G.R. No.

115324 February 19, 2003

PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK), petitioner,

vs.
HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision1 of the Court of Appeals dated June 25,
1991 in CA-G.R. CV No. 11791 and of its Resolution2 dated May 5, 1994, denying the motion for
reconsideration of said decision filed by petitioner Producers Bank of the Philippines.

Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend
Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his
business, the Sterela Marketing and Services ("Sterela" for brevity). Specifically, Sanchez asked
private respondent to deposit in a bank a certain amount of money in the bank account of
Sterela for purposes of its incorporation. She assured private respondent that he could
withdraw his money from said account within a month’s time. Private respondent asked
Sanchez to bring Doronilla to their house so that they could discuss Sanchez’s request.3

On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi,
Doronilla’s private secretary, met and discussed the matter. Thereafter, relying on the
assurances and representations of Sanchez and Doronilla, private respondent issued a check in
the amount of Two Hundred Thousand Pesos (₱200,000.00) in favor of Sterela. Private
respondent instructed his wife, Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in
opening a savings account in the name of Sterela in the Buendia, Makati branch of Producers
Bank of the Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went to the bank to
deposit the check. They had with them an authorization letter from Doronilla authorizing
Sanchez and her companions, "in coordination with Mr. Rufo Atienza," to open an account for
Sterela Marketing Services in the amount of ₱200,000.00. In opening the account, the
authorized signatories were Inocencia Vives and/or Angeles Sanchez. A passbook for Savings
Account No. 10-1567 was thereafter issued to Mrs. Vives.4

Subsequently, private respondent learned that Sterela was no longer holding office in the
address previously given to him. Alarmed, he and his wife went to the Bank to verify if their
money was still intact. The bank manager referred them to Mr. Rufo Atienza, the assistant
manager, who informed them that part of the money in Savings Account No. 10-1567 had been
withdrawn by Doronilla, and that only ₱90,000.00 remained therein. He likewise told them that
Mrs. Vives could not withdraw said remaining amount because it had to answer for some
postdated checks issued by Doronilla. According to Atienza, after Mrs. Vives and Sanchez
opened Savings Account No. 10-1567, Doronilla opened Current Account No. 10-0320 for
Sterela and authorized the Bank to debit Savings Account No. 10-1567 for the amounts
necessary to cover overdrawings in Current Account No. 10-0320. In opening said current
account, Sterela, through Doronilla, obtained a loan of ₱175,000.00 from the Bank. To cover
payment thereof, Doronilla issued three postdated checks, all of which were dishonored.
Atienza also said that Doronilla could assign or withdraw the money in Savings Account No. 10-
1567 because he was the sole proprietor of Sterela. 5

Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he
received a letter from Doronilla, assuring him that his money was intact and would be returned
to him. On August 13, 1979, Doronilla issued a postdated check for Two Hundred Twelve
Thousand Pesos (₱212,000.00) in favor of private respondent. However, upon presentment
thereof by private respondent to the drawee bank, the check was dishonored. Doronilla
requested private respondent to present the same check on September 15, 1979 but when the
latter presented the check, it was again dishonored. 6

Private respondent referred the matter to a lawyer, who made a written demand upon
Doronilla for the return of his client’s money. Doronilla issued another check for ₱212,000.00 in
private respondent’s favor but the check was again dishonored for insufficiency of funds. 7

Private respondent instituted an action for recovery of sum of money in the Regional Trial Court
(RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was
docketed as Civil Case No. 44485. He also filed criminal actions against Doronilla, Sanchez and
Dumagpi in the RTC. However, Sanchez passed away on March 16, 1985 while the case was
pending before the trial court. On October 3, 1995, the RTC of Pasig, Branch 157, promulgated
its Decision in Civil Case No. 44485, the dispositive portion of which reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J.

Doronila, Estrella Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin Vives
jointly and severally –

(a) the amount of ₱200,000.00, representing the money deposited, with interest at the
legal rate from the filing of the complaint until the same is fully paid;

(b) the sum of ₱50,000.00 for moral damages and a similar amount for exemplary
damages;

(c) the amount of ₱40,000.00 for attorney’s fees; and

(d) the costs of the suit.

SO ORDERED.8

Petitioner appealed the trial court’s decision to the Court of Appeals. In its Decision dated June
25, 1991, the appellate court affirmed in toto the decision of the RTC. 9 It likewise denied with
finality petitioner’s motion for reconsideration in its Resolution dated May 5, 1994. 10
On June 30, 1994, petitioner filed the present petition, arguing that –

I.

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION

BETWEEN THE DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN
AND NOT ACCOMMODATION;

II.

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONER’S BANK

MANAGER, MR. RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING
PETITIONER (Sic. Should be PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER
SHOULD BE HELD LIABLE UNDER THE PRINCIPLE OF NATURAL JUSTICE;

III.

THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF THE
REGIONAL TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS THE FINDINGS
OF THE REGIONAL TRIAL COURT WERE BASED ON A MISAPPREHENSION OF FACTS;

IV.

THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION IN
SALUDARES VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR
ACTS COMMITTED BY AN EMPLOYEE IS APPLICABLE;

V.

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE LOWER
COURT THAT HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER
DEFENDANTS FOR THE AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS ACCOUNT
DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES,
P40,000.00 FOR ATTORNEY’S FEES AND THE COSTS OF SUIT.11

Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto
on September 25, 1995. The Court then required private respondent to submit a rejoinder to
the reply. However, said rejoinder was filed only on April 21, 1997, due to petitioner’s delay in
furnishing private respondent with copy of the reply 12 and several substitutions of counsel on
the part of private respondent.13 On January 17, 2001, the Court resolved to give due course to
the petition and required the parties to submit their respective memoranda.14 Petitioner filed
its memorandum on April 16, 2001 while private respondent submitted his memorandum on
March 22, 2001.
Petitioner contends that the transaction between private respondent and Doronilla is a simple
loan (mutuum) since all the elements of a mutuum are present: first, what was delivered by
private respondent to Doronilla was money, a consumable thing; and second, the transaction
was onerous as Doronilla was obliged to pay interest, as evidenced by the check issued by
Doronilla in the amount of ₱212,000.00, or ₱12,000 more than what private respondent
deposited in Sterela’s bank account.15 Moreover, the fact that private respondent sued his good
friend Sanchez for his failure to recover his money from Doronilla shows that the transaction
was not merely gratuitous but "had a business angle" to it. Hence, petitioner argues that it
cannot be held liable for the return of private respondent’s ₱200,000.00 because it is not privy
to the transaction between the latter and Doronilla. 16

It argues further that petitioner’s Assistant Manager, Mr. Rufo Atienza, could not be faulted for
allowing Doronilla to withdraw from the savings account of Sterela since the latter was the sole
proprietor of said company. Petitioner asserts that Doronilla’s May 8, 1979 letter addressed to
the bank, authorizing Mrs. Vives and Sanchez to open a savings account for Sterela, did not
contain any authorization for these two to withdraw from said account. Hence, the authority to
withdraw therefrom remained exclusively with Doronilla, who was the sole proprietor of
Sterela, and who alone had legal title to the savings account. 17 Petitioner points out that no
evidence other than the testimonies of private respondent and Mrs. Vives was presented
during trial to prove that private respondent deposited his ₱200,000.00 in Sterela’s account for
purposes of its incorporation.18 Hence, petitioner should not be held liable for allowing
Doronilla to withdraw from Sterela’s savings account.1a\^/phi1.net

Petitioner also asserts that the Court of Appeals erred in affirming the trial court’s decision
since the findings of fact therein were not accord with the evidence presented by petitioner
during trial to prove that the transaction between private respondent and Doronilla was a
mutuum, and that it committed no wrong in allowing Doronilla to withdraw from Sterela’s
savings account.19

Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not
liable for the actual damages suffered by private respondent, and neither may it be held liable
for moral and exemplary damages as well as attorney’s fees. 20

Private respondent, on the other hand, argues that the transaction between him and Doronilla
is not a mutuum but an accommodation,21 since he did not actually part with the ownership of
his ₱200,000.00 and in fact asked his wife to deposit said amount in the account of Sterela so
that a certification can be issued to the effect that Sterela had sufficient funds for purposes of
its incorporation but at the same time, he retained some degree of control over his money
through his wife who was made a signatory to the savings account and in whose possession the
savings account passbook was given.22

He likewise asserts that the trial court did not err in finding that petitioner, Atienza’s employer,
is liable for the return of his money. He insists that Atienza, petitioner’s assistant manager,
connived with Doronilla in defrauding private respondent since it was Atienza who facilitated
the opening of Sterela’s current account three days after Mrs. Vives and Sanchez opened a
savings account with petitioner for said company, as well as the approval of the authority to
debit Sterela’s savings account to cover any overdrawings in its current account. 23

There is no merit in the petition.

At the outset, it must be emphasized that only questions of law may be raised in a petition for
review filed with this Court. The Court has repeatedly held that it is not its function to analyze
and weigh all over again the evidence presented by the parties during trial. 24 The Court’s
jurisdiction is in principle limited to reviewing errors of law that might have been committed by
the Court of Appeals.25 Moreover, factual findings of courts, when adopted and confirmed by
the Court of Appeals, are final and conclusive on this Court unless these findings are not
supported by the evidence on record.26 There is no showing of any misapprehension of facts on
the part of the Court of Appeals in the case at bar that would require this Court to review and
overturn the factual findings of that court, especially since the conclusions of fact of the Court
of Appeals and the trial court are not only consistent but are also amply supported by the
evidence on record.

No error was committed by the Court of Appeals when it ruled that the transaction between
private respondent and Doronilla was a commodatum and not a mutuum. A circumspect
examination of the records reveals that the transaction between them was a commodatum.
Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise:

By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case
the contract is called a commodatum; or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid, in which case the contract is
simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.

The foregoing provision seems to imply that if the subject of the contract is a consumable thing,
such as money, the contract would be a mutuum. However, there are some instances where a
commodatum may have for its object a consumable thing. Article 1936 of the Civil Code
provides:

Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of
the parties is to lend consumable goods and to have the very same goods returned at the end
of the period agreed upon, the loan is a commodatum and not a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial consideration
in determining the actual character of a contract. 27 In case of doubt, the contemporaneous and
subsequent acts of the parties shall be considered in such determination. 28

As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows
that private respondent agreed to deposit his money in the savings account of Sterela
specifically for the purpose of making it appear "that said firm had sufficient capitalization for
incorporation, with the promise that the amount shall be returned within thirty (30)
days."29 Private respondent merely "accommodated" Doronilla by lending his money without
consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the
transaction that the money would not be removed from Sterela’s savings account and would be
returned to private respondent after thirty (30) days.

Doronilla’s attempts to return to private respondent the amount of ₱200,000.00 which the
latter deposited in Sterela’s account together with an additional ₱12,000.00, allegedly
representing interest on the mutuum, did not convert the transaction from a commodatum
into a mutuum because such was not the intent of the parties and because the additional
₱12,000.00 corresponds to the fruits of the lending of the ₱200,000.00. Article 1935 of the Civil
Code expressly states that "[t]he bailee in commodatum acquires the use of the thing loaned
but not its fruits." Hence, it was only proper for Doronilla to remit to private respondent the
interest accruing to the latter’s money deposited with petitioner.

Neither does the Court agree with petitioner’s contention that it is not solidarily liable for the
return of private respondent’s money because it was not privy to the transaction between
Doronilla and private respondent. The nature of said transaction, that is, whether it is a
mutuum or a commodatum, has no bearing on the question of petitioner’s liability for the
return of private respondent’s money because the factual circumstances of the case clearly
show that petitioner, through its employee Mr. Atienza, was partly responsible for the loss of
private respondent’s money and is liable for its restitution.

Petitioner’s rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of
Sterela for Savings Account No. 10-1567 expressly states that—

"2. Deposits and withdrawals must be made by the depositor personally or upon his written
authority duly authenticated, and neither a deposit nor a withdrawal will be permitted except
upon the production of the depositor savings bank book in which will be entered by the Bank
the amount deposited or withdrawn."30

Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant
Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom even without
presenting the passbook (which Atienza very well knew was in the possession of Mrs. Vives),
not just once, but several times. Both the Court of Appeals and the trial court found that
Atienza allowed said withdrawals because he was party to Doronilla’s "scheme" of defrauding
private respondent:

XXX

But the scheme could not have been executed successfully without the knowledge, help and
cooperation of Rufo Atienza, assistant manager and cashier of the Makati (Buendia) branch of
the defendant bank. Indeed, the evidence indicates that Atienza had not only facilitated the
commission of the fraud but he likewise helped in devising the means by which it can be done
in such manner as to make it appear that the transaction was in accordance with banking
procedure.

To begin with, the deposit was made in defendant’s Buendia branch precisely because Atienza
was a key officer therein. The records show that plaintiff had suggested that the ₱200,000.00
be deposited in his bank, the Manila Banking Corporation, but Doronilla and Dumagpi insisted
that it must be in defendant’s branch in Makati for "it will be easier for them to get a
certification". In fact before he was introduced to plaintiff, Doronilla had already prepared a
letter addressed to the Buendia branch manager authorizing Angeles B. Sanchez and company
to open a savings account for Sterela in the amount of ₱200,000.00, as "per coordination with
Mr. Rufo Atienza, Assistant Manager of the Bank x x x" (Exh. 1). This is a clear manifestation
that the other defendants had been in consultation with Atienza from the inception of the
scheme. Significantly, there were testimonies and admission that Atienza is the brother-in-law
of a certain Romeo Mirasol, a friend and business associate of Doronilla.1awphi1.nét

Then there is the matter of the ownership of the fund. Because of the "coordination" between
Doronilla and Atienza, the latter knew before hand that the money deposited did not belong to
Doronilla nor to Sterela. Aside from such foreknowledge, he was explicitly told by Inocencia
Vives that the money belonged to her and her husband and the deposit was merely to
accommodate Doronilla. Atienza even declared that the money came from Mrs. Vives.

Although the savings account was in the name of Sterela, the bank records disclose that the
only ones empowered to withdraw the same were Inocencia Vives and Angeles B. Sanchez. In
the signature card pertaining to this account (Exh. J), the authorized signatories were Inocencia
Vives &/or Angeles B. Sanchez. Atienza stated that it is the usual banking procedure that
withdrawals of savings deposits could only be made by persons whose authorized signatures
are in the signature cards on file with the bank. He, however, said that this procedure was not
followed here because Sterela was owned by Doronilla. He explained that Doronilla had the full
authority to withdraw by virtue of such ownership. The Court is not inclined to agree with
Atienza. In the first place, he was all the time aware that the money came from Vives and did
not belong to Sterela. He was also told by Mrs. Vives that they were only accommodating
Doronilla so that a certification can be issued to the effect that Sterela had a deposit of so much
amount to be sued in the incorporation of the firm. In the second place, the signature of
Doronilla was not authorized in so far as that account is concerned inasmuch as he had not
signed the signature card provided by the bank whenever a deposit is opened. In the third
place, neither Mrs. Vives nor Sanchez had given Doronilla the authority to withdraw.

Moreover, the transfer of fund was done without the passbook having been presented. It is an
accepted practice that whenever a withdrawal is made in a savings deposit, the bank requires
the presentation of the passbook. In this case, such recognized practice was dispensed with.
The transfer from the savings account to the current account was without the submission of the
passbook which Atienza had given to Mrs. Vives. Instead, it was made to appear in a
certification signed by Estrella Dumagpi that a duplicate passbook was issued to Sterela
because the original passbook had been surrendered to the Makati branch in view of a loan
accommodation assigning the savings account (Exh. C). Atienza, who undoubtedly had a hand in
the execution of this certification, was aware that the contents of the same are not true. He
knew that the passbook was in the hands of Mrs. Vives for he was the one who gave it to her.
Besides, as assistant manager of the branch and the bank official servicing the savings and
current accounts in question, he also was aware that the original passbook was never
surrendered. He was also cognizant that Estrella Dumagpi was not among those authorized to
withdraw so her certification had no effect whatsoever.

The circumstance surrounding the opening of the current account also demonstrate that
Atienza’s active participation in the perpetration of the fraud and deception that caused the
loss. The records indicate that this account was opened three days later after the ₱200,000.00
was deposited. In spite of his disclaimer, the Court believes that Atienza was mindful and
posted regarding the opening of the current account considering that Doronilla was all the
while in "coordination" with him. That it was he who facilitated the approval of the authority to
debit the savings account to cover any overdrawings in the current account (Exh. 2) is not hard
to comprehend.

Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case. x
x x.31

Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for
damages caused by their employees acting within the scope of their assigned tasks. To hold the
employer liable under this provision, it must be shown that an employer-employee relationship
exists, and that the employee was acting within the scope of his assigned task when the act
complained of was committed.32 Case law in the United States of America has it that a
corporation that entrusts a general duty to its employee is responsible to the injured party for
damages flowing from the employee’s wrongful act done in the course of his general authority,
even though in doing such act, the employee may have failed in its duty to the employer and
disobeyed the latter’s instructions.33

There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not
deny that Atienza was acting within the scope of his authority as Assistant Branch Manager
when he assisted Doronilla in withdrawing funds from Sterela’s Savings Account No. 10-1567, in
which account private respondent’s money was deposited, and in transferring the money
withdrawn to Sterela’s Current Account with petitioner. Atienza’s acts of helping Doronilla, a
customer of the petitioner, were obviously done in furtherance of petitioner’s interests 34 even
though in the process, Atienza violated some of petitioner’s rules such as those stipulated in its
savings account passbook.35 It was established that the transfer of funds from Sterela’s savings
account to its current account could not have been accomplished by Doronilla without the
invaluable assistance of Atienza, and that it was their connivance which was the cause of
private respondent’s loss.

The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil
Code, petitioner is liable for private respondent’s loss and is solidarily liable with Doronilla and
Dumagpi for the return of the ₱200,000.00 since it is clear that petitioner failed to prove that it
exercised due diligence to prevent the unauthorized withdrawals from Sterela’s savings
account, and that it was not negligent in the selection and supervision of Atienza. Accordingly,
no error was committed by the appellate court in the award of actual, moral and exemplary
damages, attorney’s fees and costs of suit to private respondent.

WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court
of Appeals are AFFIRMED.

SO ORDERED.

G.R. No. 80294 March 23, 1990

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,

vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO and JUAN VALDEZ, respondents.

Valdez, Ereso, Polido & Associates for petitioner. Sabino Padilla, Jr. collaborating counsel for
petitioner. Jaime G. de Leon for the Heirs of E. Octaviano. Fernando P. Cabato for the Heirs of
Juan Valdez.

GANCAYCO, J.:

Before the Court are a motion for reconsideration and a supplemental motion for
reconsideration filed by petitioner relating to the decision of the Court dated September 21,
1988. The comment and opposition thereto have been filed by the private respondents and a
reply was filed by petitioner.

Petitioner argues that the findings of facts of the Court of Appeals in CA-G.R. No. 38830-R are:
(1) contrary to the law; (2) contrary to the findings of the trial court; (3) contrary to the findings
of the Court of Appeals in CA-G.R. No. 08890-R; (4) contrary to the admissions of the parties;
and (5) based on a clear misapprehension of historical and ecclesiastical facts made of judicial
notice, which are well within the exceptions consistently adhered to by this Court as in Republic
vs. Court of Appeals. 1

The Court finds no merit in this contention. The said decision of the Court of Appeals dated May
4, 1977 in CA-G.R. No. 38830-R was already elevated to this Court by petitioner through a
petition for review in G.R. No. L-46832 entitled Catholic Vicar Apostolic of the Mountain
Province vs. Court of Appeals and Heirs of Egmidio Octaviano, while the heirs of Juan Valdez and
Pacita Valdez also filed a petition for review of the same decision in this Court docketed as G.R.
No. L-46872 entitled Heirs of Juan Valdez and Pacita Valdez vs. CA, et al. In a minute resolution
dated January 13, 1978, this Court denied both petitions for lack of merit.

It is in paid petition for review wherein the petitioner should have questioned the findings of
facts of the appellate court in CA-G.R. No. 38830-R but since said petition had been denied
outright, the aforestated decision of the appellate court which has long become final and
executory, is res judicata as between the parties and the findings of facts therein are
conclusive. Thus, the factual findings in said final judgment cannot be reviewed anew in the
present proceedings.

The relevant question that should now be asked is, considering the aforestated decision of the
appellate court and guided by the findings of facts therein, who is entitled to the possession of
the lots in question? Who owns these lots?

