G.R. No.

L-19190             November 29, 1922

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
VENANCIO CONCEPCION, defendant-appellant.

Recaredo Ma. Calvo for appellant.

Attorney-General Villa-Real for appellee.

MALCOLM, J.:

By telegrams and a letter of confirmation to the manager of the Aparri branch of the Philippine
National Bank, Venancio Concepcion, President of the Philippine National Bank, between April 10,
1919, and May 7, 1919, authorized an extension of credit in favor of "Puno y Concepcion, S. en C." in
the amount of P300,000. This special authorization was essential in view of the memorandum order of
President Concepcion dated May 17, 1918, limiting the discretional power of the local manager at
Aparri, Cagayan, to grant loans and discount negotiable documents to P5,000, which, in certain
cases, could be increased to P10,000. Pursuant to this authorization, credit aggregating P300,000,
was granted the firm of "Puno y Concepcion, S. en C.," the only security required consisting of six
demand notes. The notes, together with the interest, were taken up and paid by July 17, 1919.

"Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000. Anacleto Concepcion

contributed P5,000; Clara Vda. de Concepcion, P5,000; Miguel S. Concepcion, P20,000; Clemente
Puno, P20,000; and Rosario San Agustin, "casada con Gral. Venancio Concepcion," P50,000.
Member Miguel S. Concepcion was the administrator of the company.

On the facts recounted, Venancio Concepcion, as President of the Philippine National Bank and as
member of the board of directors of this bank, was charged in the Court of First Instance of Cagayan
with a violation of section 35 of Act No. 2747. He was found guilty by the Honorable Enrique V.
Filamor, Judge of First Instance, and was sentenced to imprisonment for one year and six months, to
pay a fine of P3,000, with subsidiary imprisonment in case of insolvency, and the costs.

Section 35 of Act No. 2747, effective on February 20, 1918, just mentioned, to which reference must
hereafter repeatedly be made, reads as follows: "The National Bank shall not, directly or indirectly,
grant loans to any of the members of the board of directors of the bank nor to agents of the branch
banks."

Section 49 of the same Act provides: "Any person who shall violate any of the provisions of this Act
shall be punished by a fine not to exceed ten thousand pesos, or by imprisonment not to exceed five
years, or by both such fine and imprisonment." These two sections were in effect in 1919 when the
alleged unlawful acts took place, but were repealed by Act No. 2938, approved on January 30, 1921.

Counsel for the defense assign ten errors as having been committed by the trial court. These errors
they have argued adroitly and exhaustively in their printed brief, and again in oral argument. Attorney-
General Villa-Real, in an exceptionally accurate and comprehensive brief, answers the proposition of
appellant one by one.

The question presented are reduced to their simplest elements in the opinion which follows:

I. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, a "loan" within the meaning of
section 35 of Act No. 2747?
Counsel argue that the documents of record do not prove that authority to make a loan was given, but
only show the concession of a credit. In this statement of fact, counsel is correct, for the exhibits in
question speak of a "credito" (credit) and not of a " prestamo" (loan).

The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust
reposed by a lender that he will pay what he may promise. (Donnell vs. Jones [1848], 13 Ala., 490;
Bouvier's Law Dictionary.) A "loan" means the delivery by one party and the receipt by the other party
of a given sum of money, upon an agreement, express or implied, to repay the sum loaned, with or
without interest. (Payne vs. Gardiner [1864], 29 N. Y., 146, 167.) The concession of a "credit"
necessarily involves the granting of "loans" up to the limit of the amount fixed in the "credit,"

II. (Was) Whether or not the granting of a credit of P300,000 to the copartnership "Puno y
Concepcion, S. en C.," by Venancio Concepcion, President of the Philippine National Bank, a "loan"
or a "discount"?

Counsel argue that while section 35 of Act No. 2747 prohibits the granting of a "loan," it does not
prohibit what is commonly known as a "discount."

In a letter dated August 7, 1916, H. Parker Willis, then President of the National Bank, inquired of the
Insular Auditor whether section 37 of Act No. 2612 was intended to apply to discounts as well as to
loans. The ruling of the Acting Insular Auditor, dated August 11, 1916, was to the effect that said
section referred to loans alone, and placed no restriction upon discount transactions. It becomes
material, therefore, to discover the distinction between a "loan" and a "discount," and to ascertain if
the instant transaction comes under the first or the latter denomination.

Discounts are favored by bankers because of their liquid nature, growing, as they do, out of an actual,
live, transaction. But in its last analysis, to discount a paper is only a mode of loaning money, with,
however, these distinctions: (1) In a discount, interest is deducted in advance, while in a loan, interest
is taken at the expiration of a credit; (2) a discount is always on double-name paper; a loan is
generally on single-name paper.

Conceding, without deciding, that, as ruled by the Insular Auditor, the law covers loans and not
discounts, yet the conclusion is inevitable that the demand notes signed by the firm "Puno y
Concepcion, S. en C." were not discount paper but were mere evidences of indebtedness, because
(1) interest was not deducted from the face of the notes, but was paid when the notes fell due; and (2)
they were single-name and not double-name paper.

The facts of the instant case having relation to this phase of the argument are not essentially different
from the facts in the Binalbagan Estate case. Just as there it was declared that the operations
constituted a loan and not a discount, so should we here lay down the same ruling.

III. Was the granting of a credit of P300,000 to the copartnership, "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, an "indirect loan" within the meaning
of section 35 of Act No. 2747?

Counsel argue that a loan to the partnership "Puno y Concepcion, S. en C." was not an "indirect loan."
In this connection, it should be recalled that the wife of the defendant held one-half of the capital of
this partnership.

In the interpretation and construction of statutes, the primary rule is to ascertain and give effect to the
intention of the Legislature. In this instance, the purpose of the Legislature is plainly to erect a wall of
safety against temptation for a director of the bank. The prohibition against indirect loans is a
recognition of the familiar maxim that no man may serve two masters — that where personal interest
clashes with fidelity to duty the latter almost always suffers. If, therefore, it is shown that the husband
is financially interested in the success or failure of his wife's business venture, a loan to partnership of
which the wife of a director is a member, falls within the prohibition.
Various provisions of the Civil serve to establish the familiar relationship called a conjugal partnership.
(Articles 1315, 1393, 1401, 1407, 1408, and 1412 can be specially noted.) A loan, therefore, to a
partnership of which the wife of a director of a bank is a member, is an indirect loan to such director.

That it was the intention of the Legislature to prohibit exactly such an occurrence is shown by the
acknowledged fact that in this instance the defendant was tempted to mingle his personal and family
affairs with his official duties, and to permit the loan P300,000 to a partnership of no established
reputation and without asking for collateral security.

In the case of Lester and Wife vs. Howard Bank ([1870], 33 Md., 558; 3 Am. Rep., 211), the Supreme
Court of Maryland said:

What then was the purpose of the law when it declared that no director or officer should
borrow of the bank, and "if any director," etc., "shall be convicted," etc., "of directly or
indirectly violating this section he shall be punished by fine and imprisonment?" We say to
protect the stockholders, depositors and creditors of the bank, against the temptation to which
the directors and officers might be exposed, and the power which as such they must
necessarily possess in the control and management of the bank, and the legislature unwilling
to rely upon the implied understanding that in assuming this relation they would not acquire
any interest hostile or adverse to the most exact and faithful discharge of duty, declared in
express terms that they should not borrow, etc., of the bank.

In the case of People vs. Knapp ([1912], 206 N. Y., 373), relied upon in the Binalbagan Estate
decision, it was said:

We are of opinion the statute forbade the loan to his copartnership firm as well as to himself
directly. The loan was made indirectly to him through his firm.

IV. Could Venancio Concepcion, President of the Philippine National Bank, be convicted of a violation
of section 35 of Act No. 2747 in relation with section 49 of the same Act, when these portions of Act
No. 2747 were repealed by Act No. 2938, prior to the finding of the information and the rendition of the
judgment?

As noted along toward the beginning of this opinion, section 49 of Act No. 2747, in relation to section
35 of the same Act, provides a punishment for any person who shall violate any of the provisions of
the Act. It is contended, however, by the appellant, that the repeal of these sections of Act No. 2747
by Act No. 2938 has served to take away the basis for criminal prosecution.

This same question has been previously submitted and has received an answer adverse to such
contention in the cases of United Stated vs. Cuna ([1908], 12 Phil., 241); People vs.
Concepcion ([1922], 43 Phil., 653); and Ong Chang Wing and Kwong Fok vs. United States ([1910],
218 U. S., 272; 40 Phil., 1046). In other words, it has been the holding, and it must again be the
holding, that where an Act of the Legislature which penalizes an offense, such repeals a former Act
which penalized the same offense, such repeal does not have the effect of thereafter depriving the
courts of jurisdiction to try, convict, and sentenced offenders charged with violations of the old law.

V. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, in violation of section 35 of Act No.
2747, penalized by this law?

Counsel argue that since the prohibition contained in section 35 of Act No. 2747 is on the bank, and
since section 49 of said Act provides a punishment not on the bank when it violates any provisions of
the law, but on a  person violating any provisions of the same, and imposing imprisonment as a part of
the penalty, the prohibition contained in said section 35 is without penal sanction.lawph!l.net

The answer is that when the corporation itself is forbidden to do an act, the prohibition extends to the
board of directors, and to each director separately and individually. (People vs. Concepcion, supra.)
VI. Does the alleged good faith of Venancio Concepcion, President of the Philippine National Bank, in
extending the credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." constitute a legal
defense?

Counsel argue that if defendant committed the acts of which he was convicted, it was because he was
misled by rulings coming from the Insular Auditor. It is furthermore stated that since the loans made to
the copartnership "Puno y Concepcion, S. en C." have been paid, no loss has been suffered by the
Philippine National Bank.

Neither argument, even if conceded to be true, is conclusive. Under the statute which the defendant
has violated, criminal intent is not necessarily material. The doing of the inhibited act, inhibited on
account of public policy and public interest, constitutes the crime. And, in this instance, as previously
demonstrated, the acts of the President of the Philippine National Bank do not fall within the purview
of the rulings of the Insular Auditor, even conceding that such rulings have controlling effect.

Morse, in his work, Banks and Banking, section 125, says:

It is fraud for directors to secure by means of their trust, and advantage not common to the
other stockholders. The law will not allow private profit from a trust, and will not listen to any
proof of honest intent.

JUDGMENT

On a review of the evidence of record, with reference to the decision of the trial court, and the errors
assigned by the appellant, and with reference to previous decisions of this court on the same subject,
we are irresistibly led to the conclusion that no reversible error was committed in the trial of this case,
and that the defendant has been proved guilty beyond a reasonable doubt of the crime charged in the
information. The penalty imposed by the trial judge falls within the limits of the punitive provisions of
the law.

Judgment is affirmed, with the costs of this instance against the appellant. So ordered.

Araullo, C. J., Johnson, Street, Avanceña, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.
G.R. No. L-4150             February 10, 1910

FELIX DE LOS SANTOS, plaintiff-appelle,

vs.
AGUSTINA JARRA, administratrix of the estate of Magdaleno Jimenea, deceased, defendant-
appellant.

Matias Hilado, for appellant.

Jose Felix Martinez, for appellee.

TORRES, J.:

On the 1st of September, 1906, Felix de los Santos brought suit against Agustina Jarra, the
administratrix of the estate of Magdaleno Jimenea, alleging that in the latter part of 1901 Jimenea
borrowed and obtained from the plaintiff ten first-class carabaos, to be used at the animal-power mill
of his hacienda during the season of 1901-2, without recompense or remuneration whatever for the
use thereof, under the sole condition that they should be returned to the owner as soon as the work at
the mill was terminated; that Magdaleno Jimenea, however, did not return the carabaos,
notwithstanding the fact that the plaintiff claimed their return after the work at the mill was finished;
that Magdaleno Jimenea died on the 28th of October, 1904, and the defendant herein was appointed
by the Court of First Instance of Occidental Negros administratrix of his estate and she took over the
administration of the same and is still performing her duties as such administratrix; that the plaintiff
presented his claim to the commissioners of the estate of Jimenea, within the legal term, for the return
of the said ten carabaos, but the said commissioners rejected his claim as appears in their report;
therefore, the plaintiff prayed that judgment be entered against the defendant as administratrix of the
estate of the deceased, ordering her to return the ten first-class carabaos loaned to the late Jimenea,
or their present value, and to pay the costs.

The defendant was duly summoned, and on the 25th of September, 1906, she demurred in writing to
the complaint on the ground that it was vague; but on the 2d of October of the same year, in answer
to the complaint, she said that it was true that the late Magdaleno Jimenea asked the plaintiff to loan
him ten carabaos, but that he only obtained three second-class animals, which were afterwards
transferred by sale by the plaintiff to the said Jimenea; that she denied the allegations contained in
paragraph 3 of the complaint; for all of which she asked the court to absolve her of the complaint with
the cost against the plaintiff.

By a writing dated the 11th of December, 1906, Attorney Jose Felix Martinez notified the defendant
and her counsel, Matias Hilado, that he had made an agreement with the plaintiff to the effect that the
latter would not compromise the controversy without his consent, and that as fees for his professional
services he was to receive one half of the amount allowed in the judgment if the same were entered in
favor of the plaintiff.

The case came up for trial, evidence was adduced by both parties, and either exhibits were made of
record. On the 10th of January, 1907, the court below entered judgment sentencing Agustina Jarra,
as administratrix of the estate of Magdaleno Jimenea, to return to the plaintiff, Felix de los Santos, the
remaining six second and third class carabaos, or the value thereof at the rate of P120 each, or a total
of P720 with the costs.

Counsel for the defendant excepted to the foregoing judgment, and, by a writing dated January 19,
moved for anew trial on the ground that the findings of fact were openly and manifestly contrary to the
weight of the evidence. The motion was overruled, the defendant duly excepted, and in due course
submitted the corresponding bill of exceptions, which was approved and submitted to this court.

The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan of ten carabaos
which are now claimed by the latter, as shown by two letters addressed by the said Jimenea to Felix
de los Santos; but in her answer the said defendant alleged that the late Jimenea only obtained three
second-class carabaos, which were subsequently sold to him by the owner, Santos; therefore, in
order to decide this litigation it is indispensable that proof be forthcoming that Jimenea only received
three carabaos from his son-in-law Santos, and that they were sold by the latter to him.

The record discloses that it has been fully proven from the testimony of a sufficient number of
witnesses that the plaintiff, Santos, sent in charge of various persons the ten carabaos requested by
his father-in-law, Magdaleno Jimenea, in the two letters produced at the trial by the plaintiff, and that
Jimenea received them in the presence of some of said persons, one being a brother of said Jimenea,
who saw the animals arrive at the hacienda where it was proposed to employ them. Four died of
rinderpest, and it is for this reason that the judgment appealed from only deals with six surviving
carabaos.

The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not evidenced by
any trustworthy documents such as those of transfer, nor were the declarations of the witnesses
presented by the defendant affirming it satisfactory; for said reason it can not be considered that
Jimenea only received three carabaos on loan from his son-in-law, and that he afterwards kept them
definitely by virtue of the purchase.

By the laws in force the transfer of large cattle was and is still made by means of official documents
issued by the local authorities; these documents constitute the title of ownership of the carabao or
horse so acquired. Furthermore, not only should the purchaser be provided with a new certificate or
credential, a document which has not been produced in evidence by the defendant, nor has the loss
of the same been shown in the case, but the old documents ought to be on file in the municipality, or
they should have been delivered to the new purchaser, and in the case at bar neither did the
defendant present the old credential on which should be stated the name of the previous owner of
each of the three carabaos said to have been sold by the plaintiff.

ISSUE: Whether or not the contract entered into by the parties is commodatum and thus the
ownership of the carabaos still remains with the plaintiff, Felix De Los Santos?

From the foregoing it may be logically inferred that the carabaos loaned or given on commodatum to
the now deceased Magdaleno Jimenea were ten in number; that they, or at any rate the six surviving
ones, have not been returned to the owner thereof, Felix de los Santos, and that it is not true that the
latter sold to the former three carabaos that the purchaser was already using; therefore, as the said
six carabaos were not the property of the deceased nor of any of his descendants, it is the duty of the
administratrix of the estate to return them or indemnify the owner for their value.

The Civil Code, in dealing with loans in general, from which generic denomination the specific one of
commodatum is derived, establishes prescriptions in relation to the last-mentioned contract by the
following articles:

ART. 1740. By the contract of loan, one of the parties delivers to the other, either anything not
perishable, in order that the latter may use it during a certain period and return it to the
former, in which case it is called commodatum, or money or any other perishable thing, under
the condition to return an equal amount of the same kind and quality, in which case it is
merely called a loan.

Commodatum is essentially gratuitous.

A simple loan may be gratuitous, or made under a stipulation to pay interest.

ART. 1741. The bailee acquires retains the ownership of the thing loaned. The bailee
acquires the use thereof, but not its fruits; if any compensation is involved, to be paid by the
person requiring the use, the agreement ceases to be a commodatum.
 ART. 1742. The obligations and rights which arise from the commodatum pass to the heirs of
both contracting parties, unless the loan has been in consideration for the person of the
bailee, in which case his heirs shall not have the right to continue using the thing loaned.

The carabaos delivered to be used not being returned by the defendant upon demand, there is no
doubt that she is under obligation to indemnify the owner thereof by paying him their value.

Article 1101 of said code reads:

Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and those who
in any manner whatsoever act in contravention of the stipulations of the same, shall be
subjected to indemnify for the losses and damages caused thereby.

The obligation of the bailee or of his successors to return either the thing loaned or its value, is
sustained by the supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out with precision
the legal doctrine touching commodatum as follows:

Although it is true that in a contract of commodatum the bailor retains the ownership of the
thing loaned, and at the expiration of the period, or after the use for which it was loaned has
been accomplished, it is the imperative duty of the bailee to return the thing itself to its owner,
or to pay him damages if through the fault of the bailee the thing should have been lost or
injured, it is clear that where public securities are involved, the trial court, in deferring to the
claim of the bailor that the amount loaned be returned him by the bailee in bonds of the same
class as those which constituted the contract, thereby properly applies law 9 of title 11
of partida  5.

With regard to the third assignment of error, based on the fact that the plaintiff Santos had not
appealed from the decision of the commissioners rejecting his claim for the recovery of his carabaos,
it is sufficient to estate that we are not dealing with a claim for the payment of a certain sum, the
collection of a debt from the estate, or payment for losses and damages (sec. 119, Code of Civil
Procedure), but with the exclusion from the inventory of the property of the late Jimenea, or from his
capital, of six carabaos which did not belong to him, and which formed no part of the inheritance.

The demand for the exclusion of the said carabaos belonging to a third party and which did not form
part of the property of the deceased, must be the subject of a direct decision of the court in an
ordinary action, wherein the right of the third party to the property which he seeks to have excluded
from the inheritance and the right of the deceased has been discussed, and rendered in view of the
result of the evidence adduced by the administrator of the estate and of the claimant, since it is so
provided by the second part of section 699 and by section 703 of the Code of Civil Procedure; the
refusal of the commissioners before whom the plaintiff unnecessarily appeared can not affect nor
reduce the unquestionable right of ownership of the latter, inasmuch as there is no law nor principle of
justice authorizing the successors of the late Jimenea to enrich themselves at the cost and to the
prejudice of Felix de los Santos.

For the reasons above set forth, by which the errors assigned to the judgment appealed from have
been refuted, and considering that the same is in accordance with the law and the merits of the case,
it is our opinion that it should be affirmed and we do hereby affirm it with the costs against the
appellant. So ordered.

Arellano, C.J., Johnson, Moreland and Elliott, JJ., concur.

Carson, J., reserves his vote.
SAURA IMPORT and EXPERT CO., INC., vs DBP 
[G.R. No. L-24968, April 27, 1972] MAKALINTAL, J.

FACTS:

 In July 1952, Saura, Inc., applied to Rehabilitation Finance Corp., now DBP, for an
industrial loan of P500,000 to be used for the construction of a factory building, to pay the
balance of the jute mill machinery and equipment and as additional working capital.  In
Resolution No.145, the loan application was approved to be secured first by mortgage on
the factory buildings, the land site, and machinery and equipment to be installed.
 The mortgage was registered and documents for the promissory note were
executed. But then, later on, was cancelled to make way for the registration of a mortgage
contract over the same property in favor of Prudential Bank and Trust Co., the latter
having issued Saura letter of credit for the release of the jute machinery. As security,
Saura execute a trust receipt in favor of the Prudential. For failure of Saura to pay said
obligation, Prudential sued Saura.
 After almost 9 years, Saura Inc, commenced an action against RFC, alleging
failure on the latter to comply with its obligations to release the loan applied for and
approved, thereby preventing the plaintiff from completing or paying contractual
commitments it had entered into, in connection with its jute mill project.
 The trial court ruled in favor of Saura, ruling that there was a perfected contract
between the parties and that the RFC was guilty of breach thereof.

ISSUE: Whether or not there was a perfected contract between the parties? 

YES. There was indeed a perfected consensual contract.

HELD:
Article 1934 provides: An accepted promise to deliver something by way of commodatum or
simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be
perfected until delivery of the object of the contract.
 There was undoubtedly offer and acceptance in the case. The application of Saura, Inc. for
a loan of P500,000.00 was approved by resolution of the defendant, and the corresponding
mortgage was executed and registered. The defendant failed to fulfill its obligation and the
plaintiff is therefore entitled to recover damages.
 When an application for a loan of money was approved by resolution of the respondent
corporation and the responding mortgage was executed and registered, there arises a
perfected consensual contract.
 However, it should be noted that RFC imposed two conditions (availability of raw materials
and increased production) when it restored the loan to the original amount of P500,000.00.
 Saura, Inc. obviously was in no position to comply with RFC’s conditions. So instead of
doing so and insisting that the loan be released as agreed upon, Saura, Inc. asked that the
mortgage be cancelled. The action thus taken by both parties was in the nature of
mutual desistance which is a mode of extinguishing obligations. It is a concept that
derives from the principle that since mutual agreement can create a contract, mutual
disagreement by the parties can cause its extinguishment.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed.
G.R. No. 118375             October 3, 2003

CELESTINA T. NAGUIAT, petitioner,
vs.
COURT OF APPEALS and AURORA QUEAÑO, respondents.

DECISION

TINGA, J.:

Before us is a Petition for Review on Certiorari under Rule 45, assailing the decision of the Sixteenth
Division of the respondent Court of Appeals promulgated on 21 December 1994 1 , which affirmed in
toto the decision handed down by the Regional Trial Court (RTC) of Pasay City.2

The case arose when on 11 August 1981, private respondent Aurora Queaño (Queaño) filed a
complaint before the Pasay City RTC for cancellation of a Real Estate Mortgage she had entered into
with petitioner Celestina Naguiat (Naguiat). The RTC rendered a decision, declaring the questioned
Real Estate Mortgage void, which Naguiat appealed to the Court of Appeals. After the Court of
Appeals upheld the RTC decision, Naguiat instituted the present petition.1ªvvphi1.nét

The operative facts follow:

Queaño applied with Naguiat for a loan in the amount of Two Hundred Thousand Pesos
(₱200,000.00), which Naguiat granted. On 11 August 1980, Naguiat indorsed to Queaño Associated
Bank Check No. 090990 (dated 11 August 1980) for the amount of Ninety Five Thousand Pesos
(₱95,000.00), which was earlier issued to Naguiat by the Corporate Resources Financing
Corporation. She also issued her own Filmanbank Check No. 065314, to the order of Queaño, also
dated 11 August 1980 and for the amount of Ninety Five Thousand Pesos (₱95,000.00). The
proceeds of these checks were to constitute the loan granted by Naguiat to Queaño.3

To secure the loan, Queaño executed a Deed of Real Estate Mortgage dated 11 August 1980 in favor
of Naguiat, and surrendered to the latter the owner’s duplicates of the titles covering the mortgaged
properties.4 On the same day, the mortgage deed was notarized, and Queaño issued to Naguiat a
promissory note for the amount of TWO HUNDRED THOUSAND PESOS (₱200,000.00), with interest
at 12% per annum, payable on 11 September 1980.5 Queaño also issued a Security Bank and Trust
Company check, postdated 11 September 1980, for the amount of TWO HUNDRED THOUSAND
PESOS (₱200,000.00) and payable to the order of Naguiat.

Upon presentment on its maturity date, the Security Bank check was dishonored for insufficiency of
funds. On the following day, 12 September 1980, Queaño requested Security Bank to stop payment
of her postdated check, but the bank rejected the request pursuant to its policy not to honor such
requests if the check is drawn against insufficient funds.6

On 16 October 1980, Queaño received a letter from Naguiat’s lawyer, demanding settlement of the
loan. Shortly thereafter, Queaño and one Ruby Ruebenfeldt (Ruebenfeldt) met with Naguiat. At the
meeting, Queaño told Naguiat that she did not receive the proceeds of the loan, adding that the
checks were retained by Ruebenfeldt, who purportedly was Naguiat’s agent.7

Naguiat applied for the extrajudicial foreclosure of the mortgage with the Sheriff of Rizal Province,
who then scheduled the foreclosure sale on 14 August 1981. Three days before the scheduled sale,
Queaño filed the case before the Pasay City RTC, 8 seeking the annulment of the mortgage deed. The
trial court eventually stopped the auction sale.9

On 8 March 1991, the RTC rendered judgment, declaring the Deed of Real Estate Mortgage null and
void, and ordering Naguiat to return to Queaño the owner’s duplicates of her titles to the mortgaged
lots.10 Naguiat appealed the decision before the Court of Appeals, making no less than eleven
assignments of error. The Court of Appeals promulgated the decision now assailed before us that
affirmed in toto the RTC decision. Hence, the present petition.

Naguiat questions the findings of facts made by the Court of Appeals, especially on the issue of
whether Queaño had actually received the loan proceeds which were supposed to be covered by the
two checks Naguiat had issued or indorsed. Naguiat claims that being a notarial instrument or public
document, the mortgage deed enjoys the presumption that the recitals therein are true. Naguiat also
questions the admissibility of various representations and pronouncements of Ruebenfeldt, invoking
the rule on the non-binding effect of the admissions of third persons.11

The resolution of the issues presented before this Court by Naguiat involves the determination of
facts, a function which this Court does not exercise in an appeal by certiorari. Under Rule 45 which
governs appeal by certiorari, only questions of law may be raised 12 as the Supreme Court is not a trier
of facts.13 The resolution of factual issues is the function of lower courts, whose findings on these
matters are received with respect and are in fact generally binding on the Supreme Court. 14 A question
of law which the Court may pass upon must not involve an examination of the probative value of the
evidence presented by the litigants.15 There is a question of law in a given case when the doubt or
difference arises as to what the law is on a certain state of facts; there is a question of fact when the
doubt or difference arises as to the truth or the falsehood of alleged facts.16

Surely, there are established exceptions to the rule on the conclusiveness of the findings of facts of
the lower courts.17 But Naguiat’s case does not fall under any of the exceptions. In any event, both the
decisions of the appellate and trial courts are supported by the evidence on record and the applicable
laws.

Against the common finding of the courts below, Naguiat vigorously insists that Queaño received the
loan proceeds. Capitalizing on the status of the mortgage deed as a public document, she cites the
rule that a public document enjoys the presumption of validity and truthfulness of its contents. The
Court of Appeals, however, is correct in ruling that the presumption of truthfulness of the recitals in a
public document was defeated by the clear and convincing evidence in this case that pointed to the
absence of consideration.18 This Court has held that the presumption of truthfulness engendered by
notarized documents is rebuttable, yielding as it does to clear and convincing evidence to the
contrary, as in this case.19

On the other hand, absolutely no evidence was submitted by Naguiat that the checks she issued or
endorsed were actually encashed or deposited. The mere issuance of the checks did not result in the
perfection of the contract of loan. For the Civil Code provides that the delivery of bills of exchange and
mercantile documents such as checks shall produce the effect of payment only when they have been
cashed.20 It is only after the checks have produced the effect of payment that the contract of loan may
be deemed perfected. Art. 1934 of the Civil Code provides:

"An accepted promise to deliver something by way of commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object
of the contract."

A loan contract is a real contract, not consensual, and, as such, is perfected only upon the delivery of
the object of the contract.21 In this case, the objects of the contract are the loan proceeds which
Queaño would enjoy only upon the encashment of the checks signed or indorsed by Naguiat. If
indeed the checks were encashed or deposited, Naguiat would have certainly presented the
corresponding documentary evidence, such as the returned checks and the pertinent bank records.
Since Naguiat presented no such proof, it follows that the checks were not encashed or credited to
Queaño’s account.1awphi1.nét

Naguiat questions the admissibility of the various written representations made by Ruebenfeldt on the
ground that they could not bind her following the res inter alia acta alteri nocere non debet rule. The
Court of Appeals rejected the argument, holding that since Ruebenfeldt was an authorized
representative or agent of Naguiat the situation falls under a recognized exception to the rule.22 Still,
Naguiat insists that Ruebenfeldt was not her agent.
Suffice to say, however, the existence of an agency relationship between Naguiat and Ruebenfeldt is
supported by ample evidence. As correctly pointed out by the Court of Appeals, Ruebenfeldt was not
a stranger or an unauthorized person. Naguiat instructed Ruebenfeldt to withhold from Queaño the
checks she issued or indorsed to Queaño, pending delivery by the latter of additional collateral.
Ruebenfeldt served as agent of Naguiat on the loan application of Queaño’s friend, Marilou Farralese,
and it was in connection with that transaction that Queaño came to know Naguiat.23 It was also
Ruebenfeldt who accompanied Queaño in her meeting with Naguiat and on that occasion, on her own
and without Queaño asking for it, Reubenfeldt actually drew a check for the sum of ₱220,000.00
payable to Naguiat, to cover for Queaño’s alleged liability to Naguiat under the loan agreement.24

The Court of Appeals recognized the existence of an "agency by estoppel25 citing Article 1873 of the
Civil Code.26 Apparently, it considered that at the very least, as a consequence of the interaction
between Naguiat and Ruebenfeldt, Queaño got the impression that Ruebenfeldt was the agent of
Naguiat, but Naguiat did nothing to correct Queaño’s impression. In that situation, the rule is clear.
One who clothes another with apparent authority as his agent, and holds him out to the public as
such, cannot be permitted to deny the authority of such person to act as his agent, to the prejudice of
innocent third parties dealing with such person in good faith, and in the honest belief that he is what
he appears to be.27 The Court of Appeals is correct in invoking the said rule on agency by
estoppel.1awphi1.nét

More fundamentally, whatever was the true relationship between Naguiat and Ruebenfeldt is
irrelevant in the face of the fact that the checks issued or indorsed to Queaño were never encashed or
deposited to her account of Naguiat.

All told, we find no compelling reason to disturb the finding of the courts a quo that the lender did not
remit and the borrower did not receive the proceeds of the loan. That being the case, it follows that
the mortgage which is supposed to secure the loan is null and void. The consideration of the
mortgage contract is the same as that of the principal contract from which it receives life, and without
which it cannot exist as an independent contract.28 A mortgage contract being a mere accessory
contract, its validity would depend on the validity of the loan secured by it.29

WHEREFORE, the petition is denied and the assailed decision is affirmed. Costs against petitioner.

SO ORDERED.

Bellosillo, (Chairman), Quisumbing, Austria-Martinez, and Callejo, Sr., JJ., concur.

G.R. No. 154878             March 16, 2007

CAROLYN M. GARCIA, Petitioner,
vs.
RICA MARIE S. THIO, Respondent.

DECISION

CORONA, J.:

Assailed in this petition for review on certiorari1 are the June 19, 2002 decision2 and August 20, 2002
resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside the February 28,
1997 decision of the Regional Trial Court (RTC) of Makati City, Branch 58.

Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M.
Garcia a crossed check4 dated February 24, 1995 in the amount of US$100,000 payable to the order
of a certain Marilou Santiago.5 Thereafter, petitioner received from respondent every month
(specifically, on March 24, April 26, June 26 and July 26, all in 1995) the amount of US$3,000 6 and
₱76,5007 on July 26,8 August 26, September 26 and October 26, 1995.

In June 1995, respondent received from petitioner another crossed check9 dated June 29, 1995 in the
amount of ₱500,000, also payable to the order of Marilou Santiago.10 Consequently, petitioner
received from respondent the amount of ₱20,000 every month on August 5, September 5, October 5
and November 5, 1995.11

According to petitioner, respondent failed to pay the principal amounts of the loans (US$100,000 and
₱500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a complaint for sum of
money and damages in the RTC of Makati City, Branch 58 against respondent, seeking to collect the
sums of US$100,000, with interest thereon at 3% a month from October 26, 1995 and ₱500,000, with
interest thereon at 4% a month from November 5, 1995, plus attorney’s fees and actual damages.12

Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of
US$100,000 with interest thereon at the rate of 3% per month, which loan would mature on October
26, 1995.13 The amount of this loan was covered by the first check. On June 29, 1995, respondent
again borrowed the amount of ₱500,000 at an agreed monthly interest of 4%, the maturity date of
which was on November 5, 1995.14 The amount of this loan was covered by the second check. For
both loans, no promissory note was executed since petitioner and respondent were close friends at
the time.15 Respondent paid the stipulated monthly interest for both loans but on their maturity dates,
she failed to pay the principal amounts despite repeated demands.161awphi1.nét

Respondent denied that she contracted the two loans with petitioner and countered that it was Marilou
Santiago to whom petitioner lent the money. She claimed she was merely asked by petitioner to give
the crossed checks to Santiago.17 She issued the checks for ₱76,000 and ₱20,000 not as payment of
interest but to accommodate petitioner’s request that respondent use her own checks instead of
Santiago’s.18

In a decision dated February 28, 1997, the RTC ruled in favor of petitioner.19 It found that respondent
borrowed from petitioner the amounts of US$100,000 with monthly interest of 3% and ₱500,000 at a
monthly interest of 4%:20

WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is

hereby rendered in favor of [petitioner], sentencing [respondent] to pay the former the amount of:

1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month from October
26, 1995 until fully paid;
 2. ₱500,000.00 with interest thereon at 4% per month from November 5, 1995 until fully paid.

3. ₱100,000.00 as and for attorney’s fees; and

4. ₱50,000.00 as and for actual damages.

For lack of merit, [respondent’s] counterclaim is perforce dismissed.

With costs against [respondent].

