; and that a creditor's right to
proceed against the surety exists independently
of the creditor's right to proceed against the
principal.48
Finally, the RTC ordered Rebecca, Barbara and
Rosalina to be jointly and severally liable to
China Bank for the deficiency between the
acquisition cost of the foreclosed real estate
property and the outstanding loan obligation of
Barbara and Rebecca at the time of the
foreclosure sale. Interest was set at the rate of
12% per annum from 13 January 2000 until full
payment. Rebecca and Barbara were also
ordered to reimburse Rosalina for the amount of
the deficiency payment charged against her
including interests thereon.49
THE RULING OF THE CA
Rosalina filed a timely Notice of Appeal and
imputed error to the trial court in finding her,
together with Rebecca and Barbara, jointly and
severally liable to pay the deficiency claim; in
finding that she was still liable as surety even if
the bank had already released the collateral of
the principal borrower; and in not annulling the
foreclosure sale of the property, not reconveying
the property to her, and not awarding her
damages as prayed for in her counterclaim. She
said that these were done by the court despite
the fact that China Bank had deliberately and
maliciously released the properties of the
principal borrowers, thereby exposing her
property to risk.50
The CA found the appeal bereft of merit.51 It
qualified Rosalina as a surety who had assumed
or undertaken a principal debtor's responsibility
or obligation. As such, she was supposed to be
principally liable for the payment of the debt in
case the principal debtors did not pay,
regardless of their financial capacity to do so.52
As for the deficiency, the CA cited BPI Family
Savings Bank v. Avenido,53 The Supreme
Court had ruled therein that the creditor was not
precluded from recovering any unpaid balance
on the principal obligation if the extrajudicial
foreclosure sale of the property, subject of the
real estate mortgage, would result in a
deficiency.54 The CA ultimately affirmed the
RTC Decision in toto55 and denied the Motion
for Reconsideration.56 Hence, this Petition.
Before this Court, petitioner Rosalina now
imputes error to the CA's affirmance of the RTC
Decision. She says that the CA Decision was
not in accord with law and jurisprudence in
holding that petitioner, jointly and severally with
Barbara and Rebecca, was liable to pay China
Bank's deficiency claim after the bank's release
of the collateral of the principal debtors.
Respondent bank's alleged act of exposing
Rosalina's property to the risk of foreclosure
despite the indivisible character of the Real
Estate Mortgage supposedly violated Article
2089 of the New Civil Code.57
China Bank filed its Comment58 claiming that all
the grounds cited by petitioner were "mere
reiterations, repetitions, or rehashed grounds
and arguments raised in the Appellant's Brief x
x x which were exhaustively passed upon and
considered by the CA in its Decision";59 and
that the petition "is wanting of any new,
substantial and meritorious grounds that would
justify the reversal of the CA Decision affirming
the RTC decision."60
THE ISSUE
The sole issue to be resolved by this Court is
whether petitioner Rosalina is liable jointly and
severally with Barbara and Rebecca for the
payment of respondent China Bank's claims.
THE RULING OF THIS COURT
Loan transactions in banking institutions usually
entail the execution of loan documents, typically
a promissory note, covered by a real estate
mortgage and/or a surety agreement.61 In the
instant case, petitioner Rosalina admitted that
she was a party to these loan documents
although she vehemently insisted that she had
received nothing from the proceeds of the
loan.62 Meanwhile, respondent bank offered in
evidence the Promissory Note, the Real Estate
Mortgage and the Surety Agreement signed by
the parties.
We find that Rosalina is liable as an
accommodation mortgagor.
In Belo v. PNB,63 we had the occasion to
declare:
An accommodation mortgage is not necessarily
void simply because the accommodation
mortgagor did not benefit from the same. The
validity of an accommodation mortgage is
allowed under Article 2085 of the New Civil
Code which provides that (t)hird persons who
are not parties to the principal obligation may
secure the latter by pledging or mortgaging their
own property. An accommodation mortgagor,
ordinarily, is not himself a recipient of the loan,
otherwise that would be contrary to his
designation as such.64
Apart from being an accommodation mortgagor,
Rosalina is also a surety, defined under Article
2047 of the Civil Code in this wise:
Art. 2047. By guaranty a person, called a
guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the
latter should fail to do so.
If a person binds himself solidarity with the
principal debtor, the provisions of Section 4,
Chapter 3, Title 1 of this Book shall be observed.
In such case the contract is called a suretyship.