CA-G.R. No. 38830-R was a land registration case where petitioner and private respondents
were asking for confirmation of their alleged imperfect titles to the lots in question under
Section 49 (b) of the Public Land Act. 2

In the said decision, the appellate court found that the petitioner was not entitled to
confirmation of its imperfect title to Lots 2 and 3. In separate motions for reconsideration filed
by private respondents Heirs of Octaviano and Heirs of Juan Valdez relating to the same
decision, they also asked that said two lots be registered in their names. On August 12, 1977,
the Court of Appeals denied both motions. Effectively, therefore, in the said decision the
appellate court ruled that neither the petitioner nor the private respondents are entitled to the
confirmation of imperfect title over said two lots. That is now res judicata.

What is the nature of these two lots? Pursuant to the said decision in CA-G.R. No. 38830-R, the
two lots in question remained part of the public lands. This is the only logical conclusion when
the appellate court found that neither the petitioner nor private respondents are entitled to
confirmation of imperfect title over said lots.

Hence, the Court finds the contention of petitioner to be well taken in that the trial court and
the appellate court have no lawful basis in ordering petitioner to return and surrender
possession of said lots to private respondents. Said property being a public land its disposition
is subject to the provision of the Public Land Act, as amended. 3

The present actions that were instituted in the Regional Trial Court by private respondents are
actions for recovery of possession (accion publiciana) and not for recovery of ownership (accion
reivindicatoria).

In the aforestated decision of the appellate court in CA-G.R. No. 38830-R, the following are
among the findings of facts:

9th. The totality of foregoing together with evidence of oppositors must

convince this Court that as to lots 2 and 3, it was oppositors who were
possessors under bona fide claim of ownership thru their predecessors since
around 1906; and that appellee came in only in the concept of a borrower
in commodatum, but that appellee took it upon itself to claim and repudiate the
trust sometime in 1951, and since from that time at least, possession of
oppositors had been interrupted, neither can they claim registration under Sec.
48, par. b of the Public Land Law, Com. Act 141, as amended by R.A. 1942; this
must be the final result, and there would be no more need to rule on the errors
impugning the personality of appellee to secure registration; 4

From the foregoing, it appears that the petitioner was in possession of the said property as
borrower in commodatum from private respondents since 1906 but in 1951 petitioner
repudiated the trust when it declared the property for tax purposes under its name. When it
filed its application for registration of the said property in 1962, petitioner had been in adverse
possession of the same for at least 11 years. Article 555 of the Civil Code provides as follows:

Art. 555. A possessor may lose his possession:

(1) By the abandonment of the thing;

(2) By an assignment made to another either by onerous or

gratuitous title;

(3) By the destruction or total loss of the thing or because it goes

out of commerce;

(4) By the possession of another, subject to the provisions of

Article 537, if the new possession has lasted longer than one
year. But the real right of possession is not lost till after the lapse
of ten years. (460a) (Emphasis supplied.)

From the foregoing provision of the law, particularly paragraph 4 thereof, it is clear that the real
right of possession of private respondents over the property was lost or no longer exists after
the lapse of 10 years that petitioner had been in adverse possession thereof. Thus, the action
for recover of possession of said property filed by private respondents against petitioner must
fail.

The Court, therefore, finds that the trial court and the Court of Appeals erred in declaring the
private respondents to be entitled to the possession thereof. Much less can they pretend to be
owners thereof. Said lots are part of the public domain.

WHEREFORE, the motion for reconsideration is GRANTED and the decision of this Court dated
September 21, 1988 is hereby set aside and another judgment is hereby rendered reversing and
setting aside the decision of the appellate court in CA-G.R. Nos. 05148-49 dated August 31,
1987 and dismissing the complaints for recovery of possession, without pronouncement as to
costs.

SO ORDERED.

[ G.R. No. 220826. March 27, 2019 ]

HUN HYUNG PARK, PETITIONER, V. EUNG WON[*] CHOI, RESPONDENT.

DECISION
CAGUIOA, J:
Before this Court is a petition for review on certiorari[1] under Rule 45 of the Rules of Court filed
by Petitioner Hun Hyung Park (Park) against Respondent Eung Won Choi (Choi), assailing the
Court of Appeals' (CA) Decision[2] dated March 30, 2015 and Resolution[3] dated September 30,
2015 in CA-G.R. SP No. 124173.
In the assailed Decision and Resolution, the CA reversed and set aside the Decision[4] dated
December 23, 2011 and Order[5] dated March 28, 2012 of the Regional Trial Court of Makati City
- Branch 142 (RTC - Branch 142), which affirmed the Decision[6] dated April 26, 2011 of the
Metropolitan Trial Court of Makati City - Branch 65 (MeTC), holding Choi civilly liable to pay
Park the amount of One Million Eight Hundred Seventy-Five Thousand Pesos (P1,875,000.00)
plus interest of 12% percent per annum from August 31, 2000 until the whole amount is paid,
P200,000.00 as attorney's fees, and P9,322.25 as reimbursement for filing fees.[7]

The Antecedent Facts

The present petition arose from a complaint[8] for estafa and violation of Batas Pambansa Blg.
(B.P.) 22 filed by Park against Choi.
On June 28, 1999, Park, who was engaged in the business of lending money, extended a loan to
Choi in the amount of P1,875,000.00.[9] As payment for the loan, Choi issued PNB Check No.
0077133[10] in the same amount dated August 28, 1999 in favor of Park. [11] On October 5, 1999,
Park attempted to deposit the check to his bank account but the same was returned to him
dishonored for having been drawn against a closed account. [12] Thereafter, Park, through
counsel, sent a letter to Choi on May 11, 2000 informing the latter of the dishonored
check.[13] Based on the registry return receipt attached to Park's Complaint-Affidavit,[14] and as
stipulated by Choi during the pre-trial conference,[15] Choi received the demand letter on May
19, 2000 through a certain Ina Soliven. [16] Nevertheless, Choi failed to resolve the dishonored
check.
With the loan remaining unpaid, Park instituted a complaint against Choi for estafa and
violation of B.P. 22. Following Park's complaint, the Office of the City Prosecutor of Makati, [17] in
an Information[18] dated August 31, 2000, charged Choi with one count of violation of B.P. 22.
The case was later docketed as Criminal Case No. 294690 before the MeTC. [19]
On arraignment,[20] Choi pleaded not guilty.[21] After the pre-trial conference and the
prosecution's presentation of evidence, Choi filed a Motion for Leave of Court to File Demurrer
to Evidence along with his Demurrer. In his Demurrer, Choi asserted that the prosecution failed
to prove that he received the notice of dishonor. [22] Thus, Choi argued that since receipt of the
notice of dishonor was not proven, then the presumption of knowledge of insufficiency of funds
— an element for conviction of violation of B.P. 22 — did not arise.[23]

Proceedings before the MeTC

The MeTC granted Choi's Demurrer in an Order dated February 27, 2003[24] and dismissed the
criminal complaint. The prosecution's Motion for Reconsideration of the dismissal was likewise
denied, leading Park to appeal to the RTC of Makati City - Branch 60 (RTC - Branch 60).[25] In his
appeal, Park contended that the dismissal of the criminal case should not carry with it the
dismissal of the civil aspect of the case.[26]

Ruling of the RTC - Branch 60

The RTC - Branch 60,[27] in a Decision[28] dated September 11, 2003, granted Park's appeal. The
RTC - Branch 60 held that while the evidence presented was insufficient to prove Choi's criminal
liability for B.P. 22, it did not altogether extinguish his civil liability. [29] Accordingly, the RTC -
Branch 60 ordered Choi to pay Park the face value of the check (P1,875,000.00) with legal
interest.[30]
Aggrieved by the RTC - Branch 60 Decision, Choi filed a Motion for Reconsideration. Acting on
Choi's Motion for Reconsideration, the RTC -Branch 60 reversed its September 11,
2003 Decision (finding that Choi was liable to Park for P1,875,000.00) and instead ordered
the remand of the case to the MeTC so that Choi may adduce evidence on the civil aspect of
the case.[31]
Meanwhile, aggrieved by the RTC - Branch 60's remand of the case to the MeTC, Park elevated
the matter to the CA.[32] The CA, however, dismissed Park's petition on procedural grounds (i.e.,
the verification and certification of non-forum shopping failed to comply with Section 4, Rule 7
of the Rules of Court;[33] failure to attach copies of the MeTC Order dismissing the criminal case,
the motion for leave to file demurrer to evidence and the demurrer; and finally, for attaching an
uncertified and illegible copy of the RTC - Branch 60 Decision of September 11, 2003).[34]
Unsatisfied with the CA's dismissal of his petition on procedural grounds, Park assailed the CA
dismissal of his petition before the Court, and, in G.R. No. 165496 entitled "Hun Hyung Park v.
Eung Won Choi,"[35] the Court, through its Second Division, [36] ruled that the remand of the case
to the MeTC for reception of Choi's evidence on the civil aspect of the case was proper, viz.:
This Court therefore upholds respondent's right to present evidence as reserved by his filing of
leave of court to file the demurrer.

WHEREFORE, the petition is, in light of the foregoing discussions, DENIED.

The case is REMANDED to the court of origin, Metropolitan Trial Court of Makati City, Branch 65
which is DIRECTED to forthwith set Criminal Case No. 294690 for further proceedings only for
the purpose of receiving evidence on the civil aspect of the case.
Costs against petitioner.

SO ORDERED.[37]
In a Resolution[38] dated June 29, 2007, the Court denied Park's Motion for Reconsideration
from the above Decision. The Court's Decision in G.R. No. 165496 attained finality on January
18, 2008.

Proceedings before the MeTC.

With the proceedings now before the MeTC, the MeTC ordered the presentation of Choi's
evidence on the civil aspect of the case. However, in the course of the proceedings before
MeTC, Choi repeatedly moved for several postponements, which postponements eventually led
the MeTC to issue its Order[39] dated March 7, 2011, declaring that Choi had waived his right to
present evidence.
The specific incidents leading up to the MeTC Order dated March 7, 2011 are as follows:
The MeTC initially scheduled the case for reception of Choi's evidence on July 16, 2008, but the
same was declared a holiday. Hearing was then reset to January 7, 2009, then to April 7, 2009
and to May 19, 2009 upon the instance of Choi. The case was again rescheduled to August 5,
2009, but the same was again declared a holiday. On September 15, 2010, Choi asked for
postponement on the ground that he needed the assistance of an interpreter to assist him in
translating his testimony from Korean to English. [40]
The MeTC granted Choi's request to reset the hearing from September 15, 2010 to November
23, 2010 in an Order[41] issued the same day. In the Order, the court warned that "[i]n the event
that the defense fails to present its evidence on the next scheduled hearing, its right to do so
will be deemed waived and the case will be considered submitted for resolution based on the
prosecution's evidence."[42]
Notwithstanding the court's warning, in the scheduled hearing on November 23, 2010, Choi
asked for another postponement on the ground that the Certification as a Qualified
Interpreter[43] issued by the Korean Embassy of the Philippines and presented by Choi's
interpreter, Han Jong[43a] Oh (Oh), certifies Oh's qualification as an interpreter in another case
and not to the case then before the court.[44]
The MeTC again granted Choi's motion for postponement, with a warning that the grant of
postponement on November 23, 2010 would be the last. The MeTC cautioned Choi that should
he still be not ready by the next hearing, his right to present evidence would be considered
waived.[45]
Despite the warning, on the scheduled hearing of March 7, 2011, Choi asked for yet another
postponement on the ground that his previous counsel was retired from the practice of law and
his new counsel was not prepared for the day's hearing. On that day, Park objected to further
postponement of the case considering that the last two postponements had already come with
the court's warning against further postponements. [46]
Ruling on what was by then the sixth motion for postponement by Choi, the MeTC, in
an Order dated March 7, 2011, denied Choi's motion for postponement and declared that his
right to present evidence had been waived. Accordingly, the MeTC ruled that the case was
submitted for resolution.[47]
Subsequently, on April 26, 2011, the MeTC, rendered a Decision finding Choi civilly liable to
Park, the dispositive portion of which reads:
WHEREFORE, premises considered, Eung Won Choi is ordered to pay private complainant Hun
Hyung Park the amount of P1,875,000.00 representing the face value of the check subject of
this case plus interest of 12% percent per annum from August 31, 2000 until the whole amount
is paid, the amount of P200,000.00 by way of attorney's fees, and the amount of P9,322.25 as
reimbursement for the filing fees.
Costs against the accused.

SO ORDERED.[48]
Insofar as Choi's alleged indebtedness was concerned, the MeTC held that the prosecution had
proven that the check subject matter of the case was issued by Choi to Park in exchange of the
cash loaned to him.[49] Choi, on the other hand, did not even adduce any evidence to controvert
Park's claim of indebtedness.[50] Consequently, finding that Choi had no valid defense against
Park's claim of indebtedness, the MeTC held that Choi was civilly liable to Park for the loan.[51]
On Choi's repeated motions for postponement, the MeTC observed that:

As early as May 12, 2008, the defense was ordered to present its evidence. In the interim, the
parties negotiated for the settlement of the case. The reception of defense evidence was
postponed on several dates to accommodate the alleged negotiation for the settlement of the
case as well as due to the unavailability of a Korean interpreter to aid the accused.

In the Order of September 15, 2010, the defense was given one last chance to present evidence
on November 23, 2010. Accused again failed to present its evidence. In order to afford the
accused his constitutional right to defend himself and to present evidence, he was again given
one last chance to present evidence on March 7, 2011. On said date, the handling lawyer, sent
his son, Atty. Rainald Paggao, who manifested that his father can no longer handle the case. On
the same day, Atty. Jesus F. Fernandez verbally entered his appearance as new counsel for the
accused. Atty. Fernandez moved for a resetting of the case, which the Court denied considering
the objection of the private prosecutor, as well as due to the repeated warnings issued, and
considering further the length of time afforded the accused to present its (sic) evidence. The
defense right (sic) to present evidence was deemed waived and the case was considered
submitted for resolution.[52]
Unsatisfied, Choi appealed the above MeTC Decision dated April 26, 2011 to the RTC - Branch
142.
The Ruling of the RTC - Branch 142

In its Decision, dated December 23, 2011, the RTC - Branch 142 affirmed the
MeTC Decision and denied Choi's appeal, viz.:
All told, this Court finds that the imposition of civil liability against the accused-appellant is
correctly decided by the lower court.

WHEREFORE, the instant appeal is hereby DENIED and the Decision dated 26 April 2011,
rendered by the Metropolitan Trial Court, Branch 65, Makati City is AFFIRMED IN TOTO.[53]
In this regard, the RTC - Branch 142 observed that:

In the 15 September 2010 Order of the lower [court], [Choi] was already given the last
opportunity to present his defense on 23 November 2010, but still failed to introduce any. [In
spite] of the warning, the lower court cancelled the hearing to afford the defense another day,
on 7 March 2011. It was on said date that the lower court was constrained to declare the right
of [Choi] to present evidence as deemed waived considering the prosecution's vigorous
objection, the repeated warnings to [Choi] and the length of time afforded to [Choi] to present
his defense.

xxxx

[Choi's] failure to adduce his evidence[,] is, clearly, attributable not to the lower court but to
himself due to his repeated postponements. If it were true that [Choi] wanted to adduce his
evidence, he could have taken advantage of the ample opportunity to present, to be heard and
to testify in open court with the assistance of his counsel. [54]
Maintaining his position that he did not waive his right to present evidence, Choi filed a Motion
for Reconsideration[55] of the above Decision on March 6, 2012, scheduled for hearing on March
9, 2012.[56]
On March 7, 2012, the RTC - Branch 142 gave Park ten (10) days within which to file an
Opposition (to the Motion for Reconsideration) and ten (10) days to Choi to file a Reply to the
Opposition upon receipt thereof.[57] On March 13, 2012, Park filed his opposition, which was
received by Choi on March 20, 2012.[58]
On March 28, 2012, the RTC - Branch 142 issued an Order denying Choi's Motion for
Reconsideration. On March 30, 2012 - that is, the day on which his ten (10) day period to file his
Opposition to the Motion for Reconsideration was to expire - Choi filed a motion for extension
of time to file his reply.[59] Notably, the court had already denied Choi's Motion for
Reconsideration two days prior, or on March 28, 2012. Based on the record, Choi did not file a
Reply to the Opposition to the Motion for Reconsideration.
Aggrieved, Choi filed a petition for review[60] under Rule 42 of the Rules of Court with the CA.
In his petition before the CA, Choi's arguments were two-fold: (i) the RTC violated his
constitutional right to due process in denying his motion for reconsideration even before his
period to file a reply to Park's opposition had expired (i.e., Choi had until March 30, 2012 to file
a reply to the opposition, while the RTC - Branch 142 Order dismissing the motion for
reconsideration was issued on March 28, 2012)[61] and (ii) the RTC erred in declaring his right to
present evidence to have been waived for the simple reason that the day of presentation of
evidence was the day of the retirement of his lawyer. [62]

The Ruling of the CA

In its Decision dated March 30, 2015, the CA reversed the RTC -Branch 142 Decision dated
December 23, 2011 and Order dated March 28, 2012, viz.:

WHEREFORE, foregoing considered, the petition is GRANTED. The assailed Regional Trial
Court's Decision dated December 23, 2011 and its Order of March 28, 2012
are REVERSED and SET ASIDE.

The Case is hereby REMANDED to the Metropolitan Trial Court, Branch 65, Makati City, for the
reception of petitioner's evidence.
SO ORDERED.[63]

First, in remanding the case to the MeTC, the CA held that only a full-blown hearing would
guarantee a fair resolution of the case. [64] To the CA, the courts' strict adherence to the rules of
procedure may be relaxed when a strict implementation of the rules would cause substantial
injustice to the parties. In particular, the CA held that several postponements were with
"justifiable reasons,"[65] such as, in the instances of the erroneous certification and the
substitution of counsel.[66]
As to the other instances of postponement, the CA noted that:

While it is true that several motions for postponements have been recorded, it behooves on
the courts to rationalize the reasons for the postponements and to treat each case accordingly.
What is foremost is to render substantive justice and give the parties their day in court.

xxxx

We shall not touch on the claim of payments posed by [Choi] as the same can be best validated
when [Choi] is allowed to present his evidence. [67]
Second, with respect to the RTC - Branch 142's denial of Choi's Motion for Reconsideration two
(2) days before the expiration of the period within which he was to file a reply to the
opposition, the CA, without making a categorical ruling on whether Choi was deprived of his
right to due process, simply ruled that "the failure of [Choi] to present [his] evidence was
because of justified reasons beyond his control."[68]
In a Resolution dated September 30, 2015, the CA denied Park's Motion for
Reconsideration[69] for lack of merit.
Hence, this petition.

In a Resolution[70] dated January 11, 2016, the Court required Choi to comment on Park's
petition. Choi filed his Comment[71] on January 16, 2017. On February 3, 2017, Park filed
his Reply.[72]
Issue
The sole issue for the Court's resolution is whether the CA committed any reversible error in
the issuance of the assailed Decision dated March 30, 2015 and Resolution dated September 30,
2015.
Our Ruling
The petition is meritorious.

