ARTICLE 1306 AUTONOMY OF CONTRACTS

G.R. No. 142830

March 24, 2006
WILLIAM GOLANGCO CONSTRUCTION CORPORATION, Petitioner,
vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK*, Respondent
DECISION
CORONA, J.:
The facts of this case are straightforward.1
William Golangco Construction Corporation (WGCC) and the Philippine Commercial International Bank
(PCIB) entered into a contract for the construction of the extension of PCIB Tower II (denominated as
PCIB Tower II, Extension Project [project])2 on October 20, 1989. The project included, among others, the
application of a granitite wash-out finish3 on the exterior walls of the building.
PCIB, with the concurrence of its consultant TCGI Engineers (TCGI), accepted the turnover of the
completed work by WGCC in a letter dated June 1, 1992. To answer for any defect arising within a period
of one year, WGCC submitted a guarantee bond dated July 1, 1992 issued by Malayan Insurance
Company, Inc. in compliance with the construction contract. 4
The controversy arose when portions of the granitite wash-out finish of the exterior of the building began peeling off and falling from the walls in 1993. WGCC made minor repairs after
PCIB requested it to rectify the construction defects. In 1994, PCIB entered into another contract with Brains and Brawn Construction and Development Corporation to re-do the entire
granitite wash-out finish after WGCC manifested that it was "not in a position to do the new finishing work," though it was willing to share part of the cost. PCIB incurred expenses
amounting toP11,665,000 for the repair work.
PCIB filed a request for arbitration with the Construction Industry Arbitration Commission (CIAC) for the reimbursement of its expenses for the repairs made by another contractor. It
complained of WGCCs alleged non-compliance with their contractual terms on materials and workmanship. WGCC interposed a counterclaim forP5,777,157.84 for material cost
adjustment.
The CIAC declared WGCC liable for the construction defects in the project.5 WGCC filed a petition for review with the Court of Appeals (CA) which dismissed it for lack of merit.6 Its
motion for reconsideration was similarly denied.7
In this petition for review on certiorari, WGCC raises this main question of law: whether or not petitioner WGCC is liable for defects in the granitite wash-out finish that occurred after
the lapse of the one-year defects liability period provided in Art. XI of the construction contract.8
We rule in favor of WGCC.
The controversy pivots on a provision in the construction contract referred to as the defects liability period:
ARTICLE XI GUARANTEE
Unless otherwise specified for specific works, and without prejudice to the rights and causes of action of the OWNER under Article 1723 of the Civil Code, the CONTRACTOR hereby
guarantees the work stipulated in this Contract, and shall make good any defect in materials and workmanship which [becomes] evident within one (1) year after the final
acceptance of the work. The CONTRACTOR shall leave the work in perfect order upon completion and present the final certificate to the ENGINEER promptly.
If in the opinion of the OWNER and ENGINEER, the CONTRACTOR has failed to act promptly in rectifying any defect in the work which appears within the period mentioned above,
the OWNER and the ENGINEER may, at their own discretion, using the Guarantee Bond amount for corrections, have the work done by another contractor at the expense of the
CONTRACTOR or his bondsmen.
However, nothing in this section shall in any way affect or relieve the CONTRACTORS responsibility to the OWNER. On the completion of the [w]orks, the CONTRACTOR
shall clear away and remove from the site all constructional plant, surplus materials, rubbish and temporary works of every kind, and leave the whole of the [s]ite and [w]orks clean
and in a workmanlike condition to the satisfaction of the ENGINEER and OWNER.9(emphasis ours)
Although both parties based their arguments on the same stipulations, they reached conflicting conclusions. A careful reading of the stipulations, however, leads us to the conclusion
that WGCCs arguments are more tenable.
Autonomy of contracts
The autonomous nature of contracts is enunciated in Article 1306 of the Civil Code.
Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.
Obligations arising from contracts have the force of law between the parties and should be complied with in good faith.10 In characterizing the contract as having the force of law
between the parties, the law stresses the obligatory nature of a binding and valid agreement.

The provision in the construction contract providing for a defects liability period was not shown as contrary to law, morals, good customs, pubic order or public policy. By the nature of
the obligation in such contract, the provision limiting liability for defects and fixing specific guaranty periods was not only fair and equitable; it was also necessary. Without such
limitation, the contractor would be expected to make a perpetual guarantee on all materials and workmanship.
The adoption of a one-year guarantee, as done by WGCC and PCIB, is established usage in the Philippines for private and government construction contracts.11 The contract did not
specify a different period for defects in the granitite wash-out finish; hence, any defect therein should have been brought to WGCCs attention within the one-year defects liability
period in the contract.
We cannot tolerate an interpretation that undermines a contractual stipulation freely and validly agreed upon. The courts will not relieve a party from the effects of an unwise or
unfavorable contract freely entered into.12
[T]he inclusion in a written contract for a piece of work [,] such as the one in question, of a provision defining a warranty period against defects, is not uncommon. This kind of a
stipulation is of particular importance to the contractor, for as a general rule, after the lapse of the period agreed upon therein, he may no longer be held accountable for whatever
defects, deficiencies or imperfections that may be discovered in the work executed by him.13
Interpretation of contracts
To challenge the guarantee period provided in Article XI of the contract, PCIB calls our attention to Article 62.2 which provides:
62.2 Unfulfilled Obligations
Notwithstanding the issue of the Defects Liability Certificate[,] the Contractor and the Owner shall remain liable for the fulfillment of any obligation[,] incurred under the
provisions of the Contract prior to the issue of the Defects Liability Certificate[,] which remains unperformed at the time such Defects Liability Certificate is issued[. And]
for the purpose of determining the nature and extent of any such obligation, the Contract shall be deemed to remain in force between the parties of the Contract. (emphasis ours)
The defects in the granitite wash-out finish were not the "obligation" contemplated in Article 62.2. It was not an obligation that remained unperformed or unfulfilled at the time the
defects liability certificate was issued. The alleged defects occurred more than a year from the final acceptance by PCIB.
An examination of Article 1719 of the Civil Code is enlightening:
Art. 1719. Acceptance of the work by the employer relieves the contractor of liability for any defect in the work, unless:
(1) The defect is hidden and the employer is not, by his special knowledge, expected to recognize the same; or
(2) The employer expressly reserves his rights against the contractor by reason of the defect.
The lower courts conjectured that the peeling off of the granitite wash-out finish was probably due to "defective materials and workmanship." This they characterized as hidden or
latent defects. We, however, do not agree with the conclusion that the alleged defects were hidden.
First, PCIBs team of experts14 (who were specifically employed to detect such defects early on) supervised WGCCs workmanship. Second, WGCC regularly submitted progress
reports and photographs. Third, WGCC worked under fair and transparent circumstances. PCIB had access to the site and it exercised reasonable supervision over WGCCs work.
Fourth, PCIB issued several "punch lists" for WGCCs compliance before the issuance of PCIBs final certificate of acceptance. Fifth, PCIB supplied the materials for the granitite
wash-out finish. And finally, PCIBs team of experts gave their concurrence to the turnover of the project.
The purpose of the defects liability period was precisely to give PCIB additional, albeit limited, opportunity to oblige WGCC to make good any defect, hidden or otherwise, discovered
within one year.
Contrary to the CAs conclusion, the first sentence of the third paragraph of Article XI on guarantee previously quoted did not operate as a blanket exception to the one-year guarantee
period under the first paragraph. Neither did it modify, extend, nullify or supersede the categorical terms of the defects liability period.
Under the circumstances, there were no hidden defects for which WGCC could be held liable. Neither was there any other defect for which PCIB made any express reservation of its
rights against WGCC. Indeed, the contract should not be interpreted to favor the one who caused the confusion, if any. The contract was prepared by TCGI for PCIB.15
WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. SP No. 41152 isANNULED and SET ASIDE.
SO ORDERED.

G.R. No. 197861

June 5, 2013
SPOUSES FLORENTINO T. MALLARI and AUREA V. MALLARI, Petitioners,
vs.
PRUDENTIAL BANK (now BANK OF THE PHILIPPINE ISLANDS), Respondent.
DECISION
PERALTA, J.:
Before us is a Petition for Review on Certiorari under Rule 45, assailing the Decision 1 dated June 17,
2010 and the Resolution2 dated July 20, 2011 of the Court of Appeals (CA) in CA-G.R. CV No. 65993.

The antecedent facts are as follows:

On December 11, 1984, petitioner Florentino T. Mallari (Florentino) obtained from respondent Prudential
Bank-Tarlac Branch (respondent bank), a loan in the amount of P300,000.00 as evidenced by Promissory
Note (PN) No. BD 84-055.3 Under the promissory note, the loan was subject to an interest rate of 21% per
annum (p.a.), attorney's fees equivalent to 15% of the total amount due but not less than P200.00 and, in
case of default, a penalty and collection charges of 12% p.a. of the total amount due. The loan had a
maturity date of January 10, 1985, but was renewed up to February 17, 1985. Petitioner Florentino
executed a Deed of Assignment4 wherein he authorized the respondent bank to pay his loan with his time
deposit with the latter in the amount ofP300,000.00.
On December 22, 1989, petitioners spouses Florentino and Aurea Mallari (petitioners) obtained again
from respondent bank another loan of P1.7 million as evidenced by PN No. BDS 606-895 with a maturity
date of March 22, 1990. They stipulated that the loan will bear 23% interest p.a., attorney's fees
equivalent to 15% p.a. of the total amount due, but not less than P200.00, and penalty and collection
charges of 12% p.a. Petitioners executed a Deed of Real Estate Mortgage 6 in favor of respondent bank
covering petitioners' property under Transfer Certificate of Title (TCT) No. T-215175 of the Register of
Deeds of Tarlac to answer for the said loan.
Petitioners failed to settle their loan obligations with respondent bank, thus, the latter, through its lawyer,
sent a demand letter to the former for them to pay their obligations, which when computed up to January
31, 1992, amounted to P571,218.54 for PN No. BD 84-055 and P2,991,294.82 for PN No. BDS 606-89.
On February 25, 1992, respondent bank filed with the Regional Trial Court (RTC) of Tarlac, a petition for
the extrajudicial foreclosure of petitioners' mortgaged property for the satisfaction of the latter's obligation
ofP1,700,000.00 secured by such mortgage, thus, the auction sale was set by the Provincial Sheriff on
April 23, 1992.7
On April 10, 1992, respondent bank's Assistant Manager sent petitioners two (2) separate Statements of
Account as of April 23, 1992, i.e., the loan of P300,000.00 was increased to P594,043.54, while
the P1,700,000.00 loan was already P3,171,836.18.
On April 20, 1992, petitioners filed a complaint for annulment of mortgage, deeds, injunction, preliminary
injunction, temporary restraining order and damages claiming, among others, that: (1) the P300,000.00
loan obligation should have been considered paid, because the time deposit with the same amount under
Certificate of Time Deposit No. 284051 had already been assigned to respondent bank; (2) respondent
bank still added theP300,000.00 loan to the P1.7 million loan obligation for purposes of applying the
proceeds of the auction sale; and (3) they realized that there were onerous terms and conditions imposed
by respondent bank when it tried to unilaterally increase the charges and interest over and above those
stipulated. Petitioners asked the court to restrain respondent bank from proceeding with the scheduled
foreclosure sale.
Respondent bank filed its Answer with counterclaim arguing that: (1) the interest rates were clearly
provided in the promissory notes, which were used in computing for interest charges; (2) as early as
January 1986, petitioners' time deposit was made to apply for the payment of interest of
their P300,000.00 loan; and (3) the statement of account as of April 10, 1992 provided for a computation
of interest and penalty charges only from May 26, 1989, since the proceeds of petitioners' time deposit
was applied to the payment of interest and penalty charges for the preceding period. Respondent bank
also claimed that petitioners were fully apprised of the bank's terms and conditions; and that the
extrajudicial foreclosure was sought for the satisfaction of the second loan in the amount of P1.7 million
covered by PN No. BDS 606-89 and the real estate mortgage, and not the P300,000.00 loan covered by
another PN No. 84-055.
In an Order8 dated November 10, 1992, the RTC denied the Application for a Writ of Preliminary
Injunction. However, in petitioners' Supplemental Motion for Issuance of a Restraining Order and/or
Preliminary Injunction to enjoin respondent bank and the Provincial Sheriff from effecting or conducting
the auction sale, the RTC reversed itself and issued the restraining order in its Order 9 dated January 14,
1993.

Respondent bank filed its Motion to Lift Restraining Order, which the RTC granted in its Order 10 dated
March 9, 1993. Respondent bank then proceeded with the extrajudicial foreclosure of the mortgaged
property. On July 7, 1993, a Certificate of Sale was issued to respondent bank being the highest bidder in
the amount ofP3,500,000.00.
Subsequently, respondent bank filed a Motion to Dismiss Complaint 11 for failure to prosecute action for
unreasonable length of time to which petitioners filed their Opposition. 12 On November 19, 1998, the RTC
issued its Order13 denying respondent bank's Motion to Dismiss Complaint.
Trial thereafter ensued. Petitioner Florentino was presented as the lone witness for the plaintiffs.
Subsequently, respondent bank filed a Demurrer to Evidence.
On November 15, 1999, the RTC issued its Order14 granting respondent's demurrer to evidence, the
dispositive portion of which reads:
WHEREFORE, this case is hereby ordered DISMISSED. Considering there is no evidence of bad faith,
the Court need not order the plaintiffs to pay damages under the general concept that there should be no
premium on the right to litigate.
NO COSTS.
SO ORDERED.15
The RTC found that as to the P300,000.00 loan, petitioners had assigned petitioner Florentino's time
deposit in the amount of P300,000.00 in favor of respondent bank, which maturity coincided with
petitioners' loan maturity. Thus, if the loan was unpaid, which was later extended to February 17, 1985,
respondent bank should had just applied the time deposit to the loan. However, respondent bank did not,
and allowed the loan interest to accumulate reaching the amount of P594,043.54 as of April 10, 1992,
hence, the amount of P292,600.00 as penalty charges was unjust and without basis.
As to the P1.7 million loan which petitioners obtained from respondent bank after the P300,000.00 loan, it
had reached the amount of P3,171,836.18 per Statement of Account dated April 27, 1993, which was
computed based on the 23% interest rate and 12% penalty charge agreed upon by the parties; and that
contrary to petitioners' claim, respondent bank did not add the P300,000.00 loan to the P1.7 million loan
obligation for purposes of applying the proceeds of the auction sale.
The RTC found no legal basis for petitioners' claim that since the total obligation was P1.7 million and
respondent bank's bid price was P3.5 million, the latter should return to petitioners the difference of P1.8
million. It found that since petitioners' obligation had reached P2,991,294.82 as of January 31, 1992, but
the certificate of sale was executed by the sheriff only on July 7, 1993, after the restraining order was
lifted, the stipulated interest and penalty charges from January 31, 1992 to July 7, 1993 added to the loan
already amounted to P3.5 million as of the auction sale.
The RTC found that the 23% interest rate p.a., which was then the prevailing loan rate of interest could
not be considered unconscionable, since banks are not hospitable or equitable institutions but are entities
formed primarily for profit. It also found that Article 1229 of the Civil Code invoked by petitioners for the
reduction of the interest was not applicable, since petitioners had not paid any single centavo of the P1.7
million loan which showed they had not complied with any part of the obligation.
Petitioners appealed the RTC decision to the CA. A Comment was filed by respondent bank and
petitioners filed their Reply thereto.
On June 17, 2010, the CA issued its assailed Decision, the dispositive portion of which reads:
WHEREFORE, the instant appeal is hereby DENIED. The Order dated November 15, 1999 issued by the
Regional Trial Court (RTC), Branch 64, Tarlac City, in Civil Case No. 7550 is hereby AFFIRMED. 16
The CA found that the time deposit of P300,000.00 was equivalent only to the principal amount of the loan
ofP300,000.00 and would not be sufficient to cover the interest, penalty, collection charges and attorney's
fees agreed upon, thus, in the Statement of Account dated April 10, 1992, the outstanding balance of
petitioners' loan was P594,043.54. It also found not persuasive petitioners' claim that the P300,000.00
loan was added to the P1.7 million loan. The CA, likewise, found that the interest rates and penalty
charges imposed were not unconscionable and adopted in toto the findings of the RTC on the matter.

