CREDIT AND TRANSACTIONS FIRST BATCH OF CASES

ASG

G.R. No. L-24968 April 27, 1972

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.
Jesus A. Avancea and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on
June 28, 1965 sentencing defendant Development Bank of the Philippines (DBP) to pay
actual and consequential damages to plaintiff Saura Import and Export Co., Inc. in the
amount of P383,343.68, plus interest at the legal rate from the date the complaint was filed
and attorney's fees in the amount of P5,000.00. The present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation
Finance Corporation (RFC), before its conversion into DBP, for an industrial loan of
P500,000.00, to be used as follows: P250,000.00 for the construction of a factory building
(for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price of
the jute mill machinery and equipment; and P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been
purchased by Saura on the strength of a letter of credit extended by the Prudential Bank
and Trust Co., and arrived in Davao City in July 1953; and that to secure its release without
first paying the draft, Saura, Inc. executed a trust receipt in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for
P500,000.00, to be secured by a first mortgage on the factory building to be constructed,
the land site thereof, and the machinery and equipment to be installed. Among the other
terms spelled out in the resolution were the following:
1. That the proceeds of the loan shall be utilized exclusively for the following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00

T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria
Estabillo and China Engineers, Ltd. shall sign the promissory notes jointly with the
borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation Finance Corporation,
subject to availability of funds, and as the construction of the factory buildings progresses,
to be certified to by an appraiser of this Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before,
however, evidently having otherwise been informed of its approval, Saura, Inc. wrote a
letter to RFC, requesting a modification of the terms laid down by it, namely: that in lieu of
having China Engineers, Ltd. (which was willing to assume liability only to the extent of its
stock subscription with Saura, Inc.) sign as co-maker on the corresponding promissory
notes, Saura, Inc. would put up a bond for P123,500.00, an amount equivalent to such
subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as one of
the other co-makers, having acquired the latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954,
designating of the members of its Board of Governors, for certain reasons stated in the
resolution, "to reexamine all the aspects of this approved loan ... with special reference as
to the advisability of financing this particular project based on present conditions obtaining
in the operations of jute mills, and to submit his findings thereon at the next meeting of the
Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to
act as co-signer for the loan, and asked that the necessary documents be prepared in
accordance with the terms and conditions specified in Resolution No. 145. In connection
with the reexamination of the project to be financed with the loan applied for, as stated in
Resolution No. 736, the parties named their respective committees of engineers and
technical men to meet with each other and undertake the necessary studies, although in
appointing its own committee Saura, Inc. made the observation that the same "should not
be taken as an acquiescence on (its) part to novate, or accept new conditions to, the
agreement already) entered into," referring to its acceptance of the terms and conditions
mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R.
Halling, representing China Engineers, Ltd., as one of the co-signers; and the
corresponding deed of mortgage, which was duly registered on the following April 17.
It appears, however, that despite the formal execution of the loan agreement the
reexamination contemplated in Resolution No. 736 proceeded. In a meeting of the RFC
Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura, Inc.,
was present, it was decided to reduce the loan from P500,000.00 to P300,000.00.
Resolution No. 3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc.
under Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res.
No. 736, c.s., authorizing the re-examination of all the various aspects of the loan granted
the Saura Import & Export Co. under Resolution No. 145, c.s., for the purpose of financing
the manufacture of jute sacks in Davao, with special reference as to the advisability of

financing this particular project based on present conditions obtaining in the operation of
jute mills, and after having heard Ramon E. Saura and after extensive discussion on the
subject the Board, upon recommendation of the Chairman, RESOLVED that the loan
granted the Saura Import & Export Co. be REDUCED from P500,000 to P300,000 and that
releases up to P100,000 may be authorized as may be necessary from time to time to place
the factory in actual operation: PROVIDED that all terms and conditions of Resolution No.
145, c.s., not inconsistent herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory
note for China Engineers Ltd. jointly and severally with the other RFC that his company no
longer to of the loan and therefore considered the same as cancelled as far as it was
concerned. A follow-up letter dated July 2 requested RFC that the registration of the
mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be
granted. The request was denied by RFC, which added in its letter-reply that it was
"constrained to consider as cancelled the loan of P300,000.00 ... in view of a notification ...
from the China Engineers Ltd., expressing their desire to consider the loan insofar as they
are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed
RFC that China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the
note if RFC releases to us the P500,000.00 originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original
amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the
promissory notes jointly with the borrower-corporation," but with the following proviso:
That in view of observations made of the shortage and high cost of imported raw materials,
the Department of Agriculture and Natural Resources shall certify to the following:
1. That the raw materials needed by the borrower-corporation to carry out its operation are
available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide adequately for the
requirements of the factory."
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December
22, 1954, wherein it was explained that the certification by the Department of Agriculture
and Natural Resources was required "as the intention of the original approval (of the loan) is
to develop the manufacture of sacks on the basis of locally available raw materials." This
point is important, and sheds light on the subsequent actuations of the parties. Saura, Inc.
does not deny that the factory he was building in Davao was for the manufacture of bags
from local raw materials. The cover page of its brochure (Exh. M) describes the project as a
"Joint venture by and between the Mindanao Industry Corporation and the Saura Import
and Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture
copra and corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw
materials, principal kenaf." The explanatory note on page 1 of the same brochure states
that, the venture "is the first serious attempt in this country to use 100% locally grown raw
materials notably kenaf which is presently grown commercially in theIsland of Mindanao
where the proposed jutemill is located ..."

This fact, according to defendant DBP, is what moved RFC to approve the loan application
in the first place, and to require, in its Resolution No. 9083, a certification from the
Department of Agriculture and Natural Resources as to the availability of local raw materials
to provide adequately for the requirements of the factory. Saura, Inc. itself confirmed the
defendant's stand impliedly in its letter of January 21, 1955: (1) stating that according to a
special study made by the Bureau of Forestry "kenaf will not be available in sufficient
quantity this year or probably even next year;" (2) requesting "assurances (from RFC) that
my company and associates will be able to bring in sufficient jute materials as may be
necessary for the full operation of the jute mill;" and (3) asking that releases of the loan be
made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &
Trust Company P250,000.00
(For immediate release)
b) For the purchase of materials and equipment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the opening of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Dear Sirs:
This is with reference to your letter of January 21, 1955, regarding the release of your loan
under consideration of P500,000. As stated in our letter of December 22, 1954, the releases
of the loan, if revived, are proposed to be made from time to time, subject to availability of
funds towards the end that the sack factory shall be placed in actual operating status. We
shall be able to act on your request for revised purpose and manner of releases upon
re-appraisal of the securities offered for the loan.
With respect to our requirement that the Department of Agriculture and Natural Resources
certify that the raw materials needed are available in the immediate vicinity and that there is
prospect of increased production thereof to provide adequately the requirements of the
factory, we wish to reiterate that the basis of the original approval is to develop the
manufacture of sacks on the basis of the locally available raw materials. Your statement
that you will have to rely on the importation of jute and your request that we give you
assurance that your company will be able to bring in sufficient jute materials as may be

necessary for the operation of your factory, would not be in line with our principle in
approving the loan.
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the
matter further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955
RFC executed the corresponding deed of cancellation and delivered it to Ramon F. Saura
himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a
mortgage contract, executed on August 6, 1954, over the same property in favor of the
Prudential Bank and Trust Co., under which contract Saura, Inc. had up to December 31 of
the same year within which to pay its obligation on the trust receipt heretofore mentioned. It
appears further that for failure to pay the said obligation the Prudential Bank and Trust Co.
sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the
request of Saura, Inc., the latter commenced the present suit for damages, alleging failure
of RFC (as predecessor of the defendant DBP) to comply with its obligation to release the
proceeds of the loan applied for and approved, thereby preventing the plaintiff from
completing or paying contractual commitments it had entered into, in connection with its jute
mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract
between the parties and that the defendant was guilty of breach thereof. The defendant
pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of action had
prescribed, or that its claim had been waived or abandoned; (2) that there was no perfected
contract; and (3) that assuming there was, the plaintiff itself did not comply with the terms
thereof.
We hold that there was indeed a perfected consensual contract, as recognized in Article
1934 of the Civil Code, which provides:
ART. 1954. An accepted promise to deliver something, by way of commodatum or simple
loan is binding upon the parties, but the commodatum or simple loan itself shall not be
perferted until the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for
a loan of P500,000.00 was approved by resolution of the defendant, and the corresponding
mortgage was executed and registered. But this fact alone falls short of resolving the basic
claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled to
recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the
assumption that the factory to be constructed would utilize locally grown raw materials,
principally kenaf. There is no serious dispute about this. It was in line with such assumption
that when RFC, by Resolution No. 9083 approved on December 17, 1954, restored the loan
to the original amount of P500,000.00. it imposed two conditions, to wit: "(1) that the raw
materials needed by the borrower-corporation to carry out its operation are available in the
immediate vicinity; and (2) that there is prospect of increased production thereof to provide
adequately for the requirements of the factory." The imposition of those conditions was by
no means a deviation from the terms of the agreement, but rather a step in its
implementation. There was nothing in said conditions that contradicted the terms laid down

in RFC Resolution No. 145, passed on January 7, 1954, namely "that the proceeds of
the loan shall be utilized exclusively for the following purposes: for construction of factory
building P250,000.00; for payment of the balance of purchase price of machinery and
equipment P240,900.00; for working capital P9,100.00." Evidently Saura, Inc. realized
that it could not meet the conditions required by RFC, and so wrote its letter of January 21,
1955, stating that local jute "will not be able in sufficient quantity this year or probably next
year," and asking that out of the loan agreed upon the sum of P67,586.09 be released "for
raw materials and labor." This was a deviation from the terms laid down in Resolution No.
145 and embodied in the mortgage contract, implying as it did a diversion of part of the
proceeds of the loan to purposes other than those agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the negotiations which
had been going on for the implementation of the agreement reached an impasse. Saura,
Inc. obviously was in no position to comply with RFC's conditions. So instead of doing so
and insisting that the loan be released as agreed upon, Saura, Inc. asked that the mortgage
be cancelled, which was done on June 15, 1955. The action thus taken by both parties was
in the nature cf mutual desistance what Manresa terms "mutuo disenso" 1 which is a
mode of extinguishing obligations. It is a concept that derives from the principle that since
mutual agreement can create a contract, mutual disagreement by the parties can cause its
extinguishment. 2
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against
any alleged breach of contract by RFC, or even point out that the latter's stand was legally
unjustified. Its request for cancellation of the mortgage carried no reservation of whatever
rights it believed it might have against RFC for the latter's non-compliance. In 1962 it even
applied with DBP for another loan to finance a rice and corn project, which application was
disapproved. It was only in 1964, nine years after the loan agreement had been cancelled
at its own request, that Saura, Inc. brought this action for damages.All these circumstances
demonstrate beyond doubt that the said agreement had been extinguished by mutual
desistance and that on the initiative of the plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to consider and resolve the other
issues raised in the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with
costs against the plaintiff-appellee.
Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ.,
concur.
Makasiar, J., too

[G.R. No. 133632. February 15, 2002]

BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and
ALS MANAGEMENT & DEVELOPMENT CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the Court of
Appeals and its resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate
court affirmed the judgment of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil
Case No. 11831, for foreclosure of mortgage by petitioner BPI Investment Corporation
(BPIIC for brevity) against private respondents ALS Management and Development
Corporation and Antonio K. Litonjua,[1] consolidated with (b) Civil Case No. 52093, for
damages with prayer for the issuance of a writ of preliminary injunction by the private
respondents against said petitioner.
The trial court had held that private respondents were not in default in the payment of
their monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC was
premature and made in bad faith. It awarded private respondents the amount of P300,000
for moral damages, P50,000 for exemplary damages, and P50,000 for attorneys fees and
expenses for litigation. It likewise dismissed the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala
Investment and Development Corporation (AIDC), the predecessor of petitioner BPIIC, for
the construction of a house on his lot in New Alabang Village, Muntinlupa. Said house and
lot were mortgaged to AIDC to secure the loan. Sometime in 1980, Roa sold the house and
lot to private respondents ALS and Antonio Litonjua for P850,000. They paid P350,000 in
cash and assumed the P500,000 balance of Roas indebtedness with AIDC. The latter,
however, was not willing to extend the old interest rate to private respondents and proposed
to grant them a new loan of P500,000 to be applied to Roas debt and secured by the same
property, at an interest rate of 20% per annum and service fee of 1% per annum on the
outstanding principal balance payable within ten years in equal monthly amortization
of P9,996.58 and penalty interest at the rate of 21% per annum per day from the date the
amortization became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed
containing the above stipulations with the provision that payment of the monthly
amortization shall commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC the
sum of P190,601.35. This reduced Roas principal balance to P457,204.90 which, in turn,
was liquidated when BPIIC applied thereto the proceeds of private respondents loan
of P500,000.

On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting

to be what was left of their loan after full payment of Roas loan.
In June 1984, BPIIC instituted foreclosure proceedings against private respondents on
the ground that they failed to pay the mortgage indebtedness which from May 1,
1981 to June 30, 1984, amounted to Four Hundred Seventy Five Thousand Five Hundred
Eighty Five and 31/100 Pesos (P475,585.31). A notice of sheriffs sale was published
on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They
alleged, among others, that they were not in arrears in their payment, but in fact made an
overpayment as of June 30, 1984. They maintained that they should not be made to pay
amortization before the actual release of the P500,000 loan in August and September 1982.
Further, out of the P500,000 loan, only the total amount of P464,351.77 was released to
private respondents. Hence, applying the effects of legal compensation, the balance
of P35,648.23 should be applied to the initial monthly amortization for the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and
52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and
Development Corporation and Antonio K. Litonjua and against BPI Investment Corporation,
holding that the amount of loan granted by BPI to ALS and Litonjua was only in the principal
sum of P464,351.77, with interest at 20% plus service charge of 1% per annum, payable on
equal monthly and successive amortizations at P9,283.83 for ten (10) years or one hundred
twenty (120) months. The amortization schedule attached as Annex A to the Deed of
Mortgage is correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when BPI
caused their publication in a newspaper of general circulation as defaulting debtors, and
therefore orders BPI to pay ALS and Litonjua the following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorneys fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.
Costs against BPI.
SO ORDERED.[2]
Both parties appealed to the Court of Appeals. However, private respondents appeal
was dismissed for non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive
portion reads:
WHEREFORE, finding no error in the appealed decision the same is hereby
AFFIRMED in toto.
SO ORDERED.[3]

In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon
the delivery of the object of the contract. The contract of loan between BPIIC and ALS &
Litonjua was perfected only on September 13, 1982, the date when BPIIC released the
purported balance of the P500,000 loan after deducting therefrom the value of Roas
indebtedness. Thus, payment of the monthly amortization should commence only a month
after the said date, as can be inferred from the stipulations in the contract. This, despite the
express agreement of the parties that payment shall commence on May 1, 1981. From
October 1982 to June 1984, the total amortization due was only P194,960.43. Evidence
showed that private respondents had an overpayment, because as of June 1984, they
already paid a total amount of P201,791.96. Therefore, there was no basis for BPIIC to
extrajudicially foreclose the mortgage and cause the publication in newspapers concerning
private respondents delinquency in the payment of their loan. This fact constituted sufficient
ground for moral damages in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this
petition, where BPIIC submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT
IN THE LIGHT OF THE RULE LAID DOWN IN BONNEVIE VS. COURT OF
APPEALS, 125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND
EXEMPLARY DAMAGES AND ATTORNEYS FEES IN THE FACE OF
IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED TO THE RULE LAID
DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120 SCRA
707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that
because a simple loan is perfected upon the delivery of the object of the contract, the loan
contract in this case was perfected only on September 13, 1982. Petitioner claims that a
contract of loan is a consensual contract, and a loan contract is perfected at the time the
contract of mortgage is executed conformably with our ruling in Bonnevie v. Court of
Appeals, 125 SCRA 122. In the present case, the loan contract was perfected on March 31,
1981, the date when the mortgage deed was executed, hence, the amortization and
interests on the loan should be computed from said date.
Petitioner also argues that while the documents showed that the loan was released only
on August 1982, the loan was actually released on March 31, 1981, when BPIIC issued a
cancellation of mortgage of Frank Roas loan. This finds support in the registration on March
31, 1981 of the Deed of Absolute Sale executed by Roa in favor of ALS, transferring the title
of the property to ALS, and ALS executing the Mortgage Deed in favor of BPIIC. Moreover,
petitioner claims, the delay in the release of the loan should be attributed to private
respondents. As BPIIC only agreed to extend a P500,000 loan, private respondents were
required to reduce Frank Roas loan below said amount. According to petitioner, private
respondents were only able to do so in August 1982.
In their comment, private respondents assert that based on Article 1934 of the Civil
Code,[4] a simple loan is perfected upon the delivery of the object of the contract, hence a
real contract. In this case, even though the loan contract was signed on March 31, 1981, it
was perfected only on September 13, 1982, when the full loan was released to private
respondents.They submit that petitioner misread Bonnevie. To give meaning to Article 1934,
according to private respondents, Bonnevie must be construed to mean that the contract to
extend the loan was perfected on March 31, 1981 but the contract of loan itself was only
perfected upon the delivery of the full loan to private respondents on September 13, 1982.