IT IS SO ORDERED.21

On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan
between the parties:

A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that
[respondent] indeed borrowed money from her. There is nothing in the record that shows that
[respondent] received money from [petitioner]. What is evident is the fact that [respondent]
received a MetroBank [crossed] check dated February 24, 1995 in the sum of US$100,000.00,
payable to the order of Marilou Santiago and a CityTrust [crossed] check dated June 29, 1995 in the
amount of ₱500,000.00, again payable to the order of Marilou Santiago, both of which were issued by
[petitioner]. The checks received by [respondent], being crossed, may not be encashed but only
deposited in the bank by the payee thereof, that is, by Marilou Santiago herself.

It must be noted that crossing a check has the following effects: (a) the check may not be encashed
but only deposited in the bank; (b) the check may be negotiated only once—to one who has an
account with the bank; (c) and the act of crossing the check serves as warning to the holder that the
check has been issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose, otherwise, he is not a holder in due course.

Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and delivery to
the payee in contemplation of law since the latter is not the person who could take the checks as a
holder, i.e., as a payee or indorsee thereof, with intent to transfer title thereto. Neither could she be
deemed as an agent of Marilou Santiago with respect to the checks because she was merely
facilitating the transactions between the former and [petitioner].

With the foregoing circumstances, it may be fairly inferred that there were really no contracts of loan
that existed between the parties. x x x (emphasis supplied)22

Hence this petition.23

As a rule, only questions of law may be raised in a petition for review on certiorari under Rule 45 of
the Rules of Court. However, this case falls under one of the exceptions, i.e., when the factual
findings of the CA (which held that there were no  contracts of loan between petitioner and
respondent) and the RTC (which held that there were contracts of loan) are contradictory.24

ISSUE: Whether or not there exists a contract of loan between the parties?

The petition is impressed with merit.

A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object
of the contract.25 This is evident in Art. 1934 of the Civil Code which provides:
An accepted promise to deliver something by way of commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the
object of the contract. (Emphasis supplied)

Upon delivery of the object of the contract of loan (in this case the money received by the debtor when
the checks were encashed) the debtor acquires ownership of such money or loan proceeds and is
bound to pay the creditor an equal amount.26

It is undisputed that the checks were delivered to respondent. However, these checks were crossed
and payable not to the order of respondent but to the order of a certain Marilou Santiago. Thus the
main question to be answered is: who borrowed money from petitioner — respondent or Santiago?

Petitioner insists that it was upon respondent’s instruction that both checks were made payable to
Santiago.27 She maintains that it was also upon respondent’s instruction that both checks were
delivered to her (respondent) so that she could, in turn, deliver the same to Santiago.28 Furthermore,
she argues that once respondent received the checks, the latter had possession and control of them
such that she had the choice to either forward them to Santiago (who was already her debtor), to
retain them or to return them to petitioner.29

We agree with petitioner. Delivery is the act by which the res or substance thereof is placed within the
actual or constructive possession or control of another.30 Although respondent did not physically
receive the proceeds of the checks, these instruments were placed in her control and possession
under an arrangement whereby she actually re-lent the amounts to Santiago.

Several factors support this conclusion.

First, respondent admitted that petitioner did not personally know Santiago.31 It was highly improbable
that petitioner would grant two loans to a complete stranger without requiring as much as promissory
notes or any written acknowledgment of the debt considering that the amounts involved were quite
big. Respondent, on the other hand, already had transactions with Santiago at that time.32

Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in both
parties’ list of witnesses) testified that respondent’s plan was for petitioner to lend her money at a
monthly interest rate of 3%, after which respondent would lend the same amount to Santiago at a
higher rate of 5% and realize a profit of 2%.33 This explained why respondent instructed petitioner to
make the checks payable to Santiago. Respondent has not shown any reason why Ruiz’ testimony
should not be believed.

Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of
₱76,000 each (peso equivalent of US$3,000) for eight months to cover the monthly interest. For the
₱500,000 loan, she also issued her own checks in the amount of ₱20,000 each for four
months.34 According to respondent, she merely accommodated petitioner’s request for her to issue
her own checks to cover the interest payments since petitioner was not personally acquainted with
Santiago.35 She claimed, however, that Santiago would replace the checks with cash. 36 Her
explanation is simply incredible. It is difficult to believe that respondent would put herself in a position
where she would be compelled to pay interest, from her own funds, for loans she allegedly did not
contract. We declared in one case that:

In the assessment of the testimonies of witnesses, this Court is guided by the rule
that for evidence to be believed, it must not only proceed from the mouth of a credible
witness, but must be credible in itself such as the common experience of mankind can
approve as probable under the circumstances. We have no test of the truth of human
testimony except its conformity to our knowledge, observation, and experience. Whatever is
repugnant to these belongs to the miraculous, and is outside of juridical cognizance.37

Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not petitioner,
who was listed as one of her (Santiago’s) creditors.38
Last, respondent inexplicably never presented Santiago as a witness to corroborate her story.39 The
presumption is that "evidence willfully suppressed would be adverse if produced."40 Respondent was
not able to overturn this presumption.

We hold that the CA committed reversible error when it ruled that respondent did not borrow the
amounts of US$100,000 and ₱500,000 from petitioner. We instead agree with the ruling of the RTC
making respondent liable for the principal amounts of the loans.

We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the
US$100,000 and ₱500,000 loans respectively. There was no written proof of the interest payable
except for the verbal agreement that the loans would earn 3% and 4% interest per month. Article 1956
of the Civil Code provides that "[n]o interest shall be due unless it has been expressly stipulated in
writing."

Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant to
Article 2209 of the Civil Code. It is well-settled that:

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.41

Hence, respondent is liable for the payment of legal interest per annum to be computed from
November 21, 1995, the date when she received petitioner’s demand letter.42 From the finality of the
decision until it is fully paid, the amount due shall earn interest at 12% per annum, the interim period
being deemed equivalent to a forbearance of credit.43

The award of actual damages in the amount of ₱50,000 and ₱100,000 attorney’s fees is deleted since
the RTC decision did not explain the factual bases for these damages.

WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August 20,
2002 resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET ASIDE.
The February 28, 1997 decision of the Regional Trial Court in Civil Case No. 96-266
is AFFIRMED with the MODIFICATION that respondent is directed to pay petitioner the amounts of
US$100,000 and ₱500,000 at 12% per annum interest from November 21, 1995 until the finality of the
decision. The total amount due as of the date of finality will earn interest of 12% per annum until fully
paid. The award of actual damages and attorney’s fees is deleted.

SO ORDERED.
Credit Transactions Case Digest: Republic V. Bagtas (1962)

 G.R. No. L-17474 October 25, 1962

FACTS:

 May 8, 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 1 year for breeding purposes subject to
a breeding fee of 10% of the book value of the bulls
 May 7, 1949: Jose requested for a renewal for another year for the three bulls but only one
bull was approved while the others are to be returned
 March 25, 1950: He wrote to the Director of Animal Industry that he would pay the value of
the 3 bulls
 October 17, 1950: he reiterated his desire to buy them at a value with a deduction of yearly
depreciation to be approved by the Auditor General.
 October 19, 1950: Director of Animal Industry advised him that either the 3 bulls are to be
returned or their book value without deductions should be paid not later than October 31, 1950
which he was not able to do
 December 20, 1950: An action at the CFI was commenced against Jose praying that he be
ordered to return the 3 bulls or to pay their book value of P3,241.45 and the unpaid breeding fee
of P199.62, both with interests, and costs
 July 5, 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, he could not return the animals nor pay their
value and prayed for the dismissal of the complaint.
 RTC: granted the action
 December 1958: granted an ex-parte motion for the appointment of a special sheriff to serve
the writ outside Manila
 December 6, 1958: Felicidad M. Bagtas, the surviving spouse of Jose who died on October
23, 1951 and administratrix of his estate, was notified
 January 7, 1959: she file a motion that the 2 bulls where returned by his son on June 26,
1952 evidenced by recipt and the 3rd bull died from gunshot wound inflicted during a Huk raid
and prayed that the writ of execution be quashed and that a writ of preliminary injunction be
issued. 

ISSUE: W/N the contract is commodatum and NOT a lease and the estate should be liable for the
loss due to force majeure due to delay.

HELD: YES. writ of execution appealed from is set aside, without pronouncement as to costs
 If contract was commodatum then Bureau of Animal Industry retained ownership or title to the
bull it should suffer its loss due to force majeure. A contract of commodatum is essentially
gratuitous.  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 if he keeps it
longer than the period stipulated
 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 because it was killed while in the custody of the administratrix of his
estate
 Special proceedings for the administration and settlement of the estate of the deceased Jose
V. Bagtas having been instituted in the CFI, 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.
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V.
Bagtas, petitioner-appellant.

D. T. Reyes, Liaison and Associates for petitioner-appellant.

Office of the Solicitor General for plaintiff-appellee.

PADILLA, J.:

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 in the amount of P626.17 with interest on 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.
G.R. No. L-46240             November 3, 1939

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,

vs.
BECK, defendant-appellee.

Mauricio Carlos for appellants.

Felipe Buencamino, Jr. for appellee.

IMPERIAL, J.:

The plaintiff brought this action to compel the defendant to return her certain furniture which she lent
him for his use. She appealed from the judgment of the Court of First Instance of Manila which
ordered that the defendant return to her the three has heaters and the four electric lamps found in the
possession of the Sheriff of said city, that she call for the other furniture from the said sheriff of Manila
at her own expense, and that the fees which the Sheriff may charge for the deposit of the furniture be
paid  pro rata  by both parties, without pronouncement as to the costs.

The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar
street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the plaintiff
and the defendant, the former gratuitously granted to the latter the use of the furniture described in the
third paragraph of the stipulation of facts, subject to the condition that the defendant would return
them to the plaintiff upon the latter's demand. The plaintiff sold the property to Maria Lopez and
Rosario Lopez and on September 14, 1936, these three notified the defendant of the conveyance,
giving him sixty days to vacate the premises under one of the clauses of the contract of lease. There
after the plaintiff required the defendant to return all the furniture transferred to him for them in the
house where they were found. On November 5, 1936, the defendant, through another person, wrote
to the plaintiff reiterating that she may call for the furniture in the ground floor of the house. On the 7th
of the same month, the defendant wrote another letter to the plaintiff informing her that he could not
give up the three gas heaters and the four electric lamps because he would use them until the 15th of
the same month when the lease in due to expire. The plaintiff refused to get the furniture in view of the
fact that the defendant had declined to make delivery of all of them. On November 15th, before
vacating the house, the defendant deposited with the Sheriff all the furniture belonging to the plaintiff
and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the custody of
the said sheriff.

In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in
holding that they violated the contract by not calling for all the furniture on November 5, 1936, when
the defendant placed them at their disposal; in not ordering the defendant to pay them the value of the
furniture in case they are not delivered; in holding that they should get all the furniture from the Sheriff
at their expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the deposit
of the furniture; in ruling that both parties should pay their respective legal expenses or the costs; and
in denying pay their respective legal expenses or the costs; and in denying the motions for
reconsideration and new trial. To dispose of the case, it is only necessary to decide whether the
defendant complied with his obligation to return the furniture upon the plaintiff's demand; whether the
latter is bound to bear the deposit fees thereof, and whether she is entitled to the costs of
litigation.lawphi1.net

ISSUE: Whether or not the contract entered into by the parties is commodatum?

The contract entered into between the parties is one of commadatum, because under it the plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership
thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the
latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil
Code). The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's
demand, means that he should return all of them to the plaintiff at the latter's residence or house. The
defendant did not comply with this obligation when he merely placed them at the disposal of the
plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. The provisions of
article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial
court, therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with her
obligation to get the furniture when they were offered to her.

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's
demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of
the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on
deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the
defendant wanted to retain the three gas heaters and the four electric lamps.

As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof by
the defendant in case of his inability to return some of the furniture because under paragraph 6 of the
stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the said
value. Should the defendant fail to deliver some of the furniture, the value thereof should be latter
determined by the trial Court through evidence which the parties may desire to present.

The costs in both instances should be borne by the defendant because the plaintiff is the prevailing
party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the
contract of commodatum, and without any reason he refused to return and deliver all the furniture
upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal
expenses and other judicial costs which the plaintiff would not have otherwise defrayed.

The appealed judgment is modified and the defendant is ordered to return and deliver to the plaintiff,
in the residence to return and deliver to the plaintiff, in the residence or house of the latter, all the
furniture described in paragraph 3 of the stipulation of facts Exhibit A. The expenses which may be
occasioned by the delivery to and deposit of the furniture with the Sheriff shall be for the account of
the defendant. the defendant shall pay the costs in both instances. So ordered.

Avanceña, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.

Colito T. Pajuyo v. CA
Facts:

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.

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.

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.

CA: 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. Pajuyo and Guevarra are in pari delicto or in equal fault.
The court will leave them where they are.

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 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.

Issue:

Whether or not the CA erred or abused its authority and discretion tantamount to lack of jurisdiction
in ruling that the Kasunduan voluntarily entered into by the parties was in fact a commodatum,
instead of a Contract of Lease as found by the Metropolitan Trial Court and in holding that the
ejectment case filed against defendant-appellant is without legal and factual basis.

Held:

The Court do not subscribe to the CA’s 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. An essential feature of
commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing
belonging to another is for a certain period. Thus, the bailor cannot demand the return of the thing
loaned until after expiration of the period stipulated, or after accomplishment of the use for which
the commodatum is constituted. If the bailor should have urgent need of the thing, he may demand
its return for temporary use. If the use of the thing is merely tolerated by the bailor, he can demand
the return of the thing at will, in which case the contractual relation is called a precarium. Under the
Civil Code, precarium is a kind of commodatum.

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. 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. These contracts certainly involve the
obligation to deliver or return the thing received.

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.
Pajuyo v. CA
GR No. 146364 June 3, 2004

Facts: Pajuyo entrusted a house to Guevara for the latter's use provided he should
return the same upon demand and with the condition that Guevara should be
responsible of the maintenance of the property. Upon demand Guevara refused to return
the property to Pajuyo. The petitioner then filed an ejectment case against Guevara with
the MTC who ruled in favor of the petitioner. On appeal with the CA, the appellate court
reversed the judgment of the lower court on the ground that both parties are illegal
settlers on the property thus have no legal right so that the Court should leave the
present situation with respect to possession of the property as it is, and ruling further
that the contractual relationship of Pajuyo and Guevara was that of a commodatum.

Issue: Is the contractual relationship of Pajuyo and Guevara that of a commodatum?

Held: No. The Court of Appeals’ theory that the Kasunduan is one of commodatum is
devoid of merit. In a contract of commodatum, one of the parties delivers to another
something not consumable so that the latter may use the same for a certain time and
return it. An essential feature of commodatum is that it is gratuitous. Another feature of
commodatum is that the use of the thing belonging to another is for a certain period.
Thus, the bailor cannot demand the return of the thing loaned until after expiration of
the period stipulated, or after accomplishment of the use for which the commodatum is
constituted. If the bailor should have urgent need of the thing, he may demand its
return for temporary use. If the use of the thing is merely tolerated by the bailor, he can
demand the return of the thing at will, in which case the contractual relation is called a
precarium. Under the Civil Code, precarium is a kind of commodatum. 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. The
tenant’s withholding of the property would then be unlawful.
G.R. No. L-20240      December 31, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE GRIJALDO, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

Isabelo P. Samson for defendant-appellant.

ZALDIVAR, J.:

In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank of
Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per annum,
compounded quarterly. These loans are evidenced by five promissory notes executed by the
appellant in favor of the Bank of Taiwan, Ltd., as follows: On June 1, 1943, P600.00; on June 3, 1943,
P159.11; on June 18, 1943, P22.86; on August 9, 1943,P300.00; on August 13, 1943, P200.00, all
notes without due dates, but because the loans were due one year after they were incurred. To
secure the payment of the loans the appellant executed a chattel mortgage on the standing crops on
his land, Lot No. 1494 known as Hacienda Campugas in Hinigiran, Negros Occidental.

By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided for in
the Trading with the Enemy Act, as amended, the assets in the Philippines of the Bank of Taiwan, Ltd.
were vested in the Government of the United States. Pursuant to the Philippine Property Act of 1946
of the United States, these assets, including the loans in question, were subsequently transferred to
the Republic of the Philippines by the Government of the United States under Transfer Agreement
dated July 20, 1954. These assets were among the properties that were placed under the
administration of the Board of Liquidators created under Executive Order No. 372, dated November
24, 1950, and in accordance with Republic Acts Nos. 8 and 477 and other pertinent laws.

On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman of the
Board of Liquidators, made a written extrajudicial demand upon the appellant for the payment of the
account in question. The record shows that the appellant had actually received the written demand for
payment, but he failed to pay.

The aggregate amount due as principal of the five loans in question, computed under the Ballantyne
scale of values as of the time that the loans were incurred in 1943, was P889.64; and the interest due
thereon at the rate of 6% per annum compounded quarterly, computed as of December 31, 1959 was
P2,377.23.

On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of Hinigaran,
Negros Occidental, to collect from the appellant the unpaid account in question. The Justice of the
Peace Of Hinigaran, after hearing, dismissed the case on the ground that the action had prescribed.
The appellee appealed to the Court of First Instance of Negros Occidental and on March 26, 1962 the
court a quo  rendered a decision ordering the appellant to pay the appellee the sum of P2,377.23 as of
December 31, 1959, plus interest at the rate of 6% per annum compounded quarterly from the date of
the filing of the complaint until full payment was made. The appellant was also ordered to pay the sum
equivalent to 10% of the amount due as attorney's fees and costs.

The appellant appealed directly to this Court. During the pendency of this appeal the appellant Jose
Grijaldo died. Upon motion by the Solicitor General this Court, in a resolution of May 13, 1963,
required Manuel Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are the legal
heirs of Jose Grijaldo to appear and be substituted as appellants in accordance with Section 17 of
Rule 3 of the Rules of Court.

In the present appeal the appellant contends: (1) that the appellee has no cause of action against the
appellant; (2) that if the appellee has a cause of action at all, that action had prescribed; and (3) that
the lower court erred in ordering the appellant to pay the amount of P2,377.23.
In discussing the first point of contention, the appellant maintains that the appellee has no privity of
contract with the appellant. It is claimed that the transaction between the Taiwan Bank, Ltd. and the
appellant, so that the appellee, Republic of the Philippines, could not legally bring action against the
appellant for the enforcement of the obligation involved in said transaction. This contention has no
merit. It is true that the Bank of Taiwan, Ltd. was the original creditor and the transaction between the
appellant and the Bank of Taiwan was a private contract of loan. However, pursuant to the Trading
with the Enemy Act, as amended, and Executive Order No. 9095 of the United States; and under
Vesting Order No. P-4, dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity
which was declared to be under the jurisdiction of the enemy country (Japan), were vested in the
United States Government and the Republic of the Philippines, the assets of the Bank of Taiwan, Ltd.
were transferred to and vested in the Republic of the Philippines. The successive transfer of the rights
over the loans in question from the Bank of Taiwan, Ltd. to the United States Government, and from
the United States Government to the government of the Republic of the Philippines, made the
Republic of the Philippines the successor of the rights, title and interest in said loans, thereby creating
a privity of contract between the appellee and the appellant. In defining the word "privy" this Court, in
a case, said:

The word "privy" denotes the idea of succession ... hence an assignee of a credit, and one
subrogated to it, etc. will be privies; in short, he who by succession is placed in the position of
one of those who contracted the judicial relation and executed the private document and
appears to be substituting him in the personal rights and obligation is a privy (Alpurto vs.
Perez, 38 Phil. 785, 790).

The United States of America acting as a belligerent sovereign power seized the assets of the Bank of
Taiwan, Ltd. which belonged to an enemy country. The confiscation of the assets of the Bank of
Taiwan, Ltd. being an involuntary act of war, and sanctioned by international law, the United States
succeeded to the rights and interests of said Bank of Taiwan, Ltd. over the assets of said bank. As
successor in interest in, and transferee of, the property rights of the United States of America over the
loans in question, the Republic of the Philippines had thereby become a privy to the original contracts
of loan between the Bank of Taiwan, Ltd. and the appellant. It follows, therefore, that the Republic of
the Philippines has a legal right to bring the present action against the appellant Jose Grijaldo.

The appellant likewise maintains, in support of his contention that the appellee has no cause of action,
that because the loans were secured by a chattel mortgage on the standing crops on a land owned by
him and these crops were lost or destroyed through enemy action his obligation to pay the loans was
thereby extinguished. This argument is untenable. The terms of the promissory notes and the chattel
mortgage that the appellant executed in favor of the Bank of Taiwan, Ltd. do not support the claim of
appellant. The obligation of the appellant under the five promissory notes was not to deliver a
determinate thing namely, the crops to be harvested from his land, or the value of the crops that
would be harvested from his land. Rather, his obligation was to pay a generic thing — the amount of
money representing the total sum of the five loans, with interest. The transaction between the
appellant and the Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money.
"By a contract of (simple) loan, one of the parties delivers to another ... money or other consumable
thing upon the condition that the same amount of the same kind and quality shall be paid." (Article
1933, Civil Code) The obligation of the appellant under the five promissory notes evidencing the loans
in questions is to pay the value thereof; that is, to deliver a sum of money — a clear case of an
obligation to deliver, a generic thing. Article 1263 of the Civil Code provides:

In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind
does not extinguish the obligation.

The chattel mortgage on the crops growing on appellant's land simply stood as a security for the
fulfillment of appellant's obligation covered by the five promissory notes, and the loss of the crops did
not extinguish his obligation to pay, because the account could still be paid from other sources aside
from the mortgaged crops.

In his second point of contention, the appellant maintains that the action of the appellee had
prescribed. The appellant points out that the loans became due on June 1, 1944; and when the
complaint was filed on January 17,1961 a period of more than 16 years had already elapsed — far
beyond the period of ten years when an action based on a written contract should be brought to court.

This contention of the appellant has no merit. Firstly, it should be considered that the complaint in the
present case was brought by the Republic of the Philippines not as a nominal party but in the exercise
of its sovereign functions, to protect the interests of the State over a public property. Under paragraph
4 of Article 1108 of the Civil Code prescription, both acquisitive and extinctive, does not run against
the State. This Court has held that the statute of limitations does not run against the right of action of
the Government of the Philippines (Government of the Philippine Islands vs. Monte de Piedad, etc.,
35 Phil. 738-751).Secondly, the running of the period of prescription of the action to collect the loan
from the appellant was interrupted by the moratorium laws (Executive Orders No. 25, dated
November 18, 1944; Executive Order No. 32. dated March 10, 1945; and Republic Act No. 342,
approved on July 26, 1948). The loan in question, as evidenced by the five promissory notes, were
incurred in the year 1943, or during the period of Japanese occupation of the Philippines. This case is
squarely covered by Executive Order No. 25, which became effective on November 18, 1944,
providing for the suspension of payments of debts incurred after December 31, 1941. The period of
prescription was, therefore, suspended beginning November 18, 1944. This Court, in the case
of Rutter vs. Esteban (L-3708, May 18, 1953, 93 Phil. 68), declared on May 18, 1953 that the
Moratorium Laws, R.A. No. 342 and Executive Orders Nos. 25 and 32, are unconstitutional; but in that
case this Court ruled that the moratorium laws had suspended the prescriptive period until May 18,
1953. This ruling was categorically reiterated in the decision in the case of Manila Motors vs. Flores,
L-9396, August 16, 1956. It follows, therefore, that the prescriptive period in the case now before US
was suspended from November 18,1944, when Executive Orders Nos. 25 and 32 were declared
unconstitutional by this Court. Computed accordingly, the prescriptive period was suspended for 8
years and 6 months. By the appellant's own admission, the cause of action on the five promissory
notes in question arose on June 1, 1944. The complaint in the present case was filed on January 17,
1961, or after a period of 16 years, 6 months and 16 days when the cause of action arose. If the
prescriptive period was not interrupted by the moratorium laws, the action would have prescribed
already; but, as We have stated, the prescriptive period was suspended by the moratorium laws for a
period of 8 years and 6 months. If we deduct the period of suspension (8 years and 6 months) from
the period that elapsed from the time the cause of action arose to the time when the complaint was
filed (16 years, 6 months and 16 days) there remains a period of 8 years and 16 days. In other words,
the prescriptive period ran for only 8 years and 16 days. There still remained a period of one year, 11
months and 14 days of the prescriptive period when the complaint was filed.

In his third point of contention the appellant maintains that the lower court erred in ordering him to pay
the amount of P2,377.23. It is claimed by the appellant that it was error on the part of the lower court
to apply the Ballantyne Scale of values in evaluating the Japanese war notes as of June 1943 when
the loans were incurred, because what should be done is to evaluate the loans on the basis of the
Ballantyne Scale as of the time the loans became due, and that was in June 1944. This contention of
the appellant is also without merit.

The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of December
31, 1959, plus interest rate of 6% per annum compounded quarterly from the date of the filing of the
complaint. The sum total of the five loans obtained by the appellant from the Bank of Taiwan, Ltd. was
P1,281.97 in Japanese war notes. Computed under the Ballantyne Scale of values as of June 1943,
this sum of P1,281.97 in Japanese war notes in June 1943 is equivalent to P889.64 in genuine
Philippine currency which was considered the aggregate amount due as principal of the five loans,
and the amount of P2,377.23 as of December 31, 1959 was arrived at after computing the interest on
the principal sum of P889.64 compounded quarterly from the time the obligations were incurred in
1943.

It is the stand of the appellee that the Ballantyne scale of values should be applied as of the time the
obligation was incurred, and that was in June 1943. This stand of the appellee was upheld by the
lower court; and the decision of the lower court is supported by the ruling of this Court in the case
of Hilado vs. De la Costa (G.R. No. L-150, April 30, 1949; 46 O.G. 5472), which states:

... Contracts stipulating for payments presumably in Japanese war notes may be enforced in
our Courts after the liberation to the extent of the just obligation of the contracting parties and,
 as said notes have become worthless, in order that justice may be done and the party entitled
to be paid can recover their actual value in Philippine Currency, what the debtor or defendant
bank should return or pay is the value of the Japanese military notes in relation to the peso in
Philippine Currency obtaining on the date when and at the place where the obligation was
incurred unless the parties had agreed otherwise. ... . (italics supplied)

IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs against the
appellant. Inasmuch as the appellant Jose Grijaldo died during the pendency of this appeal, his estate
must answer in the execution of the judgment in the present case.

Bengzon, C.J., Concepcion, Barrera, Regala, Bautista Angelo, Reyes, J.B.L., Makalintal and
Bengzon, J.P., JJ., concur.
G.R. No. 225433, August 28, 2019

LARA'S GIFTS & DECORS, INC., PETITIONER, v.

MIDTOWN INDUSTRIAL SALES, INC., RESPONDENT.

DECISION

CARPIO, J.:

The Case

This petition for review1 assails the 21 April 2016 Decision 2 and the 29 June 2016
Resolution3 of the Court of Appeals in CA-G.R. CV No. 102465. The Court of Appeals
affirmed the 27 January 2014 Decision4 of the Regional Trial Court, Branch 128,
Caloocan City in Civil Case No. C-22007.

The Facts

Petitioner Lara's Gifts & Decors, Inc. (petitioner) is engaged in the business of
manufacturing, selling, and exporting handicraft products. On the other hand,
respondent Midtown Industrial Sales, Inc. (respondent) is engaged in the business of
selling industrial and construction materials, and petitioner is one of respondent's
customers. Respondent alleged that from January 2007 up to December 2007, petitioner
purchased from respondent various industrial and construction materials in the total
amount of P1,263,104.22. The purchases were on a sixty (60)-day credit term, with the
condition that 24% interest per annum would be charged on all accounts overdue, as
stated in the sales invoices. Petitioner paid for its purchases by issuing several
Chinabank postdated checks in favor of respondent. However, when respondent
deposited the Chinabank checks on their maturity dates, the checks bounced. After
repeated demands from respondent, petitioner replaced the bounced checks with new
postdated Export and Industry Bank checks. However, when respondent deposited the
replacement checks on their maturity dates, the checks were likewise dishonored for
being "Drawn Against Insufficient Funds," and subsequently, for "Account Closed."
Respondent sent a demand letter5 dated 21 January 2008, which was received by
petitioner on 22 January 2008, informing petitioner of the bounced checks and
demanding that petitioner settle its accounts. Still petitioner failed to pay, prompting
respondent to file on 5 February 2008 a Complaint 6 for Sum of Money with Prayer for
Attachment against petitioner.

In its Answer,7 petitioner admitted that from January 2007 to December 2007, petitioner
purchased from respondent, on a 60-day credit term, various industrial and construction
materials in the total amount of P1,263,104.22. However, petitioner claimed that most
of the deliveries made were substandard and of poor quality. Petitioner alleged that the
checks it issued for payment were not for value because not all of the materials
delivered by respondent were received in good order and condition. Thus, when
petitioner used the raw materials, the finished product allegedly did not pass the
standards required by petitioner's buyers from the United States (US) who rejected the
products. Furthermore, due to the economic recession in the US, subsequent orders
made by petitioner's US buyers were canceled. Petitioner claimed that on 19 February
2008, a fire razed its factory and office, destroying its equipment, machineries, and
inventories, including those rejected by the US buyers.

The Ruling of the Trial Court

On 27 January 2014, the trial court rendered a Decision, the dispositive portion of which
reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff
MIDTOWN INDUSTRIAL SALES, INC. and against the defendant LARA'S GIFTS [&]
DECORS, INC. ordering the latter to pay the former the following amount:

1. ONE MILLION TWO HUNDRED SIXTY THREE THOUSAND ONE HUNDRED FOUR PESOS
and 22/100 (Php1,263,104.22) plus interest fixed at 24% per annum to be computed
from February 5, 2008, the date of judicial demand, until the judgment obligation is fully
paid.

2. The sum of FIFTY THOUSAND PESOS (Php50,000.00) as and by way of attorney's

fees.

Finally, defendant is ordered to pay the cost of suit.

SO ORDERED.8
The trial court held that petitioner failed to prove that the deliveries made by respondent
did not comply with the required specifications. Other than the self-serving denials of its
witnesses, no other evidence was offered by petitioner to prove that the materials
delivered were substandard. On the other hand, the amount of P1,263,104.22 claimed
by respondent against petitioner was supported by the sales invoices and postdated
checks. The trial court also held that the stipulated 24% interest per annum on overdue
accounts is not unconscionable.

The Ruling of the Court of Appeals

The Court of Appeals denied petitioner's appeal, and affirmed the 27 January 2014
Decision of the trial court.

The Court of Appeals sustained the finding of the trial court that petitioner admitted
issuing postdated checks as payment for the materials purchased from respondent from
January 2007 to December 2007. The Court of Appeals ruled that petitioner failed to
prove that the materials delivered were substandard and of poor quality to justify its
claim that the checks were issued without valuable consideration.

On the 24% interest per annum imposed, the Court of Appeals found implausible

petitioner's claim that it was placed in a disadvantageous position. Petitioner could not
have been cheated or misled into agreeing to the 24% interest rate per annum that was
stated in the sales invoices. Petitioner, an established company with numerous
transactions with respondent prior to the purchases made in 2007, could have
negotiated with respondent for more favorable terms. Since the 24% interest rate per
annum was stipulated in writing, the Court of Appeals held that such rate should be
applied considering that petitioner has not shown that it was placed at a disadvantage in
its contractual relation with respondent.

The Issues

Petitioner raises the following issues:

I. WHETHER OR NOT MIDTOWN'S SALES INVOICES HAVE PROBATIVE

VALUE, CONSIDERING THAT THEIR GENUINENESS, DUE EXECUTION AND
AUTHENTICITY ARE NOT ESTABLISHED UNDER SECTION 20, RULE 132 OF
THE RULES OF COURT.
 II. WHETHER OR NOT [LARA'S GIFTS & DECORS, INC.] IS IN DEFAULT OF
ITS CONTRACTUAL OBLIGATIONS.

III. WHETHER OR NOT ARTICLES 1192 AND 1283 OF THE CIVIL CODE ARE
APPLICABLE IN THE PRESENT CASE.

IV. WHETHER OR NOT THE INTEREST RATE FIXED AT 24% PER ANNUM IS
VOID.

V. ASSUMING THAT THE INTEREST RATE OF 24% IS VALID, WHETHER OR

NOT THE SAID RATE SHALL BE APPLIED ONLY UNTIL FINALITY OF
JUDGMENT.9

The Court's Ruling

We find the petition without merit. We affirm the ruling of the Court of Appeals with
modification.

Admissibility of the Sales Invoices

Petitioner argues that the sales invoices on the alleged purchases have no probative
value because their genuineness, due execution, and authenticity have not been
established. Petitioner stresses that in paragraph 2 of its Answer, 10 it only admitted the
existence of the sales invoices but not their due execution.

It should be stressed that petitioner admitted in its Answer that from January 2007 to
December 2007, it purchased from respondent various industrial and construction
materials in the total amount of P1,263,104.22. Petitioner likewise admitted the
existence of the sales invoices covering the said purchases, which were attached as
annexes to the Complaint. Although petitioner stated that it is not admitting the due
execution of the sales invoices, petitioner's Answer failed to specifically deny or contest
under oath the genuineness or due execution of any of the sales invoices or any of the
signatures of petitioner's representatives or employees appearing therein. Furthermore,
petitioner failed to specify which of the sales invoices pertain to materials delivered
which were allegedly substandard and of poor quality.

The rule on actionable documents is provided under Sections 7 and 8, Rule 8 of the 1997
Rules of Civil Procedure:
Sec. 7. Action or defense based on document. - Whenever an action or defense is based
upon a written instrument or document, the substance of such instrument or document
shall be set forth in the pleading, and the original or a copy thereof shall be attached to
the pleading as an exhibit, which shall be deemed to be a part of the pleading, or said
copy may with like effect be set forth in the pleading.

Sec. 8. How to contest such documents. - When an action or defense is founded upon a
written instrument, copied in or attached to the corresponding pleading as provided in
the preceding section, the genuineness and due execution of the instrument shall
be deemed admitted unless the adverse party, under oath, specifically denies
them, and sets forth what he claims to be the facts; but the requirement of an oath
does not apply when the adverse party does not appear to be a party to the instrument
or when compliance with an order for an inspection of the original instrument is refused.
(Emphasis supplied)
Section 10 of Rule 8 further describes how a specific denial should be made:
Sec. 10. Specific denial. - A defendant must specify each material allegation of
fact the truth of which he does not admit and, whenever practicable, shall set
forth the substance of the matters upon which he relies to support his
denial. Where a defendant desires to deny only a part of an averment, he shall specify
so much of it as is true and material and shall deny only the remainder. Where a
defendant is without knowledge or information sufficient to form a belief as to the truth
of a material averment made in the complaint, he shall so state, and this shall have the
effect of a denial. (Emphasis supplied)
In this case, petitioner did not state the facts or substance of the matters relied upon to
support its denial of the due execution of the sales invoices As held m Sy-Quia v
Marsman,11 "the Rules require that besides specifying the allegations of fact not
admitted, the answer should set forth the matters relied upon m support of the denial;
so that, in effect, the Rules are no longer satisfied with mere denials, even if specific, but
demand that defendant manifest what he considers to be the true facts." The purpose of
the specific denial is to compel the defendant to specify the allegations which he or she
intends to disprove and disclose the matters relied upon to support such
denial,12 thereby limiting the issues and avoiding unnecessary delays and
surprises.13 Petitioner's general denial amounts to an admission of the genuineness and
due execution of the sales invoices.