Petitioners filed their Motion for Reconsideration, which the CA denied in a Resolution dated July 20,
2011.
Hence, petitioners filed this petition for review arguing that:
THE HON. COURT OF APPEALS ERRED IN AFFIRMING THE ORDER OF THE RTC-BRANCH 64,
TARLAC CITY, DATED NOVEMBER 15, 1999, DESPITE THE FACT THAT THE SAME IS CONTRARY
TO SETTLED JURISPRUDENCE ON THE MATTER.17
The issue for resolution is whether the 23% p.a. interest rate and the 12% p.a. penalty charge on
petitioners'P1,700,000.00 loan to which they agreed upon is excessive or unconscionable under the
circumstances.
Parties are free to enter into agreements and stipulate as to the terms and conditions of their contract, but
such freedom is not absolute. As Article 1306 of the Civil Code provides, "The contracting parties may
establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order, or public policy." Hence, if the stipulations in
the contract are valid, the parties thereto are bound to comply with them, since such contract is the law
between the parties. In this case, petitioners and respondent bank agreed upon on a 23% p.a. interest
rate on the P1.7 million loan. However, petitioners now contend that the interest rate of 23% p.a. imposed
by respondent bank is excessive or unconscionable, invoking our ruling in Medel v. Court of
Appeals,18 Toring v. Spouses Ganzon-Olan,19 and Chua v. Timan.20
We are not persuaded.
In Medel v. Court of Appeals,21 we found the stipulated interest rate of 66% p.a. or a 5.5% per month on
aP500,000.00 loan excessive, unconscionable and exorbitant, hence, contrary to morals if not against the
law and declared such stipulation void. In Toring v. Spouses Ganzon-Olan, 22 the stipulated interest rates
involved were 3% and 3.81% per month on a P10 million loan, which we find under the circumstances
excessive and reduced the same to 1% per month. While in Chua v. Timan, 23 where the stipulated interest
rates were 7% and 5% a month, which are equivalent to 84% and 60% p.a., respectively, we had reduced
the same to 1% per month or 12% p.a. We said that we need not unsettle the principle we had affirmed in
a plethora of cases that stipulated interest rates of 3% per month and higher are excessive,
unconscionable and exorbitant, hence, the stipulation was void for being contrary to morals.24
In this case, the interest rate agreed upon by the parties was only 23% p.a., or less than 2% per month,
which are much lower than those interest rates agreed upon by the parties in the above-mentioned cases.
Thus, there is no similarity of factual milieu for the application of those cases.
We do not consider the interest rate of 23% p.a. agreed upon by petitioners and respondent bank to be
unconscionable.
In Villanueva v. Court of Appeals,25 where the issue raised was whether the 24% p.a. stipulated interest
rate is unreasonable under the circumstances, we answered in the negative and held:
In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino Savings and Mortgage Bank,
Dagupan City Branch, this Court held that the interest rate of 24% per annum on a loan of P244,000.00,
agreed upon by the parties, may not be considered as unconscionable and excessive. As such, the Court
ruled that the borrowers cannot renege on their obligation to comply with what is incumbent upon them
under the contract of loan as the said contract is the law between the parties and they are bound by its
stipulations.
Also, in Garcia v. Court of Appeals, this Court sustained the agreement of the parties to a 24% per annum
interest on an P8,649,250.00 loan finding the same to be reasonable and clearly evidenced by the
amended credit line agreement entered into by the parties as well as two promissory notes executed by
the borrower in favor of the lender.
Based on the above jurisprudence, the Court finds that the 24% per annum interest rate, provided for in
the subject mortgage contracts for a loan of P225,000.00, may not be considered unconscionable.
Moreover, considering that the mortgage agreement was freely entered into by both parties, the same is
the law between them and they are bound to comply with the provisions contained therein. 26

Clearly, jurisprudence establish that the 24% p.a. stipulated interest rate was not considered
unconscionable, thus, the 23% p.a. interest rate imposed on petitioners' loan in this case can by no
means be considered excessive or unconscionable.
We also do not find the stipulated 12% p.a. penalty charge excessive or unconscionable.
In Ruiz v. CA,27 we held:
The 1% surcharge on the principal loan for every month of default is valid.1wphi1 This surcharge or
penalty stipulated in a loan agreement in case of default partakes of the nature of liquidated damages
under Art. 2227 of the New Civil Code, and is separate and distinct from interest payment. Also referred to
as a penalty clause, it is expressly recognized by law. It is an accessory undertaking to assume greater
liability on the part of an obligor in case of breach of an obligation. The obligor would then be bound to
pay the stipulated amount of indemnity without the necessity of proof on the existence and on the
measure of damages caused by the breach. x x x28 And in Development Bank of the Philippines v. Family
Foods Manufacturing Co., Ltd.,29 we held that:
x x x The enforcement of the penalty can be demanded by the creditor only when the non-performance is
due to the fault or fraud of the debtor. The non-performance gives rise to the presumption of fault; in order
to avoid the payment of the penalty, the debtor has the burden of proving an excuse - the failure of the
performance was due to either force majeure or the acts of the creditor himself. 30
Here, petitioners defaulted in the payment of their loan obligation with respondent bank and their contract
provided for the payment of 12% p.a. penalty charge, and since there was no showing that petitioners'
failure to perform their obligation was due to force majeure or to respondent bank's acts, petitioners
cannot now back out on their obligation to pay the penalty charge. A contract is the law between the
parties and they are bound by the stipulations therein.
WHEREFORE, the petition for review is DENIED. The Decision dated June 17, 2010 and the Resolution
dated July 20, 2011 of the Court of Appeals are hereby AFFIRMED.
SO ORDERED.

G.R. No. 176425

HEIRS OF MANUEL UY EK LIONG, represented by BELEN LIM VDA. DE UY, Petitioners,
vs.
MAURICIA MEER CASTILLO, HEIRS OF BUENAFLOR C. UMALI, represented by NANCY UMALI,
VICTORIA H. CASTILLO, BERTILLA C. RADA, MARIETTA C. CAVANEZ, LEOVINA C. JALBUENA
and PHILIP M. CASTILLO, Respondents.
DECISION
PEREZ, J.:
Assailed in this Petition for Review on Certiorari filed pursuant to Rule 45 of the Rules of Court is the
Decision1dated 23 January 2007 rendered by the Fifteenth Division of the Court of Appeals in CA-G.R.
CV No. 84687,2 the dispositive portion of which states:
WHEREFORE, premises considered, the assailed January 27, 2005 Decision of the Regional Trial Court
of Lucena City, Branch 59, in Civil Case No. 93-176, is hereby REVERSED and SET ASIDE and a new
one entered declaring the AGREEMENT and the KASUNDUAN void ab initio for being contrary to law and
public policy, without prejudice to the attorneys filing a proper action for collection of reasonable
attorneys fees based on quantum meruit and without prejudice also to administrative charges being filed
against counsel for counsels openly entering into such an illegal AGREEMENT in violation of the Canons
of Professional Responsibility which action may be instituted with the Supreme Court which has exclusive
jurisdiction to impose such penalties on members of the bar.
No pronouncement as to costs.
SO ORDERED.3 (Italics and Underscore Ours)
The Facts

Alongside her husband, Felipe Castillo, respondent Mauricia Meer Castillo was the owner of four parcels
of land with an aggregate area of 53,307 square meters, situated in Silangan Mayao, Lucena City and
registered in their names under Transfer Certificate of Title (TCT) Nos. T-42104, T-32227, T-31752 and T42103. With the death of Felipe, a deed of extrajudicial partition over his estate was executed by his heirs,
namely, Mauricia, Buenaflor Umali and respondents Victoria Castillo, Bertilla Rada, Marietta Cavanez,
Leovina Jalbuena and Philip Castillo. Utilized as security for the payment of a tractor purchased by
Mauricias nephew, Santiago Rivera, from Bormaheco, Inc., it appears, however, that the subject
properties were subsequently sold at a public auction where Insurance Corporation of the Philippines
(ICP) tendered the highest bid. Having consolidated its title, ICP likewise sold said parcels in favor of
Philippine Machinery Parts Manufacturing Co., Inc. (PMPMCI) which, in turn, caused the same to be titled
in its name.4
On 29 September 1976, respondents and Buenaflor instituted Civil Case No. 8085 before the then Court
of First Instance (CFI) of Quezon, for the purpose of seeking the annulment of the transactions and/or
proceedings involving the subject parcels, as well as the TCTs procured by PMPMCI.5 Encountering
financial difficulties in the prosecution of Civil Case No. 8085, respondents and Buenaflor entered into an
Agreement dated 20 September 1978 whereby they procured the legal services of Atty. Edmundo Zepeda
and the assistance of Manuel Uy Ek Liong who, as financier, agreed to underwrite the litigation expenses
entailed by the case. In exchange, it was stipulated in the notarized Agreement that, in the event of a
favorable decision in Civil Case No. 8085, Atty. Zepeda and Manuel would be entitled to "a share of forty
(40%) percent of all the realties and/or monetary benefits, gratuities or damages" which may be
adjudicated in favor of respondents.6
On the same date, respondents and Buenaflor entered into another notarized agreement denominated as
a Kasunduan whereby they agreed to sell their remaining sixty (60%) percent share in the subject parcels
in favor of Manuel for the sum of P180,000.00. The parties stipulated that Manuel would pay a
downpayment in the sum of P1,000.00 upon the execution of the Kasunduan and that respondents and
Buenaflor would retain and remain the owners of a 1,750-square meter portion of said real properties. It
was likewise agreed that any party violating the Kasunduan would pay the aggrieved party a penalty fixed
in the sum of P50,000.00, together with the attorneys fees and litigation expenses incurred should a case
be subsequently filed in court. The parties likewise agreed to further enter into such other stipulations as
would be necessary to ensure that the sale would push through and/or in the event of illegality or
impossibility of any part of the Kasunduan.7
With his death on 19 August 1989,8 Manuel was survived by petitioners, Heirs of Manuel Uy Ek Liong,
who were later represented in the negotiations regarding the subject parcels and in this suit by petitioner
BelenLim Vda. de Uy. The record also shows that the proceedings in Civil Case No. 8085 culminated in
this Courts rendition of a 13 September 1990 Decision in G.R. No. 89561 9 in favor of respondents and
Buenaflor.10 Subsequent to the finality of the Courts Decision,11 it appears that the subject parcels were
subdivided in accordance with the Agreement, with sixty (60%) percent thereof consisting of 31,983
square meters equally apportioned among and registered in the names of respondents and Buenaflor
under TCT Nos. T-72027, T-72028, T-72029, T-72030, T-72031, T-72032 and T-72033. 12 Consisting of
21,324 square meters, the remaining forty (40%) percent was, in turn, registered in the names of
petitioners and Atty. Zepeda under TCT No. T-72026.13
Supposedly acting on the advice of Atty. Zepeda, respondents wrote petitioners a letter dated 22 March
1993, essentially informing petitioners that respondents were willing to sell their sixty (60%) percent share
in the subject parcels for the consideration of P500.00 per square meter.14 Insisting on the price agreed
upon in the Kasunduan, however, petitioners sent a letter dated 19 May 1993, requesting respondents to
execute within 15 days from notice the necessary Deed of Absolute Sale over their 60% share as
aforesaid, excluding the 1,750-square meter portion specified in their agreement with Manuel. Informed
that petitioners were ready to pay the remaining P179,000.00 balance of the agreed price,15 respondents
wrote a 28 May 1993 reply, reminding the former of their purported refusal of earlier offers to sell the
shares of Leovina and of Buenaflor who had, in the meantime, died. 16 In a letter dated 1 June 1993,

respondents also called petitioners attention to the fact, among others, that their right to ask for an
additional consideration for the sale was recognized under the Kasunduan. 17
On 6 October 1993, petitioners commenced the instant suit with the filing of their complaint for specific
performance and damages against the respondents and respondent Heirs of Buenaflor, as then
represented by Menardo Umali. Faulting respondents with unjustified refusal to comply with their
obligation under the Kasunduan, petitioners prayed that the former be ordered to execute the necessary
Deed of Absolute Sale over their shares in the subject parcels, with indemnities for moral and exemplary
damages, as well as attorneys fees, litigation expenses and the costs of the suit. 18 Served with summons,
respondents filed their Answer with Counterclaim and Motion to File Third Party Complaint on 3
December 1993. Maintaining that the Agreement and the Kasunduan were illegal for being
unconscionable and contrary to public policy, respondents averred that Atty. Zepeda was an
indispensable party to the case. Together with the dismissal of the complaint and the annulment of said
contracts and TCT No. T-72026, respondents sought the grant of their counterclaims for moral and
exemplary damages, as well as attorneys fees and litigation expenses. 19
The issues thereby joined, the Regional Trial Court (RTC), Branch 54, Lucena City, proveeded to conduct
the mandatory preliminary conference in the case. 20 After initially granting respondents motion to file a
third party complaint against Atty. Zepeda,21 the RTC, upon petitioners motion for reconsideration, 22 went
on to issue the 18 July 1997 Order disallowing the filing of said pleading on the ground that the validity of
the Agreement and the cause of action against Atty. Zepeda, whose whereabouts were then unknown,
would be better threshed out in a separate action. 23 The denial24 of their motion for reconsideration of the
foregoing order25 prompted respondents to file a notice of appeal 26 which was, however, denied due
course by the RTC on the ground that the orders sought to be appealed were non-appealable. 27 On 14
December 1997, Menardo died28 and was substituted by his daughter Nancy as representative of
respondent Heirs of Buenaflor.29
In the ensuing trial of the case on the merits, petitioners called to the witness stand Samuel Lim Uy Ek
Liong30whose testimony was refuted by Philip31 and Leovina32 during the presentation of the defense
evidence. On 27 January 2005, the RTC rendered a decision finding the Kasunduan valid and binding
between respondents and petitioners who had the right to demand its fulfillment as Manuels successorsin-interest. Brushing aside Philips testimony that respondents were forced to sign the Kasunduan, the
RTC ruled that said contract became effective upon the finality of this Courts 13 September 1990
Decision in G.R. No. 89561 which served as a suspensive condition therefor. Having benefited from the
legal services rendered by Atty. Zepeda and the financial assistance extended by Manuel, respondents
were also declared estopped from questioning the validity of the Agreement, Kasunduan and TCT No. T72026. With the Kasunduan upheld as the law between the contracting parties and their privies, 33 the RTC
disposed of the case in the following wise:
WHEREFORE, premises considered, the Court finds for the petitioners and hereby:
1. Orders the respondents to execute and deliver a Deed of Conveyance in favor of the
petitioners covering the 60% of the properties formerly covered by Transfer Certificates of Title
Nos. T-3175, 42104, T-42103, T-32227 and T-42104 which are now covered by Transfer
Certificates of Title Nos. T-72027, T-72028, T-72029, T-72030, T-72031, T-72032, T-72033 and T72026, all of the Registry of Deeds of Lucena City, for and in consideration of the amount
of P180,000.00 in accordance with the provisions of the KASUNDUAN, and
2. Orders the petitioners to pay and deliver to the respondents upon the latters execution of the
Deed of Conveyance mentioned in the preceding paragraph, the amount of P179,000.00
representing the balance of the purchase price as provided in the KASUNDUAN, and
3. Orders the respondents to pay the petitioners the following amounts:
a). P50,000.00 as and for moral damages;
b). P50,000.00 as and for exemplary damages; and
c). P50,000.00 as and for attorneys fees.
and to pay the costs.

