G.R. No.

L-20240
December 31, 1965
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
JOSE GRIJALDO, defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.
Isabelo P. Samson for defendant-appellant.
ZALDIVAR, J.:
In the year 1943 appellant Jose Grijaldo obtained five
loans from the branch office of the Bank of Taiwan, Ltd. in
Bacolod City, in the total sum of P1,281.97 with interest at
the rate of 6% per annum, compounded quarterly. These
loans are evidenced by five promissory notes executed by
the appellant in favor of the Bank of Taiwan, Ltd., as
follows: On June 1, 1943, P600.00; on June 3, 1943,
P159.11; on June 18, 1943, P22.86; on August 9,
1943,P300.00; on August 13, 1943, P200.00, all notes
without due dates, but because the loans were due one
year after they were incurred. To secure the payment of
the loans the appellant executed a chattel mortgage on
the standing crops on his land, Lot No. 1494 known as
Hacienda Campugas in Hinigiran, Negros Occidental.
By virtue of Vesting Order No. P-4, dated January 21,
1946, and under the authority provided for in the Trading
with the Enemy Act, as amended, the assets in the
Philippines of the Bank of Taiwan, Ltd. were vested in the
Government of the United States. Pursuant to the
Philippine Property Act of 1946 of the United States, these
assets, including the loans in question, were subsequently
transferred to the Republic of the Philippines by the
Government of the United States under Transfer
Agreement dated July 20, 1954. These assets were
among the properties that were placed under the
administration of the Board of Liquidators created under
Executive Order No. 372, dated November 24, 1950, and
in accordance with Republic Acts Nos. 8 and 477 and
other pertinent laws.
On September 29, 1954 the appellee, Republic of the
Philippines, represented by the Chairman of the Board of
Liquidators, made a written extrajudicial demand upon the
appellant for the payment of the account in question. The
record shows that the appellant had actually received the
written demand for payment, but he failed to pay.
The aggregate amount due as principal of the five loans in
question, computed under the Ballantyne scale of values
as of the time that the loans were incurred in 1943, was
P889.64; and the interest due thereon at the rate of 6%
per annum compounded quarterly, computed as of
December 31, 1959 was P2,377.23.
On January 17, 1961 the appellee filed a complaint in the
Justice of the Peace Court of Hinigaran, Negros
Occidental, to collect from the appellant the unpaid
account in question. The Justice of the Peace Of
Hinigaran, after hearing, dismissed the case on the
ground that the action had prescribed. The appellee
appealed to the Court of First Instance of Negros
Occidental and on March 26, 1962 the court a
quo rendered a decision ordering the appellant to pay the
appellee the sum of P2,377.23 as of December 31, 1959,
plus interest at the rate of 6% per annum compounded
quarterly from the date of the filing of the complaint until
full payment was made. The appellant was also ordered to
pay the sum equivalent to 10% of the amount due as
attorney's fees and costs.
The appellant appealed directly to this Court. During the
pendency of this appeal the appellant Jose Grijaldo died.
Upon motion by the Solicitor General this Court, in a
resolution of May 13, 1963, required Manuel Lagtapon,
Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar,
who are the legal heirs of Jose Grijaldo to appear and be
substituted as appellants in accordance with Section 17 of
Rule 3 of the Rules of Court.