Default in the Contractual Obligations

Petitioner admits that it made purchases amounting to P1,263,104.22, but that the
materials delivered were substandard or of poor quality. 14 In effect, petitioner is alleging
fraud in the transactions, which petitioner is bound to substantiate. Whoever alleges
fraud or mistake affecting a transaction must substantiate his allegation and has the
burden of proof.15 As found by the trial court and the appellate court, petitioner failed to
substantiate its claim that the materials delivered by respondent did not comply with the
specifications required or that the materials were substandard and of poor quality.

The best evidence of the transaction between petitioner and respondent are the sales
invoices and the checks issued by petitioner as payments for the materials purchased.
The sales invoices show that petitioner, through its authorized staff or employees,
acknowledged receipt of the deliveries without protest. The sales invoices clearly stated
that petitioner "RECEIVED MERCHANDISE IN GOOD ORDER &
CONDITION."16 Furthermore, petitioner admits issuing the postdated checks as payment
for the materials delivered. The postdated checks were subsequently dishonored for
being "drawn against insufficient funds" or for "account closed." Petitioner insists that
the checks were issued without valuable consideration since most of the materials
delivered did not comply with the required specifications. However, other than its bare
allegation that the materials delivered were substandard and of poor quality, petitioner
failed to prove or substantiate its claims. As found by the trial court, none of petitioner's
witnesses was able to present proof that the materials delivered were substandard or of
poor quality.

Applicability of Articles 1192 and 1283 of the Civil Code

Articles 1192 and 1283 of the Civil Code read:

Art 1192 In case both parties have committed a breach of the obligation, the liability of
the first infractor shall be equitably tempered by the courts fit cannot be determined
which of the parties first violated the contract the same shall be deemed extinguished,
and each shall bear his own damages.

Art 1283 If one of the parties to a suit over an obligation has a claim for damages
against the other, the former may set it off by proving his right to said damages and the
amount thereof.
As previously discussed, petitioner failed to substantiate its claims that the materials
delivered were substandard or of poor quality. Thus, petitioner cannot demand either a
tempering of its liability or an offset of damages.
Validity of the 24% Interest Rate

In Asian Construction and Development Corporation v. Cathay Pacific Steel

Corporation,17 the Court upheld the validity of interest rate fixed at 24% per annum that
was expressly stipulated in the sales invoices. The Court held that petitioner construction
company is presumed to have full knowledge of the terms and conditions of the contract
and that by not objecting to the stipulations in the sales invoice, it also bound itself to
pay not only the stated selling price but also the interest of 24% per annum on overdue
accounts and the 25% of the unpaid invoice for attorney's fees.

In the present case, petitioner, which has been doing business since 1990 and has been
purchasing various materials from respondent since 2004, cannot claim to have been
misled into agreeing to the 24% interest rate which was expressly stated in the sales
invoices. Besides, this Court has already ruled in several cases that an interest rate of
24% per annum agreed upon between the parties is valid and binding 18 and not
excessive and unconscionable.19 Thus, the stipulated 24% interest per annum is binding
on petitioner.

Imposition of Legal Interest

The rates of interest stated in the guidelines on the imposition of interests, as laid down
in the landmark case of Eastern Shipping Lines, Inc. v. Court of Appeals 20 have already
been modified in Bangko Sentral ng Pilipinas Monetary Board (BSP-MB) Circular No. 799,
Series of 2013, which reduced the rate of legal interest from twelve percent (12%) per
annum to six percent (6%) per annum.

The modified guidelines are detailed in the 2013 case of Nacar v. Gallery Frames,21 thus:

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:

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

contracts, delicts or quasi-delicts is breached, the contravenor can be held liable
for damages. The provisions under Title XVIII on "Damages" of the Civil Code
govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:

1. When the obligation is breached, and it consists in the payment

of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 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 demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty
cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
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. 22 (Emphasis
supplied)
However, if the rate of interest is stipulated, such stipulated interest shall apply and not
the legal interest,23 provided the stipulated interest is not excessive and
unconscionable.24The stipulated interest shall be applied until full payment of the
obligation because that is the law between the parties. 25 The legal interest only
applies in the absence of stipulated interest. This is in accord with Article 2209 of the
Civil Code, which states:
Art 2209. If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six percent per annum. (Boldfacing
and italicization supplied)
Even BSP-MB Circular No. 799 expressly states that the legal interest applies only in
the absence of stipulated interest in loan contracts. Circular No. 799 reads:
CIRCULAR NO. 799
Series of 2013

Subject: Rate of interest in the absence of stipulation

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. (Emphasis supplied)

Clearly, Circular No. 799 will apply only in the absence of stipulated interest.

In Eastern Shipping Lines, which first laid down the guidelines on the computation of
legal interest, the Court declared:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:

1. When the obligation is breached, and it consists in the payment of a sum of

money, i.e., a loan or forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the
date of the judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount of [sic] finally
adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1
or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.26 (Emphasis supplied)
Paragraph 3 above failed to qualify that for loans or forbearance of money, the
prevailing legal interest should only apply in the absence of stipulated interest.
The stipulated interest is the law between the parties and should apply from
the time of extrajudicial or judicial demand until full payment. 27 This omission
resulted in several rulings of this Court, which imposed the stipulated interest on the
adjudged amount until finality of the decision BUT applied the prevailing legal interest in
lieu of the stipulated interest from finality of the decision until full payment of the
obligation.28 This is in direct contravention of the law, particularly Article 2209 of the Civil
Code, which mandates that when a debtor incurs a delay in obligations to pay a sum of
money, the indemnity for damages shall be the payment of the interest agreed upon.
Only in the absence of a stipulated interest will the legal interest be applied.

To repeat, the stipulated interest is the law between the parties, and should be applied
until full payment of the obligation. Article 1159 of the Civil Code provides that
"[o]bligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith." Article 1956 of the Civil Code also
states that "[n]o interest shall be due unless it has been expressly stipulated in writing."
Furthermore, the contracting parties may establish such stipulations as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order,
or public policy,29 and the parties are bound to fulfill what has been expressly
stipulated.30Thus, unless the stipulated interest is excessive and unconscionable,
there is no legal basis for the reduction of the stipulated interest at any time
until full payment of the principal amount. The stipulated interest remains in force
until the obligation is satisfied. In the absence of stipulated interest, the prevailing legal
interest prescribed by the Bangko Sentral ng Pilipinas shall apply.

Moreover, there should be no compounding of interest, whether stipulated or legal,

unless compounding is expressly agreed upon in writing by the parties or mandated by
law or regulation.31 Section 5 of the Usury Law, as amended, expressly provides that
compounded interest "shall not be reckoned, except by agreement."32 Being more
burdensome than simple interest, compounded interest must be expressly stipulated by
the parties or mandated by law or regulation.

Articles 2210 and 2211 of the Civil Code Apply to Obligations Other Than Loans
or Forbearance of Money, Goods or Credits

Articles 2210 and 2211 of the Civil Code provide:

Art. 2210. Interest may, in the discretion of the court, be allowed upon damages
awarded for breach of contract.

Art. 2211. In crimes and quasi-delicts, interest as a part of the damages may, in a
proper case, be adjudicated in the discretion of the court.
Under these articles, when the obligation, other than loans or forbearance of
money, goods or credits, is breached, the court may in its discretion impose an
interest on the damages awarded. The interest imposed in the discretion of the court will
be the prevailing legal interest prescribed by the Bangko Sentral ng Pilipinas.

In contrast, Article 2209 of the Civil Code is applicable only to loans or forbearance of
money, goods or credit which arise out of "obligations consisting in the payment of
a sum of money, and the debtor incurs in delay," and thus where there is a debtor-
creditor relationship. Articles 2210 and 2211 refer to obligations that do not involve the
payment of a sum of money and there is no debtor-creditor relationship. Moreover, the
payment of interest in Article 2209 is mandatory, while the payment of interest in
Articles 2210 and 2211 is discretionary on the court.

The Legal Interest Rate in Article 2209 of the Civil Code Has Been Amended

On 24 February 1916, Act No. 265533 or the Usury Law was enacted which fixed the legal
interest at 6% per annum for loans, forbearance of money, goods, credits or
judgments.34 This legal interest applied in the absence of stipulated interest.

On 18 June 1949, Republic Act No. 386, 35 otherwise known as the Civil Code of the
Philippines, was enacted and took effect the following year. Article 2209 36 of the Civil
Code declared that the legal interest in obligations to pay a sum of money is 6%  per
annum when the debtor incurs in delay. Article 2209 applies to loans and forbearance of
money, goods or credits. 37 This legal interest will apply in the absence of stipulated
interest.38

On 29 January 1973, Presidential Decree No. 116 39 (P.D. No. 116) was issued, which
amended the Usury Law and fixed the legal interest for loans, forbearance of money,
goods, credits or judgments at 6% per annum "or such rate as may be prescribed by
the Monetary Board of the Central Bank of the Philippines." This legal interest
applies in the absence of stipulated interest. Section 11 of P.D. No. 116 states: "All Acts
and parts of Acts inconsistent with the provisions of this Decree are hereby
repealed." This repealing clause applied to Acts, Commonwealth Acts, and Republic
Acts, including Article 2209 of Republic Act No. 386 (Civil Code of the Philippines). When
P.D. No. 116 says "[a]ll Acts and parts of Acts," it does not mean only Act No. 2655
(Usury Law) but all other Acts, without exception.
P.D. No. 116 was obviously intended to amend all laws prescribing the rate of legal
interest in the absence of stipulated interest. The Whereas clauses of P.D. No. 116
state that "the monetary authorities have recognized the need to amend the present
Usury Law to allow for more flexible interest rate ceilings that would be more
responsive to the requirements of changing economic conditions,"40 and that "the
availability of adequate capital resources is, among other factors, a decisive element in
the achievement of the declared objective of accelerating the growth of the
national economy."41 Thus, RD. No. 116 amended all laws, including Article 2209 of the
Civil Code, prescribing the rate of legal interest to allow the Bangko Sentral ng
Pilipinas to calibrate the legal interest rate to meet changing economic conditions and to
accelerate the growth of the national economy. If RD. No. 116 did not amend Article
2209, then all "obligations consisting in the payment of a sum of money," which is
the all-encompassing coverage of Article 2209 applying to all loans or forbearance of
money, goods, credits or judgments, would still be subject to the fixed 6% legal interest
rate. This would prevent the Bangko Sentral ng Pilipinas from calibrating the legal
interest to meet changing economic conditions and to accelerate the growth of the
national economy.

Thus, the legal interest referred to in Article 2209 of the Civil Code is now 6% per
annum or as may be fixed by the Monetary Board of the Bangko Sentral ng
Pilipinas pursuant to the Usury Law, as amended by PD116.

Forbearance of Money, Goods or Credits

The term "forbearance" in the context of the Usury Law has been defined as "a
contractual obligation of lender or creditor to refrain, during a given period of time, from
requiring the borrower or debtor to repay a loan or debt then due and payable." 42 In
consideration of this forbearance, the parties often agree on the payment of interest on
the amount due.

In Estores v. Spouses Supangan,43 the Court ruled that "forbearance of money, goods or

credits" has a "separate meaning from a loan." The Court then reiterated,
citing Crismina Garments, Inc. v. Court of Appeals,44 that "forbearance of money, goods
or credits" refers to "arrangements other than loan agreements, where a person
acquiesces to the temporary use of his money, goods or credits pending happening of
certain events or fulfillment of certain conditions." The Court explained in Estores:
The contract involved in this case is admittedly not a loan but a Conditional Deed of
Sale. However, the contract provides that the seller (petitioner) must return the
payment made by the buyer (respondent-spouses) if the conditions are not fulfilled.
There is no question that they have in fact, not been fulfilled as the seller (petitioner)
has admitted this. Notwithstanding demand by the buyer (respondent-spouses), the
seller (petitioner) has failed to return the money and should be considered in default
from the time that demand was made on September 27, 2000.

Even if the transaction involved a Conditional Deed of Sale, can the stipulation governing
the return of the money be considered as a forbearance of money which required
payment of interest at the rate of 12%? We believe so.

In Crismina Garments, Inc. v. Court of Appeals, "forbearance" was defined as a

"contractual obligation of lender or creditor to refrain during a given period of time, from
requiring the borrower or debtor to repay a loan or debt then due and payable." This
definition describes a loan where a debtor is given a period within which to pay a loan or
debt. In such case, "forbearance of money, goods or credits" will have no distinct
definition from a loan. We believe, however, that the phrase "forbearance of
money, goods or credits" is meant to have a separate meaning from a loan,
otherwise there would have been no need to add that phrase as a loan is
already sufficiently defined in the Civil Code. Forbearance of money, goods or
credits should therefore refer to arrangements other than loan agreements,
where a person acquiesces to the temporary use of his money, goods or credits
pending happening of certain events or fulfillment of certain conditions. In this
case, the respondent-spouses parted with their money even before the conditions were
fulfilled. They have therefore allowed or granted forbearance to the seller (petitioner) to
use their money pending fulfillment of the conditions. They were deprived of the use of
their money for the period pending fulfillment of the conditions and when those
conditions were breached, they are entitled not only to the return of the principal
amount paid, but also to compensation for the use of their money. And the
compensation for the use of their money, absent any stipulation, should be the same
rate of legal interest applicable to a loan since the use or deprivation of funds is similar
to a loan.45 (Emphasis supplied)
The Court further stressed in Reformina v. Judge Tomol, Jr.46 that Act No. 2655 or the
Usury Law deals with "interest on (1) loans; (2) forbearance of any money, goods
or credits; and (3) the rate allowed in judgments."47 The Court clarified that the
term "judgments" refers to judgments in litigations involving loans or forbearance of any
money, goods or credits. 48 As declared in Eastern Shipping Lines, the "finality [of
judgment] until its satisfaction xxx [is a] period being deemed to be by then an
equivalent to a forbearance of credit"49or a forbearance of money. P.D. No. 116
amended Act No. 2655 or the Usury Law, as follows:
SECTION 1. Section one of Act Numbered two thousand six hundred fifty-five is hereby
amended to read as follows:
"Sec. 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 express contract
as to such rate of interest, shall be six per centum per annum or such rate as
may be prescribed by the Monetary Board of the Central Bank of the
Philippines for that purpose in accordance with the authority hereby granted."
SECTION 2. The same Act is hereby amended by adding the following section
immediately after section one thereof, which reads as follows:
"Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or
rate of interest for the loan or renewal thereof or the forbearance of any money, goods
or credits, and to chance [sic] such rate or rates whenever warranted by prevailing
economic and social conditions: Provided, That such changes shall not be made oftener
than once every twelve months.

In the exercise of the authority herein granted, the Monetary Board may prescribe
higher maximum rates for consumer loans or renewals thereof as well as loans made by
pawnshops, finance companies and other similar credit institutions although the rates
prescribed for these institutions need not necessarily be uniform."
xxxx

SECTION 7. Section five of the same Act is hereby amended to read as follows:
"Sec. 5. In computing the interest on any obligation, promissory note or other
instrument or contract, compound interest shall not be reckoned, except by
agreement: Provided, That whatever compound interest is agreed upon, the effective
rate of interest charged by the creditor shall not exceed the equivalent of the maximum
rate prescribed by the Monetary Board, or, in default thereof, whenever the debt is
judicially claimed, in which last case it shall draw six per centum per annum interest or
such rate as may be prescribed by the Monetary Board. No person or corporation shall
require interest to be paid in advance for a period of not more than one year: Provided,
however, That whenever interest is paid in advance, the effective rate of interest
charged by the creditor shall not exceed the equivalent of the maximum rate prescribed
by the Monetary Board."
xxxx (Boldfacing and italicization supplied)
Clearly, under the law and jurisprudence, the prevailing legal interest prescribed by
the Bangko Sentral ng Pilipinas applies, in the absence of stipulated interest, on the
following: (1) loans; (2) forbearance of any money, goods or credits; and (3) judgments
in litigations involving loans or forbearance of money, goods or credits. It should be
noted that under Section 1 of P.D. No. 116, the prevailing legal interest prescribed by
the Bangko Sentral ng Pilipinas applies to "judgments" in the absence of stipulated
interest.

Forbearance of goods includes the sale of goods on installment, requiring periodic

payment of money to the creditor. Forbearance of credits includes the sale of anything
on credit, where the full amount due can be paid at a date after the sale.

As previously discussed, the general rule is that the interest stipulated by the parties
shall apply, provided it is not excessive and unconscionable. Absent any stipulation, the
Court has consistently held that the prevailing legal interest prescribed by the Bangko
Sentral ng Pilipinas applies to loans or forbearance of money, goods or credits, as well as
to judgments.50

To summarize, the guidelines on the imposition of interest as provided in Eastern

Shipping Lines and Nacar are further modified for clarity and uniformity, as follows:
With regard 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, goods, credits or judgments, the
interest due shall be that which is stipulated by the parties in writing, 51provided
it is not excessive and unconscionable, which, in the absence of a stipulated
reckoning date,52shall be computed from default, i.e., from extrajudicial or
judicial demand in accordance with Article 1169 53of the Civil Code, UNTIL FULL
PAYMENT, without compounding any interest unless compounded interest is
expressly stipulated by the parties, by law or regulation. Interest due on the
principal amount accruing as of judicial demand shall SEPARATELY earn legal
interest54at the prevailing rate prescribed by the Bangko Sentral ng
Pilipinas,55from the time of judicial demand UNTIL FULL PAYMENT. 56

2. In the absence of stipulated interest, in a loan or forbearance of money,

goods, credits or judgments, the rate of interest on the principal amount shall
be the prevailing legal interest prescribed by the Bangko Sentral ng Pilipinas,
which shall be computed from default, i.e., from extrajudicial or judicial
demand in accordance with Article 1169 of the Civil Code, UNTIL FULL
PAYMENT, without compounding any interest unless compounded interest is
expressly stipulated by law or regulation. Interest due on the principal amount
accruing as of judicial demand shall SEPARATELY earn legal interest at the
prevailing rate prescribed by the Bangko Sentral ng Pilipinas,57from the time of
judicial demand UNTIL FULL PAYMENT.58

3. When the obligation, not constituting a loan or forbearance of money, goods,

credits or judgments, is breached, an interest on the amount of damages
awarded may be imposed in the discretion of the court at the prevailing legal
interest prescribed by the Bangko Sentral ng Pilipinas, pursuant to Articles
2210 and 2011 of the Civil Code. 59No interest, however, shall be adjudged on
unliquidated claims or damages until the demand can be established with
reasonable certainty.60Accordingly, where the amount of the claim or damages
is established with reasonable certainty, the prevailing legal interest shall
begin to run from the time the claim is made extrajudicially or judicially (Art.
1169, Civil Code) UNTIL FULL PAYMENT, but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin
to run only from the date of the judgment of the trial court (at which time the
quantification of damages may be deemed to have been reasonably
ascertained) UNTIL FULL PAYMENT. The actual base for the computation of the
interest shall, in any case, be on the principal amount finally adjudged, without
compounding any interest unless compounded interest is expressly stipulated
by law or regulation.61
This case involves a forbearance of credit wherein petitioner was granted a 60-day credit
term on its purchases, with the condition that a 24% interest per annum would be
charged on all accounts overdue. Since there was an extrajudicial demand before the
complaint was filed, interest on the amount due begins to run not from the filing of the
complaint but from the date of such extrajudicial demand. 62 Thus, the unpaid principal
obligation of P1,263,104.22 shall earn the stipulated interest of 24% per annum from
the date of extrajudicial demand on 22 January 2008 until full payment.

Furthermore, in accordance with Article 221263 of the Civil Code, the 24% interest per
annum due on the principal amount accruing as of the judicial demand shall earn legal
interest at the rate of 12% per annum from the date of judicial demand on 5 February
2008 until 30 June 2013, and thereafter at the rate of 6% per annum from 1 July 2013
until full payment. From the date of judicial demand on 5 February 2008 until 30 June
2013, the prevailing rate of legal interest was 12% per annum. The 6% per annum legal
interest prescribed under BSP-MB Circular No. 799 took effect on 1 July 2013 and could
only be applied prospectively.64 The P50,000.00 attorney's fees shall also earn legal
interest at the rate of 6% per annum from the finality of this Decision until full payment.

WHEREFORE, the Decision dated 21 April 2016 of the Court of Appeals in CA-G.R. CV
No. 102465, affirming the 27 January 2014 Decision of the Regional Trial Court, Branch
128, Caloocan City, is AFFIRMED with MODIFICATION, as follows:
Petitioner Lara's Gifts & Decors, Inc. is ordered to pay respondent Midtown Industrial
Sales, Inc. the following:

1. ONE MILLION TWO HUNDRED SIXTY THREE THOUSAND ONE HUNDRED FOUR PESOS
and 22/100 (P1,263,104.22) representing the principal amount plus stipulated interest
at 24% per annum to be computed from 22 January 2008, the date of extrajudicial
demand, until full payment.

2. Legal interest on the 24% per annum interest due on the principal amount accruing as
of judicial demand, at the rate of 12% per annum from the date of judicial demand on 5
February 2008 until 30 June 2013, and thereafter at the rate of 6% per annum from 1
July 2013 until full payment.

3. The sum of FIFTY THOUSAND PESOS (P50,000.00) as attorney's fees, plus legal
interest thereon at the rate of 6% per annum to be computed from the finality of this
Decision until full payment.

4. Cost of the suit.

SO ORDERED.

Bersamin, C. J., Peralta, Perlas-Bernabe, A. Reyes, Jr., Gesmundo, Lazaro-Javier,

Inting, and Zalameda, JJ., concur.
Leonen, J., I concur. See separate opinion.
Jardeleza, J., I join Caguioa separate concurring and dissenting opinion.
Caguioa, J., Please see separate concurring and dissenting.
J. Reyes, Jr., J., no part.
Hernando, J., no part (on official leave).
Carandang, J., concurred is the Court of Appeals decision.
G.R. No. 187678               April 10, 2013

SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners,

vs.
CHINA BANKING CORPORATION, Respondent.

DECISION

VILLARAMA, JR., J.:

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure,
as amended, assailing the February 20, 2009 Decision1 and April 27, 2009 Resolution2 of the
Court of Appeals (CA) in CA G.R. CV No. 80338. The CA affirmed the April 14, 2003 Decision 3 of
the Regional Trial Court (RTC) of Makati City, Branch 147.

The factual antecedents:

Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking
Corporation (respondent) as evidenced by two Promissory Notes both dated October 6, 1998
and numbered 507-001051-34 and 507-001052-0,5 for the sums of !!6,216,000 and ₱4, 139,000,
respectively. The loan was secured by a Real Estate Mortgage (REM) over petitioners’ property
located at 49 Greensville St., White Plains, Quezon City covered by Transfer Certificate of Title
(TCT) No. RT-103568 (167394) PR-412086 of the Register of Deeds of Quezon City.

When petitioners failed to pay the monthly amortizations due, respondent demanded the full
payment of the outstanding balance with accrued monthly interests. On September 5, 2000,
petitioners received respondent’s last demand letter7 dated August 29, 2000.

As of February 23, 2001, the amount due on the two promissory notes totaled ₱19,201,776.63
representing the principal, interests, penalties and attorney’s fees. On the same day, the
mortgaged property was sold at public auction, with respondent as highest bidder for the amount
of ₱10,300,000.

On May 8, 2001, petitioners received8 a demand letter9 dated May 2, 2001 from respondent for
the payment of ₱8,901,776.63, the amount of deficiency after applying the proceeds of the
foreclosure sale to the mortgage debt. As its demand remained unheeded, respondent filed a
collection suit in the trial court. In its Complaint, 10 respondent prayed that judgment be rendered
ordering the petitioners to pay jointly and severally: (1) ₱8,901,776.63 representing the amount
of deficiency, plus interests at the legal rate, from February 23, 2001 until fully paid; (2) an
additional amount equivalent to 1/10 of 1% per day of the total amount, until fully paid, as
penalty; (3) an amount equivalent to 10% of the foregoing amounts as attorney’s fees; and (4)
expenses of litigation and costs of suit.

In their Answer,11 petitioners admitted the existence of the debt but interposed, by way of special
and affirmative defense, that the complaint states no cause of action considering that the
principal of the loan was already paid when the mortgaged property was extrajudicially
foreclosed and sold for ₱10,300,000. Petitioners contended that should they be held liable for
any deficiency, it should be only for ₱55,000 representing the difference between the total
outstanding obligation of ₱10,355,000 and the bid price of ₱10,300,000. Petitioners also argued
that even assuming there is a cause of action, such deficiency cannot be enforced by respondent
because it consists only of the penalty and/or compounded interest on the accrued interest which
is generally not favored under the Civil Code. By way of counterclaim, petitioners prayed that
respondent be ordered to pay ₱100,000 in attorney’s fees and costs of suit.
At the trial, respondent presented Ms. Annabelle Cokai Yu, its Senior Loans Assistant, as
witness. She testified that she handled the account of petitioners and assisted them in
processing their loan application. She called them monthly to inform them of the prevailing rates
to be used in computing interest due on their loan. As of the date of the public auction,
petitioners’ outstanding balance was ₱19,201,776.63 12 based on the following statement of
account which she prepared:

STATEMENT OF ACCOUNT
As of FEBRUARY 23, 2001
IGNACIO F. JUICO

PN# 507-0010520 due on 04-07-2004

1âwphi1

Principal balance of PN# 5070010520. . . . . . . . . . . . . . 4,139,000.00

Interest on ₱4,139,000.00 fr. 04-Nov-99

04-Nov-2000 366 days @ 15.00%. . . . . . . . . . . . . . . . . 622,550.96

Interest on ₱4,139,000.00 fr. 04-Nov-2000

04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 83,346.99

Interest on ₱4,139,000.00 fr. 04-Dec-2000

04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 75,579.27

Interest on ₱4,139,000.00 fr. 04-Jan-2001

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 68,548.64

Interest on ₱4,139,000.00 fr. 04-Feb-2001

23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 38,781.86

Penalty charge @ 1/10 of 1% of the total amount due
(₱4,139,000.00 from 11-04-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 1,974,303.00

Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,002,110.73
PN# 507-0010513 due on 04-07-2004
Principal balance of PN# 5070010513. . . . . . . . . . . . . . 6,216,000.00
Interest on ₱6,216,000.00 fr. 06-Oct-99
04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . . 1,009,035.62
Interest on ₱6,216,000.00 fr. 04-Nov-2000
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 125,171.51
Interest on ₱6,216,000.00 fr. 04-Dec-2000
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 113,505.86
 Interest on ₱6,216,000.00 fr. 04-Jan-2001
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 102,947.18
Interest on ₱6,216,000.00 fr. 04-Feb-2001
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 58,243.07
Penalty charge @ 1/10 of 1% of the total amount due
(₱6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 3,145,296.00

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,770,199.23

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,772,309.96

Less: A/P applied to balance of principal (55,000.00)

Less: Accounts payable L & D (261,149.39) 17,456,160.57

Add: 10% Attorney’s Fee 1,745,616.06

Total amount due 19,201,776.63

Less: Bid Price 10,300,000.00

TOTAL DEFICIENCY AMOUNT AS OF
FEB. 23, 2001 8,901,776.63 13

Petitioners thereafter received a demand letter 14 dated May 2, 2001 from respondent’s counsel
for the deficiency amount of ₱8,901,776.63. Ms. Yu further testified that based on the Statement
of Account15 dated March 15, 2002 which she prepared, the outstanding balance of petitioners
was ₱15,190,961.48.16

On cross-examination, Ms. Yu reiterated that the interest rate changes every month based on the
prevailing market rate and she notified petitioners of the prevailing rate by calling them monthly
before their account becomes past due. When asked if there was any written authority from
petitioners for respondent to increase the interest rate unilaterally, she answered that petitioners
signed a promissory note indicating that they agreed to pay interest at the prevailing rate.17

Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to sign a
blank promissory note and was informed that the interest rate on the loan will be based on
prevailing market rates. Every month, respondent informs him by telephone of the prevailing
interest rate. At first, he was able to pay his monthly amortizations but when he started to incur
delay in his payments due to the financial crisis, respondent pressured him to pay in full,
including charges and interests for the delay. His property was eventually foreclosed and was
sold at public auction.18

On cross-examination, petitioner testified that he is a Doctor of Medicine and also engaged in the
business of distributing medical supplies. He admitted having read the promissory notes and that
he is aware of his obligation under them before he signed the same.19

In its decision, the RTC ruled in favor of respondent. The fallo of the RTC decision reads:

WHEREFORE, premises considered, the Complaint is hereby sustained, and Judgment is

rendered ordering herein defendants to pay jointly and severally to plaintiff, the following:
 1. ₱8,901,776.63 representing the amount of the deficiency owing to the plaintiff, plus
interest thereon at the legal rate after February 23, 2001;

2. An amount equivalent to 10% of the total amount due as and for attorney’s fees, there
being stipulation therefor in the promissory notes;

3. Costs of suit.

SO ORDERED.20

The trial court agreed with respondent that when the mortgaged property was sold at public
auction on February 23, 2001 for ₱10,300,000 there remained a balance of ₱8,901,776.63 since
before foreclosure, the total amount due on the two promissory notes aggregated to
₱19,201,776.63 inclusive of principal, interests, penalties and attorney’s fees. It ruled that the
amount realized at the auction sale was applied to the interest, conformably with Article 1253 of
the Civil Code which provides that if the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been covered. This being the case,
petitioners’ principal obligation subsists but at a reduced amount of ₱8,901,776.63.

The trial court further held that Ignacio’s claim that he signed the promissory notes in blank
cannot negate or mitigate his liability since he admitted reading the promissory notes before
signing them. It also ruled that considering the substantial amount involved, it is unbelievable that
petitioners threw all caution to the wind and simply signed the documents without reading and
understanding the contents thereof. It noted that the promissory notes, including the terms and
conditions, are pro forma and what appears to have been left in blank were the promissory note
number, date of the instrument, due date, amount of loan, and condition that interest will be at
the prevailing rates. All of these details, the trial court added, were within the knowledge of the
petitioners.

When the case was elevated to the CA, the latter affirmed the trial court’s decision. The CA
recognized respondent’s right to claim the deficiency from the debtor where the proceeds of the
sale in an extrajudicial foreclosure of mortgage are insufficient to cover the amount of the debt.
Also, it found as valid the stipulation in the promissory notes that interest will be based on the
prevailing rate. It noted that the parties agreed on the interest rate which was not unilaterally
imposed by the bank but was the rate offered daily by all commercial banks as approved by the
Monetary Board. Having signed the promissory notes, the CA ruled that petitioners are bound by
the stipulations contained therein.

Petitioners are now before this Court raising the sole issue of whether the interest rates imposed
upon them by respondent are valid. Petitioners contend that the interest rates imposed by
respondent are not valid as they were not by virtue of any law or Bangko Sentral ng Pilipinas
(BSP) regulation or any regulation that was passed by an appropriate government entity. They
insist that the interest rates were unilaterally imposed by the bank and thus violate the principle
of mutuality of contracts. They argue that the escalation clause in the promissory notes does not
give respondent the unbridled authority to increase the interest rate unilaterally. Any change
must be mutually agreed upon.

Respondent, for its part, points out that petitioners failed to show that their case falls under any of
the exceptions wherein findings of fact of the CA may be reviewed by this Court. It contends that
an inquiry as to whether the interest rates imposed on the loans of petitioners were supported by
appropriate regulations from a government agency or the Central Bank requires a reevaluation of
the evidence on records. Thus, the Court would in effect, be confronted with a factual and not a
legal issue.

The appeal is partly meritorious.

The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code, which
provides:

Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them. Article 1956 of the Civil Code likewise ordains that "no interest shall
be due unless it has been expressly stipulated in writing."

The binding effect of any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties;
and (2) that there must be mutuality between the parties based on their essential equality. Any
contract which appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance of the contract
which is left solely to the will of one of the parties, is likewise, invalid.21

Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by
the contracting parties. This Court has long recognized that there is nothing inherently wrong with
escalation clauses which are valid stipulations in commercial contracts to maintain fiscal stability
and to retain the value of money in long term contracts. 22 Hence, such stipulations are not void
per se.23

Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the
interest independently and upwardly, completely depriving the debtor of the right to assent to an
important modification in the agreement" is void. A stipulation of such nature violates the
principle of mutuality of contracts.24 Thus, this Court has previously nullified the unilateral
determination and imposition by creditor banks of increases in the rate of interest provided in
loan contracts.25

In Banco Filipino Savings & Mortgage Bank v. Navarro, 26 the escalation clause stated: "I/We
hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this
contract without advance notice to me/us in the event a law should be enacted increasing the
lawful rates of interest that may be charged on this particular kind of loan." While escalation
clauses in general are considered valid, we ruled that Banco Filipino may not increase the
interest on respondent borrower’s loan, pursuant to Circular No. 494 issued by the Monetary
Board on January 2, 1976, because said circular is not a law although it has the force and effect
of law and the escalation clause has no provision for reduction of the stipulated interest "in the
event that the applicable maximum rate of interest is reduced by law or by the Monetary Board"
(de-escalation clause).

Subsequently, in Insular Bank of Asia and America v. Spouses Salazar 27 we reiterated that
escalation clauses are valid stipulations but their enforceability are subject to certain conditions.
The increase of interest rate from 19% to 21% per annum made by petitioner bank was
disallowed because it did not comply with the guidelines adopted by the Monetary Board to
govern interest rate adjustments by banks and non-banks performing quasi-banking functions.

In the 1991 case of Philippine National Bank v. Court of Appeals, 28 the promissory notes
authorized PNB to increase the stipulated interest per annum "within the limits allowed by law at
any time depending on whatever policy PNB may adopt in the future; Provided, that, the interest
rate on this note shall be correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board." This Court declared the increases
(from 18% to 32%, then to 41% and then to 48%) unilaterally imposed by PNB to be in violation
of the principle of mutuality essential in contracts.29

A similar ruling was made in a 1994 case30 also involving PNB where the credit agreement
provided that "PNB reserves the right to increase the interest rate within the limits allowed by law
at any time depending on whatever policy it may adopt in the future: Provided, that the interest
rate on this accommodation shall be correspondingly decreased in the event that the applicable
maximum interest is reduced by law or by the Monetary Board x x x".