Private respondents further maintain that even granting, arguendo, that the loan
contract was perfected on March 31, 1981, and their payment did not start a month
thereafter, still no default took place. According to private respondents, a perfected loan
agreement imposes reciprocal obligations, where the obligation or promise of each party is
the consideration of the other party. In this case, the consideration for BPIIC in entering into
the loan contract is the promise of private respondents to pay the monthly amortization. For
the latter, it is the promise of BPIIC to deliver the money. In reciprocal obligations, neither
party incurs in delay if the other does not comply or is not ready to comply in a proper
manner with what is incumbent upon him.Therefore, private respondents conclude, they did
not incur in delay when they did not commence paying the monthly amortization on May 1,
1981, as it was only on September 13, 1982when petitioner fully complied with its
obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but a
real contract. It is perfected only upon the delivery of the object of the contract.[5] Petitioner
misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected
consensual contract falls under the first clause of Article 1934, Civil Code. It is an accepted
promise to deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA
445, petitioner applied for a loan of P500,000 with respondent bank. The latter approved
the application through a board resolution. Thereafter, the corresponding mortgage was
executed and registered. However, because of acts attributable to petitioner, the loan was
not released. Later, petitioner instituted an action for damages. We recognized in this case,
a perfected consensual contract which under normal circumstances could have made the
bank liable for not releasing the loan. However, since the fault was attributable to petitioner
therein, the court did not award it damages.
A perfected consensual contract, as shown above, can give rise to an action for
damages. However, said contract does not constitute the real contract of loan which
requires the delivery of the object of the contract for its perfection and which gives rise to
obligations only on the part of the borrower.[6]
In the present case, the loan contract between BPI, on the one hand, and ALS and
Litonjua, on the other, was perfected only on September 13, 1982, the date of the second
release of the loan. Following the intentions of the parties on the commencement of the
monthly amortization, as found by the Court of Appeals, private respondents obligation to
pay commenced only on October 13, 1982, a month after the perfection of the contract.[7]
We also agree with private respondents that a contract of loan involves a reciprocal
obligation, wherein the obligation or promise of each party is the consideration for that of
the other.[8]As averred by private respondents, the promise of BPIIC to extend and deliver
the loan is upon the consideration that ALS and Litonjua shall pay the monthly amortization
commencing on May 1, 1981, one month after the supposed release of the loan. It is a
basic principle in reciprocal obligations that neither party incurs in delay, if the other does
not comply or is not ready to comply in a proper manner with what is incumbent upon
him.[9] Only when a party has performed his part of the contract can he demand that the
other party also fulfills his own obligation and if the latter fails, default sets in. Consequently,
petitioner could only demand for the payment of the monthly amortization after September
13, 1982 for it was only then when it complied with its obligation under the loan
contract. Therefore, in computing the amount due as of the date when BPIIC extrajudicially
caused the foreclosure of the mortgage, the starting date is October 13, 1982 and not May
1, 1981.

Other points raised by petitioner in connection with the first issue, such as the date of
actual release of the loan and whether private respondents were the cause of the delay in
the release of the loan, are factual. Since petitioner has not shown that the instant case is
one of the exceptions to the basic rule that only questions of law can be raised in a petition
for review under Rule 45 of the Rules of Court,[10] factual matters need not tarry us now. On
these points we are bound by the findings of the appellate and trial courts.
On the second issue, petitioner claims that it should not be held liable for moral and
exemplary damages for it did not act maliciously when it initiated the foreclosure
proceedings. It merely exercised its right under the mortgage contract because private
respondents were irregular in their monthly amortization. It invoked our ruling in Social
Security System vs. Court of Appeals, 120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded by the
Court of Appeals the negligence of the appellant is not so gross as to warrant moral and
temperate damages, except that, said Court reduced those damages by only P5,000.00
instead of eliminating them. Neither can we agree with the findings of both the Trial Court
and respondent Court that the SSS had acted maliciously or in bad faith. The SSS was of
the belief that it was acting in the legitimate exercise of its right under the mortgage contract
in the face of irregular payments made by private respondents and placed reliance on the
automatic acceleration clause in the contract. The filing alone of the foreclosure application
should not be a ground for an award of moral damages in the same way that a clearly
unfounded civil action is not among the grounds for moral damages.
Private respondents counter that BPIIC was guilty of bad faith and should be liable for
said damages because it insisted on the payment of amortization on the loan even before it
was released. Further, it did not make the corresponding deduction in the monthly
amortization to conform to the actual amount of loan released, and it immediately initiated
foreclosure proceedings when private respondents failed to make timely payment.
But as admitted by private respondents themselves, they were irregular in their payment
of monthly amortization. Conformably with our ruling in SSS, we can not properly declare
BPIIC in bad faith. Consequently, we should rule out the award of moral and exemplary
damages.[11]
However, in our view, BPIIC was negligent in relying merely on the entries found in the
deed of mortgage, without checking and correspondingly adjusting its records on the
amount actually released to private respondents and the date when it was released. Such
negligence resulted in damage to private respondents, for which an award of nominal
damages should be given in recognition of their rights which were violated by BPIIC.[12] For
this purpose, the amount of P25,000 is sufficient.
Lastly, as in SSS where we awarded attorneys fees because private respondents were
compelled to litigate, we sustain the award of P50,000 in favor of private respondents as
attorneys fees.
WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its
resolution dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of
damages. The award of moral and exemplary damages in favor of private respondents is
DELETED, but the award to them of attorneys fees in the amount of P50,000 is UPHELD.
Additionally, petitioner is ORDERED to pay private respondents P25,000 as nominal
damages. Costs against petitioner.
SO ORDERED.

Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

G.R. No. L-49101 October 24, 1983

RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF
COMMERCE, respondents.
Edgardo I. De Leon for petitioners.
Siguion Reyna, Montecillo & Associates for private respondent.

GUERRERO, J:
Petition for review on certiorari seeking the reversal of the decision of the defunct Court of
Appeals, now Intermediate Appellate Court, in CA-G.R. No. 61193-R, entitled "Honesto
Bonnevie vs. Philippine Bank of Commerce, et al.," promulgated August 11, 1978 1 as well
as the Resolution denying the motion for reconsideration.
The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with the Court of
First Instance of Rizal against respondent Philippine Bank of Commerce sought the
annulment of the Deed of Mortgage dated December 6, 1966 executed in favor of the
Philippine Bank of Commerce by the spouses Jose M. Lozano and Josefa P. Lozano as
well as the extrajudicial foreclosure made on September 4, 1968. It alleged among others
that (a) the Deed of Mortgage lacks consideration and (b) the mortgage was executed by
one who was not the owner of the mortgaged property. It further alleged that the property in
question was foreclosed pursuant to Act No. 3135 as amended, without, however,
complying with the condition imposed for a valid foreclosure. Granting the validity of the
mortgage and the extrajudicial foreclosure, it finally alleged that respondent Bank should

have accepted petitioner's offer to redeem the property under the principle of equity said
justice.
On the other hand, the answer of defendant Bank, now private respondent herein,
specifically denied most of the allegations in the complaint and raised the following
affirmative defenses: (a) that the defendant has not given its consent, much less the
requisite written consent, to the sale of the mortgaged property to plaintiff and the
assumption by the latter of the loan secured thereby; (b) that the demand letters and notice
of foreclosure were sent to Jose Lozano at his address; (c) that it was notified for the first
time about the alleged sale after it had foreclosed the Lozano mortgage; (d) that the law on
contracts requires defendant's consent before Jose Lozano can be released from his
bilateral agreement with the former and doubly so, before plaintiff may be substituted for
Jose Lozano and Alfonso Lim; (e) that the loan of P75,000.00 which was secured by
mortgage, after two renewals remain unpaid despite countless reminders and demands; of
that the property in question remained registered in the name of Jose M. Lozano in the land
records of Rizal and there was no entry, notation or indication of the alleged sale to plaintiff;
(g) that it is an established banking practice that payments against accounts need not be
personally made by the debtor himself; and (h) that it is not true that the mortgage, at the
time of its execution and registration, was without consideration as alleged because the
execution and registration of the securing mortgage, the signing and delivery of the
promissory note and the disbursement of the proceeds of the loan are mere implementation
of the basic consensual contract of loan.
After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul SV Bonnevie
filed a motion for intervention. The intervention was premised on the Deed of Assignment
executed by petitioner Honesto Bonnevie in favor of petitioner Raoul SV Bonnevie covering
the rights and interests of petitioner Honesto Bonnevie over the subject property. The
intervention was ultimately granted in order that all issues be resolved in one proceeding to
avoid multiplicity of suits.
On March 29, 1976, the lower court rendered its decision, the dispositive portion of which
reads as follows:
WHEREFORE, all the foregoing premises considered, judgment is hereby rendered
dismissing the complaint with costs against the plaintiff and the intervenor.
After the motion for reconsideration of the lower court's decision was denied, petitioners
appealed to respondent Court of Appeals assigning the following errors:
1. The lower court erred in not finding that the real estate mortgage executed by Jose
Lozano was null and void;
2. The lower court erred in not finding that the auction sale decide on August 19, 1968 was
null and void;
3. The lower court erred in not allowing the plaintiff and the intervenor to redeem the
property;
4. The lower court erred in not finding that the defendant acted in bad faith; and
5. The lower court erred in dismissing the complaint.

On August 11, 1978, the respondent court promulgated its decision affirming the decision of
the lower court, and on October 3. 1978 denied the motion for reconsideration. Hence, the
present petition for review.
The factual findings of respondent Court of Appeals being conclusive upon this Court, We
hereby adopt the facts found the trial court and found by the Court of Appeals to be
consistent with the evidence adduced during trial, to wit:
It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the owners of
the property which they mortgaged on December 6, 1966, to secure the payment of the
loan in the principal amount of P75,000.00 they were about to obtain from
defendant-appellee Philippine Bank of Commerce; that on December 8, 1966, executed in
favor of plaintiff-appellant the Deed of Sale with Mortgage ,, for and in consideration of the
sum of P100,000.00, P25,000.00 of which amount being payable to the Lozano spouses
upon the execution of the document, and the balance of P75,000.00 being payable to
defendant- appellee; that on December 6, 1966, when the mortgage was executed by the
Lozano spouses in favor of defendant-appellee, the loan of P75,000.00 was not yet
received them, as it was on December 12, 1966 when they and their co-maker Alfonso Lim
signed the promissory note for that amount; that from April 28, 1967 to July 12, 1968,
plaintiff-appellant made payments to defendant-appellee on the mortgage in the total
amount of P18,944.22; that on May 4, 1968, plaintiff-appellant assigned all his rights under
the Deed of Sale with Assumption of Mortgage to his brother, intervenor Raoul Bonnevie;
that on June 10, 1968, defendant-appellee applied for the foreclosure of the mortgage, and
notice of sale was published in the Luzon Weekly Courier on June 30, July 7, and July 14,
1968; that auction sale was conducted on August 19, 1968, and the property was sold to
defendant-appellee for P84,387.00; and that offers from plaintiff-appellant to repurchase the
property failed, and on October 9, 1969, he caused an adverse claim to be annotated on the
title of the property. (Decision of the Court of Appeals, p. 5).
Presented for resolution in this review are the following issues:
I
Whether the real estate mortgage executed by the spouses Lozano in favor of respondent
bank was validly and legally executed.
II
Whether the extrajudicial foreclosure of the said mortgage was validly and legally effected.
III
Whether petitioners had a right to redeem the foreclosed property.
IV
Granting that petitioners had such a right, whether respondent was justified in refusing their
offers to repurchase the property.
As clearly seen from the foregoing issues raised, petitioners' course of action is three-fold.
They primarily attack the validity of the mortgage executed by the Lozano spouses in favor
of respondent Bank. Next, they attack the validity of the extrajudicial foreclosure and finally,

appeal to justice and equity. In attacking the validity of the deed of mortgage, they
contended that when it was executed on December 6, 1966, there was yet no principal
obligation to secure as the loan of P75,000.00 was not received by the Lozano spouses "So
much so that in the absence of a principal obligation, there is want of consideration in the
accessory contract, which consequently impairs its validity and fatally affects its very
existence." (Petitioners' Brief, par. 1, p. 7).
This contention is patently devoid of merit. From the recitals of the mortgage deed itself, it is
clearly seen that the mortgage deed was executed for and on condition of the loan granted
to the Lozano spouses. The fact that the latter did not collect from the respondent Bank the
consideration of the mortgage on the date it was executed is immaterial. A contract of loan
being a consensual contract, the herein contract of loan was perfected at the same time the
contract of mortgage was executed. The promissory note executed on December 12, 1966
is only an evidence of indebtedness and does not indicate lack of consideration of the
mortgage at the time of its execution.
Petitioners also argued that granting the validity of the mortgage, the subsequent renewals
of the original loan, using as security the same property which the Lozano spouses had
already sold to petitioners, rendered the mortgage null and void,
This argument failed to consider the provision 2 of the contract of mortgage which prohibits
the sale, disposition of, mortgage and encumbrance of the mortgaged properties, without
the written consent of the mortgagee, as well as the additional proviso that if in spite of said
stipulation, the mortgaged property is sold, the vendee shall assume the mortgage in the
terms and conditions under which it is constituted. These provisions are expressly made
part and parcel of the Deed of Sale with Assumption of Mortgage.
Petitioners admit that they did not secure the consent of respondent Bank to the sale with
assumption of mortgage. Coupled with the fact that the sale/assignment was not registered
so that the title remained in the name of the Lozano spouses, insofar as respondent Bank
was concerned, the Lozano spouses could rightfully and validly mortgage the property.
Respondent Bank had every right to rely on the certificate of title. It was not bound to go
behind the same to look for flaws in the mortgagor's title, the doctrine of innocent purchaser
for value being applicable to an innocent mortgagee for value. (Roxas vs. Dinglasan, 28
SCRA 430; Mallorca vs. De Ocampo, 32 SCRA 48). Another argument for the respondent
Bank is that a mortgage follows the property whoever the possessor may be and subjects
the fulfillment of the obligation for whose security it was constituted. Finally, it can also be
said that petitioners voluntarily assumed the mortgage when they entered into the Deed of
Sale with Assumption of Mortgage. They are, therefore, estopped from impugning its
validity whether on the original loan or renewals thereof.
Petitioners next assail the validity and legality of the extrajudicial foreclosure on the
following grounds:
a) petitioners were never notified of the foreclosure sale.
b) The notice of auction sale was not posted for the period required by law.
c) publication of the notice of auction sale in the Luzon Weekly Courier was not in
accordance with law.