SO ORDERED.34
Dissatisfied with the RTCs decision, both petitioners35 and respondents perfected their appeals36 which
were docketed before the CA as CA-G.R. CV No. 84687. While petitioners prayed for the increase of the
monetary awards adjudicated a quo, as well as the further grant of liquidated damages in their
favor,37 respondents sought the complete reversal of the appealed decision on the ground that the
Agreement and the Kasunduan were null and void. 38 On 23 January 2007, the CA rendered the herein
assailed decision, setting aside the RTCs decision, upon the following findings and conclusions, to wit:
(a) the Agreement and Kasunduan are byproducts of the partnership between Atty. Zepeda and Manuel
who, as a non-lawyer, was not authorized to practice law; (b) the Agreement is void under Article 1491 (5)
of the Civil Code of the Philippines which prohibits lawyers from acquiring properties which are the objects
of the litigation in which they have taken part; (c) jointly designed to completely deprive respondents of
the subject parcels, the Agreement and the Kasunduan are invalid and unconscionable; and (d) without
prejudice to his liability for violation of the Canons of Professional Responsibility, Atty. Zepeda can file an
action to collect attorneys fees based on quantum meruit. 39
The Issue
Petitioners seek the reversal of the CAs decision on the following issue:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS, FIFTEENTH DIVISION, COMITTED A
REVERSIBLE ERROR WHEN IT REVERSED AND SET ASIDE THE DECISION OF THE RTC BRANCH
59, LUCENA CITY, IN CIVIL CASE NO. 93-176 DECLARING THE AGREEMENT AND KASUNDUAN
VOID AB INITIO FOR BEING CONTRARY TO LAW AND PUBLIC POLICY FOR BEING VIOLATIVE OF
ART. 1491 OF THE NEW CIVIL CODE AND THE CANONS OF PROFESSIONAL RESPONSIBILITY.40
The Courts Ruling
We find the petition impressed with partial merit.
At the outset, it bears pointing out that the complaint for specific performance filed before the RTC sought
only the enforcement of petitioners rights and respondents obligation under the Kasunduan. Although the
answer filed by respondents also assailed the validity of the Agreement and TCT No. T-72026, the record
shows that the RTC, in its order dated 18 July 1997, disallowed the filing of a third-party complaint against
Atty. Zepeda on the ground that the causes of action in respect to said contract and title would be better
threshed out in a separate action. As Atty. Zepedas whereabouts were then unknown, the RTC also ruled
that, far from contributing to the expeditious settlement of the case, the grant of respondents motion to file
a third-party complaint would only delay the proceedings in the case. 41 With the 1 October 1998 denial of
their motion for reconsideration of the foregoing order, respondents subsequently filed a notice of appeal
which was, however, denied due course on the ground that the orders denying their motion to file a thirdparty complaint and their motion for reconsideration were interlocutory and non-appealable. 42
Absent a showing that the RTCs ruling on the foregoing issues was reversed and set aside, we find that
the CA reversibly erred in ruling on the validity of the Agreement which respondents executed not only
with petitioners predecessor-in-interest, Manuel, but also with Atty. Zepeda. Since it is generally accepted
that no man shall be affected by any proceeding to which he is a stranger,43 the rule is settled that a court
must first acquire jurisdiction over a party either through valid service of summons or voluntary
appearance for the latter to be bound by a court decision. 44 The fact that Atty. Zepeda was not properly
impleaded in the suit and given a chance to present his side of the controversy before the RTC should
have dissuaded the CA from invalidating the Agreement and holding that attorneys fees should, instead,
be computed on a quantum meruit basis. Admittedly, Article 1491 (5)45 of the Civil Code prohibits lawyers
from acquiring by purchase or assignment the property or rights involved which are the object of the
litigation in which they intervene by virtue of their profession. The CA lost sight of the fact, however, that
the prohibition applies only during the pendency of the suit 46 and generally does not cover contracts for
contingent fees where the transfer takes effect only after the finality of a favorable judgment. 47
Although executed on the same day, it cannot likewise be gainsaid that the Agreement and the
Kasunduan are independent contracts, with parties, objects and causes different from that of the other.
Defined as a meeting of the minds between two persons whereby one binds himself, with respect to the

other to give something or to render some service,48 a contract requires the concurrence of the following
requisites: (a) consent of the contracting parties; (b) object certain which is the subject matter of the
contract; and, (c) cause of the obligation which is established. 49 Executed in exchange for the legal
services of Atty. Zepeda and the financial assistance to be extended by Manuel, the Agreement
concerned respondents transfer of 40% of the avails of the suit, in the event of a favorable judgment in
Civil Case No. 8085. While concededly subject to the same suspensive condition, the Kasunduan was, in
contrast, concluded by respondents with Manuel alone, for the purpose of selling in favor of the latter 60%
of their share in the subject parcels for the agreed price of P180,000.00. Given these clear distinctions,
petitioners correctly argue that the CA reversibly erred in not determining the validity of the Kasunduan
independent from that of the Agreement.
Viewed in the light of the autonomous nature of contracts enunciated under Article 1306 50 of the Civil
Code, on the other hand, we find that the Kasunduan was correctly found by the RTC to be a valid and
binding contract between the parties. Already partially executed with respondents receipt of P1,000.00
from Manuel upon the execution thereof, the Kasunduan simply concerned the sale of the formers 60%
share in the subject parcel, less the 1,750-square meter portion to be retained, for the agreed
consideration of P180,000.00. As a notarized document that carries the evidentiary weight conferred upon
it with respect to its due execution,51 the Kasunduan was shown to have been signed by respondents with
full knowledge of its contents, as may be gleaned from the testimonies elicited from Philip 52 and Leovina.53
Although Philip had repeatedly claimed that respondents had been forced to sign the Agreement and the
Kasunduan, his testimony does not show such vitiation of consent as would warrant the avoidance of the
contract. He simply meant that respondents felt constrained to accede to the stipulations insisted upon by
Atty. Zepeda and Manuel who were not otherwise willing to push through with said contracts. 54
At any rate, our perusal of the record shows that respondents main objection to the enforcement of the
Kasunduan was the perceived inadequacy of the P180,000.00 which the parties had fixed as
consideration for 60% of the subject parcels. Rather than claiming vitiation of their consent in the answer
they filed a quo, respondents, in fact, distinctly averred that the Kasunduan was tantamount to unjust
enrichment and "a clear source of speculative profit" at their expense since their remaining share in said
properties had "a current market value of P9,594,900.00, more or less."55 In their 22 March 1993 letter to
petitioners, respondents also cited prices then prevailing for the sale of properties in the area and offered
to sell their 60% share for the price of P500.00 per square meter56 or a total of P15,991,500.00. In
response to petitioners insistence on the price originally agreed upon by the parties, 57 respondents even
invoked the last paragraph58 of the Kasunduan to the effect that the parties agreed to enter into such
other stipulations as would be necessary to ensure the fruition of the sale. 59
In the absence of any showing, however, that the parties were able to agree on new stipulations that
would modify their agreement, we find that petitioners and respondents are bound by the original terms
embodied in the Kasunduan. Obligations arising from contracts, after all, have the force of law between
the contracting parties60who are expected to abide in good faith with their contractual commitments, not
weasel out of them.61 Moreover, when the terms of the contract are clear and leave no doubt as to the
intention of the contracting parties, the rule is settled that the literal meaning of its stipulations should
govern. In such cases, courts have no authority to alter a contract by construction or to make a new
contract for the parties. Since their duty is confined to the interpretation of the one which the parties have
made for themselves without regard to its wisdom or folly, it has been ruled that courts cannot supply
material stipulations or read into the contract words it does not contain. 62Indeed, courts will not relieve a
party from the adverse effects of an unwise or unfavorable contract freely entered into. 63
Our perusal of the Kasunduan also shows that it contains a penal clause 64 which provides that a party
who violates any of its provisions shall be liable to pay the aggrieved party a penalty fixed at P50,000.00,
together with the attorneys fees and litigation expenses incurred by the latter should judicial resolution of
the matter becomes necessary.65 An accessory undertaking to assume greater liability on the part of the
obligor in case of breach of an obligation, the foregoing stipulation is a penal clause which serves to
strengthen the coercive force of the obligation and provides for liquidated damages for such
breach.66 "The obligor would then be bound to pay the stipulated indemnity without the necessity of proof

of the existence and the measure of damages caused by the breach." 67 Articles 1226 and 1227 of the
Civil Code state:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and
the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
Art. 1227. The debtor cannot exempt himself from the performance of the obligation by paying the
penalty, save in the case where this right has been expressly reserved for him. Neither can the creditor
demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this
right has been clearly granted to him. However, if after the creditor has decided to require the fulfillment of
the obligation, the performance thereof should become impossible without his fault, the penalty may be
enforced."
In the absence of a showing that they expressly reserved the right to pay the penalty in lieu of the
performance of their obligation under the Kasunduan, respondents were correctly ordered by the RTC to
execute and deliver a deed of conveyance over their 60% share in the subject parcels in favor of
petitiOners. Considering that the Kasunduan stipulated that respondents would retain a portion of their
share consisting of 1,750 square meters, said disposition should, however, be modified to give full effect
to the intention of the contracting parties. Since the parties also fixed liquidated damages in the sum
of P50,000.00 in case of breach, we find that said amount should suffice as petitioners' indemnity, without
further need of compensation for moral and exemplary damages. In obligations with a penal clause, the
penalty generally substitutes the indemnity for damages and the payment of interests in case of noncompliance.68 Usually incorporated to create an effective deterrent against breach of the obligation by
making the consequences of such breach as onerous as it may be possible, the rule is settled that a
penal clause is not limited to actual and compensatory damages 69
The RTC's award of attorney's fees in the sum of P50,000.00 is, however, proper.1wphi1 Aside from the
fact that the penal clause included a liability for said award in the event of litigation over a breach of the
Kasunduan, petitioners were able to prove that they incurred said sum in engaging the services of their
lawyer to pursue their rights and protect their interests. 70
WHEREFORE, premises considered, the Court of Appeals' assailed 23 January 2007 Decision is
REVERSED and SET ASIDE. In lieu thereof, the RTC's 27 January 2005 Decision is REINSTATED
subject to the following MODIFICATIONS: (a) the exclusion of a 1,750-square meter portion from the 60%
share in the subject parcel respondents were ordered to convey in favor of petitioners; and (b) the
deletion of the awards of moral and exemplary damages. The rights of the parties under the Agreement
may be determined in a separate litigation.
SO ORDERED.

1308 MUTUALITY OF CONTRACTS

G.R. No. 107569 November 8, 1994
PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO FERNANDEZ, respondents.
Vidad, Corpus & Associates for petitioner.
Remedios Jayme-Fernandez for privaate respondents.
PUNO, J.:

Petitioner bank seeks the review of the decision, dated October 15, 1992, of the Court of Appeals 1 in CA
G.R. CV No. 27195, the dispositive portion of which reads as follows:
WHEREFORE, the judgment appealed from is hereby SET ASIDE and a new one is
entered ordering defendant-appellee PNB to re-apply the interest rate of 12% per
annum to plaintiffs-appellants' (referring to herein private respondents) indebtedness and
to accordingly take the appropriate charges from plaintiffs-appellants' (private
respondents') payment of P81,000.00 made on December 26, 1985. Any balance on the
indebtedness should, likewise, be charged interest at the rate of 12%per annum.
SO ORDERED.
The parties do not dispute the facts as laid down by respondent court in its impugned decision, viz.:
On April 7, 1982, (private respondents) as owners of a NACIDA-registered enterprise,
obtained a loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from the
Philippine National Bank (PNB) in the amount of Fifty Thousand (P50,000.00) Pesos, as
evidenced by a Credit Agreement. Under the Promissory Note covering the loan, the loan
was to be amortized over a period of three (3) years to end on March 29, 1985, at twelve
(12%) percent interest annually.
To secure the loan, (private respondents) executed a Real Estate Mortgage over a
1.5542-hectare parcel of unregistered agricultural land located at Cambang-ug, Toledo
City, which was appraised by the PNB at P1,062.52 and given a loan value of P531.26 by
the Bank. In addition, (private respondents) executed a Chattel Mortgage over a thermo
plastic-forming machine, which had an appraisal value of P8,800 and a loan value of
P4,400.00.
The Credit Agreement provided inter alia, that
(a) The BANK reserves the right to increase the interest rate within the
limits allowed by law at any time depending on whatever policy it may
adopt in the future; Provided, that the interest rate on this
accommodation shall be correspondingly decreased in the event that the
applicable maximum interest is reduced by law or by the Monetary
Board. In either case, the adjustment in the interest rate agreed upon
shall take effect on the effectivity date of the increase or decrease in the
maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time
without notice, beyond the stipulated rate of 12% but only "within the limits allowed by
law."
The Real Estate Mortgage contract likewise provided that
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the
obligation secured by this mortgage as well as the interest on the amount
which may have been advanced by the MORTGAGE, in accordance with
the provision hereof, shall be subject during the life of this contract to
such an increase within the rate allowed by law, as the Board of Directors
of the MORTGAGEE may prescribe for its debtors.
On February 17, 1983, (private respondents) were granted an additional NACIDA loan of
Fifty Thousand (P50,000.00) Pesos by the PNB, for which (private respondents)
executed another Promissory Note, which was to mature on April 1, 1985. Other than the
date of maturity, the second promissory note contained the same terms and stipulations
as the previous note. The parties likewise executed a new Credit Agreement, changing
the amount of the loan from P50,000.00 to P100,000.00, but otherwise preserving the
stipulations contained in the original agreement.
As additional security for the loan, (private respondents) constituted another real estate
mortgage over 2 parcels of registered land, with a combined area of 311 square meters,

located at Guadalupe, Cebu City. The land, upon which several buildings are standing,
was appraised by the PNB to have a value of P40,000.00 and a loan value of
P28,000.00.
In a letter dated August 1, 1984, the PNB informed (private respondents) "that the interest
rate of your CIGLF loan account with us is now 25% per annum plus a penalty of 6% per
annum on past dues." The PNB further increased this interest rate to 30% on October 15,
1984; and to 42% on October 25, 1984.
The records show that as of December 1985, (private respondents) had an outstanding
principal account of P81,000.00 of which P18,523.14 was credited to the principal,
P57,488.89 to the interest, and the rest to penalty and other charges. Thus, as of said
date, the unpaid principal obligation of (private respondent) amounted to P62,830.32.
Thereafter, (private respondents) exerted efforts to get the PNB to re-adopt the 12%
interest and to condone the present interest and penalties due; but to no
avail. 2 (Citations omitted.)
On December 15, 1987, private respondents filed a suit for specific performance against petitioner PNB
and the NACIDA. It was docketed as Civil Case No. CEB-5610, and raffled to the Regional Trial Court,
7th Judicial Region, Cebu City, Br. 7. 3 Private respondents prayed the trial court to order:
1. The PNB and NACIDA to issue in (private respondents') favor, a release of mortgage;
2. The PNB to pay pecuniary consequential damages for the destruction of (private
respondents') enterprise;
3. The PNB to pay moral and exemplary damages as well as the costs of suit; and
4. Granting (private respondents') such other relief as may be found just and equitable in
the premises. 4
On February 26, 1990, the trial court dismissed private respondents' complaint in Civil Case No. CEB5610. On October 15, 1992, the Court of Appeals reversed the dismissal with respect to petitioner bank,
and disallowed the increases in interest rates.
Petitioner bank now contends that "respondent Court of Appeals committed grave error when it ruled (1)
that the increase in interest rates are unauthorized; (2) that the Credit Agreement and the Promissory
Notes are not the law between the parties; (3) that CB Circular No. 773 and CB Circular
No. 905 are not applicable; and (4) that private respondents are not estopped from questioning the
increase of rate interest made by petitioner." 5
The petition is bereft of merit.
In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause
contained in their credit agreement which provides, as follows:
The Bank reserves the right to increase the interest rate within the limits allowed by law
at any time depending on whatever policy it may adopt in the future and provided, that,
the interest rate on this accommodation shall be correspondingly decreased in the event
that the applicable maximum interest rate is reduced by law or by the Monetary Board. In
either case, the adjustment in the interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.)
No. 1684 which further amended Act No. 2655 ("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after Section 7, to
read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or
credits may stipulate that the rate of interest agreed upon may be increased in the event
that the applicable maximum rate of interest is increased 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.
Section 1 of P.D. No. 1684 also empowered the Central Bank's Monetary Board to prescribe the
maximum rates of interest for loans and certain forbearances. Pursuant to such authority, the Monetary
Board issued Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges. The rate of interest, including
commissions, premiums, fees and other charges, on any loan, or
forbearance of any money, goods or credits, regardless of maturity and
whether secured or unsecured, shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely
regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of
money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously
stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law and circular did
not authorize either party to unilaterally raise the interest rate without the other's consent.
It is basic that there can be no contract in the true sense in the absence of the element of agreement, or
of mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his act has
no more efficacy than if it had been done under duress or by a person of unsound mind. 6
Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the
parties must meet as to the proposed modification, especially when it affects an important aspect of the
agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital
component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon,
otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled
right tounilaterally upwardly adjust the interest on private respondents' loan. That would completely take
away from private respondents the right to assent to an important modification in their agreement, and
would negate the element of mutuality in contracts. In Philippine National Bank v. Court of Appeals, et al.,
196 SCRA 536, 544-545 (1991) we held
. . . The unilateral action of the PNB in increasing the interest rate on the private
respondent's loan violated the mutuality of contracts ordained in Article 1308 of the Civil
Code:
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force or law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties, is void . . . . Hence, even assuming
that
the . . . loan agreement between the PNB and the private respondent gave the PNB a
license (although in fact there was none) to increase the interest rate at will during the
term of the loan, that license would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not bargain on equal
footing, the weaker party's (the debtor) participation being reduced to the alternative "to
take it or leave it" . . . . Such a contract is a veritable trap for the weaker party whom the
courts of justice must protect against abuse and imposition. (Citation omitted.)