Again, in 1996, the Court invalidated escalation clauses authorizing PNB to raise the stipulated
interest rate at any time without notice, within the limits allowed by law. The Court observed that
there was no attempt made by PNB to secure the conformity of respondent borrower to the
successive increases in the interest rate. The borrower’s assent to the increases cannot be
implied from their lack of response to the letters sent by PNB, informing them of the increases.31

In the more recent case of Philippine Savings Bank v. Castillo,32 we sustained the CA in declaring
as unreasonable the following escalation clause: "The rate of interest and/or bank charges herein
stipulated, during the terms of this promissory note, its extensions, renewals or other
modifications, may be increased, decreased or otherwise changed from time to time within the
rate of interest and charges allowed under present or future law(s) and/or government
regulation(s) as the PSBank may prescribe for its debtors." Clearly, the increase or decrease of
interest rates under such clause hinges solely on the discretion of petitioner as it does not require
the conformity of the maker before a new interest rate could be enforced. We also said that
respondents’ assent to the modifications in the interest rates cannot be implied from their lack of
response to the memos sent by petitioner, informing them of the amendments, nor from the
letters requesting for reduction of the rates. Thus:

… the validity of the escalation clause did not give petitioner the unbridled right to unilaterally
adjust interest rates. The adjustment should have still been subjected to the mutual agreement of
the contracting parties. In light of the absence of consent on the part of respondents to the
modifications in the interest rates, the adjusted rates cannot bind them notwithstanding the
inclusion of a de-escalation clause in the loan agreement.33

It is now settled that an escalation clause is void where the creditor unilaterally determines and
imposes an increase in the stipulated rate of interest without the express conformity of the
debtor. Such unbridled right given to creditors to adjust the interest independently and upwardly
would completely take away from the debtors the right to assent to an important modification in
their agreement and would also negate the element of mutuality in their contracts.34 While a
ceiling on interest rates under the Usury Law was already lifted under Central Bank Circular No.
905, nothing therein "grants lenders carte blanche authority to raise interest rates to levels which
will either enslave their borrowers or lead to a hemorrhaging of their assets."35

The two promissory notes signed by petitioners provide:

I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the
case may be, the interest rate/service charge presently stipulated in this note without any
advance notice to me/us in the event a law or Central Bank regulation is passed or promulgated
by the Central Bank of the Philippines or appropriate government entities, increasing or
decreasing such interest rate or service charge.36

Such escalation clause is similar to that involved in the case of Floirendo, Jr. v. Metropolitan
Bank and Trust Company37 where this Court ruled:

The provision in the promissory note authorizing respondent bank to increase, decrease or
otherwise change from time to time the rate of interest and/or bank charges "without advance
notice" to petitioner, "in the event of change in the interest rate prescribed by law or the Monetary
Board of the Central Bank of the Philippines," does not give respondent bank unrestrained
freedom to charge any rate other than that which was agreed upon. Here, the monthly
upward/downward adjustment of interest rate is left to the will of respondent bank alone. It
violates the essence of mutuality of the contract.38
More recently in Solidbank Corporation v. Permanent Homes, Incorporated, 39 we upheld as valid
an escalation clause which required a written notice to and conformity by the borrower to the
increased interest rate. Thus:

The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December
1982 of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905
which took effect on 1 January 1983. These circulars removed the ceiling on interest rates for
secured and unsecured loans regardless of maturity. The effect of these circulars is to allow the
parties to agree on any interest that may be charged on a loan. The virtual repeal of the Usury
Law is within the range of judicial notice which courts are bound to take into account. Although
interest rates are no longer subject to a ceiling, the lender still does not have an unbridled license
to impose increased interest rates. The lender and the borrower should agree on the imposed
rate, and such imposed rate should be in writing.

The three promissory notes between Solidbank and Permanent all contain the following
provisions:

"5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate
agreed in this Note or Loan on the basis of, among others, prevailing rates in the local or
international capital markets. For this purpose, We/I authorize Solidbank to debit any deposit or
placement account with Solidbank belonging to any one of us. The adjustment of the interest rate
shall be effective from the date indicated in the written notice sent to us by the bank, or if no date
is indicated, from the time the notice was sent.

6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under
this Note or Loan within thirty (30) days from the receipt by anyone of us of the written notice.
Otherwise, We/I shall be deemed to have given our consent to the interest rate adjustment."

The stipulations on interest rate repricing are valid because (1) the parties mutually agreed on
said stipulations; (2) repricing takes effect only upon Solidbank’s written notice to Permanent of
the new interest rate; and (3) Permanent has the option to prepay its loan if Permanent and
Solidbank do not agree on the new interest rate. The phrases "irrevocably authorize," "at any
time" and "adjustment of the interest rate shall be effective from the date indicated in the written
notice sent to us by the bank, or if no date is indicated, from the time the notice was sent,"
emphasize that Permanent should receive a written notice from Solidbank as a condition for the
adjustment of the interest rates. (Emphasis supplied.)

In this case, the trial and appellate courts, in upholding the validity of the escalation clause,
underscored the fact that there was actually no fixed rate of interest stipulated in the promissory
notes as this was made dependent on prevailing rates in the market. The subject promissory
notes contained the following condition written after the first paragraph:

With one year grace period on principal and thereafter payable in 54 equal monthly instalments
to start on the second year. Interest at the prevailing rates payable quarterly in arrears.40

In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner cardholder assailed the trial and appellate courts
in ruling for the validity of the escalation clause in the Cardholder’s Agreement. On petitioner’s
contention that the interest rate was unilaterally imposed and based on the standards and rate
formulated solely by respondent credit card company, we held:

The contractual provision in question states that "if there occurs any change in the prevailing
market rates, the new interest rate shall be the guiding rate in computing the interest due on the
outstanding obligation without need of serving notice to the Cardholder other than the required
posting on the monthly statement served to the Cardholder." This could not be considered an
escalation clause for the reason that it neither states an increase nor a decrease in interest rate.
Said clause simply states that the interest rate should be based on the prevailing market rate.
Interpreting it differently, while said clause does not expressly stipulate a reduction in interest
rate, it nevertheless provides a leeway for the interest rate to be reduced in case the prevailing
market rates dictate its reduction.

Admittedly, the second paragraph of the questioned proviso which provides that "the Cardholder
hereby authorizes Security Diners to correspondingly increase the rate of such interest in the
event of changes in prevailing market rates x x x" is an escalation clause. However, it cannot be
said to be dependent solely on the will of private respondent as it is also dependent on the
prevailing market rates.

Escalation clauses are not basically wrong or legally objectionable as long as they are not solely
potestative but based on reasonable and valid grounds. Obviously, the fluctuation in the market
rates is beyond the control of private respondent.42 (Emphasis supplied.)

In interpreting a contract, its provisions should not be read in isolation but in relation to each
other and in their entirety so as to render them effective, having in mind the intention of the
parties and the purpose to be achieved. The various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from all of them taken
jointly.43

Here, the escalation clause in the promissory notes authorizing the respondent to adjust the rate
of interest on the basis of a law or regulation issued by the Central Bank of the Philippines,
should be read together with the statement after the first paragraph where no rate of interest was
fixed as it would be based on prevailing market rates. While the latter is not strictly an escalation
clause, its clear import was that interest rates would vary as determined by prevailing market
rates. Evidently, the parties intended the interest on petitioners’ loan, including any upward or
downward adjustment, to be determined by the prevailing market rates and not dictated by
respondent’s policy. It may also be mentioned that since the deregulation of bank rates in 1983,
the Central Bank has shifted to a market-oriented interest rate policy.44

There is no indication that petitioners were coerced into agreeing with the foregoing provisions of
the promissory notes. In fact, petitioner Ignacio, a physician engaged in the medical supply
business, admitted having understood his obligations before signing them. At no time did
petitioners protest the new rates imposed on their loan even when their property was foreclosed
by respondent.

This notwithstanding, we hold that the escalation clause is still void because it grants respondent
the power to impose an increased rate of interest without a written notice to petitioners and their
written consent. Respondent’s monthly telephone calls to petitioners advising them of the
prevailing interest rates would not suffice. A detailed billing statement based on the new imposed
interest with corresponding computation of the total debt should have been provided by the
respondent to enable petitioners to make an informed decision. An appropriate form must also be
signed by the petitioners to indicate their conformity to the new rates. Compliance with these
requisites is essential to preserve the mutuality of contracts. For indeed, one-sided impositions
do not have the force of law between the parties, because such impositions are not based on the
parties’ essential equality.45

Modifications in the rate of interest for loans pursuant to an escalation clause must be the result
of an agreement between the parties. Unless such important change in the contract terms is
mutually agreed upon, it has no binding effect.46 In the absence of consent on the part of the
petitioners to the modifications in the interest rates, the adjusted rates cannot bind them. Hence,
we consider as invalid the interest rates in excess of 15%, the rate charged for the first year.

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

Petitioners’ Statement of Account, as of February 23, 2001, the date of the foreclosure
proceedings, should thus be modified as follows:

Principal ₱10,355,000.00
Interest at 15% per annum
₱10,355,000 x .15 x 477 days/365 days 2,029,863.70
Penalty at 12% per annum 1,623 ,890. 96
₱10,355,000 x .12 x 477days/365 days
Sub-Total 14,008,754.66
Less: A/P applied to balance of principal (55,000.00)
Less: Accounts payable L & D (261,149.39)
13,692,605.27
Add: Attorney's Fees 1,369,260.53
Total Amount Due 15,061,865.79
Less: Bid Price 10,300,000.00

TOTAL DEFICIENCY AMOUNT 4,761,865.79

WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The February 20,
2009 · Decision and April 27, 2009 Resolution of the Court of Appeals in CA G.R. CV No. 80338
are hereby MODIFIED. Petitioners Spouses Ignacio F. Juico and Alice P. Juico are hereby
ORDERED to pay jointly and severally respondent China Banking Corporation ₱4, 7 61 ,865. 79
representing the amount of deficiency inclusive of interest, penalty charge and attorney's fees.
Said amount shall bear interest at 12% per annum, reckoned from the time of the filing of the
complaint until its full satisfaction.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 192986               January 15, 2013

ADVOCATES FOR TRUTH IN LENDING, INC. and EDUARDO B. OLAGUER, Petitioners,

vs.
BANGKO SENTRAL MONETARY BOARD, represented by its Chairman, GOVERNOR
ARMANDO M. TETANGCO, JR., and its incumbent members: JUANITA D. AMATONG,
ALFREDO C. ANTONIO, PETER FA VILA, NELLY F. VILLAFUERTE, IGNACIO R. BUNYE
and CESAR V. PURISIMA, Respondents.

DECISION

REYES, J.:

Petitioners, claiming that they are raising issues of transcendental importance to the public, filed
directly with this Court this Petition for Certiorari under Rule 65 of the 1997 Rules of Court,
seeking to declare that the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), replacing the
Central Bank Monetary Board (CB-MB) by virtue of Republic Act (R.A.) No. 7653, has no
authority to continue enforcing Central Bank Circular No. 905, 1 issued by the CB-MB in 1982,
which "suspended" Act No. 2655, or the Usury Law of 1916.

Factual Antecedents

Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a non-profit, non-stock corporation
organized to engage in pro bono concerns and activities relating to money lending issues. It was
incorporated on July 9, 2010,2 and a month later, it filed this petition, joined by its founder and
president, Eduardo B. Olaguer, suing as a taxpayer and a citizen.

R.A. No. 265, which created the Central Bank (CB) of the Philippines on June 15, 1948,
empowered the CB-MB to, among others, set the maximum interest rates which banks may
charge for all types of loans and other credit operations, within limits prescribed by the Usury
Law. Section 109 of R.A. No. 265 reads:

Sec. 109. Interest Rates, Commissions and Charges. — The Monetary Board may fix the
maximum rates of interest which banks may pay on deposits and on other obligations.

The Monetary Board may, within the limits prescribed in the Usury Law fix the maximum rates of
interest which banks may charge for different types of loans and for any other credit operations,
or may fix the maximum differences which may exist between the interest or rediscount rates of
the Central Bank and the rates which the banks may charge their customers if the respective
credit documents are not to lose their eligibility for rediscount or advances in the Central Bank.

Any modifications in the maximum interest rates permitted for the borrowing or lending
operations of the banks shall apply only to future operations and not to those made prior to the
date on which the modification becomes effective.

In order to avoid possible evasion of maximum interest rates set by the Monetary Board, the
Board may also fix the maximum rates that banks may pay to or collect from their customers in
the form of commissions, discounts, charges, fees or payments of any sort. (Underlining ours)

On March 17, 1980, the Usury Law was amended by Presidential Decree (P.D.) No. 1684, giving
the CB-MB authority to prescribe different maximum rates of interest which may be imposed for a
loan or renewal thereof or the forbearance of any money, goods or credits, provided that the
changes are effected gradually and announced in advance. Thus, Section 1-a of Act No. 2655
now reads:
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of
interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to
change such rate or rates whenever warranted by prevailing economic and social conditions:
Provided, That changes in such rate or rates may be effected gradually on scheduled dates
announced in advance.

In the exercise of the authority herein granted the Monetary Board may prescribe higher
maximum rates for loans of low priority, such as consumer loans or renewals thereof as well as
such loans made by pawnshops, finance companies and other similar credit institutions although
the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board
is also authorized to prescribe different maximum rate or rates for different types of borrowings,
including deposits and deposit substitutes, or loans of financial intermediaries. (Underlining and
emphasis ours)

In its Resolution No. 2224 dated December 3, 1982,3 the CB-MB issued CB Circular No. 905,
Series of 1982, effective on January 1, 1983. Section 1 of the Circular, under its General
Provisions, removed the ceilings on interest rates on loans or forbearance of any money, goods
or credits, to wit:

Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan
or forbearance of any money, goods, or credits, regardless of maturity and whether secured or
unsecured, that may be charged or collected by any person, whether natural or juridical, shall not
be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.
(Underscoring and emphasis ours)

The Circular then went on to amend Books I to IV of the CB’s "Manual of Regulations for Banks
and Other Financial Intermediaries" (Manual of Regulations) by removing the applicable ceilings
on specific interest rates. Thus, Sections 5, 9 and 10 of CB Circular No. 905 amended Book I,
Subsections 1303, 1349, 1388.1 of the Manual of Regulations, by removing the ceilings for
interest and other charges, commissions, premiums, and fees applicable to commercial banks;
Sections 12 and 17 removed the interest ceilings for thrift banks (Book II, Subsections 2303,
2349); Sections 19 and 21 removed the ceilings applicable to rural banks (Book III, Subsection
3152.3-c); and, Sections 26, 28, 30 and 32 removed the ceilings for non-bank financial
intermediaries (Book IV, Subsections 4303Q.1 to 4303Q.9, 4303N.1, 4303P).4

On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653 establishing the
Bangko Sentral ng Pilipinas (BSP) to replace the CB. The repealing clause thereof, Section 135,
reads:

Sec. 135. Repealing Clause. — Except as may be provided for in Sections 46 and 132 of this
Act, Republic Act No. 265, as amended, the provisions of any other law, special charters, rule or
regulation issued pursuant to said Republic Act No. 265, as amended, or parts thereof, which
may be inconsistent with the provisions of this Act are hereby repealed. Presidential Decree No.
1792 is likewise repealed.

Petition for Certiorari

To justify their skipping the hierarchy of courts and going directly to this Court to secure a writ of
certiorari, petitioners contend that the transcendental importance of their Petition can readily be
seen in the issues raised therein, to wit:

a) Whether under R.A. No. 265 and/or P.D. No. 1684, the CB-MB had the statutory or
constitutional authority to prescribe the maximum rates of interest for all kinds of credit
transactions and forbearance of money, goods or credit beyond the limits prescribed in
the Usury Law;
 b) If so, whether the CB-MB exceeded its authority when it issued CB Circular No. 905,
which removed all interest ceilings and thus suspended Act No. 2655 as regards
usurious interest rates;

c) Whether under R.A. No. 7653, the new BSP-MB may continue to enforce CB Circular
No. 905.5

Petitioners attached to their petition copies of several Senate Bills and Resolutions of the 10th
Congress, which held its sessions from 1995 to 1998, calling for investigations by the Senate
Committee on Banks and Financial Institutions into alleged unconscionable commercial rates of
interest imposed by these entities. Senate Bill (SB) Nos. 376 and 1860,7 filed by Senator Vicente
C. Sotto III and the late Senator Blas F. Ople, respectively, sought to amend Act No. 2655 by
fixing the rates of interest on loans and forbearance of credit; Philippine Senate Resolution (SR)
No. 1053,8 10739 and 1102,10 filed by Senators Ramon B. Magsaysay, Jr., Gregorio B. Honasan
and Franklin M. Drilon, respectively, urged the aforesaid Senate Committee to investigate ways
to curb the high commercial interest rates then obtaining in the country; Senator Ernesto Maceda
filed SB No. 1151 to prohibit the collection of more than two months of advance interest on any
loan of money; and Senator Raul Roco filed SR No. 1144 11 seeking an investigation into an
alleged cartel of commercial banks, called "Club 1821", reportedly behind the regime of high
interest rates. The petitioners also attached news clippings 12 showing that in February 1998 the
banks’ prime lending rates, or interests on loans to their best borrowers, ranged from 26% to
31%.

Petitioners contend that under Section 1-a of Act No. 2655, as amended by P.D. No. 1684, the
CB-MB was authorized only to prescribe or set the maximum rates of interest for a loan or
renewal thereof or for the forbearance of any money, goods or credits, and to change such rates
whenever warranted by prevailing economic and social conditions, the changes to be effected
gradually and on scheduled dates; that nothing in P.D. No. 1684 authorized the CB-MB to lift or
suspend the limits of interest on all credit transactions, when it issued CB Circular No. 905. They
further insist that under Section 109 of R.A. No. 265, the authority of the CB-MB was clearly only
to fix the banks’ maximum rates of interest, but always within the limits prescribed by the Usury
Law.

Thus, according to petitioners, CB Circular No. 905, which was promulgated without the benefit
of any prior public hearing, is void because it violated Article 5 of the New Civil Code, which
provides that "Acts executed against the provisions of mandatory or prohibitory laws shall be
void, except when the law itself authorizes their validity."

They further claim that just weeks after the issuance of CB Circular No. 905, the benchmark 91-
day Treasury bills (T-bills),13 then known as "Jobo" bills14 shot up to 40% per annum, as a result.
The banks immediately followed suit and re-priced their loans to rates which were even higher
than those of the "Jobo" bills. Petitioners thus assert that CB Circular No. 905 is also
unconstitutional in light of Section 1 of the Bill of Rights, which commands that "no person shall
be deprived of life, liberty or property without due process of law, nor shall any person be denied
the equal protection of the laws."

Finally, petitioners point out that R.A. No. 7653 did not re-enact a provision similar to Section 109
of R.A. No. 265, and therefore, in view of the repealing clause in Section 135 of R.A. No. 7653,
the BSP-MB has been stripped of the power either to prescribe the maximum rates of interest
which banks may charge for different kinds of loans and credit transactions, or to suspend Act
No. 2655 and continue enforcing CB Circular No. 905.

Ruling

The petition must fail.

A. The Petition is procedurally infirm.

The decision on whether or not to accept a petition for certiorari, as well as to grant due course
thereto, is addressed to the sound discretion of the court.15 A petition for certiorari being an
extraordinary remedy, the party seeking to avail of the same must strictly observe the procedural
rules laid down by law, and non-observance thereof may not be brushed aside as mere
technicality.16

As provided in Section 1 of Rule 65, a writ of certiorari is directed against a tribunal exercising
judicial or quasi-judicial functions.17 Judicial functions are exercised by a body or officer clothed
with authority to determine what the law is and what the legal rights of the parties are with
respect to the matter in controversy. Quasi-judicial function is a term that applies to the action or
discretion of public administrative officers or bodies given the authority to investigate facts or
ascertain the existence of facts, hold hearings, and draw conclusions from them as a basis for
their official action using discretion of a judicial nature.18

The CB-MB (now BSP-MB) was created to perform executive functions with respect to the
establishment, operation or liquidation of banking and credit institutions, and branches and
agencies thereof.19 It does not perform judicial or quasi-judicial functions. Certainly, the issuance
of CB Circular No. 905 was done in the exercise of an executive function. Certiorari will not lie in
the instant case.20

B. Petitioners have no locus standi to file the Petition

Locus standi is defined as "a right of appearance in a court of justice on a given question." In
private suits, Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides that "every action
must be prosecuted or defended in the name of the real party in interest," who is "the party who
stands to be benefited or injured by the judgment in the suit or the party entitled to the avails of
the suit." Succinctly put, a party’s standing is based on his own right to the relief sought.21

Even in public interest cases such as this petition, the Court has generally adopted the "direct
injury" test that the person who impugns the validity of a statute must have "a personal and
substantial interest in the case such that he has sustained, or will sustain direct injury as a
result."22 Thus, while petitioners assert a public right to assail CB Circular No. 905 as an illegal
executive action, it is nonetheless required of them to make out a sufficient interest in the
vindication of the public order and the securing of relief. It is significant that in this petition, the
petitioners do not allege that they sustained any personal injury from the issuance of CB Circular
No. 905.

Petitioners also do not claim that public funds were being misused in the enforcement of CB
Circular No. 905. In Kilosbayan, Inc. v. Morato, 23 involving the on-line lottery contract of the
PCSO, there was no allegation that public funds were being misspent, which according to the
Court would have made the action a public one, "and justify relaxation of the requirement that an
action must be prosecuted in the name of the real party-in-interest." The Court held, moreover,
that the status of Kilosbayan as a people’s organization did not give it the requisite personality to
question the validity of the contract. Thus:

Petitioners do not in fact show what particularized interest they have for bringing this suit. It does
not detract from the high regard for petitioners as civic leaders to say that their interest falls short
of that required to maintain an action under the Rule 3, Sec. 2.24

C. The Petition raises no issues of transcendental importance.

In the 1993 case of Joya v. Presidential Commission on Good Government, 25 it was held that no
question involving the constitutionality or validity of a law or governmental act may be heard and
decided by the court unless there is compliance with the legal requisites for judicial inquiry,
namely: (a) that the question must be raised by the proper party; (b) that there must be an actual
case or controversy; (c) that the question must be raised at the earliest possible opportunity; and
(d) that the decision on the constitutional or legal question must be necessary to the
determination of the case itself.

In Prof. David v. Pres. Macapagal-Arroyo,26 the Court summarized the requirements before

taxpayers, voters, concerned citizens, and legislators can be accorded a standing to sue, viz:

(1) the cases involve constitutional issues;

(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that the
tax measure is unconstitutional;

(3) for voters, there must be a showing of obvious interest in the validity of the election
law in question;

(4) for concerned citizens, there must be a showing that the issues raised are of
transcendental importance which must be settled early; and

(5) for legislators, there must be a claim that the official action complained of infringes
upon their prerogatives as legislators.

While the Court may have shown in recent decisions a certain toughening in its attitude
concerning the question of legal standing, it has nonetheless always made an exception where
the transcendental importance of the issues has been established, notwithstanding the
petitioners’ failure to show a direct injury.27 In CREBA v. ERC,28 the Court set out the following
instructive guides as determinants on whether a matter is of transcendental importance, namely:
(1) the character of the funds or other assets involved in the case; (2) the presence of a clear
case of disregard of a constitutional or statutory prohibition by the public respondent agency or
instrumentality of the government; and (3) the lack of any other party with a more direct and
specific interest in the questions being raised. Further, the Court stated in Anak Mindanao Party-
List Group v. The Executive Secretary29 that the rule on standing will not be waived where these
determinants are not established.

In the instant case, there is no allegation of misuse of public funds in the implementation of CB
Circular No. 905. Neither were borrowers who were actually affected by the suspension of the
Usury Law joined in this petition. Absent any showing of transcendental importance, the petition
must fail.

More importantly, the Court notes that the instant petition adverted to the regime of high interest
rates which obtained at least 15 years ago, when the banks’ prime lending rates ranged from
26% to 31%,30 or even 29 years ago, when the 91-day Jobo bills reached 40% per annum. In
contrast, according to the BSP, in the first two (2) months of 2012 the bank lending rates
averaged 5.91%, which implies that the banks’ prime lending rates were lower; moreover,
deposit interests on savings and long-term deposits have also gone very low, averaging 1.75%
and 1.62%, respectively.31

Judging from the most recent auctions of T-bills, the savings rates must be approaching 0%.  In 1âwphi1

the auctions held on November 12, 2012, the rates of 3-month, 6-month and 1-year T-bills have
dropped to 0.150%, 0.450% and 0.680%, respectively. 32 According to Manila Bulletin, this very
low interest regime has been attributed to "high liquidity and strong investor demand amid
positive economic indicators of the country."33

While the Court acknowledges that cases of transcendental importance demand that they be
settled promptly and definitely, brushing aside, if we must, technicalities of procedure,34 the delay
of at least 15 years in the filing of the instant petition has actually rendered moot and academic
the issues it now raises.

For its part, BSP-MB maintains that the petitioners’ allegations of constitutional and statutory
violations of CB Circular No. 905 are really mere challenges made by petitioners concerning the
wisdom of the Circular. It explains that it was in view of the global economic downturn in the early
1980’s that the executive department through the CB-MB had to formulate policies to achieve
economic recovery, and among these policies was the establishment of a market-oriented
interest rate structure which would require the removal of the government-imposed interest rate
ceilings.35

D. The CB-MB merely suspended the effectivity of the Usury Law when it issued CB Circular No.
905.

The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long
been recognized and upheld in many cases. As the Court explained in the landmark case of
Medel v. CA,36 citing several cases, CB Circular No. 905 "did not repeal nor in anyway amend the
Usury Law but simply suspended the latter’s effectivity;" 37 that "a CB Circular cannot repeal a law,
[for] only a law can repeal another law;"38 that "by virtue of CB Circular No. 905, the Usury Law
has been rendered ineffective;" 39 and "Usury has been legally non-existent in our jurisdiction.
Interest can now be charged as lender and borrower may agree upon."40

In First Metro Investment Corp. v. Este Del Sol Mountain Reserve, Inc.41 cited in DBP v.
Perez,42 we also belied the contention that the CB was engaged in self-legislation. Thus:

Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply
suspended the latter’s effectivity. The illegality of usury is wholly the creature of legislation. A
Central Bank Circular cannot repeal a law. Only a law can repeal another law. x x x.43

In PNB v. Court of Appeals,44 an escalation clause in a loan agreement authorized the PNB to
unilaterally increase the rate of interest to 25% per annum, plus a penalty of 6% per annum on
past dues, then to 30% on October 15, 1984, and to 42% on October 25, 1984. The Supreme
Court invalidated the rate increases made by the PNB and upheld the 12% interest imposed by
the CA, in this wise:

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely
regarding any subsequent adjustment in the interest rate that shall accrue on a loan or
forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward,
the interest previously stipulated. x x x.45

Thus, according to the Court, by lifting the interest ceiling, CB Circular No. 905 merely upheld the
parties’ freedom of contract to agree freely on the rate of interest. It cited Article 1306 of the New
Civil Code, under which 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.

E. The BSP-MB has authority to enforce CB Circular No. 905.

Section 1 of CB Circular No. 905 provides that "The rate of interest, including commissions,
premiums, fees and other charges, on a loan or forbearance of any money, goods, or credits,
regardless of maturity and whether secured or unsecured, that may be charged or collected by
any person, whether natural or juridical, shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law, as amended." It does not purport to suspend the Usury Law only as it
applies to banks, but to all lenders.
Petitioners contend that, granting that the CB had power to "suspend" the Usury Law, the new
BSP-MB did not retain this power of its predecessor, in view of Section 135 of R.A. No. 7653,
which expressly repealed R.A. No. 265. The petitioners point out that R.A. No. 7653 did not
reenact a provision similar to Section 109 of R.A. No. 265.

A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended by banks,
whereas under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the
maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any
money, goods or credits, including those for loans of low priority such as consumer loans, as well
as such loans made by pawnshops, finance companies and similar credit institutions. It even
authorizes the BSP-MB to prescribe different maximum rate or rates for different types of
borrowings, including deposits and deposit substitutes, or loans of financial intermediaries.

Act No. 2655, an earlier law, is much broader in scope, whereas R.A. No. 265, now R.A. No.
7653, merely supplemented it as it concerns loans by banks and other financial institutions. Had
R.A. No. 7653 been intended to repeal Section 1-a of Act No. 2655, it would have so stated in
unequivocal terms.

Moreover, the rule is settled that repeals by implication are not favored, because laws are
presumed to be passed with deliberation and full knowledge of all laws existing pertaining to the
subject.46 An implied repeal is predicated upon the condition that a substantial conflict or
repugnancy is found between the new and prior laws. Thus, in the absence of an express repeal,
a subsequent law cannot be construed as repealing a prior law unless an irreconcilable
inconsistency and repugnancy exists in the terms of the new and old laws. 47 We find no such
conflict between the provisions of Act 2655 and R.A. No. 7653.

F. The lifting of the ceilings for interest rates does not authorize stipulations charging excessive,
unconscionable, and iniquitous interest.

It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets.48 As held in Castro v. Tan:49

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.50

Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down
for being contrary to morals, if not against the law.51 Indeed, under Article 1409 of the Civil Code,
these contracts are deemed inexistent and void ab initio, and therefore cannot be ratified, nor
may the right to set up their illegality as a defense be waived.

Nonetheless, the nullity of the stipulation of usurious interest does not affect the lender’s right to
recover the principal of a loan, nor affect the other terms thereof. 52 Thus, in a usurious loan with
mortgage, the right to foreclose the mortgage subsists, and this right can be exercised by the
creditor upon failure by the debtor to pay the debt due. The debt due is considered as without the
stipulated excessive interest, and a legal interest of 12% per annum will be added in place of the
excessive interest formerly imposed,53following the guidelines laid down in the landmark case of
Eastern Shipping Lines, Inc. v. Court of Appeals, 54 regarding the manner of computing legal
interest:

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
 1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time the quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the computation
of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance of
credit.55 (Citations omitted)

The foregoing rules were further clarified in Sunga-Chan v. Court of Appeals, 56 as follows:

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the
applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only
to loans or forbearance of money, goods, or credits, as well as to judgments involving such loan
or forbearance of money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil
Code applies "when the transaction involves the payment of indemnities in the concept of
damage arising from the breach or a delay in the performance of obligations in general," with the
application of both rates reckoned "from the time the complaint was filed until the [adjudged]
amount is fully paid." In either instance, the reckoning period for the commencement of the
running of the legal interest shall be subject to the condition "that the courts are vested with
discretion, depending on the equities of each case, on the award of interest."57 (Citations omitted)

WHEREFORE, premises considered, the Petition for certiorari is DISMISSED.

SO ORDERED.
Tan v Valdehueza (Credit Transactions)
TAN v VALDEHUEZA G.R. No. L-38745 August 6, 1975  

FACTS: 

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

DECISION OF LOWER COURTS: 

* Trial court: declared tan as the absolute owner. appeal was certified to SC by the Court
of Appeals as involving questions purely of law.  

ISSUES & RULING: 

1. WON the subject land subject of pacto de retro is actually an equitable mortgage  

Yes, it is an equitable mortgage.  

The Valdehuezas having remained in possession of the land and the realty taxes having
been paid by them, the contracts which purported to be pacto de retro transactions are
presumed to be equitable mortgages, whether registered or not, there being no third
parties involved.  

Under article 1875 of the Civil Code of 1889, registration was a necessary requisite for
the validity of a mortgage even as between the parties, but under article 2125 of the
new Civil Code (in effect since August 30,1950), this is no longer so.  

If the instrument is not recorded, the mortgage is nonetheless binding between the
parties. (Article 2125, 2nd sentence).  

2. WON the imposition of legal interest on the amounts subject of the equitable
mortgages, P1,200 and P300, respectively  

It is without legal basis, for, "No interest shall be due unless it has been expressly
stipulated in writing." (Article 1956, new Civil Code) Furthermore, the plaintiff did not
pray for such interest; her thesis was a consolidation of ownership, which was properly
rejected, the contracts being equitable mortgages. 

Posted by Victor Morvis

G.R. No. L-47878             July 24, 1942

GIL JARDENIL, plaintiff-appellant,
vs.
HEFTI SOLAS (alias HEPTI SOLAS, JEPTI SOLAS), defendant-appellee.

Eleuterio J. Gustilo for appellant.

Jose C. Robles for appellee.

MORAN, J.:

This is an action for foreclosure of mortgage. The only question raised in this appeal is: Is
defendant-appellee bound to pay the stipulated interest only up to the date of maturity as fixed in
the promissory note, or up to the date payment is effected? This question is, in our opinion
controlled by the express stipulation of the parties.

Paragraph 4 of the mortgage deed recites:

Que en consideracion a dicha suma aun por pagar de DOS MIL CUATROCIENTOS
PESOS (P2,4000.00), moneda filipina, que el Sr. Hepti Solas se compromete a pagar al
Sr. Jardenil en o antes del dia treintaiuno (31) de marzo de mil novecientos treintaicuarto
(1934), con los intereses de dicha suma al tipo de doce por ciento (12%) anual a partir
desde fecha hasta el dia de su vencimiento o sea treintaiuno (31) de marzo de mil
novecientos treintaicuatro (1934), por la presente, el Sr. Hepti Solas cede y traspasa, por
via de primera hipoteca, a favor del Sr. Jardenil, sus herederos y causahabientes, la
parcela de terreno descrita en el parrafo primero (1.º) de esta escritura.

Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date of maturity,
or until March 31, 1934. As the contract is silent as to whether after that date, in the event of non-
payment, the debtor would continue to pay interest, we cannot in law, indulge in any presumption
as to such interest; otherwise, we would be imposing upon the debtor an obligation that the
parties have not chosen to agree upon. Article 1755 of the Civil Code provides that "interest shall
be due only when it has been expressly stipulated." (Emphasis supplied.)

A writing must be interpreted according to the legal meaning of its language (section 286, Act No.
190, now section 58, Rule 123), and only when the wording of the written instrument appears to
be contrary to the evident intention of the parties that such intention must prevail. (Article 1281,
Civil Code.) There is nothing in the mortgage deed to show that the terms employed by the
parties thereto are at war with their evident intent. On the contrary the act of the mortgage of
granting to the mortgagor on the same date of execution of the deed of mortgage, an extension
of one year from the date of maturity within which to make payment, without making any mention
of any interest which the mortgagor should pay during the additional period (see Exhibit B
attached to the complaint), indicates that the true intention of the parties was that no interest
should be paid during the period of grace. What reason the parties may have therefor, we need
not here seek to explore.