A contract of suretyship (second paragraph of
Article 2047) has been juxtaposed against a
contract of guaranty (first paragraph of Article
2047) as follows:
A surety is an insurer of the debt, whereas a
guarantor is an insurer of the solvency of the
debtor. A suretyship is an undertaking that the
debt shall be paid; a guaranty, an undertaking
that the debtor shall pay. Stated differently, a
surety promises to pay the principal's debt if the
principal will not pay, while a guarantor agrees
that the creditor, after proceeding against the
principal, may proceed against the guarantor if
the principal is unable to pay.A surety binds
himself to perform if the principal does not,
without regard to his ability to do so. A
guarantor, on the other hand, does not contract
that the principal will pay, but simply that he is
able to do so. In other words, a surety
undertakes directly for the payment and is so
responsible at once if the principal debtor makes
default, while a guarantor contracts to pay if, by
the use of due diligence, the debt cannot be
made out of the principal debtor.65(Citations
omitted)
In Inciong, Jr. v. CA,66 we elucidated further in
this wise:
While a guarantor may bind himself solidarity
with the principal debtor, the liability of a
guarantor is different from that of a solidary
debtor. Thus, Tolentino explains:
chanRoblesvirtualLawlibrary
A guarantor who binds himself in solidum with
the principal debtor under the provisions of the
second paragraph does not become a solidary
co-debtor to all intents and purposes. There is a
difference between a solidary co-debtor, and a
fiador in solidum (surety). The latter, outside of
the liability he assumes to pay the debt before
the property of the principal debtor has been
exhausted, retains all the other rights, actions
and benefits which pertain to him by reason of
the fiansa; while a solidary co-debtor has no
other rights than those bestowed upon him in
Section 4, Chapter 3, title I, Book IV of the Civil
Code.
Section 4, Chapter 3, Title I, Book IV of the Civil
Code states the law on joint and several
obligations. Under Art. 1207 thereof, when there
are two or more debtors in one and the same
obligation, the presumption is that the obligation
is joint so that each of the debtors is liable only
for a proportionate part of the debt. There is a
solidarity liability only when the obligation
expressly so states, when the law so provides
or when the nature of the obligation so
requires.67 (Citations omitted)
Further discussion on the same legal concept
proceeded thusly:
A contract of surety is an accessory promise by
which a person binds himself for another
already bound, and agrees with the creditor to
satisfy the obligation if the debtor does not. A
contract of guaranty, on the other hand, is a
collateral undertaking to pay the debt of another
in case the latter does not pay the debt.
Strictly speaking, guaranty and surety are nearly
related, and many of the principles are common
to both. However, under our civil law, they may
be distinguished thus: A surety is usually bound
with his principal by the same instrument,
executed at the same time, and on the same
consideration. He is an original promissor and
debtor from the beginning, and is held,
ordinarily, to know every default of his principal.
Usually, he will not be discharged, either by the
mere indulgence of the creditor to the principal,
or by want of notice of the default of the
principal, no matter how much he may be injured
thereby. On the other hand, the contract of
guaranty is the guarantor's own separate
undertaking, in which the principal does not join.
It is usually entered into before or after that of
the principal, and is often supported on a
separate consideration from that supporting the
contract of the principal. The original contract of
his principal is not his contract, and he is not
bound to take notice of its non-performance. He
is often discharged by the mere indulgence of
the creditor to the principal, and is usually not
liable unless notified of the default of the
principal.
Simply put, a surety is distinguished from a
guaranty in that a guarantor is the insurer of the
solvency of the debtor and thus binds himself to
pay if the principal is unable to pay while a
surety is the insurer of the debt, and he obligates
himself to pay if the principal does not
pay.68(Citations omitted)
When Rosalina affixed her signature to the Real
Estate Mortgage as mortgagor and to the Surety
Agreement as surety which covered the loan
transaction represented by the Promissory
Note, she thereby bound herself to be liable to
China Bank in case the principal debtors,
Barbara and Rebecca, failed to pay. She
consequently became liable to respondent bank
for the payment of the debt of Barbara and
Rebecca when the latter two actually did not
pay.
China Bank, on the other hand, had a right to
proceed after either the principal debtors or the
surety when the debt became due. It had a right
to foreclose the mortgage involving Rosalina's
property to answer for the loan.
The proceeds from the extrajudicial foreclosure,
however, did not satisfy the entire obligation.
For this reason, respondent bank instituted the
present Complaint against Barbara and
Rebecca as principals and Rosalina as surety.
A mortgage is simply a security for, and not a
satisfaction of indebtedness.69 If the proceeds
of the sale are insufficient to cover the debt in an
extrajudicial foreclosure of mortgage, the
mortgagee is entitled to claim the deficiency
from the debtor.70 We have already recognized
this rule:
While Act No. 3135, as amended, does not
discuss the mortgagee's right to recover the
deficiency, neither does it contain any provision
expressly or impliedly prohibiting recovery. If the
legislature had intended to deny the creditor the
right to sue for any deficiency resulting from the
foreclosure of a security given to guarantee an
obligation, the law would expressly so provide.
