G.R. Nos.
173654-765             August 28, 2008
PEOPLE OF THE PHILIPPINES, petitioner,
vs.
TERESITA PUIG and ROMEO PORRAS, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner
People of the Philippines, represented by the Office of the Solicitor General, praying for the
reversal of the Orders dated 30 January 2006 and 9 June 2006 of the Regional Trial Court
(RTC) of the 6th Judicial Region, Branch 68, Dumangas, Iloilo, dismissing the 112 cases of
Qualified Theft filed against respondents Teresita Puig and Romeo Porras, and denying
petitioner’s Motion for Reconsideration, in Criminal Cases No. 05-3054 to 05-3165.
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutor’s Office filed before Branch 68 of the
RTC in Dumangas, Iloilo, 112 cases of Qualified Theft against respondents Teresita Puig
(Puig) and Romeo Porras (Porras) who were the Cashier and Bookkeeper, respectively, of
private complainant Rural Bank of Pototan, Inc. The cases were docketed as Criminal Cases
No. 05-3054 to 05-3165.
The allegations in the Informations1 filed before the RTC were uniform and pro-forma, except
for the amounts, date and time of commission, to wit:
INFORMATION
That on or about the 1st day of August, 2002, in the Municipality of Pototan, Province
of Iloilo, Philippines, and within the jurisdiction of this Honorable Court, above-named
[respondents], conspiring, confederating, and helping one another, with grave
abuse of confidence, being the Cashier and Bookkeeper of the Rural Bank of
Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of the
management of the Bank and with intent of gain, did then and there willfully,
unlawfully and feloniously take, steal and carry away the sum of FIFTEEN
THOUSAND PESOS (P15,000.00), Philippine Currency, to the damage and
prejudice of the said bank in the aforesaid amount.
After perusing the Informations in these cases, the trial court did not find the existence of
probable cause that would have necessitated the issuance of a warrant of arrest based on
the following grounds:
(1) the element of ‘taking without the consent of the owners’ was missing on the
ground that it is the depositors-clients, and not the Bank, which filed the complaint in
these cases, who are the owners of the money allegedly taken by respondents and
hence, are the real parties-in-interest; and
(2) the Informations are bereft of the phrase alleging "dependence, guardianship or
vigilance between the respondents and the offended party that would have
created a high degree of confidence between them which the respondents
could have abused."
It added that allowing the 112 cases for Qualified Theft filed against the respondents to push
through would be violative of the right of the respondents under Section 14(2), Article III of the
1987 Constitution which states that in all criminal prosecutions, the accused shall enjoy the
right to be informed of the nature and cause of the accusation against him. Following Section
6, Rule 112 of the Revised Rules of Criminal Procedure, the RTC dismissed the cases on 30
January 2006 and refused to issue a warrant of arrest against Puig and Porras.
A Motion for Reconsideration2 was filed on 17 April 2006, by the petitioner.
On 9 June 2006, an Order3 denying petitioner’s Motion for Reconsideration was issued by the
RTC, finding as follows:
Accordingly, the prosecution’s Motion for Reconsideration should be, as it hereby,
DENIED. The Order dated January 30, 2006 STANDS in all respects.
Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45,
raising the sole legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT
SUFFICIENTLY ALLEGE THE ELEMENT OF TAKING WITHOUT THE CONSENT
OF THE OWNER, AND THE QUALIFYING CIRCUMSTANCE OF GRAVE ABUSE
OF CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the Orders dated 30
January 2006 and 9 June 2006 issued by the trial court, and that it be directed to proceed
with Criminal Cases No. 05-3054 to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and current
deposits of money in banks and similar institutions shall be governed by the provisions
concerning simple loans." Corollary thereto, Article 1953 of the same Code provides that "a
person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality."
Thus, it posits that the depositors who place their money with the bank are considered
creditors of the bank. The bank acquires ownership of the money deposited by its clients,
making the money taken by respondents as belonging to the bank.
Petitioner also insists that the Informations sufficiently allege all the elements of the crime of
qualified theft, citing that a perusal of the Informations will show that they specifically allege
that the respondents were the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,
respectively, and that they took various amounts of money with grave abuse of confidence,
and without the knowledge and consent of the bank, to the damage and prejudice of the
bank.
Parenthetically, respondents raise procedural issues. They challenge the petition on the
ground that a Petition for Review on Certiorari via Rule 45 is the wrong mode of appeal
because a finding of probable cause for the issuance of a warrant of arrest presupposes
evaluation of facts and circumstances, which is not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ), through the Secretary of
Justice, is the principal party to file a Petition for Review on Certiorari, considering that the
incident was indorsed by the DOJ.
We find merit in the petition.
The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the
Informations and, therefore, because of this defect, there is no basis for the existence of
probable cause which will justify the issuance of the warrant of arrest. Petitioner assails the
dismissal contending that the Informations for Qualified Theft sufficiently state facts which
constitute (a) the qualifying circumstance of grave abuse of confidence; and (b) the element
of taking, with intent to gain and without the consent of the owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the RTC judge
found the allegations in the Information inadequate. He ruled that the Information failed to
state facts constituting the qualifying circumstance of grave abuse of confidence and the
element of taking without the consent of the owner, since the owner of the money is not the
Bank, but the depositors therein. He also cites People v. Koc Song,4 in which this Court held:
There must be allegation in the information and proof of a relation, by reason of
dependence, guardianship or vigilance, between the respondents and the offended
party that has created a high degree of confidence between them, which the
respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that there was no
probable cause simply on the insufficiency of the allegations in the Informations concerning
the facts constitutive of the elements of the offense charged. This, therefore, makes the issue
of sufficiency of the allegations in the Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is
committed as follows, viz:
ART. 310. Qualified Theft. – The crime of theft shall be punished by the penalties
next higher by two degrees than those respectively specified in the next preceding
article, if committed by a domestic servant, or with grave abuse of confidence, or if
the property stolen is motor vehicle, mail matter or large cattle or consists of coconuts
taken from the premises of a plantation, fish taken from a fishpond or fishery or if
property is taken on the occasion of fire, earthquake, typhoon, volcanic eruption, or
any other calamity, vehicular accident or civil disturbance. (Emphasis supplied.)
Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of
another’s property without violence or intimidation against persons or force upon things. The
elements of the crime under this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
1. Taking of personal property;
2. That the said property belongs to another;
3. That the said taking be done with intent to gain;
4. That it be done without the owner’s consent;
5. That it be accomplished without the use of violence or intimidation against
persons, nor of force upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires, inter
alia, that the information must state the acts or omissions complained of as constitutive of the
offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of the Rules of
Court, is enlightening:
 Section 9. Cause of the accusation. The acts or omissions complained of as
constituting the offense and the qualifying and aggravating circumstances must be
stated in ordinary and concise language and not necessarily in the language used in
the statute but in terms sufficient to enable a person of common understanding to
know what offense is being charged as well as its qualifying and aggravating
circumstances and for the court to pronounce judgment.
It is evident that the Information need not use the exact language of the statute in alleging the
acts or omissions complained of as constituting the offense. The test is whether it enables a
person of common understanding to know the charge against him, and the court to render
judgment properly.5
The portion of the Information relevant to this discussion reads:
A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse of confidence, being the Cashier and
Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank x x x.
It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who
come into possession of the monies deposited therein enjoy the confidence reposed in them
by their employer. Banks, on the other hand, where monies are deposited, are considered the
owners thereof. This is very clear not only from the express provisions of the law, but from
established jurisprudence. The relationship between banks and depositors has been held to
be that of creditor and debtor. Articles 1953 and 1980 of the New Civil Code, as appropriately
pointed out by petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal amount
of the same kind and quality.
Article 1980. Fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the nature of
possession by the Bank of the money deposits therein, and the duties being performed by its
employees who have custody of the money or have come into possession of it. The Court
has consistently considered the allegations in the Information that such employees acted with
grave abuse of confidence, to the damage and prejudice of the Bank, without particularly
referring to it as owner of the money deposits, as sufficient to make out a case of Qualified
Theft. For a graphic illustration, we cite Roque v. People,6 where the accused teller was
convicted for Qualified Theft based on this Information:
That on or about the 16th day of November, 1989, in the municipality of
Floridablanca, province of Pampanga, Philippines and within the jurisdiction of his
Honorable Court, the above-named accused ASUNCION GALANG ROQUE, being
then employed as teller of the Basa Air Base Savings and Loan Association Inc.
(BABSLA) with office address at Basa Air Base, Floridablanca, Pampanga, and as
such was authorized and reposed with the responsibility to receive and collect capital
contributions from its member/contributors of said corporation, and having collected
and received in her capacity as teller of the BABSLA the sum of TEN THOUSAND
PESOS (P10,000.00), said accused, with intent of gain, with grave abuse of
confidence and without the knowledge and consent of said corporation, did
then and there willfully, unlawfully and feloniously take, steal and carry away the
amount of P10,000.00, Philippine currency, by making it appear that a certain
depositor by the name of Antonio Salazar withdrew from his Savings Account No.
1359, when in truth and in fact said Antonio Salazar did not withdr[a]w the said
amount of P10,000.00 to the damage and prejudice of BABSLA in the total amount
of P10,000.00, Philippine currency.
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank places money in the
teller’s possession due to the confidence reposed on the teller, the felony of qualified
theft would be committed.7
Also in People v. Sison,8 the Branch Operations Officer was convicted of the crime of
Qualified Theft based on the Information as herein cited:
That in or about and during the period compressed between January 24, 1992 and
February 13, 1992, both dates inclusive, in the City of Manila, Philippines, the said
accused did then and there wilfully, unlawfully and feloniously, with intent of gain and
without the knowledge and consent of the owner thereof, take, steal and carry away
the following, to wit:
Cash money amounting to P6,000,000.00 in different denominations belonging to the
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (PCIBank for brevity), Luneta
Branch, Manila represented by its Branch Manager, HELEN U. FARGAS, to the
damage and prejudice of the said owner in the aforesaid amount of P6,000,000.00,
Philippine Currency.
That in the commission of the said offense, herein accused acted with grave abuse of
confidence and unfaithfulness, he being the Branch Operation Officer of the said
complainant and as such he had free access to the place where the said amount of
money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the Philippine Commercial
and Industrial Bank (PCIB), is Qualified Theft. Appellant could not have committed
the crime had he not been holding the position of Luneta Branch Operation Officer
which gave him not only sole access to the bank vault xxx. The management of the
 PCIB reposed its trust and confidence in the appellant as its Luneta Branch
Operation Officer, and it was this trust and confidence which he exploited to enrich
himself to the damage and prejudice of PCIB x x x.9
From another end, People v. Locson,10 in addition to People v. Sison, described the nature
of possession by the Bank. The money in this case was in the possession of the defendant as
receiving teller of the bank, and the possession of the defendant was the possession of the
Bank. The Court held therein that when the defendant, with grave abuse of confidence,
removed the money and appropriated it to his own use without the consent of the Bank, there
was taking as contemplated in the crime of Qualified Theft.11
Conspicuously, in all of the foregoing cases, where the Informations merely alleged the
positions of the respondents; that the crime was committed with grave abuse of confidence,
with intent to gain and without the knowledge and consent of the Bank, without necessarily
stating the phrase being assiduously insisted upon by respondents, "of a relation by reason
of dependence, guardianship or vigilance, between the respondents and the offended
party that has created a high degree of confidence between them, which respondents
abused,"12 and without employing the word "owner" in lieu of the "Bank" were considered to
have satisfied the test of sufficiency of allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of the Bank in
this case, there is even no reason to quibble on the allegation in the Informations that they
acted with grave abuse of confidence. In fact, the Information which alleged grave abuse of
confidence by accused herein is even more precise, as this is exactly the requirement of the
law in qualifying the crime of Theft.
In summary, the Bank acquires ownership of the money deposited by its clients; and the
employees of the Bank, who are entrusted with the possession of money of the Bank due to
the confidence reposed in them, occupy positions of confidence. The Informations, therefore,
sufficiently allege all the essential elements constituting the crime of Qualified Theft.
On the theory of the defense that the DOJ is the principal party who may file the instant
petition, the ruling in Mobilia Products, Inc. v. Hajime Umezawa13 is instructive. The Court
thus enunciated:
In a criminal case in which the offended party is the State, the interest of the private
complainant or the offended party is limited to the civil liability arising therefrom.
Hence, if a criminal case is dismissed by the trial court or if there is an acquittal, a
reconsideration of the order of dismissal or acquittal may be undertaken, whenever
legally feasible, insofar as the criminal aspect thereof is concerned and may be made
only by the public prosecutor; or in the case of an appeal, by the State only, through
the OSG. x x x.
On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is well-
settled that in appeals by certiorari under Rule 45 of the Rules of Court, only errors of law
may be raised,14 and herein petitioner certainly raised a question of law.
As an aside, even if we go beyond the allegations of the Informations in these cases, a closer
look at the records of the preliminary investigation conducted will show that, indeed, probable
cause exists for the indictment of herein respondents. Pursuant to Section 6, Rule 112 of the
Rules of Court, the judge shall issue a warrant of arrest only upon a finding of probable cause
after personally evaluating the resolution of the prosecutor and its supporting
evidence. Soliven v. Makasiar,15 as reiterated in Allado v. Driokno,16 explained that
probable cause for the issuance of a warrant of arrest is the existence of such facts and
circumstances that would lead a reasonably discreet and prudent person to believe that an
offense has been committed by the person sought to be arrested.17 The records reasonably
indicate that the respondents may have, indeed, committed the offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or the judge, as
the case may be, to relieve the respondents from the pain of going through a trial once it is
ascertained that no probable cause exists to form a sufficient belief as to the guilt of the
respondents, conversely, it is also equally imperative upon the judge to proceed with the case
upon a showing that there is a prima facie case against the respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is
hereby GRANTED. The Orders dated 30 January 2006 and 9 June 2006 of the RTC
dismissing Criminal Cases No. 05-3054 to 05-3165  are REVERSED and SET ASIDE. Let the
corresponding Warrants of Arrest issue against herein respondents TERESITA PUIG and
ROMEO PORRAS. The RTC Judge of Branch 68, in Dumangas, Iloilo, is directed to proceed
with the trial of Criminal Cases No. 05-3054 to 05-3165, inclusive, with reasonable dispatch.
No pronouncement as to costs.
SO ORDERED
G.R. No. 123498               November 23, 2007
BPI FAMILY BANK, Petitioner,
vs.
AMADO FRANCO and COURT OF APPEALS, Respondents.
DECISION
NACHURA, J.:
Banks are exhorted to treat the accounts of their depositors with meticulous care and
utmost fidelity. We reiterate this exhortation in the case at bench.
Before us is a Petition for Review on Certiorari seeking the reversal of the Court of
Appeals (CA) Decision1 in CA-G.R. CV No. 43424 which affirmed with modification the
judgment2 of the Regional Trial Court, Branch 55, Manila (Manila RTC), in Civil Case No.
90-53295.
This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI Family
Bank (BPI-FB) allegedly by respondent Amado Franco (Franco) in conspiracy with other
individuals,3 some of whom opened and maintained separate accounts with BPI-FB, San
Francisco del Monte (SFDM) branch, in a series of transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a
savings and current account with BPI-FB. Soon thereafter, or on August 25, 1989, First
Metro Investment Corporation (FMIC) also opened a time deposit account with the same
branch of BPI-FB with a deposit of ₱100,000,000.00, to mature one year thence.
Subsequently, on August 31, 1989, Franco opened three accounts, namely, a
current,4 savings,5 and time deposit,6 with BPI-FB. The current and savings accounts
were respectively funded with an initial deposit of ₱500,000.00 each, while the time
deposit account had ₱1,000,000.00 with a maturity date of August 31, 1990. The total
amount of ₱2,000,000.00 used to open these accounts is traceable to a check issued by
Tevesteco allegedly in consideration of Franco’s introduction of Eladio Teves,7 who was
looking for a conduit bank to facilitate Tevesteco’s business transactions, to Jaime
Sebastian, who was then BPI-FB SFDM’s Branch Manager. In turn, the funding for the
₱2,000,000.00 check was part of the ₱80,000,000.00 debited by BPI-FB from FMIC’s
time deposit account and credited to Tevesteco’s current account pursuant to an
Authority to Debit purportedly signed by FMIC’s officers.
It appears, however, that the signatures of FMIC’s officers on the Authority to Debit were
forged.8 On September 4, 1989, Antonio Ong,9 upon being shown the Authority to Debit,
personally declared his signature therein to be a forgery. Unfortunately, Tevesteco had
already effected several withdrawals from its current account (to which had been credited
the ₱80,000,000.00 covered by the forged Authority to Debit) amounting to
₱37,455,410.54, including the ₱2,000,000.00 paid to Franco.
On September 8, 1989, impelled by the need to protect its interests in light of FMIC’s
forgery claim, BPI-FB, thru its Senior Vice-President, Severino Coronacion, instructed
Jesus Arangorin10 to debit Franco’s savings and current accounts for the amounts
remaining therein.11 However, Franco’s time deposit account could not be debited due to
the capacity limitations of BPI-FB’s computer.12
In the meantime, two checks13 drawn by Franco against his BPI-FB current account were
dishonored upon presentment for payment, and stamped with a notation "account under
garnishment." Apparently, Franco’s current account was garnished by virtue of an Order
of Attachment issued by the Regional Trial Court of Makati (Makati RTC) in Civil Case
No. 89-4996 (Makati Case), which had been filed by BPI-FB against Franco et al.,14 to
recover the ₱37,455,410.54 representing Tevesteco’s total withdrawals from its account.
Notably, the dishonored checks were issued by Franco and presented for payment at
BPI-FB prior to Franco’s receipt of notice that his accounts were under garnishment.15 In
fact, at the time the Notice of Garnishment dated September 27, 1989 was served on
BPI-FB, Franco had yet to be impleaded in the Makati case where the writ of attachment
was issued.
It was only on May 15, 1990, through the service of a copy of the Second Amended
Complaint in Civil Case No. 89-4996, that Franco was impleaded in the Makati
case.16 Immediately, upon receipt of such copy, Franco filed a Motion to Discharge
Attachment which the Makati RTC granted on May 16, 1990. The Order Lifting the Order
of Attachment was served on BPI-FB on even date, with Franco demanding the release