The lack of notice of the foreclosure sale on petitioners is a flimsy ground. Respondent
Bank not being a party to the Deed of Sale with Assumption of Mortgage, it can validly claim
that it was not aware of the same and hence, it may not be obliged to notify petitioners.
Secondly, petitioner Honesto Bonnevie was not entitled to any notice because as of May 14,
1968, he had transferred and assigned all his rights and interests over the property in favor
of intervenor Raoul Bonnevie and respondent Bank not likewise informed of the same. For
the same reason, Raoul Bonnevie is not entitled to notice. Most importantly, Act No. 3135
does not require personal notice on the mortgagor. The requirement on notice is that:
Section 3. Notice shall be given by posting notices of the sale for not less than twenty days
in at least three public places of the municipality or city where the property is situated, and if
such property is worth more than four hundred pesos, such notice shall also be published
once a week for at least three consecutive weeks in a newspaper of general circulation in
the municipality or city
In the case at bar, the notice of sale was published in the Luzon Courier on June 30, July 7
and July 14, 1968 and notices of the sale were posted for not less than twenty days in at
least three (3) public places in the Municipality where the property is located. Petitioners
were thus placed on constructive notice.
The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is inapplicable because
said case involved a judicial foreclosure and the sale to the vendee of the mortgaged
property was duly registered making the mortgaged privy to the sale.
As regards the claim that the period of publication of the notice of auction sale was not in
accordance with law, namely: once a week for at least three consecutive weeks, the Court
of Appeals ruled that the publication of notice on June 30, July 7 and July 14, 1968 satisfies
the publication requirement under Act No. 3135 notwithstanding the fact that June 30 to
July 14 is only 14 days. We agree. Act No. 3135 merely requires that such notice shall be
published once a week for at least three consecutive weeks." Such phrase, as interpreted
by this Court in Basa vs. Mercado, 61 Phil. 632, does not mean that notice should be
published for three full weeks.
The argument that the publication of the notice in the "Luzon Weekly Courier" was not in
accordance with law as said newspaper is not of general circulation must likewise be
disregarded. The affidavit of publication, executed by the Publisher, business/advertising
manager of the Luzon Weekly Courier, stares that it is "a newspaper of general circulation
in ... Rizal, and that the Notice of Sheriff's sale was published in said paper on June 30, July
7 and July 14, 1968. This constitutes prima facie evidence of compliance with the requisite
publication. Sadang vs. GSIS, 18 SCRA 491).
To be a newspaper of general circulation, it is enough that "it is published for the
dissemination of local news and general information; that it has a bona fide subscription list
of paying subscribers; that it is published at regular intervals." (Basa vs. Mercado, 61 Phil.
632). The newspaper need not have the largest circulation so long as it is of general
circulation. Banta vs. Pacheco, 74 Phil. 67). The testimony of three witnesses that they do
read the Luzon Weekly Courier is no proof that said newspaper is not a newspaper of
general circulation in the province of Rizal.
Whether or not the notice of auction sale was posted for the period required by law is a
question of fact. It can no longer be entertained by this Court. (see Reyes, et al. vs. CA, et

al., 107 SCRA 126). Nevertheless, the records show that copies of said notice were posted
in three conspicuous places in the municipality of Pasig, Rizal namely: the Hall of Justice,
the Pasig Municipal Market and Pasig Municipal Hall. In the same manner, copies of said
notice were also posted in the place where the property was located, namely: the Municipal
Building of San Juan, Rizal; the Municipal Market and on Benitez Street. The following
statement of Atty. Santiago Pastor, head of the legal department of respondent bank,
namely:
Q How many days were the notices posted in these two places, if you know?
A We posted them only once in one day. (TSN, p. 45, July 25, 1973)
is not a sufficient countervailing evidence to prove that there was no compliance with the
posting requirement in the absence of proof or even of allegation that the notices were
removed before the expiration of the twenty- day period. A single act of posting (which may
even extend beyond the period required by law) satisfies the requirement of law. The
burden of proving that the posting requirement was not complied with is now shifted to the
one who alleges non-compliance.
On the question of whether or not the petitioners had a right to redeem the property, We
hold that the Court of Appeals did not err in ruling that they had no right to redeem. No
consent having been secured from respondent Bank to the sale with assumption of
mortgage by petitioners, the latter were not validly substituted as debtors. In fact, their rights
were never recorded and hence, respondent Bank is charged with the obligation to
recognize the right of redemption only of the Lozano spouses. But even granting that as
purchaser or assignee of the property, as the case may be, the petitioners had acquired a
right to redeem the property, petitioners failed to exercise said right within the period
granted by law. Thru certificate of sale in favor of appellee was registered on September 2,
1968 and the one year redemption period expired on September 3, 1969. It was not until
September 29, 1969 that petitioner Honesto Bonnevie first wrote respondent and offered to
redeem the property. Moreover, on September 29, 1969, Honesto had at that time already
transferred his rights to intervenor Raoul Bonnevie.
On the question of whether or not respondent Court of Appeals erred in holding that
respondent Bank did not act in bad faith, petitioners rely on Exhibit "B" which is the letter of
lose Lozano to respondent Bank dated December 8, 1966 advising the latter that Honesto
Bonnevie was authorized to make payments for the amount secured by the mortgage on
the subject property, to receive acknowledgment of payments, obtain the Release of the
Mortgage after full payment of the obligation and to take delivery of the title of said property.
On the assumption that the letter was received by respondent Bank, a careful reading of the
same shows that the plaintiff was merely authorized to do acts mentioned therein and does
not mention that petitioner is the new owner of the property nor request that all
correspondence and notice should be sent to him.
The claim of appellants that the collection of interests on the loan up to July 12, 1968
extends the maturity of said loan up to said date and accordingly on June 10, 1968 when
defendant applied for the foreclosure of the mortgage, the loan was not yet due and
demandable, is totally incorrect and misleading. The undeniable fact is that the loan
matured on December 26, 1967. On June 10, 1968, when respondent Bank applied for
foreclosure, the loan was already six months overdue. Petitioners' payment of interest on
July 12, 1968 does not thereby make the earlier act of respondent Bank inequitous nor

does it ipso facto result in the renewal of the loan. In order that a renewal of a loan may be
effected, not only the payment of the accrued interest is necessary but also the payment of
interest for the proposed period of renewal as well. Besides, whether or not a loan may be
renewed does not solely depend on the debtor but more so on the discretion of the bank.
Respondent Bank may not be, therefore, charged of bad faith.
WHEREFORE, the appeal being devoid of merit, the decision of the Court of Appeals is
hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
Aquino, J., concur.
Makasiar (Chairman), Abad Santos and Escolin, JJ., concurs in the result.
Concepcion J J., took no part.
De Castro, J., is on leave

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T.
CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his
capacity as statutory receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the decision of the
Court of Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the
decision dated February 15, 1972 of the Court of First Instance of Agusan, which dismissed
the petition of respondent Sulpicio M. Tolentino for injunction, specific performance or
rescission, and damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal
department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as
a security for the loan, executed on the same day a real estate mortgage over his
100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305,
and which mortgage was annotated on the said title the next day. The approved loan
application called for a lump sum P80,000.00 loan, repayable in semi-annual installments
for a period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino

shall use the loan proceeds solely as an additional capital to develop his other property into
a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by
the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note
for P17,000.00 at 12% annual interest, payable within 3 years from the date of execution of
the contract at semi-annual installments of P3,459.00 (p. 64, rec.). An advance interest for
the P80,000.00 loan covering a 6-month period amounting to P4,800.00 was deducted from
the partial release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M.
Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet
available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its
vice-president and treasurer, promised repeatedly the release of the P63,000.00 balance (p.
113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings
Bank was suffering liquidity problems, issued Resolution No. 1049, which provides:
In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit
liabilities, the Board, by unanimous vote, decided as follows:
1) To prohibit the bank from making new loans and investments [except investments in
government securities] excluding extensions or renewals of already approved loans,
provided that such extensions or renewals shall be subject to review by the Superintendent
of Banks, who may impose such limitations as may be necessary to insure correction of the
bank's deficiency as soon as possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put
up the required capital to restore its solvency, issued Resolution No. 967 which prohibited
Island Savings Bank from doing business in the Philippines and instructed the Acting
Superintendent of Banks to take charge of the assets of Island Savings Bank (pp. 48-49,
rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00
covered by the promissory note, filed an application for the extra-judicial foreclosure of the
real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff
scheduled the auction for January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of
Agusan for injunction, specific performance or rescission and damages with preliminary
injunction, alleging that since Island Savings Bank failed to deliver the P63,000.00 balance
of the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings
Bank to deliver the P63,000.00 with interest of 12% per annum from April 28, 1965, and if
said balance cannot be delivered, to rescind the real estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a
temporary restraining order enjoining the Island Savings Bank from continuing with the
foreclosure of the mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the
dismissal of the petition of Sulpicio M. Tolentino and the setting aside of the restraining
order, filed by the Central Bank and by the Acting Superintendent of Banks (pp. 65-76,
rec.).
On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank
the amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the
restraining order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified
the Court of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's
petition for specific performance, but it ruled that Island Savings Bank can neither foreclose
the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory
note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate
mortgage be foreclosed to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan
agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations,
the obligation or promise of each party is the consideration for that of the other (Penaco vs.
Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when
one party has performed or is ready and willing to perform his part of the contract, the other
party who has not performed or is not ready and willing to perform incurs in delay (Art. 1169
of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the
obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M.
Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to
pay the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish
the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on
April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central
Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank
from doing further business. Such prohibition made it legally impossible for Island Savings
Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary
Board to take over insolvent banks for the protection of the public is recognized by Section
29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in
question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of
Island Savings Bank in complying with its obligation of releasing the P63,000.00 balance
because said resolution merely prohibited the Bank from making new loans and
investments, and nowhere did it prohibit island Savings Bank from releasing the balance of
loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill an
engagement does not discharge the obligation of the contract, nor does it constitute any

defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39
Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an excuse for the
non-fulfillment of an obligation but 'instead it is taken as a breach of the contract by him (vol.
17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted
interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month
period cannot be taken as a waiver of his right to collect the P63,000.00 balance. The act of
Island Savings Bank, in asking the advance interest for 6 months on the supposed
P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00
loan was released. A person cannot be legally charged interest for a non-existing debt.
Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was an exercise of
his right to it, which right exist independently of his right to demand the completion of the
P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the
exercise of the other.
The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral
cannot exempt it from complying with its reciprocal obligation to furnish the entire
P80,000.00 loan. 'This Court previously ruled that bank officials and employees are
expected to exercise caution and prudence in the discharge of their functions (Rural Bank
of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the bank's officials
and employees that before they approve the loan application of their customers, they must
investigate the existence and evaluation of the properties being offered as a loan security.
The recent rush of events where collaterals for bank loans turn out to be non-existent or
grossly over-valued underscore the importance of this responsibility. The mere reliance by
bank officials and employees on their customer's representation regarding the loan
collateral being offered as loan security is a patent non-performance of this responsibility. If
ever bank officials and employees totally reIy on the representation of their customers as to
the valuation of the loan collateral, the bank shall bear the risk in case the collateral turn out
to be over-valued. The representation made by the customer is immaterial to the bank's
responsibility to conduct its own investigation. Furthermore, the lower court, on objections
of' Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on the alleged
over-valuation because of their failure to raise the same in their pleadings (pp. 198-199,
t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by the Rules of Court, Section
2, Rule 9, which states that "defenses and objections not pleaded either in a motion to
dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same
issue before the Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose
between specific performance or rescission with damages in either case. But since Island
Savings Bank is now prohibited from doing further business by Monetary Board Resolution
No. 967, WE cannot grant specific performance in favor of Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for
the P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar
as such amount is concerned, as there is no doubt that the bank failed to give the
P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino
accepted and executed a promissory note to cover it, the bank was deemed to have
complied with its reciprocal obligation to furnish a P17,000.00 loan. The promissory note
gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it

falls due. His failure to pay the overdue amortizations under the promissory note made him
a party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If there is
a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island
Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of
P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan
because he cannot possibly be in default as there was no date for him to perform his
reciprocal obligation to pay.
Since both parties were in default in the performance of their respective reciprocal
obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the
entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his
P17,000.00 debt within 3 years as stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of
their reciprocal obligations, the liability of the first infractor shall be equitably tempered by
the courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the
entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of
penalties and surcharges, for not paying his overdue P17,000.00 debt. The liability of
Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be included in offsetting
the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use of
the P17,000.00, it is just that he should account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same as that of
the principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the
consideration of his obligation to pay is the existence of a debt. Thus, in the accessory
contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage
is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art,
2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no
consideration was then in existence, as there was no debt yet because Island Savings Bank
had not made any release on the loan, does not make the real estate mortgage void for lack
of consideration. It is not necessary that any consideration should pass at the time of the
execution of the contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt
may either be a prior or subsequent matter. But when the consideration is subsequent to
the mortgage, the mortgage can take effect only when the debt secured by it is created as a
binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed.,
Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration, the
mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol.
172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually
owing to the holder of the mortgage is less than the sum named in the mortgage, the
mortgage cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co.
vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan,
the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent.
P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100
hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the

remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25 hectares
is more than sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil
Code is inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be divided among the
successors in interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.
Neither can the creditor's heir who have received his share of the debt return the pledge or
cancel the mortgage, to the prejudice of other heirs who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted
presupposes several heirs of the debtor or creditor which does not obtain in this case.
Hence, the rule of indivisibility of a mortgage cannot apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11,
1977 IS HEREBY MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN
PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12%
INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22,
1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22,
1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE
COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL
INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY
DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF
SULPICIO M. TOLENTINO.
NO COSTS. SO ORDERED.
Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.
Aquino (Chairman) and Abad Santos, JJ., took no part.
G.R. No. L-17474

October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V.
Bagtas, petitioner-appellant.

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

Office of the Solicitor General for plaintiff-appellee.
PADILLA, J.:
The Court of Appeals certified this case to this Court because only questions of law are
raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the
Bureau of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a
Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May
1948 to 7 May 1949 for breeding purposes subject to a government charge of breeding fee
of 10% of the book value of the bulls. Upon the expiration on 7 May 1949 of the contract,
the borrower asked for a renewal for another period of one year. However, the Secretary of
Agriculture and Natural Resources approved a renewal thereof of only one bull for another
year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25
March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the
value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value
with a deduction of yearly depreciation to be approved by the Auditor General. On 19
October 1950 the Director of Animal Industry advised him that the book value of the three
bulls could not be reduced and that they either be returned or their book value paid not later
than 31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to
return them. So, on 20 December 1950 in the Court of First Instance of Manila the Republic
of the Philippines commenced an action against him praying that he be ordered to return
the three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the
unpaid breeding fee in the sum of P199.62, both with interests, and costs; and that other
just and equitable relief be granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered
that because of the bad peace and order situation in Cagayan Valley, particularly in the
barrio of Baggao, and of the pending appeal he had taken to the Secretary of Agriculture
and Natural Resources and the President of the Philippines from the refusal by the Director
of Animal Industry to deduct from the book value of the bulls corresponding yearly
depreciation of 8% from the date of acquisition, to which depreciation the Auditor General
did not object, he could not return the animals nor pay their value and prayed for the
dismissal of the complaint.
After hearing, on 30 July 1956 the trial court render judgment
. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three
bulls plus the breeding fees in the amount of P626.17 with interest on both sums of (at) the
legal rate from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court
granted on 18 October and issued on 11 November 1958. On 2 December 1958 granted an
ex-parte motion filed by the plaintiff on November 1958 for the appointment of a special
sheriff to serve the writ outside Manila. Of this order appointing a special sheriff, on 6
December 1958, Felicidad M. Bagtas, the surviving spouse of the defendant Jose Bagtas
who died on 23 October 1951 and as administratrix of his estate, was notified. On 7 January
1959 she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were
returned to the Bureau Animal of Industry and that sometime in November 1958 the third

bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda
Felicidad Intal, and praying that the writ of execution be quashed and that a writ of
preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her motion.
On 6 February 1959 she filed a reply thereto. On the same day, 6 February, the Court
denied her motion. Hence, this appeal certified by the Court of Appeals to this Court as
stated at the beginning of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late
defendant, returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of
the NVB Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by
a memorandum receipt signed by the latter (Exhibit 2). That is why in its objection of 31
January 1959 to the appellant's motion to quash the writ of execution the appellee prays
"that another writ of execution in the sum of P859.53 be issued against the estate of
defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which
already had been returned to and received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the
Huk in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao,
Cagayan, where the animal was kept, and that as such death was due to force majeure she
is relieved from the duty of returning the bull or paying its value to the appellee. The
contention is without merit. The loan by the appellee to the late defendant Jose V. Bagtas of
the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May
1949, later on renewed for another year as regards one bull, was subject to the payment by
the borrower of breeding fee of 10% of the book value of the bulls. The appellant contends
that the contract was commodatum and that, for that reason, as the appellee retained
ownership or title to the bull it should suffer its loss due to force majeure. A contract
of commodatum is essentially gratuitous.1 If the breeding fee be considered a
compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil
Code the lessee would be subject to the responsibilities of a possessor in bad faith,
because she had continued possession of the bull after the expiry of the contract. And even
if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil
Code provides that a bailee in a contract of commodatum
. . . is liable for loss of the things, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event;
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull
was renewed for another period of one year to end on 8 May 1950. But the appellant kept
and used the bull until November 1953 when during a Huk raid it was killed by stray bullets.
Furthermore, when lent and delivered to the deceased husband of the appellant the bulls
had each an appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at
P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull
due to fortuitous event the late husband of the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the return of the
bull or the payment of its value being a money claim should be presented or filed in the
intestate proceedings of the defendant who died on 23 October 1951, is not altogether

without merit. However, the claim that his civil personality having ceased to exist the trial
court lost jurisdiction over the case against him, is untenable, because section 17 of Rule 3
of the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the court shall order, upon
proper notice, the legal representative of the deceased to appear and to be substituted for
the deceased, within a period of thirty (30) days, or within such time as may be granted. . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply with
section 16 of Rule 3 which provides that
Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the
court promptly of such death . . . and to give the name and residence of the executory
administrator, guardian, or other legal representative of the deceased . . . .
The notice by the probate court and its publication in the Voz de Manila that Felicidad M.
Bagtas had been issue letters of administration of the estate of the late Jose Bagtas and
that "all persons having claims for monopoly against the deceased Jose V. Bagtas, arising
from contract express or implied, whether the same be due, not due, or contingent, for
funeral expenses and expenses of the last sickness of the said decedent, and judgment for
monopoly against him, to file said claims with the Clerk of this Court at the City Hall Bldg.,
Highway 54, Quezon City, within six (6) months from the date of the first publication of this
order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed
administratrix of the estate of the said deceased," is not a notice to the court and the
appellee who were to be notified of the defendant's death in accordance with the
above-quoted rule, and there was no reason for such failure to notify, because the attorney
who appeared for the defendant was the same who represented the administratrix in the
special proceedings instituted for the administration and settlement of his estate. The
appellee or its attorney or representative could not be expected to know of the death of the
defendant or of the administration proceedings of his estate instituted in another court that if
the attorney for the deceased defendant did not notify the plaintiff or its attorney of such
death as required by the rule.
As the appellant already had returned the two bulls to the appellee, the estate of the late
defendant is only liable for the sum of P859.63, the value of the bull which has not been
returned to the appellee, because it was killed while in the custody of the administratrix of
his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959
to the motion filed on 7 January 1959 by the appellant for the quashing of the writ of
execution.
Special proceedings for the administration and settlement of the estate of the deceased
Jose V. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the
money judgment rendered in favor of the appellee cannot be enforced by means of a writ of
execution but must be presented to the probate court for payment by the appellant, the
administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement
as to costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon,
Regala and Makalintal, JJ., concur.
Barrera, J., concurs in the result.