Neither has either of the parties shown that, by mutual mistake, the deed of mortgage fails to
express their agreement, for if such mistake existed, plaintiff would have undoubtedly adduced
evidence to establish it and asked that the deed be reformed accordingly, under the parcel-
evidence rule.

We hold therefore, that as the contract is clear and unmistakable and the terms employed therein
have not been shown to belie or otherwise fail to express the true intention of the parties and that
the deed has not been assailed on the ground of mutual mistake which would require its
reformation, same should be given its full force and effect. When a party sues on a written
contract and no attempt is made to show any vice therein, he cannot be allowed to lay any claim
more than what its clear stipulations accord. His omission, to which the law attaches a definite
warning as an in the instant case, cannot by the courts be arbitrarily supplied by what their own
notions of justice or equity may dictate.

Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of P2, 400
from November 8, 1932 to March 31, 1934. And it being a fact that extra judicial demands have
been made which we may assume to have been so made on the expiration of the year of grace,
he shall be entitled to legal interest upon the principal and the accrued interest from April 1,
1935, until full payment.

Thus modified judgment is affirmed, with costs against appellant.

Yulo, C.J., Ozaeta and Bocobo, JJ., concur.

Separate Opinions

PARAS, J., dissenting:

Under the facts stated in the decision of the majority, I come to the conclusion that interest at the
rate of 12 per cent per annum should be paid up to the date of payment of the whole
indebtedness is made. Payment of such interest is expressly stipulated. True, it is stated in the
mortgage contract that interest was to be paid up to March 31, 1934, but this date was inserted
merely because it was the date of maturity. The extension note is silent as regards interest, but
its payment is clearly implied from the nature of the transaction which is only a renewal of the
obligation. In my opinion, the ruling of the majority is anomalous and at war with common
practice and everyday business usage.
G.R. No. 155223             April 4, 2007

BOBIE ROSE V. FRIAS, represented by her Attorney-in-fact, MARIE F. FUJITA, Petitioner,

vs.
FLORA SAN DIEGO-SISON, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before us is a Petition for Review on Certiorari filed by Bobie Rose V. Frias represented by her
Attorney-in-fact, Marie Regine F. Fujita (petitioner) seeking to annul the Decision1 dated June 18,
2002 and the Resolution2 dated September 11, 2002 of the Court of Appeals (CA) in CA-G.R. CV
No. 52839.

Petitioner is the owner of a house and lot located at No. 589 Batangas East, Ayala Alabang,
Muntinlupa, Metro Manila, which she acquired from Island Masters Realty and Development
Corporation (IMRDC) by virtue of a Deed of Sale dated Nov. 16, 1990. 3 The property is covered
by TCT No. 168173 of the Register of Deeds of Makati in the name of IMRDC.4

On December 7, 1990, petitioner, as the FIRST PARTY, and Dra. Flora San Diego-Sison
(respondent), as the SECOND PARTY, entered into a Memorandum of Agreement 5 over the
property with the following terms:

NOW, THEREFORE, for and in consideration of the sum of THREE MILLION PESOS
(₱3,000,000.00) receipt of which is hereby acknowledged by the FIRST PARTY from the
SECOND PARTY, the parties have agreed as follows:

1. That the SECOND PARTY has a period of Six (6) months from the date of the
execution of this contract within which to notify the FIRST PARTY of her intention to
purchase the aforementioned parcel of land together within (sic) the improvements
thereon at the price of SIX MILLION FOUR HUNDRED THOUSAND PESOS
(₱6,400,000.00). Upon notice to the FIRST PARTY of the SECOND PARTY’s intention to
purchase the same, the latter has a period of another six months within which to pay the
remaining balance of ₱3.4 million.

2. That prior to the six months period given to the SECOND PARTY within which to
decide whether or not to purchase the above-mentioned property, the FIRST PARTY
may still offer the said property to other persons who may be interested to buy the same
provided that the amount of ₱3,000,000.00 given to the FIRST PARTY BY THE
SECOND PARTY shall be paid to the latter including interest based on prevailing
compounded bank interest plus the amount of the sale in excess of ₱7,000,000.00
should the property be sold at a price more than ₱7 million.

3. That in case the FIRST PARTY has no other buyer within the first six months from the
execution of this contract, no interest shall be charged by the SECOND PARTY on the
P3 million however, in the event that on the sixth month the SECOND PARTY would
decide not to purchase the aforementioned property, the FIRST PARTY has a period of
another six months within which to pay the sum of ₱3 million pesos provided that the said
amount shall earn compounded bank interest for the last six months only. Under this
circumstance, the amount of P3 million given by the SECOND PARTY shall be treated as
[a] loan and the property shall be considered as the security for the mortgage which can
be enforced in accordance with law.
 x x x x.6

Petitioner received from respondent two million pesos in cash and one million pesos in a post-
dated check dated February 28, 1990, instead of 1991, which rendered said check
stale.7 Petitioner then gave respondent TCT No. 168173 in the name of IMRDC and the Deed of
Absolute Sale over the property between petitioner and IMRDC.

Respondent decided not to purchase the property and notified petitioner through a letter 8 dated
March 20, 1991, which petitioner received only on June 11, 1991, 9 reminding petitioner of their
agreement that the amount of two million pesos which petitioner received from respondent
should be considered as a loan payable within six months. Petitioner subsequently failed to pay
respondent the amount of two million pesos.

On April 1, 1993, respondent filed with the Regional Trial Court (RTC) of Manila, a complaint 10 for
sum of money with preliminary attachment against petitioner. The case was docketed as Civil
Case No. 93-65367 and raffled to Branch 30. Respondent alleged the foregoing facts and in
addition thereto averred that petitioner tried to deprive her of the security for the loan by making a
false report11 of the loss of her owner’s copy of TCT No. 168173 to the Tagig Police Station on
June 3, 1991, executing an affidavit of loss and by filing a petition 12 for the issuance of a new
owner’s duplicate copy of said title with the RTC of Makati, Branch 142; that the petition was
granted in an Order13 dated August 31, 1991; that said Order was subsequently set aside in an
Order dated April 10, 199214 where the RTC Makati granted respondent’s petition for relief from
judgment due to the fact that respondent is in possession of the owner’s duplicate copy of TCT
No. 168173, and ordered the provincial public prosecutor to conduct an investigation of petitioner
for perjury and false testimony. Respondent prayed for the ex-parte issuance of a writ of
preliminary attachment and payment of two million pesos with interest at 36% per annum from
December 7, 1991, ₱100,000.00 moral, corrective and exemplary damages and ₱200,000.00 for
attorney’s fees.

In an Order dated April 6, 1993, the Executive Judge of the RTC of Manila issued a writ of
preliminary attachment upon the filing of a bond in the amount of two million pesos.15

Petitioner filed an Amended Answer16 alleging that the Memorandum of Agreement was

conceived and arranged by her lawyer, Atty. Carmelita Lozada, who is also respondent’s lawyer;
that she was asked to sign the agreement without being given the chance to read the same; that
the title to the property and the Deed of Sale between her and the IMRDC were entrusted to Atty.
Lozada for safekeeping and were never turned over to respondent as there was no
consummated sale yet; that out of the two million pesos cash paid, Atty. Lozada took the one
million pesos which has not been returned, thus petitioner had filed a civil case against her; that
she was never informed of respondent’s decision not to purchase the property within the six
month period fixed in the agreement; that when she demanded the return of TCT No. 168173
and the Deed of Sale between her and the IMRDC from Atty. Lozada, the latter gave her these
documents in a brown envelope on May 5, 1991 which her secretary placed in her attache case;
that the envelope together with her other personal things were lost when her car was forcibly
opened the following day; that she sought the help of Atty. Lozada who advised her to secure a
police report, to execute an affidavit of loss and to get the services of another lawyer to file a
petition for the issuance of an owner’s duplicate copy; that the petition for the issuance of a new
owner’s duplicate copy was filed on her behalf without her knowledge and neither did she sign
the petition nor testify in court as falsely claimed for she was abroad; that she was a victim of the
manipulations of Atty. Lozada and respondent as shown by the filing of criminal charges for
perjury and false testimony against her; that no interest could be due as there was no valid
mortgage over the property as the principal obligation is vitiated with fraud and deception. She
prayed for the dismissal of the complaint, counter-claim for damages and attorney’s fees.

Trial on the merits ensued. On January 31, 1996, the RTC issued a decision, 17 the dispositive
portion of which reads:
WHEREFORE, judgment is hereby RENDERED:

1) Ordering defendant to pay plaintiff the sum of P2 Million plus interest thereon at the
rate of thirty two (32%) per cent per annum beginning December 7, 1991 until fully paid.

2) Ordering defendant to pay plaintiff the sum of ₱70,000.00 representing premiums paid
by plaintiff on the attachment bond with legal interest thereon counted from the date of
this decision until fully paid.

3) Ordering defendant to pay plaintiff the sum of ₱100,000.00 by way of moral, corrective
and exemplary damages.

4) Ordering defendant to pay plaintiff attorney’s fees of ₱100,000.00 plus cost of

litigation.18

The RTC found that petitioner was under obligation to pay respondent the amount of two million
pesos with compounded interest pursuant to their Memorandum of Agreement; that the
fraudulent scheme employed by petitioner to deprive respondent of her only security to her
loaned money when petitioner executed an affidavit of loss and instituted a petition for the
issuance of an owner’s duplicate title knowing the same was in respondent’s possession, entitled
respondent to moral damages; and that petitioner’s bare denial cannot be accorded credence
because her testimony and that of her witness did not appear to be credible.

The RTC further found that petitioner admitted that she received from respondent the two million
pesos in cash but the fact that petitioner gave the one million pesos to Atty. Lozada was without
respondent’s knowledge thus it is not binding on respondent; that respondent had also proven
that in 1993, she initially paid the sum of ₱30,000.00 as premium for the issuance of the
attachment bond, ₱20,000.00 for its renewal in 1994, and ₱20,000.00 for the renewal in 1995,
thus plaintiff should be reimbursed considering that she was compelled to go to court and ask for
a writ of preliminary attachment to protect her rights under the agreement.

Petitioner filed her appeal with the CA. In a Decision dated June 18, 2002, the CA affirmed the
RTC decision with modification, the dispositive portion of which reads:

WHEREFORE, premises considered, the decision appealed from is MODIFIED in the sense that
the rate of interest is reduced from 32% to 25% per annum, effective June 7, 1991 until fully
paid.19

The CA found that: petitioner gave the one million pesos to Atty. Lozada partly as her
commission and partly as a loan; respondent did not replace the mistakenly dated check of one
million pesos because she had decided not to buy the property and petitioner knew of her
decision as early as April 1991; the award of moral damages was warranted since even granting
petitioner had no hand in the filing of the petition for the issuance of an owner’s copy, she
executed an affidavit of loss of TCT No. 168173 when she knew all along that said title was in
respondent’s possession; petitioner’s claim that she thought the title was lost when the brown
envelope given to her by Atty. Lozada was stolen from her car was hollow; that such deceitful
conduct caused respondent serious anxiety and emotional distress.

The CA concluded that there was no basis for petitioner to say that the interest should be
charged for six months only and no more; that a loan always bears interest otherwise it is not a
loan; that interest should commence on June 7, 199120 with compounded bank interest prevailing
at the time the two million was considered as a loan which was in June 1991; that the bank
interest rate for loans secured by a real estate mortgage in 1991 ranged from 25% to 32% per
annum as certified to by Prudential Bank,21 that in fairness to petitioner, the rate to be charged
should be 25% only.
Petitioner’s motion for reconsideration was denied by the CA in a Resolution dated September
11, 2002.

Hence the instant Petition for Review on Certiorari filed by petitioner raising the following issues:

(A) WHETHER OR NOT THE COMPOUNDED BANK INTEREST SHOULD BE LIMITED

TO SIX (6) MONTHS AS CONTAINED IN THE MEMORANDUM OF AGREEMENT.

(B) WHETHER OR NOT THE RESPONDENT IS ENTITLED TO MORAL DAMAGES.

(C) WHETHER OR NOT THE GRANT OF CORRECTIVE AND EXEMPLARY DAMAGES

AND ATTORNEY’S FEES IS PROPER EVEN IF NOT MENTIONED IN THE TEXT OF
THE DECISION.22

Petitioner contends that the interest, whether at 32% per annum awarded by the trial court or at
25% per annum as modified by the CA which should run from June 7, 1991 until fully paid, is
contrary to the parties’ Memorandum of Agreement; that the agreement provides that if
respondent would decide not to purchase the property, petitioner has the period of another six
months to pay the loan with compounded bank interest for the last six months only; that the CA’s
ruling that a loan always bears interest otherwise it is not a loan is contrary to Art. 1956 of the
New Civil Code which provides that no interest shall be due unless it has been expressly
stipulated in writing.

We are not persuaded.

While the CA’s conclusion, that a loan always bears interest otherwise it is not a loan, is flawed
since a simple loan may be gratuitous or with a stipulation to pay interest, 23 we find no error
committed by the CA in awarding a 25% interest per annum on the two-million peso loan even
beyond the second six months stipulated period.

The Memorandum of Agreement executed between the petitioner and respondent on December
7, 1990 is the law between the parties. In resolving an issue based upon a contract, we must first
examine the contract itself, especially the provisions thereof which are relevant to the
controversy.24 The general rule is that if the terms of an agreement are clear and leave no doubt
as to the intention of the contracting parties, the literal meaning of its stipulations shall prevail. 25 It
is further required that the various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them taken jointly.26

In this case, the phrase "for the last six months only" should be taken in the context of the entire
agreement. We agree with and adopt the CA’s interpretation of the phrase in this wise:

Their agreement speaks of two (2) periods of six months each. The first six-month period was
given to plaintiff-appellee (respondent) to make up her mind whether or not to purchase
defendant-appellant’s (petitioner's) property. The second six-month period was given to
defendant-appellant to pay the P2 million loan in the event that plaintiff-appellee decided not to
buy the subject property in which case interest will be charged "for the last six months only",
referring to the second six-month period. This means that no interest will be charged for the first
six-month period while appellee was making up her mind whether to buy the property, but only
for the second period of six months after appellee had decided not to buy the property. This is
the meaning of the phrase "for the last six months only". Certainly, there is nothing in their
agreement that suggests that interest will be charged for six months only even if it takes
defendant-appellant an eternity to pay the loan.27

The agreement that the amount given shall bear compounded bank interest for the last six
months only, i.e., referring to the second six-month period, does not mean that interest will no
longer be charged after the second six-month period since such stipulation was made on the
logical and reasonable expectation that such amount would be paid within the date stipulated.
Considering that petitioner failed to pay the amount given which under the Memorandum of
Agreement shall be considered as a loan, the monetary interest for the last six months continued
to accrue until actual payment of the loaned amount.

The payment of regular interest constitutes the price or cost of the use of money and thus, until
the principal sum due is returned to the creditor, regular interest continues to accrue since the
debtor continues to use such principal amount.28 It has been held that for a debtor to continue in
possession of the principal of the loan and to continue to use the same after maturity of the loan
without payment of the monetary interest, would constitute unjust enrichment on the part of the
debtor at the expense of the creditor.29

Petitioner and respondent stipulated that the loaned amount shall earn compounded bank
interests, and per the certification issued by Prudential Bank, the interest rate for loans in 1991
ranged from 25% to 32% per annum. The CA reduced the interest rate to 25% instead of the
32% awarded by the trial court which petitioner no longer assailed. 1awphi1.nét

In Bautista v. Pilar Development Corp.,30 we upheld the validity of a 21% per annum interest on a
₱142,326.43 loan. In Garcia v. Court of Appeals,31 we sustained the agreement of the parties to a
24% per annum interest on an ₱8,649,250.00 loan. Thus, the interest rate of 25% per annum
awarded by the CA to a ₱2 million loan is fair and reasonable.

Petitioner next claims that moral damages were awarded on the erroneous finding that she used
a fraudulent scheme to deprive respondent of her security for the loan; that such finding is
baseless since petitioner was acquitted in the case for perjury and false testimony filed by
respondent against her.

We are not persuaded.

Article 31 of the Civil Code provides that when the civil action is based on an obligation not
arising from the act or omission complained of as a felony, such civil action may proceed
independently of the criminal proceedings and regardless of the result of the latter.32

While petitioner was acquitted in the false testimony and perjury cases filed by respondent
against her, those actions are entirely distinct from the collection of sum of money with damages
filed by respondent against petitioner.

We agree with the findings of the trial court and the CA that petitioner’s act of trying to deprive
respondent of the security of her loan by executing an affidavit of loss of the title and instituting a
petition for the issuance of a new owner’s duplicate copy of TCT No. 168173 entitles respondent
to moral damages.  Moral damages may be awarded in culpa contractual or breach of contract
1a\^/phi1.net

cases when the defendant acted fraudulently or in bad faith. Bad faith does not simply connote
bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and
conscious doing of wrong. It partakes of the nature of fraud.33

The Memorandum of Agreement provides that in the event that respondent opts not to buy the
property, the money given by respondent to petitioner shall be treated as a loan and the property
shall be considered as the security for the mortgage. It was testified to by respondent that after
they executed the agreement on December 7, 1990, petitioner gave her the owner’s copy of the
title to the property, the Deed of Sale between petitioner and IMRDC, the certificate of
occupancy, and the certificate of the Secretary of the IMRDC who signed the Deed of
Sale.34 However, notwithstanding that all those documents were in respondent’s possession,
petitioner executed an affidavit of loss that the owner’s copy of the title and the Deed of Sale
were lost.
Although petitioner testified that her execution of the affidavit of loss was due to the fact that she
was of the belief that since she had demanded from Atty. Lozada the return of the title, she
thought that the brown envelope with markings which Atty. Lozada gave her on May 5, 1991
already contained the title and the Deed of Sale as those documents were in the same brown
envelope which she gave to Atty. Lozada prior to the transaction with respondent. 35 Such
statement remained a bare statement. It was not proven at all since Atty. Lozada had not taken
the stand to corroborate her claim. In fact, even petitioner’s own witness, Benilda Ynfante
(Ynfante), was not able to establish petitioner's claim that the title was returned by Atty. Lozada
in view of Ynfante's testimony that after the brown envelope was given to petitioner, the latter
passed it on to her and she placed it in petitioner’s attaché case36 and did not bother to look at
the envelope.37

It is clear therefrom that petitioner’s execution of the affidavit of loss became the basis of the
filing of the petition with the RTC for the issuance of new owner’s duplicate copy of TCT No.
168173. Petitioner’s actuation would have deprived respondent of the security for her loan were it
not for respondent’s timely filing of a petition for relief whereby the RTC set aside its previous
order granting the issuance of new title. Thus, the award of moral damages is in order.

The entitlement to moral damages having been established, the award of exemplary damages is
proper.38 Exemplary damages may be imposed upon petitioner by way of example or correction
for the public good.39 The RTC awarded the amount of ₱100,000.00 as moral and exemplary
damages. While the award of moral and exemplary damages in an aggregate amount may not
be the usual way of awarding said damages,40 no error has been committed by CA. There is no
question that respondent is entitled to moral and exemplary damages.

Petitioner argues that the CA erred in awarding attorney’s fees because the trial court’s decision
did not explain the findings of facts and law to justify the award of attorney’s fees as the same
was mentioned only in the dispositive portion of the RTC decision.

We agree.

Article 220841 of the New Civil Code enumerates the instances where such may be awarded and,
in all cases, it must be reasonable, just and equitable if the same were to be granted. 42 Attorney's
fees as part of damages are not meant to enrich the winning party at the expense of the losing
litigant. They are not awarded every time a party prevails in a suit because of the policy that no
premium should be placed on the right to litigate. 43 The award of attorney's fees is the exception
rather than the general rule. As such, it is necessary for the trial court to make findings of facts
and law that would bring the case within the exception and justify the grant of such award. The
matter of attorney's fees cannot be mentioned only in the dispositive portion of the
decision.44 They must be clearly explained and justified by the trial court in the body of its
decision. On appeal, the CA is precluded from supplementing the bases for awarding attorney’s
fees when the trial court failed to discuss in its Decision the reasons for awarding the same.
Consequently, the award of attorney's fees should be deleted.

WHEREFORE, in view of all the foregoing, the Decision dated June 18, 2002 and the Resolution
dated September 11, 2002 of the Court of Appeals in CA-G.R. CV No. 52839 are AFFIRMED
with MODIFICATION that the award of attorney’s fees is DELETED.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 142277           December 11, 2002

ARWOOD INDUSTRIES, INC., petitioner,

vs.
D.M. CONSUNJI, INC., respondent.

DECISION

CORONA, J.:

This is a petition for review of the decision 1 dated November 12, 1999 of the Court of Appeals,
which affirmed, with modification, the decision2 dated April 1, 1997 of the Regional Trial Court,
Branch 153, Pasig City in Civil Case No. 63489.

The core issue of this petition is the propriety of the imposition of two percent (2%) interest on the
amount adjudged by the trial court and later affirmed by the Court of Appeals in favor of
respondent D.M. Consunji, Inc. and against petitioner Arwood Industries, Inc.

The factual backdrop of this case is as follows:

Petitioner and respondent, as owner and contractor, respectively, entered into a Civil, Structural
and Architectural Works Agreement3 (Agreement) dated February 6, 1989 for the construction of
petitioner's Westwood Condominium at No. 23 Eisenhower St., Greenhills, San Juan, Metro
Manila. The contract price for the condominium project aggregated P20,800,000.00.

Despite the completion of the condominium project, the amount of P962,434.78 remained unpaid
by petitioner. Repeated demands by respondent for petitioner to pay went unheeded.

Thus, on August 13, 1993, respondent, as plaintiff in Civil Case No. 63489 filed its complaint 4 for
the recovery of the balance of the contract price and for damages against petitioner.

Respondent specifically prayed for the payment of the (a) amount of P962,434.78 with interest of
2% per month or a fraction thereof, from November 1990 up to the time of payment; (b) the
amount of P250,000 as attorney's fees and litigation expenses; (c) amount of P150,000 as
exemplary damages and (d) costs of suit.5

After trial, the court below resolved to grant the relief prayed for by respondent, thus:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against defendant

ordering the latter to pay the former the following:

"(1) the sum of P962,434.78 representing the balance of contract price with interest at
2% per month from November 1990 up to the time of payment;

"(2) the amount of P150,000.00 as attorney's fees; and

"(3) Cost(s) of suit.

SO ORDERED."6

Petitioner appealed to the Court of Appeals, particularly opposing the finding of the trial court with
regard to the imposition of the monetary interest of 2% per month on the adjudicated amount.
The Court of Appeals upheld the trial court despite dauntless demurring by petitioner.
Respondent court found basis in Article 6.03 of the Agreement concerning the imposition of the
2% interest, which reads:

"Payment shall be made by the OWNER to the CONTRACTOR within fifteen (15) calendar days
after receipt of the Construction Manager's Certificate. In the event OWNER delays the
payments (i.e. beyond the stipulated time) to the CONTRACTOR of monthly progress
billings, the CONTRACTOR shall have the option to either suspend the works on the
Project until such payments have been remitted by the OWNER or continue the work but
the OWNER shall be required to pay the interest at a rate of two (2%) percent per month or
the fraction thereof in days of the amount due for payment by the OWNER. The same
interest shall be added to the billing of the following month. Furthermore, the progress payments
shall be reduced by a portion of the downpayment made by the OWNER corresponding to the
value of the work completed."7

Respondent court, however, modified the decision of the trial court by deleting the award of
attorney's fees for the following reasons:

"Finally, defendant-appellant argues that the court a quo erred in awarding attorney’s fees
because the same was not mentioned in the body of the decision.

"On this ultimate point, We agree.

"In the case of Del Rosario vs. Court of Appeals (267 SCRA 158, 175), the Supreme Court held
that:

‘Finally, like the adjudication of actual or compensatory damages, the award of attorney’s fees
must be deleted. The matter was dealt with only in the dispositive portion of the Trial Court’s
decision. Since the judgment does not say why attorney’s fees were awarded, there is no basis
for such award, which should consequently be removed. So did this Court rule, for instance,
in Scott Consultants and Resource Development Corp., Inc. et al. (242 SCRA 393, 406):

‘It is settled that the award of attorney’s fees is the exception rather than the rule and counsel’s
fees are not to be awarded every time a party wins. The power of the court to award attorney’s
fees under Article 2208 of the Civil Code demands factual, legal, and equitable justification; its
basis cannot be left to speculation or conjecture. Where granted, the court must explicitly state in
the body of the decision, and not only in the dispositive portion thereof, the legal reason for the
award of attorney’s fees."8

Petitioner moved to reconsider, unsuccessfully.

Hence, this petition for review. The only issue is the correctness of imposing a 2% per month
interest on the award of P962,434.78.

Petitioner argues that the trial court's decision has no basis in imposing the 2% interest per
month. Although the Agreement contained a provision with regard to the interest, this provision
was not mentioned by the trial court in awarding interest in the dispositive portion. This provision
of the Agreement does not apply to the claim of respondent but refers to the "monthly progress
billings." The amount of P962,434.78 is not a "monthly progress billing" and should not therefore
be subject to interest.

Furthermore, the pre-trial order of the trial court dated February 4, 1994 did not include interest
as one of the issues to be resolved and determined during the trial; the parties agreed that the
main issue was –
"x x x whether or not defendant is liable to pay the balance of P964,434.78 as stated in the
Complaint."9

Thus, the trial court erroneously disposed of the issue on payment of interest.

Petitioner points to the error of the Court of Appeals in basing its decision (on the issue of
interest) on Article 6.03 of the Agreement. It reasons that while there was a formal offer of the
Agreement and its sub-markings, the provision on interest was neither sub-marked nor formally
offered in evidence.10 Hence, the imposition of interest is wanting in basis as it is not even
explicitly alleged in the complaint before the trial court.

Petitioner's stance hardly deserves this Court's attention.

The Agreement or the contract between the parties is the formal expression of the parties’ rights,
duties and obligations. It is the best evidence of the intention of the parties. Thus, "when the
terms of an agreement have been reduced to writing, it is considered as containing all the terms
agreed upon and there can be, between the parties and their successors in interest, no evidence
of such terms other than the contents of the written agreement."11

Consequently, upon the fulfillment by respondent of its obligation to complete the construction
project, petitioner had the correlative duty to pay for respondent’s services. However, petitioner
refused to pay the balance of the contract price. From the moment respondent completed the
construction of the condominium project and petitioner refused to pay in full, there was delay on
the part of petitioner. This delay was never disputed.

Delay in the performance of an obligation is looked upon with disfavor because, when a party to
a contract incurs delay, the other party who performs his part of the contract suffers damages
thereby. Dilationes in lege sunt idiosae.12 Obviously, respondent suffered damages brought about
by the failure of petitioner to comply with its obligation on time. And, sans elaboration of the
matter at hand, damages take the form of interest. Accordingly, the appropriate measure of
damages in this case is the payment of interest at the rate agreed upon, which is 2% interest for
every month of delay.

It must be noted that the Agreement provided the contractor, respondent in this case, two options
in case of delay in monthly payments, to wit: a) suspend work on the project until payment is
remitted by the owner or b) continue the work but the owner shall be required to pay interest at a
rate of two percent (2%) per month or a fraction thereof. Evidently, respondent chose the latter
option, as the condominium project was in fact already completed. The payment of the 2%
monthly interest, therefore, cannot be jettisoned overboard.

Since the Agreement stands as the law between the parties, 13 this Court cannot ignore the
existence of such provision providing for a penalty for every month’s delay. Facta legem facunt
inter partes.14 Neither can petitioner impugn the Agreement to which it willingly gave its consent.
From the moment petitioner gave its consent, it was bound not only to fulfill what was expressly
stipulated in the Agreement but also all the consequences which, according to their nature, may
be in keeping with good faith, usage and law.15 Petitioner’s attempt to mitigate its liability to
respondent should thus fail.

As a last-ditch effort to evade liability, petitioner argues that the amount of P962,434.78 claimed
by respondent and later awarded by the lower courts does not refer to "monthly progress
billings," the delayed payment of which would earn interest at 2% per month.

We disagree.
Petitioner appears confused by a semantics problem. "Monthly progress billings" certainly form
part of the contract price. If the amount claimed by respondent is not the "monthly progress
billings" provided in the contract, what then does such amount represent? Petitioner has not in
point of fact convincingly supplied an answer to this query. Neither has petitioner shown any
effort to clarify the meaning of "monthly progress billings" to support its position. This leaves us
no choice but to agree with respondent that the phrase "monthly progress billings" refers to a
portion of the contract price payable by the owner (petitioner) of the project to the contractor
(respondent) based on the percentage of completion of the project or on work accomplished at a
particular stage. It refers to that portion of the contract price still to be paid as work progresses,
after the downpayment is made."16

This definition is, indeed, not without basis. Articles 6.02 and 6.03 of the Agreement, which
respectively provides that the "(b)alance shall be paid in monthly progress payments based on
actual value of the work accomplished"17 and that "the progress payments shall be reduced by a
portion of the downpayment made by the OWNER corresponding to the value of the work
completed" give sense to respondent’s interpretation of "monthly progress billings."

Even supposing that petitioner has a different definition of "monthly progress billings," it must
nonetheless be interpreted in favor of herein respondent because Article 6.03 of the Agreement,
which gives respondent the options in case of petitioner’s default in payment, was obviously
stipulated for respondent’s benefit.18

Thus, respondent correctly contends that the amount claimed, which is part of the contract price,
would not have accumulated had petitioner been diligent in the monthly payment of the work
accomplished by respondent.

Respondent’s claim, it must be noted, includes "payment of the sum of P962,474.78, exclusive

of damages." The Complaint of plaintiff-respondent prayed for the amount of P962,474.78
"exclusive of damages." Petitioner had all the opportunity to squarely meet the issue on interest
at the pre-trial as it was deemed included in the phrase "exclusive of damages." The appeal to
the respondent court on the matter of interest was, therefore, a belated effort to object to the
contents of the Agreement. Petitioner cannot resort to this sneaky scheme. "Objection to
evidence cannot be raised for the first time on appeal; when a party desires the court to reject the
evidence offered, he must so state in the form of objection. Without such objection, he cannot
raise the question for the first time on appeal."19 And, since there was no timely objection to the
contents of the Agreement, the Agreement and its contents form part of the evidence of the case.
All the parties to the case, therefore, are considered bound by any favorable or unfavorable
effects resulting from the evidence.20

Needless to state, it is not indispensable that Article 6.03 of the Agreement be sub-marked and
formally offered in evidence during the pre-trial before said provision may take effect. For one,
the provision on the payment of monthly interest is included in the Agreement, the existence and
validity of which, to reiterate, were not objected to by petitioner. For another, the payment of
interest as penalty is a necessary consequence of petitioner’s failure to exercise diligence in the
discharge of its obligation under the contract.

Moreover, even assuming that there was a default of stipulation or agreement on interest,
respondent may still recover on the basis of the general provision of law, which is Article 2209 of
the Civil Code, thus:

"Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment
of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six
percent per annum."
Article 2209 of the Civil Code, as abovementioned, specifies the appropriate measure of
damages where the obligation breached consisted of the payment of sum of money. Article 2209
was, in extent, explicated by the Court in State Investment House, Inc. vs. Court of
Appeals, 21 which provides:

"The appropriate measure for damages in case of delay in discharging an obligation

consisting of the payment of a sum of money, is the payment of penalty interest at the
rate agreed upon; and in the absence of a stipulation of a particular rate of penalty interest, then
the payment of additional interest at a rate equal to the regular monetary interest; and if no
regular interest had been agreed upon, then payment of legal interest or six percent (6%) per
annum."22

Hence, even in the absence of a stipulation on interest, under Article 2209 of the Civil Code,
respondent would still be entitled to recover the balance of the contract price with interest.
Respondent court, therefore, correctly interpreted the terms of the agreement which provides that
"the OWNER shall be required to pay the interest at a rate of two percent (2%) per month or the
fraction thereof in days of the amount due for payment by the OWNER."

We, therefore, find no basis to alter the findings of the Court of Appeals affirming the decision of
the trial court.

WHEREFORE, the petition is hereby DENIED.

SO ORDERED.
G.R. No. L-33582 March 30, 1982

THE OVERSEAS BANK OF MANILA, petitioner,

vs.
VICENTE CORDERO and COURT OF APPEALS, respondents.

ESCOLIN, J.:

Again, We are confronted with another case involving the Overseas Bank of Manila, filed by one
of its depositors.

This is a petition for review on certiorari of the decision of the Court of Appeals which affirmed
the judgment of the Court of First Instance of Manila, holding petitioner bank liable to respondent
Vicente Cordero in the amount of P80,000.00 representing the latter's time deposit with
petitioner, plus interest thereon at 6% per annum until fully paid, and costs.

On July 20, 1967, private respondent opened a one-year time deposit with petitioner bank in the
amount of P80,000.00 to mature on July 20, 1968 with interest at the rate of 6% per annum.
However, due to its distressed financial condition, petitioner was unable to pay Cordero his said
time deposit together with the interest. To enforce payment, Cordero instituted an action in the
Court of First Instance of Manila.

Petitioner, in its answer, raised as special defense the finding by the Monetary Board of its state
of insolvency. It cited the Resolution of August 1, 1968 of the Monetary Board which authorized
petitioner's board of directors to suspend all its operations, and the Resolution of August 13,
1968 of the same Board, ordering the Superintendent of Banks to take over the assets of
petitioner for purposes of liquidation.

Petitioner contended that although the Resolution of August 13, 1968 was then pending review
before the Supreme Court, 1 it effectively barred or abated the action of respondent for even if
judgment be ultimately rendered in favor of Cordero, satisfaction thereof would not be possible in view
of the restriction imposed by the Monetary Board, prohibiting petitioner from issuing manager's and
cashier's checks and the provisions of Section 85 of Rep. Act 337, otherwise known as the General
Banking Act, forbidding its directors and officers from making any payment out of its funds after the
bank had become insolvent. It was further claimed that a judgment in favor of respondent would
create a preference in favor of a particular creditor to the prejudice of other creditors and/or depositors
of petitioner bank.

After pre-trial, petitioner filed on November 29, 1968, a motion to dismiss, reiterating the same
defenses raised in its answer. Finding the same unmeritorious, the lower court denied the motion
and proceeded with the trial on the merits. In due time, the lower court rendered the aforesaid
decision. Dissatisfied, petitioner appealed to the Court of Appeals, which affirmed the decision of
the lower court.