to him of the funds in his savings and current accounts. Jesus Arangorin, BPI-FB’s new
manager, could not forthwith comply with the demand as the funds, as previously stated,
had already been debited because of FMIC’s forgery claim. As such, BPI-FB’s computer
at the SFDM Branch indicated that the current account record was "not on file."
With respect to Franco’s savings account, it appears that Franco agreed to an
arrangement, as a favor to Sebastian, whereby ₱400,000.00 from his savings account
was temporarily transferred to Domingo Quiaoit’s savings account, subject to its
immediate return upon issuance of a certificate of deposit which Quiaoit needed in
connection with his visa application at the Taiwan Embassy. As part of the arrangement,
Sebastian retained custody of Quiaoit’s savings account passbook to ensure that no
withdrawal would be effected therefrom, and to preserve Franco’s deposits.
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB deducted the
amount of ₱63,189.00 from the remaining balance of the time deposit account
representing advance interest paid to him.
These transactions spawned a number of cases, some of which we had already
resolved.
FMIC filed a complaint against BPI-FB for the recovery of the amount of ₱80,000,000.00
debited from its account.17 The case eventually reached this Court, and in BPI Family
Savings Bank, Inc. v. First Metro Investment Corporation,18 we upheld the finding of the
courts below that BPI-FB failed to exercise the degree of diligence required by the nature
of its obligation to treat the accounts of its depositors with meticulous care. Thus, BPI-FB
was found liable to FMIC for the debited amount in its time deposit. It was ordered to pay
₱65,332,321.99 plus interest at 17% per annum from August 29, 1989 until fully restored.
In turn, the 17% shall itself earn interest at 12% from October 4, 1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica
(Buenaventura, et al.),19 recipients of a ₱500,000.00 check proceeding from the
₱80,000,000.00 mistakenly credited to Tevesteco, likewise filed suit. Buenaventura et al.,
as in the case of Franco, were also prevented from effecting withdrawals20 from their
current account with BPI-FB, Bonifacio Market, Edsa, Caloocan City Branch. Likewise,
when the case was elevated to this Court docketed as BPI Family Bank v.
Buenaventura,21 we ruled that BPI-FB had no right to freeze Buenaventura, et al.’s
accounts and adjudged BPI-FB liable therefor, in addition to damages.
Meanwhile, BPI-FB filed separate civil and criminal cases against those believed to be
the perpetrators of the multi-million peso scam.22 In the criminal case, Franco, along with
the other accused, except for Manuel Bienvenida who was still at large, were acquitted of
the crime of Estafa as defined and penalized under Article 351, par. 2(a) of the Revised
Penal Code.23 However, the civil case24 remains under litigation and the respective rights
and liabilities of the parties have yet to be adjudicated.
Consequently, in light of BPI-FB’s refusal to heed Franco’s demands to unfreeze his
accounts and release his deposits therein, the latter filed on June 4, 1990 with the Manila
RTC the subject suit. In his complaint, Franco prayed for the following reliefs: (1) the
interest on the remaining balance25 of his current account which was eventually released
to him on October 31, 1991; (2) the balance26 on his savings account, plus interest
thereon; (3) the advance interest27 paid to him which had been deducted when he pre-
terminated his time deposit account; and (4) the payment of actual, moral and exemplary
damages, as well as attorney’s fees.
BPI-FB traversed this complaint, insisting that it was correct in freezing the accounts of
Franco and refusing to release his deposits, claiming that it had a better right to the
amounts which consisted of part of the money allegedly fraudulently withdrawn from it by
Tevesteco and ending up in Franco’s accounts. BPI-FB asseverated that the claimed
consideration of ₱2,000,000.00 for the introduction facilitated by Franco between George
Daantos and Eladio Teves, on the one hand, and Jaime Sebastian, on the other, spoke
volumes of Franco’s participation in the fraudulent transaction.
On August 4, 1993, the Manila RTC rendered judgment, the dispositive portion of which
reads as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of
[Franco] and against [BPI-FB], ordering the latter to pay to the former the following sums:
1. ₱76,500.00 representing the legal rate of interest on the amount of
₱450,000.00 from May 18, 1990 to October 31, 1991;
2. ₱498,973.23 representing the balance on [Franco’s] savings account as of
May 18, 1990, together with the interest thereon in accordance with the bank’s
guidelines on the payment therefor;
3. ₱30,000.00 by way of attorney’s fees; and
4. ₱10,000.00 as nominal damages.
The counterclaim of the defendant is DISMISSED for lack of factual and legal anchor.
Costs against [BPI-FB].
SO ORDERED.28
Unsatisfied with the decision, both parties filed their respective appeals before the CA.
Franco confined his appeal to the Manila RTC’s denial of his claim for moral and
exemplary damages, and the diminutive award of attorney’s fees. In affirming with
modification the lower court’s decision, the appellate court decreed, to wit:
WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with
modification ordering [BPI-FB] to pay [Franco] ₱63,189.00 representing the interest
deducted from the time deposit of plaintiff-appellant. ₱200,000.00 as moral damages and
₱100,000.00 as exemplary damages, deleting the award of nominal damages (in view of
the award of moral and exemplary damages) and increasing the award of attorney’s fees
from ₱30,000.00 to ₱75,000.00.
Cost against [BPI-FB].
SO ORDERED.29
In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1) Franco had a
better right to the deposits in the subject accounts which are part of the proceeds of a
forged Authority to Debit; (2) Franco is entitled to interest on his current account; (3)
Franco can recover the ₱400,000.00 deposit in Quiaoit’s savings account; (4) the
dishonor of Franco’s checks was not legally in order; (5) BPI-FB is liable for interest on
Franco’s time deposit, and for moral and exemplary damages; and (6) BPI-FB’s counter-
claim has no factual and legal anchor.
The petition is partly meritorious.
We are in full accord with the common ruling of the lower courts that BPI-FB cannot
unilaterally freeze Franco’s accounts and preclude him from withdrawing his deposits.
However, contrary to the appellate court’s ruling, we hold that Franco is not entitled to
unearned interest on the time deposit as well as to moral and exemplary damages.
First. On the issue of who has a better right to the deposits in Franco’s accounts, BPI-FB
urges us that the legal consequence of FMIC’s forgery claim is that the money
transferred by BPI-FB to Tevesteco is its own, and considering that it was able to recover
possession of the same when the money was redeposited by Franco, it had the right to
set up its ownership thereon and freeze Franco’s accounts.
BPI-FB contends that its position is not unlike that of an owner of personal property who
regains possession after it is stolen, and to illustrate this point, BPI-FB gives the following
example: where X’s television set is stolen by Y who thereafter sells it to Z, and where Z
unwittingly entrusts possession of the TV set to X, the latter would have the right to keep
possession of the property and preclude Z from recovering possession thereof. To
bolster its position, BPI-FB cites Article 559 of the Civil Code, which provides:
Article 559. The possession of movable property acquired in good faith is equivalent to a
title. Nevertheless, one who has lost any movable or has been unlawfully deprived
thereof, may recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has been unlawfully deprived,
has acquired it in good faith at a public sale, the owner cannot obtain its return without
reimbursing the price paid therefor.
BPI-FB’s argument is unsound. To begin with, the movable property mentioned in Article
559 of the Civil Code pertains to a specific or determinate thing.30 A determinate or
specific thing is one that is individualized and can be identified or distinguished from
others of the same kind.31
In this case, the deposit in Franco’s accounts consists of money which, albeit
characterized as a movable, is generic and fungible.32 The quality of being fungible
depends upon the possibility of the property, because of its nature or the will of the
parties, being substituted by others of the same kind, not having a distinct individuality.33
Significantly, while Article 559 permits an owner who has lost or has been unlawfully
deprived of a movable to recover the exact same thing from the current possessor, BPI-
FB simply claims ownership of the equivalent amount of money, i.e., the value thereof,
which it had mistakenly debited from FMIC’s account and credited to Tevesteco’s, and
subsequently traced to Franco’s account. In fact, this is what BPI-FB did in filing the
Makati Case against Franco, et al. It staked its claim on the money itself which passed
from one account to another, commencing with the forged Authority to Debit.
It bears emphasizing that money bears no earmarks of peculiar ownership,34 and this
characteristic is all the more manifest in the instant case which involves money in a
banking transaction gone awry. Its primary function is to pass from hand to hand as a
medium of exchange, without other evidence of its title.35 Money, which had passed
through various transactions in the general course of banking business, even if of
traceable origin, is no exception.
Thus, inasmuch as what is involved is not a specific or determinate personal property,
BPI-FB’s illustrative example, ostensibly based on Article 559, is inapplicable to the
instant case.
There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but
not as a legal consequence of its unauthorized transfer of FMIC’s deposits to
Tevesteco’s account. BPI-FB conveniently forgets that the deposit of money in banks is
governed by the Civil Code provisions on simple loan or mutuum.36 As there is a debtor-
creditor relationship between a bank and its depositor, BPI-FB ultimately acquired
ownership of Franco’s deposits, but such ownership is coupled with a corresponding
obligation to pay him an equal amount on demand.37 Although BPI-FB owns the deposits
in Franco’s accounts, it cannot prevent him from demanding payment of BPI-FB’s
obligation by drawing checks against his current account, or asking for the release of the
funds in his savings account. Thus, when Franco issued checks drawn against his
current account, he had every right as creditor to expect that those checks would be
honored by BPI-FB as debtor.
More importantly, BPI-FB does not have a unilateral right to freeze the accounts of
Franco based on its mere suspicion that the funds therein were proceeds of the multi-
million peso scam Franco was allegedly involved in. To grant BPI-FB, or any bank for
that matter, the right to take whatever action it pleases on deposits which it supposes are
derived from shady transactions, would open the floodgates of public distrust in the
banking industry.
Our pronouncement in Simex International (Manila), Inc. v. Court of Appeals38 continues
to resonate, thus:
The banking system is an indispensable institution in the modern world and plays a vital
role in the economic life of every civilized nation. Whether as mere passive entities for
the safekeeping and saving of money or as active instruments of business and
commerce, banks have become an ubiquitous presence among the people, who have
come to regard them with respect and even gratitude and, most of all, confidence. Thus,
even the humble wage-earner has not hesitated to entrust his life’s savings to the bank
of his choice, knowing that they will be safe in its custody and will even earn some
interest for him. The ordinary person, with equal faith, usually maintains a modest
checking account for security and convenience in the settling of his monthly bills and the
payment of ordinary expenses. x x x.
In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank
must record every single transaction accurately, down to the last centavo, and as
promptly as possible. This has to be done if the account is to reflect at any given time the
amount of money the depositor can dispose of as he sees fit, confident that the bank will
deliver it as and to whomever directs. A blunder on the part of the bank, such as the
dishonor of the check without good reason, can cause the depositor not a little
embarrassment if not also financial loss and perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and because of the nature of
its functions, the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship. x x x.
Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the
signatures of its customers. Having failed to detect the forgery in the Authority to Debit
and in the process inadvertently facilitate the FMIC-Tevesteco transfer, BPI-FB cannot
now shift liability thereon to Franco and the other payees of checks issued by Tevesteco,
or prevent withdrawals from their respective accounts without the appropriate court writ
or a favorable final judgment.
Further, it boggles the mind why BPI-FB, even without delving into the authenticity of the
signature in the Authority to Debit, effected the transfer of ₱80,000,000.00 from FMIC’s
to Tevesteco’s account, when FMIC’s account was a time deposit and it had already paid
advance interest to FMIC. Considering that there is as yet no indubitable evidence
establishing Franco’s participation in the forgery, he remains an innocent party. As
between him and BPI-FB, the latter, which made possible the present predicament, must
bear the resulting loss or inconvenience.
Second. With respect to its liability for interest on Franco’s current account, BPI-FB
argues that its non-compliance with the Makati RTC’s Order Lifting the Order of
Attachment and the legal consequences thereof, is a matter that ought to be taken up in
that court.
The argument is tenuous. We agree with the succinct holding of the appellate court in
this respect. The Manila RTC’s order to pay interests on Franco’s current account arose
from BPI-FB’s unjustified refusal to comply with its obligation to pay Franco pursuant to
their contract of mutuum. In other words, from the time BPI-FB refused Franco’s demand
for the release of the deposits in his current account, specifically, from May 17, 1990,
interest at the rate of 12% began to accrue thereon.39
Undeniably, the Makati RTC is vested with the authority to determine the legal
consequences of BPI-FB’s non-compliance with the Order Lifting the Order of
Attachment. However, such authority does not preclude the Manila RTC from ruling on
BPI-FB’s liability to Franco for payment of interest based on its continued and unjustified
refusal to perform a contractual obligation upon demand. After all, this was the core issue
raised by Franco in his complaint before the Manila RTC.
Third. As to the award to Franco of the deposits in Quiaoit’s account, we find no reason
to depart from the factual findings of both the Manila RTC and the CA.
Noteworthy is the fact that Quiaoit himself testified that the deposits in his account are
actually owned by Franco who simply accommodated Jaime Sebastian’s request to
temporarily transfer ₱400,000.00 from Franco’s savings account to Quiaoit’s
account.40 His testimony cannot be characterized as hearsay as the records reveal that
he had personal knowledge of the arrangement made between Franco, Sebastian and
himself.41
BPI-FB makes capital of Franco’s belated allegation relative to this particular
arrangement. It insists that the transaction with Quiaoit was not specifically alleged in
Franco’s complaint before the Manila RTC. However, it appears that BPI-FB had
impliedly consented to the trial of this issue given its extensive cross-examination of
Quiaoit.
Section 5, Rule 10 of the Rules of Court provides:
Section 5. Amendment to conform to or authorize presentation of evidence.— When
issues not raised by the pleadings are tried with the express or implied consent of the
parties, they shall be treated in all respects as if they had been raised in the pleadings.
Such amendment of the pleadings as may be necessary to cause them to conform to the
evidence and to raise these issues may be made upon motion of any party at any time,
even after judgment; but failure to amend does not affect the result of the trial of these
issues. If evidence is objected to at the trial on the ground that it is now within the issues
made by the pleadings, the court may allow the pleadings to be amended and shall do so
with liberality if the presentation of the merits of the action and the ends of substantial
justice will be subserved thereby. The court may grant a continuance to enable the
amendment to be made. (Emphasis supplied)
In all, BPI-FB’s argument that this case is not the right forum for Franco to recover the
₱400,000.00 begs the issue. To reiterate, Quiaoit, testifying during the trial,
unequivocally disclaimed ownership of the funds in his account, and pointed to Franco as
the actual owner thereof. Clearly, Franco’s action for the recovery of his deposits
appropriately covers the deposits in Quiaoit’s account.
Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that the dishonor of
Franco’s checks respectively dated September 11 and 18, 1989 was legally in order in
view of the Makati RTC’s supplemental writ of attachment issued on September 14,
1989. It posits that as the party that applied for the writ of attachment before the Makati
RTC, it need not be served with the Notice of Garnishment before it could place Franco’s
accounts under garnishment.
The argument is specious. In this argument, we perceive BPI-FB’s clever but transparent
ploy to circumvent Section 4,42 Rule 13 of the Rules of Court. It should be noted that the
strict requirement on service of court papers upon the parties affected is designed to
comply with the elementary requisites of due process. Franco was entitled, as a matter of
right, to notice, if the requirements of due process are to be observed. Yet, he received a
copy of the Notice of Garnishment only on September 27, 1989, several days after the
two checks he issued were dishonored by BPI-FB on September 20 and 21, 1989. Verily,
it was premature for BPI-FB to freeze Franco’s accounts without even awaiting service of
the Makati RTC’s Notice of Garnishment on Franco.
Additionally, it should be remembered that the enforcement of a writ of attachment
cannot be made without including in the main suit the owner of the property attached by
virtue thereof. Section 5, Rule 13 of the Rules of Court specifically provides that "no levy
or attachment pursuant to the writ issued x x x shall be enforced unless it is preceded, or
contemporaneously accompanied, by service of summons, together with a copy of the
complaint, the application for attachment, on the defendant within the Philippines."
Franco was impleaded as party-defendant only on May 15, 1990. The Makati RTC had
yet to acquire jurisdiction over the person of Franco when BPI-FB garnished his
accounts.43 Effectively, therefore, the Makati RTC had no authority yet to bind the
deposits of Franco through the writ of attachment, and consequently, there was no legal
basis for BPI-FB to dishonor the checks issued by Franco.
Fifth. Anent the CA’s finding that BPI-FB was in bad faith and as such liable for the
advance interest it deducted from Franco’s time deposit account, and for moral as well
as exemplary damages, we find it proper to reinstate the ruling of the trial court, and
allow only the recovery of nominal damages in the amount of ₱10,000.00. However, we
retain the CA’s award of ₱75,000.00 as attorney’s fees.
In granting Franco’s prayer for interest on his time deposit account and for moral and
exemplary damages, the CA attributed bad faith to BPI-FB because it (1) completely
disregarded its obligation to Franco; (2) misleadingly claimed that Franco’s deposits were
under garnishment; (3) misrepresented that Franco’s current account was not on file; and
(4) refused to return the ₱400,000.00 despite the fact that the ostensible owner, Quiaoit,
wanted the amount returned to Franco.
In this regard, we are guided by Article 2201 of the Civil Code which provides:
Article 2201. In contracts and quasi-contracts, the damages for which the obligor who
acted in good faith is liable shall be those that are the natural and probable
consequences of the breach of the obligation, and which the parties have foreseen or
could have reasonable foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for
all damages which may be reasonably attributed to the non-performance of the
obligation. (Emphasis supplied.)
We find, as the trial court did, that BPI-FB acted out of the impetus of self-protection and
not out of malevolence or ill will. BPI-FB was not in the corrupt state of mind
contemplated in Article 2201 and should not be held liable for all damages now being
imputed to it for its breach of obligation. For the same reason, it is not liable for the
unearned interest on the time deposit.
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.44 We have held that it is a breach of a known duty through some motive of
interest or ill will.45 In the instant case, we cannot attribute to BPI-FB fraud or even a
motive of self-enrichment. As the trial court found, there was no denial whatsoever by
BPI-FB of the existence of the accounts. The computer-generated document which
indicated that the current account was "not on file" resulted from the prior debit by BPI-
FB of the deposits. The remedy of freezing the account, or the garnishment, or even the
outright refusal to honor any transaction thereon was resorted to solely for the purpose of
holding on to the funds as a security for its intended court action,46 and with no other goal
but to ensure the integrity of the accounts.
We have had occasion to hold that in the absence of fraud or bad faith,47 moral damages WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals Decision
cannot be awarded; and that the adverse result of an action does not per se make the dated November 29, 1995 is AFFIRMED with the MODIFICATION that the award of
action wrongful, or the party liable for it. One may err, but error alone is not a ground for unearned interest on the time deposit and of moral and exemplary damages is
granting such damages.48 DELETED.