G.R. No. 80294-95 September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN
VALDEZ, respondents.
Valdez, Ereso, Polido & Associates for petitioner.
Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.
Jaime G. de Leon for the Heirs of Egmidio Octaviano.
Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:
The principal issue in this case is whether or not a decision of the Court of Appeals
promulgated a long time ago can properly be considered res judicata by respondent Court
of Appeals in the present two cases between petitioner and two private respondents.
Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the
Ninth Division of Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No.
3607 (419)] and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for Recovery of
Possession, which affirmed the Decision of the Honorable Nicodemo T. Ferrer, Judge of the
Regional Trial Court of Baguio and Benguet in Civil Case No. 3607 (419) and Civil Case No.
3655 (429), with the dispositive portion as follows:
WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar
Apostolic of the Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to the
plaintiffs. Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set of plaintiffs, the
Heirs of Egmidio Octaviano (Leonardo Valdez, et al.). For lack or insufficiency of evidence,
the plaintiffs' claim or damages is hereby denied. Said defendant is ordered to pay costs. (p.
36, Rollo)
Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial
court's conclusions that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R.
No. 38830-R, in the two cases affirmed by the Supreme Court, touched on the ownership of
lots 2 and 3 in question; that the two lots were possessed by the predecessors-in-interest of
private respondents under claim of ownership in good faith from 1906 to 1951; that
petitioner had been in possession of the same lots as bailee in commodatum up to 1951,
when petitioner repudiated the trust and when it applied for registration in 1962; that
petitioner had just been in possession as owner for eleven years, hence there is no
possibility of acquisitive prescription which requires 10 years possession with just title and
30 years of possession without; that the principle of res judicata on these findings by the
Court of Appeals will bar a reopening of these questions of facts; and that those facts may
no longer be altered.
Petitioner's motion for reconsideation of the respondent appellate court's Decision in the
two aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied.

The facts and background of these cases as narrated by the trail court are as follows
... The documents and records presented reveal that the whole controversy started when
the defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed
with the Court of First Instance of Baguio Benguet on September 5, 1962 an application for
registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La
Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of the Catholic Church
building, convents, high school building, school gymnasium, school dormitories, social hall,
stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of Egmidio
Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting
ownership and title thereto. After trial on the merits, the land registration court promulgated
its Decision, dated November 17, 1965, confirming the registrable title of VICAR to Lots 1, 2,
3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of
Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607) appealed the decision of
the land registration court to the then Court of Appeals, docketed as CA-G.R. No. 38830-R.
The Court of Appeals rendered its decision, dated May 9, 1977, reversing the decision of
the land registration court and dismissing the VICAR's application as to Lots 2 and 3, the
lots claimed by the two sets of oppositors in the land registration case (and two sets of
plaintiffs in the two cases now at bar), the first lot being presently occupied by the convent
and the second by the women's dormitory and the sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court
of Appeals to order the registration of Lot 3 in the names of the Heirs of Egmidio Octaviano,
and on May 17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed their motion for
reconsideration praying that both Lots 2 and 3 be ordered registered in the names of the
Heirs of Juan Valdez and Pacita Valdez. On August 12,1977, the Court of Appeals denied
the motion for reconsideration filed by the Heirs of Juan Valdez on the ground that there
was "no sufficient merit to justify reconsideration one way or the other ...," and likewise
denied that of the Heirs of Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the
decision of the Court of Appeals dismissing his (its) application for registration of Lots 2 and
3, docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic of the Mountain
Province vs. Court of Appeals and Heirs of Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for reconsideration the Heirs of Juan
Valdez and Pacita Valdez, on September 8, 1977, filed with the Supreme Court a petition
for review, docketed as G.R. No. L-46872, entitled, Heirs of Juan Valdez and Pacita Valdez
vs. Court of Appeals, Vicar, Heirs of Egmidio Octaviano and Annable O. Valdez.
On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of
VICAR on the one hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for
lack of merit. Upon the finality of both Supreme Court resolutions in G.R. No. L-46832 and
G.R. No. L- 46872, the Heirs of Octaviano filed with the then Court of First Instance of
Baguio, Branch II, a Motion For Execution of Judgment praying that the Heirs of Octaviano
be placed in possession of Lot 3. The Court, presided over by Hon. Salvador J. Valdez, on
December 7, 1978, denied the motion on the ground that the Court of Appeals decision in
CA-G.R. No. 38870 did not grant the Heirs of Octaviano any affirmative relief.

On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petitioner for
certiorari and mandamus, docketed as CA-G.R. No. 08890-R, entitled Heirs of Egmidio
Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its decision dated May 16, 1979,
the Court of Appeals dismissed the petition.
It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed
Civil Case No. 3607 (419) on July 24, 1979, for recovery of possession of Lot 3; and the
Heirs of Juan Valdez filed Civil Case No. 3655 (429) on September 24, 1979, likewise for
recovery of possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano
presented one (1) witness, Fructuoso Valdez, who testified on the alleged ownership of the
land in question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano (Exh. C ); his
written demand (Exh. BB-4 ) to defendant Vicar for the return of the land to them; and the
reasonable rentals for the use of the land at P10,000.00 per month. On the other hand,
defendant Vicar presented the Register of Deeds for the Province of Benguet, Atty. Nicanor
Sison, who testified that the land in question is not covered by any title in the name of
Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed with the
testimony of Mons.William Brasseur when the plaintiffs admitted that the witness if called to
the witness stand, would testify that defendant Vicar has been in possession of Lot 3, for
seventy-five (75) years continuously and peacefully and has constructed permanent
structures thereon.
In Civil Case No. 3655, the parties admitting that the material facts are not in dispute,
submitted the case on the sole issue of whether or not the decisions of the Court of Appeals
and the Supreme Court touching on the ownership of Lot 2, which in effect declared the
plaintiffs the owners of the land constitute res judicata.
In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up
the defense of ownership and/or long and continuous possession of the two lots in question
since this is barred by prior judgment of the Court of Appeals in CA-G.R. No. 038830-R
under the principle of res judicata. Plaintiffs contend that the question of possession and
ownership have already been determined by the Court of Appeals (Exh. C, Decision,
CA-G.R. No. 038830-R) and affirmed by the Supreme Court (Exh. 1, Minute Resolution of
the Supreme Court). On his part, defendant Vicar maintains that the principle of res
judicata would not prevent them from litigating the issues of long possession and ownership
because the dispositive portion of the prior judgment in CA-G.R. No. 038830-R merely
dismissed their application for registration and titling of lots 2 and 3. Defendant Vicar
contends that only the dispositive portion of the decision, and not its body, is the controlling
pronouncement of the Court of Appeals. 2
The alleged errors committed by respondent Court of Appeals according to petitioner are as
follows:
1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE
ACQUIRED BY PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;
3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3
FROM VALDEZ AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER
OWNERS WERE VALDEZ AND OCTAVIANO;

4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS

WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT
PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT
APPLICATIONS AND THE PREDECESSORS OF PRIVATE RESPONDENTS ALREADY
HAD FREE PATENT APPLICATIONS SINCE 1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951
AND JUST TITLE IS A PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO
ART. 1129 OF THE CIVIL CODE FOR ORDINARY ACQUISITIVE PRESCRIPTION OF 10
YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R.
NO. 038830 WAS AFFIRMED BY THE SUPREME COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON
OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR
PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF
OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2
AND 3 MERELY AS BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN
FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD
FAITH WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED
BY THE FINALITY AND CONCLUSIVENESS OF THE DECISION IN CA G.R. NO.
038830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and
05149, when it clearly held that it was in agreement with the findings of the trial court that
the Decision of the Court of Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the
question of ownership of Lots 2 and 3, declared that the said Court of Appeals Decision
CA-G.R. No. 38830-R) did not positively declare private respondents as owners of the land,
neither was it declared that they were not owners of the land, but it held that the
predecessors of private respondents were possessors of Lots 2 and 3, with claim of
ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower in
commodatum up to 1951, when it repudiated the trust by declaring the properties in its
name for taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 1962,
it had been in possession in concept of owner only for eleven years. Ordinary acquisitive
prescription requires possession for ten years, but always with just title. Extraordinary
acquisitive prescription requires 30 years. 4
On the above findings of facts supported by evidence and evaluated by the Court of
Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We see no error in respondent
appellate court's ruling that said findings are res judicata between the parties. They can no
longer be altered by presentation of evidence because those issues were resolved with
finality a long time ago. To ignore the principle of res judicata would be to open the door to
endless litigations by continuous determination of issues without end.

An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in
CA-G.R. No. 38830-R, shows that it reversed the trial court's Decision 6 finding petitioner to
be entitled to register the lands in question under its ownership, on its evaluation of
evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of 30 years
possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the
requirement of 10 years possession for ordinary acquisitive prescription because of the
absence of just title. The appellate court did not believe the findings of the trial court that Lot
2 was acquired from Juan Valdez by purchase and Lot 3 was acquired also by purchase
from Egmidio Octaviano by petitioner Vicar because there was absolutely no documentary
evidence to support the same and the alleged purchases were never mentioned in the
application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and
Octaviano. Both Valdez and Octaviano had Free Patent Application for those lots since
1906. The predecessors of private respondents, not petitioner Vicar, were in possession of
the questioned lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but
not Lots 2 and 3, because the buildings standing thereon were only constructed after
liberation in 1945. Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in 1951.
The improvements oil Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was
appointed only in 1947, the church was constructed only in 1951 and the new convent only
2 years before the trial in 1963.
When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy
the lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar
only in 1962.
Private respondents were able to prove that their predecessors' house was borrowed by
petitioner Vicar after the church and the convent were destroyed. They never asked for the
return of the house, but when they allowed its free use, they became bailors
in commodatum and the petitioner the bailee. The bailees' failure to return the subject
matter of commodatum to the bailor did not mean adverse possession on the part of the
borrower. The bailee held in trust the property subject matter of commodatum. The adverse
claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The
action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary
acquisitive prescription because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents were
possessors under claim of ownership in good faith from 1906; that petitioner Vicar was only
a bailee in commodatum; and that the adverse claim and repudiation of trust came only in
1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No.
38830-R. Its findings of fact have become incontestible. This Court declined to review said
decision, thereby in effect, affirming it. It has become final and executory a long time ago.
Respondent appellate court did not commit any reversible error, much less grave abuse of
discretion, when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is
governing, under the principle of res judicata, hence the rule, in the present cases CA-G.R.

No. 05148 and CA-G.R. No. 05149. The facts as supported by evidence established in that
decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack
of merit, the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by
respondent Court of Appeals is AFFIRMED, with costs against petitioner.
SO ORDERED.
Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concu
G.R. No. L-46240

November 3, 1939

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

vs.
BECK, defendant-appellee.
Mauricio Carlos for appellants.
Felipe Buencamino, Jr. for appellee.

IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to return her certain furniture which
she lent him for his use. She appealed from the judgment of the Court of First Instance of
Manila which ordered that the defendant return to her the three has heaters and the four
electric lamps found in the possession of the Sheriff of said city, that she call for the other
furniture from the said sheriff of Manila at her own expense, and that the fees which the
Sheriff may charge for the deposit of the furniture be paid pro rata by both parties, without
pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H.
del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease
between the plaintiff and the defendant, the former gratuitously granted to the latter the use
of the furniture described in the third paragraph of the stipulation of facts, subject to the
condition that the defendant would return them to the plaintiff upon the latter's demand. The
plaintiff sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936,
these three notified the defendant of the conveyance, giving him sixty days to vacate the
premises under one of the clauses of the contract of lease. There after the plaintiff required
the defendant to return all the furniture transferred to him for them in the house where they
were found. On
November 5, 1936, the defendant, through another person,
wrote to the plaintiff reiterating that she may call for the furniture in the ground floor of the
house. On the 7th of the same month, the defendant wrote another letter to the plaintiff
informing her that he could not give up the three gas heaters and the four electric lamps
because he would use them until the 15th of the same month when the lease in due to
expire. The plaintiff refused to get the furniture in view of the fact that the defendant had
declined to make delivery of all of them. On
November 15th, before vacating the
house, the defendant deposited with the Sheriff all the furniture belonging to the plaintiff and
they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the
custody of the said sheriff.

In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the
law: in holding that they violated the contract by not calling for all the furniture on November
5, 1936, when the defendant placed them at their disposal; in not ordering the defendant to
pay them the value of the furniture in case they are not delivered; in holding that they should
get all the furniture from the Sheriff at their expenses; in ordering them to pay-half of the
expenses claimed by the Sheriff for the deposit of the furniture; in ruling that both parties
should pay their respective legal expenses or the costs; and in denying pay their respective
legal expenses or the costs; and in denying the motions for reconsideration and new trial.
To dispose of the case, it is only necessary to decide whether the defendant complied with
his obligation to return the furniture upon the plaintiff's demand; whether the latter is bound
to bear the deposit fees thereof, and whether she is entitled to the costs of
litigation.lawphi1.net
The contract entered into between the parties is one of commadatum, because under it the
plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself
the ownership thereof; by this contract the defendant bound himself to return the furniture to
the plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; articles 1740,
paragraph 1, and 1741 of the Civil Code). The obligation voluntarily assumed by the
defendant to return the furniture upon the plaintiff's demand, means that he should return all
of them to the plaintiff at the latter's residence or house. The defendant did not comply with
this obligation when he merely placed them at the disposal of the plaintiff, retaining for his
benefit the three gas heaters and the four eletric lamps. The provisions of article 1169 of the
Civil Code cited by counsel for the parties are not squarely applicable. The trial court,
therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with
her obligation to get the furniture when they were offered to her.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon
the latter's demand, the Court could not legally compel her to bear the expenses
occasioned by the deposit of the furniture at the defendant's behest. The latter, as bailee,
was not entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept
the offer to return the furniture, because the defendant wanted to retain the three gas
heaters and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment
thereof by the defendant in case of his inability to return some of the furniture because
under paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor
admitted the correctness of the said value. Should the defendant fail to deliver some of the
furniture, the value thereof should be latter determined by the trial Court through evidence
which the parties may desire to present.
The costs in both instances should be borne by the defendant because the plaintiff is the
prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one
who breached the contract of commodatum, and without any reason he refused to return
and deliver all the furniture upon the plaintiff's demand. In these circumstances, it is just and
equitable that he pay the legal expenses and other judicial costs which the plaintiff would
not have otherwise defrayed.
The appealed judgment is modified and the defendant is ordered to return and deliver to the
plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of
the latter, all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The
expenses which may be occasioned by the delivery to and deposit of the furniture with the

Sheriff shall be for the account of the defendant. the defendant shall pay the costs in both
instances. So ordered.
Avancea, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.