In resolving the issues raised in the present petition, the Court emphasizes at the outset that
the dispute between the parties arose in 2000, or almost eighteen (18) years ago, and that the
case has already been remanded to the MeTC on two occasions (i.e., by the Court's Second
Division in 2007 and by the CA in the assailed Decision and Resolution in 2015). Justice dictates,
therefore, that the Court resolve the present petition instead of remanding the same to the
lower court. In this regard, the Court finds that the CA erred in reversing the RTC - Branch
142) Decision dated December 23, 2011 and Order dated March 28, 2012, for the reasons that
follow.
Contrary to the CA's ruling, Choi was
not deprived of due process.
The totality of circumstances painstakingly detailed above reveals that Choi was not deprived of
due process, either: (i) in the MeTC Order dated March 7, 2011, as affirmed by the RTC - Branch
142, declaring Choi to have waived his right to present evidence after he moved for a sixth
postponement; or (ii) in the RTC - Branch 142 Order dated March 28, 2012 denying his Motion
for Reconsideration two days before the lapse of the ten (10) day period given to him by the
RTC to file his Reply to the Opposition (to the Motion for Reconsideration).
First, contrary to the ruling of the CA, the MeTC, as affirmed by the RTC - Branch 142, was
correct in ruling that Choi had waived his right to present evidence.
Claiming that substantive justice must be the determinative end of courts,[73] Choi argues that
any grant of postponement must take into consideration the reason for the postponement and
the merits of the case of the movant. [74] To that extent, the Court agrees, and so holds, that
Choi had been provided with more than ample opportunity to present his case.
To begin with, the grant or denial of a motion - or, in this case, motions - for postponement is
addressed to the sound discretion of the court, which should always be predicated on the
consideration that the ends of justice and fairness are served by the grant or denial of the
motion.[75] As the Court enunciated in Sibay v. Bermudez:[76]
x x x After all, postponements and continuances are part and parcel of our procedural system of
dispensing justice. When no substantial rights are affected and the intention to delay is not
manifest with the corresponding motion to transfer the hearing having been filed accordingly, it
is sound judicial discretion to allow the same to the end that the merits of the case may be fully
ventilated. Thus, in considering motions for postponements, two things must be borne in mind:
(1) the reason for the postponement, and (2) the merits of the case of the movant. Unless grave
abuse of discretion is shown, such discretion will not be interfered with either by mandamus or
appeal.[77] Because it is a matter of privilege, not a right, a movant for postponement should
not assume beforehand that his motion will be granted.[78]
Thus, We agree with the appellate court's finding that in the absence of any clear and manifest
grave abuse of discretion resulting in lack or in excess of jurisdiction, We cannot overturn the
decision of the court a quo. More so, in this case, where the denial of the motion for
postponement appears to be justified.[79] (Emphasis and underscoring supplied)
In fact, pursuant to Sections 2[80] and 3[81] of Rule 30 of the Rules of Court, although a court may
adjourn a trial from day to day, a motion to postpone trial on the ground of absence of
evidence can be granted only upon affidavit showing the materiality or relevancy of such
evidence, and that due diligence has been used to procure it. Rules governing postponements
serve a clear purpose — to avert the erosion of people's confidence in the judiciary. [82]
Consequently, in granting or denying motions for postponements, courts must exercise their
discretion constantly mindful of the Constitutional guarantee against unreasonable delay in the
disposition of cases. In other words, while it is true that cases must be adjudicated in a manner
that is in accordance with the established rules of procedure, so is it crucial that cases be
promptly disposed to better serve the ends of justice. After all, justice delayed is justice
denied.[83] Excessive delay in the disposition of cases renders inutile the rights of the people
guaranteed by the constitution and by various legislations. [84]
Here, Choi bewails the MeTC Order dated March 7, 2011 in which the court, after several
warnings, declared Choi to have waived his right to present evidence. The facts leading up to
the MeTC Order dated March 7, 2011, however, clearly show that the MeTC had been very
liberal in granting Choi's numerous motions for postponement, each time reminding Choi to
come prepared to present his evidence. In all these, Choi's propensity to disregard the
opportunity given to him to present his evidence is palpable.
To be clear, trial was initially scheduled on July 16, 2008. After four motions for postponement
(July 16, 2008 to January 7, 2009, then to April 7, 2009, then to May 19, 2009, and to
September 15, 2010) at Choi's instance, trial was set to proceed on September 15, 2010. Come
September 15, 2010, however, Choi again moved that the trial be postponed to November 23,
2010, asking for the first time the assistance of an interpreter in translating his testimony from
Korean to English.[85]
While the lower court granted Choi's by then sixth postponement, it did so with a stern warning
that his failure to present evidence on the scheduled date would result in his right to present
evidence being deemed waived. Yet, on November 23, 2010, Choi again moved for
postponement on the excuse that the Korean Interpreter who was present to assist him had an
erroneous certification (i.e., was a Certified Qualified Interpreter, but the Certification issued by
the Korean embassy was for another case). Using the certification issue as reason, Choi again
asked that the trial be postponed to March 7, 2011. On that day, Choi's counsel moved for
another postponement on the ground that Choi's previous counsel was retiring and this new
counsel was not prepared to present evidence that day.
Based on the foregoing, it does not escape the Court's attention that from the time the MeTC
gave Choi the opportunity to present his evidence on July 16, 2008 until the issuance of the
MeTC Order dated March 7, 2011 declaring Choi's right to present evidence to have been
waived, Choi had been given several opportunities — spanning almost three (3) years — to
present his evidence.
There is no deprivation of due process when a party is given an opportunity to be heard, not
only through hearings, but even through pleadings, so that one may explain one's side or
arguments.[86] Inasmuch as Choi had been given more than enough opportunity to present his
case, the Court agrees with the MeTC and the RTC that Choi had waived his right to present
evidence. In this regard, Choi cannot claim that he was "prevented from testifying" [87] by the
trial court, considering that all the postponements in the proceedings were at the instance of
Choi.
In any event, the unpreparedness of counsel that led to the MeTC Order of March 7, 2011
cannot, by any stretch of imagination, justify further delay in the proceedings to the detriment
of Park's right to an expeditious resolution of what really is, at the end of the day, a simple
money claim.

Second, that the RTC - Branch 142 denied Choi's Motion for Reconsideration on March 28,
2012, or two days before the lapse of the ten (10) day period given to Choi by the RTC to file
his Reply to the Opposition (to the Motion for Reconsideration) does not, by and of itself,
support Choi's claim of a violation of due process considering that, to begin with, the Reply to
Opposition is limited to issues and arguments raised in Park's Opposition, which in turn, is
limited to the issues and arguments raised in Choi's own Motion for Reconsideration.
Choi is liable to pay Park the
principal amount of P1,875,000.00
and corresponding legal interests
thereon.
Having dispensed with the procedural issues, the Court proceeds to determine the extent of
Choi's liability to Park.

Suffice it to state that based on the records, it is clear that Choi is liable to Park for the loan
extended by the latter to him. This is so because, Choi in his Counter-Affidavit, already admitted
that he borrowed money from Park, arguing only regarding the extent of his liability — i.e., that
what he owed was P1,500,000.00 and not P1,875,000.00. In his Counter-Affidavit, Choi himself
stipulated:
"2. That the truth of the matter is that I borrowed from said complainant the amount of
P1,500,000.00 on June 29, 1999 and he thereupon issued to me two (2) International Bank
Manager's Checks, to wit:
IEB Check No. 01022
- P1,000,000.00
6/29/99
IEB Check No. 01023
- [P]500,000.00
6/29/99
P1,500,000.00
Total:
==========
3. That in place of a formal document such as a promissory note, [Park] required me instead to
give him the subject check in the amount of P1,875,000.00 which includes the interest of
Twenty-Five percent (25%) which is equivalent to P375,000.00 and the date of said check of
August 28, 1999 served to indicate the maturity date of the two-month period within which the
aforementioned loan was to be paid. In other words, the subject check was not intended by us
to be in payment of the loan but to serve merely as an evidence of my indebtedness to the
complaint in lieu of a promissory note as I have duly informed the complainant of the lack of
sufficient funds to cover the same check when I handed over to him that check. [88] (Emphasis
and underscoring supplied)
Judicial admissions made by parties in the course of the trial in the same case are conclusive
and do not require further evidence to prove them. [89] They are legally binding on the party
making them[90] except when it is shown that they have been made through palpable mistake,
or that no such admission was made,[91] neither of which was shown to exist in this case. Thus,
Choi himself having admitted liability, the only question that remains for the Court to resolve is
the extent of such liability.
In this regard, the Court finds that Choi is liable to pay Park the face value of the check in the
amount of P1,875,000.00 as principal. The Court notes that the only bases relied upon by Choi
in support of his contention that P1,500,000.00 is the principal and P375,000.00 to be the
interest are his own allegations in his Counter-Affidavit. Without more, Choi's bare allegations
on the terms of the loan fail to persuade. This is so because in accordance with Article 1956 of
the Civil Code, no interest shall be due unless it has been expressly stipulated in
writing.[92] Here, without further proof of any express agreement that P375,000.00 of the
P1,875,000.00 pertains to interest, the Court is predisposed, based on the facts of the case, to
rule that the entire principal amount owed by Choi to Park is the face value of the check, or
P1,875,000.00.
In an attempt to further minimize liability, Choi raises the defense of payment and insists that
he already paid the sum of P1,590,000.00 (P1,500,000.00 as principal and P90,000.00 as
interest), and that the remaining amount that he owes Park is P285,000.00. [93] In his Counter-
Affidavit, Choi claims:
"5. That complainant is now demanding still for the payment of the face value of the check
which is P1,875,000.00 notwithstanding his awareness of the fact that I have already paid to
him the total amount of P1,590,000.00 as of this date, thereby leaving an unpaid balance of
only P285,000.00.
6. That, attached hereto as Annex "A" the LIST of the instalment payments I made to
complainant from August 28, 1999 up to February 22, 2000, together with documents
evidencing some of such payments, as Annexes "B", "C" and "D"." [94] (Emphasis and
underscoring supplied; italics omitted)
Yet, other than mere allegation of payment of P1,590,000.00, Choi has adduced no evidence to
prove the fact of payment. A party claiming that an obligation has been discharged by payment
has the burden of proving the same. [95] As aptly elucidated by the Court in Alonzo v. San
Juan:[96]
The law requires in civil cases that the party who alleges a fact has the burden of proving it.
Section 1, Rule 131 of the Rules of Court provides that the burden of proof is the duty of a party
to prove the truth of his claim or defense, or any fact in issue by the amount of evidence
required by law. In this case, the burden of proof is on the respondents because they allege an
affirmative defense, namely payment. As a rule, one who pleads payment has the burden of
proving it. Even where the plaintiff must allege [non-payment], the general rule is that the
burden rests on the defendant to prove payment, rather than on the plaintiff to prove [non-
payment]. The debtor has the burden of showing with legal certainty that the obligation has
been discharged by payment.[97] (Emphasis supplied)
As against Choi's allegation of payment, Park's categorical testimony that Choi owed him
P1,875,000.00, coupled with the presentation of the subject check constituting evidence of
indebtedness and absent evidence on the part of Choi to the contrary, leads to the conclusion
that Choi in fact owes Park the full amount of P1,875,000.00. [98]
More importantly, Park, in his Reply-Affidavit, categorically testified that although Choi gave
him a check for P1,590,000.00, that amount was not in payment of PNB Check No. 0077133
(the P1,875,000.00 check dated June 28,1999), but was for the payment of PNB Check No.
0077134 in the amount of P750,000.00 dated August 28, 1999 and PNB Check No. 0008013 in
the amount of P700,000.00 dated September 7, 1999.[99]
Given these facts, as correctly observed by the RTC - Branch 142, if Choi really did make a
partial payment on the loan, then he would have taken the check back as debtors would in the
ordinary course of business.[100] Quite the contrary, the check for P1,875,000.00 remained in
Park's possession who continued to make demands on the basis of the check.
Finally, even if the Court were to indulge Choi's claim that he handed Park a check for
P1,590,000.00, it has not been shown, much less proven, to the satisfaction of the Court
whether those payments were made specifically by Choi for the purpose of discharging his loan
obligations to Park. As shown in Park's Reply-Affidavit:
"2. That after I gave him the cash of P1,875,000.00, he gave P100,000.00 to Moo Pyung Park as
the latter's commission for bringing him to me; then he handed P196,000.00 to me to pay for
and in his behalf the rentals for 14 months of the warehouse he is renting through me from Mr.
Tony Arellano located at Cubao, Quezon City; likewise, he handed P1,500,000.00 to me to
change it to manager's checks which he said he will use in paying Samsung Electric Company
which he did not want to pay in cash for fear of bringing that much with him and which
account (sic) for IEB Checks Nos. 01022 and 01023; and lastly[,] he gave me the balance of
P69,000.00 in payment on interest on the P1,875,000.00 for two months, i.e., July and
August.
3. That I admit that he had indorsed in my favor several checks from different owners as
enumerated in Annex "A" of his counter-affidavit and he had issued two checks in my favor in
the sum total of P1,590,000.00 but not in payment of the PNB Check No. 0077133 in the
amount of P1,875,000.00 he issued to me in June 28, 1999 but of PNB Check No. 0077134 in
the amount of P750,000.00 dated August 28, 1999 and the PNB Check No. 0008013 in the
amount of P700,000.00 dated September 7, 1999 which he encash (sic) with me also in July
1999 and which he told me not to present for payment anymore as he will just replace them
with other checks. Copies of said checks are hereto attached as Annexes "D" and "E" and made
as integral parts hereof."[101] (Emphasis and underscoring supplied)
Given the foregoing, the Court therefore finds that: first, Choi was not deprived of due process,
and was in fact, given more than ample opportunity to present his case; and second, that, as
correctly observed by the MeTC and subsequently affirmed by the RTC - Branch 142, Choi is
liable to pay Park the amount P1,875,000.00 along with its corresponding legal interest.
A final note on interest. There are two types of interest - monetary interest and compensatory
interest.[102] Interest as a compensation fixed by the parties for the use or forbearance of
money is referred to as monetary interest,[103] while interest that may be imposed by law or by
courts as penalty for damages is referred to as compensatory interest. [104] Right to interest
therefore 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.[105]
Inasmuch as the parties did not execute a written loan agreement, and consequently, did not
stipulate on the imposition of interest, Article 1956 of the Civil Code, which states that "[n]o
interest shall be due unless it has been expressly stipulated in writing," operates to preclude
the imposition and running of monetary interest on the principal. In other words, no monetary
interest having been agreed upon between the parties, none accrues in favor of Park.

Nevertheless, the moment a debtor incurs in delay in the payment of a sum of money, the
creditor is entitled to the payment of interest as indemnity for damages arising out of that
delay. Article 2209 of the Civil Code provides that: "[i]f the obligation consists in the payment of
sum of money, and the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six percent (6%) per annum."
Consequently, by operation of Article 2209 of the Civil Code, Choi becomes liable to pay
Park compensatory interest to indemnify Park for the damages the latter suffered as a result of
Choi's delay in the payment of the loan. Delay in this case, pursuant to Article 1169 of the Civil
Code,[106] begins to run from the time Park extrajudicially demanded from Choi the fulfillment
of his loan obligation that is, on May 19, 2000. There being no stipulation as to the rate of
compensatory interest, the rate is six percent (6%) per annum pursuant to Article 2209 of the
Civil Code.
To be clear, however, Article 2212 of the Civil Code, which provides that "[i]nterest due shall
earn legal interest from the time it is judicially demanded, although the obligation may be silent
upon this point," does not apply because "interest due" in Article 2212 refers only
to accrued interest. A look at the counterpart provision of Article 2212 of the new Civil Code,
Article 1109 of the old Civil Code, supports this. It provides:
Art. 1109. Accrued interest shall draw interest at the legal rate from the time the suit is filed for
its recovery, even if the obligation should have been silent on this point.
In commercial transactions the provisions of the Code of Commerce shall govern.

Pawnshops and savings banks shall be governed by their special regulations. (Emphasis and
underscoring supplied)

In interpreting the above provision of the old Civil Code, the Court in Zobel v. City of
Manila,[107] ruled that Article 1109 applies only to conventional obligations containing a
stipulation on interest. Similarly, Article 2212 of the new Civil Code contemplates, and
therefore applies, only when there exists stipulated or conventional interest. [108]
Finally, in accordance Eastern Shipping Lines, Inc. v. Court of Appeals[109] as further clarified by
the Court in Nacar v. Gallery Frames,[110] 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 is twelve percent (12%) per
annum computed from default (i.e., the date of judicial or extrajudicial demand). With the
issuance of Bangko Sentral ng Pilipinas (BSP-MB) Circular No. 799 (s. 2013), said rate of 12% per
annum applies until June 30, 2013, and, from July 1, 2013, the new rate of six percent (6%) per
annum applies. Finally, when the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest shall be 6% per annum from such finality until its
satisfaction, the interim period being deemed to be by then an equivalent to a forbearance of
credit.[111]
WHEREFORE, premises considered, the petition is GRANTED. The Court of
Appeals' Decision dated March 30, 2015 and Resolution dated September 30, 2015 in CA-G.R.
SP No. 124173 are hereby REVERSED and SET ASIDE. The Decision of the Regional Trial Court,
Branch 142 dated December 23, 2011 and Order dated March 28, 2012, which affirmed the
Metropolitan Trial Court of Makati City - Branch 65 Decision dated April 26, 2011, are
hereby REINSTATED.
Respondent Eung Won Choi is hereby ordered to pay Petitioner Hun Hyung Park the amount of
One Million Eight Hundred Seventy-Five Thousand Pesos (P1,875,000.00) representing the
principal amount of the unpaid PNB Check No. 0077133 dated August 28, 1999, with legal
interest at the rate of twelve percent (12%) per annum from May 19, 2000, the date of
extrajudicial demand, until June 30, 2013;[112] and thereafter, six percent (6%) per
annum[113] until this Decision becomes final and executory.
Further, this sum shall further earn interest at the rate of six percent (6%) per annum from the
date of finality of this Decision until full payment,[114] in accordance with the Monetary Board of
the Bangko Sentral ng Pilipinas Circular No. 799 (s. 2013).
SO ORDERED.

CATALINA F. ISLA, ELIZABETH ISLA, AND GILBERT F. ISLA, PETITIONERS, V. GENEVIRA[*] P.

ESTORGA, RESPONDENT.

DECISION

PERLAS-BERNABE, J.:

Before the Court is a petition for review on certiorari1 filed by petitioners Catalina F. Isla
(Catalina), Elizabeth Isla, and Gilbert F. Isla (collectively, petitioners) assailing the
Decision2 dated May 31, 2017 and the Resolution3 dated August 24, 2017 of the Court of
Appeals (CA) in CA-G.R. CV No. 101743, which affirmed with modification the Decision4 dated
December 10, 2012 of the Regional Trial Court of Pasay City, Branch 112 (RTC) in Civil Case No.
07-0014, directing petitioners to pay respondent Genevira P. Estorga (respondent) the
following sums: (a) P100,000.00 representing the principal of the loan obligation; (b) an amount
equivalent to twelve percent (12%) of P100,000.00 computed from November 16, 2006 until
full payment, representing interest on the loan; (c) an amount equivalent to six percent (6%) of
the sums due in (a) and per annum computed from the finality of the CA Decision until full
payment, representing legal interest; and (d) P20,000.00 as attorney's fees.

The Facts
 On December 6, 2004, petitioners obtained a loan in the amount of P100,000.00 from
respondent, payable anytime from six (6) months to one (1) year and subject to interest at the
rate of ten percent (10%) per month, payable on or before the end of each month. As security,
a real estate mortgage5 was constituted over a parcel of land located in Pasay City, covered by
Transfer Certificate of Title (TCT) No. 1326736 and registered under the name of Edilberto Isla
(Edilberto), who is married to Catalina (subject property). When petitioners failed to pay the
said loan, respondent sought assistance from the barangay, and consequently, a Kasulatan ng
Pautang7 dated December 8, 2005 was executed.ℒαwρhi৷ Petitioners, however, failed to
comply with its terms, prompting respondent to send a demand letter8 dated November 16,
2006. Once more, petitioners failed to comply with the demand, causing respondent to file a
Petition for Judicial Foreclosure9 against them before the RTC.10

For their part,11petitioners maintained that the subject mortgage was not a real estate
mortgage but a mere loan, and that the stipulated interest of ten percent (10%) per month was
exorbitant and grossly unconscionable.12 They also insisted that since petitioners were not the
absolute owners of the subject property - as the same was allegedly owned by Edilberto – they
could not have validly constituted the subject mortgage thereon.13

The RTC Ruling

In a Decision14 dated December 10, 2012, the RTC granted the Petition for Judicial
Foreclosure, finding that petitioners themselves admitted that: (a) they obtained a loan in the
amount of P100,000.00 and that the said loan was secured by a real estate mortgage over the
subject property; and (b) the subject mortgage was annotated on TCT No. 132673.15 Further,
the RTC observed that while it is true that the present action pertains to a judicial foreclosure,
the underlying principle is that a real estate mortgage is but a security and not a satisfaction of
indebtedness. Thus, it is only proper to render petitioners solidarily liable to pay respondent
and/or foreclose the subject mortgage should they fail to fulfill their obligation.16

Consequently, the RTC directed petitioners to pay respondent the amounts of P100,000.00
with twelve percent (12%) interest per annum from December 2007 until fully paid and
P20,000.00 as attorney's fees. Alternatively, in the event that petitioners fail to pay or deposit
with the Clerk of Court the said amounts within a period of six (6) months from receipt of a
copy of the RTC Decision, it held that the subject property will be foreclosed and sold at public
auction to satisfy the mortgage debt, and the surplus, if any, will be delivered to petitioners
with reasonable interest under the law.17

Aggrieved, respondent appealed18 to the CA.