An award of moral damages contemplates the existence of the following requisites: (1) No pronouncement as to costs.
there must be an injury clearly sustained by the claimant, whether physical, mental or
psychological; (2) there must be a culpable act or omission factually established; (3) the SO ORDERED
wrongful act or omission of the defendant is the proximate cause of the injury sustained
by the claimant; and (4) the award for damages is predicated on any of the cases stated
in Article 2219 of the Civil Code.49

Franco could not point to, or identify any particular circumstance in Article 2219 of the
Civil Code,50 upon which to base his claim for moral damages. 1âwphi1

Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral damages
under Article 2220 of the Civil Code for breach of contract.51

We also deny the claim for exemplary damages. Franco should show that he is entitled
to moral, temperate, or compensatory damages before the court may even consider the
question of whether exemplary damages should be awarded to him.52 As there is no
basis for the award of moral damages, neither can exemplary damages be granted.

While it is a sound policy not to set a premium on the right to litigate,53 we, however, find
that Franco is entitled to reasonable attorney’s fees for having been compelled to go to
court in order to assert his right. Thus, we affirm the CA’s grant of ₱75,000.00 as
attorney’s fees.

Attorney’s fees may be awarded when a party is compelled to litigate or incur expenses
to protect his interest,54 or when the court deems it just and equitable.55 In the case at
bench, BPI-FB refused to unfreeze the deposits of Franco despite the Makati RTC’s
Order Lifting the Order of Attachment and Quiaoit’s unwavering assertion that the
₱400,000.00 was part of Franco’s savings account. This refusal constrained Franco to
incur expenses and litigate for almost two (2) decades in order to protect his interests
and recover his deposits. Therefore, this Court deems it just and equitable to grant
Franco ₱75,000.00 as attorney’s fees. The award is reasonable in view of the complexity
of the issues and the time it has taken for this case to be resolved.56

Sixth. As for the dismissal of BPI-FB’s counter-claim, we uphold the Manila RTC’s ruling,
as affirmed by the CA, that BPI-FB is not entitled to recover ₱3,800,000.00 as actual
damages. BPI-FB’s alleged loss of profit as a result of Franco’s suit is, as already
pointed out, of its own making. Accordingly, the denial of its counter-claim is in order.
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 Agreement5 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
letter8 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
complaint10 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 petition12 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
1a\^/phi1.net
in culpa contractual or breach of contract 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. 173227               January 20, 2009
SEBASTIAN SIGA-AN, Petitioner,
vs.
ALICIA VILLANUEVA, Respondent.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court
seeking to set aside the Decision,2 dated 16 December 2005, and Resolution,3 dated 19
June 2006 of the Court of Appeals in CA-G.R. CV No. 71814, which affirmed in toto the
Decision,4 dated 26 January 2001, of the Las Pinas City Regional Trial Court, Branch
255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint5 for sum of money
against petitioner Sebastian Siga-an before the Las Pinas City Regional Trial Court
(RTC), Branch 255, docketed as Civil Case No. LP-98-0068. Respondent alleged that
she was a businesswoman engaged in supplying office materials and equipments to the
Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig City, while petitioner was
a military officer and comptroller of the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the PNO
and offered to loan her the amount of ₱540,000.00. Since she needed capital for her
business transactions with the PNO, she accepted petitioner’s proposal. The loan
agreement was not reduced in writing. Also, there was no stipulation as to the payment
of interest for the loan.6
On 31 August 1993, respondent issued a check worth ₱500,000.00 to petitioner as
partial payment of the loan. On 31 October 1993, she issued another check in the
amount of ₱200,000.00 to petitioner as payment of the remaining balance of the loan.
Petitioner told her that since she paid a total amount of ₱700,000.00 for the ₱540,000.00
worth of loan, the excess amount of ₱160,000.00 would be applied as interest for the
loan. Not satisfied with the amount applied as interest, petitioner pestered her to pay
additional interest. Petitioner threatened to block or disapprove her transactions with the
PNO if she would not comply with his demand. As all her transactions with the PNO were
subject to the approval of petitioner as comptroller of the PNO, and fearing that petitioner
might block or unduly influence the payment of her vouchers in the PNO, she conceded.
Thus, she paid additional amounts in cash and checks as interests for the loan. She
asked petitioner for receipt for the payments but petitioner told her that it was not
necessary as there was mutual trust and confidence between them. According to her
computation, the total amount she paid to petitioner for the loan and interest
accumulated to ₱1,200,000.00.7
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on
the loan despite absence of agreement to that effect. Her lawyer told her that petitioner
could not validly collect interest on the loan because there was no agreement between
her and petitioner regarding payment of interest. Since she paid petitioner a total amount
of ₱1,200,000.00 for the ₱540,000.00 worth of loan, and upon being advised by her
lawyer that she made overpayment to petitioner, she sent a demand letter to petitioner
asking for the return of the excess amount of ₱660,000.00. Petitioner, despite receipt of
the demand letter, ignored her claim for reimbursement.8
Respondent prayed that the RTC render judgment ordering petitioner to pay respondent
(1) ₱660,000.00 plus legal interest from the time of demand; (2) ₱300,000.00 as moral
damages; (3) ₱50,000.00 as exemplary damages; and (4) an amount equivalent to 25%
of ₱660,000.00 as attorney’s fees.9
In his answer10 to the complaint, petitioner denied that he offered a loan to respondent.
He averred that in 1992, respondent approached and asked him if he could grant her a
loan, as she needed money to finance her business venture with the PNO. At first, he
was reluctant to deal with respondent, because the latter had a spotty record as a
supplier of the PNO. However, since respondent was an acquaintance of his officemate,
he agreed to grant her a loan. Respondent paid the loan in full.11
Subsequently, respondent again asked him to give her a loan. As respondent had been
able to pay the previous loan in full, he agreed to grant her another loan. Later,
respondent requested him to restructure the payment of the loan because she could not
give full payment on the due date. He acceded to her request. Thereafter, respondent
pleaded for another restructuring of the payment of the loan. This time he rejected her
plea. Thus, respondent proposed to execute a promissory note wherein she would
acknowledge her obligation to him, inclusive of interest, and that she would issue several
postdated checks to guarantee the payment of her obligation. Upon his approval of
respondent’s request for restructuring of the loan, respondent executed a promissory
note dated 12 September 1994 wherein she admitted having borrowed an amount of
₱1,240,000.00, inclusive of interest, from petitioner and that she would pay said amount
in March 1995. Respondent also issued to him six postdated checks amounting to
₱1,240,000.00 as guarantee of compliance with her obligation. Subsequently, he
presented the six checks for encashment but only one check was honored. He
demanded that respondent settle her obligation, but the latter failed to do so. Hence, he
filed criminal cases for Violation of the Bouncing Checks Law (Batas Pambansa Blg. 22)
against respondent. The cases were assigned to the Metropolitan Trial Court of Makati
City, Branch 65 (MeTC).12
Petitioner insisted that there was no overpayment because respondent admitted in the
latter’s promissory note that her monetary obligation as of 12 September 1994 amounted
to ₱1,240,000.00 inclusive of interests. He argued that respondent was already estopped
from complaining that she should not have paid any interest, because she was given
several times to settle her obligation but failed to do so. He maintained that to rule in
favor of respondent is tantamount to concluding that the loan was given interest-free.
Based on the foregoing averments, he asked the RTC to dismiss respondent’s
complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent
made an overpayment of her loan obligation to petitioner and that the latter should refund
the excess amount to the former. It ratiocinated that respondent’s obligation was only to
pay the loaned amount of ₱540,000.00, and that the alleged interests due should not be
included in the computation of respondent’s total monetary debt because there was no
agreement between them regarding payment of interest. It concluded that since
respondent made an excess payment to petitioner in the amount of ₱660,000.00 through
mistake, petitioner should return the said amount to respondent pursuant to the principle
of solutio indebiti.13
The RTC also ruled that petitioner should pay moral damages for the sleepless nights
and wounded feelings experienced by respondent. Further, petitioner should pay
exemplary damages by way of example or correction for the public good, plus attorney’s
fees and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law
and jurisprudence on the matter, judgment is hereby rendered in favor of the plaintiff and
against the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of ₱660,000.00 plus legal
interest of 12% per annum computed from 3 March 1998 until the amount is paid
in full;
(2) Ordering defendant to pay plaintiff the amount of ₱300,000.00 as moral
damages;
(3) Ordering defendant to pay plaintiff the amount of ₱50,000.00 as exemplary
damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of
₱660,000.00 as attorney’s fees; and
(5) Ordering defendant to pay the costs of suit.14
Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court
promulgated its Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the
assailed decision [is] AFFIRMED in toto.15
Petitioner filed a motion for reconsideration of the appellate court’s decision but this was
denied.16 Hence, petitioner lodged the instant petition before us assigning the following
errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST
WAS DUE TO PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE
OF SOLUTIO INDEBITI.17
Interest is a compensation fixed by the parties for the use or forbearance of money. This
is referred to as monetary interest. Interest may also be imposed by law or by courts as
penalty or indemnity for damages. This is called compensatory interest.18 The right to
interest arises only by virtue of a contract or by virtue of damages for delay or failure to
pay the principal loan on which interest is demanded.19
Article 1956 of the Civil Code, which refers to monetary interest,20 specifically mandates
that no interest shall be due unless it has been expressly stipulated in writing. As can be
gleaned from the foregoing provision, payment of monetary interest is allowed only if: (1)
there was an express stipulation for the payment of interest; and (2) the agreement for
the payment of interest was reduced in writing. The concurrence of the two conditions is
required for the payment of monetary interest. Thus, we have held that collection of
interest without any stipulation therefor in writing is prohibited by law.21
It appears that petitioner and respondent did not agree on the payment of interest for the
loan. Neither was there convincing proof of written agreement between the two regarding
the payment of interest. Respondent testified that although she accepted petitioner’s
offer of loan amounting to ₱540,000.00, there was, nonetheless, no verbal or written
agreement for her to pay interest on the loan.22
Petitioner presented a handwritten promissory note dated 12 September 199423 wherein
respondent purportedly admitted owing petitioner "capital and interest." Respondent,
however, explained that it was petitioner who made a promissory note and she was told
to copy it in her own handwriting; that all her transactions with the PNO were subject to
the approval of petitioner as comptroller of the PNO; that petitioner threatened to
disapprove her transactions with the PNO if she would not pay interest; that being
unaware of the law on interest and fearing that petitioner would make good of his threats
if she would not obey his instruction to copy the promissory note, she copied the
promissory note in her own handwriting; and that such was the same promissory note
presented by petitioner as alleged proof of their written agreement on
interest.24 Petitioner did not rebut the foregoing testimony. It is evident that respondent
did not really consent to the payment of interest for the loan and that she was merely
tricked and coerced by petitioner to pay interest. Hence, it cannot be gainfully said that
such promissory note pertains to an express stipulation of interest or written agreement
of interest on the loan between petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that
he and respondent agreed on the payment of 7% rate of interest on the loan; that the
agreed 7% rate of interest was duly admitted by respondent in her testimony in the Batas
Pambansa Blg. 22 cases he filed against respondent; that despite such judicial
admission by respondent, the RTC and the Court of Appeals, citing Article 1956 of the
Civil Code, still held that no interest was due him since the agreement on interest was
not reduced in writing; that the application of Article 1956 of the Civil Code should not be
absolute, and an exception to the application of such provision should be made when the
borrower admits that a specific rate of interest was agreed upon as in the present case;
and that it would be unfair to allow respondent to pay only the loan when the latter very
well knew and even admitted in the Batas Pambansa Blg. 22 cases that there was an
agreed 7% rate of interest on the loan.25
We have carefully examined the RTC Decision and found that the RTC did not make a
ruling therein that petitioner and respondent agreed on the payment of interest at the rate
of 7% for the loan. The RTC clearly stated that although petitioner and respondent
entered into a valid oral contract of loan amounting to ₱540,000.00, they, nonetheless,
never intended the payment of interest thereon.26 While the Court of Appeals mentioned
in its Decision that it concurred in the RTC’s ruling that petitioner and respondent agreed
on a certain rate of interest as regards the loan, we consider this as merely an
inadvertence because, as earlier elucidated, both the RTC and the Court of Appeals
ruled that petitioner is not entitled to the payment of interest on the loan. The rule is that
factual findings of the trial court deserve great weight and respect especially when
affirmed by the appellate court.27 We found no compelling reason to disturb the ruling of
both courts.
Petitioner’s reliance on respondent’s alleged admission in the Batas Pambansa Blg. 22
cases that they had agreed on the payment of interest at the rate of 7% deserves scant
consideration. In the said case, respondent merely testified that after paying the total
amount of loan, petitioner ordered her to pay interest.28 Respondent did not categorically
declare in the same case that she and respondent made an express stipulation in writing
as regards payment of interest at the rate of 7%. As earlier discussed, monetary interest
is due only if there was an express stipulation in writing for the payment of interest.
There are instances in which an interest may be imposed even in the absence of express
stipulation, verbal or written, regarding payment of interest. Article 2209 of the Civil Code
states that if the obligation consists in the payment of a sum of money, and the debtor
incurs delay, a legal interest of 12% per annum may be imposed as indemnity for
damages if no stipulation on the payment of interest was agreed upon. Likewise, Article
2212 of the Civil Code provides that interest due shall earn legal interest from the time it
is judicially demanded, although the obligation may be silent on this point.
All the same, the interest under these two instances may be imposed only as a penalty
or damages for breach of contractual obligations. It cannot be charged as a
compensation for the use or forbearance of money. In other words, the two instances
apply only to compensatory interest and not to monetary interest.29 The case at bar
involves petitioner’s claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because it was
not duly proven that respondent defaulted in paying the loan. Also, as earlier found, no
interest was due on the loan because there was no written agreement as regards
payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio
indebiti does not apply to the instant case. Thus, he cannot be compelled to return the
alleged excess amount paid by respondent as interest.30
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has
been no stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied. Article 2154 of the Civil Code explains the
principle of solutio indebiti. Said provision provides that if something is received when
there is no right to demand it, and it was unduly delivered through mistake, the obligation
to return it arises. In such a case, a creditor-debtor relationship is created under a quasi-
contract whereby the payor becomes the creditor who then has the right to demand the
return of payment made by mistake, and the person who has no right to receive such
payment becomes obligated to return the same. The quasi-contract of solutio
indebiti harks back to the ancient principle that no one shall enrich himself unjustly at the
expense of another.31 The principle of solutio indebiti applies where (1) a payment is
made when there exists no binding relation between the payor, who has no duty to pay,
and the person who received the payment; and (2) the payment is made through
mistake, and not through liberality or some other cause.32 We have held that the principle
of solutio indebiti applies in case of erroneous payment of undue interest.33
It was duly established that respondent paid interest to petitioner. Respondent was under
no duty to make such payment because there was no express stipulation in writing to
that effect. There was no binding relation between petitioner and respondent as regards
the payment of interest. The payment was clearly a mistake. Since petitioner received
something when there was no right to demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award and damages imposed by
the RTC and the Court of Appeals.
Records show that respondent received a loan amounting to ₱540,000.00 from
petitioner.34 Respondent issued two checks with a total worth of ₱700,000.00 in favor of
petitioner as payment of the loan.35 These checks were subsequently encashed by
petitioner.36 Obviously, there was an excess of ₱160,000.00 in the payment for the loan.
Petitioner claims that the excess of ₱160,000.00 serves as interest on the loan to which
he was entitled. Aside from issuing the said two checks, respondent also paid cash in the
total amount of ₱175,000.00 to petitioner as interest.37 Although no receipts reflecting the
same were presented because petitioner refused to issue such to respondent, petitioner,
nonetheless, admitted in his Reply-Affidavit38 in the Batas Pambansa Blg. 22 cases that
respondent paid him a total amount of ₱175,000.00 cash in addition to the two checks.
Section 26 Rule 130 of the Rules of Evidence provides that the declaration of a party as
to a relevant fact may be given in evidence against him. Aside from the amounts of
₱160,000.00 and ₱175,000.00 paid as interest, no other proof of additional payment as
interest was presented by respondent. Since we have previously found that petitioner is
not entitled to payment of interest and that the principle of solutio indebiti applies to the
instant case, petitioner should return to respondent the excess amount of ₱160,000.00
and ₱175,000.00 or the total amount of ₱335,000.00. Accordingly, the reimbursable
amount to respondent fixed by the RTC and the Court of Appeals should be reduced
from ₱660,000.00 to ₱335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa
Blg. 22 against respondent. In the said cases, the MeTC found respondent guilty of
violating Batas Pambansa Blg. 22 for issuing five dishonored checks to petitioner.
Nonetheless, respondent’s conviction therein does not affect our ruling in the instant
case. The two checks, subject matter of this case, totaling ₱700,000.00 which
respondent claimed as payment of the ₱540,000.00 worth of loan, were not among the
five checks found to be dishonored or bounced in the five criminal cases. Further, the
MeTC found that respondent made an overpayment of the loan by reason of the interest
which the latter paid to petitioner.39
Article 2217 of the Civil Code provides that moral damages may be recovered if the party
underwent physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation and similar injury.
Respondent testified that she experienced sleepless nights and wounded feelings when
petitioner refused to return the amount paid as interest despite her repeated demands.
Hence, the award of moral damages is justified. However, its corresponding amount of
₱300,000.00, as fixed by the RTC and the Court of Appeals, is exorbitant and should be
equitably reduced. Article 2216 of the Civil Code instructs that assessment of damages is
left to the discretion of the court according to the circumstances of each case. This
discretion is limited by the principle that the amount awarded should not be palpably
excessive as to indicate that it was the result of prejudice or corruption on the part of the
trial court.40 To our mind, the amount of ₱150,000.00 as moral damages is fair,
reasonable, and proportionate to the injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti,
exemplary damages may be imposed if the defendant acted in an oppressive manner.
Petitioner acted oppressively when he pestered respondent to pay interest and
threatened to block her transactions with the PNO if she would not pay interest. This
forced respondent to pay interest despite lack of agreement thereto. Thus, the award of
exemplary damages is appropriate. The amount of ₱50,000.00 imposed as exemplary
damages by the RTC and the Court is fitting so as to deter petitioner and other lenders
from committing similar and other serious wrongdoings.41
Jurisprudence instructs that in awarding attorney’s fees, the trial court must state the
factual, legal or equitable justification for awarding the same.42 In the case under
consideration, the RTC stated in its Decision that the award of attorney’s fees equivalent
to 25% of the amount paid as interest by respondent to petitioner is reasonable and
moderate considering the extent of work rendered by respondent’s lawyer in the instant
case and the fact that it dragged on for several years.43 Further, respondent testified that
she agreed to compensate her lawyer handling the instant case such amount.44 The
award, therefore, of attorney’s fees and its amount equivalent to 25% of the amount paid
as interest by respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the
amount refundable to respondent computed from 3 March 1998 until its full payment.
This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals, 45 that when an obligation,
not constituting a loan or forbearance of money is breached, an interest on the amount of
damages awarded may be imposed at the rate of 6% per annum. We further declared
that when the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether it is a loan/forbearance of money or not,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed equivalent to a forbearance of credit.
In the present case, petitioner’s obligation arose from a quasi-contract of solutio
indebiti and not from a loan or forbearance of money. Thus, an interest of 6% per annum
should be imposed on the amount to be refunded as well as on the damages awarded
and on the attorney’s fees, to be computed from the time of the extra-judicial demand on
3 March 1998,46 up to the finality of this Decision. In addition, the interest shall become
12% per annum from the finality of this Decision up to its satisfaction.

WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16
December 2005, is hereby AFFIRMED with the following MODIFICATIONS: (1) the
amount of ₱660,000.00 as refundable amount of interest is reduced to THREE
HUNDRED THIRTY FIVE THOUSAND PESOS (₱335,000.00); (2) the amount of
₱300,000.00 imposed as moral damages is reduced to ONE HUNDRED FIFTY
THOUSAND PESOS (₱150,000.00); (3) an interest of 6% per annum is imposed on the
₱335,000.00, on the damages awarded and on the attorney’s fees to be computed from
the time of the extra-judicial demand on 3 March 1998 up to the finality of this Decision;
and (4) an interest of 12% per annum is also imposed from the finality of this Decision up
to its satisfaction. Costs against petitioner.