Absent such a provision in Act No. 3135, as
amended, the creditor is not precluded from
taking action to recover any unpaid balance on
the principal obligation simply because he
chose to extrajudicially foreclose the real estate
mortgage.71ChanRoblesVirtualawlibrary
The creditor, respondent China Bank in this
Petition, is therefore not precluded, from
recovering any unpaid balance on the principal
obligation if the extrajudicial foreclosure sale of
the property, subject of the Real Estate
Mortgage, would result in a deficiency.
Rosalina protests her liability for the deficiency.
She claims that China Bank cancelled the
mortgage lien and released the principal
borrowers from liability. She contends that this
act violated Article 2089 of the Civil Code on the
indivisibility of mortgage and ultimately
discharged her from liability as a surety.
We disagree.
A resort to the terms of the Surety Agreement
can easily settle the question of whether
Rosalina should still be held liable. The
agreement expressly contains the following
stipulation:
The Surety(ies) expressly waive all rights to
demand for payment and notice of non-payment
and protest, and agree that the securities of
every kind that are now and may hereafter be
left with the Creditor its successors, indorsees
or assigns as collateral to any evidence of debt
or obligation, or upon which a lien may exist
therefor, may be substituted, withdrawn or
surrendered at any time, and the time for the
payment of such obligations extended, without
notice to or consent by the Surety(ies) x x x.72
(Emphases supplied)
We therefore find no merit in Rosalina's
protestations in this petition. As provided by the
quoted clause in the contract, she not only
waived the rights to demand payment and to
receive notice of nonpayment and protest, but
she also expressly agreed that the time for
payment may be extended. More significantly,
she agreed that the securities may be
"substituted, withdrawn or surrendered at any
time" without her consent or without notice to
her. That China Bank indeed surrendered the
properties of the principal debtors was precisely
within the ambit of this provision in the contract.
Rosalina cannot now contest that act in light of
her express agreement to that stipulation.
There have been similar cases in which this
Court was tasked to rule on whether a surety
can be discharged from liability due to an act or
omission of the creditor. A review of these
rulings reveals though, that in the absence of an
express stipulation, the surety was discharged
from liability if the act of the creditor was such
as would be declared negligent or constitutive of
a material alteration of the contract. On the other
hand, in the presence of an express stipulation
in the surety agreement allowing these acts, the
surety was not considered discharged and was
decreed to be bound by the stipulations.
In PNB v. Manila Surety,73 the Court en banc
declared the surety discharged from liability on
account of the creditor's negligence. In that
case, the creditor failed to collect the amounts
due to the debtor contrary to the former's duty to
make collections as holder of an exclusive and
irrevocable power of attorney. The negligence of
the creditor allowed the assigned funds to be
exhausted without notice to the surety and
ultimately resulted in depriving the latter of any
possibility of recourse against that security.
Also, in PNB v. Luzon Surety,74 the Court
hinted at the possibility of the surety's discharge
from liability. It was recognized in that case that
in this jurisdiction, alteration can be a ground for
release. The Court clarified, though, that this
principle can only be successfully invoked on
the condition that the alteration is material.
Failure to comply with this requisite means that
the surety cannot be freed from liability.
Applying this doctrine in that case, the Court
ruled that the alterations in the form of increases
in the credit line with the full consent of the
surety did not suffice to release the surety.
Meanwhile, in Pal mares v. CA75 the Court
ruled:
It may not be amiss to add that leniency shown
to a debtor in default, by delay permitted by the
creditor without change in the time when the
debt might be demanded, does not constitute an
extension of the time of payment, which would
release the surety. In order to constitute an
extension discharging the surety, it should
appear that the extension of the time was for a
definite period, pursuant to an enforceable
agreement between the principal and the
creditor, and that it was made without the
consent of the surety or with the reservation of
rights with respect to him. The contract must be
one which precludes the creditor from, or at
least hinders him in, enforcing the principal
contract with the period during which he could
otherwise have enforced it, and which precludes
the surety from paying the debt. (Citations
omitted)
In E. Zobel Inc. v. CA, et al.76 the Court upheld
the validity of the provision on the continuing
guaranty - which we had earlier interpreted as a
surety consistent with its contents and intention
of the parties. The Court upheld the validity of
the provision despite the insistence of the surety
that he should be released from liability due to
the failure of the creditor to register the
mortgage. In particular, the Court decreed:
SOLIDBANK's failure to register the chattel
mortgage did not release petitioner from the
obligation. In the Continuing Guaranty executed
in favor of SOLIDBANK, petitioner bound itself
to the contract irrespective of the existence of
any collateral. It even released SOLIDBANK
from any fault or negligence that may impair the
contract. The pertinent portions of the contract
so provides:
the undersigned (petitioner) who hereby agrees
to be and remain bound upon this guaranty,
irrespective of the existence, value or condition
of any collateral, and notwithstanding any such
change, exchange, settlement, compromise,
surrender, release, sale, application, renewal or
extension, and notwithstanding also that all
obligations of the Borrower to you outstanding
and unpaid at any time(s) may exceed the
aggregate principal sum herein above
prescribed.