[G.R. No. 114286. April 19, 2001]

THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK), petitioner,

vs. THE COURT OF APPEALS, CONTINENTAL CEMENT CORPORATION,
GREGORY T. LIM and SPOUSE, respondents.
DECISION
YNARES-SANTIAGO, J.:
The instant petition for review seeks to partially set aside the July 26, 1993 Decision[1] of
respondent Court of Appeals in CA-G.R. CV No. 29950, insofar as it orders petitioner to
reimburse respondent Continental Cement Corporation the amount of P490,228.90 with
interest thereon at the legal rate from July 26, 1988 until fully paid. The petition also seeks
to set aside the March 8, 1994 Resolution[2] of respondent Court of Appeals denying its
Motion for Reconsideration.
The facts are as follows:
On July 13, 1982, respondents Continental Cement Corporation (hereinafter,
respondent Corporation) and Gregory T. Lim (hereinafter, respondent Lim) obtained from
petitioner Consolidated Bank and Trust Corporation Letter of Credit No. DOM-23277 in the
amount of P1,068,150.00 On the same date, respondent Corporation paid a marginal
deposit of P320,445.00 to petitioner. The letter of credit was used to purchase around five
hundred thousand liters of bunker fuel oil from Petrophil Corporation, which the latter
delivered directly to respondent Corporation in its Bulacan plant. In relation to the same
transaction, a trust receipt for the amount of P1,001,520.93 was executed by respondent
Corporation, with respondent Lim as signatory.
Claiming that respondents failed to turn over the goods covered by the trust receipt or
the proceeds thereof, petitioner filed a complaint for sum of money with application for
preliminary attachment[3]before the Regional Trial Court of Manila. In answer to the
complaint, respondents averred that the transaction between them was a simple loan and
not a trust receipt transaction, and that the amount claimed by petitioner did not take into
account payments already made by them. Respondent Lim also denied any personal
liability in the subject transactions. In a Supplemental Answer, respondents prayed for
reimbursement of alleged overpayment to petitioner of the amount of P490,228.90.
At the pre-trial conference, the parties agreed on the following issues:
1) Whether or not the transaction involved is a loan transaction or a trust receipt
transaction;

2) Whether or not the interest rates charged against the defendants by the plaintiff are
proper under the letter of credit, trust receipt and under existing rules or regulations of the
Central Bank;
3) Whether or not the plaintiff properly applied the previous payment of P300,456.27 by the
defendant corporation on July 13, 1982 as payment for the latters account; and
4) Whether or not the defendants are personally liable under the transaction sued for in this
case.[4]
On September 17, 1990, the trial court rendered its Decision,[5] dismissing the
Complaint and ordering petitioner to pay respondents the following amounts under their
counterclaim: P490,228.90 representing overpayment of respondent Corporation, with
interest thereon at the legal rate from July 26, 1988 until fully paid; P10,000.00 as attorneys
fees; and costs.
Both parties appealed to the Court of Appeals, which partially modified the Decision by
deleting the award of attorneys fees in favor of respondents and, instead, ordering
respondent Corporation to pay petitioner P37,469.22 as and for attorneys fees and litigation
expenses.
Hence, the instant petition raising the following issues:
1. WHETHER OR NOT THE RESPONDENT APPELLATE COURT ACTED
INCORRECTLY OR COMMITTED REVERSIBLE ERROR IN HOLDING THAT THERE
WAS OVERPAYMENT BY PRIVATE RESPONDENTS TO THE PETITIONER IN THE
AMOUNT OF P490,228.90 DESPITE THE ABSENCE OF ANY COMPUTATION MADE IN
THE DECISION AND THE ERRONEOUS APPLICATION OF PAYMENTS WHICH IS IN
VIOLATION OF THE NEW CIVIL CODE.
2. WHETHER OR NOT THE MANNER OF COMPUTATION OF THE MARGINAL
DEPOSIT BY THE RESPONDENT APPELLATE COURT IS IN ACCORDANCE WITH
BANKING PRACTICE.
3. WHETHER OR NOT THE AGREEMENT AMONG THE PARTIES AS TO THE
FLOATING OF INTEREST RATE IS VALID UNDER APPLICABLE JURISPRUDENCE
AND THE RULES AND REGULATIONS OF THE CENTRAL BANK.
4. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED
IN NOT CONSIDERING THE TRANSACTION AT BAR AS A TRUST RECEIPT
TRANSACTION ON THE BASIS OF THE JUDICIAL ADMISSIONS OF THE PRIVATE
RESPONDENTS AND FOR WHICH RESPONDENTS ARE LIABLE THEREFOR.
5. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED
IN NOT HOLDING PRIVATE RESPONDENT SPOUSES LIABLE UNDER THE TRUST
RECEIPT TRANSACTION.[6]
The petition must be denied.
On the first issue respecting the fact of overpayment found by both the lower court and
respondent Court of Appeals, we stress the time-honored rule that findings of fact by the
Court of Appeals especially if they affirm factual findings of the trial court will not be
disturbed by this Court, unless these findings are not supported by evidence.[7]

Petitioner decries the lack of computation by the lower court as basis for its ruling that
there was an overpayment made. While such a computation may not have appeared in the
Decision itself, we note that the trial courts finding of overpayment is supported by evidence
presented before it. At any rate, we painstakingly reviewed and computed the payments
together with the interest and penalty charges due thereon and found that the amount of
overpayment made by respondent Bank to petitioner, i.e., P563,070.13, was more than
what was ordered reimbursed by the lower court. However, since respondents did not file
an appeal in this case, the amount ordered reimbursed by the lower court should stand.
Moreover, petitioners contention that the marginal deposit made by respondent
Corporation should not be deducted outright from the amount of the letter of credit is
untenable. Petitioner argues that the marginal deposit should be considered only after
computing the principal plus accrued interests and other charges. However, to sustain
petitioner on this score would be to countenance a clear case of unjust enrichment, for
while a marginal deposit earns no interest in favor of the debtor-depositor, the bank is not
only able to use the same for its own purposes, interest-free, but is also able to earn interest
on the money loaned to respondent Corporation. Indeed, it would be onerous to compute
interest and other charges on the face value of the letter of credit which the petitioner issued,
without first crediting or setting off the marginal deposit which the respondent Corporation
paid to it. Compensation is proper and should take effect by operation of law because the
requisites in Article 1279 of the Civil Code are present and should extinguish both debts to
the concurrent amount.[8]
Hence, the interests and other charges on the subject letter of credit should be
computed only on the balance of P681,075.93, which was the portion actually loaned by the
bank to respondent Corporation.
Neither do we find error when the lower court and the Court of Appeals set aside as
invalid the floating rate of interest exhorted by petitioner to be applicable. The pertinent
provision in the trust receipt agreement of the parties fixing the interest rate states:
I, WE jointly and severally agree to any increase or decrease in the interest rate which may
occur after July 1, 1981, when the Central Bank floated the interest rate, and to pay
additionally the penalty of 1% per month until the amount/s or installment/s due and unpaid
under the trust receipt on the reverse side hereof is/are fully paid.[9]
We agree with respondent Court of Appeals that the foregoing stipulation is invalid,
there being no reference rate set either by it or by the Central Bank, leaving the
determination thereof at the sole will and control of petitioner.
While it may be acceptable, for practical reasons given the fluctuating economic
conditions, for banks to stipulate that interest rates on a loan not be fixed and instead be
made dependent upon prevailing market conditions, there should always be a reference
rate upon which to peg such variable interest rates. An example of such a valid variable
interest rate was found in Polotan, Sr. v. Court of Appeals.[10] In that case, the contractual
provision stating 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[11] was considered valid. The
aforequoted provision was upheld notwithstanding that it may partake of the nature of an
escalation clause, because at the same time it provides for the decrease in the interest rate
in case the prevailing market rates dictate its reduction. In other words, unlike the
stipulation subject of the instant case, the interest rate involved in the Polotan case is

designed to be based on the prevailing market rate. On the other hand, a stipulation
ostensibly signifying an agreement to any increase or decrease in the interest rate, without
more, cannot be accepted by this Court as valid for it leaves solely to the creditor the
determination of what interest rate to charge against an outstanding loan.
Petitioner has also failed to convince us that its transaction with respondent Corporation
is really a trust receipt transaction instead of merely a simple loan, as found by the lower
court and the Court of Appeals.
The recent case of Colinares v. Court of Appeals[12] appears to be foursquare with the
facts obtaining in the case at bar. There, we found that inasmuch as the debtor received the
goods subject of the trust receipt before the trust receipt itself was entered into, the
transaction in question was a simple loan and not a trust receipt agreement. Prior to the
date of execution of the trust receipt, ownership over the goods was already transferred to
the debtor. This situation is inconsistent with what normally obtains in a pure trust receipt
transaction, wherein the goods belong in ownership to the bank and are only released to
the importer in trust after the loan is granted.
In the case at bar, as in Colinares, the delivery to respondent Corporation of the goods
subject of the trust receipt occurred long before the trust receipt itself was executed. More
specifically, delivery of the bunker fuel oil to respondent Corporations Bulacan plant
commenced on July 7, 1982 and was completed by July 19, 1982.[13] Further, the oil was
used up by respondent Corporation in its normal operations by August, 1982.[14] On the
other hand, the subject trust receipt was only executed nearly two months after full delivery
of the oil was made to respondent Corporation, or on September 2, 1982.
The danger in characterizing a simple loan as a trust receipt transaction was explained
in Colinares, to wit:
The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes
the dishonesty and abuse of confidence in the handling of money or goods to the prejudice
of another regardless of whether the latter is the owner. Here, it is crystal clear that on the
part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of
money to the prejudice of PBC. Petitioners continually endeavored to meet their obligations,
as shown by several receipts issued by PBC acknowledging payment of the loan.
The Information charges Petitioners with intent to defraud and misappropriating the money
for their personal use. The mala prohibita nature of the alleged offense notwithstanding,
intent as a state of mind was not proved to be present in Petitioners situation. Petitioners
employed no artifice in dealing with PBC and never did they evade payment of their
obligation nor attempt to abscond. Instead, Petitioners sought favorable terms precisely to
meet their obligation.
Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale,
contrary to the express provision embodied in the trust receipt. They are contractors who
obtained the fungible goods for their construction project. At no time did title over the
construction materials pass to the bank, but directly to the Petitioners from CM Builders
Centre. This impresses upon the trust receipt in question vagueness and ambiguity, which
should not be the basis for criminal prosecution in the event of violation of its provisions.
The practice of banks of making borrowers sign trust receipts to facilitate collection of loans
and place them under the threats of criminal prosecution should they be unable to pay it
may be unjust and inequitable, if not reprehensible. Such agreements are contracts of

adhesion which borrowers have no option but to sign lest their loan be disapproved. The
resort to this scheme leaves poor and hapless borrowers at the mercy of banks, and is
prone to misinterpretation, as had happened in this case. Eventually, PBC showed its true
colors and admitted that it was only after collection of the money, as manifested by its
Affidavit of Desistance.
Similarly, respondent Corporation cannot be said to have been dishonest in its dealings
with petitioner. Neither has it been shown that it has evaded payment of its
obligations. Indeed, it continually endeavored to meet the same, as shown by the various
receipts issued by petitioner acknowledging payment on the loan. Certainly, the payment of
the sum of P1,832,158.38 on a loan with a principal amount of only P681,075.93 negates
any badge of dishonesty, abuse of confidence or mishandling of funds on the part of
respondent Corporation, which are the gravamen of a trust receipt violation. Furthermore,
respondent Corporation is not an importer which acquired the bunker fuel oil for re-sale; it
needed the oil for its own operations. More importantly, at no time did title over the oil pass
to petitioner, but directly to respondent Corporation to which the oil was directly delivered
long before the trust receipt was executed. The fact that ownership of the oil belonged to
respondent Corporation, through its President, Gregory Lim, was acknowledged by
petitioners own account officer on the witness stand, to wit:
Q - After the bank opened a letter of credit in favor of Petrophil Corp. for the account of
the defendants thereby paying the value of the bunker fuel oil what transpired next
after that?
A - Upon purchase of the bunker fuel oil and upon the requests of the defendant
possession of the bunker fuel oil were transferred to them.
Q - You mentioned them to whom are you referring to?
A - To the Continental Cement Corp. upon the execution of the trust receipt
acknowledging the ownership of the bunker fuel oil this should be acceptable for
whatever disposition he may make.
Q - You mentioned about acknowledging ownership of the bunker fuel oil to whom by
whom?
A - By the Continental Cement Corp.
Q - So by your statement who really owns the bunker fuel oil?
ATTY. RACHON:
Objection already answered.
COURT:
Give time to the other counsel to object.
ATTY. RACHON:
He has testified that ownership was acknowledged in favor of Continental Cement Corp.
so that question has already been answered.
ATTY. BAAGA:
That is why I made a follow up question asking ownership of the bunker fuel oil.
COURT:
Proceed.

ATTY. BAAGA:
Q - Who owns the bunker fuel oil after purchase from Petrophil Corp.?
A - Gregory Lim.[15]
By all indications, then, it is apparent that there was really no trust receipt transaction
that took place. Evidently, respondent Corporation was required to sign the trust receipt
simply to facilitate collection by petitioner of the loan it had extended to the former.
Finally, we are not convinced that respondent Gregory T. Lim and his spouse should be
personally liable under the subject trust receipt. Petitioners argument that respondent
Corporation and respondent Lim and his spouse are one and the same cannot be
sustained. The transactions sued upon were clearly entered into by respondent Lim in his
capacity as Executive Vice President of respondent Corporation.We stress the hornbook
law that corporate personality is a shield against personal liability of its officers. Thus, we
agree that respondents Gregory T. Lim and his spouse cannot be made personally liable
since respondent Lim entered into and signed the contract clearly in his official capacity as
Executive Vice President. The personality of the corporation is separate and distinct from
the persons composing it.[16]
WHEREFORE, in view of all the foregoing, the instant Petition for Review is
DENIED. The Decision of the Court of Appeals dated July 26, 1993 in CA-G.R. CV No.
29950 is AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, and Kapunan, JJ., concur.
Pardo J., no part.

G.R. No. L-20240

December 31, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

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

By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority
provided for in the Trading with the Enemy Act, as amended, the assets in the Philippines of
the Bank of Taiwan, Ltd. were vested in the Government of the United States. Pursuant to
the Philippine Property Act of 1946 of the United States, these assets, including the loans in
question, were subsequently transferred to the Republic of the Philippines by the
Government of the United States under Transfer Agreement dated July 20, 1954. These
assets were among the properties that were placed under the administration of the Board of
Liquidators created under Executive Order No. 372, dated November 24, 1950, and in
accordance with Republic Acts Nos. 8 and 477 and other pertinent laws.
On September 29, 1954 the appellee, Republic of the Philippines, represented by the
Chairman of the Board of Liquidators, made a written extrajudicial demand upon the
appellant for the payment of the account in question. The record shows that the appellant
had actually received the written demand for payment, but he failed to pay.
The aggregate amount due as principal of the five loans in question, computed under the
Ballantyne scale of values as of the time that the loans were incurred in 1943, was P889.64;
and the interest due thereon at the rate of 6% per annum compounded quarterly, computed
as of December 31, 1959 was P2,377.23.
On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of
Hinigaran, Negros Occidental, to collect from the appellant the unpaid account in question.
The Justice of the Peace Of Hinigaran, after hearing, dismissed the case on the ground that
the action had prescribed. The appellee appealed to the Court of First Instance of Negros
Occidental and on March 26, 1962 the court a quo rendered a decision ordering the
appellant to pay the appellee the sum of P2,377.23 as of December 31, 1959, plus interest
at the rate of 6% per annum compounded quarterly from the date of the filing of the
complaint until full payment was made. The appellant was also ordered to pay the sum
equivalent to 10% of the amount due as attorney's fees and costs.
The appellant appealed directly to this Court. During the pendency of this appeal the
appellant Jose Grijaldo died. Upon motion by the Solicitor General this Court, in a resolution
of May 13, 1963, required Manuel Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita
L. Aguilar, who are the legal heirs of Jose Grijaldo to appear and be substituted as
appellants in accordance with Section 17 of Rule 3 of the Rules of Court.
In the present appeal the appellant contends: (1) that the appellee has no cause of action
against the appellant; (2) that if the appellee has a cause of action at all, that action had
prescribed; and (3) that the lower court erred in ordering the appellant to pay the amount of
P2,377.23.
In discussing the first point of contention, the appellant maintains that the appellee has no
privity of contract with the appellant. It is claimed that the transaction between the Taiwan
Bank, Ltd. and the appellant, so that the appellee, Republic of the Philippines, could not
legally bring action against the appellant for the enforcement of the obligation involved in
said transaction. This contention has no merit. It is true that the Bank of Taiwan, Ltd. was
the original creditor and the transaction between the appellant and the Bank of Taiwan was
a private contract of loan. However, pursuant to the Trading with the Enemy Act, as
amended, and Executive Order No. 9095 of the United States; and under Vesting Order No.
P-4, dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity which was
declared to be under the jurisdiction of the enemy country (Japan), were vested in the

United States Government and the Republic of the Philippines, the assets of the Bank of
Taiwan, Ltd. were transferred to and vested in the Republic of the Philippines. The
successive transfer of the rights over the loans in question from the Bank of Taiwan, Ltd. to
the United States Government, and from the United States Government to the government
of the Republic of the Philippines, made the Republic of the Philippines the successor of the
rights, title and interest in said loans, thereby creating a privity of contract between the
appellee and the appellant. In defining the word "privy" this Court, in a case, said:
The word "privy" denotes the idea of succession ... hence an assignee of a credit, and one
subrogated to it, etc. will be privies; in short, he who by succession is placed in the position
of one of those who contracted the judicial relation and executed the private document and
appears to be substituting him in the personal rights and obligation is a privy (Alpurto vs.
Perez, 38 Phil. 785, 790).
The United States of America acting as a belligerent sovereign power seized the assets of
the Bank of Taiwan, Ltd. which belonged to an enemy country. The confiscation of the
assets of the Bank of Taiwan, Ltd. being an involuntary act of war, and sanctioned by
international law, the United States succeeded to the rights and interests of said Bank of
Taiwan, Ltd. over the assets of said bank. As successor in interest in, and transferee of, the
property rights of the United States of America over the loans in question, the Republic of
the Philippines had thereby become a privy to the original contracts of loan between the
Bank of Taiwan, Ltd. and the appellant. It follows, therefore, that the Republic of the
Philippines has a legal right to bring the present action against the appellant Jose Grijaldo.
The appellant likewise maintains, in support of his contention that the appellee has no
cause of action, that because the loans were secured by a chattel mortgage on the standing
crops on a land owned by him and these crops were lost or destroyed through enemy action
his obligation to pay the loans was thereby extinguished. This argument is untenable. The
terms of the promissory notes and the chattel mortgage that the appellant executed in favor
of the Bank of Taiwan, Ltd. do not support the claim of appellant. The obligation of the
appellant under the five promissory notes was not to deliver a determinate thing namely, the
crops to be harvested from his land, or the value of the crops that would be harvested from
his land. Rather, his obligation was to pay a generic thing the amount of money
representing the total sum of the five loans, with interest. The transaction between the
appellant and the Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums
of money. "By a contract of (simple) loan, one of the parties delivers to another ... money or
other consumable thing upon the condition that the same amount of the same kind and
quality shall be paid." (Article 1933, Civil Code) The obligation of the appellant under the
five promissory notes evidencing the loans in questions is to pay the value thereof; that is,
to deliver a sum of money a clear case of an obligation to deliver, a generic thing. Article
1263 of the Civil Code provides:
In an obligation to deliver a generic thing, the loss or destruction of anything of the same
kind does not extinguish the obligation.
The chattel mortgage on the crops growing on appellant's land simply stood as a security
for the fulfillment of appellant's obligation covered by the five promissory notes, and the loss
of the crops did not extinguish his obligation to pay, because the account could still be paid
from other sources aside from the mortgaged crops.