SO ORDERED
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 Decision3 of the Regional Trial Court (RTC) of Makati City, Branch 147.
The factual antecedents:
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China
Banking Corporation (respondent) as evidenced by two Promissory Notes both dated
October 6, 1998 and numbered 507-001051-34 and 507-001052-0,5 for the sums of !!
6,216,000 and ₱4, 139,000, respectively. The loan was secured by a Real Estate
Mortgage (REM) over petitioners’ property located at 49 Greensville St., White Plains,
Quezon City covered by Transfer Certificate of Title (TCT) No. RT-103568 (167394) PR-
412086 of the Register of Deeds of Quezon City.
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 ₱19,201,776.6312 based on the
following statement of account which she prepared:
STATEMENT OF ACCOUNT
As of FEBRUARY 23, 2001
IGNACIO F. JUICO
PN# 507-0010520 due on 04-07-2004
1âwphi1
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 Add: 10% Attorney’s Fee 1,745,616.06

Interest on ₱4,139,000.00 fr. 04-Jan-2001 Total amount due 19,201,776.63

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 68,548.64 Less: Bid Price 10,300,000.00

TOTAL DEFICIENCY AMOUNT AS OF
Interest on ₱4,139,000.00 fr. 04-Feb-2001 FEB. 23, 2001 8,901,776.63 13

23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 38,781.86 Petitioners thereafter received a demand letter14 dated May 2, 2001 from respondent’s
Penalty charge @ 1/10 of 1% of the total amount due counsel for the deficiency amount of ₱8,901,776.63. Ms. Yu further testified that based
(₱4,139,000.00 from 11-04-99 to 02-23-2001 @ on the Statement of Account15 dated March 15, 2002 which she prepared, the
1/10 of 1% per day). . . . . . . . . . . . . . . . . 1,974,303.00 outstanding balance of petitioners was ₱15,190,961.48.16

Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PN# 507-0010513 due on 04-07-2004
Principal balance of PN# 5070010513. . . . . . . . . . . . . .
Interest on ₱6,216,000.00 fr. 06-Oct-99
04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . .
Interest on ₱6,216,000.00 fr. 04-Nov-2000
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . .
Interest on ₱6,216,000.00 fr. 04-Dec-2000
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . .
Interest on ₱6,216,000.00 fr. 04-Jan-2001
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . .
Interest on ₱6,216,000.00 fr. 04-Feb-2001
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . .
Penalty charge @ 1/10 of 1% of the total amount due
(₱6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . .
7,002,110.73 On cross-examination, Ms. Yu reiterated that the interest rate changes every month
based on the prevailing market rate and she notified petitioners of the prevailing rate by
calling them monthly before their account becomes past due. When asked if there was
6,216,000.00
any written authority from petitioners for respondent to increase the interest rate
unilaterally, she answered that petitioners signed a promissory note indicating that they
1,009,035.62 agreed to pay interest at the prevailing rate.17
125,171.51 Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required
to sign a blank promissory note and was informed that the interest rate on the loan will
be based on prevailing market rates. Every month, respondent informs him by telephone
113,505.86
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
102,947.18 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
58,243.07
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
3,145,296.00 same.19

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,770,199.23 In its decision, the RTC ruled in favor of respondent. The fallo of the RTC decision reads:

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,772,309.96 WHEREFORE, premises considered, the Complaint is hereby sustained, and Judgment
is rendered ordering herein defendants to pay jointly and severally to plaintiff, the
Less: A/P applied to balance of principal (55,000.00) following:

Less: Accounts payable L & D (261,149.39) 17,456,160.57 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 Salazar27 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 period November 4, 1999 to February 23, 2001, petitioners’ balance ballooned to
may result from all of them taken jointly.43 ₱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,
Here, the escalation clause in the promissory notes authorizing the respondent to adjust hence the same is hereby reduced to 1% per month or 12% per annum. 1âwphi1

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 Petitioners’ Statement of Account, as of February 23, 2001, the date of the foreclosure
rate of interest was fixed as it would be based on prevailing market rates. While the latter proceedings, should thus be modified as follows:
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 Principal ₱10,355,000.00
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 Interest at 15% per annum
that since the deregulation of bank rates in 1983, the Central Bank has shifted to a ₱10,355,000 x .15 x 477 days/365 days 2,029,863.70
market-oriented interest rate policy.44 Penalty at 12% per annum 1,623 ,890. 96
₱10,355,000 x .12 x 477days/365 days
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 Sub-Total 14,008,754.66
medical supply business, admitted having understood his obligations before signing Less: A/P applied to balance of principal (55,000.00)
them. At no time did petitioners protest the new rates imposed on their loan even when
their property was foreclosed by respondent. Less: Accounts payable L & D (261,149.39)
13,692,605.27
This notwithstanding, we hold that the escalation clause is still void because it grants Add: Attorney's Fees 1,369,260.53
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 Total Amount Due 15,061,865.79
advising them of the prevailing interest rates would not suffice. A detailed billing Less: Bid Price 10,300,000.00
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 TOTAL DEFICIENCY AMOUNT 4,761,865.79
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’ WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The February
essential equality.45 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.
Modifications in the rate of interest for loans pursuant to an escalation clause must be Juico are hereby ORDERED to pay jointly and severally respondent China Banking
the result of an agreement between the parties. Unless such important change in the Corporation ₱4, 7 61 ,865. 79 representing the amount of deficiency inclusive of interest,
contract terms is mutually agreed upon, it has no binding effect.46 In the absence of penalty charge and attorney's fees. Said amount shall bear interest at 12% per annum,
consent on the part of the petitioners to the modifications in the interest rates, the reckoned from the time of the filing of the complaint until its full satisfaction.
adjusted rates cannot bind them. Hence, we consider as invalid the interest rates in
excess of 15%, the rate charged for the first year. No pronouncement as to costs.

Based on the August 29, 2000 demand letter of China Bank, petitioners’ total principal SO ORDERED
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
G.R. No. 181045               July 2, 2014 1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum.
Interest shall be payable in advance every one hundred twenty days at the rate
SPOUSES EDUARDO and LYDIA SILOS, Petitioners, prevailing at the time of the renewal.
vs.
PHILIPPINE NATIONAL BANK, Respondent. (b) The Borrower agrees that the Bank may modify the interest rate in the Loan
depending on whatever policy the Bank may adopt in the future, including without
DECISION limitation, the shifting from the floating interest rate system to the fixed interest rate
system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per
DEL CASTILLO, J.: annum, which is equal to the Bank’s spread over the current floating interest rate, the
Borrower hereby agrees that the Bank may, without need of notice to the Borrower,
increase or decrease its spread over the floating interest rate at any time depending on
In loan agreements, it cannot be denied that the rate of interest is a principal condition, if
whatever policy it may adopt in the future.  (Emphases supplied)
10

not the most important component. Thus, any modification thereof must be mutually
agreed upon; otherwise, it has no binding effect. Moreover, the Court cannot consider a
stipulation granting a party the option to prepay the loan if said party is not agreeable to
the arbitrary interest rates imposed. Premium may not be placed upon a stipulation in a
contract which grants one party the right to choose whether to continue with or withdraw
The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the
right to increase or reduce interest rates "within the limits allowed by law or by the
Monetary Board." 11

from the agreement if it discovers that what the other party has been doing all along is
improper or illegal. The Real Estate Mortgage agreement provided the same right to increase or reduce
interest rates "at any time depending on whatever policy PNB may adopt in the future." 12

This Petition for Review on Certiorari  questions the May 8, 2007 Decision  of the Court of
1 2

Appeals (CA) in CA-G.R. CV No. 79650, which affirmed with modifications the February Petitioners religiously paid interest on the notes at the following rates:
28, 2003 Decision  and the June 4, 2003 Order  of the Regional Trial Court (RTC),
3 4

Branch 6 of Kalibo, Aklan in Civil Case No. 5975. 1. 1st Promissory Note dated July 24, 1989 – 19.5%;

Factual Antecedents 2. 2nd Promissory Note dated November 22, 1989 – 23%;

Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two 3. 3rd Promissory Note dated March 21, 1990 – 22%;
decades of operating a department store and buying and selling of ready-to-wear
apparel. Respondent Philippine National Bank (PNB) is a banking corporation organized 4. 4th Promissory Note dated July 19, 1990 – 24%;
and existing under Philippine laws.
5. 5th Promissory Note dated December 17, 1990 – 28%;
To secure a one-year revolving credit line of ₱150,000.00 obtained from PNB, petitioners
constituted in August 1987 a Real Estate Mortgage  over a 370-square meter lot in
5
6. 6th Promissory Note dated February 14, 1991 – 32%;
Kalibo, Aklan covered by Transfer Certificate of Title No. (TCT) T-14250. In July 1988,the
credit line was increased to ₱1.8 million and the mortgage was correspondingly
7. 7th Promissory Note dated March 1, 1991 – 30%; and
increased to ₱1.8 million. 6

8. 8th Promissory Note dated July 11, 1991 – 24%. 13

And in July 1989, a Supplement to the Existing Real Estate Mortgage  was executed to
7

cover the same credit line, which was increased to ₱2.5 million, and additional security
was given in the form of a 134-square meter lot covered by TCT T-16208. In addition, In August 1991, an Amendment to Credit Agreement  was executed by the parties, with
14