This is a Continuing Guaranty and shall remain
in force and effect until written notice shall have
been received by you that it has been revoked
by the undersigned, but any such notice shall
not be released the undersigned from any
liability as to any instruments, loans, advances
or other obligations hereby guaranteed, which
may be held by you, or in which you may have
any interest, at the time of the receipt of such
notice. No act or omission of any kind on your
part in the premises shall in any event affect or
impair this guaranty, nor shall same be affected
by any change which may arise by reason of the
death of the undersigned, of any partner(s) of
the undersigned, or of the Borrower, or of the
accession to any such partnership of any one or
more new partners.77
Another illustrative case is Gateway Electronics
Corporation and Geronimo delos Reyes v.
Asianbank,78 in which the surety similarly
asked for his discharge from liability. He invoked
the creditor's repeated extensions of maturity
dates to the principal debtor's request, without
the surety's knowledge and consent. Still, this
Court ruled:
Such contention is unacceptable as it glosses
over the fact that the waiver to be notified of
extensions is embedded in surety document
itself, built in the ensuing provision:
chanRoblesvirtualLawlibrary
In case of default by any/or all of the
DEBTOR(S) to pay the whole part of said
indebtedness herein secured at maturity, I/WE
jointly and severally, agree and engage to the
CREDITOR, its successors and assigns, the
prompt payment, without demand or notice from
said CREDITOR of such notes, drafts,
overdrafts and other credit obligations on which
the DEBTOR(S) may now be indebted or may
hereafter become indebted to the CREDITOR,
together with interest, penalty and other bank
charges as may accrue thereon and all
expenses which may be incurred by the latter in
collecting any or all such
instruments.79ChanRoblesVirtualawlibrary
On Rosalina's argument that the release of the
mortgage violates the indivisibility of mortgage
as enunciated in Article 208980 of the Civil
Code, People's Bank and Trust Company v.
Tambunting et al.81 is most instructive. In that
case, the surety likewise argued that he should
be discharged from liability. He alleged that the
creditor had extended the time of payment and
released the shares pledged by the principal
debtors without his consent. The Court en banc
found his argument unpersuasive and decreed:
While we rule that Rosalina, along with the
principal debtors, Barbara and Rebecca, is still
liable as a surety for the deficiency amount, we
modify the RTC's imposition of interest rate at
12% per annum, which the CA subsequently
affirmed. We must modify the rates according to
prevailing jurisprudence. Hence, the 12% legal
interest should be imposed on the deficiency
amount from 13 January 2000 until 30 June
2013 and 6% legal interest from 1 July 2013 until
full payment.chanrobleslaw
WHEREFORE, premises considered, the
assailed CA Decision and Resolution finding
Rosalina Carodan jointly and severally liable
with Barbara Perez and Rebecca Perez-Viloria
for the deficiency amount are AFFIRMED WITH
MODIFICATIONS. Rebecca, Barbara and
Rosalina are held jointly and severally liable to
China Bank for the deficiency amount of
P365,345.77 and interest thereon at the rates of
12% per annum from 13 January 2000 until 30
June 2013 and 6% per annum from 1 July 2013
until full payment; and that Rebecca and
Barbara are also ordered to reimburse Rosalina
for the amount charged against her including
interests thereon.83

1. It is thus obvious that the contract of absolute SO ORDERED

guaranty executed by appellant Santana is the
measure of rights and duties. As it is with him,
so it is with the plaintiff bank. What was therein
stipulated had to be complied with by both
parties. Nor could appellant have any valid
cause for complaint. He had given his word; he
must live up to it. Once the validity of its terms is
conceded, he cannot be indulged in his
unilateral determination to disregard his
commitment. A promise to which the law
accords binding force must be fulfilled. It is as
simple as that. So the Civil Code explicitly
requires: "Obligations arising from contracts
have the force of law between the contracting
parties and should be complied with in good
faith."

2. It could have been different if there were no

such contract of absolute guaranty to which
appellant was a party under the aforesaid Article
2080. He would have been freed from the
obligation as a result of plaintiff releasing to the
Tambuntings without his consent the 135
shares of the International Sports Development
Corporation pledged to plaintiff bank to secure
the overdraft line. For thereby subrogation
became meaningless. Such a provision is
intended for the benefit of a surety. That was a
right he could avail of. He is not precluded
however from waiving it. That was what
appellant did precisely when he agreed to the
contract of absolute guaranty. Again the law is
clear. A right may be waived unless it would be
contrary to law, public order, public policy,
morals or good customs. There is no occasion
here for the exceptions coming into play x x
x82ChanRoblesVirtualawlibrary