The CA Ruling

In a Decision19 dated May 31, 2017, the CA affirmed with modification the RTC Decision,
and accordingly, ordered petitioners to pay respondent the following sums: (a) P100,000.00
representing the principal of the loan obligation; (b) an amount equivalent to twelve percent
(12%) of P100,000.00 computed per year from November 16, 2006 until full payment,
representing interest on the loan; (c) an amount equivalent to six percent (6%) of the sums due
in (a) and (b) per annum computed from the finality of the CA Decision until full payment,
representing legal interest; and (d) P20,000.00 as attorney's fees.20

The CA held that in light of the registry return receipt bearing the signature of Catalina, it
was established that petitioners indeed received the demand letter dated November 16,
2006.21 Meanwhile, it did not agree with the RTC's order providing petitioners alternative
remedies, which remedies are, by law, mutually exclusive. Thus, since respondent's Petition for
Judicial Foreclosure was essentially an action to collect a sum of money, she is then barred from
causing the foreclosure of the subject mortgage.22

Moreover, the CA ruled that the RTC erred in imposing the interest rate of twelve percent
(12%) per annum from December 2007 until full payment. It likewise held that the stipulated
interest of ten percent (10%) per month on the real estate mortgage is exorbitant. And finally, it
declared that respondent is entitled to the award of attorney's fees based on equity and in the
exercise of its discretion.23

Undaunted, petitioners sought partial reconsideration,24 claiming that the award of

attorney's fees was without factual, legal, and equitable justification and should therefore be
deleted.25 The same, however, was denied in a Resolution26 dated August 24, 2017; hence,
the instant petition, claiming that the CA gravely erred not only in awarding attorney's fees
despite the absence of factual justification in the body of its Decision but also in imposing
interest of twelve percent (12%) per annum interest until full payment.27

In her Comment,28 respondent retorted that the CA's award of attorney's fees was proper
and within the discretion of the court. Likewise, the CA correctly imposed interest at the rate of
twelve percent (12%) per annum to the principal loan obligation of petitioners.29

The Issues Before the Court

The issue for the Court's resolution is whether or not the CA erred in awarding: (a) twelve
percent (12%) interest on the principal obligation until full payment; and (b) attorney's fees.

The Court's Ruling

The petition is partly meritorious.

I.

In their petition, petitioners contest the interest imposed on the principal amount of the
loan at the rate of twelve percent (12%) per annum from the date of extrajudicial demand until
full payment, as stated in paragraph 2 of the CA ruling. In this regard, they argue that pursuant
to ECE Realty and Development, Inc. v. Hernandez (ECE Realty),30 the applicable interest rate
should only be six percent (6%).31

The argument is untenable.

Case law states that there are two (2) types of interest, namely, monetary interest and
compensatory interest. Monetary interest is the compensation fixed by the parties for the use
or forbearance of money. On the other hand, compensatory interest is that imposed by law or
by the courts as penalty or indemnity for damages. Accordingly, the right to recover interest
arises only either by virtue of a contract (monetary interest) or as damages for delay or failure
to pay the principal loan on which the interest is demanded (compensatory interest).32

Anent monetary interest, the parties are free to stipulate their preferred rate. However,
courts are allowed to equitably temper interest rates that are found to be excessive, iniquitous,
unconscionable, and/or exorbitant,33 such as stipulated interest rates of three percent (3%)
per month or higher.34 In such instances, it is well to clarify that only the unconscionable
interest rate is nullified and deemed not written in the contract; whereas the parties'
agreement on the payment of interest on the principal loan obligation subsists.35 It is as if the
parties failed to specify the interest rate to be imposed on the principal amount, in which
case the legal rate of interest prevailing at the time the agreement was entered into is applied
by the Court.36 This is because, according to jurisprudence, the legal rate of interest is the
presumptive reasonable compensation for borrowed money.1âшphi137

In this case, petitioners and respondent entered into a loan obligation and clearly stipulated
for the payment of monetary interest. However, the stipulated interest of ten percent (10%)
per month was found to be unconscionable, and thus, the courts a quo struck down the same
and pegged a new monetary interest of twelve percent (12%) per annum, which was the
prevailing legal rate of interest for loans and forbearances of money at the time the loan was
contracted on December 6, 2004.

In Spouses Abella v. Spouses Abella,38 the Court was also faced with a situation where the
parties entered into a loan with an agreement to pay monetary interest. Since the stipulated
rate of interest by the parties was found to be unconscionable, the Court struck down the same
and substituted it with the prevailing legal interest rate at the time the loan was perfected, i.e.,
twelve percent (12%) per annum. In holding that such rate shall persist in spite of supervening
events, the Court held:

Jurisprudence is clear about the applicable interest rate if a written

instrument fails to specify a rate. In Spouses Toring v. Spouses Olan [(589 Phil. 362
[ 2008 ])], 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."
 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 [(331 Phil. 787 [ 1996 ])]: "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."

xxxx

The rule is not only definite; it is cast in mandatory language. From Eastern
Shipping [Lines, Inc. v. CA] [(G.R. No. 97412, July 12, 1994, 234 SCRA 78)]
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. 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 Frames [(716 Phil. 267 [ 2013 ])]
recognized that the legal rate of interest has been reduced to 6% per annum[.]

xxxx

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:

xxxx

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.39 (Emphases and underscoring supplied)

Following this pronouncement, the Court rules that the CA correctly imposed a straight
monetary interest rate of twelve percent (12%) per annum on the principal loan obligation of
petitioners to respondent, reckoned from the date of extrajudicial demand until finality of this
ruling. At this point, suffice it to say that petitioner's reliance on ECE Realty is misplaced
primarily because unlike in this case, the amount due therein does not partake of a loan
obligation or forbearance of money.

In addition, not only the principal amount but also the monetary interest due to respondent
as discussed above shall itself earn compensatory interest at the legal rate, pursuant to Article
2212 of the Civil Code, which states that "[i]nterest due shall earn legal interest from the time it
is judicially demanded, although the obligation may be silent upon this point."40 To be sure,
Article 2212 contemplates the presence of stipulated or conventional interest, i.e., monetary
interest, which has accrued when demand was judicially made. In cases where no monetary
interest had been stipulated by the parties, no accrued monetary interest could further earn
compensatory .interest upon judicial demand.41 Thus, the principal amount and monetary
interest due to respondent shall earn compensatory interest of twelve percent (12%) per
annum from judicial demand, i.e., the date of the filing of the complaint on July 24, 2007,42 to
June 30, 2013, and thereafter, at the rate of six percent (6%) per annum from July 1, 2013 until
fully paid.

II.

On the issue of attorney's fees, the general rule is that the same cannot be recovered as
part of damages because of the policy that no premium should be placed on the right to
litigate. They are not to be awarded every time a party wins a suit.43 The power of the court to
award attorney's fees under Article 220844 of the Civil Code demands factual, legal, and
equitable justification.45 It must clearly state the reasons for awarding attorney's fees in the
body of its decision, and not merely in its dispositive portion.46

In this case, the CA awarded the amount of P20,000.00 as attorney's fees premised merely
on the general statement "upon equity and in the exercise of [its] discretion."47 Hence, since
the CA failed to "clearly state the reasons for awarding attorney's fees in the body of its
decision", the Court finds it proper to delete the same.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated May

31, 2017 and the Resolution dated August 24, 2017 of the Court of Appeals in CA-
G.R. CV No. 101743 are hereby MODIFIED as follows:
 1. Petitioners Catalina F. Isla, Elizabeth Isla, and Gilbert F. Isla
are ORDERED to pay respondent Genevira P. Estorga:

(a) P100,000.00 representing the principal loan obligation;

(b) Monetary interest on the principal loan obligation at the rate of

twelve percent (12%) per annum from the date of
default, i.e., extrajudicial demand on November 16, 2006, until
finality of this ruling;

(c) Compensatory interest on the monetary interest as stated in

letter (b) at the rate of twelve percent (12%) per annum from
judicial demand, i.e., July 24, 2007, to June 30, 2013, and
thereafter, at the rate of six percent (6%) per annum from July 1,
2013 until finality of this ruling; and

(d) Legal interest at the rate of six percent (6%) per annum imposed on
the sums due in letters (a), (b), and (c) from finality of this ruling
until full payment; and

2. The award of attorney's fees in favor of respondent is DELETED.

SO ORDERED.

G.R. No. 189871 August 13, 2013

DARIO NACAR, PETITIONER,

vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.

DECISION

PERALTA, J.:
This is a petition for review on certiorari assailing the Decision 1 dated September 23, 2008 of
the Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October 9, 2009
denying petitioner’s motion for reconsideration.

The factual antecedents are undisputed.

Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch
of the National Labor Relations Commission (NLRC) against respondents Gallery Frames (GF)
and/or Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.

On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found
that he was dismissed from employment without a valid or just cause. Thus, petitioner was
awarded backwages and separation pay in lieu of reinstatement in the amount of ₱158,919.92.
The dispositive portion of the decision, reads:

With the foregoing, we find and so rule that respondents failed to discharge the burden of
showing that complainant was dismissed from employment for a just or valid cause. All the
more, it is clear from the records that complainant was never afforded due process before he
was terminated. As such, we are perforce constrained to grant complainant’s prayer for the
payments of separation pay in lieu of reinstatement to his former position, considering the
strained relationship between the parties, and his apparent reluctance to be reinstated,
computed only up to promulgation of this decision as follows:

SEPARATION PAY
Date Hired = August 1990
Rate = ₱198/day
Date of Decision = Aug. 18, 1998
Length of Service = 8 yrs. & 1 month
₱198.00 x 26 days x 8 months = ₱41,184.00
BACKWAGES
Date Dismissed = January 24, 1997
Rate per day = ₱196.00
Date of Decisions = Aug. 18, 1998
a) 1/24/97 to 2/5/98 = 12.36 mos.
₱196.00/day x 12.36 mos. = ₱62,986.56
b) 2/6/98 to 8/18/98 = 6.4 months
 Prevailing Rate per day = ₱62,986.00
₱198.00 x 26 days x 6.4 mos. = ₱32,947.20
TOTAL = ₱95.933.76

xxxx

WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of

constructive dismissal and are therefore, ordered:

To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred
eighty-six pesos and 56/100 (₱62,986.56) Pesos representing his separation pay;

To pay jointly and severally the complainant the amount of nine (sic) five thousand nine
hundred thirty-three and 36/100 (₱95,933.36) representing his backwages; and

All other claims are hereby dismissed for lack of merit.

SO ORDERED.4

Respondents appealed to the NLRC, but it was dismissed for lack of merit in the
Resolution5 dated February 29, 2000. Accordingly, the NLRC sustained the decision of the Labor
Arbiter. Respondents filed a motion for reconsideration, but it was denied. 6

Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24,
2000, the CA issued a Resolution dismissing the petition. Respondents filed a Motion for
Reconsideration, but it was likewise denied in a Resolution dated May 8, 2001. 7

Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332.
Finding no reversible error on the part of the CA, this Court denied the petition in the
Resolution dated April 17, 2002.8

An Entry of Judgment was later issued certifying that the resolution became final and executory
on May 27, 2002.9 The case was, thereafter, referred back to the Labor Arbiter. A pre-execution
conference was consequently scheduled, but respondents failed to appear. 10

On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his
backwages be computed from the date of his dismissal on January 24, 1997 up to the finality of
the Resolution of the Supreme Court on May 27, 2002. 11 Upon recomputation, the
Computation and Examination Unit of the NLRC arrived at an updated amount in the sum of
₱471,320.31.12
On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the Sheriff
to collect from respondents the total amount of ₱471,320.31. Respondents filed a Motion to
Quash Writ of Execution, arguing, among other things, that since the Labor Arbiter awarded
separation pay of ₱62,986.56 and limited backwages of ₱95,933.36, no more recomputation is
required to be made of the said awards. They claimed that after the decision becomes final and
executory, the same cannot be altered or amended anymore. 14 On January 13, 2003, the Labor
Arbiter issued an Order15 denying the motion. Thus, an Alias Writ of Execution16 was issued on
January 14, 2003.

Respondents again appealed before the NLRC, which on June 30, 2003 issued a
Resolution17 granting the appeal in favor of the respondents and ordered the recomputation of
the judgment award.

On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to
be final and executory. Consequently, another pre-execution conference was held, but
respondents failed to appear on time. Meanwhile, petitioner moved that an Alias Writ of
Execution be issued to enforce the earlier recomputed judgment award in the sum of
₱471,320.31.18

The records of the case were again forwarded to the Computation and Examination Unit for
recomputation, where the judgment award of petitioner was reassessed to be in the total
amount of only ₱147,560.19.

Petitioner then moved that a writ of execution be issued ordering respondents to pay him the
original amount as determined by the Labor Arbiter in his Decision dated October 15, 1998,
pending the final computation of his backwages and separation pay.

On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment
award that was due to petitioner in the amount of ₱147,560.19, which petitioner eventually
received.

Petitioner then filed a Manifestation and Motion praying for the re-computation of the
monetary award to include the appropriate interests. 19

On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to the
amount of ₱11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that
should be enforced considering that it was the one that became final and executory. However,
the Labor Arbiter reasoned that since the decision states that the separation pay and
backwages are computed only up to the promulgation of the said decision, it is the amount of
₱158,919.92 that should be executed. Thus, since petitioner already received ₱147,560.19, he
is only entitled to the balance of ₱11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its
Resolution22 dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it
was likewise denied in the Resolution23 dated January 31, 2007.

Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.

On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined that
since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which
already became final and executory, a belated correction thereof is no longer allowed. The CA
stated that there is nothing left to be done except to enforce the said judgment. Consequently,
it can no longer be modified in any respect, except to correct clerical errors or mistakes.

Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated
October 9, 2009.

Hence, the petition assigning the lone error:

WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED
GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN UPHOLDING THE
QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005
ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION OF THE OCTOBER 15,
1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE
BODY OF THE SAME DECISION.26

Petitioner argues that notwithstanding the fact that there was a computation of backwages in
the Labor Arbiter’s decision, the same is not final until reinstatement is made or until finality of
the decision, in case of an award of separation pay. Petitioner maintains that considering that
the October 15, 1998 decision of the Labor Arbiter did not become final and executory until the
April 17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of
Entries on May 27, 2002, the reckoning point for the computation of the backwages and
separation pay should be on May 27, 2002 and not when the decision of the Labor Arbiter was
rendered on October 15, 1998. Further, petitioner posits that he is also entitled to the payment
of interest from the finality of the decision until full payment by the respondents.

On their part, respondents assert that since only separation pay and limited backwages were
awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more
recomputation is required to be made of said awards. Respondents insist that since the
decision clearly stated that the separation pay and backwages are "computed only up to [the]
promulgation of this decision," and considering that petitioner no longer appealed the decision,
petitioner is only entitled to the award as computed by the Labor Arbiter in the total amount of
₱158,919.92. Respondents added that it was only during the execution proceedings that the
petitioner questioned the award, long after the decision had become final and executory.
Respondents contend that to allow the further recomputation of the backwages to be awarded
to petitioner at this point of the proceedings would substantially vary the decision of the Labor
Arbiter as it violates the rule on immutability of judgments.

The petition is meritorious.

The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of
Appeals (Sixth Division),27 wherein the issue submitted to the Court for resolution was the
propriety of the computation of the awards made, and whether this violated the principle of
immutability of judgment. Like in the present case, it was a distinct feature of the judgment of
the Labor Arbiter in the above-cited case that the decision already provided for the
computation of the payable separation pay and backwages due and did not further order the
computation of the monetary awards up to the time of the finality of the judgment. Also in
Session Delights, the dismissed employee failed to appeal the decision of the labor arbiter. The
Court clarified, thus:

In concrete terms, the question is whether a re-computation in the course of execution of the
labor arbiter's original computation of the awards made, pegged as of the time the decision
was rendered and confirmed with modification by a final CA decision, is legally proper. The
question is posed, given that the petitioner did not immediately pay the awards stated in the
original labor arbiter's decision; it delayed payment because it continued with the litigation
until final judgment at the CA level.

A source of misunderstanding in implementing the final decision in this case proceeds from the
way the original labor arbiter framed his decision. The decision consists essentially of two parts.

The first is that part of the decision that cannot now be disputed because it has been confirmed
with finality. This is the finding of the illegality of the dismissal and the awards of separation pay
in lieu of reinstatement, backwages, attorney's fees, and legal interests.

The second part is the computation of the awards made. On its face, the computation the labor
arbiter made shows that it was time-bound as can be seen from the figures used in the
computation. This part, being merely a computation of what the first part of the decision
established and declared, can, by its nature, be re-computed. This is the part, too, that the
petitioner now posits should no longer be re-computed because the computation is already in
the labor arbiter's decision that the CA had affirmed. The public and private respondents, on
the other hand, posit that a re-computation is necessary because the relief in an illegal
dismissal decision goes all the way up to reinstatement if reinstatement is to be made, or up to
the finality of the decision, if separation pay is to be given in lieu reinstatement.

That the labor arbiter's decision, at the same time that it found that an illegal dismissal had
taken place, also made a computation of the award, is understandable in light of Section 3, Rule
VIII of the then NLRC Rules of Procedure which requires that a computation be made. This
Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as
practicable, shall embody in any such decision or order the detailed and full amount awarded.

Clearly implied from this original computation is its currency up to the finality of the labor
arbiter's decision. As we noted above, this implication is apparent from the terms of the
computation itself, and no question would have arisen had the parties terminated the case and
implemented the decision at that point.

However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the
finding of illegality as well as on all the consequent awards made. Hence, the petitioner
appealed the case to the NLRC which, in turn, affirmed the labor arbiter's decision. By law, the
NLRC decision is final, reviewable only by the CA on jurisdictional grounds.

The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds
through a timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC
exceeded its authority in affirming the payment of 13th month pay and indemnity, lapsed to
finality and was subsequently returned to the labor arbiter of origin for execution.

It was at this point that the present case arose. Focusing on the core illegal dismissal portion of
the original labor arbiter's decision, the implementing labor arbiter ordered the award re-
computed; he apparently read the figures originally ordered to be paid to be the computation
due had the case been terminated and implemented at the labor arbiter's level. Thus, the labor
arbiter re-computed the award to include the separation pay and the backwages due up to the
finality of the CA decision that fully terminated the case on the merits. Unfortunately, the labor
arbiter's approved computation went beyond the finality of the CA decision (July 29, 2003) and
included as well the payment for awards the final CA decision had deleted - specifically, the
proportionate 13th month pay and the indemnity awards. Hence, the CA issued the decision
now questioned in the present petition.

We see no error in the CA decision confirming that a re-computation is necessary as it

essentially considered the labor arbiter's original decision in accordance with its basic
component parts as we discussed above. To reiterate, the first part contains the finding of
illegality and its monetary consequences; the second part is the computation of the awards or
monetary consequences of the illegal dismissal, computed as of the time of the labor arbiter's
original decision.28

Consequently, from the above disquisitions, under the terms of the decision which is sought to
be executed by the petitioner, no essential change is made by a recomputation as this step is a
necessary consequence that flows from the nature of the illegality of dismissal declared by the
Labor Arbiter in that decision.29 A recomputation (or an original computation, if no previous
computation has been made) is a part of the law – specifically, Article 279 of the Labor Code
and the established jurisprudence on this provision – that is read into the decision. By the
nature of an illegal dismissal case, the reliefs continue to add up until full satisfaction, as
expressed under Article 279 of the Labor Code. The recomputation of the consequences of
illegal dismissal upon execution of the decision does not constitute an alteration or amendment
of the final decision being implemented. The illegal dismissal ruling stands; only the
computation of monetary consequences of this dismissal is affected, and this is not a violation
of the principle of immutability of final judgments.30

That the amount respondents shall now pay has greatly increased is a consequence that it
cannot avoid as it is the risk that it ran when it continued to seek recourses against the Labor
Arbiter's decision. Article 279 provides for the consequences of illegal dismissal in no uncertain
terms, qualified only by jurisprudence in its interpretation of when separation pay in lieu of
reinstatement is allowed. When that happens, the finality of the illegal dismissal decision
becomes the reckoning point instead of the reinstatement that the law decrees. In allowing
separation pay, the final decision effectively declares that the employment relationship ended
so that separation pay and backwages are to be computed up to that point. 31

Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc.
v. Court of Appeals,32 the Court laid down the guidelines regarding the manner of computing
legal interest, to wit:

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

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

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

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

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance of credit. 33
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 34 of Circular No. 905,
Series of 1982 and, accordingly, issued Circular No. 799,35 Series of 2013, effective July 1, 2013,
the pertinent portion of which reads:

The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following
revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby
amending Section 2 of Circular No. 905, Series of 1982:

Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and
the rate allowed in judgments, in the absence of an express contract as to such rate of interest,
shall be six percent (6%) per annum.

Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks and
Sections 4305Q.1,37 4305S.338 and 4303P.139 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 Lines40 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.

Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v.
Bangko Sentral Monetary Board,41 this Court affirmed the authority of the BSP-MB to set
interest rates and to issue and enforce Circulars when it ruled that "the BSP-MB may prescribe
the maximum rate or rates of interest for all loans or renewals thereof or the forbearance of
any money, goods or credits, including those for loans of low priority such as consumer loans,
as well as such loans made by pawnshops, finance companies and similar credit institutions. It
even authorizes the BSP-MB to prescribe different maximum rate or rates for different types of
borrowings, including deposits and deposit substitutes, or loans of financial intermediaries."

Nonetheless, with regard to those judgments that have become final and executory prior to
July 1, 2013, said judgments shall not be disturbed and shall continue to be implemented
applying the rate of interest fixed therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern
Shipping Lines42 are accordingly modified to embody BSP-MB Circular No. 799, as follows:

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

delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.1âwphi1

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

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

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

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

When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1,
2013, shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein.

WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of
Appeals in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED and
SET ASIDE. Respondents are Ordered to Pay petitioner:
 (1) backwages computed from the time petitioner was illegally dismissed on January 24,
1997 up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became
final and executory;

(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one
month pay per year of service; and

(3) interest of twelve percent (12%) per annum of the total monetary awards, computed
from May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013
until their full satisfaction.

The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary
benefits awarded and due to petitioner in accordance with this Decision.

SO ORDERED.

SPOUSES BAYANI H. ANDAL AND GRACIA G. ANDAL, Petitioners,

vs.
PHILIPPINE NATIONAL BANK REGISTER OF DEEDS OF BATANGAS CITY JOSE C.
CORALES, Respondents.

DECISION

PEREZ, J.:

Before the Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court
seeking to partially set aside the Decision,2 dated 30 March 2010, and the Resolution,3 dated 13
October 2010, of the Court of Appeals (CA) in CA-G.R. CV No. 91250. The challenged Decision
dismissed the appeal of herein respondent Philippine National Bank (respondent bank) and
affirmed the decision of the Regional Trial Court (RTC), Branch 84, Batangas City with the
modification that the interest rate to be applied by respondent bank on the principal loan
obligation of petitioners Spouses Bayani H. Andal and Gracia G. Andal (petitioners spouses)
shall be 12% per annum, to be computed from default.

As found by the CA, the facts of this case are as follows:

x x x on September 7, 1995, [petitioners-spouses] obtained a loan from [respondent bank] in

the amount of ₱21,805,000.00, for which they executed twelve (12) promissory notes x x x
[undertaking] to pay [respondent bank] the principal loan with varying interest rates of 17.5%
to 27% per interest period. It was agreed upon by the parties that the rate of interest may be
increased or decreased for the subsequent interest periods, with prior notice to [petitioners-
spouses], in the event of changes in interest rates prescribed by law or the Monetary Board x x
x, or in the bank’s overall cost of funds.

To secure the payment of the said loan, [petitioners-spouses] executed in favor of [respondent
bank] a real estate mortgage using as collateral five (5) parcels of land including all
improvements therein, all situated in Batangas City and covered by Transfer Certificate of Title
(TCT) Nos. T-641, T-32037, T-16730, T-31193 and RT 363 (3351) of the Registry of Deeds of
Batangas City, in the name of [petitioners-spouses].

Subsequently, [respondent bank] advised [petitioners-spouses] to pay their loan obligation,

otherwise the former will declare the latter’s loan due and demandable. On July 17, 2001,
[petitioners-spouses] paid ₱14,800,000.00 to [respondent bank] to avoid foreclosure of the
properties subject of the real estate mortgage. Accordingly, [respondent bank] executed a
release of real estate mortgage over the parcels of land covered by TCT Nos. T-31193 and RT-
363 (3351). However, despite payment x x x, [respondent bank] proceeded to foreclose the real
estate mortgage, particularly with respect to the three (3) parcels of land covered by TCT Nos.
T-641, T-32037 and T-16730 x x x.

x x x [A] public auction sale of the properties proceeded, with the [respondent bank] emerging
as the highest and winning bidder. Accordingly, on August 30, 2002, a certificate of sale of the
properties involved was issued. [Respondent bank] consolidated its ownership over the said
properties and TCT Nos. T-52889, T-52890, and T-52891 were issued in lieu of the cancelled
TCT[s] x x x. This prompted [petitioners-spouses] to file x x x a complaint for annulment of
mortgage, sheriff’s certificate of sale, declaration of nullity of the increased interest rates and
penalty charges plus damages, with the RTC of Batangas City.

In their amended complaint, [petitioners-spouses] alleged that they tried to religiously pay their
loan obligation to [respondent bank], but the exorbitant rate of interest unilaterally determined
and imposed by the latter prevented the former from paying their obligation. [Petitioners-
spouses] also alleged that they signed the promissory notes in blank, relying on the
representation of [respondent bank] that they were merely proforma [sic] bank requirements.
Further, [petitioners-spouses] alleged that the unilateral increase of interest rates and
exorbitant penalty charges are akin to unjust enrichment at their expense, giving [respondent
bank] no right to foreclose their mortgaged properties. x x x.

xxxx

On August 27, 2004 [respondent bank] filed its answer, denying the allegations in the
complaint. x x x [respondent bank] alleged that: the penalty charges imposed on the loan was
expressly stipulated under the credit agreements and in the promissory notes; although
[petitioners-spouses] paid to [respondent bank] ₱14,800,000.00 on July 10, 2001, the former
was still indebted to the latter in the amount of ₱33,960,633.87; assuming arguendo that the
imposition was improper, the foreclosure of the mortgaged properties is in order since
[respondent bank’s] bid in the amount of ₱28,965,100.00 was based on the aggregate
appraised rates of the foreclosed properties. x x x4

After trial, the RTC rendered judgment5 in favor of petitioners-spouses and against respondent
bank, ordering that:

1. The rate of interest should be reduced as it is hereby reduced to 6% in accordance with

Article 2209 of the Civil Code effective the next 30, 31 and 180 days respectively from the date
of the twelve (12) promissory notes x x x covered by the real estate x x x mortgages, to be
applied on a declining balance of the principal after the partial payments of ₱14,800,00.00 (paid
July 17, 2001) and ₱2,000,000.006 (payments of ₱300,000.00 on October 1, 1999,
₱1,800,000.00 as [of] December 1, 1999, ₱700,000.00 [on] January 31, 2000) per certification of
[respondent bank] to be reckoned at (sic) the dates the said payments were made, thus the
corrected amounts of the liability for principal balance and the said 6% charges per annum shall
be the new basis for the [petitioners-spouses] to make payments to the [respondent bank] x x x
which shall automatically extinguish and release the mortgage contracts and the outstanding
liabilities of the [petitioners-spouses]; [respondent bank] shall then surrender the new transfer
certificates of title x x x in its name to the [c]ourt x x x, [c]anceling the penalty charges.

xxxx

3. Declaring as illegal and void the foreclosure sales x x x, the Certificates of Sales and the
consolidation of titles of the subject real properties, including the cancellation of the new
Transfer Certificates of Title x x x in the name of the [respondent] bank and reinstating Transfer
Certificates of Title Nos. T-641, T-32037 and T-16730 in the names of the [petitioners-spouses];
the latter acts to be executed by the Register of Deeds of Batangas City. 7

The foregoing disposition of the RTC was based on the following findings of fact:

As of this writing the [respondent] bank have (sic) not complied with the said orders as to the
interest rates it had been using on the loan of [petitioners-spouses] and the monthly
computation of interest vis a vis (sic) the total shown in the statement of account as of Aug 30,
2002. Such refusal amounts to suppression of evidence thus tending to show that the interest
used by the bank was unilaterally increased without the written consent of the [petitioners-
spouses]/borrower as required by law and Central Bank Circular No. 1171. The latter circular
provides that any increase of interest in a given interest period will have to be expressly agreed
to in writing by the borrower. The mortgaged properties were subject of foreclosure and were
sold on August 30, 2002 and the [respondent] bank’s statement of account as of August 30,
2002 x x x shows unpaid interest up to July 17, 2001 of ₱12,695,718.99 without specifying the
rate of interest for each interest period of thirty days. Another statement of account of
[respondent bank] x x x as [of] the date of foreclosure on August 30, 2002 shows account
balance of ₱20,505,916.51 with a bid price of ₱28,965,100.00 and showing an interest of
₱16,163,281.65. Again, there are no details of the interest used for each interest period from
the time these loans were incurred up to the date of foreclosure. These statements of account
together with the stated interest and expenses after foreclosure were furnished by the
[respondent] bank during the court hearings. The central legal question is that there is no
agreement in writing from the [petitioners-spouses]/borrowers for the interest rate for each
interest period neither from the data coming from the Central Bank or the cost of money which
is understood to mean the interest cost of the bank deposits form the public. Such imposition
of the increased interest without the consent of the borrower is null and void pursuant to
Article 1956 of the Civil Code and as held in the pronouncement of the Supreme Court in
several cases and C.B. Circular No. 1191 that the interest rate for each re-pricing period under
the floating rate of interest is subject to mutual agreement in writing. Art. 1956 states that no
interest is due unless it has been expressly stipulated and agreed to in writing.

Any stipulation where the fixing of interest rate is the sole prerogative of the
creditor/mortgagee, belongs to the class of potestative condition which is null and void under
Art. 1308 of the New Civil Code. The fulfillment of a condition cannot be left to the sole will of
[one of] the contracting parties.

xxxx

In the instant case, if the interest is declared null and void, the foreclosure sale for a higher
amount than what is legally due is likewise null and void because under the Civil Code, a
mortgage may be foreclosed only to enforce the fulfillment of the obligation for whose security
it was constituted (Art. 2126, Civil Code).

xxxx

Following the declaration of nullity of the stipulation on floating rate of interest since no
interest may be collected based on the stipulation that is null and void and legally inexistent
and unenforceable. x x x. Since the interest imposed is illegal and void only the rate of 6%
interest per month shall be imposed as liquidated damages under Art. 2209 of the Civil Code.

It is worth mentioning that these forms used by the bank are pre- printed forms and therefore
contracts of adhesion and x x x any dispute or doubt concerning them shall be resolved in favor
of the x x x borrower. This (sic) circumstances tend to support the contention of the
[petitioners-spouses] that they were made to sign the real estate mortgages/promissory notes
in blank with respect to the interest rates.

xxxx

[Respondent bank has] no right to foreclose [petitioners-spouses’] property and any foreclosure
thereof is illegal, unreasonable and void, since [petitioners-spouses] are not and cannot be
considered in default for their inability to pay the arbitrarily, illegally, and unconscionably
adjusted interest rates and penalty charges unilaterally made and imposed by [respondent]
bank.

The [petitioners-spouses] submitted to the court certified copies of the weighted average of
Selected Domestic Interest Rates of the local banks obtained from the Bangko Sentral ng
Pilipinas Statistical Center and it shows a declining balance of interest rates x x x.

xxxx

There is no showing by the [respondent bank] that any of the foregoing rate was ever used to
increase or decrease the interest rates charged upon the [petitioners-spouses’] mortgage loan
for the 30 day re- pricing period subsequent to the first 30 days from [the] dates of the
promissory notes. These documents submitted being certified public documents are entitled to
being taken cognizance of by the court as an aid to its decision making. x x x.8

Respondent bank appealed the above judgment of the trial court to the CA. Its main contention
is that the lower court erred in ordering the re-computation of petitioners-spouses’ loans and
applying the interest rate of 6% per annum. According to respondent bank, the stipulation on
the interest rates of 17.5% to 27%, subject to periodic adjustments, was voluntarily agreed
upon by the parties; hence, it was not left to the sole will of respondent bank. Thus, the lower
court erred in reducing the interest rate to 6% and in setting aside the penalty charges, as such
is contrary to the principle of the obligatory force of contracts under Articles 1315 and 1159 of
the Civil Code.9

The CA disposed of the issue in the following manner:

We partly agree with [respondent bank’s] contention.

Settled is the rule that the contracting parties are free to enter into stipulations, clauses, terms
and conditions as they may deem convenient, as long as these are not contrary to law, morals,
good customs, public order or public policy. Pursuant to Article 1159 of the Civil Code, these
obligations arising from such contracts have the force of law between the parties and should be
complied with in good faith. x x x.

xxxx

In the case at bar, [respondent bank] and [petitioners-spouses] expressly stipulated in the
promissory notes the rate of interest to be applied to the loan obtained by the latter from the
former, x x x.

xxxx

[Respondent bank] insists that [petitioner-spouses] agreed to the interest rates stated in the
promissory notes since the latter voluntarily signed the same. However, we find more credible
and believable the version of [petitioners-spouses] that they were made to sign the said
promissory notes in blank with respect to the rate of interest and penalty charges, and
subsequently, [respondent] bank filled in the blanks, imposing high interest rate beyond which
they were made to understand at the time of the signing of the promissory notes.

xxxx

The signing by [petitioners-spouses] of the promissory notes in blank enabled [respondent]

bank to impose interest rates on the loan obligation without prior notice to [petitioners-
spouses]. The unilateral determination and imposition of interest rates by [respondent] bank
without [petitioners-spouses’] assent is obviously violative of the principle of mutuality of
contracts ordained in Article 1308 of the Civil Code x x x.

xxxx

[Respondent bank’s] act converted the loan agreement into a contract of adhesion where the
parties do not bargain on equal footing, the weaker party’s participation, herein [petitioners-
spouses], being reduced to the alternative to take it or leave it. [Respondent] bank tried to
sidestep this issue by averring that [petitioners-spouses], as businessmen, were on equal
footing with [respondent bank] as far as the subject loan agreements are concerned. That may
be true insofar as entering into the original loan agreements and mortgage contracts are
concerned. However, that does not hold true when it comes to the unilateral determination
and imposition of the escalated interest rates imposed by [respondent] bank.

xxxx

The Court further notes that in the case at bar, [respondent] bank imposed different rates in
the twelve (12) promissory notes: interest rate of 18% in five (5) promissory notes; 17.5% in
two (2) promissory notes; 23% in one (1) promissory note; and 27% in three (3) promissory
notes. Obviously, the interest rates are excessive and arbitrary. Thus, the foregoing interest
rates imposed on [petitioners-spouses’] loan obligation without their knowledge and consent
should be disregarded, not only for being iniquitous and exorbitant, but also for being violative
of the principle of mutuality of contracts.

However, we do not agree with the trial court in fixing the rate of interest of 6%. It is well-
settled that when an obligation is breached and consists in the payment of a sum of money, i.e.,
loan or forbearance of money, the interest due shall be that which may have been stipulated in
writing. In the absence of stipulation, the rate of interest shall be 12% interest per annum to be
computed from default, i.e., from judicial or extra-judicial demand and subject to the provisions
of Article 1169 of the Civil Code. Since the interest rates printed in the promissory notes are
void for the reasons above-stated, the rate of interest to be applied to the loan should be 12%
per annum only.10
The CA, consequently, dismissed respondent bank’s appeal and affirmed the decision of the
trial court with the modification that the rate of interest shall be 12% per annum instead of 6%.
Respondent bank filed a Motion for Reconsideration of the CA decision. Petitioners-spouses, on
the other hand, filed a comment praying for the denial of respondent bank’s motion for
reconsideration. They also filed an "Urgent Manifestation"11 calling the attention of the CA to
its respective decisions in the cases of Spouses Enrique and Epifania Mercado v. China Banking
Corporation, et. al. (CA-GR CV No. 75303)12 and Spouses Bonifacio Caraig and Ligaya Caraig v.
The Ex-Officio Sheriff of RTC, Batangas City, et. al. (CA-G.R. CV No. 76029).13

According to petitioners-spouses, in Spouses Mercado v. China Banking, the Special Seventh

Division of the CA held that where the interest rate is potestative, the entire interest is null and
void and no interest is due.

On the other hand, in the case of Spouses Caraig v. The Ex-Officio Sheriff of RTC, Batangas City,
the then Ninth Division of the CA ruled that under the doctrine of operative facts, no interest is
due after the auction sale because the loan is paid in kind by the auction sale, and interest shall
commence to run again upon finality of the judgment declaring the auction sale null and void. 14

The CA denied respondent bank’s Motion for Reconsideration for lack of merit. It likewise found
no merit in petitioners-spouses’ contention that no interest is due on their principal loan
obligation from the time of foreclosure until finality of the judgment annulling the foreclosure
sale. According to the CA:

x x x Notably, this Court disregarded the stipulated rate[s] of interest on the subject promissory
notes after finding that the same are iniquitous and exorbitant, and for being violative of the
principle of mutuality of contracts. Nevertheless, in Equitable PCI Bank v. Ng Sheung Ngor, the
Supreme Court ruled that because the escalation clause was annulled, the principal amount of
the loan was subject to the original or stipulated interest rate of interest, and that upon
maturity, the amount due was subject to legal interest at the rate of 12% per annum. In this
case, while we similarly annulled the escalation clause contained in the promissory notes, this
Court opted not to impose the original rates of interest stipulated therein for being excessive,
the same being 17.5% to 27% per interest period.

Relevantly, the High Court held in Asian Cathay Finance and Leasing Corporation v. Spouses
Cesario Gravador and Norma De Vera, et. al. that stipulations authorizing the imposition of
iniquitous or unconscionable interest are contrary to morals, if not against the law. x x x. The
nullity of the stipulation on the usurious interest does not, however, affect the lender’s right to
recover the principal of the loan. The debt due is to be considered without the stipulation of
the excessive interest. A legal interest of 12% per annum will be added in place of the excessive
interest formerly imposed.

Following the foregoing rulings of the Supreme Court, it is clear that the imposition by this
Court of a 12% rate of interest per annum on the principal loan obligation of [petitioners-
spouses], computed from the time of default, is proper as it is consistent with prevailing
jurisprudence.

While the decisions of the Special Seventh Division and the Ninth Division of this Court in CA-
G.R. CV No. 75303 and in CA-G.R. No. 76029 are final and executory, the same merely have
persuasive effect but do not outweigh the decisions of the Supreme Court which we are duty-
bound to follow, conformably with the principle of stare decisis.

The doctrine of stare decisis enjoins adherence to judicial precedents.1âwphi1 It requires

courts in a country to follow the rule established in a decision of the Supreme Court thereof.
That decision becomes a judicial precedent to be followed in subsequent cases by all courts in
the land. The doctrine of stare decisis is based on the principle that once a question of law has
been examined and decided, it should be deemed settled and closed to further
argument.15 (Emphasis supplied.)

Petitioners-spouses are now before us, reiterating their position that no interest should be
imposed on their loan, following the respective pronouncements of the CA in the Caraig and
Mercado Cases. Petitioners-spouses insist that "if the application of the doctrine of operative
facts is upheld, as applied in Caraig vs. Alday, x x x, interest in the instant case would be
computed only from the finality of judgment declaring the foreclosure sale null and void. If
Mercado vs. China Banking Corporation x x x, applying by analogy the rule on void usurious
interest to void potestative interest rate, is further sustained, no interest is due when the
potestative interest rate stipulation is declared null and void, as in the instant case. 16

Our Ruling

We dismiss the appeal.

We cannot subscribe to the contention of petitioners-spouses that no interest should be due on

the loan they obtained from respondent bank, or that, at the very least, interest should be
computed only from the finality of the judgment declaring the foreclosure sale null and void, on
account of the exorbitant rate of interest imposed on their loan.

It is clear from the contract of loan between petitioners-spouses and respondent bank that
petitioners-spouses, as borrowers, agreed to the payment of interest on their loan obligation.
That the rate of interest was subsequently declared illegal and unconscionable does not entitle
petitioners-spouses to stop payment of interest.1âwphi1 It should be emphasized that only the
rate of interest was declared void. The stipulation requiring petitioners-spouses to pay interest
on their loan remains valid and binding. They are, therefore, liable to pay interest from the time
they defaulted in payment until their loan is fully paid.