In his second point of contention, the appellant maintains that the action of the appellee had
prescribed. The appellant points out that the loans became due on June 1, 1944; and when
the complaint was filed on January 17,1961 a period of more than 16 years had already
elapsed far beyond the period of ten years when an action based on a written contract
should be brought to court.
This contention of the appellant has no merit. Firstly, it should be considered that the
complaint in the present case was brought by the Republic of the Philippines not as a
nominal party but in the exercise of its sovereign functions, to protect the interests of the
State over a public property. Under paragraph 4 of Article 1108 of the Civil Code
prescription, both acquisitive and extinctive, does not run against the State. This Court has
held that the statute of limitations does not run against the right of action of the Government
of the Philippines (Government of the Philippine Islands vs. Monte de Piedad, etc., 35 Phil.
738-751).Secondly, the running of the period of prescription of the action to collect the loan
from the appellant was interrupted by the moratorium laws (Executive Orders No. 25, dated
November 18, 1944; Executive Order No. 32. dated March 10, 1945; and Republic Act No.
342, approved on July 26, 1948). The loan in question, as evidenced by the five promissory
notes, were incurred in the year 1943, or during the period of Japanese occupation of the
Philippines. This case is squarely covered by Executive Order No. 25, which became
effective on November 18, 1944, providing for the suspension of payments of debts
incurred after December 31, 1941. The period of prescription was, therefore, suspended
beginning November 18, 1944. This Court, in the case of Rutter vs. Esteban (L-3708, May
18, 1953, 93 Phil. 68), declared on May 18, 1953 that the Moratorium Laws, R.A. No. 342
and Executive Orders Nos. 25 and 32, are unconstitutional; but in that case this Court ruled
that the moratorium laws had suspended the prescriptive period until May 18, 1953. This
ruling was categorically reiterated in the decision in the case of Manila Motors vs. Flores,
L-9396, August 16, 1956. It follows, therefore, that the prescriptive period in the case now
before US was suspended from November 18,1944, when Executive Orders Nos. 25 and
32 were declared unconstitutional by this Court. Computed accordingly, the prescriptive
period was suspended for 8 years and 6 months. By the appellant's own admission, the
cause of action on the five promissory notes in question arose on June 1, 1944. The
complaint in the present case was filed on January 17, 1961, or after a period of 16 years, 6
months and 16 days when the cause of action arose. If the prescriptive period was not
interrupted by the moratorium laws, the action would have prescribed already; but, as We
have stated, the prescriptive period was suspended by the moratorium laws for a period of
8 years and 6 months. If we deduct the period of suspension (8 years and 6 months) from
the period that elapsed from the time the cause of action arose to the time when the
complaint was filed (16 years, 6 months and 16 days) there remains a period of 8 years and
16 days. In other words, the prescriptive period ran for only 8 years and 16 days. There still
remained a period of one year, 11 months and 14 days of the prescriptive period when the
complaint was filed.
In his third point of contention the appellant maintains that the lower court erred in ordering
him to pay the amount of P2,377.23. It is claimed by the appellant that it was error on the
part of the lower court to apply the Ballantyne Scale of values in evaluating the Japanese
war notes as of June 1943 when the loans were incurred, because what should be done is
to evaluate the loans on the basis of the Ballantyne Scale as of the time the loans became
due, and that was in June 1944. This contention of the appellant is also without merit.
The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of
December 31, 1959, plus interest rate of 6% per annum compounded quarterly from the

date of the filing of the complaint. The sum total of the five loans obtained by the appellant
from the Bank of Taiwan, Ltd. was P1,281.97 in Japanese war notes. Computed under the
Ballantyne Scale of values as of June 1943, this sum of P1,281.97 in Japanese war notes in
June 1943 is equivalent to P889.64 in genuine Philippine currency which was considered
the aggregate amount due as principal of the five loans, and the amount of P2,377.23 as of
December 31, 1959 was arrived at after computing the interest on the principal sum of
P889.64 compounded quarterly from the time the obligations were incurred in 1943.
It is the stand of the appellee that the Ballantyne scale of values should be applied as of the
time the obligation was incurred, and that was in June 1943. This stand of the appellee was
upheld by the lower court; and the decision of the lower court is supported by the ruling of
this Court in the case of Hilado vs. De la Costa (G.R. No. L-150, April 30, 1949; 46 O.G.
5472), which states:
... Contracts stipulating for payments presumably in Japanese war notes may be enforced
in our Courts after the liberation to the extent of the just obligation of the contracting parties
and, as said notes have become worthless, in order that justice may be done and the party
entitled to be paid can recover their actual value in Philippine Currency, what the debtor or
defendant bank should return or pay is the value of the Japanese military notes in relation to
the peso in Philippine Currency obtaining on the date when and at the place where the
obligation was incurred unless the parties had agreed otherwise. ... . (italics supplied)
IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs against
the appellant. Inasmuch as the appellant Jose Grijaldo died during the pendency of this
appeal, his estate must answer in the execution of the judgment in the present case.
FIRST DIVISION
[G.R. No. 88880. April 30, 1991.]
PHILIPPINE NATIONAL BANK, Petitioner, v. THE HON. COURT OF APPEALS and
AMBROSIO PADILLA, Respondents.
The Chief Legal Counsel for Petitioner.
Ambrosio Padilla, Mempin & Reyes Law Offices for Private Respondent.
SYLLABUS
1. COMMERCIAL LAW; BANKING LAWS; RATE OF INTEREST; INCREASE OF
INTEREST RATE; NOT TO BE MADE OFTENER THAN ONCE A YEAR. PNB, over the
objection of the private respondent, and without authority from the Monetary Board, within a
period of only four (4) months, increased the 18% interest rate on the private respondents
loan obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c)
to 48% in November 1984. Those increases were null and void. Although Section 2, P.D.
No. 116 of January 29, 1973, authorizes the Monetary Board to prescribe the maximum rate
or rates of interest for loans or renewal thereof and to change such rate or rates whenever
warranted by prevailing economic and social conditions, it expressly provides that "such
changes shall not be made oftener than once every twelve months. "If the Monetary Board
itself was not authorized to make such changes oftener than once a year, even less so may

a bank which is subordinate to the Board.

2. ID.; ID.; ID.; ID.; MAY BE INCREASED WITHIN LIMITS OF LAW; PNB CIRCULARS
AND RESOLUTION ARE NEITHER LAWS NOR RESOLUTIONS OF MONETARY BOARD.
While the private respondent-debtor did agree in the Deed of Real Estate Mortgage (Exh.
5) that the interest rate may be increased during the life of the contract "to such increase
within the rate allowed by law, as the Board of Directors of the MORTGAGEE may
prescribe" (Exh. 5-e-1) or "within the limits allowed by law" (Promissory Notes, Exhs. 2, 3,
and 4), no laws was ever passed in July to November 1984 increasing the interest rates on
loans or renewals thereof to 32%, 41% and 48% (per annum), and no documents were
executed and delivered by the debtor to effectuate the increases. The PNB relied on its own
Board Resolution No. 681 (Exh. 10), PNB Circular No. 40-79-84 (Exh. 13), and PNB
Circular No. 40-129-84 (Exh. 15), but those resolution and circulars are neither laws nor
resolutions of the Monetary Board.
3. ID.; ID.; ID.; REMOVAL OF USURY LAW CEILING ON INTEREST RATES DOES NOT
AUTHORIZE BANKS TO UNILATERALLY AND SUCCESSIVELY INCREASE INTEREST
RATES. CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury law ceiling on
interest rates but it did not authorize the PNB, or any bank for that matter, to unilaterally
and successively increase the agreed interest rates from 18% to 48% within a span of four
(4) months, in violation of P.D. 116 which limits such changes to "once every twelve
months."cralaw virtua1aw library
4. ID.; ID.; ID.; UNILATERAL ACTION TO INCREASE INTEREST RATES, A VIOLATION
OF ARTICLE 1308 OF CIVIL CODE. Besides violating P.D. 116, the unilateral action of
the PNB in increasing the interest rate on the private respondents 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."cralaw virtua1aw library
5. ID.; ID.; ID.; SUCCESSIVE INCREASE OF INTEREST RATES, A VIOLATION OF
ARTICLE 1956 OF CIVIL CODE. PNBs successive increases of the interest rate on the
private respondents loan, over the latters protest, were arbitrary as they violated an
express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may be
amended only by an instrument in writing signed by the party to be bound as burdened by
such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil
Code which provides that "no interest shall be due unless it has been expressly stipulated in
writing."
DECISION
GRIO-AQUINO, J.:
The Philippine National Bank (PNB) has appealed by certiorari from the decision
promulgated on June 27, 1989 by the Court of Appeals in CA-G.R. CV No. 09791 entitled,
"AMBROSIO PADILLA, plaintiff-appellant versus PHILIPPINE NATIONAL BANK,
defendant-appellee," reversing the decision of the trial court which had dismissed the
private respondents complaint "to annul interest increases." (p. 32, Rollo.) The Court of
Appeals rendered judgment:jgc:chanrobles.com.ph

". . . declaring the questioned increases of interest as unreasonable, excessive and

arbitrary and ordering the defendant-appellee [PNB] to refund to the plaintiff-appellant the
amount of interest collected from July, 1984 in excess of twenty-four percent (24%) per
annum. Costs against the defendant-appellee." (pp 14-15, Rollo.)
In July 1982, the private respondent applied for, and was granted by petitioner PNB, a
credit line of 321.8 million, secured by a real estate mortgage, for a term of two (2) years,
with 18% interest per annum. Private respondent executed in favor of the PNB a Credit
Agreement, two (2) promissory notes in the amount of P900,000.00 each, and a Real
Estate Mortgage Contract.
The Credit Agreement provided that
"9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and
regulations of the Central Bank and the current and general policies of the Bank and those
which the Bank may adopt in the future, which may have relation to or in any way affect the
Line, which rules, regulations and policies are incorporated herein by reference as if set
forth herein in full. Promptly upon receipt of a written request from the Bank, the Borrowers
shall execute and deliver such documents and instruments, in form and substance
satisfactory to the Bank, in order to effectuate or otherwise comply with such rules,
regulations and policies." (p. 85, Rollo.)
The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated 18%
interest per annum "within the limits allowed by law at any time depending on whatever
policy it [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." (pp. 85-86, Rollo; Emphasis ours.)
The Real Estate Mortgage Contract likewise provided that:jgc:chanrobles.com.ph
"(k) INCREASE OF INTEREST RATE
"The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in
accordance with the provisions hereof, shall be subject during the life of this contract to
such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors." (p. 86, Rollo; Emphasis supplied.)
Four (4) months advance interest and incidental expenses/charges were deducted from the
loan, the net proceeds of which were released to the private respondent by crediting or
transferring the amount to his current account with the bank.chanrobles.com : virtual law
library
On June 20, 1984, PNB informed the private respondent that (1) his credit line of P1.8
million "will expire on July 4, 1984," (2)" [i]f renewal of the line for another year is intended,
please submit soonest possible your request," and (3) the "present policy of the Bank
requires at least 30% reduction of principal before your line can be renewed." (pp. 86-87,
Rollo.) Complying, private respondent on June 25, 1984, paid PNB P540,000 00 (30% of
P1.8 million) and requested that "the balance of P1,260,000.00 be renewed for another
period of two (2) years under the same arrangement" and that "the increase of the interest

rate of my mortgage loan be from 18% to 21%" (p. 87, Rollo.).

On July 4, 1984, private respondent paid PNB P360,000.00.
On July 18, 1984, private respondent reiterated in writing his request that "the increase in
the rate of interest from 18% be fixed at 21% of 24%. (p. 87, Rollo.)
On July 26, 1984, private respondent made an additional payment of P100,000.
On August 10, 1984, PNB informed private respondent that "we can not give due course to
your request for preferential interest rate in view of the following reasons: Existing Loan
Policies of the bank requires 32% for loan of more than one year; our present cost of funds
has substantially increased." (pp. 8788, Rollo.)
On August 17, 1984, private respondent further paid PNB P150,000.00.
In a letter dated August 24, 1984 to PNB, private respondent announced that he would
"continue making further payments, and instead of a loan of more than one year, I shall
pay the said loan before the lapse of one year or before July 4, 1985. . . . I reiterate my
request that the increase of my rate of interest from 18% be fixed at 21% or 24%." (p. 88,
Rollo.)
On September 12, 1984, private respondent paid PNB P160,000.00.
In letters dated September 12, 1984 and September 13, 1984, PNB informed private
respondent that "the interest rate on your outstanding line/loan is hereby adjusted from 32%
p.a. to 41% p.a. (35% prime rate + 6%) effective September 6, 1984;" and further explained
"why we can not grant your request for a lower rate of 21% or 24%." (pp. 88-89, Rollo.)
In a letter dated September 24, 1984 to PNB, private respondent registered his protest
against the increase of interest rate from 18% to 32% on July 4, 1984 and from 32% to 41%
on September 6, 1984.
On October 15, 1984, private respondent reiterated his request that the interest rate should
not be increased from 18% to 32% and from 32% to 41%. He also attached (as payment) a
check for P140,000.00.chanrobles.com.ph : virtual law library
Like rubbing salt on the private respondents wound, the petitioner informed private
respondent on October 29, 1984, that "the interest rate on your outstanding line/loan is
hereby adjusted from 41% p.a. to 48% p.a. (42% prime rate plus 6% spread) effective 25
October 1984." (p. 89, Rollo.)
In November 1984, private respondent paid PNB P50,000.00 thus reducing his principal
loan obligation to P300,000.00.
On December 18, 1984, private respondent filed in the Regional Trial Court of Manila a
complaint against PNB entitled, "AMBROSIO PADILLA v. PHILIPPINE NATIONAL BANK"
(Civil Case No. 84-28391), praying that judgment be rendered:jgc:chanrobles.com.ph
"a. Declaring that the unilateral increase of interest rates from 18% to 32%, then to 41% and
again to 48% are illegal, not valid nor binding on plaintiff, and that an adjustment of his

interest rate from 18% to 24% is reasonable, fair and just;