petitioners issued eight Promissory Notes  and signed a Credit Agreement.  This July
8 9 the following stipulation regarding interest:
1989 Credit Agreement contained a stipulation on interest which provides as follows:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment
thereof at the rate per annum which is determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment.  (Emphases supplied)
15
Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the
following 18 Promissory Notes, which petitioners settled – except the last (the note
covering the principal) – at the following interest rates:
1. 9th Promissory Note dated November 8, 1991 – 26%;
2. 10th Promissory Note dated March 19, 1992 – 25%;
3. 11th Promissory Note dated July 11, 1992 – 23%;
4. 12th Promissory Note dated November 10, 1992 – 21%;
5. 13th Promissory Note dated March 15, 1993 – 21%;
6. 14th Promissory Note dated July 12, 1993 – 17.5%;
7. 15th Promissory Note dated November 17, 1993 – 21%;
8. 16th Promissory Note dated March 28, 1994 – 21%;
9. 17th Promissory Note dated July 13, 1994 – 21%;
10. 18th Promissory Note dated November 16, 1994 – 16%;
11. 19th Promissory Note dated April 10, 1995 – 21%;
12. 20th Promissory Note dated July 19, 1995 – 18.5%;
13. 21st Promissory Note dated December 18, 1995 – 18.75%;
14. 22nd Promissory Note dated April 22, 1996 – 18.5%;
15. 23rd Promissory Note dated July 22, 1996 – 18.5%;
16. 24th Promissory Note dated November 25, 1996 – 18%;
17. 25th Promissory Note dated May 30, 1997 – 17.5%; and
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%. 16
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate
the Bank may at any time without notice, raise within the limits allowed by law x x x."17
On the other hand, the 18th up to the 26th promissory notes – including PN 9707237,
which is the 26th promissory note – carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be
increased or decreased for the subsequent Interest Periods, with prior notice to the
Borrower in the event of changes in interest rate prescribed by law or the Monetary
Board of the Central Bank of the Philippines, or in the Bank’s overall cost of funds. I/We
hereby agree that in the event I/we are not agreeable to the interest rate fixed for any
Interest Period, I/we shall have the option top repay the loan or credit facility without
penalty within ten (10) calendar days from the Interest Setting Date.  (Emphasis
18
supplied)
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good
on the promissory notes, religiously paying the interests without objection or fail. But in
1997, petitioners faltered when the interest rates soared due to the Asian financial crisis.
Petitioners’ sole outstanding promissory note for ₱2.5 million – PN 9707237 executed in
July 1997 and due 120 days later or on October 28, 1997 – became past due, and
despite repeated demands, petitioners failed to make good on the note.
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case
of default, as follows:
Without need for notice or demand, failure to pay this note or any installment thereon,
when due, shall constitute default and in such cases or in case of garnishment,
receivership or bankruptcy or suit of any kind filed against me/us by the Bank, the
outstanding principal of this note, at the option of the Bank and without prior notice of
demand, shall immediately become due and payable and shall be subject to a penalty
charge of twenty four percent (24%) per annum based on the defaulted principal amount.
x x x  (Emphasis supplied)
19
PNB prepared a Statement of Account  as of October 12, 1998, detailing the amount due
20
and demandable from petitioners in the total amount of ₱3,620,541.60, broken down as
follows:
Principal P 2,500,000.00
 Interest 538,874.94
Penalties 581,666.66
Total P 3,620,541.60
Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed
on the mortgage, and on January 14, 1999, TCTs T-14250 and T-16208 were sold to it at
auction for the amount of ₱4,324,172.96.  The sheriff’s certificate of sale was registered
21
on March 11, 1999.
More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975,
seeking annulment of the foreclosure sale and an accounting of the PNB credit.
Petitioners theorized that after the first promissory note where they agreed to pay 19.5%
interest, the succeeding stipulations for the payment of interest in their loan agreements
with PNB – which allegedly left to the latter the sole will to determine the interest rate –
became null and void. Petitioners added that because the interest rates were fixed by
respondent without their prior consent or agreement, these rates are void, and as a
result, petitioners should only be made liable for interest at the legal rate of 12%. They
claimed further that they overpaid interests on the credit, and concluded that due to this
overpayment of steep interest charges, their debt should now be deemed paid, and the
foreclosure and sale of TCTs T-14250 and T-16208 became unnecessary and wrongful.
As for the imposed penalty of ₱581,666.66, petitioners alleged that since the Real Estate
Mortgage and the Supplement thereto did not include penalties as part of the secured
amount, the same should be excluded from the foreclosure amount or bid price, even if
such penalties are provided for in the final Promissory Note, or PN 9707237. 22
In addition, petitioners sought to be reimbursed an alleged overpayment of ₱848,285.00
made during the period August 21, 1991 to March 5, 1998,resulting from respondent’s
imposition of the alleged illegal and steep interest rates. They also prayed to be awarded
₱200,000.00 by way of attorney’s fees. 23
In its Answer,  PNB denied that it unilaterally imposed or fixed interest rates; that
24
petitioners agreed that without prior notice, PNB may modify interest rates depending on
future policy adopted by it; and that the imposition of penalties was agreed upon in the
Credit Agreement. It added that the imposition of penalties is supported by the all-
inclusive clause in the Real Estate Mortgage agreement which provides that the
mortgage shall stand as security for any and all other obligations of whatever kind and
nature owing to respondent, which thus includes penalties imposed upon default or non-
payment of the principal and interest on due date.
On pre-trial, the parties mutually agreed to the following material facts, among others:
a) That since 1991 up to 1998, petitioners had paid PNB the total amount of
₱3,484,287.00;  and
25
b) That PNB sent, and petitioners received, a March 10, 2000 demand letter. 26
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the
Amendment to Credit Agreement, Real Estate Mortgage and the Supplement thereto
were all prepared by respondent PNB and were presented to her and her husband
Eduardo only for signature; that she was told by PNB that the latter alone would
determine the interest rate; that as to the Amendment to Credit Agreement, she was told
that PNB would fill up the interest rate portion thereof; that at the time the parties
executed the said Credit Agreement, she was not informed about the applicable spread
that PNB would impose on her account; that the interest rate portion of all Promissory
Notes she and Eduardo issued were always left in blank when they executed them, with
respondent’s mere assurance that it would be the one to enter or indicate thereon the
prevailing interest rate at the time of availment; and that they agreed to such
arrangement. She further testified that the two Real Estate Mortgage agreements she
signed did not stipulate the payment of penalties; that she and Eduardo consulted with a
lawyer, and were told that PNB’s actions were improper, and so on March 20, 2000, they
wrote to the latter seeking a recomputation of their outstanding obligation; and when
PNB did not oblige, they instituted Civil Case No. 5975. 27
On cross-examination, Lydia testified that she has been in business for 20 years; that
she also borrowed from other individuals and another bank; that it was only with banks
that she was asked to sign loan documents with no indicated interest rate; that she did
not bother to read the terms of the loan documents which she signed; and that she
received several PNB statements of account detailing their outstanding obligations, but
she did not complain; that she assumed instead that what was written therein is correct. 28
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness
for respondent, stated on cross-examination that as a practice, the determination of the
prime rates of interest was the responsibility solely of PNB’s Treasury Department which
is based in Manila; that these prime rates were simply communicated to all PNB
branches for implementation; that there are a multitude of considerations which
determine the interest rate, such as the cost of money, foreign currency values, PNB’s
spread, bank administrative costs, profitability, and the practice in the banking industry;
that in every repricing of each loan availment, the borrower has the right to question the
rates, but that this was not done by the petitioners; and that anything that is not found in
the Promissory Note may be supplemented by the Credit Agreement. 29
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment dismissing Civil Case No.
5975. 30
It ruled that:
1. While the Credit Agreement allows PNB to unilaterally increase its spread over
the floating interest rate at any time depending on whatever policy it may adopt in
the future, it likewise allows for the decrease at any time of the same. Thus, such
stipulation authorizing both the increase and decrease of interest rates as may
be applicable is valid,  as was held in Consolidated Bank and Trust Corporation
31
(SOLIDBANK) v. Court of Appeals; 32
2. Banks are allowed to stipulate that interest rates on loans need not be fixed
and instead be made dependent on prevailing rates upon which to peg such
variable interest rates;
33
3. The Promissory Note, as the principal contract evidencing petitioners’ loan,
prevails over the Credit Agreement and the Real Estate Mortgage.
As such, the rate of interest, penalties and attorney’s fees stipulated in the
Promissory Note prevail over those mentioned in the Credit Agreement and the
Real Estate Mortgage agreements; 34
4. Roughly, PNB’s computation of the total amount of petitioners’ obligation is
correct;
35
5. Because the loan was admittedly due and demandable, the foreclosure was
regularly made; 36
6. By the admission of petitioners during pre-trial, all payments made to PNB
were properly applied to the principal, interest and penalties.
37
The dispositive portion of the trial court’s Decision reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the respondent
and against the petitioners by DISMISSING the latter’s petition.
Costs against the petitioners.
SO ORDERED. 38
Petitioners moved for reconsideration. In an Order  dated June 4, 2003, the trial court
39
granted only a modification in the award of attorney’s fees, reducing the same from 10%
to 1%. Thus, PNB was ordered to refund to petitioner the excess in attorney’s fees in the
amount of ₱356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate
charged by the respondent as well as the extra-judicial foreclosure proceedings and the
Certificate of Sale. However, respondent is directed to refund to the petitioner the
amount of ₱356,589.90 representing the excess interest charged against the latter.
No pronouncement as to costs.
SO ORDERED. 40
Ruling of the Court of Appeals
Petitioners appealed to the CA, which issued the questioned Decision with the following
decretal portion:
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The
modified Decision of the Regional Trial Court per Order dated June 4, 2003 is hereby
AFFIRMED with MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the expiration of the first 30-day
interest period for PN. No. 9707237 should be 12% per annum;
2. [T]hat the attorney’s fees of10% is valid and binding; and
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid
price of ₱377,505.99 which is the difference between the total amount due [PNB]
and the amount of its bid price.
SO ORDERED. 41
On the other hand, respondent did not appeal the June 4,2003 Order of the trial court
which reduced its award of attorney’s fees. It simply raised the issue in its appellee’s
brief in the CA, and included a prayer for the reversal of said Order.
In effect, the CA limited petitioners’ appeal to the following issues:
1) Whether x x x the interest rates on petitioners’ outstanding obligation were
unilaterally and arbitrarily imposed by PNB;
 2) Whether x x x the penalty charges were secured by the real estate mortgage;
and
3) Whether x x x the extrajudicial foreclosure and sale are valid. 42
The CA noted that, based on receipts presented by petitioners during trial, the latter
dutifully paid a total of ₱3,027,324.60 in interest for the period August 7, 1991 to August
6, 1997, over and above the ₱2.5 million principal obligation. And this is exclusive of
payments for insurance premiums, documentary stamp taxes, and penalty. All the while,
petitioners did not complain nor object to the imposition of interest; they in fact paid the
same religiously and without fail for seven years. The appellate court ruled that
petitioners are thus estopped from questioning the same.
The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB
wrongly applied an interest rate of 25.72% instead of the agreed 25%; thus it
overcharged petitioners, and the latter paid, an excess of ₱736.56 in interest.
On the issue of penalties, the CA ruled that the express tenor of the Real Estate
Mortgage agreements contemplated the inclusion of the PN 9707237-stipulated 24%
penalty in the amount to be secured by the mortgaged property, thus –
For and in consideration of certain loans, overdrafts and other credit accommodations
obtained from the MORTGAGEE and to secure the payment of the same and those
others that the MORTGAGEE may extend to the MORTGAGOR, including interest and
expenses, and other obligations owing by the MORTGAGOR to the MORTGAGEE,
whether direct or indirect, principal or secondary, as appearing in the accounts, books
and records of the MORTGAGEE, the MORTGAGOR does hereby transfer and convey
by way of mortgage unto the MORTGAGEE x x x  (Emphasis supplied)
43
The CA believes that the 24% penalty is covered by the phrase "and other obligations
owing by the mortgagor to the mortgagee" and should thus be added to the amount
secured by the mortgages. 44
The CA then proceeded to declare valid the foreclosure and sale of properties covered
by TCTs T-14250 and T-16208, which came as a necessary result of petitioners’ failure
to pay the outstanding obligation upon demand.  The CA saw fit to increase the trial
45
court’s award of 1% to 10%, finding the latter rate to be reasonable and citing the Real
Estate Mortgage agreement which authorized the collection of the higher rate. 46
Finally, the CA ruled that petitioners are entitled to ₱377,505.09 surplus, which is the
difference between PNB’s bid price of ₱4,324,172.96 and petitioners’ total computed
obligation as of January 14, 1999, or the date of the auction sale, in the amount of
₱3,946,667.87. 47
Hence, the present Petition.
Issues
The following issues are raised in this Petition:
I
A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT
ERRED IN NOT NULLIFYING THE INTEREST RATE PROVISION IN
THE CREDIT AGREEMENT DATED JULY 24, 1989 X X X AND IN THE
AMENDMENT TO CREDIT AGREEMENT DATEDAUGUST 21, 1991 X
X X WHICH LEFT TO THE SOLE UNILATERAL DETERMINATION OF
THE RESPONDENT PNB THE ORIGINAL FIXING OF INTEREST RATE
AND ITS INCREASE, WHICH AGREEMENT IS CONTRARY TO LAW,
ART. 1308 OF THE [NEW CIVIL CODE], AS ENUNCIATED IN
PONCIANO ALMEIDA V. COURT OF APPEALS,G.R. [NO.] 113412,
APRIL 17, 1996, AND CONTRARY TO PUBLIC POLICY AND PUBLIC
INTEREST, AND IN APPLYING THE PRINCIPLE OF ESTOPPEL
ARISING FROM THE ALLEGED DELAYED COMPLAINT OF
PETITIONER[S], AND [THEIR] PAYMENT OF THE INTEREST
CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER
COURT ERRED IN NOT DECLARING THAT PNB IS NOT AT ALL
ENTITLED TO ANY INTEREST EXCEPT THE LEGAL RATE FROM
DATE OF DEMAND, AND IN NOT APPLYING THE EXCESS OVER THE
LEGAL RATE OF THE ADMITTED PAYMENTS MADE BY
PETITIONER[S] FROM 1991-1998 IN THE ADMITTED TOTAL AMOUNT
OF ₱3,484,287.00, TO PAYMENT OF THE PRINCIPAL OF ₱2,500,000.
[00] LEAVING AN OVERPAYMENT OF₱984,287.00 REFUNDABLE BY
RESPONDENT TO PETITIONER[S] WITH INTEREST OF 12% PER
ANNUM.
II
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT
PENALTIES ARE INCLUDEDIN THE SECURED AMOUNT, SUBJECT TO
FORECLOSURE, WHEN NO PENALTIES ARE MENTIONED [NOR] PROVIDED FOR
IN THE REAL ESTATE MORTGAGE AS A SECURED AMOUNT AND THEREFORE
THE AMOUNT OF PENALTIES SHOULDHAVE BEEN EXCLUDED FROM [THE]
FORECLOSURE AMOUNT.
 III
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER
COURT, WHICH REDUCED THE ATTORNEY’S FEES OF 10% OF THE TOTAL
INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL FORECLOSURE
TOONLY 1%, AND [AWARDING] 10% ATTORNEY’S FEES. 48
Petitioners’ Arguments
Petitioners insist that the interest rate provision in the Credit Agreement and the
Amendment to Credit Agreement should be declared null and void, for they relegated to
PNB the sole power to fix interest rates based on arbitrary criteria or factors such as
bank policy, profitability, cost of money, foreign currency values, and bank administrative
costs; spaces for interest rates in the two Credit Agreements and the promissory notes
were left blank for PNB to unilaterally fill, and their consent or agreement to the interest
rates imposed thereafter was not obtained; the interest rate, which consists of the prime
rate plus the bank spread, is determined not by agreement of the parties but by PNB’s
Treasury Department in Manila. Petitioners conclude that by this method of fixing the
interest rates, the principle of mutuality of contracts is violated, and public policy as well
as Circular 905  of the then Central Bank had been breached.
49
Petitioners question the CA’s application of the principle of estoppel, saying that no
estoppel can proceed from an illegal act. Though they failed to timely question the
imposition of the alleged illegal interest rates and continued to pay the loan on the basis
of these rates, they cannot be deemed to have acquiesced, and hence could recover
what they erroneously paid. 50
Petitioners argue that if the interest rates were nullified, then their obligation to PNB is
deemed extinguished as of July 1997; moreover, it would appear that they even made an
over payment to the bank in the amount of ₱984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage agreements did not
include nor specify, as part of the secured amount, the penalty of 24% authorized in PN
9707237, such amount of ₱581,666.66 could not be made answerable by or collected
from the mortgages covering TCTs T-14250 and T-16208. Claiming support from
Philippine Bank of Communications [PBCom] v. Court of Appeals,  petitioners insist that
51
the phrase "and other obligations owing by the mortgagor to the mortgagee"  in the
52
mortgage agreements cannot embrace the ₱581,666.66 penalty, because, as held in the
PBCom case, "[a] penalty charge does not belong to the species of obligations
enumerated in the mortgage, hence, the said contract cannot be understood to secure
the penalty";  while the mortgages are the accessory contracts, what items are secured
53
may only be determined from the provisions of the mortgage contracts, and not from the
Credit Agreement or the promissory notes.
Finally, petitioners submit that the trial court’s award of 1% attorney’s fees should be
maintained, given that in foreclosures, a lawyer’s work consists merely in the preparation
and filing of the petition, and involves minimal study.  To allow the imposition of a
54
staggering ₱396,211.00 for such work would be contrary to equity. Petitioners state that
the purpose of attorney’s fees in cases of this nature "is not to give respondent a larger
compensation for the loan than the law already allows, but to protect it against any future
loss or damage by being compelled to retain counsel x x x to institute judicial
proceedings for the collection of its credit."  And because the instant case involves a
55
simple extrajudicial foreclosure, attorney’s fees may be equitably tempered.
Respondent’s Arguments
For its part, respondent disputes petitioners’ claim that interest rates were unilaterally
fixed by it, taking relief in the CA pronouncement that petitioners are deemed estopped
by their failure to question the imposed rates and their continued payment thereof without
opposition. It adds that because the Credit Agreement and promissory notes contained
both an escalation clause and a de-escalation clause, it may not be said that the bank
violated the principle of mutuality. Besides, the increase or decrease in interest rates
have been mutually agreed upon by the parties, as shown by petitioners’ continuous
payment without protest. Respondent adds that the alleged unilateral imposition of
interest rates is not a proper subject for review by the Court because the issue was never
raised in the lower court.
As for petitioners’ claim that interest rates imposed by it are null and void for the reasons
that 1) the Credit Agreements and the promissory notes were signed in blank; 2) interest
rates were at short periods; 3) no interest rates could be charged where no agreement
on interest rates was made in writing; 4) PNB fixed interest rates on the basis of arbitrary
policies and standards left to its choosing; and 5) interest rates based on prime rate plus
applicable spread are indeterminate and arbitrary – PNB counters:
a. That Credit Agreements and promissory notes were signed by petitioner[s] in
blank – Respondent claims that this issue was never raised in the lower court.
Besides, documentary evidence prevails over testimonial evidence; Lydia Silos’
testimony in this regard is self-serving, unsupported and uncorroborated, and for
being the lone evidence on this issue. The fact remains that these documents are
in proper form, presumed regular, and endure, against arbitrary claims by Silos –
who is an experienced business person – that she signed questionable loan
documents whose provisions for interest rates were left blank, and yet she
continued to pay the interests without protest for a number of years. 56
b. That interest rates were at short periods – Respondent argues that the law
which governs and prohibits changes in interest rates made more than once
 every twelve months has been removed  with the issuance of Presidential
57
Decree No. 858. 58
c. That no interest rates could be charged where no agreement on interest rates
was made in writing in violation of Article 1956 of the Civil Code, which provides
that no interest shall be due unless it has been expressly stipulated in writing –
Respondent insists that the stipulated 25% per annum as embodied in PN
9707237 should be imposed during the interim, or the period after the loan
became due and while it remains unpaid, and not the legal interest of 12% as
claimed by petitioners. 59
d. That PNB fixed interest rates on the basis of arbitrary policies and standards
left to its choosing – According to respondent, interest rates were fixed taking into
consideration increases or decreases as provided by law or by the Monetary
Board, the bank’s overall costs of funds, and upon agreement of the parties. 60
e. That interest rates based on prime rate plus applicable spread are
indeterminate and arbitrary – On this score, respondent submits there are various
factors that influence interest rates, from political events to economic
developments, etc.; the cost of money, profitability and foreign currency
transactions may not be discounted. 61
On the issue of penalties, respondent reiterates the trial court’s finding that during pre-
trial, petitioners admitted that the Statement of Account as of October 12, 1998 – which
detailed and included penalty charges as part of the total outstanding obligation owing to
the bank – was correct. Respondent justifies the imposition and collection of a penalty as
a normal banking practice, and the standard rate per annum for all commercial banks, at
the time, was 24%.
Respondent adds that the purpose of the penalty or a penal clause for that matter is to
ensure the performance of the obligation and substitute for damages and the payment of
interest in the event of non-compliance.  And the promissory note – being the principal
62
agreement as opposed to the mortgage, which is a mere accessory – should prevail.
This being the case, its inclusion as part of the secured amount in the mortgage
agreements is valid and necessary.
Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-
empting consolidation of its ownership over TCTs T-14250 and T-16208; that petitioners
filed Civil Case No. 5975 ostensibly to question the foreclosure and sale of properties
covered by TCTs T-14250 and T-16208 in a desperate move to retain ownership over
these properties, because they failed to timely redeem them.
Respondent directs the attention of the Court to its petition in G.R. No. 181046,  where
63
the propriety of the CA’s ruling on the following issues is squarely raised:
1. That the interest rate to be applied after the expiration of the first 30-day
interest period for PN 9707237 should be 12% per annum; and
2. That PNB should reimburse petitioners the excess in the bid price of
₱377,505.99 which is the difference between the total amount due to PNB and
the amount of its bid price.
Our Ruling
The Court grants the Petition.
Before anything else, it must be said that it is not the function of the Court to re-examine
or re-evaluate evidence adduced by the parties in the proceedings below. The rule
admits of certain well-recognized exceptions, though, as when the lower courts’ findings
are not supported by the evidence on record or are based on a misapprehension of facts,
or when certain relevant and undisputed facts were manifestly overlooked that, if
properly considered, would justify a different conclusion. This case falls within such
exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the Court’s First
Division denying respondent’s petition in G.R. No. 181046, due to late filing, failure to
attach the required affidavit of service of the petition on the trial court and the petitioners,
and submission of a defective verification and certification of non-forum shopping. On
June 25, 2008, the Court issued another Resolution denying with finality respondent’s
motion for reconsideration of the March 5, 2008 Resolution. And on August 15, 2008,
entry of judgment was made. This thus settles the issues, as above-stated, covering a)
the interest rate – or 12% per annum– that applies upon expiration of the first 30 days
interest period provided under PN 9707237, and b)the CA’s decree that PNB should
reimburse petitioner the excess in the bid price of ₱377,505.09.
It appears that respondent’s practice, more than once proscribed by the Court, has been
carried over once more to the petitioners. In a number of decided cases, the Court struck
down provisions in credit documents issued by PNB to, or required of, its borrowers
which allow the bank to increase or decrease interest rates "within the limits allowed by
law at any time depending on whatever policy it may adopt in the future." Thus, in
Philippine National Bank v. Court of Appeals,  such stipulation and similar ones were
64
declared in violation of Article 1308  of the Civil Code. In a second case, Philippine
65
National Bank v. Court of Appeals,  the very same stipulations found in the credit
66
agreement and the promissory notes prepared and issued by the respondent were again
invalidated. The Court therein said:
The Credit Agreement provided inter alia, that —
(a) The BANK reserves the right to increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may adopt in the future; Provided, that
the interest rate on this accommodation shall be correspondingly decreased in the event
that the applicable maximum interest is reduced by law or by the Monetary Board. In
either case, the adjustment in the interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time
without notice, beyond the stipulated rate of 12% but only "within the limits allowed by
law."
The Real Estate Mortgage contract likewise provided that —
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation
secured by this mortgage as well as the interest on the amount which may have been
advanced by the MORTGAGEE, in accordance with the provision hereof, shall be
subject during the life of this contract to such an increase within the rate allowed by law,
as the Board of Directors of the MORTGAGEE may prescribe for its debtors.
xxxx
In making the unilateral increases in interest rates, petitioner bank relied on the
escalation clause contained in their credit agreement which provides, as follows:
The Bank reserves the right to increase the interest rate within the limits allowed by law
at any time depending on whatever policy it may adopt in the future and provided, that,
the interest rate on this accommodation shall be correspondingly decreased in the event
that the applicable maximum interest rate is reduced by law or by the Monetary Board. In
either case, the adjustment in the interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which
further amended Act No. 2655 ("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after Section 7, to
read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or
credits may stipulate that the rate of interest agreed upon may be increased in the event
that the applicable maximum rate of interest is increased bylaw or by the Monetary
Board; Provided, That such stipulation shall be valid only if there is also a stipulation in
the agreement that the rate of interest agreed upon shall be reduced in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board;
Provided further, That the adjustment in the rate of interest agreed upon shall take effect
on or after the effectivity of the increase or decrease in the maximum rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central Bank’s Monetary Board to
prescribe the maximum rates of interest for loans and certain forbearances. Pursuant to
such authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905, series
of 1982, Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges.
— The rate of interest, including commissions, premiums, fees and other charges, on
any loan, or forbearance of any money, goods or credits, regardless of maturity and
whether secured or unsecured, shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to
stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue
on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust,
upward or downward, the interest previously stipulated. However, contrary to the
stubborn insistence of petitioner bank, the said law and circular did not authorize either
party to unilaterally raise the interest rate without the other’s consent.
It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the
one who contracts, his act has no more efficacy than if it had been done under duress or
by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties.
The minds of all the parties must meet as to the proposed modification, especially when
it affects an important aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it can make or break a
capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft
of any binding effect.
We cannot countenance petitioner bank’s posturing that the escalation clause at bench
gives it unbridled right to unilaterally upwardly adjust the interest on private respondents’
loan. That would completely take away from private respondents the right to assent to an
important modification in their agreement, and would negate the element of mutuality in
contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-
545 (1991) we held —
x x x The unilateral action of the PNB in increasing the interest rate on the private
respondent’s loan violated the mutuality of contracts ordained in Article 1308 of the Civil
Code:
Art. 1308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties, is void . . . . Hence, even assuming
that the . . . loan agreement between the PNB and the private respondent gave the PNB
a license (although in fact there was none) to increase the interest rate at will during the
term of the loan, that license would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not bargain on equal
footing, the weaker party’s (the debtor) participation being reduced to the alternative "to
take it or leave it" . . . . Such a contract is a veritable trap for the weaker party whom the
courts of justice must protect against abuse and imposition.  (Emphases supplied)
67
Then again, in a third case, Spouses Almeda v. Court of Appeals,  the Court invalidated
68
the very same provisions in the respondent’s prepared Credit Agreement, declaring thus:
The binding effect of any agreement between parties to a contract is premised on two
settled principles: (1) that any obligation arising from contract has the force of law
between the parties; and (2) that there must be mutuality between the parties based on
their essential equality. Any contract which appears to be heavily weighed in favor of one
of the parties so as to lead to an unconscionable result is void. Any stipulation regarding
the validity or compliance of the contract which is left solely to the will of one of the
parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that respondent
bank unilaterally altered the terms of its contract with petitioners by increasing the
interest rates on the loan without the prior assent of the latter. In fact, the manner of
agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956
that "No interest shall be due unless it has been expressly stipulated in writing." What
has been "stipulated in writing" from a perusal of interest rate provision of the credit
agreement signed between the parties is that petitioners were bound merely to pay 21%
interest, subject to a possible escalation or de-escalation, when 1) the circumstances
warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon
agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the
contract in this case was the 21% rate stipulated in the interest provision. Any doubt
about this is in fact readily resolved by a careful reading of the credit agreement because
the same plainly uses the phrase "interest rate agreed upon," in reference to the original
21% interest rate. x x x
xxxx
Petitioners never agreed in writing to pay the increased interest rates demanded by
respondent bank in contravention to the tenor of their credit agreement. That an increase
in interest rates from 18% to as much as 68% is excessive and unconscionable is
indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to
virtually half of the entire principal (₱7,735,004.66) which was applied to interest alone.
By the time the spouses tendered the amount of ₱40,142,518.00 in settlement of their
obligations; respondent bank was demanding ₱58,377,487.00 over and above those
amounts already previously paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as they are
not solely potestative but based on reasonable and valid grounds. Here, as clearly
demonstrated above, not only [are] the increases of the interest rates on the basis of the
escalation clause patently unreasonable and unconscionable, but also there are no valid
and reasonable standards upon which the increases are anchored.
xxxx
In the face of the unequivocal interest rate provisions in the credit agreement and in the
law requiring the parties to agree to changes in the interest rate in writing, we hold that
the unilateral and progressive increases imposed by respondent PNB were null and void.
Their effect was to increase the total obligation on an eighteen million peso loan to an
amount way over three times that which was originally granted to the borrowers. That
these increases, occasioned by crafty manipulations in the interest rates is
unconscionable and neutralizes the salutary policies of extending loans to spur business
cannot be disputed.  (Emphases supplied)
69
Still, in a fourth case, Philippine National Bank v. Court of Appeals,  the above doctrine
70
was reiterated:
The promissory note contained the following stipulation:
For value received, I/we, [private respondents] jointly and severally promise to pay to the
ORDER of the PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines,
the sum of FIFTEEN THOUSAND ONLY (₱15,000.00), Philippine Currency, together
with interest thereon at the rate of 12% per annum until paid, which interest rate the Bank
may at any time without notice, raise within the limits allowed by law, and I/we also agree
to pay jointly and severally ____% per annum penalty charge, by way of liquidated
damages should this note be unpaid or is not renewed on due dated.
Payment of this note shall be as follows:
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made subject to the
condition that any and/or all extensions hereof that will leave any portion of the amount
still unpaid after 730 days shall automatically convert the outstanding balance into a
medium or long-term obligation as the case may be and give the Bank the right to charge
the interest rates prescribed under its policies from the date the account was originally
granted.
To secure payment of the loan the parties executed a real estate mortgage contract
which provided:
(k) INCREASE OF INTEREST RATE:
The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in
accordance with the provision hereof, shall be subject during the life of this contract to
such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
xxxx
To begin with, PNB’s argument rests on a misapprehension of the import of the appellate
court’s ruling. The Court of Appeals nullified the interest rate increases not because the
promissory note did not comply with P.D. No. 1684 by providing for a de-escalation, but
because the absence of such provision made the clause so one-sided as to make it
unreasonable.
That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage
Bank v. Navarro that although P.D. No. 1684 is not to be retroactively applied to loans
granted before its effectivity, there must nevertheless be a de-escalation clause to
mitigate the one-sidedness of the escalation clause. Indeed because of concern for the
unequal status of borrowers vis-à-vis the banks, our cases after Banco Filipino have
fashioned the rule that any increase in the rate of interest made pursuant to an
escalation clause must be the result of agreement between the parties.
Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized
PNB to increase the stipulated interest per annum" within the limits allowed by law at any
time depending on whatever policy [PNB] may adopt in the future; Provided, that the
interest rate on this note shall be correspondingly decreased in the event that the
applicable maximum interest rate is reduced by law or by the Monetary Board." The real
estate mortgage likewise provided:
The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in
accordance with the provisions hereof, shall be subject during the life of this contract to
such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
Pursuant to these clauses, PNB successively increased the interest from 18% to 32%,
then to 41% and then to 48%. This Court declared the increases unilaterally imposed by
[PNB] to be in violation of the principle of mutuality as embodied in Art.1308 of the Civil
Code, which provides that "[t]he contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them." As the Court explained:
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda,
Inc., 21 SCRA 555). Hence, even assuming that the ₱1.8 million loan agreement
between the PNB and the private respondent gave the PNB a license (although in fact
there was none) to increase the interest rate at will during the term of the loan, that
license would have been null and void for being violative of the principle of mutuality
essential in contracts. It would have invested the loan agreement with the character of a
contract of adhesion, where the parties do not bargain on equal footing, the weaker
party’s (the debtor) participation being reduced to the alternative "to take it or leave it"
(Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable
trap for the weaker party whom the courts of justice must protect against abuse and
imposition.
A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit
agreement in that case provided:
The BANK reserves the right to increase the interest rate within the limits allowed by law
at any time depending on whatever policy it may adopt in the future: Provided, that the
interest rate on this accommodation shall be correspondingly decreased in the event that
the applicable maximum interest is reduced by law or by the Monetary Board. . . .
As in the first case, PNB successively increased the stipulated interest so that what was
originally 12% per annum became, after only two years, 42%. In declaring the increases
invalid, we held:
We cannot countenance petitioner bank’s posturing that the escalation clause at bench
gives it unbridled right to unilaterally upwardly adjust the interest on private respondents’
loan. That would completely take away from private respondents the right to assent to an
important modification in their agreement, and would negate the element of mutuality in
contracts.
Only recently we invalidated another round of interest increases decreed by PNB
pursuant to a similar agreement it had with other borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in
the said circular could possibly be read as granting respondent bank carte blanche
authority to raise interest rates to levels which would either enslave its borrowers or lead
to a hemorrhaging of their assets.
In this case no attempt was made by PNB to secure the conformity of private
respondents to the successive increases in the interest rate. Private respondents’ assent
to the increases can not be implied from their lack of response to the letters sent by PNB,
informing them of the increases. For as stated in one case, no one receiving a proposal
to change a contract is obliged to answer the proposal.  (Emphasis supplied)
71
We made the same pronouncement in a fifth case, New Sampaguita Builders
Construction, Inc. v. Philippine National Bank,  thus –
72
Courts have the authority to strike down or to modify provisions in promissory notes that
grant the lenders unrestrained power to increase interest rates, penalties and other
charges at the latter’s sole discretion and without giving prior notice to and securing the
consent of the borrowers. This unilateral authority is anathema to the mutuality of
contracts and enable lenders to take undue advantage of borrowers. Although the Usury
Law has been effectively repealed, courts may still reduce iniquitous or unconscionable
rates charged for the use of money. Furthermore, excessive interests, penalties and
other charges not revealed in disclosure statements issued by banks, even if stipulated
in the promissory notes, cannot be given effect under the Truth in Lending
Act.  (Emphasis supplied)
73
Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora,  the
74
above pronouncements were reiterated to debunk PNB’s repeated reliance on its
invalidated contract stipulations:
We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the
1996 case of PNB v. CA and Spouses Basco. Taking no heed of these rulings, the
escalation clause PNB used in the present case to justify the increased interest rates is
no different from the escalation clause assailed in the 1996 PNB case; in both, the
interest rates were increased from the agreed 12% per annum rate to 42%. x x x
xxxx
On the strength of this ruling, PNB’s argument – that the spouses Rocamora’s failure to
contest the increased interest rates that were purportedly reflected in the statements of
account and the demand letters sent by the bank amounted to their implied acceptance
of the increase – should likewise fail.
Evidently, PNB’s failure to secure the spouses Rocamora’s consent to the increased
interest rates prompted the lower courts to declare excessive and illegal the interest
rates imposed. Togo around this lower court finding, PNB alleges that the ₱206,297.47
deficiency claim was computed using only the original 12% per annum interest rate. We
find this unlikely. Our examination of PNB’s own ledgers, included in the records of the
case, clearly indicates that PNB imposed interest rates higher than the agreed 12% per
annum rate. This confirmatory finding, albeit based solely on ledgers found in the
records, reinforces the application in this case of the rule that findings of the RTC, when
affirmed by the CA, are binding upon this Court.  (Emphases supplied)
75
Verily, all these cases, including the present one, involve identical or similar provisions
found in respondent’s credit agreements and promissory notes. Thus, the July 1989
Credit Agreement executed by petitioners and respondent contained the following
stipulation on interest:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum].
Interest shall be payable in advance every one hundred twenty days at the rate
prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan
depending on whatever policy the Bank may adopt in the future, including without
limitation, the shifting from the floating interest rate system to the fixed interest rate
system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per
annum which is equal to the Bank’s spread over the current floating interest rate, the
Borrower hereby agrees that the Bank may, without need of notice to the Borrower,
increase or decrease its spread over the floating interest rate at any time depending on 10th Promissory Note dated March 19, 1992 – 25%;
whatever policy it may adopt in the future.  (Emphases supplied)
76