Private respondents are not also estopped from assailing the unilateral increases in interest rate made by
petitioner bank. No one receiving a proposal to change a contract to which he is a party, is obliged to
answer the proposal, and his silence per se cannot be construed as an acceptance. 7 In the case at
bench, the circumstances do not show that private respondents implicitly agreed to the proposed
increases in interest rate which by any standard were too sudden and too stiff.
IN VIEW THEREOF, the instant petition is DENIED for lack of merit, and the decision of the Court of
Appeals in CA-G.R. CV No. 27195, dated October 15, 1992, is AFFIRMED. Costs against petitioner.
SO ORDERED.

[G.R. No. 124290. January 16, 1998]

ALLIED BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, HON. JOSE C. DE
GUZMAN, OSCAR D. TANQUECO, LUCIA D. TANQUECO-MATIAS, RUBEN D. TANQUECO
and NESTOR D. TANQUECO, respondents
DECISION
BELLOSILLO, J .:
There are two (2) main issues in this petition for review: namely, (a) whether a stipulation in a
contract of lease to the effect that the contract "may be renewed for a like term at the option of the
lessee" is void for being potestative or violative of the principle of mutuality of contracts under Art. 1308 of
the Civil Code and, corollarily, what is the meaning of the clause "may be renewed for a like term at the
option of the lessee;" and, (b) whether a lessee has the legal personality to assail the validity of a deed of
donation executed by the lessor over the leased premises.
Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square meter lot located at
No. 2 Sarmiento Street corner Quirino Highway, Novaliches, Quezon City, covered by TCT No. 136779 in
their name. On 30 June 1978 they leased the property to petitioner Allied Banking Corporation (ALLIED)
for a monthly rental of P1,000.00 for the first three (3) years, adjustable by 25% every three (3) years
thereafter.[1] The lease contract specifically states in its Provision No. 1 that "the term of this lease shall
be fourteen (14) years commencing from April 1, 1978 and may be renewed for a like term at the option of
the lessee."
Pursuant to their lease agreement, ALLIED introduced an improvement on the property consisting of
a concrete building with a floor area of 340-square meters which it used as a branch office. As stipulated,
the ownership of the building would be transferred to the lessors upon the expiration of the original term of
the lease.
Sometime in February 1988 the Tanqueco spouses executed a deed of donation over the subject
property in favor of their four (4) children, namely, private respondents herein Oscar D. Tanqueco, Lucia
Tanqueco-Matias, Ruben D. Tanqueco and Nestor D. Tanqueco, who accepted the donation in the same
public instrument.
On 13 February 1991, a year before the expiration of the contract of lease, the Tanquecos notified
petitioner ALLIED that they were no longer interested in renewing the lease.
[2]
ALLIED replied that it was exercising its option to renew their lease under the same terms with
additional proposals.[3]Respondent Ruben D. Tanqueco, acting in behalf of all the donee-lessors, made a
counter-proposal.[4] ALLIED however rejected the counter-proposal and insisted on Provision No. 1 of
their lease contract.
When the lease contract expired in 1992 private respondents demanded that ALLIED vacate the
premises. But the latter asserted its sole option to renew the lease and enclosed in its reply letter a
cashiers check in the amount of P68,400.00 representing the advance rental payments for six (6) months
taking into account the escalation clause. Private respondents however returned the check to ALLIED,
prompting the latter to consign the amount in court.

An action for ejectment was commenced before the Metropolitan Trial Court of Quezon City. After
trial, the MeTC-Br. 33 declared Provision No. 1 of the lease contract void for being violative of Art. 1308
of the Civil Code thus x x x but such provision [in the lease contract], to the mind of the Court, does not add luster to
defendants cause nor constitutes as an unbridled or unlimited license or sanctuary of the defendant to
perpetuate its occupancy on the subject property. The basic intention of the law in any contract is
mutuality and equality. In other words, the validity of a contract cannot be left at (sic) the will of one of the
contracting parties. Otherwise, it infringes (upon) Article 1308 of the New Civil Code, which
provides: The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them x x x x Using the principle laid down in the case of Garcia v. Legarda as
cornerstone, it is evident that the renewal of the lease in this case cannot be left at the sole option or will
of the defendant notwithstanding provision no. 1 of their expired contract. For that would amount to a
situation where the continuance and effectivity of a
contract will depend only upon the sole will or power of the lessee, which is repugnant to the very
spirit envisioned under Article 1308 of the New Civil Code x x x x the theory adopted by this Court in the
case at bar finds ample affirmation from the principle echoed by the Supreme Court in the case of Lao
Lim v. CA, 191 SCRA 150, 154, 155.
On appeal to the Regional Trial Court, and later to the Court of Appeals, the assailed decision was
affirmed.[5]
On 20 February 1993, while the case was pending in the Court of Appeals, ALLIED vacated the
leased premises by reason of the controversy.[6]
ALLIED insists before us that Provision No. 1 of the lease contract was mutually agreed upon hence
valid and binding on both parties, and the exercise by petitioner of its option to renew the contract was
part of their agreement and in pursuance thereof.
We agree with petitioner. Article 1308 of the Civil Code expresses what is known in law as
the principle of mutuality of contracts. It provides that "the contract must bind both the
contracting parties; its validity or compliance cannot be left to the will of one of them." This binding effect
of a contract on both parties is based on the principle that the obligations arising from
contracts have the force of law between the contracting parties, and there must be mutuality between
them based essentially on their equality under which it is repugnant to have one party bound
by the contract while leaving the other free therefrom. The ultimate purpose is to render void a contract
containing a condition which makes its fulfillment dependent solely upon the uncontrolled will of one of the
contracting parties.
An express agreement which gives the lessee the sole option to renew the lease is frequent and
subject to statutory restrictions, valid and binding on the parties. This option, which is provided in the
same lease agreement, is fundamentally part of the consideration in the contract and is no different from
any other provision of the lease carrying an undertaking on the part of the lessor to act conditioned on the
performance by the lessee. It is a purely executory contract and at most confers a right to obtain a
renewal if there is compliance with the conditions on which the right is made to depend. The right of
renewal constitutes a part of the lessees interest in the land and forms a substantial and integral part of
the agreement.
The fact that such option is binding only on the lessor and can be exercised only by the lessee does
not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the
lessee. And while the lessee has a right to elect whether to continue with the lease or not, once he
exercises his option to continue and the lessor accepts, both parties are thereafter bound by the new
lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled to retain
possession of the property for the duration of the new lease, and the lessor may hold him liable for the
rent therefor. The lessee cannot thereafter escape liability even if he should subsequently decide to
abandon the premises. Mutuality obtains in such a contract and equality exists between the lessor and
the lessee since they remain with the same faculties in respect to fulfillment. [7]

The case of Lao Lim v. Court of Appeals [8] relied upon by the trial court is not applicable here. In that
case, the stipulation in the disputed compromise agreement was to the effect that the lessee would be
allowed to stay in the premises "as long as he needs it and can pay the rents." In the present case, the
questioned provision states that the lease "may be renewed for a like term at the option of the
lessee." The lessor is bound by the option he has conceded to the lessee. The lessee likewise becomes
bound only when he exercises his option and the lessor cannot thereafter be excused from performing
his part of the agreement.
Likewise, reliance by the trial court on the 1967 case of Garcia v. Rita Legarda, Inc., [9] is
misplaced. In that case, what was involved was a contract to sell involving residential lots, which gave
the vendor the right to declare the contract cancelled and of no effect upon the failure of the vendee to
fulfill any of the conditions therein set forth. In the instant case, we are dealing with a contract of lease
which gives the lessee the right to renew the same.
With respect to the meaning of the clause "may be renewed for a like term at the option of the
lessee," we sustain petitioner's contention that its exercise of the option resulted in the automatic
extension of the contract of lease under the same terms and conditions. The subject contract simply
provides that "the term of this lease shall be fourteen (14) years and may be renewed for a like term at
the option of the lessee." As we see it, the only term on which there has been a clear agreement is the
period of the new contract, i.e., fourteen (14) years, which is evident from the clause "may be renewed for
a like term at the option of the lessee," the phrase "for a like term" referring to the period. It is silent as
to what the specific terms and conditions of the renewed lease shall be. Shall it be the same terms and
conditions as in the original contract, or shall it be under the terms and conditions as may be mutually
agreed upon by the parties after the expiration of the existing lease?
In Ledesma v. Javellana[10] this Court was confronted with a similar problem. In that case the
lessee was given the sole option to renew the lease, but the contract failed to specify the terms and
conditions that would govern the new contract. When the lease expired, the lessee demanded an
extension under the same terms and conditions. The lessor expressed conformity to the renewal of the
contract but refused to accede to the claim of the lessee that the renewal should be under the same terms
and conditions as the original contract. In sustaining the lessee, this Court made the following
pronouncement:
x x x in the case of Hicks v. Manila Hotel Company, a similar issue was resolved by this Court. It
was held that 'such a clause relates to the very contract in which it is placed, and does not permit the
defendant upon the renewal of the contract in which the clause is found, to insist upon different terms
than those embraced in the contract to be renewed;' and that 'a stipulation to renew always relates to the
contract in which it is found and the rights granted thereunder, unless it expressly provides for variations
in the terms of the contract to be renewed.'
The same principle is upheld in American Law regarding the renewal of lease contracts. In 50 Am. Jur.
2d, Sec. 1159, at p. 45, we find the following citations: 'The rule is well-established that a general
covenant to renew or extend a lease which makes no provision as to the terms of a renewal or extension
implies a renewal or extension upon the same terms as provided in the original lease.'
In the lease contract under consideration, there is no provision to indicate that the renewal will be
subject to new terms and conditions that the parties may yet agree upon. It is to renewal provisions
of lease contracts of the kind presently considered that the principles stated above squarely apply. We
do not agree with the contention of the appellants that if it was intended by the parties to renew the
contract under the same terms and conditions stipulated in the contract of lease, such should have
expressly so stated in the contract itself. The same argument could easily be interposed by the
appellee who could likewise contend that if the intention was to renew the contract of lease under such
new terms and conditions that the parties may agree upon, the contract should have so
specified. Between the two assertions, there is more logic in the latter.
The settled rule is that in case of uncertainty as to the meaning of a provision granting extension to a
contract of lease, the tenant is the one favored and not the landlord. 'As a general rule, in
construing provisions relating to renewals or extensions, where there is any uncertainty, the tenant is

favored, and not the landlord, because the latter, having the power of stipulating in his own favor, has
neglected to do so; and also upon the principle that every man's grant is to be taken
most strongly against himself (50 Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599).'
Besides, if we were to adopt the contrary theory that the terms and conditions to be embodied in
the renewed contract were still subject to mutual agreement by and between the parties, then the option which is an integral part of the consideration for the contract - would be rendered worthless. For then, the
lessor could easily defeat the lessee's right of renewal by simply imposing unreasonable and onerous
conditions to prevent the parties from reaching an agreement, as in the case at bar. As in a statute no
word, clause, sentence, provision or part of a contract shall be considered surplusage or superfluous,
meaningless, void, insignificant or nugatory, if that can be reasonably avoided. To this end, a construction
which will render every word operative is to be preferred over that which would make some words idle
and nugatory.[11]
Fortunately for respondent lessors, ALLIED vacated the premises on 20 February 1993 indicating its
abandonment of whatever rights it had under the renewal clause. Consequently, what remains to be
done is for ALLIED to pay rentals for the continued use of the premises until it vacated the same,
computed from the expiration of the original term of the contract on 31 March 1992 to the time it actually
left the premises on 20 February 1993, deducting therefrom the amount of P68,400.00 consigned in court
by ALLIED and any other amount which it may have deposited or advanced in conection with the
lease. Since the old lease contract was deemed renewed under the same terms and conditions upon the
exercise by ALLIED of its option, the basis of the computation of rentals should be the rental rate provided
for in the existing contract.
Finally, ALLIED cannot assail the validity of the deed of donation, not being a party thereto. A
person who is not principally or subsidiarily bound has no legal capacity to challenge the validity of the
contract.[12] He must first have an interest in it. "Interest" within the meaning of the term means material
interest, an interest to be affected by the deed, as distinguished from a mere
incidental interest. Hence, a person who is not a party to a contract and for whose benefit it was not
expressly made cannot maintain an action on it, even if the contract, if performed by the parties thereto
would incidentally affect him,[13]except when he is prejudiced in his rights with respect to one of the
contracting parties and can show the detriment which could positively result to him from the contract in
which he had no intervention.[14] We find none in the instant case.
WHEREFORE, the Decision of the Court of Appeals is REVERSED and SET ASIDE. Considering
that petitioner ALLIED BANKING CORPORATION already vacated the leased premises as of 20
February 1993, the renewed lease contract is deemed terminated as of that date. However, petitioner is
required to pay rentals to respondent lessors at the rate provided in their existing contract, subject to
computation in view of the consignment in court ofP68,400.00 by petitioner, and of such other amounts it
may have deposited or advanced in connection with the lease.
SO ORDERED.
MANILA INTERNATIONAL AIRPORT AUTHORITY,
Petitioner, versus DING VELAYO SPORTS CENTER, INC.,
Respondent.
G.R. No. 161718
December 14, 2011
DECISION
LEONARDO-DE CASTRO, J.:
Before Us is a Petition for Review under Rule 45 of the Rules of Court of the Decision [1] dated
January 8, 2004 of the Court Appeals in CA-G.R. CV No. 68787, affirming the Decision [2] dated October

29, 1999 of Branch 111 of the Regional Trial Court (RTC) of Pasay City in Civil Case No. 8847, which
granted the Complaint for Injunction, Consignation, and Damages with prayer for a Temporary Restraining
Order filed by respondent Ding Velayo Sports Center, Inc. against petitioner Manila International Airport
Authority (MIAA), and essentially compelled petitioner to renew the lease of respondent over a parcel of
land within the airport premises.
Below are the facts as culled from the records of the case:
On February 15, 1967, petitioner (then still called the Civil Aeronautics Administration or CAA)
and Salem Investment Corporation (Salem) entered into a Contract of Lease whereby petitioner leased in
favor of Salem a parcel of land known as Lot 2-A, with an area of 76,328 square meters, located in front
of the Manila International Airport (MIA) in Pasay City, and registered under Transfer Certificate of Title
(TCT) No. 6735 in the name of the Republic (Lot 2-A). Petitioner and Salem entered into said Contract of
Lease for the following reasons:
WHEREAS, this particular portion of land is presently an eyesore to the airport
premises due to the fact that a major portion of it consists of swampy and talahib infested
silt and abandoned fishponds and occupied by squatters and some [petitioners]
employees with ungainly makeshift dwellings;
WHEREAS, the LESSOR, in accordance with its general plan to improve and
beautify the airport premises, is interested in developing this particular area by providing
such facilities and conveniences as may be necessary for the comfort, convenience and
relaxation of transients, tourists and the general public;
WHEREAS, the LESSEE, a corporation engaged in hostelry and other allied
business, is ready, willing and able to cooperate with the LESSOR in the implementation
of this general development plan for the airport premises;
x xxx
WHEREAS, the LESSEEs main interest is to have a sufficient land area within
which to construct a modern hotel with such facilities as would ordinarily go with modern
hostelry, including recreation halls, facilities for banks, tourist agencies, travel bureaus,
laundry shops, postal stations, curio and native shops and other allied business
calculated to make the hotel and its facilities comfortable, convenient and attractive, and
for this purpose, an initial land area of some Thirty[-]Five Thousand Ten (35,010) square
meters would be first utilized.[3]
The term of the lease and renewal thereof as stipulated upon by petitioner and Salem are as follows:
3.
That the term of the lease shall be for a period of Twenty-Five (25) years,
commencing from the date of receipt of approval of this Contract by the Secretary of
Public Works and Communications, and at the option of the LESSEE, renewable for
another Twenty-Five (25) years. It is understood, that after the first 25 years lease, the
ownership of, and full title to, all the buildings and permanent improvements introduced
by the LESSEE on the leased premises including those introduced on
the Golf Driving Range shall automatically vest in the LESSOR, without cost.
Upon the termination of the lease or should the LESSEE not exercise this option
for renewal, the LESSEE shall deliver the peaceful possession of all the building and
other permanent improvements herein above referred to, with the understanding that the
LESSEE shall have the right to remove from the premises such equipment, furnitures,
accessories and other articles as would ordinarily be classified as movable property
under pertinent provisions of law.