"b. The interest rate on the P900,000.00 released on September 27, 1982 be counted from
said date and not from July 4, 1984;
"c. The excess of interest payment collected by defendant bank by debiting plaintiffs current
account be refunded to plaintiff or credited to his current account;
"d. Pending the determination of the merits of this case, a restraining order and or a writ of
preliminary injunction be issued (1) to restrain and or enjoin defendant bank for [sic]
collecting from plaintiff and/or debiting his current account with illegal and excessive
increases of interest rates; and (2) to prevent defendant bank from declaring plaintiff in
default for non-payment and from instituting any foreclosure proceeding, extrajudicial or
judicial, of the valuable commercial property of plaintiff." (pp. 89-90, Rollo.)
In its answer to the complaint, PNB denied that the increases in interest rates were illegal,
unilateral excessive and arbitrary and recited the reasons justifying said increases.
On March 31, 1985, the private respondent paid the P300,000 balance of his obligation to
PNBN (Exh. 5).
The trial court rendered judgment on April 14, 1986, dismissing the complaint because the
increases of interest were properly made.
The private respondent appealed to the Court of Appeals. On June 27, 1989, the Court of
Appeals reversed the trial court, hence, NBs recourse to this Court by a petition for review
under Rule 45 of the Rules of Court.
The assignments of error raised in PNBs petition for review can be resolved into a single
legal issue of whether the bank, within the term of the loan which it granted to the private
respondent, may unilaterally change or increase the interest rate stipulated therein at will
and as often as it pleased.
The answer to that question is no.
In the first place, although Section 2, PD. No. 116 of January 29, 1973, authorizes the
Monetary Board to prescribe the maximum rate or rates of interest for loans or renewal
thereof and to change such rate or rates whenever warranted by prevailing economic and
social conditions, it expressly provides that "such changes shall not be made oftener than
once every twelve months."cralaw virtua1aw library
In this case, PNB, over the objection of the private respondent, and without authority from
the Monetary Board, within a period of only four (4) months, increased the 18% interest rate
on the private respondents loan obligation three (3) times: (a) to 32% in July 1984; (b) to
41% in October 1984; and (c) to 48% in November 1984. Those increases were null and
void, for if the Monetary Board itself was not authorized to make such changes oftener than
once a year, even less so may a bank which is subordinate to the Board.chanrobles law
library : red
Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor did
agree in the Deed of Real Estate Mortgage (Exh. 5) that the interest rate may be increased

during the life of the contract "to such increase within the rate allowed by law, as the Board
of Directors of the MORTGAGEE may prescribe" (Exh. 5-e-1) or "within the limits allowed
by law" (Promissory Notes, Exs. 2, 3, and 4), no law was ever passed in July to November
1984 increasing the interest rates on loans or renewals thereof to 32%, 41% and 48% (per
annum), and no documents were executed and delivered by the debtor to effectuate the
increases. The Court of Appeals observed.
". . . We focus Our attention first of all on the agreement between the parties as embodied in
the following instruments, to wit: (1) Exhibit 1 Credit Agreement dated July 1, 1982; (2)
Exhibit 2 Promissory Note dated July 5, 1982; (3) Exhibit (3) Promissory Note dated
January 3, 1983; (4) Exhibit 4 Promissory Note, dated December 13, 1983; and (5)
Exhibit 5 Real Estate Mortgage contract dated July 1, 1982.
"Exhibit 1 states in its portion marked Exhibit 1-g-1:chanrob1es virtual 1aw library
9 .06 Other Conditions. The Borrowers hereby agree to be bound by the rules and
regulations of the Central Bank and the current and general policies of the Bank and those
which the Bank may adopt in the future, which may have relation to or in any way affect the
Line, which rules, regulations and policies are incorporated herein by reference as if set
forth herein in full. Promptly upon receipt of a written request from the Bank, the Borrowers
shall execute and deliver such documents and instruments, in form and substance
satisfactory to the Bank, in order to effectuate or otherwise comply with such rules,
regulations and policies.
"Exhibits 2, 3, and 4 in their portions respectively marked Exhibits 2-B, 3-B, and 4-B
uniformly authorize the defendant bank to increase the stipulated interest rate of 18% per
annum 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 note shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced by law or by
the Monetary Board.
"Exhibit 5 in its portion marked Exhibit 5-e-1 stipulates:chanrob1es virtual 1aw library
(k) INCREASE OF INTEREST RATE
The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in
accordance with the provisions hereof, shall be subject during the life of this contract to
such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
"Clearly, then, the agreement between the parties authorized the defendant bank to
increase the interest rate beyond the original rate of 18% per annum but within the limits
allowed by law or within the rate allowed by law, it being declared the obligation of the
plaintiff as borrower to execute and deliver the corresponding documents and instruments
to effectuate the increase." (pp. 11-12, Rollo.)
In Banco Filipino Savings and Mortgage Bank v. Navarro, 15 SCRA 346 (1987), this Court
disauthorized the bank from raising the interest rate on the borrowers loan from 12% to
17% despite an escalation clause in the loan agreement signed by the debtors authorizing
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." (Emphasis
supplied.)chanrobles virtual lawlibrary
In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494 dated July 1,
1976 (72 O.G. No. 3, p. 676-J) which provided that "the maximum rate of interest, including
commissions premiums, fees and other charges on loans with a maturity of more than 730
days by banking institution . . . shall be 19%."cralaw virtua1aw library
This Court disallowed the increase for the simple reason that said "Circular No. 494,
although it has the effect of law is not a law." Speaking through Mme. Justice Ameurfina M.
Herrera, this Court held:jgc:chanrobles.com.ph
"It is now clear that from March 17, 1980, escalation clauses to be valid should specifically
provide: (1) that there can be an increase in interest if increased by law or by the Monetary
Board; and (2) in order for such stipulation to be valid, it must include a 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." p. 111, Rollo.).
In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB
Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those
resolution and circulars are neither laws nor resolutions of the Monetary Board.
CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest
rates
". . . increases in interest rates are not subject to any ceiling prescribed by the Usury
Law."cralaw virtua1aw library
but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively
increase the agreed interest rates from 18% to 48% within a span of four (4) months, in
violation of PD. 116 which limits such changes to "once every twelve months."cralaw
virtua1aw library
Besides violating PD. 116, the unilateral action of the PNB in increasing the interest rate on
the private respondents loan, violated the mutuality of contracts ordained in Article 1308 of
the Civil Code:jgc:chanrobles.com.ph
"ART. 1308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them."cralaw virtua1aw library
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void (Garcia v. Rita Legarda, Inc., 21
SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB
and the private respondent gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, that license would have been
null and void for being violative of the principle of mutuality essential in contracts. It would
have invested the loan agreement with the character of a contract of adhesion, where the
parties do not bargain on equal footing, the weaker partys (the debtor) participation being

reduced to the alternative "to take it or leave it" (Qua v. Law Union & Rock Insurance Co.,
95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.
PNBS successive increases of the interest rate on the private respondents loan, over the
latters protest, were arbitrary as they violated an express provision of the Credit Agreement
(Exh. 1) Section 9.01 that its terms "may be amended only by an instrument in writing
signed by the party to be bound as burdened by such amendment." The increases imposed
by PNB also contravene Art. 1956 of the Civil Code which provides that "no interest shall be
due unless it has been expressly stipulated in writing."cralaw virtua1aw library
The debtor herein never agreed in writing to pay the interest increases fixed by the PNB
beyond 24% per annum, hence, he is not bound to pay a higher rate than that.
That an increase in the interest rate from 18% to 48% within a period of four (4) months is
excessive, as found by the Court of Appeals, is indisputable.
WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-G.R.
CV No. 09791, the Court resolved to deny the petition for review for lack of merit, with costs
against the petitioner.
SO ORDERED.
G.R. No. 76518 July 13, 1990
IRENE P. RELUCIO, petitioner,
vs.
ZEIDA B. BRILLANTE-GARFIN and COURT OF APPEALS, respondents.
Orlando A. Martizano for petitioner.
Sivestre V. Garfin for private respondent.
RESOLUTION

FELICIANO, J.:
On 22 October 1979, private respondent Zeida B. Brillante-Garfin filed a complaint in the
lower court for specific performance with damages against petitioner Irene P. Relucio, to
compel the latter to: (a) execute, in compliance with the Contract to Buy and Sell in question,
a final deed of sale in favor of the former over two (2) residential subdivision lots in the
Mariano Village Subdivision, Naga City; and (b) construct paved roads on the northern and
southern sides of the lots, as "necessary facilities, improvements, infrastructures and other
forms of development of the subdivision area." Private respondent alleged that the lots,
which have a total contract price of P10,800.00, have already been paid for, as she had
already paid P200.00 as down payment, and had subsequently completed payment of 128
equal monthly installments of P89.45 each amounting to P11,450.00; that as the law allows
the charging of interest only as monetary interest or as compensatory interest, none of
which have obtained in her case, as she had never incurred in delay in the payment of
installments due, the stipulated interest of six percent (6%) per annum on the outstanding

balance is null and void; and that the amount of 650.00 representing overpayment be
returned to her.
Petitioner resisted the complaint, maintaining that private respondent, contrary to the latter's
allegations, is obliged to pay interest on the installment payments of the unpaid outstanding
balance even if paid on their "due dates" per schedule of payments; that private respondent
had actually been in arrears in the amount of P4,269.40, representing such interest as of
June 1979, which therefore entitled petitioner to cancel the contract in question. Petitioner
then prayed for judicial affirmance of her Notarial Notice of Cancellation over the said
contract in question.
The lower court ordered petitioner:
1. To execute a deed of absolute sale of the two lots described in the complaint in favor of
the plaintiff to enable the latter to secure the corresponding certificate of title in her name
within thirty (30) days from the finality of this Decision;
2. To construct or cause the construction of roads on the Northern and Southern sides of
the said two lots in accordance with the contract if any, and in conformity with the City of
Naga planning ordinance relative to this case;
3. The return to the plaintiff the excess payment of P650.00, plus 6% interest per annum
from the date of the filing of the complaint; and
To pay to the plaintiff attorney's fees in the sum of P l,000.00 and the costs of suit. 1
The Court of Appeals affirmed in A.C.-GR CV No. 03194 by a
Decision 2 dated 17 July 1986.
Petitioner now comes to this Court, arguing that she has the right to rescind the contract for
private respondent's continued refusal to pay the monthly installments on the contract price.
Two issues are presented for resolution in this petition: (1) whether or not private
respondent has fully paid the stipulated price in the contract so as to be entitled lawfully to
demand the execution of a deed of absolute sale in her favor. This issue in turn will depend
on the question of whether or not petitioner may validly charge interest on installment
payments, notwithstanding that private respondent had been prompt in her monthly
payments; and (2) whether or not petitioner's notice of cancellation was valid and effective.
Examination of the record shows that the questioned Contract to Buy and Sell the
subdivision lots provided for payment by private respondent of the sum of P200.00 as
downpayment, and that "the balance [of P10,600.00] shall be paid in 180 monthly
installments at P89.45 per month, including interest rate at six percent (6%) per annum,
until the purchase price is fully paid." 3 This stipulation clearly specified that an interest
charge of six percent (6%) per annum was included in the monthly installment price: private
respondent could not have helped noticing that P89.45 multiplied by 180 monthly
installments equals P16,101.00, and not P10,600.00. The contract price of P10,800.00 may
thus be seen to be the cash price of the subdivision lots, that is, the amount payable if the
price of the lots were to be paid in cash and in full at the execution of the contract; it is not
the amount that the vendor will have received in the aggregate after fifteen (15) years if the
vendee shall have religiously paid the monthly installments. The installment price, upon the
other hand, of the subdivision lots-the sum total of the monthly installments (i.e.,

P16,101.00) typically, as in the instant case, has an interest component which

compensates the vendor for waiting fifteen (15) years before receiving the total principal
amount of P10,600.00. Economically or financially, P10,600.00 delivered in full today is
simply worth much more than a long series of small payments totalling, after fifteen (15)
years, P10,600.00. For the vendor, upon receiving the full cash price, could have deposited
that amount in a bank, for instance, and earned interest income which at six percent (6%)
per year and for fifteen (15) years, would precisely total P5,501.00 (the difference between
the installment price of P16,101.00 and the cash price of P10,600.00) To suppose, as
private respondent argues, that mere prompt payment of the monthly installments as they
fell due would obviate application of the interest charge of six percent (6%) per annum, is to
ignore that simple economic fact. That economic fact is, of course, recognized by law,
which authorizes the payment of interest when contractually stipulated for by the parties 4 or
when implied in recognized commercial custom or usage.
Vendor and vendee are legally free to stipulate for the payment of either the cash price of a
subdivision lot or its installment price. Should the vendee opt to purchase a subdivision lot
via the installment payment system, he is in effect paying interest on the cash price,
whether the fact and rate of such interest payment is disclosed in the contract or not. The
contract for the purchase and sale of a piece of land on the installment payment system in
the case at bar is not only quite lawful; it also reflects a very wide spread usage or custom in
our present day commercial life.
Applying the foregoing analysis to the case at bar: when private respondent started paying
monthly installments in September 1968, the initial P89.45 was apportioned between the
principal and the interest, with P53.00 5 being allocated to service the interest charge and
P36.45 6 being credited to the principal. During the succeeding monthly payments, however,
as the outstanding balance on the principal gradually declined, the interest component (in
absolute terms) correspondingly fell while the component credited to the principal increased
proportionately, thus amortizing the balance of the principal purchase prize as that balance
gradually declined. 7 This explains petitioner's theory of declining balance, which
unfortunately was not appreciated by both the trial and appellate courts.
Despite private respondent's failure to fully pay the stipulated price of the two lots in
question, petitioner, however, could not validly rescind the contract not being lawfully
entitled to do so. Petitioner failed to rebut private respondents' allegations that the former
had failed to introduce required improvements in the subdivision; the former's bare
allegation that the improvements have already been donated to the city government was
not accepted by the trial court. Section 23 of Presidential Decree No. 957, otherwise known
as The Subdivision and Condominium Buyers' Protective Decree, provides:
Section 23. Non-forfeiture of Payments. No installment payment made by the buyer in a
subdivision or condominium project for the lot or unit he contracted to buy shall be forfeited
in favor of the owner or developer when the buyer, after due notice to the owner or
developer desists front further payment due to the failure of the owner or developer to
develop the subdivision or condominium project according to the approved plans and within
the time limit for complying with the same. Such buyer may, at his option, be reimbursed the
total amount paid. . . (Emphasis supplied)
In this respect, the trial court was correct in holding that petitioner could not rescind the
contract. As the law vests upon the buyer the option to demand reimbursement of the total
amount paid, or to wait for further development of the subdivision, private respondent who

opted for the latter alternative by waiting for the proper development of the site, may not be
ousted from the subdivision. 8
ACCORDINGLY, the Court Resolved to GRANT the Petition due course and to SET ASIDE
and NULLIFY the Decision of the Court of Appeals. In lieu thereof, a new Decision is hereby
RENDERED requiring
1. the petitioner to complete the necessary improvements and developments in the
subdivision area in accordance with the approved subdivision plans and applicable
provisions of P.D. No. 957 as well as applicable implementing administrative regulations
and City of Naga zoning ordinances, if any;
2. private respondent immediately to resume paying installment payments under her
Contract to Buy and Sell with petitioner, subject to her right to proceed against petitioner
should petitioner fail again to comply with her obligations under P.D. No. 957; and
3. petitioner to execute the Deed of Absolute Sale when private respondent shall have fully
paid the purchase price in accordance with the mentioned Contract to Buy and Sell.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY,
INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.

VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage
sustained on a shipment of goods can be a solidary, or joint and several, liability of the
common carrier, the arrastre operator and the customs broker; (b) whether the payment of
legal interest on an award for loss or damage is to be computed from the time the complaint
is filed or from the date the decision appealed from is rendered; and (c) whether the
applicable rate of interest, referred to above, is twelve percent (12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and
undisputed facts that have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and
broker-forwarder for damages sustained by a shipment while in defendants' custody, filed
by the insurer-subrogee who paid the consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan
for delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines
under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No.
81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the
custody of defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in
bad order, which damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from
defendant Metro Port Service, Inc., one drum opened and without seal (per "Request for
Bad Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the
shipment to the consignee's warehouse. The latter excepted to one drum which contained
spillages, while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No.
10649, Exh. E).
Plaintiff contended that due to the losses/damage sustained by said drum, the consignee
suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims
were presented against defendants who failed and refused to pay the same (Exhs. H, I, J, K,
L).
As a consequence of the losses sustained, plaintiff was compelled to pay the consignee
P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to
all the rights of action of said consignee against defendants (per "Form of Subrogation",
"Release" and Philbanking check, Exhs. M, N, and O). (pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate
court said:
Defendants filed their respective answers, traversing the material allegations of the
complaint contending that: As for defendant Eastern Shipping it alleged that the shipment
was discharged in good order from the vessel unto the custody of Metro Port Service so
that any damage/losses incurred after the shipment was incurred after the shipment was
turned over to the latter, is no longer its liability (p. 17, Record); Metroport averred that
although subject shipment was discharged unto its custody, portion of the same was
already in bad order (p. 11, Record); Allied Brokerage alleged that plaintiff has no cause of
action against it, not having negligent or at fault for the shipment was already in damage
and bad order condition when received by it, but nonetheless, it still exercised extra
ordinary care and diligence in the handling/delivery of the cargo to consignee in the same
condition shipment was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in the custody of defendants
(in whose respective custody, if determinable);

3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's
pre-Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).
As to the first issue, there can be no doubt that the shipment sustained losses/damages.
The two drums were shipped in good order and condition, as clearly shown by the Bill of
Lading and Commercial Invoice which do not indicate any damages drum that was shipped
(Exhs. B and C). But when on December 12, 1981 the shipment was delivered to defendant
Metro Port Service, Inc., it excepted to one drum in bad order.
Correspondingly, as to the second issue, it follows that the losses/damages were sustained
while in the respective and/or successive custody and possession of defendants carrier
(Eastern), arrastre operator (Metro Port) and broker (Allied Brokerage). This becomes
evident when the Marine Cargo Survey Report (Exh. G), with its "Additional Survey Notes",
are considered. In the latter notes, it is stated that when the shipment was "landed on
vessel" to dock of Pier # 15, South Harbor, Manila on December 12, 1981, it was observed
that "one (1) fiber drum (was) in damaged condition, covered by the vessel's Agent's Bad
Order Tally Sheet No. 86427." The report further states that when defendant Allied
Brokerage withdrew the shipment from defendant arrastre operator's custody on January 7,
1982, one drum was found opened without seal, cello bag partly torn but contents intact.
Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the consignee, one drum
was found with adulterated/faked contents. It is obvious, therefore, that these
losses/damages occurred before the shipment reached the consignee while under the
successive custodies of defendants. Under Art. 1737 of the New Civil Code, the common
carrier's duty to observe extraordinary diligence in the vigilance of goods remains in full
force and effect even if the goods are temporarily unloaded and stored in transit in the
warehouse of the carrier at the place of destination, until the consignee has been advised
and has had reasonable opportunity to remove or dispose of the goods (Art. 1738, NCC).
Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad Order Cargoes"
(Exhs. 3-Eastern) states that on December 12, 1981 one drum was found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of 12% per annum from
October 1, 1982, the date of filing of this complaints, until fully paid (the liability of defendant
Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss,
whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall be to the
extent of the actual invoice value of each package, crate box or container in no case to
exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied
Brokerage Corporation.
SO ORDERED. (p. 207, Record).