11th Promissory Note dated July 11, 1992 – 23%;

while the eight promissory notes issued pursuant thereto granted PNB the right to
increase or reduce interest rates "within the limits allowed by law or the Monetary 12th Promissory Note dated November 10, 1992 – 21%;
Board"  and the Real Estate Mortgage agreement included the same right to increase or
77

reduce interest rates "at any time depending on whatever policy PNB may adopt in the 13th Promissory Note dated March 15, 1993 – 21%;
future."
78

14th Promissory Note dated July 12, 1993 – 17.5%;

On the basis of the Credit Agreement, petitioners issued promissory notes which they
signed in blank, and respondent later on entered their corresponding interest rates, as
15th Promissory Note dated November 17, 1993 – 21%;
follows:
16th Promissory Note dated March 28, 1994 – 21%;
1st Promissory Note dated July 24, 1989 – 19.5%;
17th Promissory Note dated July 13, 1994 – 21%;
2nd Promissory Note dated November 22, 1989 – 23%;
18th Promissory Note dated November 16, 1994 – 16%;
3rd Promissory Note dated March 21, 1990 – 22%;
19th Promissory Note dated April 10, 1995 – 21%;
4th Promissory Note dated July 19, 1990 – 24%;
20th Promissory Note dated July 19, 1995 – 18.5%;
5th Promissory Note dated December 17, 1990 – 28%;
21st Promissory Note dated December 18, 1995 – 18.75%;
6th Promissory Note dated February 14, 1991 – 32%;
22nd Promissory Note dated April 22, 1996 – 18.5%;
7th Promissory Note dated March 1, 1991 – 30%; and
23rd Promissory Note dated July 22, 1996 – 18.5%;
8th Promissory Note dated July 11, 1991 – 24%. 79

24th Promissory Note dated November 25, 1996 – 18%;

On the other hand, the August 1991 Amendment to Credit Agreement contains the
following stipulation regarding interest:
25th Promissory Note dated May 30, 1997 – 17.5%; and
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment 26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%. 81

thereof at the rate per annum which is determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment.  (Emphases supplied)
80
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate
the Bank may at any time without notice, raise within the limits allowed by law x x x."  On
82

and under this Amendment to Credit Agreement, petitioners again executed and signed
the following promissory notes in blank, for the respondent to later on enter the
corresponding interest rates, which it did, as follows:
9th Promissory Note dated November 8, 1991 – 26%;
the other hand, the 18th up to the 26th promissory notes – which includes PN 9707237 –
carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be
increased or decreased for the subsequent Interest Periods, with prior notice to the
Borrower in the event of changes in interest rate prescribed by law or the Monetary
Board of the Central Bank of the Philippines, or in the Bank’s overall cost of funds. I/We
hereby agree that in the event I/we are not agreeable to the interest rate fixed for any
Interest Period, I/we shall have the option to prepay the loan or credit facility without
penalty within ten (10) calendar days from the Interest Setting Date.  (Emphasis
83
supplied)
These stipulations must be once more invalidated, as was done in previous cases. The
common denominator in these cases is the lack of agreement of the parties to the
imposed interest rates. For this case, this lack of consent by the petitioners has been
made obvious by the fact that they signed the promissory notes in blank for the
respondent to fill. We find credible the testimony of Lydia in this respect. Respondent
failed to discredit her; in fact, its witness PNB Kalibo Branch Manager Aspa admitted that
interest rates were fixed solely by its Treasury Department in Manila, which were then
simply communicated to all PNB branches for implementation. If this were the case, then
this would explain why petitioners had to sign the promissory notes in blank, since the
imposable interest rates have yet to be determined and fixed by respondent’s Treasury
Department in Manila.
Moreover, in Aspa’s enumeration of the factors that determine the interest rates PNB
fixes – such as cost of money, foreign currency values, bank administrative costs,
profitability, and considerations which affect the banking industry – it can be seen that
considerations which affect PNB’s borrowers are ignored. A borrower’s current financial
state, his feedback or opinions, the nature and purpose of his borrowings, the effect of
foreign currency values or fluctuations on his business or borrowing, etc. – these are not
factors which influence the fixing of interest rates to be imposed on him. Clearly,
respondent’s method of fixing interest rates based on one-sided, indeterminate, and
subjective criteria such as profitability, cost of money, bank costs, etc. is arbitrary for
there is no fixed standard or margin above or below these considerations.
The stipulation in the promissory notes subjecting the interest rate to review does not
render the imposition by UCPB of interest rates on the obligations of the spouses Beluso
valid. According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased by the
LENDER considering among others the prevailing financial and monetary conditions; or
the rate of interest and charges which other banks or financial institutions charge or offer
to charge for similar accommodations; and/or the resulting profitability to the LENDER
after due consideration of all dealings with the BORROWER.
It should be pointed out that the authority to review the interest rate was given [to] UCPB
alone as the lender. Moreover, UCPB may apply the considerations enumerated in this
provision as it wishes. As worded in the above provision, UCPB may give as much
weight as it desires to each of the following considerations: (1) the prevailing financial
and monetary condition;(2) the rate of interest and charges which other banks or
financial institutions charge or offer to charge for similar accommodations; and/or(3) the
resulting profitability to the LENDER (UCPB) after due consideration of all dealings with
the BORROWER (the spouses Beluso). Again, as in the case of the interest rate
provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of
UCPB as to the interest to be imposed, as both options violate the principle of mutuality
of contracts.  (Emphases supplied)
84
To repeat what has been said in the above-cited cases, any modification in the contract,
such as the interest rates, must be made with the consent of the contracting parties.  The
1âwphi1
minds of all the parties must meet as to the proposed modification, especially when it
affects an important aspect of the agreement. In the case of loan agreements, the rate of
interest is a principal condition, if not the most important component. Thus, any
modification thereof must be mutually agreed upon; otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in question no
longer provide that the parties shall agree upon the interest rate to be fixed; -instead,
they are worded in such a way that the borrower shall agree to whatever interest rate
respondent fixes. In credit agreements covered by the above-cited cases, it is provided
that:
The Bank reserves the right to increase the interest rate within the limits allowed by law
at any time depending on whatever policy it may adopt in the future: Provided, that, the
interest rate on this accommodation shall be correspondingly decreased in the event that
the applicable maximum interest rate is reduced by law or by the Monetary Board. In
either case, the adjustment in the interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease in maximum interest rate.  (Emphasis
85
supplied)
Whereas, in the present credit agreements under scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the interest rate on the Loan
depending on whatever policy the Bank may adopt in the future, including without
limitation, the shifting from the floating interest rate system to the fixed interest rate
system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per
annum, which is equal to the Bank’s spread over the current floating interest rate, the
Borrower hereby agrees that the Bank may, without need of notice to the Borrower,
increase or decrease its spread over the floating interest rate at any time depending on (5) the total amount to be financed;
whatever policy it may adopt in the future.  (Emphases supplied)
86

IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment
thereof at the rate per annum which is determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment.  (Emphasis supplied)
87
Plainly, with the present credit agreement, the element of consent or agreement by the
borrower is now completely lacking, which makes respondent’s unlawful act all the more
reprehensible.
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
Under Section 4(6), "finance charge" represents the amount to be paid by the debtor
incident to the extension of credit such as interest or discounts, collection fees, credit
investigation fees, attorney’s fees, and other service charges. The total finance charge
represents the difference between (1) the aggregate consideration (down payment plus
installments) on the part of the debtor, and (2) the sum of the cash price and non-finance
charges.91

Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for
"[e]stoppel cannot be predicated on an illegal act. As between the parties to a contract, By requiring the petitioners to sign the credit documents and the promissory notes in
validity cannot be given to it by estoppel if it is prohibited by law or is against public blank, and then unilaterally filling them up later on, respondent violated the Truth in
policy."
88
Lending Act, and was remiss in its disclosure obligations. In one case, which the Court
finds applicable here, it was held:
It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act
No. 3765, which was enacted "to protect x x x citizens from a lack of awareness of the UCPB further argues that since the spouses Beluso were duly given copies of the
true cost of credit to the user by using a full disclosure of such cost with a view of subject promissory notes after their execution, then they were duly notified of the terms
preventing the uninformed use of credit to the detriment of the national economy."  The
89
thereof, in substantial compliance with the Truth in Lending Act.
law "gives a detailed enumeration of the specific information required to be disclosed,
among which are the interest and other charges incident to the extension of Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the
credit."  Section 4 thereof provides that a disclosure statement must be furnished prior to
90
disclosure statement must be furnished prior to the consummation of the transaction:
the consummation of the transaction, thus:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent
consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the
applicable and in accordance with rules and regulations prescribed by the Board, the following information:
following information:
(1) the cash price or delivered price of the property or service to be acquired;
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such
(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the
person in connection with the transaction but which are not incident to the extension of credit;
extension of credit;
 (5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
The rationale of this provision is to protect users of credit from a lack of awareness of the
true cost thereof, proceeding from the experience that banks are able to conceal such
true cost by hidden charges, uncertainty of interest rates, deduction of interests from the
loaned amount, and the like. The law thereby seeks to protect debtors by permitting them
to fully appreciate the true cost of their loan, to enable them to give full consent to the
contract, and to properly evaluate their options in arriving at business decisions.
Upholding UCPB’s claim of substantial compliance would defeat these purposes of the
Truth in Lending Act. The belated discovery of the true cost of credit will too often not be
able to reverse the ill effects of an already consummated business decision.
In addition, the promissory notes, the copies of which were presented to the spouses
Beluso after execution, are not sufficient notification from UCPB. As earlier discussed,
the interest rate provision therein does not sufficiently indicate with particularity the
interest rate to be applied to the loan covered by said promissory notes.  (Emphases
92
supplied)
However, the one-year period within which an action for violation of the Truth in Lending
Act may be filed evidently prescribed long ago, or sometime in 2001, one year after
petitioners received the March 2000 demand letter which contained the illegal charges.
The fact that petitioners later received several statements of account detailing its
outstanding obligations does not cure respondent’s breach. To repeat, the belated
discovery of the true cost of credit does not reverse the ill effects of an already
consummated business decision. 93
Neither may the statements be considered proposals sent to secure the petitioners’
conformity; they were sent after the imposition and application of the interest rate, and
not before. And even if it were to be presumed that these are proposals or offers, there
was no acceptance by petitioners. "No one receiving a proposal to modify a loan
contract, especially regarding interest, is obliged to answer the proposal." 94
Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of
low initial interest rates, but actually accompanied by provisions written in fine print that
allow lenders to later on increase or decrease interest rates unilaterally, without the
consent of the borrower, and depending on complex and subjective factors. Because
they have been lured into these contracts by initially low interest rates, borrowers get
caught and stuck in the web of subsequent steep rates and penalties, surcharges and
the like. Being ordinary individuals or entities, they naturally dread legal complications
and cannot afford court litigation; they succumb to whatever charges the lenders impose.
At the very least, borrowers should be charged rightly; but then again this is not possible
in a one-sided credit system where the temptation to abuse is strong and the willingness
to rectify is made weak by the eternal desire for profit.
Given the above supposition, the Court cannot subscribe to respondent’s argument that
in every repricing of petitioners’ loan availment, they are given the right to question the
interest rates imposed. The import of respondent’s line of reasoning cannot be other than
that if one out of every hundred borrowers questions respondent’s practice of unilaterally
fixing interest rates, then only the loan arrangement with that lone complaining borrower
will enjoy the benefit of review or re-negotiation; as to the 99 others, the questionable
practice will continue unchecked, and respondent will continue to reap the profits from
such unscrupulous practice. The Court can no more condone a view so perverse. This is
exactly what the Court meant in the immediately preceding cited case when it said that
"the belated discovery of the true cost of credit does not reverse the ill effects of an
already consummated business decision;"  as to the 99 borrowers who did not or could
95
not complain, the illegal act shall have become a fait accompli– to their detriment, they
have already suffered the oppressive rates.
Besides, that petitioners are given the right to question the interest rates imposed is,
under the circumstances, irrelevant; we have a situation where the petitioners do not
stand on equal footing with the respondent. It is doubtful that any borrower who finds
himself in petitioners’ position would dare question respondent’s power to arbitrarily
modify interest rates at any time. In the second place, on what basis could any borrower
question such power, when the criteria or standards – which are really one-sided,
arbitrary and subjective – for the exercise of such power are precisely lost on him?
For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up
to the 26th promissory notes, petitioners are granted the option to prepay the loan or
credit facility without penalty within 10 calendar days from the Interest Setting Date if
they are not agreeable to the interest rate fixed. It has been shown that the promissory
notes are executed and signed in blank, meaning that by the time petitioners learn of the
interest rate, they are already bound to pay it because they have already pre-signed the
note where the rate is subsequently entered.
Besides, premium may not be placed upon a stipulation in a contract which grants one
party the right to choose whether to continue with or withdraw from the agreement if it
discovers that what the other party has been doing all along is improper or illegal.
Thus said, respondent’s arguments relative to the credit documents – that documentary
evidence prevails over testimonial evidence; that the credit documents are in proper
form, presumed regular, and endure, against arbitrary claims by petitioners, experienced
business persons that they are, they signed questionable loan documents whose
provisions for interest rates were left blank, and yet they continued to pay the interests
without protest for a number of years – deserve no consideration.
With regard to interest, the Court finds that since the escalation clause is annulled, the
principal amount of the loan is subject to the original or stipulated rate of interest, and
upon maturity, the amount due shall be subject to legal interest at the rate of 12% per
annum. This is the uniform ruling adopted in previous cases, including those cited
here.  The interests paid by petitioners should be applied first to the payment of the
96
stipulated or legal and unpaid interest, as the case may be, and later, to the capital or
principal.  Respondent should then refund the excess amount of interest that it has
97
illegally imposed upon petitioners; "[t]he amount to be refunded refers to that paid by
petitioners when they had no obligation to do so."  Thus, the parties’ original agreement
98
stipulated the payment of 19.5% interest; however, this rate was intended to apply only
to the first promissory note which expired on November 21, 1989 and was paid by
petitioners; it was not intended to apply to the whole duration of the loan. Subsequent
higher interest rates have been declared illegal; but because only the rates are found to
be improper, the obligation to pay interest subsists, the same to be fixed at the legal rate
of 12% per annum. However, the 12% interest shall apply only until June 30, 2013.
Starting July1, 2013, the prevailing rate of interest shall be 6% per annum pursuant to
our ruling in Nacar v. Gallery Frames  and Bangko Sentral ng Pilipinas-Monetary Board
99
Circular No. 799.
Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment
thereon, when due, shall constitute default, and a penalty charge of 24% per annum
based on the defaulted principal amount shall be imposed. Petitioners claim that this
penalty should be excluded from the foreclosure amount or bid price because the Real
Estate Mortgage and the Supplement thereto did not specifically include it as part of the
secured amount. Respondent justifies its inclusion in the secured amount, saying that the
purpose of the penalty or a penal clause is to ensure the performance of the obligation
and substitute for damages and the payment of interest in the event of non-
compliance.  Respondent adds that the imposition and collection of a penalty is a
100
normal banking practice, and the standard rate per annum for all commercial banks, at
the time, was 24%. Its inclusion as part of the secured amount in the mortgage
agreements is thus valid and necessary.
The Court sustains petitioners’ view that the penalty may not be included as part of the
secured amount. Having found the credit agreements and promissory notes to be
tainted, we must accord the same treatment to the mortgages. After all, "[a] mortgage
and a note secured by it are deemed parts of one transaction and are construed
together."  Being so tainted and having the attributes of a contract of adhesion as the
101
principal credit documents, we must construe the mortgage contracts strictly, and against
the party who drafted it. An examination of the mortgage agreements reveals that
nowhere is it stated that penalties are to be included in the secured amount. Construing
this silence strictly against the respondent, the Court can only conclude that the parties
did not intend to include the penalty allowed under PN 9707237 as part of the secured
amount. Given its resources, respondent could have – if it truly wanted to – conveniently
prepared and executed an amended mortgage agreement with the petitioners, thereby
including penalties in the amount to be secured by the encumbered properties. Yet it did
not.
With regard to attorney’s fees, it was plain error for the CA to have passed upon the
issue since it was not raised by the petitioners in their appeal; it was the respondent that
improperly brought it up in its appellee’s brief, when it should have interposed an appeal,
since the trial court’s Decision on this issue is adverse to it. It is an elementary principle
in the subject of appeals that an appellee who does not himself appeal cannot obtain
from the appellate court any affirmative relief other than those granted in the decision of
the court below.
x x x [A]n appellee, who is at the same time not an appellant, may on appeal be
permitted to make counter assignments of error in ordinary actions, when the purpose is
merely to defend himself against an appeal in which errors are alleged to have been
committed by the trial court both in the appreciation of facts and in the interpretation of
the law, in order to sustain the judgment in his favor but not when his purpose is to seek
modification or reversal of the judgment, in which case it is necessary for him to have
excepted to and appealed from the judgment. 102
Since petitioners did not raise the issue of reduction of attorney’s fees, the CA
possessed no authority to pass upon it at the instance of respondent. The ruling of the
trial court in this respect should remain undisturbed.
For the fixing of the proper amounts due and owing to the parties – to the respondent as
creditor and to the petitioners who are entitled to a refund as a consequence of
overpayment considering that they paid more by way of interest charges than the 12%
per annum  herein allowed – the case should be remanded to the lower court for proper
103
accounting and computation, applying the following procedure:
1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and
paid;
2. All subsequent promissory notes (from the 2nd to the 26th promissory notes)
shall carry an interest rate of only 12% per annum.  Thus, interest payment
104
made in excess of 12% on the 2nd promissory note shall immediately be applied
to the principal, and the principal shall be accordingly reduced. The reduced
principal shall then be subjected to the 12%  interest on the 3rd promissory note,
105
and the excess over 12% interest payment on the 3rd promissory note shall
again be applied to the principal, which shall again be reduced accordingly. The
reduced principal shall then be subjected to the 12% interest on the 4th
promissory note, and the excess over12% interest payment on the 4th
promissory note shall again be applied to the principal, which shall again be
reduced accordingly. And so on and so forth;
3. After the above procedure is carried out, the trial court shall be able to
conclude if petitioners a) still have an OUTSTANDING BALANCE/OBLIGATION
or b) MADE PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION
(principal and interest);
4. Such outstanding balance/obligation, if there be any, shall then be subjected to
a 12% per annum interest from October 28, 1997 until January 14, 1999, which is
the date of the auction sale;
5. Such outstanding balance/obligation shall also be charged a 24% per annum
penalty from August 14, 1997 until January 14, 1999. But from this total penalty,
the petitioners’ previous payment of penalties in the amount of ₱202,000.00made
on January 27, 1998  shall be DEDUCTED;
106
6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final
and executory award of 1% attorney’s fees shall be ADDED;
7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorney’s
fees (6.) shall be DEDUCTED from the bid price of ₱4,324,172.96. The penalties
(5.) are not included because they are not included in the secured amount;
8. The difference in (7.) [₱4,324,172.96 LESS sum total of the outstanding
balance (3.), interest (4.), and 1% attorney’s fees (6.)] shall be DELIVERED TO
THE PETITIONERS;
9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-
16208;
10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out
that petitioners made an OVERPAYMENT, the interest (4.), penalties (5.), and
the award of 1% attorney’s fees (6.) shall be DEDUCTED from the overpayment.
There is no outstanding balance/obligation precisely because petitioners have
paid beyond the amount of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.),
and award of 1% attorney’s fees (6.), the excess shall be RETURNED to the
petitioners, with legal interest, under the principle of solutio indebiti;
107
12. Likewise, if the overpayment exceeds the total amount of interest (4.) and
award of 1% attorney’s fees (6.), the trial court shall INVALIDATE THE
EXTRAJUDICIAL FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and award of 1% attorney’s
fees (6.) exceed petitioners’ overpayment, then the excess shall be DEDUCTED
from the bid price of ₱4,324,172.96;
14. The difference in (13.) [₱4,324,172.96 LESS sum total of the interest (4.) and
1% attorney’s fees (6.)] shall be DELIVERED TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-
16208. The outstanding penalties, if any, shall be collected by other means.
From the above, it will be seen that if, after proper accounting, it turns out that the
petitioners made payments exceeding what they actually owe by way of principal,
interest, and attorney’s fees, then the mortgaged properties need not answer for
any outstanding secured amount, because there is not any; quite the contrary,
respondent must refund the excess to petitioners.  In such case, the extrajudicial
1âwphi1
foreclosure and sale of the properties shall be declared null and void for obvious
lack of basis, the case being one of solutio indebiti instead. If, on the other hand,
it turns out that petitioners’ overpayments in interests do not exceed their total
obligation, then the respondent may consolidate its ownership over the
properties, since the period for redemption has expired. Its only obligation will be
to return the difference between its bid price (₱4,324,172.96) and petitioners’
total obligation outstanding – except penalties – after applying the latter’s
overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007
Decision of the Court of Appeals in CA-G.R. CV No. 79650 is ANNULLED and SET
ASIDE. Judgment is hereby rendered as follows:
1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory
Notes are DECLARED NULL AND VOID, and such notes shall instead be subject
to interest at the rate of twelve percent (12%) per annum up to June 30, 2013,
and starting July 1, 2013, six percent (6%) per annum until full satisfaction;
2. The penalty charge imposed in Promissory Note No. 9707237 shall be
EXCLUDED from the amounts secured by the real estate mortgages;
 3. The trial court’s award of one per cent (1%) attorney’s fees is REINSTATED;

4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of

Kalibo, Aklan for the computation of overpayments made by petitioners spouses
Eduardo and Lydia Silos to respondent Philippine National Bank, taking into
consideration the foregoing dispositions, and applying the procedure
hereinabove set forth;

5. Thereafter, the trial court is ORDERED to make a determination as to the

validity of the extrajudicial foreclosure and sale, declaring the same null and void
in case of overpayment and ordering the release and return of Transfer
Certificates of Title Nos. T-14250 and TCT T-16208 to petitioners, or ordering the
delivery to the petitioners of the difference between the bid price and the total
remaining obligation of petitioners, if any;

6. In the meantime, the respondent Philippine National Bank is ENJOINED from

consolidating title to Transfer Certificates of Title Nos. T-14250 and T-16208 until
all the steps in the procedure above set forth have been taken and applied;

7. The reimbursement of the excess in the bid price of ₱377,505.99, which

respondent Philippine National Bank is ordered to reimburse petitioners, should
be HELD IN ABEYANCE until the true amount owing to or owed by the parties as
against each other is determined;

8. Considering that this case has been pending for such a long time and that
further proceedings, albeit uncomplicated, are required, the trial court is
ORDERED to proceed with dispatch.

SO ORDERED
 G.R. No. 195166, July 08, 2015
SPOUSES SALVADOR ABELLA AND ALMA ABELLA, Petitioners, v. SPOUSES
ROMEO ABELLA AND ANNIE ABELLA, Respondents.
DECISION
LEONEN, J.:
This resolves a Petition for Review on Certiorari under Rule 45 of the Rules of
Court praying that judgment be rendered reversing and setting aside the
September 30, 2010 Decision1 and the January 4, 2011 Resolution2 of the Court
of Appeals Nineteenth Division in CA-G.R. CV No. 01388. The Petition also prays
that respondents Spouses Romeo and Annie Abella be ordered to pay petitioners
Spouses Salvador and Alma Abella 2.5% monthly interest plus the remaining
balance of the amount loaned.
The assailed September 30, 2010 Decision of the Court of Appeals reversed and
set aside the December 28, 2005 Decision3 of the Regional Trial Court, Branch 8,
Kalibo, Aklan in Civil Case No. 6627. It directed petitioners to pay respondents
P148,500.00 (plus interest), which was the amount respondents supposedly
overpaid. The assailed January 4, 2011 Resolution of the Court of Appeals denied
petitioners' Motion for Reconsideration.
The Regional Trial Court's December 28, 2005 Decision ordered respondents to
pay petitioners the supposedly unpaid loan balance of P300,000.00 plus the
allegedly stipulated interest rate of 30% per annum, as well as litigation
expenses and attorney's fees.4redarclaw
On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a
Complaint5 for sum of money and damages with prayer for preliminary
attachment against respondents Spouses Romeo and Annie Abella before the
Regional Trial Court, Branch 8, Kalibo, Aklan. The case was docketed as Civil
Case No. 6627.6redarclaw
In their Complaint, petitioners alleged that respondents obtained a loan from
them in the amount of P500,000.00. The loan was evidenced by an
acknowledgment receipt dated March 22, 1999 and was payable within one (1)
year. Petitioners added that respondents were able to pay a total of P200,000.00
—P100,000.00 paid on two separate occasions—leaving an unpaid balance of
P300,000.00.7redarclaw
In their Answer8 (with counterclaim and motion to dismiss), respondents alleged
that the amount involved did not pertain to a loan they obtained from petitioners
but was part of the capital for a joint venture involving the lending of
money.9redarclaw
Specifically, respondents claimed that they were approached by petitioners, who
proposed that if respondents were to "undertake the management of whatever
money [petitioners] would give them, [petitioners] would get 2.5% a month with
a 2.5% service fee to [respondents]."10 The 2.5% that each party would be
receiving represented their sharing of the 5% interest that the joint venture was
supposedly going to charge against its debtors. Respondents further alleged that
the one year averred by petitioners was not a deadline for payment but the term
within which they were to return the money placed by petitioners should the joint
venture prove to be not lucrative. Moreover, they claimed that the entire amount
of P500,000.00 was disposed of in accordance with their agreed terms and
conditions and that petitioners terminated the joint venture, prompting them to
collect from the joint venture's borrowers. They were, however, able to collect
only to the extent of P200,000.00; hence, the P300,000.00 balance remained
unpaid.11redarclaw
In the Decision12 dated December 28, 2005, the Regional Trial Court ruled in
favor of petitioners. It noted that the terms of the acknowledgment receipt
executed by respondents clearly showed that: (a) respondents were indebted to
the extent of P500,000.00; (b) this indebtedness was to be paid within one (1)
year; and (c) the indebtedness was subject to interest. Thus, the trial court
concluded that respondents obtained a simple loan, although they later invested
its proceeds in a lending enterprise.13 The Regional Trial Court adjudged
respondents solidarity liable to petitioners. The dispositive portion of its Decision
reads:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
WHEREFORE, premises considered, judgment is hereby
rendered:LawlibraryofCRAlaw
1. Ordering the defendants jointly and severally to pay the plaintiffs
the sum of P300,000.00 with interest at the rate of 30% per
annum from the time the complaint was filed on July 31, 2002 until
fully paid;chanRoblesvirtualLawlibrary
2. Ordering the defendants to pay the plaintiffs the sum of P2,227.50
as reimbursement for litigation expenses, and another sum of
P5,000.00 as attorney's fees.
For lack of legal basis, plaintiffs' claim for moral and exemplary damages has to
be denied, and for lack of merit the counter-claim is ordered dismissed.14
In the Order dated March 13, 2006,15 the Regional Trial Court denied
respondents' Motion for Reconsideration.
On respondents' appeal, the Court of Appeals ruled that while respondents had
indeed entered into a simple loan with petitioners, respondents were no longer
liable to pay the outstanding amount of P300,000.00.16redarclaw
The Court of Appeals reasoned that the loan could not have earned interest,
whether as contractually stipulated interest or as interest in the concept of actual
or compensatory damages. As to the loan's not having earned stipulated interest,
the Court of Appeals anchored its ruling on Article 1956 of the Civil Code, which
requires interest to be stipulated in writing for it to be due.17 The Court of Appeals
noted that while the acknowledgement receipt showed that interest was to be
charged, no particular interest rate was specified.18 Thus, at the time respondents
were making interest payments of 2.5% per month, these interest payments
were invalid for not being properly stipulated by the parties. As to the loan's not
having earned interest in the concept of actual or compensatory damages, the
Court of Appeals, citing Eusebio-Calderon v. People,19 noted that interest in the
concept of actual or compensatory damages accrues only from the time that
demand (whether judicial or extrajudicial) is made. It reasoned that since
respondents received petitioners' demand letter only on July 12, 2002, any
interest in the concept of actual or compensatory damages due should be
reckoned only from then. Thus, the payments for the 2.5% monthly interest
made after the perfection of the loan in 1999 but before the demand was made in
2002 were invalid.20redarclaw
Since petitioners' charging of interest was invalid, the Court of Appeals reasoned
that all payments respondents made by way of interest should be deemed
payments for the principal amount of P500,000.00.21redarclaw
The Court of Appeals further noted that respondents made a total payment of
P648,500.00, which, as against the principal amount of P500,000.00, entailed an
overpayment of P148,500.00. Applying the principle of solutio indebiti, the Court
of Appeals concluded that petitioners were liable to reimburse respondents for
the overpaid amount of P148,500.00.22 The dispositive portion of the assailed
Court of Appeals Decision reads:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
WHEREFORE, the Decision of the Regional Trial Court is
hereby REVERSED and SET ASIDE, and a new one issued, finding that the
Spouses Salvador and Alma Abella are DIRECTED to jointly and severally pay
Spouses Romeo and Annie Abella the amount of P148,500.00, with interest of
6% interest (sic) per annum to be computed upon receipt of this decision, until
full satisfaction thereof. Upon finality of this judgment, an interest as the rate of
12% per annum, instead of 6%, shall be imposed on the amount due, until full
payment thereof.23
In the Resolution24 dated January 4, 2011, the Court of Appeals denied
petitioners' Motion for Reconsideration.
Aggrieved, petitioners filed the present appeal25 where they claim that the Court
of Appeals erred in completely striking off interest despite the parties' written
agreement stipulating it, as well as in ordering them to reimburse and pay
interest to respondents.
In support of their contentions, petitioners cite Article 1371 of the Civil
Code,26 which calls for the consideration of the contracting parties'
contemporaneous and subsequent acts in determining their true intention.
Petitioners insist that respondents' consistent payment of interest in the year
following the perfection of the loan showed that interest at 2.5% per month was
properly agreed upon despite its not having been expressly stated in the
acknowledgment receipt. They add that during the proceedings before the
Regional Trial Court, respondents admitted that interest was due on the
loan.27redarclaw
In their Comment,28 respondents reiterate the Court of Appeals' findings that no
interest rate was ever stipulated by the parties and that interest was not due and
demandable at the time they were making interest payments.29redarclaw
In their Reply,30 petitioners argue that even though no interest rate was
stipulated in the acknowledgment receipt, the case fell under the exception to the
Parol Evidence Rule. They also argue that there exists convincing and sufficiently
credible evidence to supplement the imperfection of the acknowledgment
receipt.31redarclaw
For resolution are the following issues:LawlibraryofCRAlaw
First, whether interest accrued on respondents' loan from petitioners, If so, at
what rate?
Second, whether petitioners are liable to reimburse respondents for the Litter's
supposed excess payments and for interest.
I
As noted by the Court of Appeals and the Regional Trial Court, respondents
entered into a simple loan or mutuum, rather than a joint venture, with
petitioners.