4.
That the renewal of this lease contract shall be for another period of
Twenty-Five (25) years, under the same terms and conditions herein stipulated; provided,
however that, since the ownership of the hotel building and permanent improvement have
passed on the LESSOR, the LESSEE shall pay as rental, in addition to the rentals herein
agreed upon, an amount equivalent to One percent (1%) of the appraised value of the
hotel building and permanent improvements at the time of expiration of Twenty-Five (25)
years lease period, payable annually.[4]
Subsequently, in a Transfer of Lease Rights and Existing Improvements dated September 30,
1974, Salem conveyed in favor of Ding Velayo Export Corporation (Velayo Export), for the consideration
ofP1,050,000.00, its leasehold rights over a portion of Lot 2-A, measuring about 15,534 square meters,
with the improvements thereon, consisting of an unfinished cinema-theater. Accordingly, petitioner and
Velayo Export executed a Contract of Lease dated November 26, 1974 pertaining to the aforementioned
leased portion of Lot 2-A.
In turn, Velayo Export executed a Transfer of Lease Rights dated April 27, 1976 by which it
conveyed to respondent, for the consideration of P500,000.00, its leasehold rights over an 8,481-square
meter area (subject property) out of the 15,534-square meter portion it was leasing from petitioner. As a
result, petitioner and respondent executed another Contract of Lease [5] dated May 14, 1976 covering the
subject property.
The Contract of Lease dated May 14, 1976 between petitioner (as lessor) and respondent (as
lessee) specified how respondent shall develop and use the subject property:
2.
That the LESSEE shall utilize the premises as the site for the construction
of a Sports Complex facilities and shopping centers in line with the Presidential Decree
for Sports Development and Physical Fitness, including the beautification of the premises
and providing cemented parking areas.
3.
That the LESSEE shall construct at its expense on the leased premises a
parking area parallel to and fronting the Domestic Airport Terminal to be open to the
traveling public free of charge to ease the problem of parking congestion at the Domestic
Airport.[6]
Pursuant to the aforequoted objectives, respondent agreed to the following:
9.
Physical improvements on building spaces and areas subject of this
agreement may be undertaken by and at the expenses of the LESSEE. However, no
improvements may be commenced without prior approval of the plans by the LESSOR
and, whenever deemed necessary a cash deposit shall be made in favor of the LESSOR
which shall be equivalent to the cost of restoration of any portion affected by such
alteration or improvements;
10.
The LESSEE agrees and binds himself to complete the physical
improvements or contemplated structures within the leased premises for a period of one
(1) year. Failure on the part of the LESSEE to do so within said period shall automatically
revoke the Contract of Lease without necessity of judicial process. [7]
The lease rental shall be computed as follows:
5.
That the LESSEE shall pay to the LESSOR as monthly rentals for the
leased premises the rate of P0.45 per square meter for the first 300 square

meters, P0.30 per square meter for the next 500 square meters, and P0.25 per square
meter for the remaining area pursuant to Part VIII, Section 4 of Administrative Order No.
4, Series of 1970, which in the case of the 8,481 square meters herein leased shall
amount to P2,205.25 per month, or a royalty equivalent to one percent (1%) of the
monthly gross income of the LESSEE, whichever is higher.
6.
That for the purpose of accurately determining the monthly gross income,
the LESSEE hereby gives its consent for the examination of the books by authorized
representatives of the LESSOR or the Commission on Audit;
xxxx
13.
If, during the lifetime of this agreement and upon approval by the
LESSOR, the leased area is increased or diminished, or the LESSEE is relocated to
another area, rentals, fees, and charges imposed shall be amended
accordingly. Subsequent amendments to the Administrative Order which will affect an
increase of the rates of fees, charges and rentals agreed upon in this contract shall
automatically amend this contract to the extent that the rates of fees, rentals, and
charges are increased.
In the event of relocation of the LESSEE to other areas, the cost of relocation
shall be shouldered by the LESSEE.[8]
Nonpayment of lease rentals shall have the following consequence:
8.
Failure on the part of the LESSEE TO PAY ANY fees, charges, rentals or
the royalty of one percent (1%) within thirty (30) days after receipt of written demand, the
LESSOR shall deny the LESSEE of the further use of the leased premises and /or any of
its facilities, utilities and services. x x x.[9]

The Contract of Lease prohibits respondent from transferring its leasehold rights, engaging in any
other business outside those mentioned in said Contract, and subletting the premises whether in whole or
in part, thus:
16.
The LESSEE agrees not to assign, sell, transfer or mortgage his rights
under this agreement or sublet the whole or part of premises covered by it to a third party
or parties nor engage in any other business outside of those mentioned in this
contract. Violation of this provision shall also be a ground for revocation of the lease
contract without need of judicial process.[10]
Period of the lease and renewal thereof are governed by paragraphs 4 and 17 of the Contract of
Lease that read:
4.
That the period of this lease shall take effect from June 1, 1976 up
to February 15, 1992 which is equivalent to the unexpired portion of the lease contract
executed between [petitioner] and Ding Velayo Export Corporation.
xxxx
17.
The LESSEE, if desirous of continuing his lease, should notify the
LESSOR sixty (60) days prior to expiration of the period agreed upon for the renewal of
the Contract of Lease.[11]

The lease may be revoked/terminated under the following conditions:

15.
This contract of lease may be terminated by other party upon thirty (30)
days notice in writing. Failure on the part of the LESSEE to comply with any of the
provisions of this lease contract or any violation of any rule or regulations of the Airport
shall give the LESSOR the right to revoke this contract effective thirty (30) days after
notice of revocation without need of judicial demand. However, the LESSEE shall remain
liable and obligated to pay rentals and other fees and charges due and in arrears with
interest at the rate of twelve percent (12%) per annum;
xxxx
18.
Upon termination or revocation of this contract of lease as herein
provided, the LESSEE shall deliver possession of the premises to the LESSOR in the
same condition that they were received giving allowance to normal wear and tear and to
damage or destruction caused by act of God. All permanent improvements, however,
which the LESSEE might have constructed in the premises by virtue hereof shall upon
the termination of this lease automatically become the absolute property of the LESSOR
without cost;
19.
In the event that the LESSOR shall need the leased premises in its airport
development program, the LESSEE agrees to vacate the premises within thirty (30) days
from receipt of notice. All improvements not removed by the LESSEE within the thirty
(30) day period shall become the property of the LESSOR without cost. [12]
Respondent began occupying the subject property and paying petitioner the amount of P2,205.25
per month as rental fee. Respondent then constructed a multi-million plaza with a three-storey building
on said property. Respondent leased spaces in the building to various business proprietors.
In a Letter[13] dated April 11, 1979, petitioner requested respondent for a copy of the latters Gross
Income Statement from December 1977 to December 1978, duly certified by a certified public accountant,
for the purpose of computing the royalty equivalent to 1% of the monthly gross income of
respondent. Acceding to this request, respondent sent petitioner a Letter [14] dated May 31, 1979 and
appended therewith the requested income statements which disclosed that the total gross income of
respondent for the period in question amounted to P1,972,968.11. Respondent also submitted to
petitioner and the Commission on Audit (COA) its duly audited financial statements [15] for the years 1984
to 1988. Meanwhile, petitioner had continued billing respondent the amount of P2,205.25 as monthly
rental fee, which the latter obediently paid.
Petitioner eventually issued Administrative Order (AO) No. 4, series of 1982, [16] and AO No. 1,
series of 1984, fixing various rates for the lease rentals of its properties. AO No. 4, series of 1982, and
AO No. 1, series of 1984, allegedly effected an increase in the lease rental of respondent for the subject
property, as provided for in paragraph 13 of the Contract of Lease dated May 14, 1976 between petitioner
and respondent. However, said issuances were subjected to review for revision purposes and their
implementation was suspended. Still, petitioner, through a letter dated September 23, 1986, required
respondent to pay a moratorium rental at the rate of P5.00 per square meter rate per month or a total
ofP42,405.00 every month.
In a Letter[17] dated October 18, 1986, respondent opposed the implementation of any increase in
its lease rental for the subject property. Respondent wrote:
We believe that an increase in rental of a property which does not form part of
the Airport or its immediate premises, like the premises leased to DVSC, although owned

by MIAA is not covered by Batas Pambansa Blg. 325 or Finance Ministry Order No. 683. Furthermore, the language of B.P. No. 325 and Ministry Order No. 6-83 authorizes
the fixing or revision of fees and charges only for services and functions.
xxxx
Assuming that the increase in rental of MIAA property is authorized by B.P. No.
325 and Ministry Order No. 6-83, such increase as ordered in your moratorium rental rate
insofar as it is made applicable to DVSC is not valid.
The increase which is around 2,000 percent or 20 times above present rental
rate is unreasonably high. Both B.P. No. 325 and Ministry Order No. 6-83 prescribed only
just and reasonable rates sufficient to cover administrative costs.
Such increase in rental is uncalled for considering that:
Upon termination of the lease, all the improvements on the property shall belong
to MIAA without costs. The original cost of the buildings and other improvements on the
land we have leased isP10,600,000.00. Said improvements would now cost
overP30,000,000.00. In effect the Government would be collecting anotherP2.0 million a
year.
We, therefore, request that the moratorium rate be not applied to us.
Following the foregoing exchange, petitioner had kept on charging respondent the original
monthly rental of P2,205.25.
More than 60 days prior to the expiration of the lease between petitioner and respondent, the
latter, through its President, Conrado M. Velayo (Velayo), sent the former a Letter [18] dated December 2,
1991 stating that respondent was interested in renewing the lease for another 25 years.
Petitioner, through its General Manager, Eduardo O. Carrascoso, in a Letter [19] dated February 24,
1992, declined to renew the lease, ordered respondent to vacate the subject property within five days,
and demanded respondent to pay arrears in lease rentals as of January 1992 in the sum
ofP15,671,173.75.
Velayo, on behalf of respondent, replied to petitioner through a Letter [20] dated March 3, 1992 that
reads:
This refers to your letters which we received on 26 February 1992 and 27
February 1992, respectively, the first as a response to our letter of 2 December
1991 where we informed you of our intention to renew our lease contract, and the second
wherein you asked us to vacate within five (5) days the leased premises.
Your second letter surprised us inasmuch as we have been negotiating with you
for the renewal of our lease. In addition, your sudden decision gave us no time to
discuss your terms and conditions with our Board considering that the issues involved
major decision.
For a smoother transition and for the mutual interest of the government, the
tenants and ourselves, may we request for a reconsideration of your decision, and we be
given up to the end of March 1992 to peacefully turn-over to you the leased
premises. This will enable you to create a committee that will take-over the leased
property and its operations.

Likewise, consistent with our previous stand as communicated to you by our

legal counsel, copy of which is hereto attached, we deny any liability on rental increases.
In Letters[21] all dated March 10, 1992, Velayo informed petitioner that he already sent individual letters to
Manila Electric Company, Philippine Long Distance Telephone Company, and Manila Waterworks and
Sewerage System, instructing the said utility companies that succeeding billings for electric, telephone,
and water consumptions should already be transferred to the account of petitioner in light of the expected
turn-over of the subject property and improvements thereon from respondent to petitioner.
However, around the same time, Samuel Alomesen (Alomesen) became the new President and
General Manager of respondent, replacing Velayo. Alomesen, acting on behalf of respondent, sent
petitioner a Letter[22] dated March 25, 1992, revoking the aforementioned Letters dated March 3 and 10,
1992 since these were purportedly sent by Velayo without authority from respondents Board of
Directors. Respondent expressed its interest in continuing the lease of the subject property for another
25 years and tendered to petitioner a managers check in the amount of P8,821.00 as payment for the
lease rentals for the subject property from December 1991 until March 1992.
Petitioner entirely disregarded the claims of respondent and threatened to take-over the subject
property.
On March 30, 1992, respondent filed against petitioner before the RTC a Complaint for Injunction,
Consignation, and Damages with a Prayer for a Temporary Restraining Order. [23] Respondent essentially
prayed for the RTC to order the renewal of the Contract of Lease between the parties for another 25-year
term counted from February 15, 1992. On even date, the RTC issued a Temporary Restraining
Order[24] preventing petitioner and all persons acting on its behalf from taking possession of the entire or
any portion of the subject property, from administering the said property, from collecting rental payments
from sub-lessees, and from taking any action against respondent for the collection of alleged arrears in
rental payments until further orders from the trial court.
In its Answer,[25] petitioner contended that its Contract of Lease with respondent was already
terminated on February 15, 1992, the expiration date explicitly stated under paragraph 4 of the same
Contract. Petitioner was not bound to renew the Contract of Lease with respondent. The renewal
provision under paragraph 17 of the Contract was not automatic but merely directory and procedural and
that, in any event, Velayo, the former President of respondent, already conceded to the non-renewal of
the Contract.
Petitioner likewise invoked paragraph 15 of the Contract of Lease,i.e., its right to revoke the said
Contract in case of violation of any of the provisions thereof by respondent. Petitioner averred that
respondent committed the following violations: (1) respondent failed to fulfill the conditions set forth under
paragraphs 2 and 3 of the Contract as it did not establish a shopping center on the subject property and
did not help ease the problems of parking congestion at the Domestic Airport; (2) respondent sub-leased
the subject property in defiance of the prohibition under paragraph 16 of the Contract; and (3) respondent
did not pay the lease rentals in accordance with paragraphs 5 and 13 of the Contract, thus, incurring a
total outstanding balance of P15,671,173.75 as of February 1992.
By way of counter-claim, petitioner demanded that respondent pay the total outstanding balance
of its lease rentals for the subject property and turn-over lease rentals it had collected from sub-lessees
beginning February 15, 1992.
After the preliminary hearing, the RTC issued a Writ of Preliminary Injunction [26] against petitioner
on April 30, 1992 upon the posting by respondent of a bond in the amount of P100,000.00.
In an Order[27] dated June 11, 1996, the RTC denied the Omnibus Motion of petitioner for the
dissolution of the writ of injunction and appointment of a receiver for the fruits of the subject property; and

at the same time, granted the motion of respondent for the consignment of their monthly lease rentals for
the subject property with the RTC.
The RTC terminated the pre-trial proceedings in an Order [28] datedOctober 23, 1997 for failure of
the parties to amicably settle the dispute. Thereafter, trial on the merits ensued.
Respondent presented the testimonies of Mariano Nocom, Jr., [29]Gladioluz Segundo,[30] Mariano
Nocom, Sr.,[31] and Rosila Mabanag.[32] The RTC admitted all the documentary evidence of respondent in
an Order[33] dated December 14, 1998.
Petitioner, on the other hand, presented the lone testimony of their accounting manager, Arlene
Britanico.[34] Among the numerous documents submitted by petitioner as evidence were its own
issuances imposing various rates for the lease of its properties, which allegedly effected an increase in
the lease rentals of respondent for the subject property, specifically, AO No. 4, series of 1982; [35] AO No.
1, series of 1984;[36] AO No. 1, series of 1990; [37] AO No. 1, series of 1993;[38]Resolution No. 94-74,
[39]
Resolution No. 96-32,[40] and Resolution No. 97-51,[41] all amending AO No. 1, series of 1993; and AO
No. 1, series of 1998.[42] All of the documentary evidence of petitioner were admitted by the RTC in an
Order[43] dated May 28, 1999.
In its Decision dated October 29, 1999, the RTC ruled in favor of respondent, disposing thus:
WHEREFORE, judgment is hereby rendered in favor of [respondent] and against
[petitioner].
Accordingly, [petitioner] is hereby ordered to:
1.