Hence, this petition for review on certiorari.

The issues raised in this petition are quite novel. Petitioner stands firm on its contentions that the
suit filed by respondent Cordero for recovery of his time deposit is barred or abated by the state
of insolvency of petitioner as found by the Monetary Board of the Central Bank of the Philippines;
and that the judgment rendered in favor of respondent would in effect create a preference in his
favor to the prejudice of other creditors of the bank.
Certain supervening events, however, have rendered these issues moot and academic. The first
of these supervening events is the letter of Julian Cordero, brother and attorney-in-fact of
respondent Vicente Cordero, addressed to the Commercial Bank of Manila (Combank),
successor of petitioner Overseas Bank of Manila. In this letter dated February 13, 1981, copy of
which was furnished this Court, it appears that respondent Cordero had received from the
Philippine Deposit Insurance Company the amount of P10,000.00.

The second is a Manifestation by the same Julian Cordero dated July 3, 1981, acknowledging
receipt of the sum of P73,840.00. Said Manifestation is in the nature of a quitclaim, pertinent
portions of which We quote:

I, the undersigned acting for and in behalf of my brother Vicente R. Cordero who
resides in Canada and by virtue of a Special Power of Attorney issued by Vicente
Romero, our Consul General in Vancouver, Canada, xerox copy attached, do
hereby manifest to this honorable court that we have decided to waive all and any
damages that may be awarded to the above-mentioned case and we hereby also
agree to accept the amount of Seventy Three Thousand Eight Hundred Forty
Pesos (P73,840.00) representing the principal and interest as computed by the
Commercial Bank of Manila. We also agree to hold free and harmless the
Commercial Bank of Manila against any claim by any third party or any suit that
may arise against this agreement of payment.

... We also confirm receipt of Seventy Three Thousand Eight Hundred Forty
Pesos (P73,840.00) with our full satisfaction. ...

When asked to comment on this Manifestation, counsel for Combank filed on August 12, 1981 a
Comment confirming and ratifying the same, particularly the portions which state:

We also agree to hold free and harmless the Commercial Bank any third party or
any suit that may arise against this agreement of payment, and

We also confirm receipt of Seventy Three Thousand Eight Hundred Forty Pesos
(P73,840.00) with our full satisfaction.

However, upon further examination, this Court noted the absence of the alleged special power of
attorney executed by private respondent in favor of Julian Cordero. When directed to produce the
same, Julian Cordero submitted the following explanatory Comment, to which was attached the
special power of attorney executed by respondent Vicente Cordero:

3. This manifestation (referring to the Manifestation of July 3, 1981) applies only

to third party claims, suit and other damages. It does not mean waiving the
interest it should earn while the bank is closed and also the attorney's fees as
decided by the lower court. It is very clear. I did not waive the attorney's fees
because it belongs to our attorney and interest because it belongs to us and we
are entitled to it.

Thus, with the principal claim of respondent having been satisfied, the only remaining issue to be
determined is whether respondent is entitled to (1) interest on his time deposit during the period
that petitioner was closed and (2) to attorney's fees.

We find the answer to be in the negative.

The pronouncement made by this Court, per Justice Barredo, in the recent case of Overseas
Bank of Manila vs. Court of Appeals 2 is explicit and categorical. We quote:
 It is a matter of common knowledge which we take judicial notice of, that what
enables a bank to pay stipulated interest on money deposited with it is that thru
the other aspects of its operation, it is able to generate funds to cover the
payment of such interest. Unless a bank can lend money, engage in international
transactions, acquire foreclosed mortgaged properties or their proceeds and
generally engage in other banking and financing activities, from which it can
derive income, it is inconceivable how it can carry on as a depository obligated to
pay stipulated interest. ... Consequently, it should be deemed read into every
contract of deposit with a bank that the obligation to pay interest on the deposit
ceases the moment the operation of the bank is completely suspended by the
duly constituted authority, the Central Bank.

We consider it of trivial consequence that the stoppage of the bank's operations

by the Central Bank has been subsequently declared illegal by the Supreme
Court, for before the Court's order, the bank had no alternative under the law than
to obey the orders of the Central Bank. Whatever be the juridical significance of
the subsequent action of the Supreme Court, the stubborn fact remained that the
petitioner was totally crippled from then on from earning the income needed to
meet its obligations to its depositors. If such a situation cannot, strictly speaking
be legally denominated as "force majeure" as maintained by private respondent,
We hold it is a matter of simple equity that it be treated as such.

And concluding, this Court stated:

Parenthetically, We may add for the guidance of those who might be concerned
and so that unnecessary litigations may be avoided from further clogging the
dockets of the courts that in the light of the consideration expounded in the above
opinion, the same formula that exempts petitioner from the payment of interest to
its depositors during the whole period of factual stoppage of its operations by
orders of the Central Bank, modified in effect by the decision as well as the
approval of a formula of rehabilitation by this Court, should be, as a matter of
consistency, applicable or followed in respect to all other obligations of petitioner
which could not be paid during the period of its actual complete closure.

Neither can respondent Cordero recover attorney's fees. The trial court found that herein
petitioner's refusal to pay was not due to a wilful and dishonest refusal to comply with its
obligation but to restrictions imposed by the Central Bank. 3 Since respondent did not appeal from
this decision, he is now barred from contesting the same.

WHEREFORE, that portion of the lower court's decision ordering petitioner to pay interest on
Cordero's time deposit is set aside. It appearing that the amount of the latter's time deposit had
been fully paid, this case is hereby dismissed. No costs.

SO ORDERED.
Ramos et. al vs. Central Bank of the Philippines G.R. No. L-29352, October 4, 1971
MARCH 16, 2014LEAVE A COMMENT

Central Bank, by promising to rehabilitate the bank, is estopped from closing it down.  The conduct of the
Central Bank reveals a calculated attempt to evade rehabilitating OBM despite its promises. Hence,
respondent Central Bank of the Philippines is directed to comply with it obligations under the voting trust
agreement, and to desist from taking action in violation thereof.

Facts:    The Overseas Bank of Manila (OBM) is a commercial banking corporation duly organized and existing
under the laws of the Philippines with principal office at Rosario Street, Manila. Ramos et. al are the majority
and controlling stockholders of Overseas Bank of Manila (OBM). Pursuant to a resolution from the Central
Bank and the Monetary Board, the operation of for various violations of the banking laws and implementing
regulations. Because the financial situation of the OBM had caused mounting concern in the Central Bank,
petitioner Ramos and the OBM management met with respondent Central Bank on the necessity and urgency of
rehabilitating the OBM through the extension of necessary financial assistance.

In lieu thereof, the Monetary Board issued another resolution dated April, 1967 demanding the stockholders to
mortgage their properties or assign the same to the Central Bank and to execute a voting trust agreement
whereby they will pass the management to Philippine National Bank in order “to stave of liquidation”. Hence,
Ramos et. al executed the voting trust agreement prepared by Central Bank with petitioners as cestuis que
trust and Central Bank’s Superintendent of Banks as the Trustee. Petitioners likewise conveyed by way of
mortgage to the Central Bank all their private properties and holdings to secure the obligations of the OBM to
the Central Bank. Accordingly, new directors and officers were elected and installed and they took over the
management and control of the Overseas bank..

However, after 8 months, the Central Bank did not make any positive action to reorganize and resume OBM’s
normal operations. Instead, Central Bank issued a resolution excluding OBM from clearing with it and
authorizing the nominee board of directors to suspend operations. Worse, Central Bank Monetary Board issued
a resolution ordering the liquidation the bank. Hence this petition for certiorari, prohibition and mandamus with
prayer for the issuance of a writ of preliminary injunction to restrain respondent Central Bank of the Philippines 
from enforcing and implementing the Monetary Board Resolutions. Petitioners charged that the OBM became
financially distressed because of this suspension and the deprivation by the Central Bank of all the usual credit
facilities and accommodations accorded to the other banks. Central Bank contended that to assail Resolution of
the Monetary Board ordering the liquidation of the Overseas Bank, an action must be filed in the Court of First
Instance of Manila by the Bank itself, and not by petitioning stockholders

Issue:    Whether or not the CB had agreed to rehabilitate, normalize and stabilize OBM and whether or not the
Central Bank resolutions were adopted in abuse of discretion.

Held:    If jurisdiction was already acquired ito delve into the validity of Resolutions 1263 and 1290 (and this the
Central Bank admits), there is no cogent reason why, after such jurisdiction had been acquired, the Court should
be deprived thereof by the subsequent adoption of Resolution 1333, particularly because the latter, in relation to
the antecedent facts, appears to be no more than a deliberate effort to evade the jurisdiction of this Court, and
have the case thrown back to the Court of First Instance. The Central Bank, by promising to rehabilitate the
bank, is estopped from closing it down.  The conduct of the Central Bank reveals a calculated attempt to evade
rehabilitating OBM despite its promises. Hence, respondent Central Bank of the Philippines is directed to
comply with it obligations under the voting trust agreement, and to desist from taking action in violation thereof.

 The Central Bank made express representations to petitioners herein that it would support the OBM, and avoid
its liquidation if the petitioners would execute (a) the voting trust agreement turning over the management of
OBM to the Central Bank or its nominees, and (b) mortgage or assign their properties to the Central Bank to
cover the overdraft balance of OBM. The petitioners having complied with these conditions and parted with
value to the profit of the CB (which thus acquired additional security for its own advances), the Central Bank
may not now renege on its representations and liquidate the OBM, to the detriment of its stockholders,
depositors and other creditors, under the rule of promissory estoppel.
G.R. No. L-33205 August 31, 1987

LIRAG TEXTILE MILLS, INC., and BASILIO L. LIRAG, petitioners,

vs.
SOCIAL SECURITY SYSTEM, and HON. PACIFICO DE CASTRO, respondents.

FERNAN, J.:

This is an appeal by certiorari involving purely questions of law from the decision rendered by
respondent judge in Civil Case No. Q-12275 entitled "Social Security System versus Lirag Textile
Mills, Inc. and Basilio L. Lirag."

The antecedent facts, as stipulated by the parties during the trial, are as follows:

1. That on September 4, 1961, the plaintiff [herein respondent Social Security

System] and the defendants [herein petitioners] Lirag Textile Mills, Inc. and
Basilio Lirag entered into a Purchase Agreement under which the plaintiff agreed
to purchase from the said defendant preferred shares of stock worth ONE
MILLION PESOS [P1,000,000.00] subject to the conditions set forth in such
agreement;...

2. That pursuant to the Purchase Agreement of September 4, 1961, the plaintiff,

on January 31, 1962, paid the defendant Lirag Textile Mills, Inc. the sum of FIVE
HUNDRED THOUSAND PESOS [P500,000.00] for which the said defendant
issued to plaintiff 5,000 preferred shares with a par value of one hundred pesos
[P10000] per share as evidenced by stock Certificate No. 128, ...

3. That further in pursuance of the Purchase Agreement of September 4, 1961,

the plaintiff paid to the Lirag Textile Mills, Inc. the sum of FIVE UNDRED
THOUSAND PESOS [P500,000.00] for which the said defendant issued to
plaintiff 5,000 preferred shares with a par value of one hundred pesos [P100.00]
per share as evidenced by Stock Certificate No. 139, ...

4. That in accordance with paragraph 3 of the Purchase Agreement of September

4, 1961 which provides for the repurchase by the Lirag Textile Mills, Inc. of the
shares of stock at regular intervals of one year beginning with the 4th year
following the date of issue, Stock Certificates Nos. 128 and 139 were to be
repurchased by the Lirag Textile Mills, Inc. thus:

CERT. No. AMOUNT DATE OF REDEMPTION

128 P100,000.00 February 14, 1965

100,000.00 February 14, 1966

100,000.00 February 14, 1967

100,000.00 February 14, 1968

100,000.00 February 14, 1969

139 P100,000.00 July 3, 1966

100,000.00 July 3,1967

 100,000.00 July 3,1968

100,000.00 July 3, 1969

100,000.00 July 3,1970

5. That to guarantee the redemption of the stocks purchased by the plaintiff, the
payment of dividends, as well as the other obligations of the Lirag Textile Mills,
Inc., defendants Basilio L. Lirag signed the Purchase Agreement of September 4,
1961 not only as president of the defendant corporation, but also as surety so
that should the Lirag Textile Mills, Inc. fail to perform any of its obligations in the
said Purchase Agreement, the surety shall immediately pay to the vendee the
amounts then outstanding pursuant to Condition No. 4, to wit:

To guarantee the redemption of the stocks herein purchased, the

payment of the dividends, as well as other obligations of the
VENDOR herein, the SURETY hereby binds himself jointly and
severally liable with the VENDOR so that should the VENDOR fail
to perform any of its obligations hereunder, the SURETY shall
immediately pay to the VENDEE the amounts then outstanding. '

6. That defendant corporation failed to redeem certificates of Stock Nos. 128 and
139 by payment of the amounts mentioned in paragraph 4 above;

7. That the Lirag Textile Mills, lnc. has not paid dividends in the amounts and
within the period set forth in paragraph 10 of the complaint;*

8. That letters of demands have been sent by the plaintiff to the defendant to
redeem the foregoing stock certificates and pay the dividends set forth in
paragraph 10 of the complaint, but the Lirag Textile Mills, Inc. has not made such
redemption nor made such dividend payments;

9. That defendant Basilio L. Lirag likewise received letters of demand from the
plaintiff requiring him to make good his obligation as surety;

10. That notwithstanding such letters of demand to the defendant Basilio L. Lirag,
Stock Certificates Nos. 128 and 139 issued to plaintiff are still unredeemed and
no dividends have been paid on said stock certificates;

11. That paragraph 5 of the Purchase Agreement provides that should the Lirag
Textile Mills, Inc. fail to effect any of the redemptions stipulated therein, the entire
obligation shall immediately become due and demandable and the Lirag Textile
Mills, Inc., shall, furthermore, be liable to the plaintiff in an amount equivalent to
twelve per cent [12%] of the amount then outstanding as liquidated damages;

12. That the failure of the Lirag Textile Mills, Inc. to redeem the foregoing
certificates of stock and pay dividends thereon were due to financial reverses, to
wit:

[a] Unrestrained smuggling into the country of textiles from the

United States and other countries;

[b] Unrestricted entry of supposed remmants which competed

with textiles of domestic produce to the disadvantage and
economic prejudice of the latter;
 [c] Scarcity of money and the unavailability of financing facilities;

[d] Payment of interest on matured loans extended to defendant

corporation;

[e] Construction of the Montalban plant of the defendant

corporation financed largely through reparation benefits;

[f] Labor problems occasioned by the fact that the defendant

company is financial (sic) unable to improve, in a substantial way,
the economic plight of its workers as a result of which two costly
strikes had occurred, one in 1965 and another in 1968; and

[g] The occurrence of a fire which destroyed more than 1 million

worth of raw cotton, paralyzed operations partially, increased
overhead costs and wiped out any expected profits that year;

13. That it has been the policy of the plaintiff to be represented in the board of
directors of the corporation or entity which has obtained financial assistance from
the System be it in terms of loans, mortgages or equity investments. Thus,
pursuant to paragraph 6 of the Purchase Agreement of September 4, 1961 which
provides as follows:

The VENDEE shall be allowed to have a representative in the

Board of Directors of the VENDOR with the right to participate in
the discussions and to vote therein;

14. That Messrs. Rene Espina, Bernardino Abes and Heber Catalan were each
issued one common share of stock as a qualifying share to their election to the
Board of Directors of the Lirag Textiles Mills, Inc.;

15. That Messrs. Rene Espina, Bernardino Abes and Heber Catalan, during their
respective tenure as member of the Board of Directors of the Lirag Textile Mills,
Inc. attended the meetings of the said Board, received per diems for their
attendance therein in the same manner and in the same amount as any other
member of the Board of Directors, participated in the deliberations therein and
freely exercised their right to vote in such meetings. However, the per diems
received by the SSS representative do not go to the coffers of the System but
personally to the representative in the said board of directors. 1

For failure of Lirag Textile Mills, Inc. and Basilio L. Lirag to comply with the terms of the Purchase
Agreement, the SSS filed an action for specific performance and damages before the then Court
of First Instance of Rizal, Quezon City, praying that therein defendants Lirag Textile Mills, Inc.
and Basilio L. Lirag be adjudged liable for [1] the entire obligation of P1M which became due and
demandable upon defendants' failure to repurchase the stocks as scheduled; [21 dividends in the
amount of P220,000.00; [31 liquidated damages in an amount equivalent to twelve percent
(12%) of the amount then outstanding; [4] exemplary damages in the amount of P100,000.00
and [5] attorney's fees of P20,000.00.

Lirag Textile Mills, Inc. and Basilio L. Lirag moved for the dismissal of the complaint, but were
denied the relief sought. Thus, they filed their answer with counterclaim, denying the existence of
any obligation on their part to redeem the preferred stocks, on the ground that the SSS became
and still is a preferred stockholder of the corporation so that redemption of the shares purchased
depended upon the financial ability of said corporation. Insofar as defendant Basilio Lirag is
concerned, it was alleged that his liability arises only if the corporation is liable and does not
perform its obligations under the Purchase Agreement. They further contended that no liability on
their part has arisen because of the financial condition of the corporation upon which such liability
was made to depend, particularly the non-realization of any profit or earned surplus. Thus, the
other claims for dividends, liquidated damages and exemplary damages are allegedly without
basis.

After entering into the Stipulation of Facts above-quoted, the parties filed their respective
memoranda and submitted the case for decision.

The lower court, ruling that the purchase agreement was a debt instrument, decided in favor of
SSS and sentenced Lirag Textile Mills, Inc. and Basilio L. Lirag to pay SSS jointly and severally
P1,000,000.00 plus legal interest until the said amount is fully paid; P220,000.00 representing
the 8% per annum dividends on the preferred shares plus legal interest up to the time of actual
payment; P146,400.00 as liquidated damages; and P10,000.00 as attorney's fees. The
counterclaim of Lirag Textile Mills, Inc. and Basilio L. Lirag was dismissed.

Hence, this petition.

Petitioners assign the following errors:

1. The trial court erred in deciding that the Purchase Agreement is a debt
instrument;

2. Respondent judge erred in holding petitioner corporation liable for the payment
of the 8% preferred and cumulative dividends on the preferred shares since the
purchase agreement provides that said dividends shall be paid from the net
profits and earned surplus of petitioner corporation and respondent SSS has
admitted that due to losses sustained since -1964, no dividends had been and
can be declared by petitioner corporation;

3. Respondent judge erred in sentencing petitioners to pay P146,400.00 in

liquidated damages;

4. Respondent judge erred in sentencing petitioners to pay P10,000.00 by way of

attorney's fees;

5. Respondent judge erred in sentencing petitioners to pay interest from the time
of firing the complaint u to the time of full payment both on the P1,000,000.00
invested by respondent SSS in petitioner's corporation and on the P220,000.00
which the SSS claims as dividends due on its investments;

6. Respondent judge erred in holding that petitioner Lirag is liable to redeem the
P1,000,000.00 worth of preferred shares purchased by respondent SSS from
petitioner corporation and the 8% cumulative dividend, it appearing that Lirag was
merely a surety and not an insurer of the obligation;

7. Respondent judge erred in dismissing the counterclaim of petitioners.

The fundamental issue in this case is whether or not the Purchase Agreement entered into by
petitioners and respondent SSS is a debt instrument.

Petitioners claim that respondent SSS merely became and still is a preferred stockholder of the
petitioner corporation, the redemption of the shares purchased by said respondent being
dependent upon the financial ability of petitioner corporation. Petitioner corporation, thus, has no
obligation to redeem the preferred stocks.
On the other hand, respondent SSS claims that the Purchase Agreement is a debt instrument,
imposing upon the petitioners the obligation to pay the amount owed, and creating as between
them the relation of creditor and debtor, not that of a stockholder and a corporation.

We uphold the lower court's finding that the Purchase Agreement is, indeed, a debt instrument.
Its terms and conditions unmistakably show that the parties intended the repurchase of the
preferred shares on the respective scheduled dates to be an absolute obligation which does not
depend upon the financial ability of petitioner corporation. This absolute obligation on the part of
petitioner corporation is made manifest by the fact that a surety was required to see to it that the
obligation is fulfilled in the event of the principal debtor's inability to do so. The unconditional
undertaking of petitioner corporation to redeem the preferred shares at the specified dates
constitutes a debt which is defined "as an obligation to pay money at some fixed future time, or
at a time which becomes definite and fixed by acts of either party and which they expressly or
impliedly, agree to perform in the contract. 2

A stockholder sinks or swims with the corporation and there is no obligation to return the value of
his shares by means of repurchase if the corporation incurs losses and financial reverses, much
less guarantee such repurchase through a surety.

As private respondent rightly contends, if the parties intended it [SSS] to be merely a stockholder
of petitioner corporation, it would have been sufficient that Preferred Certificates Nos. 128 and
139 were issued in its name as the preferred certificates contained all the rights of a stockholder
as well as certain obligations on the part of petitioner corporation. However, the parties did in fact
execute the Purchase Agreement, at the same time that the petitioner corporation issued its
preferred stock to the respondent SSS. The Purchase Agreement serves to define the rights and
obligations of the parties and to establish firmly the liability of petitioners in case of breach of
contract. The Certificates of Preferred Stock serve as additional evidence of the agreement
between the parties, though the precise terms and conditions thereof must be read together with,
and regarded as qualified by the terms and conditions of the Purchase Agreement.

The rights given by the Purchase Agreement to respondent SSS are rights not enjoyed by
ordinary stockholders. This fact could only lead to the conclusion made by the trial court that:

The aforementioned rights specially stipulated for the benefit of the plaintiff
[respondent SSS] suggest eloquently an intention on the part of the plaintiff
[respondent SSS] to facilitate a loan to the defendant corporation upon the latter's
request. In order to afford protection to the plaintiff which otherwise is provided by
means of collaterals, as the plaintiff exacts in its grants of loans in its ordinary
transactions of this kind, as it is looked upon more as a lending institution rather
than as an investing agency, the purchase agreement supplied these protective
rights which would otherwise be furnished by collaterals to the loan. Thus, the
membership in the board is to have a watchdog in the operation of the business
of the corporation, so as to insure against mismanagement which may result in
losses not entirely unavoidable since payment for purposes of redemption as well
as the dividends is expressly stipulated to come from profits and/or surplus. Such
a right is never exacted by an ordinary stockholder merely investing in the
corporation. 3

Moreover, the Purchase Agreement provided that failure on the part of petitioner to repurchase
the preferred shares on the scheduled due dates renders the entire obligation due and
demandable, with petitioner in such eventuality liable to pay 12% of the then outstanding
obligation as liquidated damages. These features of the Purchase Agreement, taken collectively,
clearly show the intent of the parties to be bound therein as debtor and creditor, and not as
corporation and stockholder.
Petitioners' contention that it is beyond the power and competence of petitioner corporation to
redeem the preferred shares or pay the accrued dividends due to financial reverses can not
serve as legal justification for their failure to perform under the Purchase Agreement. The
Purchase Agreement constitutes the law between the parties and obligations arising ex
contractu must be fulfilled in accordance with the stipulations.   Besides, it was precisely this
4

eventuality that was sought to be avoided when respondent SSS required a surety for the
obligation.

Thus, it follows that petitioner Basilio L. Lirag cannot deny liability for petitioner corporation's
default. As surety, Basilio L. Lirag is bound immediately to pay respondent SSS the amount then
outstanding.

The obligation of a surety differs from that of a guarantor in that the surety
insures the debt, whereas the guarantor merely insures solvency of the debtor;
and the surety undertakes to pay if the principal does not pay, whereas a
guarantor merely binds itself to pay if the principal is unable to pay. 
5

On the liability of petitioners to pay 8% cumulative dividend, We agree with the observation of the
lower court that the dividends stipulated by the parties served evidently as interests.   The 6

amount thereof was fixed at 8% per annum and was not made to depend upon or to fluctuate
with the amount of profits or surplus realized, a clear indication that the parties intended to give a
sure and fixed earnings on the principal loan. The fact that the dividends were supposed to be
paid out of net profits and earned surplus, of which there were none, does not excuse petitioners
from the payment thereof, again for the reason that the undertaking of petitioner Basilio L. Lirag
as surety, included the payment of dividends and other obligations then outstanding.

The award of the sum of P146,400.00 in liquidated damages representing 12% of the amount
then outstanding is correct, considering that petitioners in the stipulation of facts admitted having
failed to fulfill their obligations under the Purchase Agreement. The grant of liquidated damages
in the amount stated is expressly provided for in the Purchase Agreement in case of contractual
breach.

The pronouncement of the lower court for the payment of interests on both the unredeemed
shares and unpaid dividends is also in order. Per stipulation of facts, petitioners did not deny the
fact of non-payment of dividends nor their failure to purchase the preferred shares. Since these
involve sums of money which are overdue, they are bound to earn legal interest from the time of
demand, in this case, judicial, i.e., the time of filing the action.

Petitioner Basilio L. Lirag is precluded from denying his liability under the- Purchase Agreement.
After his firm representation to "pay immediately to the VENDEE the amounts then outstanding"
evidencing his commitment as SURETY, he is estopped from denying the same. His signature in
the agreement carries with it the official imprimatur as petitioner corporation's president, in his
personal capacity as majority stockholder, as surety and as solidary obligor. The essence of his
obligation as surety is to pay immediately without qualification whatsoever if petitioner
corporation does not pay. To have another interpretation of petitioner Lirag's liability as surety
would violate the integrity of the Purchase Agreement as well as the clear and unmistakable
intent of the parties to the same.

WHEREFORE, the decision in Civil Case No. Q-12275 entitled "Social Security System vs. Lirag
Textile Mills, Inc. and Basilio L. Lirag" is hereby affirmed in toto. Costs against petitioners.

SO ORDERED.
Angel vs Chelda

Mabalacat case

David vs CA
G.R. No. 120528       January 29, 2001

ATTY. DIONISIO CALIBO, JR., petitioner,

vs.
COURT OF APPEALS and DR. PABLO U. ABELLA, respondents.

QUISUMBING, J.:

Before us is the petition for review on certiorari by petitioner Dionisio Calibo, Jr., assailing the
decision of the Court of Appeals in CA-G.R. CV No. 39705, which affirmed the decision of the
Regional Trial Court of Cebu, Branch 11, declaring private respondent as the lawful possessor of
a tractor subject of a replevin suit and ordering petitioner to pay private respondent actual
damages and attorney's fees.

The facts of the case, as summarized by respondent court, are undisputed.

"…on January 25, 1979, plaintiff-appellee [herein petitioner] Pablo U. Abella purchased
an MF 210 agricultural tractor with Serial No. 00105 and Engine No. P126M00199
(Exhibit A; Record, p.5) which he used in his farm in Dagohoy, Bohol.

Sometimes in October or November 1985, Pablo Abella's son, Mike abella rented for
residential purpose the house of defendant-appellant Dionosio R. Calibo, Jr., in
Tagbilaran City.

In October 1986, Pablo Abella pulled out his aforementioned tractor from his farm in
Dagohoy, Bohol, and left it in the safekeeping of his son, Mike Abella, in Tagbilaran City.
Mike kept the tractor in the garage of the house he was leasing from Calibo.

Since he started renting Calibo's house, Mike had been religiously paying the monthly
rentals therefor, but beginning November of 1986, he stopped doing so. The following
month, Calibo learned that Mike had never paid the charges for electric and water
consumption in the leased premises which the latter was duty-bound to shoulder. Thus,
Calibo confronted Mike about his rental arrears and the unpaid electric and water bills.
During this confrontation, Mike informed Calibo that he (Mike) would be staying in the
leased property only until the end of December 1986. Mike also assured Calibo that he
would be settling his account with the latter, offering the tractor as security. Mike even
asked Calibo to help him find a buyer for the tractor so he could sooner pay his
outstanding obligation. 1âwphi1.nêt

In January 1987 when a new tenant moved into the house formerly leased to Mike,
Calibo had the tractor moved to the garage of his father's house, also in Tagbilaran City.

Apprehensive over Mike's unsettled account, Calibo visited him in his Cebu City address
in January, February and March, 1987 and tried to collect payment. On all three
occasions, Calibo was unable to talk to Mike as the latter was reportedly out of town. On
his third trip to Cebu City, Calibo left word with the occupants of the Abella residence
thereat that there was a prospective buyer for the tractor. The following week, Mike saw
Calibo in Tagbilaran City to inquire about the possible tractor buyer. The sale, however,
did not push through as the buyer did not come back anymore. When again confronted
with his outstanding obligation, Mike reassured Calibo that the tractor would stand as a
guarantee for its payment. That was the last time Calibo saw or heard from Mike.

After a long while, or on November 22, 1988, Mike's father, Pablo Abella, came to
Tagbilaran City to claim and take possession of the tractor. Calibo, however, informed
 Pablo that Mike left the tractor with him as security for the payment of Mike's obligation to
him. Pablo offered to write Mike a check for P2,000.00 in payment of Mike's unpaid lease
rentals, in addition to issuing postdated checks to cover the unpaid electric and water
bills the correctness of which Pablo said he still had to verify with Mike. Calibo told Pablo
that he would accept the P2,000.00-check only if the latter would execute a promissory
note in his favor to cover the amount of the unpaid electric and water bills. Pablo was not
amenable to this proposal. The two of them having failed to come to an agreement,
Pablo left and went back to Cebu City, unsuccessful in his attempt to take possession of
the tractor."1

On November 25, 1988, private respondent instituted an action for replevin, claiming ownership
of the tractor and seeking to recover possession thereof from petitioner. As adverted to above,
the trial court ruled in favor of private respondent; so did the Court of Appeals when petitioner
appealed.

The Court of Appeals sustained the ruling of the trial court that Mike Abella could not have validly
pledged the subject tractor to petitioner since he was not the owner thereof, nor was he
authorized by its owner to pledge the tractor. Respondent court also rejected petitioner's
contention that, if not a pledge, then a deposit was created. The Court of Appeals said that under
the Civil Code, the primary purpose of a deposit is only safekeeping and not, as in this case,
securing payment of a debt.

The Court of Appeals reduced the amount of actual damages payable to private respondent,
deducting therefrom the cost of transporting the tractor from Tagbilaran, Bohol, to Cebu City.

Hence, this petition.

ISSUE: Whther or not the tractor in the house of Atty. Calibo is under the contract of
deposit?

Essentially, petitioner claims that the tractor in question was validly pledged to him by private
respondent's son Mike Abella to answer for the latter's monetary obligations to petitioner. In the
alternative, petitioner asserts that the tractor was left with him, in the concept of an innkeeper, on
deposit and that he may validly hold on thereto until Mike Abella pays his obligations.

Petitioner maintains that even if Mike Abella were not the owner of the tractor, a principal-agent
relationship may be implied between Mike Abella and private respondent. He contends that the
latter failed to repudiate the alleged agency, knowing that his son is acting on his behalf without
authority when he pledged the tractor to petitioner. Petitioner argues that, under Article 1911 of
the Civil Code, private respondent is bound by the pledge, even if it were beyond the authority of
his son to pledge the tractor, since he allowed his son to act as though he had full powers.

On the other hand, private respondent asserts that respondent court had correctly ruled on the
matter.

In a contract of pledge, the creditor is given the right to retain his debtor's movable property in his
possession, or in that of a third person to whom it has been delivered, until the debt is paid. For
the contract to be valid, it is necessary that: (1) the pledge is constituted to secure the fulfillment
of a principal obligation; (2) the pledgor be the absolute owner of the thing pledged; and (3) the
person constituting the pledge has the free disposal of his property, and in the absence thereof,
that he be legally authorized for the purpose.2

As found by the trial court and affirmed by respondent court, the pledgor in this case, Mike
Abella, was not the absolute owner of the tractor that was allegedly pledged to petitioner. The
tractor was owned by his father, private respondent, who left the equipment with him for
safekeeping. Clearly, the second requisite for a valid pledge, that the pledgor be the absolute
owner of the property, is absent in this case. Hence, there is no valid pledge.

"He who is not the owner or proprietor of the property pledged or mortgaged to guarantee
the fulfillment of a principal obligation, cannot legally constitute such a guaranty as may
validly bind the property in favor of his creditor, and the pledgee or mortgagee in such a
case acquires no right whatsoever in the property pledged or mortgaged."3

There also does not appear to be any agency in this case. We agree with the Court of Appeals
that:

"As indicated in Article 1869, for an agency relationship to be deemed as implied, the
principal must know that another person is acting on his behalf without authority. Here,
appellee categorically stated that the only purpose for his leaving the subject tractor in
the care and custody of Mike Abella was for safekeeping, and definitely not for him to
pledge or alienate the same. If it were true that Mike pledged appeellee's tractor to
appellant, then Mike was acting not only without appellee's authority but without the
latter's knowledge as well.

Article 1911, on the other hand, mandates that the principal is solidarily liable with the
agent if the former allowed the latter to act as though he had full powers. Again, in view
of appellee's lack of knowledge of Mike's pledging the tractor without any authority from
him, it stands to reason that the former could not have allowed the latter to pledge the
tractor as if he had full powers to do so."4

There is likewise no valid deposit in this case. In a contract of deposit, a person receives an
object belonging to another with the obligation of safely keeping it and of returning the
same.5 Petitioner himself states that he received the tractor not to safely keep it but as a form of
security for the payment of Mike Abella's obligations. There is no deposit where the principal
purpose for receiving the object is not safekeeping.6

Consequently, petitioner had no right to refuse delivery of the tractor to its lawful owner. On the
other hand, private respondent, as owner, had every right to seek to repossess the tractor,
including the institution of the instant action for replevin.
1âwphi1.nêt

We do not here pass upon the other assignment of errors made by petitioner concerning alleged
irregularities in the raffle and disposition of the case at the trial court. A petition for review on
certiorari is not the proper vehicle for such allegations.

WHEREFORE, the instant petition is DENIED for lack of merit, and the decision of the Court of
Appeals in CA-G.R. CV No. 39705 is AFFIRMED. Costs against petitioner.

SO ORDERED.
G.R. No. L-6913            November 21, 1913

THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee,

vs.
GREGORIO DE LA PEÑA, administrator of the estate of Father Agustin de la
Peña, defendant-appellant.

J. Lopez Vito, for appellant.

Arroyo and Horrilleno, for appellee.

MORELAND, J.:

This is an appeal by the defendant from a judgment of the Court of First Instance of Iloilo,
awarding to the plaintiff the sum of P6,641, with interest at the legal rate from the beginning of
the action.