It is worth mentioning that both the RTC and the CA are one in saying that "[petitioners-
spouses] cannot be considered in default for their inability to pay the arbitrary, illegal and
unconscionable interest rates and penalty charges unilaterally imposed by [respondent]
bank."17 This is precisely the reason why the foreclosure proceedings involving petitioners-
spouses’ properties were invalidated. As pointed out by the CA, "since the interest rates are
null and void, [respondent] bank has no right to foreclose [petitioners-spouses’] properties and
any foreclosure thereof is illegal. x x x. Since there was no default yet, it is premature for
[respondent] bank to foreclose the properties subject of the real estate mortgage contract." 18

Thus, for the purpose of computing the amount of liability of petitioners-spouses, they are
considered in default from the date the Resolution of the Court in G.R. No. 194164 (Philippine
National Bank v. Spouses Bayani H. Andal and Gracia G. Andal) – which is the appeal interposed
by respondent bank to the Supreme Court from the judgment of the CA – became final and
executory. Based on the records of G.R. No. 194164, the Court denied herein respondent bank’s
appeal in a Resolution dated 10 January 2011. The Resolution became final and executory on 20
May 2011.19

In addition, pursuant to Circular No. 799, series of 2013, issued by the Office of the Governor of
the Bangko Sentral ng Pilipinas on 21 June 2013, and in accordance with the ruling of the
Supreme Court in the recent case of Dario Nacar v. Gallery Frames and/or Felipe Bordey,
Jr.,20 effective 1 July 2013, 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. Accordingly, the rate of interest of 12%
per annum on petitioners-spouses’ obligation shall apply from 20 May 2011 – the date of
default – until 30 June 2013 only. From 1 July 2013 until fully paid, the legal rate of 6% per
annum shall be applied to petitioners-spouses’ unpaid obligation.

IN VIEW OF THE FOREGOING, the Petition is DENIED and the Judgment of the Court of Appeals
in CA-G.R. CV No. 91250 is AFFIRMED with the MODIFICATION that the 12% interest per annum
shall be applied from the date of default until 30 June 2013 only, after which date and until fully
paid, the outstanding obligation of petitioners-spouses shall earn interest at 6% per annum. Let
the records of this case be remanded to the trial court for the proper computation of the
amount of liability of petitioners Spouses Bayani H. Andal and Gracia G. Andal, in accordance
with the pronouncements of the Court herein and with due regard to the payments previously
made by petitioners-spouses.

SO ORDERED.

RESTITUTA M. IMPERIAL, petitioner,

vs.
ALEX A. JAUCIAN, respondent.

DECISION
PANGANIBAN, J.:

Iniquitous and unconscionable stipulations on interest rates, penalties and attorney’s fees are
contrary to morals. Consequently, courts are granted authority to reduce them equitably. If
reasonably exercised, such authority shall not be disturbed by appellate courts.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the July 19,
2000 Decision2 and the June 14, 2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV No.
43635. The decretal portion of the Decision is as follows:

"WHEREFORE, premises considered, the appealed Decision of the Regional Trial Court,
5th Judicial Region, Branch 21, Naga City, dated August 31, 1993, in Civil Case No. 89-
1911 for Sum of Money, is hereby AFFIRMED in toto."4

The assailed Resolution denied petitioner’s Motion for Reconsideration.

The dispositive portion of the August 31, 1993 Decision, promulgated by the Regional Trial
Court (RTC) of Naga City (Branch 21) and affirmed by the CA, reads as follows:

"Wherefore, Judgment is hereby rendered declaring Section I, Central Bank Circular No.
905, series of 1982 to be of no force and legal effect, it having been promulgated by the
Monetary Board of the Central Bank of the Philippines with grave abuse of discretion
amounting to excess of jurisdiction; declaring that the rate of interest, penalty, and
charges for attorney’s fees agreed upon between the parties are unconscionable,
iniquitous, and in violation of Act No. 2655, otherwise known as the Usury Law, as
amended; and ordering Defendant to pay Plaintiff the amount of FOUR HUNDRED
SEVENTY-EIGHT THOUSAND, ONE HUNDRED NINETY-FOUR and 54/100 (₱478,194.54)
PESOS, Philippine currency, with regular and compensatory interests thereon at the rate
of twenty-eight (28%) per centum per annum, computed from August 31, 1993 until full
payment of the said amount, and in addition, an amount equivalent to ten (10%) per
centum of the total amount due and payable, for attorney’s fees, without
pronouncement as to costs."5

The Facts

The CA summarized the facts of the case in this wise:

"The present controversy arose from a case for collection of money, filed by Alex A.
Jaucian against Restituta Imperial, on October 26, 1989. The complaint alleges, inter
alia, that defendant obtained from plaintiff six (6) separate loans for which the former
executed in favor of the latter six (6) separate promissory notes and issued several
checks as guarantee for payment. When the said loans became overdue and unpaid,
especially when the defendant’s checks were dishonored, plaintiff made repeated oral
and written demands for payment.

"Specifically, the six (6) separate loans obtained by defendant from plaintiff on various
dates are as follows:

(a) November 13, 1987 ₱ 50,000.00

(b) December 28, 1987 40,000.00
(c) January 6, 1988 30,000.00
(d) January 11, 1988 50,000.00
(e) January 12, 1988 50,000.00
(f) January 13, 1988 100,000.00

Total ₱320,000.00

"The loans were covered by six (6) separate promissory notes executed by defendant.
The face value of each promissory notes is bigger [than] the amount released to
defendant because said face value already include[d] the interest from date of note to
date of maturity. Said promissory notes, which indicate the interest of 16% per month,
date of issue, due date, the corresponding guarantee checks issued by defendant,
penalties and attorney’s fees, are the following:

1. Exhibit ‘D’ – for loan of ₱40,000.00 on December 28, 1987, with face value of
₱65,000.00;

2. Exhibit ‘E’ – for loan of ₱50,000.00 on January 11, 1988, with face value of
₱82,000.00;

3. Exhibit ‘F’ – for loan of ₱50,000.00 on January 12, 1988, with face value of
₱82,000.00;

4. Exhibit ‘G’ – for loan of ₱100,000.00 on January 13, 1988, with face value of
₱164,000.00;

5. Exhibit ‘H’ – This particular promissory note covers the second renewal of the
original loan of ₱50,000.00 on November 13, 1987, which was renewed for the
first time on March 16, 1988 after certain payments, and which was renewed
finally for the second time on January 4, 1988 also after certain payments, with a
face value of ₱56,240.00;
 6. Exhibit ‘I’ – This particular promissory note covers the second renewal of the
original loan of ₱30,000.00 on January 6, 1988, which was renewed for the first
time on June 4, 1988 after certain payments, and which was finally renewed for
the second time on August 6, 1988, also after certain payments, with [a] face
value of ₱12,760.00;

"The particulars about the postdated checks, i.e., number, amount, date, etc., are
indicated in each of the promissory notes. Thus, for Exhibit ‘D’, four (4) PB checks were
issued; for Exhibit ‘E’ four (4) checks; for Exhibit ‘F’ four (4) checks; for Exhibit ‘G’ four
(4) checks; for Exhibit ‘H’ one (1) check; for Exhibit ‘I’ one (1) check;

"The arrangement between plaintiff and defendant regarding these guarantee checks
was that each time a check matures the defendant would exchange it with cash.

"Although, admittedly, defendant made several payments, the same were not enough
and she always defaulted whenever her loans mature[d]. As of August 16, 1991, the
total unpaid amount, including accrued interest, penalties and attorney’s fees, [was]
₱2,807,784.20.

"On the other hand, defendant claims that she was extended loans by the plaintiff on
several occasions, i.e., from November 13, 1987 to January 13, 1988, in the total sum of
₱320,000.00 at the rate of sixteen percent (16%) per month. The notes mature[d] every
four (4) months with unearned interest compounding every four (4) months if the loan
[was] not fully paid. The loan releases [were] as follows:

(a) November 13, 1987 ₱ 50,000.00

(b) December 28, 1987 40,000.00
(c) January 6, 1988 30,000.00
(d) January 11, 1988 50,000.00
(e) January 12, 1988 50,000.00
(f) January 13, 1988 100,000.00

Total ₱320,000.00

"The loan on November 13, 1987 and January 6, 1988 ha[d] been fully paid including the
usurious interests of 16% per month, this is the reason why these were not included in
the complaint.

"Defendant alleges that all the above amounts were released respectively by checks
drawn by the plaintiff, and the latter must produce these checks as these were returned
 to him being the drawer if only to serve the truth. The above amount are the real
amount released to the defendant but the plaintiff by masterful machinations made it
appear that the total amount released was ₱462,600.00. Because in his computation he
made it appear that the true amounts released was not the original amount, since it
include[d] the unconscionable interest for four months.

"Further, defendant claims that as of January 25, 1989, the total payments made by
defendants [were] as follows:

a. Paid releases on November 13, 1987 of

₱50,000.00 and January 6, 1988 of
₱30,000.00 these two items were not
included in the complaint affirming the fact
that these were paid ₱ 80,000.00
b. Exhibit ‘26’ Receipt 231,000.00
c. Exhibit ‘8-25’ Receipt 65,300.00
d. Exhibit ‘27’ Receipt 65,000.00

Total
₱441,780.00
Less: 320,000.00

Excess Payment ₱121,780.00

"Defendant contends that from all perspectives the above excess payment of
₱121,780.00 is more than the interest that could be legally charged, and in fact as of
January 25, 1989, the total releases have been fully paid.

"On 31 August 1993, the trial court rendered the assailed decision."6

Ruling of the Court of Appeals

On appeal, the CA held that without judicial inquiry, it was improper for the RTC to rule on the
constitutionality of Section 1, Central Bank Circular No. 905, Series of 1982. Nonetheless, the
appellate court affirmed the judgment of the trial court, holding that the latter’s clear and
detailed computation of petitioner’s outstanding obligation to respondent was convincing and
satisfactory.

Hence, this Petition.7

The Issues
Petitioner raises the following arguments for our consideration:

"1. That the petitioner has fully paid her obligations even before filing of this case.

"2. That the charging of interest of twenty-eight (28%) per centum per annum without
any writing is illegal.

"3. That charging of excessive attorney’s fees is hemorrhagic.

"4. Charging of excessive penalties per month is in the guise of hidden interest.

"5. The non-inclusion of the husband of the petitioner at the time the case was filed
should have dismissed this case."8

The Court’s Ruling

The Petition has no merit.

First Issue:

Computation of Outstanding Obligation

Arguing that she had already fully paid the loan before the filing of the case, petitioner alleges
that the two lower courts misappreciated the facts when they ruled that she still had an
outstanding balance of ₱208,430.

This issue involves a question of fact. Such question exists when a doubt or difference arises as
to the truth or the falsehood of alleged facts; and when there is need for a calibration of the
evidence, considering mainly the credibility of witnesses and the existence and the relevancy of
specific surrounding circumstances, their relation to each other and to the whole, and the
probabilities of the situation.9

It is a well-entrenched rule that pure questions of fact may not be the subject of an appeal by
certiorari under Rule 45 of the Rules of Court, as this remedy is generally confined to questions
of law.10 The jurisdiction of this Court over cases brought to it is limited to the review and
rectification of errors of law allegedly committed by the lower court. As a rule, the latter’s
factual findings, when adopted and affirmed by the CA, are final and conclusive and may not be
reviewed on appeal.11

Generally, this Court is not required to analyze and weigh all over again the evidence already
considered in the proceedings below.12 In the present case, we find no compelling reason to
overturn the factual findings of the RTC -- that the total amount of the loans extended to
petitioner was ₱320,000, and that she paid a total of only ₱116,540 on twenty-nine dates.
These findings are supported by a preponderance of evidence. Moreover, the amount of the
outstanding obligation has been meticulously computed by the trial court and affirmed by the
CA. Petitioner has not given us sufficient reason why her cause falls under any of the exceptions
to this rule on the finality of factual findings.

Second Issue:

Rate of Interest

The trial court, as affirmed by the CA, reduced the interest rate from 16 percent to 1.167
percent per month or 14 percent per annum; and the stipulated penalty charge, from 5 percent
to 1.167 percent per month or 14 percent per annum.

Petitioner alleges that absent any written stipulation between the parties, the lower courts
should have imposed the rate of 12 percent per annum only.

The records show that there was a written agreement between the parties for the payment of
interest on the subject loans at the rate of 16 percent per month. As decreed by the lower
courts, this rate must be equitably reduced for being iniquitous, unconscionable and exorbitant.
"While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the
said circular grants lenders carte blanche authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their assets." 13

In Medel v. CA,14 the Court found the stipulated interest rate of 5.5 percent per month, or 66
percent per annum, unconscionable. In the present case, the rate is even more iniquitous and
unconscionable, as it amounts to 192 percent per annum. When the agreed rate is iniquitous or
unconscionable, it is considered "contrary to morals, if not against the law. [Such] stipulation is
void."15

Since the stipulation on the interest rate is void, it is as if there were no express contract
thereon.16 Hence, courts may reduce the interest rate as reason and equity demand. We find
no justification to reverse or modify the rate imposed by the two lower courts.

Third and Fourth Issue:

Penalties and Attorney’s Fees

Article 1229 of the Civil Code states thus:

"The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable."
In exercising this power to determine what is iniquitous and unconscionable, courts must
consider the circumstances of each case. 17 What may be iniquitous and unconscionable in one
may be totally just and equitable in another. In the present case, iniquitous and unconscionable
was the parties’ stipulated penalty charge of 5 percent per month or 60 percent per annum, in
addition to regular interests and attorney’s fees. Also, there was partial performance by
petitioner when she remitted ₱116,540 as partial payment of her principal obligation of
₱320,000. Under the circumstances, the trial court was justified in reducing the stipulated
penalty charge to the more equitable rate of 14 percent per annum.

The Promissory Note carried a stipulation for attorney’s fees of 25 percent of the principal
amount and accrued interests. Strictly speaking, this covenant on attorney’s fees is different
from that mentioned in and regulated by the Rules of Court. 18 "Rather, the attorney’s fees here
are in the nature of liquidated damages and the stipulation therefor is aptly called a penal
clause."19 So long as the stipulation does not contravene the law, morals, public order or public
policy, it is binding upon the obligor. It is the litigant, not the counsel, who is the judgment
creditor entitled to enforce the judgment by execution.

Nevertheless, it appears that petitioner’s failure to comply fully with her obligation was not
motivated by ill will or malice. The twenty-nine partial payments she made were a
manifestation of her good faith. Again, Article 1229 of the Civil Code specifically empowers the
judge to reduce the civil penalty equitably, when the principal obligation has been partly or
irregularly complied with. Upon this premise, we hold that the RTC’s reduction of attorney’s
fees -- from 25 percent to 10 percent of the total amount due and payable -- is reasonable.

Fifth Issue:

Non-Inclusion of Petitioner’s Husband

Petitioner contends that the case against her should have been dismissed, because her husband
was not included in the proceedings before the RTC.

We are not persuaded. The husband’s non-joinder does not warrant dismissal, as it is merely a
formal requirement that may be cured by amendment. 20 Since petitioner alleges that her
husband has already passed away, such an amendment has thus become moot.

WHEREFORE, the Petition is DENIED. Costs against petitioner.

SO ORDERED.
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 Decision 1 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
Interest on ₱4,139,000.00 fr. 04-Jan-2001
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 68,548.64
Interest on ₱4,139,000.00 fr. 04-Feb-2001
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 38,781.86
Penalty charge @ 1/10 of 1% of the total amount due
(₱4,139,000.00 from 11-04-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 1,974,303.00
 Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,002,110.73
PN# 507-0010513 due on 04-07-2004
Principal balance of PN# 5070010513. . . . . . . . . . . . . . 6,216,000.00
Interest on ₱6,216,000.00 fr. 06-Oct-99
04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . . 1,009,035.62
Interest on ₱6,216,000.00 fr. 04-Nov-2000
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 125,171.51
Interest on ₱6,216,000.00 fr. 04-Dec-2000
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 113,505.86
Interest on ₱6,216,000.00 fr. 04-Jan-2001
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 102,947.18
Interest on ₱6,216,000.00 fr. 04-Feb-2001
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 58,243.07
Penalty charge @ 1/10 of 1% of the total amount due
(₱6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 3,145,296.00
10,770,199.2
Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
17,772,309.9
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Less: A/P applied to balance of principal (55,000.00)
17,456,160.5
Less: Accounts payable L & D (261,149.39) 7
Add: 10% Attorney’s Fee 1,745,616.06
19,201,776.6
Total amount due 3
10,300,000.0
Less: Bid Price 0
TOTAL DEFICIENCY AMOUNT AS OF
13
FEB. 23, 2001 8,901,776.63

Petitioners thereafter received a demand letter14 dated May 2, 2001 from respondent’s counsel
for the deficiency amount of ₱8,901,776.63. Ms. Yu further testified that based on the
Statement of Account15 dated March 15, 2002 which she prepared, the outstanding balance of
petitioners was ₱15,190,961.48.16

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

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

On cross-examination, petitioner testified that he is a Doctor of Medicine and also engaged in

the business of distributing medical supplies. He admitted having read the promissory notes
and that he is aware of his obligation under them before he signed the same. 19

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

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

rendered ordering herein defendants to pay jointly and severally to plaintiff, the following:

1. ₱8,901,776.63 representing the amount of the deficiency owing to the plaintiff, plus
interest thereon at the legal rate after February 23, 2001;

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

3. Costs of suit.

SO ORDERED.20

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

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

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

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

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

The appeal is partly meritorious.

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

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

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

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

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

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

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

A similar ruling was made in a 1994 case 30 also involving PNB where the credit agreement
provided that "PNB reserves the right to increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may adopt in the future: Provided, that the
interest rate on this accommodation shall be correspondingly decreased in the event that the
applicable maximum interest is reduced by law or by the Monetary Board x x x".

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

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

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

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

The two promissory notes signed by petitioners provide:

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

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

The provision in the promissory note authorizing respondent bank to increase, decrease or
otherwise change from time to time the rate of interest and/or bank charges "without advance
notice" to petitioner, "in the event of change in the interest rate prescribed by law or the
Monetary Board of the Central Bank of the Philippines," does not give respondent bank
unrestrained freedom to charge any rate other than that which was agreed upon. Here, the
monthly upward/downward adjustment of interest rate is left to the will of respondent bank
alone. It violates the essence of mutuality of the contract. 38

More recently in Solidbank Corporation v. Permanent Homes, Incorporated, 39 we upheld as

valid an escalation clause which required a written notice to and conformity by the borrower to
the increased interest rate. Thus:

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

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

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

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

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

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

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

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

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

Interpreting it differently, while said clause does not expressly stipulate a reduction in interest
rate, it nevertheless provides a leeway for the interest rate to be reduced in case the prevailing
market rates dictate its reduction.

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

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

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

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

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

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

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

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

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

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

TOTAL DEFICIENCY AMOUNT 4,761,865.79

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

No pronouncement as to costs.

SO ORDERED.

FIRST DIVISION

G.R. No. 208336, November 21, 2018

VILLA CRISTA MONTE REALTY & DEVELOPMENT CORPORATION, Petitioner, v. EQUITABLE PCI
BANK (NOW KNOWN AS BANCO DE ORO UNIBANK, INC.), AND THE EX-OFFICIO SHERIFF OF
QUEZON CITY AND/OR HIS DEPUTY OR AUTHORIZED REPRESENTATIVES, Respondents.

DECISION

BERSAMIN, J.:

An escalation clause without a concomitant de-escalation clause is void and ineffectual for
violating Presidential Decree No. 1684,1 otherwise known as Amending Further Act No. 2655, As
Amended, Otherwise Known as "The Usury Law," as well as the principle of mutuality of
contracts unless the established facts and circumstances, as well as the admissions of the
parties, indicate that the lender at times lowered the interest rates, or, at least, allowed the
borrower the discretion to continue with the repriced rates.

Not all contracts of adhesion are invalid. Only a contract of adhesion in which one of the parties
is shown to be the weaker as to have been imposed upon may be invalidated and set aside.

The Case

This appeal has been taken by the borrower (petitioner) to seek the review and reversal of the
adverse decision promulgated on February 21, 2013,2 whereby the Court of Appeals (CA)
affirmed the judgment rendered on April 7, 2009 by the Regional Trial Court (RTC), Branch 216,
in Quezon City in Civil Case No. Q-01-43677.3
Antecedents

The factual and procedural antecedents, as narrated by the CA, are the following:
ChanRoblesVirtualawlibrary
Sometime in 1994, plaintiff-appellant Villa Crista Monte Realty Corporation was organized to
engage in the business of real estate development. Soon after, it acquired from a certain
Alfonso Lim the 80,000 square meters (8 hectares) parcel of land located at Old Balara, Quezon
City, which land appellant intended to develop into a residential subdivision. After successfully
putting up its clubhouse, known as the "Tivoli Royale Country Clubhouse," appellant
Corporation later negotiated and eventually succeeded in purchasing the adjoining 13.5
hectares land, thereby consolidating its ownership over the 21.5 hectares of land[s].