In the present appeal the appellant contends: (1) that the

appellee has no cause of action against the appellant; (2)
that if the appellee has a cause of action at all, that action
had prescribed; and (3) that the lower court erred in
ordering the appellant to pay the amount of P2,377.23.
In discussing the first point of contention, the appellant
maintains that the appellee has no privity of contract with
the appellant. It is claimed that the transaction between
the Taiwan Bank, Ltd. and the appellant, so that the
appellee, Republic of the Philippines, could not legally
bring action against the appellant for the enforcement of
the obligation involved in said transaction. This contention
has no merit. It is true that the Bank of Taiwan, Ltd. was
the original creditor and the transaction between the
appellant and the Bank of Taiwan was a private contract of
loan. However, pursuant to the Trading with the Enemy
Act, as amended, and Executive Order No. 9095 of the
United States; and under Vesting Order No. P-4, dated
January 21, 1946, the properties of the Bank of Taiwan,
Ltd., an entity which was declared to be under the
jurisdiction of the enemy country (Japan), were vested in
the United States Government and the Republic of the
Philippines, the assets of the Bank of Taiwan, Ltd. were
transferred to and vested in the Republic of the
Philippines. The successive transfer of the rights over the
loans in question from the Bank of Taiwan, Ltd. to the
United States Government, and from the United States
Government to the government of the Republic of the
Philippines, made the Republic of the Philippines the
successor of the rights, title and interest in said loans,
thereby creating a privity of contract between the appellee
and the appellant. In defining the word "privy" this Court, in
a case, said:
The word "privy" denotes the idea of
succession ... hence an assignee of a credit, and
one subrogated to it, etc. will be privies; in short,
he who by succession is placed in the position of
one of those who contracted the judicial relation
and executed the private document and appears
to be substituting him in the personal rights and
obligation is a privy (Alpurto vs. Perez, 38 Phil.
785, 790).
The United States of America acting as a belligerent
sovereign power seized the assets of the Bank of Taiwan,
Ltd. which belonged to an enemy country. The
confiscation of the assets of the Bank of Taiwan, Ltd.
being an involuntary act of war, and sanctioned by
international law, the United States succeeded to the
rights and interests of said Bank of Taiwan, Ltd. over the
assets of said bank. As successor in interest in, and
transferee of, the property rights of the United States of
America over the loans in question, the Republic of the
Philippines had thereby become a privy to the original
contracts of loan between the Bank of Taiwan, Ltd. and the
appellant. It follows, therefore, that the Republic of the
Philippines has a legal right to bring the present action
against the appellant Jose Grijaldo.
The appellant likewise maintains, in support of his
contention that the appellee has no cause of action, that
because the loans were secured by a chattel mortgage on
the standing crops on a land owned by him and these
crops were lost or destroyed through enemy action his
obligation to pay the loans was thereby extinguished. This
argument is untenable. The terms of the promissory notes
and the chattel mortgage that the appellant executed in
favor of the Bank of Taiwan, Ltd. do not support the claim
of appellant. The obligation of the appellant under the five
promissory notes was not to deliver a determinate thing
namely, the crops to be harvested from his land, or the
value of the crops that would be harvested from his land.
Rather, his obligation was to pay a generic thing the
amount of money representing the total sum of the five