It is established in this case that the plaintiff is the trustee of a charitable bequest made for the
construction of a leper hospital and that father Agustin de la Peña was the duly authorized
representative of the plaintiff to receive the legacy. The defendant is the administrator of the
estate of Father De la Peña.

In the year 1898 the books Father De la Peña, as trustee, showed that he had on hand as such
trustee the sum of P6,641, collected by him for the charitable purposes aforesaid. In the same
year he deposited in his personal account P19,000 in the Hongkong and Shanghai Bank at Iloilo.
Shortly thereafter and during the war of the revolution, Father De la Peña was arrested by the
military authorities as a political prisoner, and while thus detained made an order on said bank in
favor of the United States Army officer under whose charge he then was for the sum thus
deposited in said bank. The arrest of Father De la Peña and the confiscation of the funds in the
bank were the result of the claim of the military authorities that he was an insurgent and that the
funds thus deposited had been collected by him for revolutionary purposes. The money was
taken from the bank by the military authorities by virtue of such order, was confiscated and
turned over to the Government.

While there is considerable dispute in the case over the question whether the P6,641 of trust
funds was included in the P19,000 deposited as aforesaid, nevertheless, a careful examination of
the case leads us to the conclusion that said trust funds were a part of the funds deposited and
which were removed and confiscated by the military authorities of the United States.

That branch of the law known in England and America as the law of trusts had no exact
counterpart in the Roman law and has none under the Spanish law. In this jurisdiction, therefore,
Father De la Peña's liability is determined by those portions of the Civil Code which relate to
obligations. (Book 4, Title 1.)

Although the Civil Code states that "a person obliged to give something is also bound to preserve
it with the diligence pertaining to a good father of a family" (art. 1094), it also provides, following
the principle of the Roman law, major casus est, cui humana infirmitas resistere non potest, that
"no one shall be liable for events which could not be foreseen, or which having been foreseen
were inevitable, with the exception of the cases expressly mentioned in the law or those in which
the obligation so declares." (Art. 1105.)
By placing the money in the bank and mixing it with his personal funds De la Peña did not
thereby assume an obligation different from that under which he would have lain if such deposit
had not been made, nor did he thereby make himself liable to repay the money at all hazards. If
the had been forcibly taken from his pocket or from his house by the military forces of one of the
combatants during a state of war, it is clear that under the provisions of the Civil Code he would
have been exempt from responsibility. The fact that he placed the trust fund in the bank in his
personal account does not add to his responsibility. Such deposit did not make him a debtor who
must respond at all hazards.

We do not enter into a discussion for the purpose of determining whether he acted more or less
negligently by depositing the money in the bank than he would if he had left it in his home; or
whether he was more or less negligent by depositing the money in his personal account than he
would have been if he had deposited it in a separate account as trustee. We regard such
discussion as substantially fruitless, inasmuch as the precise question is not one of negligence.
There was no law prohibiting him from depositing it as he did and there was no law which
changed his responsibility be reason of the deposit. While it may be true that one who is under
obligation to do or give a thing is in duty bound, when he sees events approaching the results of
which will be dangerous to his trust, to take all reasonable means and measures to escape or, if
unavoidable, to temper the effects of those events, we do not feel constrained to hold that, in
choosing between two means equally legal, he is culpably negligent in selecting one whereas he
would not have been if he had selected the other.

The court, therefore, finds and declares that the money which is the subject matter of this action
was deposited by Father De la Peña in the Hongkong and Shanghai Banking Corporation of
Iloilo; that said money was forcibly taken from the bank by the armed forces of the United States
during the war of the insurrection; and that said Father De la Peña was not responsible for its
loss.

The judgment is therefore reversed, and it is decreed that the plaintiff shall take nothing by his
complaint.

Arellano, C.J., Torres and Carson, JJ., concur.

G.R. No. 90027 March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,

vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.

Dolorfino & Dominguez Law Offices for petitioner.

Danilo B. Banares for private respondent.

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
complaint  for damages against the respondent Bank with the Court of First Instance (now
2

Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.

In its Answer with Counterclaim,  respondent Bank alleged that the petitioner has no cause of
3

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 decision  adverse to the petitioner on 8 December 1986, the
5

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 reconsideration  having been denied, petitioner appealed from the adverse decision
7

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,  respondent Court affirmed the appealed decision
9

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   which provides:
10

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 of the property loses his
11

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 policy."   The appellate court was quick to add,
12

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   having been denied in the respondent Court's Resolution of 28
14

August 1989,   petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to
15

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.   Accordingly, it is claimed that the respondent Bank is liable for the loss of the
16

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   which is supposed to

17

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   which states that a contract for the rental of a
18

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;   the contract in the case at bar is a special kind of
19

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   on this point do not apply. Neither could
20

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.   This is just the prevailing view because:
21

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.   (citations omitted)
22

In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it
is clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section
72 of the General Banking Act   pertinently provides:
23

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. . . .   (emphasis supplied)
24

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   and, pursuant to
25

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.   In the absence of any
26

stipulation prescribing the degree of diligence required, that of a good father of a family is to be
observed.   Hence, any stipulation exempting the depositary from any liability arising from the
27

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.   (citations omitted)
30

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.
G.R. No. 4015            August 24, 1908

ANGEL JAVELLANA, plaintiff-appellee,
vs.
JOSE LIM, ET AL., defendants-appellants.

R. Zaldarriaga for appellants.

B. Montinola for appellee.

TORRES, J.:

The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th of October, 1906, with
the Court of First Instance of Iloilo, praying that the defendants, Jose Lim and Ceferino Domingo
Lim, he sentenced to jointly and severally pay the sum of P2,686.58, with interest thereon at the
rate of 15 per cent per annum from the 20th of January, 1898, until full payment should be made,
deducting from the amount of interest due the sum of P1,102.16, and to pay the costs of the
proceedings.

Authority from the court having been previously obtained, the complaint was amended on the
10th of January, 1907; it was then alleged, on the 26th of May, 1897, the defendants executed
and subscribed a document in favor of the plaintiff reading as follows:

We have received from Angel Javellana, as a deposit without interest, the sum of two thousand
six hundred and eighty-six cents of pesos fuertes, which we will return to the said gentleman,
jointly and severally, on the 20th of January, 1898. — Jaro, 26th of May, 1897. — Signed Jose
Lim. — Signed: Ceferino Domingo Lim.

That, when the obligation became due, the defendants begged the plaintiff for an extension of
time for the payment thereof, building themselves to pay interest at the rate of 15 per cent on the
amount of their indebtedness, to which the plaintiff acceded; that on the 15th of May, 1902, the
debtors paid on account of interest due the sum of P1,000 pesos, with the exception of either
capital or interest, had thereby been subjected to loss and damages.

A demurrer to the original complaint was overruled, and on the 4th of January, 1907, the
defendants answered the original complaint before its amendment, setting forth that they
acknowledged the facts stated in Nos. 1 and 2 of the complaint; that they admitted the
statements of the plaintiff relative to the payment of 1,102.16 pesos made on the 15th of
November, 1902, not, however, as payment of interest on the amount stated in the foregoing
document, but on account of the principal, and denied that there had been any agreement as to
an extension of the time for payment and the payment of interest at the rate of 15 per cent per
annum as alleged in paragraph 3 of the complaint, and also denied all the other statements
contained therein.

As a counterclaim, the defendants alleged that they had paid to the plaintiff sums which, together
with the P1,102.16 acknowledged in the complaint, aggregated the total sum of P5,602.16, and
that, deducting therefrom the total sum of P2,686.58 stated in the document transcribed in the
complaint, the plaintiff still owed the defendants P2,915.58; therefore, they asked that judgment
be entered absolving them, and sentencing the plaintiff to pay them the sum of P2,915.58 with
the costs.

Evidence was adduced by both parties and, upon their exhibits, together with an account book
having been made of record, the court below rendered judgment on the 15th of January, 1907, in
favor of the plaintiff for the recovery of the sum of P5,714.44 and costs.
The defendants excepted to the above decision and moved for a new trial. This motion was
overruled and was also excepted to by them; the bill of exceptions presented by the appellants
having been approved, the same was in due course submitted to this court.

The document of indebtedness inserted in the complaint states that the plaintiff left on deposit
with the defendants a given sum of money which they were jointly and severally obliged to return
on a certain date fixed in the document; but that, nevertheless, when the document appearing as
Exhibits 2, written in the Visayan dialect and followed by a translation into Spanish was executed,
it was acknowledged, at the date thereof, the 15th of November, 1902, that the amount
deposited had not yet been returned to the creditor, whereby he was subjected to losses and
damages amounting to 830 pesos since the 20th of January, 1898, when the return was again
stipulated with the further agreement that the amount deposited should bear interest at the rate
of 15 per cent per annum, from the aforesaid date of January 20, and that the 1,000 pesos paid
to the depositor on the 15th of May, 1900, according to the receipt issued by him to the debtors,
would be included, and that the said rate of interest would obtain until the debtors on the 20th of
May, 1897, it is called a deposit consisted, and they could have accomplished the return agreed
upon by the delivery of a sum equal to the one received by them. For this reason it must be
understood that the debtors were lawfully authorized to make use of the amount deposited,
which they have done, as subsequent shown when asking for an extension of the time for the
return thereof, inasmuch as, acknowledging that they have subjected the letter, their creditor, to
losses and damages for not complying with what had been stipulated, and being conscious that
they had used, for their own profit and gain, the money that they received apparently as a
deposit, they engaged to pay interest to the creditor from the date named until the time when the
refund should be made. Such conduct on the part of the debtors is unquestionable evidence that
the transaction entered into between the interested parties was not a deposit, but a real contract
of loan.

Article 1767 of the Civil Code provides that —

The depository can not make use of the thing deposited without the express permission
of the depositor.

Otherwise he shall be liable for losses and damages.

Article 1768 also provides that —

When the depository has permission to make use of the thing deposited, the contract
loses the character of a deposit and becomes a loan or bailment.

The permission shall not be presumed, and its existence must be proven.

When on one of the latter days of January, 1898, Jose Lim went to the office of the creditor
asking for an extension of one year, in view of the fact the money was scare, and because
neither himself nor the other defendant were able to return the amount deposited, for which
reason he agreed to pay interest at the rate of 15 per cent per annum, it was because, as a
matter of fact, he did not have in his possession the amount deposited, he having made use of
the same in his business and for his own profit; and the creditor, by granting them the extension,
evidently confirmed the express permission previously given to use and dispose of the amount
stated as having bee deposited, which, in accordance with the loan, to all intents and purposes
gratuitously, until the 20th of January, 1898, and from that dated with interest at 15 per cent per
annum until its full payment, deducting from the total amount of interest the sum of 1,000 pesos,
in accordance with the provisions of article 1173 of the Civil Code.

Notwithstanding that it does not appear that Jose Lim signed the document (Exhibit 2) executed
in the presence of three witnesses on the 15th of November, 1902, by Ceferino Domingo Lim on
behalf of himself and the former, nevertheless, the said document has not been contested as
false, either by a criminal or by a civil proceeding, nor has any doubt been cast upon the
authenticity of the signatures of the witnesses who attested the execution of the same; and from
the evidence in the case one is sufficiently convinced that the said Jose Lim was perfectly aware
of and authorized his joint codebtor to liquidate the interest, to pay the sum of 1,000 pesos, on
account thereof, and to execute the aforesaid document No. 2. A true ratification of the original
document of deposit was thus made, and not the least proof is shown in the record that Jose Lim
had ever paid the whole or any part of the capital stated in the original document, Exhibit 1.

If the amount, together with interest claimed in the complaint, less 1,000 pesos appears as fully
established, such is not the case with the defendant's counterclaim for P5,602.16, because the
existence and certainty of said indebtedness imputed to the plaintiff has not been proven, and
the defendants, who call themselves creditors for the said amount have not proven in a
satisfactory manner that the plaintiff had received partial payments on account of the same; the
latter alleges with good reason, that they should produce the receipts which he may have issued,
and which he did issue whenever they paid him any money on account. The plaintiffs allegation
that the two amounts of 400 and 1,200 pesos, referred to in documents marked "C" and "D"
offered in evidence by the defendants, had been received from Ceferino Domingo Lim on
account of other debts of his, has not been contradicted, and the fact that in the original
complaint the sum of 1,102.16 pesos, was expressed in lieu of 1,000 pesos, the only payment
made on account of interest on the amount deposited according to documents No. 2 and letter
"B" above referred to, was due to a mistake.

Moreover, for the reason above set forth it may, as a matter of course, be inferred that there was
no renewal of the contract deposited converted into a loan, because, as has already been stated,
the defendants received said amount by virtue of real loan contract under the name of a deposit,
since the so-called bailees were forthwith authorized to dispose of the amount deposited. This
they have done, as has been clearly shown.

The original joint obligation contracted by the defendant debtor still exists, and it has not been
shown or proven in the proceedings that the creditor had released Joe Lim from complying with
his obligation in order that he should not be sued for or sentenced to pay the amount of capital
and interest together with his codebtor, Ceferino Domingo Lim, because the record offers
satisfactory evidence against the pretension of Jose Lim, and it further appears that document
No. 2 was executed by the other debtor, Ceferino Domingo Lim, for himself and on behalf of Jose
Lim; and it has also been proven that Jose Lim, being fully aware that his debt had not yet been
settled, took steps to secure an extension of the time for payment, and consented to pay interest
in return for the concession requested from the creditor.

In view of the foregoing, and adopting the findings in the judgment appealed from, it is our
opinion that the same should be and is hereby affirmed with the costs of this instance against the
appellant, provided that the interest agreed upon shall be paid until the complete liquidation of
the debt.

So ordered.
G.R. No. L-6          November 14, 1901

MANUEL GARCIA GAVIERES, plaintiff-appellant,

vs.
T.H. PARDO DE TAVERA, defendant-appellee.

E.M. Llanos, for appellant.

Simplicio del Rosario, for appellee.

COOPER, J.:

The present appeal has been interposed in the declarative action of greater import filed in the
Court of First Instance of Tondo, commenced on January 10, 1900, by Don Manuel Garcia
Gavieres as plaintiff and successor in interest of the deceased Doña Ignacia de Gorricho against
Don Trinidad H. Pardo de Tavera as universal heir of the deceased Don Felix Pardo de Tavera
for the collection of a balance of 1,423 pesos 75 cents, remaining due on an original obligation of
3,000 pesos which, as the plaintiff alleges, was the amount of a deposit delivered by Doña
Ignacia Gorricho, deceased, to Don Felix Pardo de Tavera, deceased, on the 31st day of
October, 1859. The agreement between the parties appears in the following writing:

Received of Señorita Ignacia de Gorricho the sum of 3,000 pesos, gold

(3,000 pesos), as a deposit payable on two months' notice in advance, with
interest at 6 per cent per annum with an hypothecation of the goods now
owned by me or which may be owned hereafter, as security of the payment.

In witness whereof I sign in Binondo, January 31, 1859. lawphil.net

FELIX PARDO DE TAVERA.

The defendant answering complaint of plaintiff alleges among other things as a defense, that the
document upon which the complaint is based was not a contract of deposit as alleged in the
complaint, but a contract of loan, and setting forth furthermore the payment of the original
obligation as well as the prescription of the action. The defendant contends that the document
upon which the action is based is not evidence of a deposit, as the plaintiff maintains, but of a
contract of loan, and that the prescription applicable to loans has extinguished the right of action.
Although in the document in question a deposit is spoken of, nevertheless from an examination
of the entire document it clearly appears that the contract was a loan and that such was the
intention of the parties. It is unnecessary to recur to the canons of interpretation to arrive at this
conclusion. The obligation of the depositary to pay interest at the rate of 6 per cent to the
depositor suffices to cause the obligation to be considered as a loan and makes it likewise
evident that it was the intention of the parties that the depositary should have the right to make
use of the amount deposited, since it was stimulated that the amount could be collected after
notice of two months in advance. Such being the case, the contract lost the character of a
deposit and acquired that of a loan. (Art. 1768, Civil Code.)

All personal actions, such as those which arise from a contract of loan, cease to have legal effect
after twenty years according to the former law and after fifteen years according to the Civil Code
now in force. The date of the document is January 31, 1859. The proof of payment in support of
the defense we consider likewise sufficient to establish such defense. The document dated
January 8, 1869, executed by Don Felix Garcia Gavieres, husband and legal representative of
Doña Ignacia Gorricho, acknowledges the receipt of 1,224 pesos from Don Manuel Darvin,
representative of the deceased Don Felix Pardo de Tavera. This sum is declared in said
document to be the balance due upon the debt of 2,000 pesos. This was slightly more or less the
amount which remained as due upon the original obligation after deducting the payment which
are admitted to have been made. In the absence of evidence disclosing that there were other
claims in favor of Gavieres it is reasonably to be supposed that this payment was made to satisfy
the balance due upon the original obligation.

The original contract between the parties was celebrated nearly a half century ago; the
contracting parties have ceased to exist long since; it may be that there exists or may have
existed documents proving a total payment between the parties and that this document has
some time ago suffered the common fate of perishable things. He who by laches in the exercise
of his rights has caused a failure of proof has no right to complain if the court does not apply the
strict rules of evidence which are applicable in ordinary cases, and admits to a certain extent the
presumption to which the conduct of the interest party himself naturally gives rise.

It is our opinion that the judgment of the Court of First Instance should be affirmed, and it is so
ordered, with costs of appeal taxed against the appellant.
G.R. Nos. L-26948 and L-26949             October 8, 1927

SILVESTRA BARON, plaintiff-appellant,
vs.
PABLO DAVID, defendant-appellant.

And

GUILLERMO BARON, plaintiff-appellant,
vs.
PABLO DAVID, defendant-appellant.

Jose Gutierrez David for plaintiff-appellant in case of No. 26948.

Gregorio Perfecto for defendant-appellant in both cases.
Francisco, Lualhati & Lopez and Jose Gutierrez David for plaintiff-appellant in case No. 26949.

STREET, J.:

These two actions were instituted in the Court of First Instance of the Province of Pampanga by
the respective plaintiffs, Silvestra Baron and Guillermo Baron, for the purpose of recovering from
the defendant, Pablo David, the value of palay alleged to have been sold by the plaintiffs to the
defendant in the year 1920. Owing to the fact that the defendant is the same in both cases and
that the two cases depend in part upon the same facts, the cases were heard together in the trial
court and determined in a single opinion. The same course will accordingly be followed here.

In the first case, i. e., that which Silvestra Baron is plaintiff, the court gave judgment for her to
recover of the defendant the sum of P5,238.51, with costs. From this judgment both the plaintiff
and the defendant appealed.

In the second case, i. e., that in which Guillermo Baron, is plaintiff, the court gave judgment for
him to recover of the defendant the sum of P5,734.60, with costs, from which judgment both the
plaintiff and the defendant also appealed. In the same case the defendant interposed a
counterclaim in which he asked credit for the sum of P2,800 which he had advanced to the
plaintiff Guillermo Baron on various occasions. This credit was admitted by the plaintiff and
allowed by the trial court. But the defendant also interposed a cross-action against Guillermo
Baron in which the defendant claimed compensation for damages alleged to have Ben suffered
by him by reason of the alleged malicious and false statements made by the plaintiff against the
defendant in suing out an attachment against the defendant's property soon after the institution
of the action. In the same cross-action the defendant also sought compensation for damages
incident to the shutting down of the defendant's rice mill for the period of one hundred seventy
days during which the above-mentioned attachment was in force. The trial judge disallowed
these claims for damages, and from this feature of the decision the defendant appealed. We are
therefore confronted with five distinct appeals in this record.

Prior to January 17, 1921, the defendant Pablo David has been engaged in running a rice mill in
the municipality of Magalang, in the Province of Pampanga, a mill which was well patronized by
the rice growers of the vicinity and almost constantly running. On the date stated a fire occurred
that destroyed the mill and its contents, and it was some time before the mill could be rebuilt and
put in operation again. Silvestra Baron, the plaintiff in the first of the actions before us, is an aunt
of the defendant; while Guillermo Baron, the plaintiff in the other action; is his uncle. In the
months of March, April, and May, 1920, Silvestra Baron placed a quantity of palay in the
defendant's mill; and this, in connection with some that she took over from Guillermo Baron,
amounted to 1,012 cavans and 24 kilos. During approximately the same period Guillermo Baron
placed other 1,865 cavans and 43 kilos of palay in the mill. No compensation has ever been
received by Silvestra Baron upon account of the palay delivered by Guillermo Baron, he has
received from the defendant advancements amounting to P2,800; but apart from this he has not
been compensated. Both the plaintiffs claim that the palay which was delivered by them to the
defendant was sold to the defendant; while the defendant, on the other hand, claims that the
palay was deposited subject to future withdrawal by the depositors or subject to some future sale
which was never effected. He therefore supposes himself to be relieved from all responsibility by
virtue of the fire of January 17, 1921, already mentioned.

The plaintiff further say that their palay was delivered to the defendant at his special request,
coupled with a promise on his part to pay for the same at the highest price per cavan at which
palay would sell during the year 1920; and they say that in August of that year the defendant
promised to pay them severally the price of P8.40 per cavan, which was about the top of the
market for the season, provided they would wait for payment until December. The trial judge
found that no such promise had been given; and the incredulity of the court upon this point
seems to us to be justified. A careful examination of the proof, however, leads us to the
conclusion that the plaintiffs did, some time in the early part of August, 1920, make demand upon
the defendant for a settlement, which he evaded or postponed leaving the exact amount due to
the plaintiffs undetermined.

It should be stated that the palay in question was place by the plaintiffs in the defendant's mill
with the understanding that the defendant was at liberty to convert it into rice and dispose of it at
his pleasure. The mill was actively running during the entire season, and as palay was daily
coming in from many customers and as rice was being constantly shipped by the defendant to
Manila, or other rice markets, it was impossible to keep the plaintiffs' palay segregated. In fact
the defendant admits that the plaintiffs' palay was mixed with that of others. In view of the nature
of the defendant's activities and the way in which the palay was handled in the defendant's mill, it
is quite certain that all of the plaintiffs' palay, which was put in before June 1, 1920, been milled
and disposed of long prior to the fire of January 17, 1921. Furthermore, the proof shows that
when the fire occurred there could not have been more than about 360 cavans of palay in the
mill, none of which by any reasonable probability could have been any part of the palay delivered
by the plaintiffs. Considering the fact that the defendant had thus milled and doubtless sold the
plaintiffs' palay prior to the date of the fire, it result that he is bound to account for its value, and
his liability was not extinguished by the occurence of the fire. In the briefs before us it seems to
have been assumed by the opposing attorneys that in order for the plaintiffs to recover, it is
necessary that they should be able to establish that the plaintiffs' palay was delivered in the
character of a sale, and that if, on the contrary, the defendant should prove that the delivery was
made in the character of deposit, the defendant should be absolved. But the case does not
depend precisely upon this explicit alternative; for even supposing that the palay may have been
delivered in the character of deposit, subject to future sale or withdrawal at plaintiffs' election,
nevertheless if it was understood that the defendant might mill the palay and he has in fact
appropriated it to his own use, he is of course bound to account for its value. Under article 1768
of the Civil Code, when the depository has permission to make use of the thing deposited, the
contract loses the character of mere deposit and becomes a loan or a commodatum; and of
course by appropriating the thing, the bailee becomes responsible for its value. In this connection
we wholly reject the defendant's pretense that the palay delivered by the plaintiffs or any part of it
was actually consumed in the fire of January, 1921. Nor is the liability of the defendant in any
wise affected by the circumstance that, by a custom prevailing among rice millers in this country,
persons placing palay with them without special agreement as to price are at liberty to withdraw it
later, proper allowance being made for storage and shrinkage, a thing that is sometimes done,
though rarely.

In view of what has been said it becomes necessary to discover the price which the defendant
should be required to pay for the plaintiffs' palay. Upon this point the trial judge fixed upon P6.15
per cavan; and although we are not exactly in agreement with him as to the propriety of the
method by which he arrived at this figure, we are nevertheless of the opinion that, all things
considered, the result is approximately correct. It appears that the price of palay during the
months of April, May, and June, 1920, had been excessively high in the Philippine Islands and
even prior to that period the Government of the Philippine Islands had been attempting to hold
the price in check by executive regulation. The highest point was touched in this season was
apparently about P8.50 per cavan, but the market began to sag in May or June and presently
entered upon a precipitate decline. As we have already stated, the plaintiffs made demand upon
the defendant for settlement in the early part of August; and, so far as we are able to judge from
the proof, the price of P6.15 per cavan, fixed by the trial court, is about the price at which the
defendant should be required to settle as of that date. It was the date of the demand of the
plaintiffs for settlement that determined the price to be paid by the defendant, and this is true
whether the palay was delivered in the character of sale with price undetermined or in the
character of deposit subject to use by the defendant. It results that the plaintiffs are respectively
entitle to recover the value of the palay which they had placed with the defendant during the
period referred to, with interest from the date of the filing of their several complaints.

As already stated, the trial court found that at the time of the fire there were about 360 cavans of
palay in the mill and that this palay was destroyed. His Honor assumed that this was part of the
palay delivered by the plaintiffs, and he held that the defendant should be credited with said
amount. His Honor therefore deducted from the claims of the plaintiffs their respective
proportionate shares of this amount of palay. We are unable to see the propriety of this feature of
the decision. There were many customers of the defendant's rice mill who had placed their palay
with the defendant under the same conditions as the plaintiffs, and nothing can be more certain
than that the palay which was burned did not belong to the plaintiffs. That palay without a doubt
had long been sold and marketed. The assignments of error of each of the plaintiffs-appellants in
which this feature of the decision is attacked are therefore well taken; and the appealed
judgments must be modified by eliminating the deductions which the trial court allowed from the
plaintiffs' claims.

The trial judge also allowed a deduction from the claim of the plaintiff Guillermo Baron of 167
cavans of palay, as indicated in Exhibit 12, 13, 14, and 16. This was also erroneous. These
exhibits relate to transactions that occurred nearly two years after the transactions with which we
are here concerned, and they were offered in evidence merely to show the character of
subsequent transactions between the parties, it appearing that at the time said exhibits came into
existence the defendant had reconstructed his mill and that business relations with Guillermo
Baron had been resumed. The transactions shown by these exhibits (which relate to palay
withdrawn by the plaintiff from the defendant's mill) were not made the subject of controversy in
either the complaint or the cross-complaint of the defendant in the second case. They therefore
should not have been taken into account as a credit in favor of the defendant. Said credit must
therefore be likewise of course be without prejudice to any proper adjustment of the rights of the
parties with respect to these subsequent transactions that they have heretofore or may hereafter
effect.

The preceding discussion disposes of all vital contentions relative to the liability of the defendant
upon the causes of action stated in the complaints. We proceed therefore now to consider the
question of the liability of the plaintiff Guillermo Baron upon the cross-complaint of Pablo David in
case R. G. No. 26949. In this cross-action the defendant seek, as the stated in the third
paragraph of this opinion, to recover damages for the wrongful suing out of an attachment by the
plaintiff and the levy of the same upon the defendant's rice mill. It appears that about two and
one-half months after said action was begun, the plaintiff, Guillermo Baron, asked for an
attachment to be issued against the property of the defendant; and to procure the issuance of
said writ the plaintiff made affidavit to the effect that the defendant was disposing, or attempting
the plaintiff. Upon this affidavit an attachment was issued as prayed, and on March 27, 1924, it
was levied upon the defendant's rice mill, and other property, real and personal.  1awph!l.net

Upon attaching the property the sheriff closed the mill and placed it in the care of a deputy.
Operations were not resumed until September 13, 1924, when the attachment was dissolved by
an order of the court and the defendant was permitted to resume control. At the time the
attachment was levied there were, in the bodega, more than 20,000 cavans of palay belonging to
persons who held receipts therefor; and in order to get this grain away from the sheriff, twenty-
four of the depositors found it necessary to submit third-party claims to the sheriff. When these
claims were put in the sheriff notified the plaintiff that a bond in the amount of P50,000 must be
given, otherwise the grain would be released. The plaintiff, being unable or unwilling to give this
bond, the sheriff surrendered the palay to the claimants; but the attachment on the rice mill was
maintained until September 13, as above stated, covering a period of one hundred seventy days
during which the mill was idle. The ground upon which the attachment was based, as set forth in
the plaintiff's affidavit was that the defendant was disposing or attempting to dispose of his
property for the purpose of defrauding the plaintiff. That this allegation was false is clearly
apparent, and not a word of proof has been submitted in support of the assertion. On the
contrary, the defendant testified that at the time this attachment was secured he was solvent and
could have paid his indebtedness to the plaintiff if judgment had been rendered against him in
ordinary course. His financial conditions was of course well known to the plaintiff, who is his
uncle. The defendant also states that he had not conveyed away any of his property, nor had
intended to do so, for the purpose of defrauding the plaintiff. We have before us therefore a case
of a baseless attachment, recklessly sued out upon a false affidavit and levied upon the
defendant's property to his great and needless damage. That the act of the plaintiff in suing out
the writ was wholly unjustifiable is perhaps also indicated in the circumstance that the attachment
was finally dissolved upon the motion of the plaintiff himself.

The defendant testified that his mill was accustomed to clean from 400 to 450 cavans of palay
per day, producing 225 cavans of rice of 57 kilos each. The price charged for cleaning each
cavan rice was 30 centavos. The defendant also stated that the expense of running the mill per
day was from P18 to P25, and that the net profit per day on the mill was more than P40. As the
mill was not accustomed to run on Sundays and holiday, we estimate that the defendant lost the
profit that would have been earned on not less than one hundred forty work days. Figuring his
profits at P40 per day, which would appear to be a conservative estimate, the actual net loss
resulting from his failure to operate the mill during the time stated could not have been less than
P5,600. The reasonableness of these figures is also indicated in the fact that the twenty-four
customers who intervened with third-party claims took out of the camarin 20,000 cavans of
palay, practically all of which, in the ordinary course of events, would have been milled in this
plant by the defendant. And of course other grain would have found its way to this mill if it had
remained open during the one hundred forty days when it was closed.

But this is not all. When the attachment was dissolved and the mill again opened, the defendant
found that his customers had become scattered and could not be easily gotten back. So slow,
indeed, was his patronage in returning that during the remainder of the year 1924 the defendant
was able to mill scarcely more than the grain belonging to himself and his brothers; and even
after the next season opened many of his old customers did not return. Several of these
individuals, testifying as witnesses in this case, stated that, owing to the unpleasant experience
which they had in getting back their grain from the sheriff to the mill of the defendant, though they
had previously had much confidence in him.

As against the defendant's proof showing the facts above stated the plaintiff submitted no
evidence whatever. We are therefore constrained to hold that the defendant was damaged by
the attachment to the extent of P5,600, in profits lost by the closure of the mill, and to the extent
of P1,400 for injury to the good-will of his business, making a total of P7,000. For this amount the
defendant must recover judgment on his cross-complaint.

The trial court, in dismissing the defendant's cross-complaint for damages resulting from the
wrongful suing out of the attachment, suggested that the closure of the rice mill was a mere act
of the sheriff for which the plaintiff was not responsible and that the defendant might have been
permitted by the sheriff to continue running the mill if he had applied to the sheriff for permission
to operate it. This singular suggestion will not bear a moment's criticism. It was of course the duty
of the sheriff, in levying the attachment, to take the attached property into his possession, and
the closure of the mill was a natural, and even necessary, consequence of the attachment. For
the damage thus inflicted upon the defendant the plaintiff is undoubtedly responsible.
One feature of the cross-complaint consist in the claim of the defendant (cross-complaint) for the
sum of P20,000 as damages caused to the defendant by the false and alleged malicious
statements contained in the affidavit upon which the attachment was procured. The additional
sum of P5,000 is also claimed as exemplary damages. It is clear that with respect to these
damages the cross-action cannot be maintained, for the reason that the affidavit in question was
used in course of a legal proceeding for the purpose of obtaining a legal remedy, and it is
therefore privileged. But though the affidavit is not actionable as a libelous publication, this fact in
no obstacle to the maintenance of an action to recover the damage resulting from the levy of the
attachment.

Before closing this opinion a word should be said upon the point raised in the first assignment of
error of Pablo David as defendant in case R. G. No. 26949. In this connection it appears that the
deposition of Guillermo Baron was presented in court as evidence and was admitted as an
exhibit, without being actually read to the court. It is supposed in the assignment of error now
under consideration that the deposition is not available as evidence to the plaintiff because it was
not actually read out in court. This connection is not well founded. It is true that in section 364 of
the Code of Civil Procedure it is said that a deposition, once taken, may be read by either party
and will then be deemed the evidence of the party reading it. The use of the word "read" in this
section finds its explanation of course in the American practice of trying cases for the most part
before juries. When a case is thus tried the actual reading of the deposition is necessary in order
that the jurymen may become acquainted with its contents. But in courts of equity, and in all
courts where judges have the evidence before them for perusal at their pleasure, it is not
necessary that the deposition should be actually read when presented as evidence.

From what has been said it result that judgment of the court below must be modified with respect
to the amounts recoverable by the respective plaintiffs in the two actions R. G. Nos. 26948 and
26949 and must be reversed in respect to the disposition of the cross-complaint interposed by
the defendant in case R. G. No. 26949, with the following result: In case R. G. No. 26948 the
plaintiff Silvestra Baron will recover of the Pablo David the sum of P6,227.24, with interest from
November 21, 1923, the date of the filing of her complaint, and with costs. In case R. G. No.
26949 the plaintiff Guillermo Baron will recover of the defendant Pablo David the sum of
P8,669.75, with interest from January 9, 1924. In the same case the defendant Pablo David, as
plaintiff in the cross-complaint, will recover of Guillermo Baron the sum of P7,000, without costs.
So ordered.
G.R. No. L-7593            March 27, 1913

THE UNITED STATES, plaintiff-appellee,

vs.
JOSE M. IGPUARA, defendant-appellant.

W. A. Kincaid, Thos. L. Hartigan, and Jose Robles Lahesa for appellant.

Office of the Solicitor-General Harvey for appellee.

ARELLANO, C.J.:

The defendant therein is charged with the crime of estafa, for having swindled Juana Montilla
and Eugenio Veraguth out of P2,498 Philippine currency, which he had take on deposit from the
former to be at the latter's disposal. The document setting forth the obligation reads:

We hold at the disposal of Eugenio Veraguth the sum of two thousand four hundred and ninety-
eight pesos (P2,498), the balance from Juana Montilla's sugar. — Iloilo, June 26, 1911, — Jose
Igpuara, for Ramirez and Co.

The Court of First Instance of Iloilo sentenced the defendant to two years of presidio
correccional, to pay Juana Montilla P2,498 Philippine currency, and in case of insolvency to
subsidiary imprisonment at P2.50 per day, not to exceed one-third of the principal penalty, and
the costs.