Grant renewal of the lease contract for the same term as

stipulated in the old contract and the rental to be based on the
applicable rate of the time or renewal;

2.

To respect and maintain [respondents] peaceful possession

of the premises;

3.

To accept the rental payment consigned by the [respondent]

to the court beginning December 1991 onward until and after a
renewal has been duly executed by both parties;
To pay [respondent] as and by way of attorneys fees the
sum of P500,000.00; and

4.
5.

To pay the cost of suit.[44]

Petitioner appealed the RTC judgment before the Court of Appeals and assigned these errors:
I.

The trial court gravely erred in declaring that [respondent] is entitled to a

renewal of the contract of lease.

II.

The trial court gravely erred in ordering the renewal of the contract of lease
despite of the fact that it has no legal authority to do so.

III.

The trial court gravely erred in declaring that [respondent] did not violate the
terms and conditions of the contract.

IV.

The trial court gravely erred in declaring that [petitioners] act of effecting the
increase in the rental during the stipulated lifetime of the contract has no valid
basis.

V.

The trial court gravely erred in not finding that [petitioner] is entitled to its
counterclaim.[45]

The Court of Appeals promulgated its Decision on January 8, 2004, finding no reversible error in
the appealed judgment of the RTC and decreeing as follows:
WHEREFORE, finding no reversible error committed by the trial court, the instant
appeal is hereby DISMISSED, and the assailed decision is hereby AFFIRMED. [46]
Hence, the instant Petition for Review, wherein petitioner basically attributed to the Court of
Appeals the very same errors it assigned to the RTC.
Petitioner argues that the renewal of the Contract of Lease cannot be made to depend on the
sole will of respondent for the same would then be void for being a potestative condition.
We do not agree. As we have already explained in Allied Banking Corporation v. Court of
Appeals [47]:
Article 1308 of the Civil Code expresses what is known in law as the principle of mutuality
of contracts. It provides that "the contract must bind both the contracting parties; its
validity or compliance cannot be left to the will of one of them." This binding effect of a
contract on both parties is based on the principle that the obligations arising from
contracts have the force of law between the contracting parties, and there must be
mutuality between them based essentially on their equality under which it is repugnant to
have one party bound by the contract while leaving the other free therefrom. The
ultimate purpose is to render void a contract containing a condition which makes its
fulfillment dependent solely upon the uncontrolled will of one of the contracting parties.
An express agreement which gives the lessee the sole option to renew the
lease is frequent and subject to statutory restrictions, valid and binding on the
parties. This option, which is provided in the same lease agreement, is fundamentally
part of the consideration in the contract and is no different from any other provision of the
lease carrying an undertaking on the part of the lessor to act conditioned on the
performance by the lessee. It is a purely executory contract and at most confers a right
to obtain a renewal if there is compliance with the conditions on which the right is made
to depend. The right of renewal constitutes a part of the lessee's interest in the land and
forms a substantial and integral part of the agreement.
The fact that such option is binding only on the lessor and can be
exercised only by the lessee does not render it void for lack of mutuality. After all,
the lessor is free to give or not to give the option to the lessee. And while the lessee
has a right to elect whether to continue with the lease or not, once he exercises his option
to continue and the lessor accepts, both parties are thereafter bound by the new lease
agreement. Their rights and obligations become mutually fixed, and the lessee is entitled
to retain possession of the property for the duration of the new lease, and the lessor may
hold him liable for the rent therefor. The lessee cannot thereafter escape liability even if
he should subsequently decide to abandon the premises. Mutuality obtains in such a
contract and equality exists between the lessor and the lessee since they remain with the
same faculties in respect to fulfillment.[48]

Paragraph 17 of the Contract of Lease dated May 14, 1976 between petitioner and respondent
solely granted to respondent the option of renewing the lease of the subject property, the only express
requirement was for respondent to notify petitioner of its decision to renew the lease within 60 days prior
to the expiration of the original lease term. It has not been disputed that said Contract of Lease was
willingly and knowingly entered into by petitioner and respondent. Thus, petitioner freely consented to
giving respondent the exclusive right to choose whether or not to renew the lease. As we stated in Allied
Banking, the right of renewal constitutes a part of the interest of respondent, as lessee, in the subject
property, and forms a substantial and integral part of the lease agreement with petitioner. Records show
that respondent had duly complied with the only condition for renewal under Section 17 of the Contract of
Lease by notifying petitioner 60 days prior to the expiration of said Contract that it chooses to renew the
lease. We cannot now allow petitioner to arbitrarily deny respondent of said right after having previously
agreed to the grant of the same.
Equally unmeritorious is the assertion of petitioner that paragraph 17 of the Contract of Lease
dated May 14, 1976 merely provides a procedural basis for a negotiation for renewal of the lease and the
terms thereof. The exercise by respondent of its option to renew the lease need no longer be subject to
negotiations. We reiterate the point we made inAllied Banking that:
[I]f we were to adopt the contrary theory that the terms and conditions to be embodied in
the renewed contract were still subject to mutual agreement by and between the parties,
then the option - which is an integral part of the consideration for the contract - would be
rendered worthless. For then, the lessor could easily defeat the lessee's right of renewal
by simply imposing unreasonable and onerous conditions to prevent the parties from
reaching an agreement, as in the case at bar. As in a statute, no word, clause, sentence,
provision or part of a contract shall be considered surplusage or superfluous,
meaningless, void, insignificant or nugatory, if that can be reasonably avoided. To this
end, a construction which will render every word operative is to be preferred over that
which would make some words idle and nugatory.[49]
In case the lessee chooses to renew the lease but there are no specified terms and conditions for
the new contract of lease, the same terms and conditions as the original contract of lease shall continue
to govern, as the following survey of cases in Allied Banking would show:
In Ledesma v. Javellana this Court was confronted with a similar problem. In that
case the lessee was given the sole option to renew the lease, but the contract failed to
specify the terms and conditions that would govern the new contract. When the lease
expired, the lessee demanded an extension under the same terms and conditions. The
lessor expressed conformity to the renewal of the contract but refused to accede to the
claim of the lessee that the renewal should be under the same terms and conditions as
the original contract. In sustaining the lessee, this Court made the following
pronouncement:
x x x [i]n the case of Hicks v. Manila Hotel Company, a similar
issue was resolved by this Court. It was held that 'such a clause
relates to the very contract in which it is placed, and does not
permit the defendant upon the renewal of the contract in which the
clause is found, to insist upon different terms than those embraced
in the contract to be renewed'; and that 'a stipulation to renew
always relates to the contract in which it is found and the rights
granted thereunder, unless it expressly provides for variations in
the terms of the contract to be renewed.'

The same principle is upheld in American Law regarding the renewal of lease
contracts. In 50 Am. Jur. 2d, Sec. 1159, at p. 45, we find the following
citations: 'The rule is well-established that a general covenant to renew or extend
a lease which makes no provision as to the terms of a renewal or extension
implies a renewal or extension upon the same terms as provided in the original
lease.'
In the lease contract under consideration, there is no provision to indicate that
the renewal will be subject to new terms and conditions that the parties may yet agree
upon. It is to renewal provisions of lease contracts of the kind presently considered that
the principles stated above squarely apply. We do not agree with the contention of the
appellants that if it was intended by the parties to renew the contract under the same
terms and conditions stipulated in the contract of lease, such should have expressly so
stated in the contract itself. The same argument could easily be interposed by the
appellee who could likewise contend that if the intention was to renew the contract of
lease under such new terms and conditions that the parties may agree upon, the contract
should have so specified. Between the two assertions, there is more logic in the latter.
The settled rule is that in case of uncertainty as to the meaning of a
provision granting extension to a contract of lease, the tenant is the one favored
and not the landlord. 'As a general rule, in construing provisions relating to renewals
or extensions, where there is any uncertainty, the tenant is favored, and not the landlord,
because the latter, having the power of stipulating in his own favor, has neglected to
do so; and also upon the principle that every man's grant is to be taken
most strongly against himself (50 Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S.
599).'[50] (Emphases supplied.)
Being consistent with the foregoing principles, we sustain the interpretation of the RTC of
paragraph 17 of the Contract of Lease dated May 14, 1976 between petitioner and respondent, to wit:
[Paragraph 17 of the Contract of Lease dated May 14, 1976] admits several
meanings. In simpler terms, the phrase, i.e., if desirous of continuing his lease,
may be simply restated, i.e., if he wants to go on with his lease, considering the
word `CONTINUE in its verb form ordinarily means to go on in present state, or
even restated in another way if desirous of extending his lease, because the
word `continue in its verb form also means extend uniformly. Thus, if we are to
adopt the interpretation of [petitioner] that the stipulation merely established the
procedural basis for a negotiation for renewal then the aforequoted phrase would be
rendered a mere surplusage, meaningless and insignificant. But if we are to prod deeper
to the very context of the entire stipulations setforth in the contract and from what is
obvious with respect to the intentions of the contracting parties based on their
contemporaneous and subsequent acts including but not limited to the historical
antecedents of the agreement then an interpretation invariably different from that of
[petitioner] becomes inevitable.
Specifically, the extraneous source of the lease contract in question could be
the original and renewed contract of lease by and between Salem Investment
Corporation and CAA the predecessor-in-interest of [petitioner] executed
on February 10, 1967 (Exh. M). Under the said lease contract between CAA and
Salem, the term is for a period of twenty-five (25) years renewable for another 25 years at
the option of the lessee Salem (Exh. Y-1). Later, with the approval of
CAA, Salem transferred its leasehold rights over a portion of the land leased to Ding
Velayo Export Corporation on September 30, 1974 (Exh. N) and in turn Velayo
Export transferred its leasehold rights over a portion of the leased land transferred to it by
Salem toVelayo Sports Complex, Inc. [respondent] herein on April 29, 1976 (Exh.

O). Thus, on May 14, 1976, [respondent] and CAA, predecessor-in-interest of

[petitioner], concluded the lease agreement in question with a term equivalent to
the unexpired portion of the lease between Velayo Export and CAA.
As culled from the transfers effected prior to the May 14, 1976 agreement of
[respondent] and [petitioner]s predecessor-in-interest, the renewal of the contract was
clearly at the option of the lessee. Considering that there was no evidence positively
showing that [respondent] and CAA expressly intended the removal of the option for the
renewal of the lease contract from the lessee, it is but logical to conclude, although the
stipulation setforth in paragraph 17 appears to have been worded or couched in
somewhat uncertain terms, that the parties agreed that the option should remain with the
lessee. This must be so because based on the context of their agreements and
bolstered by the testimony of Mr. Mariano Nocom of Salem Investment and
particularly Rosila Mabanag, one of the signatory witness to the contract and a
retired employee of CAAs Legal Division the parties really intended a renewal for
the same term as it was then the usual practice of CAA to have the term of leases
on lands where substantial amount will be involved in the construction of the
improvements to be undertaken by the lessee to give a renewal. In fact, it clearly
appears that the right of renewal constitutes a part of the lessees interest in the land
considering the multimillion investments it made relative to the construction of the
building and facilities thereon and forms a substantial and integral part of the agreement.
[51]
(Emphases supplied.)
In sum, the renewed contract of lease of the subject property between petitioner and respondent
shall be based on the same terms and conditions as the original contract of lease. The original contract
of lease does not pertain to the Contract of Lease dated May 14, 1976 between petitioner and
respondent alone, but also to the Contract of Lease dated February 15, 1967 between petitioner (then still
called CAA) and Salem, as well as the Contract of Lease dated November 26, 1974 between petitioner
and Velayo Export all three contracts being inextricably connected. Since the Contract of Lease
between petitioner and Salem was for a term of 25 years, then the renewed contract of lease of between
petitioner and respondent shall be for another term of 25 years. This construction of the renewal clause
under paragraph 17 of the Contract of Lease dated May 14, 1976 between petitioner and respondent is
most consistent with the intent of the parties at the time of the execution of said Contract and most
effectual in implementing the same.
In addition to challenging the exclusive right of respondent to renew the Contract of Lease over
the subject property, petitioner insists on its right to refuse the renewal because of purported violations of
the said Contract by respondent, particularly: (1) subleasing of the premises; (2) failure to ease the
problems of parking congestion at the Domestic Airport and to provide a shopping center and sports
facilities, such as an oval track and a swimming pool; and (3) failure to pay monthly lease rentals in the
form of royalties equivalent to 1% of the gross income of respondent or in accordance with the rates fixed
in the administrative orders of petitioner.
We find no violations by the respondent of the Contract of Lease dated May 14, 1976 as to justify
the revocation or refusal to renew of said Contract by petitioner.
The RTC is once again correct in its construal that paragraph 16 of the Contract of Lease,
prohibiting the subleasing of the premises, refers only to the subject property. We stress that when the
said Contract was executed on May 14, 1976, the premises leased by petitioner to respondent, and
which respondent was not allowed to sublease, is the subject property, i.e., an idle piece of land with an
area of 8,481 square meters. More importantly, being the builder of the improvements on the subject
property, said improvements are owned by respondent until their turn-over to petitioner at the end of the
25-year lease in 1992. As respondent is not leasing the improvements from petitioner, then it is not
subleasing the same to third parties.

While the Contract of Lease expressly obligated respondent to build certain improvements, such
as parking, shopping mall, and sports facilities, the belated insistence by petitioner on compliance with the
same appears to be a mere afterthought.
Article 1235 of the Civil Code states that [w]hen the obligee accepts the performance, knowing
its incompleteness or irregularity, and without expressing any protest or objection, the obligation is
deemed fully complied with.
As aptly observed by the RTC, paragraphs 9 and 10 of the Contract of Lease likewise expressly
require respondent to submit, for prior approval by petitioner, all construction plans on the subject
property; and to complete the contemplated improvements thereon within a year. The Contract of Lease
was executed on May 14, 1976, and the one-year period expired on May 14, 1977. Yet, petitioner did not
register any protest or objection to the alleged incompleteness of or irregularity in the performance by
respondent of its obligation to build and develop improvements on the subject property. In fact, upon the
expiration of the original 25-year lease period in February 1992, petitioner was already ready and willing
to accept and appropriate as its own the improvements built on the subject property in 1992. Petitioner
only raised the issue of the purported incompleteness/irregularity of the said improvements when it was
brought to court by respondent for refusing to renew the lease.
Just as the RTC adjudged, no fault could be attributed to respondent for deficient payment of
lease rentals. Lease rentals were based on either the rates fixed by AO No. 4, series of 1970, or 1% of
the monthly gross income of respondent, whichever is higher. At the very beginning of the lease,
respondent had been paying monthly lease rentals based on the rates fixed by AO No. 4, series of 1970,
which amounted to P2,205.25 per month. When requested, respondent submitted to petitioner its gross
income statements, so petitioner could very well compute the 1% royalty. However, petitioner continued to
charge respondent only P2,205.25 monthly lease rental, which the latter faithfully paid.
Petitioner later demanded an increase in lease rentals based on subsequent administrative
issuances raising the rates for the rental of its properties. But the RTC found that the adverted
administrative orders were not published in full, thus, the same were legally invalid within the context of
Article 2 of the Civil Code which provides that [l]aws shall take effect after fifteen days following the
completion of their publication in the Official Gazette, unless it is otherwise provided. x x x In Taada v.
Tuvera,[52] we enunciated that publication is indispensable in order that all statutes, including
administrative rules that are intended to enforce or implement existing laws, attain binding force and
effect, to wit:
We hold therefore that all statutes, including those of local application and private
laws, shall be published as a condition for their effectivity, which shall begin fifteen days
after publication unless a different effectivity date is fixed by the legislature.
Covered by this rule are presidential decrees and executive orders promulgated by
the President in the exercise of legislative powers whenever the same are validly delegated
by the legislature or, at present, directly conferred by the Constitution. Administrative rules
and regulations must also be published if their purpose is to enforce or implement existing
law pursuant also to a valid delegation.[53]
There is no basis for the argument of petitioner that the validity of its administrative orders cannot
be collaterally attacked. To the contrary, we have previously declared that a party may raise the
unconstitutionality or invalidity of an administrative regulation on every occasion that said regulation is
being enforced.[54] Since it is petitioner which first invoked its administrative orders to justify the increase
in lease rentals of respondent, then respondent may raise before the court the invalidity of said
administrative orders on the ground of non-publication thereof.
Finally, petitioner cannot oppose the renewal of the lease because of estoppel. Our following
disquisition in Kalalo v. Luz[55] is relevant herein:

Under Article 1431 of the Civil Code, in order that estoppel may apply the person, to
whom representations have been made and who claims the estoppel in his favor must
have relied or acted on such representations. Said article provides:
Art. 1431. Through estoppel an admission or representation is
rendered conclusive upon the person making it, and cannot be denied or
disproved as against the person relying thereon.
An essential element of estoppel is that the person invoking it has been
influenced and has relied on the representations or conduct of the person sought
to be estopped, and this element is wanting in the instant case. In Cristobal vs.
Gomez, this Court held that no estoppel based on a document can be invoked by one
who has not been misled by the false statements contained therein. And in Republic of
the Philippines vs. Garcia, et al., this Court ruled that there is no estoppel when the
statement or action invoked as its basis did not mislead the adverse party. Estoppel has
been characterized as harsh or odious, and not favored in law. When misapplied,
estoppel becomes a most effective weapon to accomplish an injustice, inasmuch as it
shuts a man's mouth from speaking the truth and debars the truth in a particular
case. Estoppel cannot be sustained by mere argument or doubtful inference; it must be
clearly proved in all its essential elements by clear, convincing and satisfactory
evidence. No party should be precluded from making out his case according to its truth
unless by force of some positive principle of law, and, consequently, estoppel in pais must
be applied strictly and should not be enforced unless substantiated in every particular.
The essential elements of estoppel in pais may be considered in relation to the
party sought to be estopped, and in relation to the party invoking the estoppel in his
favor. As related to the party to be estopped, the essential elements are: (1) conduct
amounting to false representation or concealment of material facts; or at least calculated
to convey the impression that the facts are otherwise than, and inconsistent with, those
which the party subsequently attempts to assert; (2) intent, or at least expectation that his
conduct shall be acted upon by, or at least influence, the other party; and (3) knowledge,
actual or constructive, of the real facts. As related to the party claiming the estoppel,
the essential elements are (1) lack of knowledge and of the means of knowledge of
the truth as the facts in questions; (2) reliance, in good faith, upon the conduct or
statements of the party to be estopped; (3) action or inaction based thereon of
such character as to change the position or status of the party claiming the
estoppel, to his injury, detriment or prejudice.[56] (Emphases ours.)
Indeed, Velayos Letters dated March 3 and 10, 1992 to petitioner may have already expressed
acquiescence to the non-renewal of the lease and turn-over of the improvements on the subject property
to petitioner. But not long thereafter, Alomesen, the new President of respondent, already wrote another
Letter dated March 25, 1992, which revoked Velayos earlier Letters for having been sent without authority
of the Board of Directors of respondent, insisted on the renewal of the lease, and tendered payment of
past due lease rentals. Respondent, through Alomesen, timely acted to correct Velayos mistakes. In the
15-day interval between Velayos Letter dated March 10, 1992 and Alomesens Letter dated March 25,
1992, there is no showing that petitioner, relying in good faith on Velayos Letters, acted or did not act as
to have caused it injury, detriment, or prejudice. There is an utter lack of clear, convincing, and
satisfactory evidence on the part of petitioner, as the party claiming estoppel, of the second and third
elements for the application of said principle against respondent.
WHEREFORE, the instant Petition is hereby DENIED for lack of merit. The Decision
dated January 8, 2004 of the Court Appeals in CA-G.R. CV No. 68787, which affirmed the Decision
dated October 29, 1999of Branch 111 of the RTC of Pasay City in Civil Case No. 8847, is
herebyAFFIRMED.

SO ORDERED.

G.R. No. 187678

April 10, 2013
SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners,
vs.
CHINA BANKING CORPORATION, Respondent.
DECISION
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, assailing the February 20, 2009 Decision1 and April 27, 2009 Resolution2 of the Court of
Appeals (CA) in CA G.R. CV No. 80338. The CA affirmed the April 14, 2003 Decision 3 of the Regional
Trial Court (RTC) of Makati City, Branch 147.
The factual antecedents:
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking Corporation
(respondent) as evidenced by two Promissory Notes both dated October 6, 1998 and numbered 507001051-34and 507-001052-0,5 for the sums of !!6,216,000 and P4, 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-41208 6 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
respondents last demand letter7 dated August 29, 2000.
As of February 23, 2001, the amount due on the two promissory notes totaled P19,201,776.63
representing the principal, interests, penalties and attorneys fees. On the same day, the mortgaged
property was sold at public auction, with respondent as highest bidder for the amount of P10,300,000.
On May 8, 2001, petitioners received8 a demand letter9 dated May 2, 2001 from respondent for the
payment ofP8,901,776.63, 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,10respondent prayed that judgment be rendered ordering the petitioners to pay jointly and
severally: (1)P8,901,776.63 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
attorneys 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 P10,300,000.
Petitioners contended that should they be held liable for any deficiency, it should be only for P55,000
representing the difference between the total outstanding obligation of P10,355,000 and the bid price
of P10,300,000. 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 P100,000 in attorneys 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 P19,201,776.6312 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

1wphi1
Principal balance of PN# 5070010520. . . . . . . . . . . . . .

4,139,000.00

Interest on P4,139,000.00 fr. 04-Nov-99

04-Nov-2000 366 days @ 15.00%. . . . . . . . . . . . . . . . .

622,550.96

Interest on P4,139,000.00 fr. 04-Nov-2000

04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . .

83,346.99

Interest on P4,139,000.00 fr. 04-Dec-2000

04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . .

75,579.27

Interest on P4,139,000.00 fr. 04-Jan-2001

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . .

68,548.64

Interest on P4,139,000.00 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

(P4,139,000.00 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 P6,216,000.00 fr. 06-Oct-99

04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . .

1,009,035.62

Interest on P6,216,000.00 fr. 04-Nov-2000

04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . .

125,171.51

Interest on P6,216,000.00 fr. 04-Dec-2000

04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . .

113,505.86

Interest on P6,216,000.00 fr. 04-Jan-2001

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . .

102,947.18

Interest on P6,216,000.00 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

(P6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . .

3,145,296.00

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,770,199.23

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,772,309.96

Less: A/P applied to balance of principal

Less: Accounts payable L & D (261,149.39)
Add: 10% Attorneys Fee
Total amount due

(55,000.00)
17,456,160.57
1,745,616.06
19,201,776.63

Less: Bid Price

TOTAL DEFICIENCY AMOUNT AS OF
FEB. 23, 2001

10,300,000.00
8,901,776.63

13

Petitioners thereafter received a demand letter14 dated May 2, 2001 from respondents counsel for the
deficiency amount of P8,901,776.63. Ms. Yu further testified that based on the Statement of
Account15 dated March 15, 2002 which she prepared, the outstanding balance of petitioners
was P15,190,961.48.16
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. P8,901,776.63 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 attorneys 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 P10,300,000 there remained a balance of P8,901,776.63 since before foreclosure,
the total amount due on the two promissory notes aggregated to P19,201,776.63 inclusive of principal,
interests, penalties and attorneys 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 P8,901,776.63.
The trial court further held that Ignacios 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 courts decision. The CA recognized
respondents 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 borrowers loan, pursuant to
Circular No. 494 issued by the Monetary Board on January 2, 1976, because said circular is not a law
although it has the force and effect of law and the escalation clause has no provision for reduction of the
stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the
Monetary Board" (de-escalation clause).
Subsequently, in Insular Bank of Asia and America v. Spouses Salazar 27 we reiterated that escalation
clauses are valid stipulations but their enforceability are subject to certain conditions. The increase of
interest rate from 19% to 21% per annum made by petitioner bank was disallowed because it did not
comply with the guidelines adopted by the Monetary Board to govern interest rate adjustments by banks
and non-banks performing quasi-banking functions.
In the 1991 case of Philippine National Bank v. Court of Appeals, 28 the promissory notes authorized PNB
to increase the stipulated interest per annum "within the limits allowed by law at any time depending on
whatever policy PNB may adopt in the future; Provided, that, the interest rate on this note shall be
correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by
the Monetary Board." This Court declared the increases (from 18% to 32%, then to 41% and then to 48%)
unilaterally imposed by PNB to be in violation of the principle of mutuality essential in contracts. 29

A similar ruling was made in a 1994 case30 also involving PNB where the credit agreement provided that
"PNB reserves the right to increase the interest rate within the limits allowed by law at any time depending
on whatever policy it may adopt in the future: Provided, that the interest rate on this accommodation shall
be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by
the Monetary Board x x x".
Again, in 1996, the Court invalidated escalation clauses authorizing PNB to raise the stipulated interest
rate at any time without notice, within the limits allowed by law. The Court observed that there was no
attempt made by PNB to secure the conformity of respondent borrower to the successive increases in the
interest rate. The borrowers 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 Solidbanks 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 Cardholders Agreement. On petitioners 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 respondents 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. Respondents 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 P10,355,000. However, due to China Banks
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 P19,201,776.63. 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.1wphi1
Petitioners Statement of Account, as of February 23, 2001, the date of the foreclosure proceedings,
should thus be modified as follows:
Principal
Interest at 15% per annum
P10,355,000 x .15 x 477 days/365 days
Penalty at 12% per annum

P10,355,000.00
2,029,863.70
1,623 ,890. 96

P10,355,000 x .12 x 477days/365 days

Sub-Total
Less: A/P applied to balance of principal
Less: Accounts payable L & D

14,008,754.66
(55,000.00)
(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 P4, 7 61 ,865. 79 representing the amount of
deficiency inclusive of interest, penalty charge and attorney's fees. Said amount shall bear interest at 12%
per annum, reckoned from the time of the filing of the complaint until its full satisfaction.
No pronouncement as to costs.
SO ORDERED.

G.R. No. 174433

February 24, 2014
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
SPOUSES ENRIQUE MANALO & ROSALINDA JACINTO, ARNOLD J. MANALO, ARNEL J. MANALO,
and ARMA J. MANALO, Respondents.
DECISION
BERSAMIN, J.:
Although banks are free to determine the rate of interest they could impose on their borrowers, they can
do so only reasonably, not arbitrarily. They may not take advantage of the ordinary borrowers' lack of
familiarity with banking procedures and jargon. Hence, any stipulation on interest unilaterally imposed and
increased by them shall be struck down as violative of the principle of mutuality of contracts.
Antecedents
Respondent Spouses Enrique Manalo and Rosalinda Jacinto (Spouses Manalo) applied for an AllPurpose Credit Facility in the amount of P1,000,000.00 with Philippine National Bank (PNB) to finance the
construction of their house. After PNB granted their application, they executed a Real Estate Mortgage on
November 3, 1993 in favor of PNB over their property covered by Transfer Certificate of Title No. S23191 as security for the loan.1 The credit facility was renewed and increased several times over the
years. On September 20, 1996, the credit facility was again renewed for P7,000,000.00. As a
consequence, the parties executed a Supplement to and Amendment of Existing Real Estate Mortgage
whereby the property covered by TCT No. 171859 was added as security for the loan.
The additional security was registered in the names of respondents Arnold, Arnel, Anthony, and Arma, all
surnamed Manalo, who were their children.2
It was agreed upon that the Spouses Manalo would make monthly payments on the interest. However,
PNB claimed that their last recorded payment was made on December, 1997. Thus, PNB sent a demand
letter to them on their overdue account and required them to settle the account. PNB sent another
demand letter because they failed to heed the first demand. 3
After the Spouses Manalo still failed to settle their unpaid account despite the two demand letters, PNB
foreclose the mortgage. During the foreclosure sale, PNB was the highest bidder for P15,127,000.00 of
the mortgaged properties of the Spouses Manalo. The sheriff issued to PNB the Certificate of Sale dated
November 13, 2000.4
After more than a year after the Certificate of Sale had been issued to PNB, the Spouses Manalo
instituted this action for the nullification of the foreclosure proceedings and damages. They alleged that
they had obtained a loan for P1,000,000.00 from a certain Benito Tan upon arrangements made by
Antoninus Yuvienco, then the General Manager of PNBs Bangkal Branch where they had transacted; that
they had been made to understand and had been assured that the P1,000,000.00 would be used to
update their account, and that their loan would be restructured and converted into a long-term loan; 5 that
they had been surprised to learn, therefore, that had been declared in default of their obligations, and that

the mortgage on their property had been foreclosed and their property had been sold; and that PNB did
not comply with Section 3 of Act No. 3135, as amended. 6
PNB and Antoninus Yuvienco countered that the P1,000,000.00 loan obtained by the Spouses Manalo
from Benito Tan had been credited to their account; that they did not make any assurances on the
restructuring and conversion of the Spouses Manalos loan into a long-term one; 7 that PNBs right to
foreclose the mortgage had been clear especially because the Spouses Manalo had not assailed the
validity of the loans and of the mortgage; and that the Spouses Manalo did not allege having fully paid
their indebtedness.8
Ruling ofthe RTC
After trial, the RTC rendered its decision in favor of PNB, holding thusly:
In resolving this present case, one of the most significant matters the court has noted is that while during
the pre-trial held on 8 September 2003, plaintiff-spouses Manalo with the assistance counsel had agreed
to stipulate that defendants had the right to foreclose upon the subject properties and that the plaintiffs[]
main thrust was to prove that the foreclosure proceedings were invalid, in the course of the presentation
of their evidence, they modified their position and claimed [that] the loan document executed were
contracts of adhesion which were null and void because they were prepared entirely under the defendant
banks supervision. They also questioned the interest rates and penalty charges imposed arguing that
these were iniquitous, unconscionable and therefore likewise void.
Not having raised the foregoing matters as issues during the pre-trial, plaintiff-spouses are presumably
estopped from allowing these matters to serve as part of their evidence, more so because at the pre-trial
they expressly recognized the defendant banks right to foreclose upon the subject property (See Order,
pp. 193-195).
However, considering that the defendant bank did not interpose any objection to these matters being
made part of plaintiffs evidence so much so that their memorandum contained discussions rebutting
plaintiff spouses arguments on these issues, the court must necessarily include these matters in the
resolution of the present case.9
The RTC held, however, that the Spouses Manalos "contract of adhesion" argument was unfounded
because they had still accepted the terms and conditions of their credit agreement with PNB and had
exerted efforts to pay their obligation;10 that the Spouses Manalo were now estopped from questioning the
interest rates unilaterally imposed by PNB because they had paid at those rates for three years without
protest;11 and that their allegation about PNB violating the notice and publication requirements during the
foreclosure proceedings was untenable because personal notice to the mortgagee was not required
under Act No. 3135.12
The Spouses Manalo appealed to the CA by assigning a singular error, as follows:
THE COURT A QUO SERIOUSLY ERRED IN DISMISSING PLAINTIFF-APPELLANTS COMPLAINT
FOR BEING (sic) LACK OF MERIT NOTWITHSTANDING THE FACT THAT IT WAS CLEARLY SHOWN
THAT THE FORECLOSURE PROCEEDINGS WAS INVALID AND ILLEGAL. 13
The Spouses Manalo reiterated their arguments, insisting that: (1) the credit agreements they entered into
with PNB were contracts of adhesion;14 (2) no interest was due from them because their credit
agreements with PNB did not specify the interest rate, and PNB could not unilaterally increase the interest
rate without first informing them;15 and (3) PNB did not comply with the notice and publication
requirements under Section 3 of Act 3135.16On the other hand, PNB and Yuvienco did not file their briefs
despite notice.17
Ruling ofthe CA
In its decision promulgated on March 28, 2006,18 the CA affirmed the decision of the RTC insofar as it
upheld the validity of the foreclosure proceedings initiated by PNB, but modified the Spouses Manalos
liability for interest. It directed the RTC to see to the recomputation of their indebtedness, and ordered that
should the recomputed amount be less than the winning bid in the foreclosure sale, the difference should
be immediately returned to the Spouses Manalo.