Dissatisfied, defendant's recourse to US.

The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the conclusion drawn
therefrom is correct. As there is sufficient evidence that the shipment sustained damage
while in the successive possession of appellants, and therefore they are liable to the
appellee, as subrogee for the amount it paid to the consignee. (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave
abuse of discretion on the part of the appellate court when
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE
ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE
RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE
RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE
COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM
THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX
PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING INDISPUTABLY
UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are
not all that novel. Indeed, we do have a fairly good number of previous decisions this Court
can merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts
from the time the articles are surrendered to or unconditionally placed in the possession of,
and received by, the carrier for transportation until delivered to, or until the lapse of a
reasonable time for their acceptance by, the person entitled to receive them (Arts.
1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar
Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in
damaged condition, a presumption arises against the carrier of its failure to observe that
diligence, and there need not be an express finding of negligence to hold it liable (Art. 1735,
Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port
Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases
when such presumption of fault is not observed but these cases, enumerated in Article
1734 1 of the Civil Code, are exclusive, not one of which can be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of
properly delivering the goods to the consignee has, too, been passed upon by the Court.
In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained,
in holding the carrier and the arrastre operator liable in solidum, thus:
The legal relationship between the consignee and the arrastre operator is akin to that of a
depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The

relationship between the consignee and the common carrier is similar to that of the
consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil.
253 [1960]). Since it is the duty of the ARRASTRE to take good care of the goods that are in
its custody and to deliver them in good condition to the consignee, such responsibility also
devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore
charged with the obligation to deliver the goods in good condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre operator and the
customs broker are themselves always and necessarily liable solidarily with the carrier,
or vice-versa, nor that attendant facts in a given case may not vary the rule. The instant
petition has been brought solely by Eastern Shipping Lines, which, being the carrier and not
having been able to rebut the presumption of fault, is, in any event, to be held liable in this
particular case. A factual finding of both the court a quo and the appellate court, we take
note, is that "there is sufficient evidence that the shipment sustained damage while in the
successive possession of appellants" (the herein petitioner among them). Accordingly, the
liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is
inevitable regardless of whether there are others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more than
just a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of
short deliveries and pilferage of goods. In this case, appellee Malayan Insurance (the
plaintiff in the lower court) averred in its complaint that the total amount of its claim for the
value of the undelivered goods amounted to P3,947.20. This demand, however, was
neither established in its totality nor definitely ascertained. In the stipulation of facts later
entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The
trial court rendered judgment ordering the appellants (defendants) Manila Port Service and
Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51
with legal interest thereon from the date the complaint was filed on 28 December 1962 until
full payment thereof. The appellants then assailed, inter alia, the award of legal interest. In
sustaining the appellants, this Court ruled:
Interest upon an obligation which calls for the payment of money, absent a stipulation, is the
legal rate. Such interest normally is allowable from the date of demand, judicial or
extrajudicial. The trial court opted for judicial demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered
upon unliquidated claims or damages, except when the demand can be established with
reasonable certainty." And as was held by this Court in Rivera vs. Perez, 4 L-6998,
February 29, 1956, if the suit were for damages, "unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof (Montilla c. Corporacion de
P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)
The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of
Damages for Injury to Person and Loss of Property." After trial, the lower court decreed:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
defendants and against the defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly
and severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is
the value of the boat F B Pacita III together with its accessories, fishing gear and equipment
minus P80,000.00 which is the value of the insurance recovered and the amount of
P10,000.00 a month as the estimated monthly loss suffered by them as a result of the fire of
May 6, 1969 up to the time they are actually paid or already the total sum of P370,000.00 as
of June 4, 1972 with legal interest from the filing of the complaint until paid and to pay
attorney's fees of P5,000.00 with costs against defendants and third party plaintiffs.
(Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages awarded but
sustained the trial court in adjudging legal interest from the filing of the complaint until fully
paid. When the appellate court's decision became final, the case was remanded to the
lower court for execution, and this was when the trial court issued its assailed resolution
which applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In
their petition for review on certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus
By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary
Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of
interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in
judgments, in the absence of express contract as to such rate of interest, shall be twelve
(12%) percent per annum. This Circular shall take effect immediately. (Emphasis found in
the text)
should have, instead, been applied. This Court 6 ruled:
The judgments spoken of and referred to are judgments in litigations involving loans or
forbearance of any money, goods or credits. Any other kind of monetary judgment which
has nothing to do with, nor involving loans or forbearance of any money, goods or credits
does not fall within the coverage of the said law for it is not within the ambit of the authority
granted to the Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is one rendered in an
Action for Damages for injury to persons and loss of property and does not involve any loan,
much less forbearances of any money, goods or credits. As correctly argued by the private
respondents, the law applicable to the said case is Article 2209 of the New Civil Code which
reads
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall
be the payment of interest agreed upon, and in the absence of stipulation, the legal interest
which is six percent per annum.

The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated
on 28 July 1986. The case was for damages occasioned by an injury to person and loss of
property. The trial court awarded private respondent Pedro Manabat actual and
compensatory damages in the amount of P72,500.00 with legal interest thereon from the
filing of the complaint until fully paid. Relying on the Reformina v. Tomol case, this
Court 8 modified the interest award from 12% to 6% interest per annum but sustained the
time computation thereof, i.e., from the filing of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of
damages arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from
November 29, 1968, the date of the filing of the complaint until full payment . . . ." Save from
the modification of the amount granted by the lower court, the Court of Appeals sustained
the trial court's decision. When taken to this Court for review, the case, on 03 October 1986,
was decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the
special and environmental circumstances of this case, we deem it reasonable to render a
decision imposing, as We do hereby impose, upon the defendant and the third-party
defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00)
Pesos to cover all damages (with the exception to attorney's fees) occasioned by the loss of
the building (including interest charges and lost rentals) and an additional ONE HUNDRED
THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable
upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent
interest per annum shall be imposed upon aforementioned amounts from finality until paid.
Solidary costs against the defendant and third-party defendants (Except Roman Ozaeta).
(Emphasis supplied)
A motion for reconsideration was filed by United Construction, contending that "the interest
of twelve (12%) per cent per annum imposed on the total amount of the monetary award
was in contravention of law." The Court 10 ruled out the applicability of the Reformina and
Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to Central Bank
Circular No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any
money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or
forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143
SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the
instant case, there is neither a loan or a forbearance, but then no interest is actually
imposed provided the sums referred to in the judgment are paid upon the finality of the
judgment. It is delay in the payment of such final judgment, that will cause the imposition of
the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed on the
total sum, from the filing of the complaint until paid; in other words, as part of the judgment
for damages. Clearly, they are not applicable to the instant case. (Emphasis supplied.)

The subsequent case of American Express International, Inc., vs. Intermediate Appellate
Court 11 was a petition for review on certiorari from the decision, dated 27 February 1985, of
the then Intermediate Appellate Court reducing the amount of moral and exemplary
damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and its
resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial
court, i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary damages
with interest thereon at 12% per annum from notice of judgment, plus costs of suit. In a
decision of 09 November 1988, this Court, while recognizing the right of the private
respondent to recover damages, held the award, however, for moral damages by the trial
court, later sustained by the IAC, to be inconceivably large. The Court 12 thus set aside the
decision of the appellate court and rendered a new one, "ordering the petitioner to pay
private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral
damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid.
(Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which
arose from a breach of employment contract. For having been illegally dismissed, the
petitioner was awarded by the trial court moral and exemplary damages without, however,
providing any legal interest thereon. When the decision was appealed to the Court of
Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental
dated October 31, 1972 is affirmed in all respects, with the modification that
defendants-appellants, except defendant-appellant Merton Munn, are ordered to pay, jointly
and severally, the amounts stated in the dispositive portion of the decision, including the
sum of P1,400.00 in concept of compensatory damages, with interest at the legal rate from
the date of the filing of the complaint until fully paid (Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted to
the trial court, and an entry of judgment was made. The writ of execution issued by the trial
court directed that only compensatory damages should earn interest at 6% per annum from
the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the
trial judge, a petition for certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal
rate" from the time of the filing of the complaint. . . Said circular [Central Bank Circular No.
416] does not apply to actions based on a breach of employment contract like the case at
bar. (Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be computed
from the time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power
Corporation vs. Angas, 14decided on 08 May 1992, involved the expropriation of certain
parcels of land. After conducting a hearing on the complaints for eminent domain, the trial
court ordered the petitioner to pay the private respondents certain sums of money as just
compensation for their lands so expropriated "with legal interest thereon . . . until fully paid."
Again, in applying the 6% legal interest per annum under the Civil Code, the
Court 15 declared:

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or

credits but expropriation of certain parcels of land for a public purpose, the payment of
which is without stipulation regarding interest, and the interest adjudged by the trial court is
in the nature of indemnity for damages. The legal interest required to be paid on the amount
of just compensation for the properties expropriated is manifestly in the form of indemnity
for damages for the delay in the payment thereof. Therefore, since the kind of interest
involved in the joint judgment of the lower court sought to be enforced in this case is interest
by way of damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil Code
shall apply.
Concededly, there have been seeming variances in the above holdings. The cases can
perhaps be classified into two groups according to the similarity of the issues involved and
the corresponding rulings rendered by the court. The "first group" would consist of the
cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo
v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan
Insurance Company v. Manila Port Service (1969), Nakpil and Sons v. Court of
Appeals (1988), and American Express International v. Intermediate Appellate
Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under the
Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily
discernible in these cases that there has been a consistent holding that the Central Bank
Circular imposing the 12% interest per annum applies only to loans or forbearance 16of
money, goods or credits, as well as to judgments involving such loan or forbearance of
money, goods or credits, and that the 6% interest under the Civil Code governs when the
transaction involves the payment of indemnities in the concept of damage arising from the
breach or a delay in the performance of obligations in general. Observe, too, that in these
cases, a common time frame in the computation of the 6% interest per annum has been
applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12%
interest per annum, 17depending on whether or not the amount involved is a loan or
forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike,
however, the "first group" which remained consistent in holding that the running of the legal
interest should be from the time of the filing of the complaint until fully paid, the "second
group" varied on the commencement of the running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the
decision of the court a quo, explaining that "if the suit were for damages, 'unliquidated and
not known until definitely ascertained, assessed and determined by the courts after proof,'
then, interest 'should be from the date of the decision.'" American Express International
v. IAC, introduced a different time frame for reckoning the 6% interest by ordering it to be
"computed from the finality of (the) decision until paid." The Nakpil and Sons case ruled that
12% interest per annum should be imposed from the finality of the decision until the
judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called
for different applications, guided by the rule that the courts are vested with discretion,
depending on the equities of each case, on the award of interest. Nonetheless, it may not

be unwise, by way of clarification and reconciliation, to suggest the following rules of thumb
for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts
or quasi-delicts 18 is breached, the contravenor can be held liable for damages. 19 The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages. 20
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. 21 Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. 22 In the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 23 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the
court 24 at the rate of 6% per annum. 25 No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established with
reasonable certainty. 26 Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with
the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount
due computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX
PERCENT (6%), shall be imposed on such amount upon finality of this decision until the
payment thereof.
SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo,
Melo, Quiason, Puno and Kapunan, JJ., concur.
Mendoza, J., took no part.
G.R. No. L-47180 May 19, 1980

THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY,

INC., petitioner-appellant,
vs.
THE HON. JOSE P. FLORES, and CONCORDIA G. NAVALTA, respondents-appellees.

ABAD SANTOS, J.:+.wph!1

Petition to review the Order of the respondent judge dated August 24, 1977. The facts are
simple.
Private respondent was the plaintiff and the petitioner was the defendant in Civil Case No.
2414 of the Court of First Instance of La Union. On January 22, 1973, the respondent judge
rendered judgment in said case, the dispositive portion of which reads: t.hqw
IN VIEW OF THE FOREGOING, the Court hereby renders judgment and sentences the
defendant to pay Concordia Garcia Navalta the amount of P75,000.00 with legal interest
from October, 1968, Pl,000.00, as attorney's fees am the cost of suit.
The decision was appealed by the petitioner to the Court of Appeals in CA-G.R. No.
52675-R but was affirmed on February 7, 1977. On February 24, 1977, the petitioner paid
the following amounts to the private respondent: t.hqw
On the principal P75,000.00
Interest at 6% per annum
from Oct. 1968* to April 30,
1977 P 38,250.00
Attorney's fee P 1,000.00
Total P114,250.00
(*Art. 2209 of the Civil Code provides: "If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six per cent per annum." This appears to
be the basis for awarding interest at the legal rate from October, 1968, although the debt
was judicially demanded only on July 6, 1970.)
The petitioner was advised by the respondent and her counsel that the payment was not in
fun satisfaction of the judgment because the former had to pay compound interest or an
additional sum of P10,375.77.
Upon refusal of the petitioner to pay the sum additionally claimed, the private respondent
secure a writ of execution for the same which the former sought to quash over the
opposition of the latter. In resolving the question the respondent judge issued an Order on
August 24, 1977 as follows: t.hqw

After hearing and consideration of the motion of the plaintiff for the issuance of an alias writ
of execution, and the written manifestation and opposition filed by the defendant and finding
as it appears that the written schedule of interest computation, which was submitted, is
correct and in order, because compound interest has been computed from July 6, 1970
when the claim was judicially demanded, let an alias writ of execution issue to satisfy
accordingly the unpaid balance as demanded.
It is this Order which is the object of this petition and which raises the question as to
whether or not the petitioner is obligated to pay compound interest under the judgment.
The questioned Order cannot be sustained. The judgment which was sought to be
executed ordered the payment of simple "legal interest" only. It said nothing about the
payment of compound interest. Accordingly, when the respondent judge ordered the
payment of compound interest he went beyond the confines of his own judgment which had
been affirmed by the Court of Appeals and which had become final. Fundamental is the rule
that execution must conform to that ordained or decreed in the dispositive part of the
decision. Likewise, a court can not, except for clerical errors or omissions, amend a
judgment that has become final. (Jabon, et al. vs. Alo, et al., 91 Phil. 750 [1952]; Robles vs.
Timario, et al., 107 Phil. 809 [1960]; Collector of Internal Revenue vs. Gutierrez, et al., 108
Phil. 215 [1960]; Ablaza vs. Sycip, et al., 110 Phil., 4 [1960].)
Private respondent invokes Sec. 5 of the Usury Law which reads in part as follows: "In
computing the interest on any obligation, promissory note or other instrument or contract,
compound interest shall not be reckoned, except by agreement, or, in default thereof,
whenever the debt is judicially claimed in which last case it shall draw six per centum per
annum interest ..." as well as Art. 2212 of the Civil Code which stipulates: "Interest due shall
earn legal interest from the time it is judicially demanded, although the obligation may be
silent upon this point." Both legal provisions are in applicable for they contemplate the
presence of stipulated or conventional interest which had accrued when demand was
judicially made. (Sunico vs. Ramirez, 14 Phil. 500 [1909]; Salvador vs. Palencia, 25 Phil.
661 [1913]; Bachrach vs. Golingco, 39 Phil. 912 [1919]; Robinson vs. Sackermann 46 Phil.
539 [1924]; Philippine Engineering Co. vs. Green, 48 Phil. 466 [1925]; and Cu Unjieng vs.
Mabalacat Sugar Co., 54 Phil. 916 [1930].) In this case no interest had been stipulated by
the parties. In other words, there was no accrued conventional interest which could further
earn interest upon judicial demand.
WHEREFORE, the Order dated August 24, 1977, of the respondent judge is hereby set
aside. No special pronouncement as to costs.
SO ORDERED.
Barredo (Chairman), Aquino, Concepcion, Jr., and De Castro,* JJ., concur.1wph1.t