The defendant appealed, alleging as errors: (1) Holding that the document executed by him was
a certificate of deposit; (2) holding the existence of a deposit, without precedent transfer or
delivery of the P2,498; and (3) classifying the facts in the case as the crime of estafa.

A deposit is constituted from the time a person receives a thing belonging to another with
the obligation of keeping and returning it. (Art. 1758, Civil Code.)

That the defendant received P2,498 is a fact proven. The defendant drew up a document
declaring that they remained in his possession, which he could not have said had he not received
them. They remained in his possession, surely in no other sense than to take care of them,
for they remained has no other purpose. They remained in the defendant's possession at the
disposal of Veraguth; but on August 23 of the same year Veraguth demanded for him through a
notarial instrument restitution of them, and to date he has not restored them.

The appellant says: "Juana Montilla's agent voluntarily accepted the sum of P2,498 in an
instrument payable on demand, and as no attempt was made to cash it until August 23, 1911, he
could indorse and negotiate it like any other commercial instrument. There is no doubt that if
Veraguth accepted the receipt for P2,498 it was because at that time he agreed with the
defendant to consider the operation of sale on commission closed, leaving the collection of said
sum until later, which sum remained as a loan payable upon presentation of the receipt." (Brief, 3
and 4.)

Then, after averring the true facts: (1) that a sales commission was precedent; (2) that this
commission was settled with a balance of P2,498 in favor of the principal, Juana Montilla; and (3)
that this balance remained in the possession of the defendant, who drew up an instrument
payable on demand, he has drawn two conclusions, both erroneous: One, that the instrument
drawn up in the form of a deposit certificate could be indorsed or negotiated like any other
commercial instrument; and the other, that the sum of P2,498 remained in defendant's
possession as a loan.
It is erroneous to assert that the certificate of deposit in question is negotiable like any other
commercial instrument: First, because every commercial instrument is not negotiable; and
second, because only instruments payable to order are negotiable. Hence, this instrument not
being to order but to bearer, it is not negotiable.

It is also erroneous to assert that sum of money set forth in said certificate is, according to it, in
the defendant's possession as a loan. In a loan the lender transmits to the borrower the use of
the thing lent, while in a deposit the use of the thing is not transmitted, but merely possession for
its custody or safe-keeping.

In order that the depositary may use or dispose oft he things deposited, the depositor's consent
is required, and then:

The rights and obligations of the depositary and of the depositor shall cease, and the
rules and provisions applicable to commercial loans, commission, or contract which took
the place of the deposit shall be observed. (Art. 309, Code of Commerce.)

The defendant has shown no authorization whatsoever or the consent of the depositary for using
or disposing of the P2,498, which the certificate acknowledges, or any contract entered into with
the depositor to convert the deposit into a loan, commission, or other contract.

That demand was not made for restitution of the sum deposited, which could have been claimed
on the same or the next day after the certificate was signed, does not operate against the
depositor, or signify anything except the intention not to press it. Failure to claim at once or delay
for sometime in demanding restitution of the things deposited, which was immediately due, does
not imply such permission to use the thing deposited as would convert the deposit into a loan.

Article 408 of the Code of Commerce of 1829, previous to the one now in force, provided:

The depositary of an amount of money cannot use the amount, and if he makes use of it,
he shall be responsible for all damages that may accrue and shall respond to the
depositor for the legal interest on the amount.

Whereupon the commentators say:

In this case the deposit becomes in fact a loan, as a just punishment imposed upon him
who abuses the sacred nature of a deposit and as a means of preventing the desire of
gain from leading him into speculations that may be disastrous to the depositor, who is
much better secured while the deposit exists when he only has a personal action for
recovery.

According to article 548, No. 5, of the Penal Code, those who to the prejudice of another
appropriate or abstract for their own use money, goods, or other personal property which
they may have received as a deposit, on commission, or for administration, or for any
other purpose which produces the obligation of delivering it or returning it, and deny
having received it, shall suffer the penalty of the preceding article," which punishes such
act as the crime of estafa. The corresponding article of the Penal Code of the Philippines
in 535, No. 5.

In a decision of an appeal, September 28, 1895, the principle was laid down that: "Since he
commits the crime of estafa under article 548 of the Penal Code of Spain who to another's
detriment appropriates to himself or abstracts money or goods received on commission for
delivery, the court rightly applied this article to the appellant, who, to the manifest detriment of the
owner or owners of the securities, since he has not restored them, willfully and wrongfully
disposed of them by appropriating them to himself or at least diverting them from the purpose to
which he was charged to devote them."

It is unquestionable that in no sense did the P2,498 which he willfully and wrongfully disposed of
to the detriments of his principal, Juana Montilla, and of the depositor, Eugenio Veraguth, belong
to the defendant.

Likewise erroneous is the construction apparently at tempted to be given to two decisions of this
Supreme Court (U. S. vs. Dominguez, 2 Phil. Rep., 580, and U. S. vs. Morales and Morco, 15
Phil. Rep., 236) as implying that what constitutes estafa is not the disposal of money deposited,
but denial of having received same. In the first of said cases there was no evidence that the
defendant had appropriated the grain deposited in his possession.

On the contrary, it is entirely probable that, after the departure of the defendant from
Libmanan on September 20, 1898, two days after the uprising of the civil guard in Nueva
Caceres, the rice was seized by the revolutionalists and appropriated to their own uses.

In this connection it was held that failure to return the thing deposited was not sufficient, but that
it was necessary to prove that the depositary had appropriated it to himself or diverted the
deposit to his own or another's benefit. He was accused or refusing to restore, and it was held
that the code does not penalize refusal to restore but denial of having received. So much for the
crime of omission; now with reference to the crime of commission, it was not held in that decision
that appropriation or diversion of the thing deposited would not constitute the crime of estafa.

In the second of said decisions, the accused "kept none of the proceeds of the sales. Those,
such as they were, he turned over to the owner;" and there being no proof of the appropriation,
the agent could not be found guilty of the crime of estafa.

Being in accord and the merits of the case, the judgment appealed from is affirmed, with costs.
ANICETA PALACIO, Plaintiff-Appellee, v. DIONISIO SUDARIO, Defendant-
Appellant.

Frank E. Green, for Appellant.

R. Palma, for Appellee.

SYLLABUS

1. LOSS OF PROPERTY ENTRUSTED TO ANOTHER. — When cattle taken for

pasturage are claimed to have perished, the burden of explaining the loss rests upon
the person pasturing them.

2. PRESCRIPTION. — In an action arising before the present Code of Civil Procedure

with into effect, the rule of prescription to be applied is that under the Civil Code.

DECISION

TRACEY, J.  :

At an interview at which were present the defendant and three herdsmen, the
plaintiff made an arrangement for the pasturing of eighty-one head of cattle, in
return for which she was to give one-half of the calves that might be born and was
to pay the defendant one-half peso for each calf branded. On demand for the whole,
forty-eight head of cattle were afterwards returned to her and this action is brought
to recover the remaining thirty-three.

It is claimed as a first defense that arrangement was made between the plaintiff and
the herdsmen, the defendant, who was president of the municipality, tendering his
good offices only. Upon this question, the finding of the court below is conclusive in
favor of the plaintiff and is fully justified by the proofs, especially by a letter of the
defendant in reply to the demand for the cattle, in which he seeks to excuse himself
for the loss of the missing animals.

As a second defense it is claimed that the thirty-three cows either died of disease or
were drowned in a flood. As to this point, on which the trial court has made no
specific finding, the proof is conflicting in many particulars and indicates that at least
some of these cattle were living at the time of the surrender of the forty-eight head.
The defendant’s witnesses swore that of the cows that perished, six die from
overfeeding, and they failed to make clear the happening of any flood sufficient to
destroy the others.

If we consider the contract as one of deposit, then under article 1183 of the Civil
Code, the burden of explanation of the loss rested upon the depositary and under
article 1769 the fault is presumed to be his. The defendant has not succeeded in
showing that the loss occurred either without fault on his part or by reason of caso
fortuito.

If, however, the contract be not one strictly of deposit but one according to local
custom for the pasturing of cattle, the obligations of the parties remain the same.
The defendant also sets up the six years’ statute of limitation, under section 43 of
the present Code of Civil Procedure. This action, having arisen before that code went
into effect, is governed by the provisions of preexisting law (sec. 38) under which
the prescription was one of fifteen years. (Civil Code, art. 1964.)

The judgment of the court below is affirmed with the costs of both instances. After
expiration of twenty days let judgment be entered in accordance herewith and ten
days thereafter the case remanded to the court from whence it came for execution.

So ordered.
G.R. No. 126780             February 17, 2005

YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM, petitioners,

vs.
THE COURT OF APPEALS and MAURICE McLOUGHLIN, respondents.

DECISION

TINGA, J.:

The primary question of interest before this Court is the only legal issue in the case: It is whether
a hotel may evade liability for the loss of items left with it for safekeeping by its guests, by having
these guests execute written waivers holding the establishment or its employees free from blame
for such loss in light of Article 2003 of the Civil Code which voids such waivers.

Before this Court is a Rule 45 petition for review of the Decision dated 19 October 1995 of the
1 

Court of Appeals which affirmed the Decision dated 16 December 1991 of the Regional Trial
2 

Court (RTC), Branch 13, of Manila, finding YHT Realty Corporation, Brunhilda Mata-Tan (Tan),
Erlinda Lainez (Lainez) and Anicia Payam (Payam) jointly and solidarily liable for damages in an
action filed by Maurice McLoughlin (McLoughlin) for the loss of his American and Australian
dollars deposited in the safety deposit box of Tropicana Copacabana Apartment Hotel, owned
and operated by YHT Realty Corporation.

The factual backdrop of the case follow.

Private respondent McLoughlin, an Australian businessman-philanthropist, used to stay at

Sheraton Hotel during his trips to the Philippines prior to 1984 when he met Tan. Tan befriended
McLoughlin by showing him around, introducing him to important people, accompanying him in
visiting impoverished street children and assisting him in buying gifts for the children and in
distributing the same to charitable institutions for poor children. Tan convinced McLoughlin to
transfer from Sheraton Hotel to Tropicana where Lainez, Payam and Danilo Lopez were
employed. Lopez served as manager of the hotel while Lainez and Payam had custody of the
keys for the safety deposit boxes of Tropicana. Tan took care of McLoughlin's booking at the
Tropicana where he started staying during his trips to the Philippines from December 1984 to
September 1987. 3

On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana. He rented
a safety deposit box as it was his practice to rent a safety deposit box every time he registered at
Tropicana in previous trips. As a tourist, McLoughlin was aware of the procedure observed by
Tropicana relative to its safety deposit boxes. The safety deposit box could only be opened
through the use of two keys, one of which is given to the registered guest, and the other
remaining in the possession of the management of the hotel. When a registered guest wished to
open his safety deposit box, he alone could personally request the management who then would
assign one of its employees to accompany the guest and assist him in opening the safety deposit
box with the two keys. 4

McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand US Dollars
(US$15,000.00) which he placed in two envelopes, one envelope containing Ten Thousand US
Dollars (US$10,000.00) and the other envelope Five Thousand US Dollars (US$5,000.00); Ten
Thousand Australian Dollars (AUS$10,000.00) which he also placed in another envelope; two (2)
other envelopes containing letters and credit cards; two (2) bankbooks; and a checkbook,
arranged side by side inside the safety deposit box. 5
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin opened his safety
deposit box with his key and with the key of the management and took therefrom the envelope
containing Five Thousand US Dollars (US$5,000.00), the envelope containing Ten Thousand
Australian Dollars (AUS$10,000.00), his passports and his credit cards. McLoughlin left the other
6 

items in the box as he did not check out of his room at the Tropicana during his short visit to
Hongkong. When he arrived in Hongkong, he opened the envelope which contained Five
Thousand US Dollars (US$5,000.00) and discovered upon counting that only Three Thousand
US Dollars (US$3,000.00) were enclosed therein. Since he had no idea whether somebody else
7 

had tampered with his safety deposit box, he thought that it was just a result of bad accounting
since he did not spend anything from that envelope. 8

After returning to Manila, he checked out of Tropicana on 18 December 1987 and left for
Australia. When he arrived in Australia, he discovered that the envelope with Ten Thousand US
Dollars (US$10,000.00) was short of Five Thousand US Dollars (US$5,000). He also noticed that
the jewelry which he bought in Hongkong and stored in the safety deposit box upon his return to
Tropicana was likewise missing, except for a diamond bracelet. 9

When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if some money
and/or jewelry which he had lost were found and returned to her or to the management.
However, Lainez told him that no one in the hotel found such things and none were turned over
to the management. He again registered at Tropicana and rented a safety deposit box. He
placed therein one (1) envelope containing Fifteen Thousand US Dollars (US$15,000.00),
another envelope containing Ten Thousand Australian Dollars (AUS$10,000.00) and other
envelopes containing his traveling papers/documents. On 16 April 1988, McLoughlin requested
Lainez and Payam to open his safety deposit box. He noticed that in the envelope containing
Fifteen Thousand US Dollars (US$15,000.00), Two Thousand US Dollars (US$2,000.00) were
missing and in the envelope previously containing Ten Thousand Australian Dollars
(AUS$10,000.00), Four Thousand Five Hundred Australian Dollars (AUS$4,500.00) were
missing.10

When McLoughlin discovered the loss, he immediately confronted Lainez and Payam who
admitted that Tan opened the safety deposit box with the key assigned to him. McLoughlin went
11 

up to his room where Tan was staying and confronted her. Tan admitted that she had stolen
McLoughlin's key and was able to open the safety deposit box with the assistance of Lopez,
Payam and Lainez. Lopez also told McLoughlin that Tan stole the key assigned to McLoughlin
12 

while the latter was asleep.13

McLoughlin requested the management for an investigation of the incident. Lopez got in touch
with Tan and arranged for a meeting with the police and McLoughlin. When the police did not
arrive, Lopez and Tan went to the room of McLoughlin at Tropicana and thereat, Lopez wrote on
a piece of paper a promissory note dated 21 April 1988. The promissory note reads as follows:

I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and US$2,000.00 or its
equivalent in Philippine currency on or before May 5, 1988. 14

Lopez requested Tan to sign the promissory note which the latter did and Lopez also signed as a
witness. Despite the execution of promissory note by Tan, McLoughlin insisted that it must be the
hotel who must assume responsibility for the loss he suffered. However, Lopez refused to accept
the responsibility relying on the conditions for renting the safety deposit box entitled "Undertaking
For the Use Of Safety Deposit Box," specifically paragraphs (2) and (4) thereof, to wit:
15 

2. To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability
arising from any loss in the contents and/or use of the said deposit box for any cause
whatsoever, including but not limited to the presentation or use thereof by any other person
should the key be lost;
...

4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT HOTEL
upon giving up the use of the box. 16

On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as to the
validity of the abovementioned stipulations. They opined that the stipulations are void for being
violative of universal hotel practices and customs. His lawyers prepared a letter dated 30 May
1988 which was signed by McLoughlin and sent to President Corazon Aquino. The Office of the
17 

President referred the letter to the Department of Justice (DOJ) which forwarded the same to the
Western Police District (WPD). 18

After receiving a copy of the indorsement in Australia, McLoughlin came to the Philippines and
registered again as a hotel guest of Tropicana. McLoughlin went to Malacaňang to follow up on
his letter but he was instructed to go to the DOJ. The DOJ directed him to proceed to the WPD
for documentation. But McLoughlin went back to Australia as he had an urgent business matter
to attend to.

For several times, McLoughlin left for Australia to attend to his business and came back to the
Philippines to follow up on his letter to the President but he failed to obtain any concrete
assistance. 19

McLoughlin left again for Australia and upon his return to the Philippines on 25 August 1989 to
pursue his claims against petitioners, the WPD conducted an investigation which resulted in the
preparation of an affidavit which was forwarded to the Manila City Fiscal's Office. Said affidavit
became the basis of preliminary investigation. However, McLoughlin left again for Australia
without receiving the notice of the hearing on 24 November 1989. Thus, the case at the Fiscal's
Office was dismissed for failure to prosecute. Mcloughlin requested the reinstatement of the
criminal charge for theft. In the meantime, McLoughlin and his lawyers wrote letters of demand to
those having responsibility to pay the damage. Then he left again for Australia.

Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate, Manila.
Meetings were held between McLoughlin and his lawyer which resulted to the filing of a
complaint for damages on 3 December 1990 against YHT Realty Corporation, Lopez, Lainez,
Payam and Tan (defendants) for the loss of McLoughlin's money which was discovered on 16
April 1988. After filing the complaint, McLoughlin left again for Australia to attend to an urgent
business matter. Tan and Lopez, however, were not served with summons, and trial proceeded
with only Lainez, Payam and YHT Realty Corporation as defendants.

After defendants had filed their Pre-Trial Brief admitting that they had previously allowed and
assisted Tan to open the safety deposit box, McLoughlin filed an Amended/Supplemental
Complaint dated 10 June 1991 which included another incident of loss of money and jewelry in
20 

the safety deposit box rented by McLoughlin in the same hotel which took place prior to 16 April
1988. The trial court admitted the Amended/Supplemental Complaint.
21 

During the trial of the case, McLoughlin had been in and out of the country to attend to urgent
business in Australia, and while staying in the Philippines to attend the hearing, he incurred
expenses for hotel bills, airfare and other transportation expenses, long distance calls to
Australia, Meralco power expenses, and expenses for food and maintenance, among others. 22

After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the dispositive portion of
which reads:

WHEREFORE, above premises considered, judgment is hereby rendered by this Court in favor
of plaintiff and against the defendants, to wit:
 1. Ordering defendants, jointly and severally, to pay plaintiff the sum of US$11,400.00 or
its equivalent in Philippine Currency of ₱342,000.00, more or less, and the sum of
AUS$4,500.00 or its equivalent in Philippine Currency of ₱99,000.00, or a total of
₱441,000.00, more or less, with 12% interest from April 16 1988 until said amount has
been paid to plaintiff (Item 1, Exhibit CC);

2. Ordering defendants, jointly and severally to pay plaintiff the sum of ₱3,674,238.00 as
actual and consequential damages arising from the loss of his Australian and American
dollars and jewelries complained against and in prosecuting his claim and rights
administratively and judicially (Items II, III, IV, V, VI, VII, VIII, and IX, Exh. "CC");

3. Ordering defendants, jointly and severally, to pay plaintiff the sum of ₱500,000.00 as
moral damages (Item X, Exh. "CC");

4. Ordering defendants, jointly and severally, to pay plaintiff the sum of ₱350,000.00 as
exemplary damages (Item XI, Exh. "CC");

5. And ordering defendants, jointly and severally, to pay litigation expenses in the sum of
₱200,000.00 (Item XII, Exh. "CC");

6. Ordering defendants, jointly and severally, to pay plaintiff the sum of ₱200,000.00 as
attorney's fees, and a fee of ₱3,000.00 for every appearance; and

7. Plus costs of suit.

SO ORDERED. 23

The trial court found that McLoughlin's allegations as to the fact of loss and as to the amount of
money he lost were sufficiently shown by his direct and straightforward manner of testifying in
court and found him to be credible and worthy of belief as it was established that McLoughlin's
money, kept in Tropicana's safety deposit box, was taken by Tan without McLoughlin's consent.
The taking was effected through the use of the master key which was in the possession of the
management. Payam and Lainez allowed Tan to use the master key without authority from
McLoughlin. The trial court added that if McLoughlin had not lost his dollars, he would not have
gone through the trouble and personal inconvenience of seeking aid and assistance from the
Office of the President, DOJ, police authorities and the City Fiscal's Office in his desire to recover
his losses from the hotel management and Tan. 24

As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth
approximately One Thousand Two Hundred US Dollars (US$1,200.00) which allegedly occurred
during his stay at Tropicana previous to 4 April 1988, no claim was made by McLoughlin for such
losses in his complaint dated 21 November 1990 because he was not sure how they were lost
and who the responsible persons were. But considering the admission of the defendants in their
pre-trial brief that on three previous occasions they allowed Tan to open the box, the trial court
opined that it was logical and reasonable to presume that his personal assets consisting of
Seven Thousand US Dollars (US$7,000.00) and jewelry were taken by Tan from the safety
deposit box without McLoughlin's consent through the cooperation of Payam and Lainez. 25

The trial court also found that defendants acted with gross negligence in the performance and
exercise of their duties and obligations as innkeepers and were therefore liable to answer for the
losses incurred by McLoughlin. 26

Moreover, the trial court ruled that paragraphs (2) and (4) of the "Undertaking For The Use Of
Safety Deposit Box" are not valid for being contrary to the express mandate of Article 2003 of the
New Civil Code and against public policy. Thus, there being fraud or wanton conduct on the part
27 
of defendants, they should be responsible for all damages which may be attributed to the non-
performance of their contractual obligations.
28

The Court of Appeals affirmed the disquisitions made by the lower court except as to the amount
of damages awarded. The decretal text of the appellate court's decision reads:

THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED but modified as
follows:

The appellants are directed jointly and severally to pay the plaintiff/appellee the following
amounts:

1) ₱153,200.00 representing the peso equivalent of US$2,000.00 and AUS$4,500.00;

2) ₱308,880.80, representing the peso value for the air fares from Sidney [sic] to Manila
and back for a total of eleven (11) trips;

3) One-half of ₱336,207.05 or ₱168,103.52 representing payment to Tropicana

Apartment Hotel;

4) One-half of ₱152,683.57 or ₱76,341.785 representing payment to Echelon Tower;

5) One-half of ₱179,863.20 or ₱89,931.60 for the taxi xxx transportation from the
residence to Sidney [sic] Airport and from MIA to the hotel here in Manila, for the eleven
(11) trips;

6) One-half of ₱7,801.94 or ₱3,900.97 representing Meralco power expenses;

7) One-half of ₱356,400.00 or ₱178,000.00 representing expenses for food and

maintenance;

8) ₱50,000.00 for moral damages;

9) ₱10,000.00 as exemplary damages; and

10) ₱200,000 representing attorney's fees.

With costs.

SO ORDERED. 29

Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this appeal
by certiorari.

Petitioners submit for resolution by this Court the following issues: (a) whether the appellate
court's conclusion on the alleged prior existence and subsequent loss of the subject money and
jewelry is supported by the evidence on record; (b) whether the finding of gross negligence on
the part of petitioners in the performance of their duties as innkeepers is supported by the
evidence on record; (c) whether the "Undertaking For The Use of Safety Deposit Box" admittedly
executed by private respondent is null and void; and (d) whether the damages awarded to
private respondent, as well as the amounts thereof, are proper under the circumstances. 30

The petition is devoid of merit.

It is worthy of note that the thrust of Rule 45 is the resolution only of questions of law and any
peripheral factual question addressed to this Court is beyond the bounds of this mode of review.

Petitioners point out that the evidence on record is insufficient to prove the fact of prior existence
of the dollars and the jewelry which had been lost while deposited in the safety deposit boxes of
Tropicana, the basis of the trial court and the appellate court being the sole testimony of
McLoughlin as to the contents thereof. Likewise, petitioners dispute the finding of gross
negligence on their part as not supported by the evidence on record.

We are not persuaded. We adhere to the findings of the trial court as affirmed by the appellate
phi1 .n

court that the fact of loss was established by the credible testimony in open court by McLoughlin.
Such findings are factual and therefore beyond the ambit of the present petition. 1awphi1.nét

The trial court had the occasion to observe the demeanor of McLoughlin while testifying which
reflected the veracity of the facts testified to by him. On this score, we give full credence to the
appreciation of testimonial evidence by the trial court especially if what is at issue is the credibility
of the witness. The oft-repeated principle is that where the credibility of a witness is an issue, the
established rule is that great respect is accorded to the evaluation of the credibility of witnesses
by the trial court. The trial court is in the best position to assess the credibility of witnesses and
31 

their testimonies because of its unique opportunity to observe the witnesses firsthand and note
their demeanor, conduct and attitude under grilling examination. 32

We are also not impressed by petitioners' argument that the finding of gross negligence by the
lower court as affirmed by the appellate court is not supported by evidence. The evidence
reveals that two keys are required to open the safety deposit boxes of Tropicana. One key is
assigned to the guest while the other remains in the possession of the management. If the guest
desires to open his safety deposit box, he must request the management for the other key to
open the same. In other words, the guest alone cannot open the safety deposit box without the
assistance of the management or its employees. With more reason that access to the safety
deposit box should be denied if the one requesting for the opening of the safety deposit box is a
stranger. Thus, in case of loss of any item deposited in the safety deposit box, it is inevitable to
conclude that the management had at least a hand in the consummation of the taking, unless the
reason for the loss is force majeure.

Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had custody of
the master key of the management when the loss took place. In fact, they even admitted that
they assisted Tan on three separate occasions in opening McLoughlin's safety deposit box. This 33 

only proves that Tropicana had prior knowledge that a person aside from the registered guest
had access to the safety deposit box. Yet the management failed to notify McLoughlin of the
incident and waited for him to discover the taking before it disclosed the matter to him. Therefore,
Tropicana should be held responsible for the damage suffered by McLoughlin by reason of the
negligence of its employees.

The management should have guarded against the occurrence of this incident considering that
Payam admitted in open court that she assisted Tan three times in opening the safety deposit
box of McLoughlin at around 6:30 A.M. to 7:30 A.M. while the latter was still asleep. In light of 34 

the circumstances surrounding this case, it is undeniable that without the acquiescence of the
employees of Tropicana to the opening of the safety deposit box, the loss of McLoughlin's money
could and should have been avoided.

The management contends, however, that McLoughlin, by his act, made its employees believe
that Tan was his spouse for she was always with him most of the time. The evidence on record,
however, is bereft of any showing that McLoughlin introduced Tan to the management as his
wife. Such an inference from the act of McLoughlin will not exculpate the petitioners from liability
in the absence of any showing that he made the management believe that Tan was his wife or
was duly authorized to have access to the safety deposit box. Mere close companionship and
intimacy are not enough to warrant such conclusion considering that what is involved in the
instant case is the very safety of McLoughlin's deposit. If only petitioners exercised due diligence
in taking care of McLoughlin's safety deposit box, they should have confronted him as to his
relationship with Tan considering that the latter had been observed opening McLoughlin's safety
deposit box a number of times at the early hours of the morning. Tan's acts should have
prompted the management to investigate her relationship with McLoughlin. Then, petitioners
would have exercised due diligence required of them. Failure to do so warrants the conclusion
that the management had been remiss in complying with the obligations imposed upon hotel-
keepers under the law.

Under Article 1170 of the New Civil Code, those who, in the performance of their obligations, are
guilty of negligence, are liable for damages. As to who shall bear the burden of paying damages,
Article 2180, paragraph (4) of the same Code provides that the owners and managers of an
establishment or enterprise are likewise responsible for damages caused by their employees in
the service of the branches in which the latter are employed or on the occasion of their functions.
Also, this Court has ruled that if an employee is found negligent, it is presumed that the employer
was negligent in selecting and/or supervising him for it is hard for the victim to prove the
negligence of such employer. Thus, given the fact that the loss of McLoughlin's money was
35 

consummated through the negligence of Tropicana's employees in allowing Tan to open the
safety deposit box without the guest's consent, both the assisting employees and YHT Realty
Corporation itself, as owner and operator of Tropicana, should be held solidarily liable pursuant
to Article 2193.36

The issue of whether the "Undertaking For The Use of Safety Deposit Box" executed by
McLoughlin is tainted with nullity presents a legal question appropriate for resolution in this
petition. Notably, both the trial court and the appellate court found the same to be null and void.
We find no reason to reverse their common conclusion. Article 2003 is controlling, thus:

Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the
effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-
keeper and the guest whereby the responsibility of the former as set forth in Articles 1998 to
2001 is suppressed or diminished shall be void.
37 

Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely
to apply to situations such as that presented in this case. The hotel business like the common
carrier's business is imbued with public interest. Catering to the public, hotelkeepers are bound
to provide not only lodging for hotel guests and security to their persons and belongings. The
twin duty constitutes the essence of the business. The law in turn does not allow such duty to the
public to be negated or diluted by any contrary stipulation in so-called "undertakings" that
ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature.

In an early case, the Court of Appeals through its then Presiding Justice (later Associate Justice
38 

of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers or innkeeper liable for the effects
of their guests, it is not necessary that they be actually delivered to the innkeepers or their
employees. It is enough that such effects are within the hotel or inn. With greater reason should
39 

the liability of the hotelkeeper be enforced when the missing items are taken without the guest's
knowledge and consent from a safety deposit box provided by the hotel itself, as in this case.

Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of the New Civil
Code for they allow Tropicana to be released from liability arising from any loss in the contents
and/or use of the safety deposit box for any cause whatsoever. Evidently, the undertaking was
40 

intended to bar any claim against Tropicana for any loss of the contents of the safety deposit box
whether or not negligence was incurred by Tropicana or its employees. The New Civil Code is
explicit that the responsibility of the hotel-keeper shall extend to loss of, or injury to, the personal
property of the guests even if caused by servants or employees of the keepers of hotels or inns
as well as by strangers, except as it may proceed from any force majeure. It is the loss
41 
through force majeure that may spare the hotel-keeper from liability. In the case at bar, there is
no showing that the act of the thief or robber was done with the use of arms or through an
irresistible force to qualify the same as force majeure. 42

Petitioners likewise anchor their defense on Article 2002 which exempts the hotel-keeper from
43 

liability if the loss is due to the acts of his guest, his family, or visitors. Even a cursory reading of
the provision would lead us to reject petitioners' contention. The justification they raise would
render nugatory the public interest sought to be protected by the provision. What if the
negligence of the employer or its employees facilitated the consummation of a crime committed
by the registered guest's relatives or visitor? Should the law exculpate the hotel from liability
since the loss was due to the act of the visitor of the registered guest of the hotel? Hence, this
provision presupposes that the hotel-keeper is not guilty of concurrent negligence or has not
contributed in any degree to the occurrence of the loss. A depositary is not responsible for the
loss of goods by theft, unless his actionable negligence contributes to the loss. 44

In the case at bar, the responsibility of securing the safety deposit box was shared not only by
the guest himself but also by the management since two keys are necessary to open the safety
deposit box. Without the assistance of hotel employees, the loss would not have occurred. Thus,
Tropicana was guilty of concurrent negligence in allowing Tan, who was not the registered guest,
to open the safety deposit box of McLoughlin, even assuming that the latter was also guilty of
negligence in allowing another person to use his key. To rule otherwise would result in
undermining the safety of the safety deposit boxes in hotels for the management will be given
imprimatur to allow any person, under the pretense of being a family member or a visitor of the
guest, to have access to the safety deposit box without fear of any liability that will attach
thereafter in case such person turns out to be a complete stranger. This will allow the hotel to
evade responsibility for any liability incurred by its employees in conspiracy with the guest's
relatives and visitors.

Petitioners contend that McLoughlin's case was mounted on the theory of contract, but the trial
court and the appellate court upheld the grant of the claims of the latter on the basis of
tort. There is nothing anomalous in how the lower courts decided the controversy for this Court
45 

has pronounced a jurisprudential rule that tort liability can exist even if there are already
contractual relations. The act that breaks the contract may also be tort. 46

As to damages awarded to McLoughlin, we see no reason to modify the amounts awarded by the
appellate court for the same were based on facts and law. It is within the province of lower courts
to settle factual issues such as the proper amount of damages awarded and such finding is
binding upon this Court especially if sufficiently proven by evidence and not unconscionable or
excessive. Thus, the appellate court correctly awarded McLoughlin Two Thousand US Dollars
(US$2,000.00) and Four Thousand Five Hundred Australian dollars (AUS$4,500.00) or their
peso equivalent at the time of payment, being the amounts duly proven by evidence. The
47  48 

alleged loss that took place prior to 16 April 1988 was not considered since the amounts alleged
to have been taken were not sufficiently established by evidence. The appellate court also
correctly awarded the sum of ₱308,880.80, representing the peso value for the air fares from
Sydney to Manila and back for a total of eleven (11) trips; one-half of ₱336,207.05 or
49 

₱168,103.52 representing payment to Tropicana; one-half of ₱152,683.57 or ₱76,341.785

50 

representing payment to Echelon Tower; one-half of ₱179,863.20 or ₱89,931.60 for the taxi or
51 

transportation expenses from McLoughlin's residence to Sydney Airport and from MIA to the
hotel here in Manila, for the eleven (11) trips; one-half of ₱7,801.94 or ₱3,900.97 representing
52 

Meralco power expenses; one-half of ₱356,400.00 or ₱178,000.00 representing expenses for

53 

food and maintenance. 54

The amount of ₱50,000.00 for moral damages is reasonable. Although trial courts are given
discretion to determine the amount of moral damages, the appellate court may modify or change
the amount awarded when it is palpably and scandalously excessive.  Moral damages are not l^vvphi1.net

intended to enrich a complainant at the expense of a defendant.  They are awarded only to
l^vvphi1.net
enable the injured party to obtain means, diversion or amusements that will serve to alleviate the
moral suffering he has undergone, by reason of defendants' culpable action. 55

The awards of ₱10,000.00 as exemplary damages and ₱200,000.00 representing attorney's fees
are likewise sustained.

WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals dated 19

October 1995 is hereby AFFIRMED. Petitioners are directed, jointly and severally, to pay private
respondent the following amounts:

(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of payment;

(2) ₱308,880.80, representing the peso value for the air fares from Sydney to Manila and
back for a total of eleven (11) trips;

(3) One-half of ₱336,207.05 or ₱168,103.52 representing payment to Tropicana

Copacabana Apartment Hotel;

(4) One-half of ₱152,683.57 or ₱76,341.785 representing payment to Echelon Tower;

(5) One-half of ₱179,863.20 or ₱89,931.60 for the taxi or transportation expense from
McLoughlin's residence to Sydney Airport and from MIA to the hotel here in Manila, for
the eleven (11) trips;

(6) One-half of ₱7,801.94 or ₱3,900.97 representing Meralco power expenses;

(7) One-half of ₱356,400.00 or ₱178,200.00 representing expenses for food and

maintenance;

(8) ₱50,000.00 for moral damages;

(9) ₱10,000.00 as exemplary damages; and

(10) ₱200,000 representing attorney's fees.

With costs.

SO ORDERED.
G.R. No. 179419               January 12, 2011

DURBAN APARTMENTS CORPORATION, doing business under the name and style of City
Garden Hotel, Petitioner,
vs.
PIONEER INSURANCE AND SURETY CORPORATION, Respondent.

DECISION

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.  The keepers of hotels or inns shall be responsible for them as depositaries, provided
1avvphi1

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.