Respondents' claims, as articulated in their testimonies before the trial court,
cannot prevail over the clear terms of the document attesting to the relation of
the parties. "If the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall
control."32redarclaw
Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if
a contractual relation is one of simple loan or mutuum:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
Art. 1933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time
and return it, in which case the contract is called a commodatum; or money or
other consumable thing, upon the condition that the same amount of the same
kind and quality shall be paid, in which case the contract is simply called a loan or
mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in
simple loan, ownership passes to the borrower.
....
Art. 1953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality. (Emphasis supplied)
On March 22, 1999, respondents executed an acknowledgment receipt to
petitioners, which states:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
 Batan, Aklan
 March 22, 1999
This is to acknowledge receipt of the Amount of Five Hundred Thousand
(P500,000.00) Pesos from Mrs. Alma R. Abella, payable within one (1) year from
date hereof with interest.
Annie C. Abella (sgd.)             Romeo M. Abella (sgd.)33
                                               (Emphasis supplied)
The text of the acknowledgment receipt is uncomplicated and straightforward. It
attests to: first, respondents' receipt of the sum of P500,000.00 from petitioner
Alma Abella; second, respondents' duty to pay tack this amount within one (1)
year from March 22, 1999; and third, respondents' duty to pay interest.
Consistent with what typifies a simple loan, petitioners delivered to respondents
with the corresponding condition lat respondents shall pay the same amount to
petitioners within one (1) year.
II
Although we have settled the nature of the contractual relation between
petitioners and respondents, controversy persists over respondents' duty to pay
conventional interest, i.e., interest as the cost of borrowing money.34redarclaw
Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be
due unless it has been expressly stipulated in writing."
On the matter of interest, the text of the acknowledgment receipt is simple,
plain, and unequivocal. It attests to the contracting parties' intent to subject to
interest the loan extended by petitioners to respondents. The controversy,
however, stems from the acknowledgment receipt's failure to state the exact rate
of interest.
Jurisprudence is clear about the applicable interest rate if a written instrument
fails to specify a rate. In Spouses Toring v. Spouses Olan,35 this court clarified the
effect of Article 1956 of the Civil Code and noted that the legal rate of interest
(then at 12%) is to apply: "In a loan or forbearance of money, according to the
Civil Code, the interest due should be that stipulated in writing, and in the
absence thereof, the rate shall be 12% per annum."36redarclaw
Spouses Toring cites and restates (practically verbatim) what this court settled
in Security Bank and Trust Company v. Regional Trial Court of Makati, Branch 61:
"In a loan or forbearance of money, the interest due should be that stipulated in
writing, and in the absence thereof the rate shall be 12% per
annum."37redarclaw
Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of Appeals,
which, in turn, stated:38
ChanRoblesVirtualawlibrary
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.39 (Emphasis supplied)
The rule is not only definite; it is cast in mandatory language. From Eastern
Shipping to Security Bank to Spouses Toring, jurisprudence has repeatedly used
the word "shall," a term that has long been settled to denote something
imperative or operating to impose a duty.40 Thus, the rule leaves no room for
alternatives or otherwise does not allow for discretion. It requires the application
of the legal rate of interest.
Our intervening Decision in Nacar v. Gallery Frames41 recognized that the legal
rate of interest has been reduced to 6% per annum:LawlibraryofCRAlaw
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Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in
its Resolution No. 796 dated May 16, 2013, approved the amendment of Section
2 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799,
Series of 2013, effective July 1, 2013, the pertinent portion of which
reads:LawlibraryofCRAlaw
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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:LawlibraryofCRAlaw
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Section 1. The rate of interest for the loan or forbearance of any money, goods
or credits and the rate allowed in judgments, in the absence of an express
contract as to such rate of interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations
for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of
Regulations for Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate
of interest that would govern the parties, the rate of legal interest for loans or
forbearance of any money, goods or credits and the rate allowed in judgments
shall no longer be twelve percent (12%) per annum — as reflected in the case of
Eastern Shipping Lines and Subsection X305.1 of the Manual of Regulations for
Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations
for Non-Bank Financial Institutions, before its amendment by BSP-MB Circular
No. 799 — but will now be six percent (6%) per annum effective July 1, 2013. It
should be noted, nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the twelve percent (12%) per
annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the
new rate of six percent (6%) per annum shall be the prevailing rate of interest
when applicable.42 (Emphasis supplied, citations omitted)
Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013
and Nacar retain the definite and mandatory framing of the rule articulated
in Eastern Shipping, Security Bank, and Spouses Toring. Nacar even
restates Eastern Shipping:LawlibraryofCRAlaw
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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:LawlibraryofCRAlaw
....
1. When the obligation is breached, and it consists in the payment of
a sum of money, i.e., a Joan or forbearance of money, the interest
due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil
Code.43 (Emphasis supplied, citations omitted)
Thus, it remains that where interest was stipulated in writing by the debtor and
creditor in a simple loan or mutuum, but no exact interest rate was mentioned,
the legal rate of interest shall apply. At present, this is 6% per annum, subject
to Nacar's qualification on prospective application.
Applying this, the loan obtained by respondents from petitioners is deemed
subjected to conventional interest at the rate of 12% per annum, the legal rate of
interest at the time the parties executed their agreement. Moreover, should
conventional interest still be due as of July 1, 2013, the rate of 12% per annum
shall persist as the rate of conventional interest.
This is so because interest in this respect is used as a surrogate for the parties'
intent, as expressed as of the time of the execution of their contract. In this
sense, the legal rate of interest is an affirmation of the contracting parties' intent;
that is, by their contract's silence on a specific rate, the then prevailing legal rate
of interest shall be the cost of borrowing money. This rate, which by their
contract the parties have settled on, is deemed to persist regardless of shifts in
the legal rate of interest. Stated otherwise, the legal rate of interest, when
applied as conventional interest, shall always be the legal rate at the time the
agreement was executed and shall not be susceptible to shifts in rate.
Petitioners, however, insist on conventional interest at the rate of 2.5% per
month or 30% per annum. They argue that the acknowledgment receipt fails to
show the complete and accurate intention of the contracting parties. They rely on
Article 1371 of the Civil Code, which provides that the contemporaneous and
subsequent acts of the contracting parties shall be considered should there be a
need to ascertain their intent.44 In addition, they claim that this case falls under
the exceptions to the Parol Evidence Rule, as spelled out in Rule 130, Section 9 of
the Revised Rules on Evidence.45redarclaw
It is a basic precept in legal interpretation and construction that a rule or
provision that treats a subject with specificity prevails over a rule or provision
that treats a subject in general terms.46redarclaw
The rule spelled out in Security Bank and Spouses Toring is anchored on Article
1956 of the Civil Code and specifically governs simple loans or mutuum. Mutuum
is a type of nominate contract that is specifically recognized by the Civil Code and
for which the Civil Code provides a specific set of governing rules: Articles 1953
to 1961. In contrast, Article 11371 is among the Civil Code provisions generally
dealing with contracts. As this case particularly involves a simple loan, the
specific rule spelled out in Security Bank and Spouses Toring finds preferential
application as against Article 1371.
Contrary to petitioners' assertions, there is no room for entertaining extraneous
(or parol) evidence. In Spouses Bonifacio and Lucia Paras v. Kimwa Construction
and Development Corporation,47 we spelled out the requisites for the admission of
parol evidence:LawlibraryofCRAlaw
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In sum, two (2) things must be established for parol evidence to be admitted:
first, that the existence of any of the four (4) exceptions has been put in issue in
a party's pleading or has not been objected to by the adverse party; and second,
that the parol evidence sought to be presented serves to form the basis of the
conclusion proposed by the presenting party.48
The issue of admitting parol evidence is a matter that is proper to the trial, not
the appellate, stage of a case. Petitioners raised the issue of applying the
exceptions to the Parol Evidence Rule only in the Reply they filed before this
court. This is the last pleading that either of the parties has filed in the entire
string of proceedings culminating in this Decision. It is, therefore, too late for
petitioners to harp on this rule. In any case, what is at issue is not admission of
evidence per se, but the appreciation given to the evidence adduced by the
parties. In the Petition they filed before this court, petitioners themselves
acknowledged that checks supposedly attesting to payment of monthly interest at
the rate of 2.5% were admitted by the trial court (and marked as Exhibits "2,"
"3," "4," "5," "6," "7," and "8").49 What petitioners have an issue with is not the
admission of these pieces of evidence but how these have not been appreciated
in a manner consistent with the conclusions they advance.
Even if it can be shown that the parties have agreed to monthly interest at the
rate of 2.5%, this is unconscionable. As emphasized in Castro v. Tan,50 the
willingness of the parties to enter into a relation involving an unconscionable
interest rate is inconsequential to the validity of the stipulated
rate:LawlibraryofCRAlaw
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The imposition of an unconscionable rate of interest on a money debt, even if
knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a
repugnant spoliation and an iniquitous deprivation of property, repulsive to the
common sense of man. It has no support in law, in principles of justice, or in the
human conscience nor is there any reason whatsoever which may justify such
imposition as righteous and as one that may be sustained within the sphere of
public or private morals.51
The imposition of an unconscionable interest rate is void ab initio for being
"contrary to morals, and the law."52redarclaw
In determining whether the rate of interest is unconscionable, the mechanical
application of pre-established floors would be wanting. The lowest rates that have
previously been considered unconscionable need not be an impenetrable
minimum. What is more crucial is a consideration of the parties' contexts.
Moreover, interest rates must be appreciated in light of the fundamental nature
of interest as compensation to the creditor for money lent to another, which he or
she could otherwise have used for his or her own purposes at the time it was
lent. It is not the default vehicle for predatory gain. As such, interest need only
be reasonable. It ought not be a supine mechanism for the creditor's unjust
enrichment at the expense of another.
Petitioners here insist upon the imposition of 2.5% monthly or 30% annual
interest. Compounded at this rate, respondents' obligation would have more than
doubled—increased to 219.7% of the principal—by the end of the third year after
which the loan was contracted if the entire principal remained unpaid. By the end
of the ninth year, it would have multiplied more than tenfold (or increased to
1,060.45%). In 2015, this would have multiplied by more than 66 times (or
increased to 6,654.17%). Thus, from an initial loan of only P500,000.00,
respondents would be obliged to pay more than P33 million. This is grossly
unfair, especially since up to the fourth year from when the loan was obtained,
respondents had been assiduously delivering payment. This reduces their best
efforts to satisfy their obligation into a protracted servicing of a rapacious loan.
The legal rate of interest is the presumptive reasonable compensation for
borrowed money. While parties are free to deviate from this, any deviation must
be reasonable and fair. Any deviation that is far-removed is suspect. Thus, in
cases where stipulated interest is more than twice the prevailing legal rate of
interest, it is for the creditor to prove that this rate is required by prevailing
market conditions. Here, petitioners have articulated no such justification.
In sum, Article 1956 of the Civil Code, read in light of established jurisprudence,
prevents the application of any interest rate other than that specifically provided
for by the parties in their loan document or, in lieu of it, the legal rate. Here, as
the contracting parties failed to make a specific stipulation, the legal rate must
apply. Moreover, the rate that petitioners adverted to is unconscionable. The
conventional interest due on the principal amount loaned by respondents from
petitioners is held to be 12% per annum.
III
Apart from respondents' liability for conventional interest at the rate of 12% per
annum, outstanding conventional interest—if any is due from respondents—shall
itself earn legal interest from the time judicial demand was made by petitioners,
i.e., on July 31, 2002, when they filed their Complaint. This is consistent with
Article 2212 of the Civil Code, which provides:LawlibraryofCRAlaw
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Art. 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
So, too, Nacar states that "the interest due shall itself earn legal interest from the
time it is judicially demanded."53redarclaw
Consistent with Nacar, as well as with our ruling in Rivera v. Spouses Chua,54 the
interest due on conventional interest shall be at the rate of 12% per annum from
July 31, 2002 to June 30, 2013. Thereafter, or starting July 1, 2013, this shall be
at the rate of 6% per annum.
IV
Proceeding from these premises, we find that respondents made an overpayment
in the amount of P3,379.17.
As acknowledged by petitioner Salvador Abella, respondents paid a total of
P200,000.00, which was charged against the principal amount of P500,000.00.
The first payment of P100,000.00 was made on June 30, 2001,55 while the
second payment of P100,000.00 was made on December 30, 2001.56redarclaw
The Court of Appeals' September 30, 2010 Decision stated that respondents paid
P6,000.00 in March 1999.57redarclaw
The Pre-Trial Order dated December 2, 2002,58 stated that the parties admitted
that "from the time the principal sum of P500,000.00 was borrowed from
[petitioners], [respondents] ha[d] been religiously paying"59 what was supposedly
interest "at the rate of 2.5% per month."60redarclaw
From March 22, 1999 (after the loan was perfected) to June 22, 2001 (before
respondents' payment of P100,000.00 on June 30, 2001, which was deducted
from the principal amount of P500,000.00), the 2.5% monthly "interest" was
pegged to the principal amount of P500,000.00. These monthly interests, thus,
amounted to P12,500.00 per month. Considering that the period from March
1999 to June 2001 spanned twenty-seven (27) months, respondents paid a total
of P337,500.00.61redarclaw
From June 22, 2001 up to December 22, 2001 (before respondents' payment of
another P100,000.00 on December 30, 2001, which was deducted from the
remaining principal amount of P400,000.00), the 2.5% monthly "interest" was
pegged to the remaining principal amount of P400,000.00. These monthly
interests, thus, amounted to P10,000.00 per month. Considering that this period
spanned six (6) months, respondents paid a total of P60,000.00.62redarclaw
From after December 22, 2001 up to June 2002 (when petitioners filed their
Complaint), the 2.5% monthly "interest" was pegged to the remaining principal
amount of P300,000.00. These monthly interests, thus, amounted to P7,500.00
per month. Considering that this period spanned six (6) months, respondents
paid a total of P45,000.00.63redarclaw
Applying these facts and the properly applicable interest rate (for conventional
interest, 12% per annum; for interest on conventional interest, 12% per annum
from July 31, 2002 up to June 30, 2013 and 6% per annum henceforth), the
following conclusions may be drawn:LawlibraryofCRAlaw
By the end of the first year following the perfection of the loan, or as of March
21, 2000, P560,000.00 was due from respondents. This consisted cf the principal
of P500,000.00 and conventional interest of P60,000.00.
Within this first year, respondents made twelve (12) monthly payments totalling
P150,000.00 (P12,500.00 each from April 1999 to March 2000). This was in
addition to their initial payment of P6,000.00 in March 999.
Application of payments must be in accordance with Article 1253 of the Civil
Code, which reads:LawlibraryofCRAlaw
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Art. 1253. If the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered.
Thus, the payments respondents made must first be reckoned as interest
payments. Thereafter, any excess payments shall be charged against the
principal. As respondents paid a total of P156,000.00 within the first year, the
conventional interest of P60,000.00 must be deemed fully paid and the remaining
amount that respondents paid (i.e., P96,000.00) is to be charged against the
principal. This yields a balance of P404,000.00.
By the end of the second year following the perfection of the loan, or as of March
21, 2001, P452,480.00 was due from respondents. This consisted of the
outstanding principal of P404,000.00 and conventional interest of P48,480.00.
Within this second year, respondents completed another round of twelve (12)
monthly payments totaling P150,000.00.
Consistent with Article 1253 of the Civil Code, as respondents paid a total of
P156,000.00 within the second year, the conventional interest of P48,480.00
must be deemed fully paid and the remaining amount that respondents paid (i.e.,
P101,520.00) is to be charged against the principal. This yields a balance of
P302,480.00.
By the end of the third year following the perfection of the loan, or as of March
21, 2002, P338,777.60 was due from respondents. This consists of he
outstanding principal of P302,480.00 and conventional interest of P36,297.60.
Within this third year, respondents paid a total of P320,000.00, as
follows:LawlibraryofCRAlaw
(a) Between March 22, 2001 and June 30, 2001, respondents completed three (3) monthly payments
of P12,500.00 each, totaling P37,500.00.
(b) On June 30, 2001, respondents paid P100,000.00, which was charged as principal payment.
(c) Between June 30, 2001 and December 30, 2001, respondents delivered monthly payments of
P10,000.00 each. At this point, the monthly payments no longer amounted to P12,500.00 each
because the supposed monthly interest payments were pegged to the supposedly remaining
principal of P400,000.00. Thus, during this period, they paid a total of six (6) monthly payments
totaling P60,000.00.
(d) On December 30, 2001, respondents paid P100,000.00, which, like the June 30, 2001 payment,
was charged against the principal.
(e) From the end of December 2002 to the end of February 2002, respondents delivered monthly
payments of P7,500.00 each. At this point, the supposed monthly interest payments were now
pegged to the supposedly remaining principal of P300,000.00. Thus, during this period, they
delivered three (3) monthly payments totaling P22,500.00.
Consistent with Article 1253 of the Civil Code, as respondents paid a total of
P320,000.00 within the third year, the conventional interest of P36,927.50 must
be deemed fully paid and the remaining amount that respondents paid (i.e.,
P283,702.40) is to be charged against the principal. This yields a balance of
P18,777.60.
By the end of the fourth year following the perfection of the loan, or as of March
21, 2003, P21,203.51 would have been due from respondents. This consists of:
(a) the outstanding principal of P18,777.60, (b) conventional interest of
P2,253.31, and (c) interest due on conventional interest starting from July 31,
2002, the date of judicial demand, in the amount of P172.60. The last (i.e.,
interest on interest) must be pro-rated. There were only 233 days from July 31,
2002 (the date of judicial demand) to March 21, 2003 (the end of the fourth
year); this left 63.83% of the fourth year, within which interest on interest might
have accrued. Thus, the full annual interest on interest of 12% per annum could
not have been completed, and only the proportional amount of 7.66% per annum
may be properly imposed for the remainder of the fourth year.
From the end of March 2002 to June 2002, respondents delivered three (3) more
monthly payments of P7,500.00 each. Thus, during this period, they delivered
three (3) monthly payments totalling P22,500.00.
At this rate, however, payment would have been completed by respondents even
before the end of the fourth year. Thus, for precision, it is more appropriate
to reckon the amounts due as against payments made on monthly,
rather than an annual, basis.
By April 21, 2002, P18,965.38 (i.e., remaining principal of P18,777.60 plus pro-
rated monthly conventional interest at 1%, amounting to P187.78) would have
been due from respondents. Deducting the monthly payment of P7,500.00 for the
preceding month in a manner consistent with Article 1253 of the Civil Code would
yield a balance of P11,465.38.
By May 21, 2002, P11,580.03 (i.e., remaining principal of P11,465.38 plus pro-
rated monthly conventional interest at 1%, amounting to P114.65) would have
been due from respondents. Deducting the monthly payment of P7,500.00 for the
preceding month in a manner consistent with Article 1253 of the Civil Code would
yield a balance of P4,080.03.
By June 21, 2002, P4,120.83 (i.e., remaining principal of P4,080.03 plus pro-
rated monthly conventional interest at 1%, amounting to P40.80) would have
been due from respondents. Deducting the monthly payment of P7,500.00 for the
preceding month in a manner consistent with Article 1253 of the Civil Code would
yield a negative balance of P3,379.17.
Thus, by June 21, 2002, respondents had not only fully paid the principal and all
the conventional interest that had accrued on their loan. By this date, they also
overpaid P3,379.17. Moreover, while hypothetically, interest on conventional
interest would not have run from July 31, 2002, no such interest accrued since
there was no longer any conventional interest due from respondents by then.
 V 3. When the judgment of the court awarding a sum of money becomes final
As respondents made an overpayment, the principle of solutio indebiti as
provided by Article 2154 of the Civil Code64 applies. Article 2154
reads:LawlibraryofCRAlaw
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Article 2154. If something is received when there is no right to demand it, and it
was unduly delivered through mistake, the obligation to return it arises.
In Moreno-Lentfer v. Wolff,65 this court explained the application of solutio
indebiti:LawlibraryofCRAlaw
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The quasi-contract of solutio indebiti harks back to the ancient principle that no
one shall enrich himself unjustly at the expense of another. It applies where (1) a
payment is made when there exists no binding relation between the payor, who
has no duty to pay, and the person who received the payment, and (2) the
payment is made through mistake, and not through liberality or some other
cause.66
As respondents had already fully paid the principal and all conventional interest
that had accrued, they were no longer obliged to make further payments. Any
further payment they made was only because of a mistaken impression that they
were still due. Accordingly, petitioners are now bound by a quasi-contractual
obligation to return any and all excess payments delivered by respondents.
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.68
Thus, interest at the rate of 6% per annum may be properly imposed on the total
judgment award. This shall be reckoned from the finality of this Decision until its
full satisfaction.
WHEREFORE, the assailed September 30, 2010 Decision and the January 4,
2011 Resolution of the Court of Appeals Nineteenth Division in CA-G.R. CV No.
01388 are SET ASIDE. Petitioners Spouses Salvador and Alma Abella
are DIRECTED to jointly and severally reimburse respondents Spouses Romeo
and Annie Abella the amount of P3,379.17, which respondents have overpaid.
A legal interest of 6% per annum shall likewise be imposed on the total judgment
award from the finality of this Decision until its full satisfaction.
SO ORDERED

Nacar provides that "[w]hen an obligation, not constituting a loan or forbearance

of money, is breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum."67 This
applies to obligations arising from quasi-contracts such as solutio indebiti.

Further, Article 2159 of the Civil Code provides:LawlibraryofCRAlaw

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Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal
interest if a sum of money is involved, or shall be liable for fruits received or
which should have been received if the thing produces fruits.

He shall furthermore be answerable for any loss or impairment of the thing from
any cause, and for damages to the person who delivered the thing, until it is
recovered.
Consistent however, with our finding that the excess payment made by
respondents were borne out of a mere mistake that it was due, we find it in the
better interest of equity to no longer hold petitioners liable for interest arising
from their quasi-contractual obligation.

Nevertheless, Nacar also provides:LawlibraryofCRAlaw