In order to fully develop its subdivision project, appellant applied for and was granted a credit
line of P80 Million by then Equitable Philippine Commercial International Bank (E-PCIB),
now Banco De Oro. By way of security for the said credit line, appellant executed a Real Estate
Mortgage over the 80,000 square meters of its properties (covered by TCT No. T-145652) with
all the existing improvements thereon.

On August 5, 1995, appellant subdivided the parcel of land covered by TCT No. T-145652 into
174lots, each with an average area of 340 square meters and each covered by a separate
certificate of title.

Appellant subsequently applied for an additional P50 Million credit accommodation from E-
PCIB to which the latter readily acceded. It being later established that the 41 lots, out of the
174 subdivided lots, would already be sufficient securities for the credit accommodation,
appellant then asked for the release of the remaining 133 titles from the earlier mortgage. E-
PCIB granted appellant's request on the condition that the real estate mortgage contract be
amended to conform to the changes in the amount of the credit line and in the properties
subject of the mortgage, to which condition appellant readily agreed.

Under its approved P130 Million credit line, appellant separately obtained the following
amounts on various occasions from March 20, 1997 to August 15, 1997, to wit:
ChanRoblesVirtualawlibrary
Date Amount Rate of Interest Maturity Date

March 20, 1997 Php38,200,000.00 13.50% March 13, 1998

March 26, 1997 4,000,000.00 13.50% March 20, 1998

April 3, 1997 6,600,000.00 13.00% March 27, 1998

April 6, 1997 8,500,000.00 13.00% April 1, 1998

April 10, 1997 7,000,000.00 13.00% April 3, 1998

 April 14, 1997 12,500,000.00 13.00% April 8, 1998

April 17, 1997 2,900,000.00 15.00% April 10, 1998

June 28, 1997 2,700,000.00 15.00% June 23, 1998

June 30, 1997 20,000,000.00 15.25% June 28, 1998

July 4, 1997 2,000,000.00 15.25% June 25, 1998

July 4, 1997 5,000,000.00 15.50% June 29, 1998

July 5, 1997 7,500,000.00 15.50% June 30, 1998

July 10, 1997 7,000,000.00 15.50% July 8, 1998

July 15, 1997 1,800,000.00 15.50% July 8, 1998

August 15, 1997 4,000,000.00 24.00% August 12, 1998

Each of the aforesaid amount was covered by a promissory note in the prescribed form of the
E-PCIB.

Eventually, E-PCIB wrote several times to appellant apprising it of the increased rates in the
interest to be imposed on its loans covered by the promissory notes. The increased rates
ranged from 21% to 36% and were ostensibly anchored on the uniform provision in the
promissory notes on monthly repricing.

Appellant reneged on paying its loan obligations amounting to P129,700,00.00, prompting E-

PCIB to initiate foreclosure proceedings on the mortgaged properties. Thereafter, the
respondent Sheriff scheduled the auction of the subdivision lots which led to appellant's filing
of its initial complaint for the nullification of the promissory notes and the mortgage
agreements with prayer for injunctive relief. Although the said auction sale was initially
enjoined, the injunction was nonetheless lifted; and so, the auction sale proceeded where E-
PCIB emerged as the highest bidder. This led to appellant's filing of the Supplemental Complaint
with the RTC Quezon City assailing the said auction sale and the amount claimed therein
(including the alleged unwarranted assessments and charges), as well as praying for the
nullification of the titles that were consolidated in the name of E-PCIB. Appellant cited the
following instances as its causes of action:
ChanRoblesVirtualawlibrary
1. E-PCIB unilaterally made and imposed the increases in interest rates on appellant's loan
without them being discussed and negotiated with, much less agreed upon by, appellant and,
thus, invalid;

2. Since the Real Estate Mortgage and its amendment are but accessory to the loans evidenced
by the Promissory Notes, which bore the unilaterally imposed exorbitant interest rates and,
thus, contrary to law and public policy, the same (the accessory contracts) are likewise illegal
and against public policy;

3. Despite the substantial payments already made by appellant, E-PCIB still insistently
demanded for the payment of the loan obligation inclusive of the higher interest rates and
penalty charges which it unilaterally imposed, warranting the issuance of a detailed accounting
or Statement of Account. instead of issuing said statement, though, E-PCIB prematurely
initiated the foreclosure proceedings; and

4. Appellant claimed for reparation of damages as well as attorney's fees by reason of E-PCIB's
alleged palpable violation of the laws and the rights of appellant especially in imposing
arbitrary, burdensome and oppressive interests.
In its Answer to appellant's Complaint, E-PCIB countered that appellant has no cause of action
and that its complaint does not state any such cause either. E-PCIB underscored that appellant
voluntarily and consciously agreed to the complained monthly re-pricing of interest as shown
by appellant's affixing of its signature in all the promissory notes in due course, i.e., with all the
pertinent blanks duly filled-up, and its acceptance of the loan proceeds. Accordingly, the said
interest rates were then re-priced as agreed upon; and that the said re-pricing even started
only on July 1997, although the original promissory notes were executed in 1996, and were only
renewed in early 1997. E-PCIB stressed that appellant then not only accepted the stipulation on
monthly re-pricing but also the new interest rates, as re-priced, by its payment of the
corresponding adjusted interest rates until it later defaulted to pay even the interest rates to
keep the loans current. Inasmuch as the dispute lies only on the rates of interests and no longer
on the fact that appellant was already in default in its payment, E-PCIB argued that appellant
failed to prove its right to an injunction. E-PCIB maintained that it merely complied with the
provisions of the Promissory Notes.4
On April 7, 2009, the RTC rendered judgment in favor of Equitable PCI Bank (E-PCIB), holding
that the loan contracts between the parties were supported by several promissory notes, a fact
admitted by no less than the petitioner's own President, Cresencio Tio (Tio); 5 that Tio also
testified that the documents included a rider dealing with the monthly repricing of the interest
rates; that the protest allegedly made against the repricing was not established; that the
plaintiff (petitioner herein) paid the adjusted interest rates; and that the evidence on record
sustained the validity of the real estate mortgage and its amendment. 6

The RTC concluded that the extra-judicial foreclosure proceedings taken against the petitioner's
mortgaged properties were valid; that the non� inclusion in the notice of sale of the exact
amount of the lawful charges did not prejudice the petitioner; and that the certificate of sale,
the consolidation of title in the name of E-PCIB, and the corresponding issuance of the
certificates of title in its name were also valid.7

The petitioner appealed to the CA.

As stated, the CA promulgated its now assailed decision on February 21, 2013 affirming the
judgment of the RTC. The CA observed that the petitioner had defaulted on its loan obligations,
thereby triggering the foreclosure proceedings brought against it; that the only real issue to be
resolved was whether or not the monthly repricing of the interest rates on the loans, which the
petitioner claimed to have been unilaterally imposed by E� PCIB, 8 was valid; that the
contracting parties were allowed to stipulate on any rate of interest on the loans by virtue of
Resolution No. 224 and Central Bank Circular No. 905, which rendered the Usury
Law ineffective; that nonetheless E-PCIB as the lender could not unilaterally impose increased
interest rates because the parties had still to agree on the rate of interest to be applied to their
transactions;9 that there was no proof showing that the petitioner had been coerced into
agreeing to the terms and conditions of the loans, or that it had been tricked into signing the
promissory notes pertaining to the monthly repricing of the interest rates; 10 that despite the
insistence of the petitioner that the stipulation on the monthly repricing of interest rates was
an adhesion, and that all the terms had been imposed by the respondent bank thereby limiting
the petitioner's participation therein to the mere signing of the document, the monthly
repricing was not necessarily invalid per se, for a contract of adhesion was just as binding as
other contracts once the other party agreed to the terms; and that because the petitioner was
fully aware of the contents of the promissory notes, the judgment of the RTC should be upheld.

The CA disposed:
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WHEREFORE, the appeal is DENIED. The Decision, dated April 7, 2009, of the Regional Trial
Court, Branch 216, Quezon City in Civil Case No. Q-01-43677 is AFFIRMED.

SO ORDERED.11
The petitioner sought reconsideration,12 but the CA denied its motion for that purpose on July
26, 2013.13

Hence, this appeal.

Issues

The petitioner contends that the CA gravely erred in ruling:

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I. as valid the bank's repricing of the interest rates by citing the ruling in the ease of Solid
Bank Corp. vs. Permanent Homes Inc.

II. that the promissory notes though contracts of adhesion bound petitioner, absent any
proof of domination done by the bank to agree on the monthly repricing

III. that the payments made by petitioner in excess of the original rate of interest should be
credited to the principal has no basis under the factual circumstances 14

In short, did the CA commit reversible error when it affirmed the judgment of the RTC declaring
as valid the promissory notes and the corresponding repricing of interest rates?
Ruling of the Court

The appeal lacks merit.

Both the trial and appellate courts were in unison in finding that the real estate mortgage and
promissory notes were valid, as well as the subsequent foreclosure proceedings. We find no
cogent reason to depart from their common findings, considering that the same are supported
by the facts and applicable laws.

Inasmuch as the main issue under contention relates to the validity of the promissory notes and
their corresponding provision on repricing of the interest rates, an examination of the assailed
provision is in order. The uniform provision of the promissory notes on the issue is as follows:
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with interest thereon:
ChanRoblesVirtualawlibraryat the rate of ____ percent (____ %) per annum payable ____
at the rate of ____ percent (____ %) per annum for the first ____ days of this Note payable on,
after which the interest rllte shall be determined by the Lender without need of pdor notice
to the Borrower at the beginning of each succeeding ____ period, payable ____ of each such
period, at the rate of ____ percent (____ %) per annum spread over ____ as announced anciJor
published by the Bangko Sentral ng Pilipinas ("BSP") on or immediately preceding the
commencement of each ____ (____) month period payable ____ of each such period: provided,
however, that if, in either of the two above instances, where the rate is subject to periodic
adjustment, the Borrower disagrees with the new rate, he shall prepay within five (5) days
from the notice of the new rate the outstanding balance of the Loan with interest at the last
applicable rate, provided, further, that the Borrower's failure to so prepay shall be deemed
acceptance of the new rate.15 (Bold underscoring for emphasis)
The agreement between the parties on the imposition of increasing interest rates on the loan is
commonly known as the escalation clause. Generally, the escalation clause refers to the
stipulation allowing increases in the interest rates agreed upon by the contracting parties.
There is nothing inherently wrong with the escalation clause because it is validly stipulated in
commercial contracts as one of the means adopted to maintain fiscal stability and to retain the
value of money in long term contracts. In short, the escalation clause is not void per se.16

Yet, the escalation clause that "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. 17 Such escalation clause violates the principle
of mutuality of contracts, and should be annulled. To prevent or forestall any one-sidedness
that the escalation clause may cause in favor of the creditor, therefore, Presidential Decree No.
1684 was promulgated. This law specifically states, among others, as follows:
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SECTION 2. The same Act is hereby amended by adding a new section after Section 7, to read as
follows:
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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 by law 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. (Bold emphasis supplied)
Accordingly, the Court has ruled in Banco Filipino Savings and Mortgage Bank v. Judge
Navarro18 that there should be a corresponding de� escalation clause that authorizes a
reduction in the interest rates corresponding to downward changes made by law or by the
Monetary Board. Verily, the escalation clause, to be valid, should specifically provide: (1) that
there can be an increase in interest rates if allowed by law or by the Monetary Board; and (2)
that there must be a stipulation for the reduction of the stipulated interest rates in the event
that the applicable maximum rates of interest are reduced by law or by the Monetary Board.
The latter stipulation ensures the mutuality of contracts, and is known as the de-escalation
clause.

The need for and essentiality of the de-escalation clause have been elucidated in Llorin Jr. v.
Court of Appeals (Llorin Jr.),19 to wit:
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The purpose of the law in mandating the inclusion of a de�escalation clause is to prevent
one-sidedness in favor of the lender which is considered repugnant to the principle of
mutuality of contracts. As we held in Philippine National Bank vs. Court of Appeals, et al.:
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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:
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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 fulfilment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void .... Hence, even assuming that the
P1.8 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' ... Such a
contract is a veritable trap for the weaker party whom the courts of justice must protect against
abuse and imposition.

The inescapable conclusion is that a de-escalation clause is an indispensable requisite to the

validity and enforceability of an escalation clause in the contract. In other words, in the
absence of a corresponding de-escalation clause, the escalation clause shall be considered
null and void.20 (Bold underscoring for emphasis)
Although it would not necessarily prevent the lender from discriminatorily increasing the
interest rates, the de-escalation clause's main objective is to prevent the unwanted one-
sidedness in favor of the lender, a quality that is repugnant to the principle of mutuality of
contracts. The clause proposes to ensure that any unconsented increase in interest rates is
ineffective for transgressing the principle of mutuality of contracts. 21 Indeed, the clause creates
a balance in the contractual relationship between the lender and the borrower, and tempers
the power of the stronger player between the two, which is the former.

No express de-escalation clause was stipulated in the promissory notes signed by the
petitioner. Yet, the absence of the clause did not invalidate the repricing of the interest rates.
The repricing notices issued to the petitioner by E-PCIB indicated that on some occasions, the
bank had reduced or adjusted the interest rates downward. For example, the 26% interest rate
for PN No. 970019HD for P2 million on July 30, 1997 was reduced to 22.5% in August 1997; the
26% interest rate for PN No. 970044HD for P2.7 million in July 1997 was decreased to 22.5% in
August 1997.22 Based on the dictum in Llorin Jr.,23 such actual reduction or downward
adjustment by the lender bank eliminated any one-sidedness of its contracts with the borrower.
As the Court opined in Llorin Jr.:
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We are fully persuaded, however, to take particular exception from said ruling insofar as the
case at bar is concerned, considering the peculiar circumstances obtaining herein. There is no
dispute that the escalation clause in the promissory note involved in this case does not contain
a correlative de-escalation clause or a provision providing for the reduction of the stipulated
interest in the event that the applicable maximum rate of interest.is reduced by law or by the
Monetary Board. Notwithstanding the absence of such stipulation. however, it is similarly not
controverted but, as a matter of fact, specifically admitted by petitioner that respondent APEX
unilaterally and actually decreased the interest charges it imposed on herein petitioner on
three occasions. (Bold underscoring supplied)
It becomes inescapable for the Court to uphold the validity and enforceability of the escalation
clause involved herein despite the absence of the de-escalation clause. The actual grant by the
respondent of the decreases in the interest rates imposed on the loans extended to the
petitioner rendered inexistent the evil of inequality sought to be thwarted by the enactment
and application of Presidential Decree No. 1684. We do not see here a situation in which the
petitioner did not stand on equality with the lender bank.

The binding effect on the parties of any agreement is premised on two settled principles,
namely: (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 that appears to be heavily weighed in favor of only one of the parties so as to lead to
an unconscionable result is void. Specifically, any stipulation regarding the validity or
compliance of the contract that is left solely to the will of one of the parties is likewise invalid. 24
The principle of mutuality of contracts is embodied in Article 1308 of the Civil Code, to wit:
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Article 1308. The contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them.
The significance of Article 1308 cannot be doubted. It is elementary that there can be no
contract in the absence of the mutual assent of the parties. When the assent of either party is
wanting, the act of the non-�assenting party has no efficacy for his act is as if it was done
under duress or by an incapacitated person. Naturally, any modification made in the contract
must still be with or upon the consent of the contracting parties. There must still be a meeting
of the minds of all the parties on the modification, especially when the modification relates to
an important or material aspect of the agreement. In loan contracts, the rate of interest is
always important or material because it can make or break the capital ventures.

Contrary to the petitioner's position, there was mutuality of contracts between itself and the
respondent. Tio, the petitioner's President, who signed the promissory notes in behalf of the
petitioner, was aware of the provision in the documents pertaining to the monthly repricing of
the interest rates. Although the promissory notes succinctly stipulated that the loans were
subject to interest without need of prior notice to the borrower, the respondent sent notices to
the petitioner each and every time it increased the interest rate. Equally of significance was
that the respondent allowed the petitioner the sufficient time and opportunity either to reject
the imposition of the increased interest rates by paying the outstanding obligations or by
accepting the same through payment of whatever amounts were due. The sufficient time and
opportunity negated the petitioner's insistence about the respondent having unilaterally
determined the interest rates in violation of the principle of mutuality of contracts embodied in
Article 1308.

It is noteworthy in this regard that the CA, despite being aware of the authority of the
respondent as lender to reprice the interest rates without need of prior notice to the borrower,
still recognized the validity of the stipulation in view of the option on the part of the petitioner
to reject the repricing, to wit:
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Significantly, the phrase "without need of prior notice to the borrower" should not be
construed to be an absolute lack of notice to the borrower since receipt of said notice, in fact, is
the reckoning point for the borrower to convey its objection to the said repricing by due
payment of the obligation with the original interest rate or by its consent to the said repricing
by the borrower's failure to so prepay.25
There is no question, therefore, that the respondent accorded the petitioner the notice of any
repricing of the interest rates. Although there have been occasions in which the Court struck
down the escalation clauses in loan agreements for violating the mutuality of contracts, this
case will not be one of them. This is because the respondent either has given notice to the
petitioner whenever it repriced the interest rates in order to give the latter the option to reject
the repricing, or has implemented the downward repricing of the interest rates. The
respondent thereby served both the letter and the spirit of Presidential Decree No. 1684.
We also affirm the CA's findings despite the showing of the promissory notes being contracts of
adhesion.

A contract of adhesion is one wherein one party imposes a ready�-made form of contract on
the other in which almost all of the provisions are drafted by one party, thereby reducing the
participation of the other to affixing its signature or to adhering to the contract. However, the
contract of adhesion is not invalid per se but is as binding as any other contract. The only
occasions in which the Court has struck down contracts of adhesion as void have happened only
when the weaker party has been imposed upon in dealing with the dominant bargaining party
as to be reduced to the alternative of taking it or leaving it, being completely deprived of the
opportunity to bargain on equal footing. Thus, the validity or enforceability of the impugned
contracts will have to be determined by the peculiar circumstances obtaining in each case and
by the situation of the parties concerned. 26

We are aware of the ruling in Limso v. Philippine National Bank (Limso),27 which reiterates the
essentiality of the long standing dictum that the contract is void when there is no mutuality
between the parties. The ruling stresses that mutuality is absent when the interest rate in a
loan agreement is set at the sole discretion of one party; or when there is no reasonable means
by which the other party can determine the applicable interest rate. This is because the parties
are not then on equal footing when they negotiated and concluded the terms of the contract.

The Limso petitioners (i.e., Spouses Robert Alan L. Limso and Nancy Lee Limso and their
business enterprise Davao Sunrise Investment and Development Corporation) had restructured
their loan with respondent Philippine National Bank (PNB); however, their ultimate inability to
meet and settle their obligations led to the foreclosure of their mortgage and the sale of their
mortgaged properties. The Limso petitioners then assailed the validity of the agreement as
contravening the principle of mutuality of contracts. Finding in favor of the Limso petitioners,
the Court observed that the principle of mutuality of contracts dictated that a contract must be
rendered invalid when the execution of its terms was skewed in favor of only one party.

There may be similarities in the factual antecedents of Limso and those in this case, but both
cases also had several remarkable distinctions that warranted the conclusion that the principle
of mutuality pervaded the agreements on the interest rates between the parties herein.

For one, PNB, the lender in Limso, not only failed to consult the Limso petitioners as the
borrowers on the imposition of the new interest rates but also did not send notices to them, or
even allowed some of its notices to be received by mere employees not authorized to receive
such crucial communications. In fact, some of the communications did not appear to have been
received by the principal borrowers at all. In this case, such irregularity was not attendant. As
the CA pointed out, the respondent sent the notices to the petitioner because the very receipt
of the notices increasing the interest rates became the reckoning point for either the effectivity
of the new rates imposed by the respondent, or for the effectivity of the petitioner's option to
pay the outstanding obligations should it object to the proposed rate.
Secondly, in Limso, the Spouses Limso and Davao Sunrise had their loans restructured in the
hopes of meeting their financial obligations with PNB. In contrast, the petitioner herein had
opened a credit line with the respondent from which it drew specific amounts on various dates;
each drawing from the credit line had a corresponding promissory note signed by both parties;
and the petitioner sometimes drew more than five times in a month. Ostensibly, the frequency
afforded to the petitioner the opportunity to discuss or negotiate the interest rates being
imposed not only on the current drawing of funds but also on those repriced and covered by
other promissory notes.