The CA found it necessary to pass upon the issues of PNBs failure to specify the applicable interest and
the lack of mutuality in the execution of the credit agreements considering the earlier cited observation
made by the trial court in its decision. Applying Article 1956 of the Civil Code, the CA held that PNBs
failure to indicate the rate of interest in the credit agreements would not excuse the Spouses Manalo from
their contractual obligation to pay interest to PNB because of the express agreement to pay interest in the
credit agreements. Nevertheless, the CA ruled that PNBs inadvertence to specify the interest rate should
be construed against it because the credit agreements were clearly contracts of adhesion due to their
having been prepared solely by PNB.
The CA further held that PNB could not unilaterally increase the rate of interest considering that the credit
agreements specifically provided that prior notice was required before an increase in interest rate could
be effected. It found that PNB did not adduce proof showing that the Spouses Manalo had been notified
before the increased interest rates were imposed; and that PNBs unilateral imposition of the increased
interest rate was null and void for being violative of the principle of mutuality of contracts enshrined in
Article 1308 of the Civil Code. Reinforcing its "contract of adhesion" conclusion, it added that the Spouses
Manalos being in dire need of money rendered them to be not on an equal footing with PNB.
Consequently, the CA, relying on Eastern Shipping Lines, v. Court of Appeals, 19 fixed the interest rate to
be paid by the Spouses Manalo at 12% per annum, computed from their default.
The CA deemed to be untenable the Spouses Manalos allegation that PNB had failed to comply with the
requirements for notice and posting under Section 3 of Act 3135. The CA stated that Sheriff Norberto
Magsajos testimony was sufficient proof of his posting of the required Notice of Sheriffs Sale in three
public places; that the notarized Affidavit of Publication presented by Sheriff Magsajo was prima facie
proof of the publication of the notice; and that the Affidavit of Publication enjoyed the presumption of
regularity, such that the Spouses Manalos bare allegation of non-publication without other proof did not
overcome the presumption.
On August 29, 2006, the CA denied the Spouses Manalos Motion for Reconsideration and PNBs Partial
Motion for Reconsideration.20
Issues
21
In its Memorandum, PNB raises the following issues:
I
WHETHER OR NOT THE COURT OF APPEALS WAS CORRECT IN NULLIFYING THE INTEREST
RATES IMPOSED ON RESPONDENT SPOUSES LOAN AND IN FIXING THE SAME AT TWELVE
PERCENT (12%) FROM DEFAULT, DESPITE THE FACT THAT (i) THE SAME WAS RAISED BY THE
RESPONDENTS ONLY FOR THE FIRST TIME ON APPEAL (ii) IT WAS NEVER PART OF THEIR
COMPLAINT (iii) WAS EXLUDED AS AN ISSUE DURING PRE-TRIAL, AND WORSE, (iv) THERE WAS
NO FORMALLY OFFERED PERTAINING TO THE SAME DURING TRIAL.
II
WHETHER OR NOT THE COURT OF APPEALS CORRECTLY RULED THAT THERE WAS NO
MUTUALITY OF CONSENT IN THE IMPOSITION OF INTEREST RATES ON THE RESPONDENT
SPOUSES LOAN DESPITE THE EXISTENCE OF FACTS AND CIRCUMSTANCES CLEARLY
SHOWING RESPONDENTS ASSENT TO THE RATES OF INTEREST SO IMPOSED BY PNB ON THE
LOAN.
Anent the first issue, PNB argues that by passing upon the issue of the validity of the interest rates, and in
nullifying the rates imposed on the Spouses Manalo, the CA decided the case in a manner not in accord
with Section 15, Rule 44 of the Rules of Court, which states that only questions of law or fact raised in the
trial court could be assigned as errors on appeal; that to allow the Spouses Manalo to raise an issue for
the first time on appeal would "offend the basic rules of fair play, justice and due process;" 22 that the
resolution of the CA was limited to the issues agreed upon by the parties during pre-trial; 23 that the CA
erred in passing upon the validity of the interest rates inasmuch as the Spouses Manalo did not present
evidence thereon; and that the Judicial Affidavit of Enrique Manalo, on which the CA relied for its finding,

was not offered to prove the invalidity of the interest rates and was, therefore, inadmissible for that
purpose.24
As to the substantive issues, PNB claims that the Spouses Manalos continuous payment of interest
without protest indicated their assent to the interest rates imposed, as well as to the subsequent
increases of the rates; and that the CA erred in declaring that the interest rates and subsequent increases
were invalid for lack of mutuality between the contracting parties.
Ruling
The appeal lacks merit.
1.
Procedural Issue
Contrary to PNBs argument, the validity of the interest rates and of the increases, and on the lack of
mutuality between the parties were not raised by the Spouses Manalos for the first time on appeal.
Rather, the issues were impliedly raised during the trial itself, and PNBs lack of vigilance in voicing out a
timely objection made that possible.
It appears that Enrique Manalos Judicial Affidavit introduced the issues of the validity of the interest rates
and the increases, and the lack of mutuality between the parties in the following manner, to wit:
5. True to his words, defendant Yuvienco, after several days, sent us a document through a
personnel of defendant PNB, Bangkal, Makati City Branch, who required me and my wife to affix
our signature on the said document;
6. When the document was handed over me, I was able to know that it was a Promissory Note
which was in ready made form and prepared solely by the defendant PNB;
xxxx
21. As above-noted, the rates of interest imposed by the defendant bank were never the subject
of any stipulation between us mortgagors and the defendant PNB as mortgagee;
22. The truth of the matter is that defendant bank imposed rate of interest which ranges from 19%
to as high as 28% and which changes from time to time;
23. The irregularity, much less the invalidity of the imposition of iniquitous rates of interest was
aggravated by the fact that we were not informed, notified, nor the same had our prior consent
and acquiescence therefor. x x x25
PNB cross-examined Enrique Manalo upon his Judicial Affidavit. There is no showing that PNB raised any
objection in the course of the cross examination.26 Consequently, the RTC rightly passed upon such
issues in deciding the case, and its having done so was in total accord with Section 5, Rule 10 of the
Rules of Court, which states:
Section 5. Amendment to conform to or authorize presentation of evidence. When issues not raised by
the pleadings are tried with the express or implied consent of the parties, they shall be treated in all
respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to raise these issues may be made upon motion
of any party at any time, even after judgment; but failure to amend does not affect the result of the trial of
these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by
the pleadings, the court may allow the pleadings to be amended and shall do so with liberality if the
presentation of the merits of the action and the ends of substantial justice will be subserved thereby. The
court may grant a continuance to enable the amendment to be made.
In Bernardo Sr. v. Court of Appeals,27 we held that:
It is settled that even if the complaint be defective, but the parties go to trial thereon, and the plaintiff,
without objection, introduces sufficient evidence to constitute the particular cause of action which it
intended to allege in the original complaint, and the defendant voluntarily produces witnesses to meet the
cause of action thus established, an issue is joined as fully and as effectively as if it had been previously
joined by the most perfect pleadings. Likewise, when issues not raised by the pleadings are tried by

express or implied consent of the parties, they shall be treated in all respects as if they had been raised in
the pleadings.
The RTC did not need to direct the amendment of the complaint by the Spouses Manalo. Section 5, Rule
10 of the Rules of Court specifically declares that the "failure to amend does not affect the result of the
trial of these issues." According to Talisay-Silay Milling Co., Inc. v. Asociacion de Agricultores de TalisaySilay, Inc.:28
The failure of a party to amend a pleading to conform to the evidence adduced during trial does not
preclude an adjudication by the court on the basis of such evidence which may embody new issues not
raised in the pleadings, or serve as a basis for a higher award of damages. Although the pleading may not
have been amended to conform to the evidence submitted during trial, judgment may nonetheless be
rendered, not simply on the basis of the issues alleged but also on the basis of issues discussed and the
assertions of fact proved in the course of trial.1wphi1 The court may treat the pleading as if it had been
amended to conform to the evidence, although it had not been actually so amended. Former Chief Justice
Moran put the matter in this way:
When evidence is presented by one party, with the expressed or implied consent of the adverse party, as
to issues not alleged in the pleadings, judgment may be rendered validly as regards those issues, which
shall be considered as if they have been raised in the pleadings. There is implied, consent to the
evidence thus presented when the adverse party fails to object thereto." (Emphasis supplied)
Clearly, a court may rule and render judgment on the basis of the evidence before it even though the
relevant pleading had not been previously amended, so long as no surprise or prejudice is thereby
caused to the adverse party. Put a little differently, so long as the basic requirements of fair play had been
met, as where litigants were given full opportunity to support their respective contentions and to object to
or refute each other's evidence, the court may validly treat the pleadings as if they had been amended to
conform to the evidence and proceed to adjudicate on the basis of all the evidence before it.
There is also no merit in PNBs contention that the CA should not have considered and ruled on the issue
of the validity of the interest rates because the Judicial Affidavit of Enrique Manalo had not been offered to
prove the same but only "for the purpose of identifying his affidavit." 29 As such, the affidavit was
inadmissible to prove the nullity of the interest rates.
We do not agree.
Section 5, Rule 10 of the Rules of Court is applicable in two situations.1wphi1 The first is when evidence
is introduced on an issue not alleged in the pleadings and no objection is interposed by the adverse party.
The second is when evidence is offered on an issue not alleged in the pleadings but an objection is raised
against the offer.30 This case comes under the first situation. Enrique Manalos Judicial Affidavit would
introduce the very issues that PNB is now assailing. The question of whether the evidence on such issues
was admissible to prove the nullity of the interest rates is an entirely different matter. The RTC accorded
credence to PNBs evidence showing that the Spouses Manalo had been paying the interest imposed
upon them without protest. On the other hand, the CAs nullification of the interest rates was based on the
credit agreements that the Spouses Manalo and PNB had themselves submitted.
Based on the foregoing, the validity of the interest rates and their increases, and the lack of mutuality
between the parties were issues validly raised in the RTC, giving the Spouses Manalo every right to raise
them in their appeal to the CA. PNBs contention was based on its wrong appreciation of what transpired
during the trial. It is also interesting to note that PNB did not itself assail the RTCs ruling on the issues
obviously because the RTC had decided in its favor. In fact, PNB did not even submit its appellees brief
despite notice from the CA.
2.
Substantive Issue
The credit agreement executed succinctly stipulated that the loan would be subjected to interest at a rate
"determined by the Bank to be its prime rate plus applicable spread, prevailing at the current
month."31 This stipulation was carried over to or adopted by the subsequent renewals of the credit
agreement. PNB thereby arrogated unto itself the sole prerogative to determine and increase the interest

rates imposed on the Spouses Manalo. Such a unilateral determination of the interest rates contravened
the principle of mutuality of contracts embodied in Article 1308 of the Civil Code. 32
The Court has declared that a contract where there is no mutuality between the parties partakes of the
nature of a contract of adhesion,33 and any obscurity will be construed against the party who prepared the
contract, the latter being presumed the stronger party to the agreement, and who caused the
obscurity.34 PNB should then suffer the consequences of its failure to specifically indicate the rates of
interest in the credit agreement. We spoke clearly on this in Philippine Savings Bank v. Castillo, 35 to wit:
The unilateral determination and imposition of the increased rates is violative of the principle of mutuality
of contracts under Article 1308 of the Civil Code, which provides that [t]he contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of them. A perusal of the
Promissory Note will readily show that the increase or decrease of interest rates hinges solely on the
discretion of petitioner. It does not require the conformity of the maker before a new interest rate could be
enforced. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to
an unconscionable result, thus partaking of the nature of a contract of adhesion, is void. Any stipulation
regarding the validity or compliance of the contract left solely to the will of one of the parties is likewise
invalid. (Emphasis supplied)
PNB could not also justify the increases it had effected on the interest rates by citing the fact that the
Spouses Manalo had paid the interests without protest, and had renewed the loan several times. We rule
that the CA, citing Philippine National Bank v. Court of Appeals, 36 rightly concluded that "a borrower is not
estopped from assailing the unilateral increase in the interest made by the lender since no one who
receives a proposal to change a contract, to which he is a party, is obliged to answer the same and said
partys silence cannot be construed as an acceptance thereof." 37
Lastly, the CA observed, and properly so, that the credit agreements had explicitly provided that prior
notice would be necessary before PNB could increase the interest rates. In failing to notify the Spouses
Manalo before imposing the increased rates of interest, therefore, PNB violated the stipulations of the
very contract that it had prepared. Hence, the varying interest rates imposed by PNB have to be vacated
and declared null and void, and in their place an interest rate of 12% per annum computed from their
default is fixed pursuant to the ruling in Eastern Shipping Lines, Inc. v. Court of Appeals. 38
The CAs directive to PNB (a) to recompute the Spouses Manalos indebtedness under the oversight of
the RTC; and (b) to refund to them any excess of the winning bid submitted during the foreclosure sale
over their recomputed indebtedness was warranted and equitable. Equally warranted and equitable was
to make the amount to be refunded, if any, bear legal interest, to be reckoned from the promulgation of
the CAs decision on March 28, 2006.39 Indeed, the Court said in Eastern Shipping Lines, Inc. v. Court of
Appeals40 that interest should be computed from the time of the judicial or extrajudicial demand. However,
this case presents a peculiar situation, the peculiarity being that the Spouses Manalo did not demand
interest either judicially or extrajudicially. In the RTC, they specifically sought as the main reliefs the
nullification of the foreclosure proceedings brought by PNB, accounting of the payments they had made to
PNB, and the conversion of their loan into a long term one. 41In its judgment, the RTC even upheld the
validity of the interest rates imposed by PNB.42 In their appellants brief, the Spouses Manalo again
sought the nullification of the foreclosure proceedings as the main relief. 43 It is evident, therefore, that the
Spouses Manalo made no judicial or extrajudicial demand from which to reckon the interest on any
amount to be refunded to them. Such demand could only be reckoned from the promulgation of the CAs
decision because it was there that the right to the refund was first judicially recognized. Nevertheless,
pursuant to Eastern Shipping Lines, Inc. v. Court of Appeals, 44 the amount to be refunded and the interest
thereon should earn interest to be computed from the finality of the judgment until the full refund has been
made.
Anent the correct rates of interest to be applied on the amount to be refunded by PNB, the Court, in Nacar
v. Gallery Frames45 and S.C. Megaworld Construction v. Parada,46 already applied Monetary Board
Circular No. 799 by reducing the interest rates allowed in judgments from 12% per annum to 6% per
annum.47 According to Nacar v. Gallery Frames, MB Circular No. 799 is applied prospectively, and
judgments that became final and executory prior to its effectivity on July 1, 2013 are not to be disturbed

but continue to be implemented applying the old legal rate of 12% per annum. Hence, the old legal rate of
12% per annum applied to judgments becoming final and executory prior to July 1, 2013, but the new rate
of 6% per annum applies to judgments becoming final and executory after said dater.
Conformably with Nacar v. Gallery Frames and S.C. Megaworld Construction v. Parada, therefore, the
proper interest rates to be imposed in the present case are as follows:
1. Any amount to be refunded to the Spouses Manalo shall bear interest of 12% per annum
computed from March 28, 2006, the date of the promulgation of the CA decision, until June 30,
2013; and 6% per annum computed from July 1, 2013 until finality of this decision; and
2. The amount to be refunded and its accrued interest shall earn interest of 6% per annum until
full refund.
WHEREFORE, the Court AFFIRMS the decision promulgated by the Court of Appeals on March 28, 2006
in CA-G.R. CV No. 84396, subject to the MODIFICATION that any amount to be refunded to the
respondents shall bear interest of 12% per annum computed from March 28, 2006 until June 30, 2013,
and 6% per annum computed from July 1, 2013 until finality hereof; that the amount to be refunded and
its accrued interest shall earn interest at 6o/o per annum until full refund; and DIRECTS the petitioner to
pay the costs of suit.
SO ORDERED.