And, thirdly, that there was no showing by the petitioner herein that it had been placed at any
disadvantage in dealing with the respondent was decisive. On the contrary, it appeared that
mutuality always pervaded the relationship between the parties. As noted by the CA, the
petitioner had earlier requested the release of 133 of the subdivision lots under mortgage to
the respondent when it became established that 41 out of the 174 subdivision lots would
already be sufficient securities for the credit accommodation, and the respondent granted the
request subject only to the condition that the real estate mortgage contract be duly amended
to make it conform to the changes in the amount of the credit line and the lots covered by the
mortgage. The petitioner readily agreed to the condition. Also, in their transactions, Tiu, the
petitioner's President, who appeared to have been trained and experienced in business at the
time he acted in the petitioner's behalf in dealing with the respondent, had functioned without
duress or force in signing the various promissory notes and allied agreements on petitioner's
behalf. Furthermore, Tiu was aware of the rider of the agreements and had full knowledge of
the import of the rider. The rider contained the agreements on the monthly repricing of the
interest rates. The natural presumption under the circumstances was that Tiu would not have
signed the documents unless he had informed himself of their contents, import and
consequences. This presumption was not overturned.

The foregoing distinctions indicated that the petitioner herein was never a party at a
disadvantage, unlike the Limso petitioners.

WHEREFORE, we DENY the petition for review on certiorari; and AFFIRM the decision
promulgated on February 21, 2013, with costs of suit to be paid by the petitioner.

SO ORDERED.

EQUITABLE PCI BANK,* AIMEE YU and BEJAN LIONEL APAS, Petitioners,

vs.
NG SHEUNG NGOR** doing business under the name and style "KEN MARKETING," KEN
APPLIANCE DIVISION, INC. and BENJAMIN E. GO, Respondents.

DECISION
CORONA, J.:

This petition for review on certiorari1 seeks to set aside the decision2 of the Court of Appeals
(CA) in CA-G.R. SP No. 83112 and its resolution3 denying reconsideration.

On October 7, 2001, respondents Ng Sheung Ngor,4 Ken Appliance Division, Inc. and Benjamin
E. Go filed an action for annulment and/or reformation of documents and contracts 5 against
petitioner Equitable PCI Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel Apas, in
the Regional Trial Court (RTC), Branch 16 of Cebu City. 6 They claimed that Equitable induced
them to avail of its peso and dollar credit facilities by offering low interest rates7 so they
accepted Equitable's proposal and signed the bank's pre-printed promissory notes on various
dates beginning 1996. They, however, were unaware that the documents contained identical
escalation clauses granting Equitable authority to increase interest rates without their consent. 8

Equitable, in its answer, asserted that respondents knowingly accepted all the terms and
conditions contained in the promissory notes. 9 In fact, they continuously availed of and
benefited from Equitable's credit facilities for five years. 10

After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone,
Equitable restructured respondents' loans amounting to US$228,200 and ₱1,000,000. 11 The
trial court, however, invalidated the escalation clause contained therein because it violated the
principle of mutuality of contracts. 12 Nevertheless, it took judicial notice of the steep
depreciation of the peso during the intervening period13 and declared the existence of
extraordinary deflation.14 Consequently, the RTC ordered the use of the 1996 dollar exchange
rate in computing respondents' dollar-denominated loans.15 Lastly, because the business
reputation of respondents was (allegedly) severely damaged when Equitable froze their
accounts,16 the trial court awarded moral and exemplary damages to them. 17

The dispositive portion of the February 5, 2004 RTC decision18 provided:

WHEREFORE, premises considered, judgment is hereby rendered:

A) Ordering [Equitable] to reinstate and return the amount of [respondents'] deposit

placed on hold status;

B) Ordering [Equitable] to pay [respondents] the sum of ₱12 [m]illion [p]esos as moral
damages;

C) Ordering [Equitable] to pay [respondents] the sum of ₱10 [m]illion [p]esos as

exemplary damages;

D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay [respondents], jointly
and severally, the sum of [t]wo [m]illion [p]esos as moral and exemplary damages;
 E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and severally, to pay
[respondents'] attorney's fees in the sum of ₱300,000; litigation expenses in the sum of
₱50,000 and the cost of suit;

F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable] the unpaid
principal obligation for the peso loan as well as the unpaid obligation for the dollar
denominated loan;

G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable] interest as
follows:

1) 12% per annum for the peso loans;

2) 8% per annum for the dollar loans. The basis for the payment of the dollar
obligation is the conversion rate of P26.50 per dollar availed of at the time of
incurring of the obligation in accordance with Article 1250 of the Civil Code of
the Philippines;

H) Dismissing [Equitable's] counterclaim except the payment of the aforestated unpaid

principal loan obligations and interest.

SO ORDERED.19

Equitable and respondents filed their respective notices of appeal. 20

In the March 1, 2004 order of the RTC, both notices were denied due course because Equitable
and respondents "failed to submit proof that they paid their respective appeal fees." 21

WHEREFORE, premises considered, the appeal interposed by defendants from the Decision in
the above-entitled case is DENIED due course. As of February 27, 2004, the Decision dated
February 5, 2004, is considered final and executory in so far as [Equitable, Aimee Yu and
Bejan Lionel Apas] are concerned.22 (emphasis supplied)

Equitable moved for the reconsideration of the March 1, 2004 order of the RTC 23 on the ground
that it did in fact pay the appeal fees. Respondents, on the other hand, prayed for the issuance
of a writ of execution.24

On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for
reconsideration for lack of merit25 and ordered the issuance of a writ of execution in favor of
respondents.26 According to the RTC, because respondents did not move for the
reconsideration of the previous order (denying due course to the parties’ notices of
appeal),27 the February 5, 2004 decision became final and executory as to both parties and a
writ of execution against Equitable was in order. 28
A writ of execution was thereafter issued29 and three real properties of Equitable were levied
upon.30

On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004
order.31 It, however, withdrew that petition on March 30, 200432 and instead filed a petition for
certiorari with an application for an injunction in the CA to enjoin the implementation and
execution of the March 24, 2004 omnibus order.33

On June 16, 2004, the CA granted Equitable's application for injunction. A writ of preliminary
injunction was correspondingly issued.34

Notwithstanding the writ of injunction, the properties of Equitable previously levied upon were
sold in a public auction on July 1, 2004. Respondents were the highest bidders and certificates
of sale were issued to them.35

On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to cite the
sheriffs who conducted the sale in contempt for proceeding with the auction despite the
injunction order of the CA.36

On October 28, 2005, the CA dismissed the petition for certiorari. 37 It found Equitable guilty of
forum shopping because the bank filed its petition for certiorari in the CA several hours before
withdrawing its petition for relief in the RTC. 38 Moreover, Equitable failed to disclose, both in
the statement of material dates and certificate of non-forum shopping (attached to its petition
for certiorari in the CA), that it had a pending petition for relief in the RTC. 39

Equitable moved for reconsideration40 but it was denied.41 Thus, this petition.

Equitable asserts that it was not guilty of forum shopping because the petition for relief was
withdrawn on the same day the petition for certiorari was filed. 42 It likewise avers that its
petition for certiorari was meritorious because the RTC committed grave abuse of discretion in
issuing the March 24, 2004 omnibus order which was based on an erroneous assumption. The
March 1, 2004 order denying its notice of appeal for non payment of appeal fees was erroneous
because it had in fact paid the required fees. 43 Thus, the RTC, by issuing its March 24, 2004
omnibus order, effectively prevented Equitable from appealing the patently wrong February 5,
2004 decision.44

This petition is meritorious.

Equitable Was Not Guilty Of Forum shopping

Forum shopping exists when two or more actions involving the same transactions, essential
facts and circumstances are filed and those actions raise identical issues, subject matter and
causes of action.45 The test is whether, in two or more pending cases, there is identity of
parties, rights or causes of actions and reliefs. 46
Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not have
identical causes of action. The petition for relief from the denial of its notice of appeal was
based on the RTC’s judgment or final order preventing it from taking an appeal by "fraud,
accident, mistake or excusable negligence."47 On the other hand, its petition for certiorari in the
CA, a special civil action, sought to correct the grave abuse of discretion amounting to lack of
jurisdiction committed by the RTC.48

In a petition for relief, the judgment or final order is rendered by a court with competent
jurisdiction. In a petition for certiorari, the order is rendered by a court without or in excess of
its jurisdiction.

Moreover, Equitable substantially complied with the rule on non-forum shopping when it
moved to withdraw its petition for relief in the RTC on the same day (in fact just four hours and
forty minutes after) it filed the petition for certiorari in the CA. Even if Equitable failed to
disclose that it had a pending petition for relief in the RTC, it rectified what was doubtlessly a
careless oversight by withdrawing the petition for relief just a few hours after it filed its petition
for certiorari in the CA ― a clear indication that it had no intention of maintaining the two
actions at the same time.

The Trial Court Committed Grave Abuse of Discretion In Issuing Its March 1, 2004 and March
24, 2004 Orders

Section 1, Rule 65 of the Rules of Court provides:

Section 1. Petition for Certiorari. When any tribunal, board or officer exercising judicial or
quasi-judicial function has acted without or in excess of its or his jurisdiction, or with grave
abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal, nor any
plain, speedy or adequate remedy in the ordinary course of law, a person aggrieved thereby
may file a verified petition in the proper court, alleging the facts with certainty and praying that
judgment be rendered annulling or modifying the proceedings of such tribunal, board or officer,
and granting such incidental reliefs as law and justice may require.

The petition shall be accompanied by a certified true copy of the judgment, order or resolution
subject thereof, copies of all pleadings and documents relevant and pertinent thereto, and a
sworn certificate of non-forum shopping as provided in the third paragraph of Section 3, Rule
46.

There are two substantial requirements in a petition for certiorari. These are:

1. that the tribunal, board or officer exercising judicial or quasi-judicial functions acted
without or in excess of his or its jurisdiction or with grave abuse of discretion amounting
to lack or excess of jurisdiction; and
 2. that there is no appeal or any plain, speedy and adequate remedy in the ordinary
course of law.

For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner must
show that the public respondent patently and grossly abused his discretion and that abuse
amounted to an evasion of positive duty or a virtual refusal to perform a duty enjoined by law
or to act at all in contemplation of law, as where the power was exercised in an arbitrary and
despotic manner by reason of passion or hostility. 49

The March 1, 2004 order denied due course to the notices of appeal of both Equitable and
respondents. However, it declared that the February 5, 2004 decision was final and executory
only with respect to Equitable.50 As expected, the March 24, 2004 omnibus order denied
Equitable's motion for reconsideration and granted respondents' motion for the issuance of a
writ of execution.51

The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to prevent
Equitable, et al. from appealing the February 5, 2004 decision. Not only that. The execution of
the decision was undertaken with indecent haste, effectively obviating or defeating Equitable's
right to avail of possible legal remedies. No matter how we look at it, the RTC committed grave
abuse of discretion in rendering those orders.

With regard to whether Equitable had a plain, speedy and adequate remedy in the ordinary
course of law, we hold that there was none. The RTC denied due course to its notice of appeal
in the March 1, 2004 order. It affirmed that denial in the March 24, 2004 omnibus order. Hence,
there was no way Equitable could have possibly appealed the February 5, 2004 decision. 52

Although Equitable filed a petition for relief from the March 24, 2004 order, that petition was
not a plain, speedy and adequate remedy in the ordinary course of law. 53 A petition for relief
under Rule 38 is an equitable remedy allowed only in exceptional circumstances or where there
is no other available or adequate remedy.54

Thus, we grant Equitable's petition for certiorari and consequently give due course to its
appeal.

Equitable Raised Pure Questions of Law in Its Petition For Review

The jurisdiction of this Court in Rule 45 petitions is limited to questions of law. 55 There is a
question of law "when the doubt or controversy concerns the correct application of law or
jurisprudence to a certain set of facts; or when the issue does not call for the probative value of
the evidence presented, the truth or falsehood of facts being admitted." 56

Equitable does not assail the factual findings of the trial court. Its arguments essentially focus
on the nullity of the RTC’s February 5, 2004 decision. Equitable points out that that decision
was patently erroneous, specially the exorbitant award of damages, as it was inconsistent with
existing law and jurisprudence.57

The Promissory Notes Were Valid

The RTC upheld the validity of the promissory notes despite respondents’ assertion that those
documents were contracts of adhesion.

A contract of adhesion is a contract whereby almost all of its provisions are drafted by one
party.58 The participation of the other party is limited to affixing his signature or his "adhesion"
to the contract.59 For this reason, contracts of adhesion are strictly construed against the party
who drafted it.60

It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are, on
the contrary, as binding as ordinary contracts. A party is in reality free to accept or reject it. A
contract of adhesion becomes void only when the dominant party takes advantage of the
weakness of the other party, completely depriving the latter of the opportunity to bargain on
equal footing.61

That was not the case here. As the trial court noted, if the terms and conditions offered by
Equitable had been truly prejudicial to respondents, they would have walked out and
negotiated with another bank at the first available instance. But they did not. Instead, they
continuously availed of Equitable's credit facilities for five long years.

While the RTC categorically found that respondents had outstanding dollar- and peso-
denominated loans with Equitable, it, however, failed to ascertain the total amount due
(principal, interest and penalties, if any) as of July 9, 2001. The trial court did not explain how it
arrived at the amounts of US$228,200 and ₱1,000,000. 62 In Metro Manila Transit Corporation v.
D.M. Consunji,63 we reiterated that this Court is not a trier of facts and it shall pass upon them
only for compelling reasons which unfortunately are not present in this case. 64 Hence, we
ordered the partial remand of the case for the sole purpose of determining the amount of
actual damages.65

Escalation Clause Violated The Principle Of Mutuality Of Contracts

Escalation clauses are not void per se. However, one "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. Clauses of that nature
violate the principle of mutuality of contracts.66 Article 130867 of the Civil Code holds that a
contract must bind both contracting parties; its validity or compliance cannot be left to the will
of one of them.68

For this reason, we have consistently held that a valid escalation clause provides:
1. that the rate of interest will only be increased if the applicable maximum rate of interest is
increased by law or by the Monetary Board; and

2. that the stipulated rate of interest will be reduced if the applicable maximum rate of interest
is reduced by law or by the Monetary Board (de-escalation clause).69

The RTC found that Equitable's promissory notes uniformly stated:

If subject promissory note is extended, the interest for subsequent extensions shall be at such
rate as shall be determined by the bank.70

Equitable dictated the interest rates if the term (or period for repayment) of the loan was
extended. Respondents had no choice but to accept them. This was a violation of Article 1308
of the Civil Code. Furthermore, the assailed escalation clause did not contain the necessary
provisions for validity, that is, it neither provided that the rate of interest would be increased
only if allowed by law or the Monetary Board, nor allowed de-escalation. For these reasons, the
escalation clause was void.

With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National
Bank71 we held that, because the escalation clause was annulled, the principal amount of the
loan was subject to the original or stipulated rate of interest. Upon maturity, the amount due
was subject to legal interest at the rate of 12% per annum. 72

Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their
dollar-denominated loans and 20% p.a. for their peso-denominated loans from January 10,
2001 to July 9, 2001. Thereafter, Equitable was entitled to legal interest of 12% p.a. on all
amounts due.

There Was No Extraordinary Deflation

Extraordinary inflation exists when there is an unusual decrease in the purchasing power of
currency (that is, beyond the common fluctuation in the value of currency) and such decrease
could not be reasonably foreseen or was manifestly beyond the contemplation of the parties at
the time of the obligation. Extraordinary deflation, on the other hand, involves an inverse
situation.73

Article 1250 of the Civil Code provides:

Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should
intervene, the value of the currency at the time of the establishment of the obligation shall be
the basis of payment, unless there is an agreement to the contrary.

For extraordinary inflation (or deflation) to affect an obligation, the following requisites must
be proven:
 1. that there was an official declaration of extraordinary inflation or deflation from the
Bangko Sentral ng Pilipinas (BSP);74

2. that the obligation was contractual in nature;75 and

3. that the parties expressly agreed to consider the effects of the extraordinary inflation
or deflation.76

Despite the devaluation of the peso, the BSP never declared a situation of extraordinary
inflation. Moreover, although the obligation in this instance arose out of a contract, the parties
did not agree to recognize the effects of extraordinary inflation (or deflation).77 The RTC never
mentioned that there was a such stipulation either in the promissory note or loan agreement.
Therefore, respondents should pay their dollar-denominated loans at the exchange rate fixed
by the BSP on the date of maturity.78

The Award Of Moral And Exemplary Damages Lacked Basis

Moral damages are in the category of an award designed to compensate the claimant for actual
injury suffered, not to impose a penalty to the wrongdoer. 79 To be entitled to moral damages, a
claimant must prove:

1. That he or she suffered besmirched reputation, or physical, mental or psychological

suffering sustained by the claimant;

2. That the defendant committed a wrongful act or omission;

3. That the wrongful act or omission was the proximate cause of the damages the
claimant sustained;

4. The case is predicated on any of the instances expressed or envisioned by Article

221980 and 222081 . 82

In culpa contractual or breach of contract, moral damages are recoverable only if the defendant
acted fraudulently or in bad faith or in wanton disregard of his contractual obligations. 83 The
breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive.84

The RTC found that respondents did not pay Equitable the interest due on February 9, 2001 (or
any month thereafter prior to the maturity of the loan)85 or the amount due (principal plus
interest) due on July 9, 2001.86 Consequently, Equitable applied respondents' deposits to their
loans upon maturity.

The relationship between a bank and its depositor is that of creditor and debtor. 87 For this
reason, a bank has the right to set-off the deposits in its hands for the payment of a depositor's
indebtedness.88
Respondents indeed defaulted on their obligation. For this reason, Equitable had the option to
exercise its legal right to set-off or compensation. However, the RTC mistakenly (or, as it now
appears, deliberately) concluded that Equitable acted "fraudulently or in bad faith or in wanton
disregard" of its contractual obligations despite the absence of proof. The undeniable fact was
that, whatever damage respondents sustained was purely the consequence of their failure to
pay their loans. There was therefore absolutely no basis for the award of moral damages to
them.

Neither was there reason to award exemplary damages. Since respondents were not entitled to
moral damages, neither should they be awarded exemplary damages. 89 And if respondents
were not entitled to moral and exemplary damages, neither could they be awarded attorney's
fees and litigation expenses.90

ACCORDINGLY, the petition is hereby GRANTED.

The October 28, 2005 decision and February 3, 2006 resolution of the Court of Appeals in CA-
G.R. SP No. 83112 are hereby REVERSED and SET ASIDE.

The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in Civil
Case No. CEB-26983 is hereby ANNULLED for being rendered with grave abuse of discretion
amounting to lack or excess of jurisdiction. All proceedings undertaken pursuant thereto are
likewise declared null and void.

The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No.
CEB-26983 is hereby SET ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee Yu and
Bejan Lionel Apas is therefore given due course.1avvphi1

The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in Civil Case
No. CEB-26983 is accordingly SET ASIDE. New judgment is hereby entered:

1. ordering respondents Ng Sheung Ngor, doing business under the name and style of
"Ken Marketing," Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner
Equitable PCI Bank the principal amount of their dollar- and peso-denominated loans;

2. ordering respondents Ng Sheung Ngor, doing business under the name and style of
"Ken Marketing," Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner
Equitable PCI Bank interest at:

a) 12.66% p.a. with respect to their dollar-denominated loans from January 10,
2001 to July 9, 2001;

b) 20% p.a. with respect to their peso-denominated loans from January 10, 2001
to July 9, 2001;91
 c) pursuant to our ruling in Eastern Shipping Lines v. Court of Appeals,92 the total
amount due on July 9, 2001 shall earn legal interest at 12% p.a. from the time
petitioner Equitable PCI Bank demanded payment, whether judicially or extra-
judicially; and

d) after this Decision becomes final and executory, the applicable rate shall be
12% p.a. until full satisfaction;

3. all other claims and counterclaims are dismissed.

As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute the exact
amounts due on the respective dollar-denominated and peso-denominated loans, as of July 9,
2001, of respondents Ng Sheung Ngor, doing business under the name and style of "Ken
Marketing," Ken Appliance Division and Benjamin E. Go.

SO ORDERED.