loans, with interest. The transaction between the appellant

and the Bank of Taiwan, Ltd. was a series of five contracts
of simple loan of sums of money. "By a contract of
(simple) loan, one of the parties delivers to another ...
money or other consumable thing upon the condition that
the same amount of the same kind and quality shall be
paid." (Article 1933, Civil Code) The obligation of the
appellant under the five promissory notes evidencing the
loans in questions is to pay the value thereof; that is, to
deliver a sum of money a clear case of an obligation to
deliver, a generic thing. Article 1263 of the Civil Code
provides:
In an obligation to deliver a generic thing, the
loss or destruction of anything of the same kind
does not extinguish the obligation.
The chattel mortgage on the crops growing on appellant's
land simply stood as a security for the fulfillment of
appellant's obligation covered by the five promissory
notes, and the loss of the crops did not extinguish his
obligation to pay, because the account could still be paid
from other sources aside from the mortgaged crops.
In his second point of contention, the appellant maintains
that the action of the appellee had prescribed. The
appellant points out that the loans became due on June 1,
1944; and when the complaint was filed on January
17,1961 a period of more than 16 years had already
elapsed far beyond the period of ten years when an
action based on a written contract should be brought to
court.
This contention of the appellant has no merit. Firstly, it
should be considered that the complaint in the present
case was brought by the Republic of the Philippines not as
a nominal party but in the exercise of its sovereign
functions, to protect the interests of the State over a public
property. Under paragraph 4 of Article 1108 of the Civil
Code prescription, both acquisitive and extinctive, does
not run against the State. This Court has held that the
statute of limitations does not run against the right of
action of the Government of the Philippines (Government
of the Philippine Islands vs. Monte de Piedad, etc., 35
Phil. 738-751).Secondly, the running of the period of
prescription of the action to collect the loan from the
appellant was interrupted by the moratorium laws
(Executive Orders No. 25, dated November 18, 1944;
Executive Order No. 32. dated March 10, 1945; and
Republic Act No. 342, approved on July 26, 1948). The
loan in question, as evidenced by the five promissory
notes, were incurred in the year 1943, or during the period
of Japanese occupation of the Philippines. This case is
squarely covered by Executive Order No. 25, which
became effective on November 18, 1944, providing for the
suspension of payments of debts incurred after December
31, 1941. The period of prescription was, therefore,
suspended beginning November 18, 1944. This Court, in
the case of Rutter vs. Esteban (L-3708, May 18, 1953, 93
Phil. 68), declared on May 18, 1953 that the Moratorium
Laws, R.A. No. 342 and Executive Orders Nos. 25 and 32,
are unconstitutional; but in that case this Court ruled that
the moratorium laws had suspended the prescriptive
period until May 18, 1953. This ruling was categorically
reiterated in the decision in the case of Manila Motors vs.
Flores, L-9396, August 16, 1956. It follows, therefore, that
the prescriptive period in the case now before US was
suspended from November 18,1944, when Executive
Orders Nos. 25 and 32 were declared unconstitutional by
this Court. Computed accordingly, the prescriptive period
was suspended for 8 years and 6 months. By the
appellant's own admission, the cause of action on the five
promissory notes in question arose on June 1, 1944. The
complaint in the present case was filed on January 17,
1961, or after a period of 16 years, 6 months and 16 days
when the cause of action arose. If the prescriptive period
was not interrupted by the moratorium laws, the action

would have prescribed already; but, as We have stated,

the prescriptive period was suspended by the moratorium
laws for a period of 8 years and 6 months. If we deduct the
period of suspension (8 years and 6 months) from the
period that elapsed from the time the cause of action
arose to the time when the complaint was filed (16 years,
6 months and 16 days) there remains a period of 8 years
and 16 days. In other words, the prescriptive period ran for
only 8 years and 16 days. There still remained a period of
one year, 11 months and 14 days of the prescriptive period
when the complaint was filed.
In his third point of contention the appellant maintains that
the lower court erred in ordering him to pay the amount of
P2,377.23. It is claimed by the appellant that it was error
on the part of the lower court to apply the Ballantyne Scale
of values in evaluating the Japanese war notes as of June
1943 when the loans were incurred, because what should
be done is to evaluate the loans on the basis of the
Ballantyne Scale as of the time the loans became due,
and that was in June 1944. This contention of the
appellant is also without merit.
The decision of the court a quo ordered the appellant to
pay the sum of P2,377.23 as of December 31, 1959, plus
interest rate of 6% per annum compounded quarterly from
the date of the filing of the complaint. The sum total of the
five loans obtained by the appellant from the Bank of
Taiwan, Ltd. was P1,281.97 in Japanese war notes.
Computed under the Ballantyne Scale of values as of
June 1943, this sum of P1,281.97 in Japanese war notes
in June 1943 is equivalent to P889.64 in genuine
Philippine currency which was considered the aggregate
amount due as principal of the five loans, and the amount
of P2,377.23 as of December 31, 1959 was arrived at after
computing the interest on the principal sum of P889.64
compounded quarterly from the time the obligations were
incurred in 1943.
It is the stand of the appellee that the Ballantyne scale of
values should be applied as of the time the obligation was
incurred, and that was in June 1943. This stand of the
appellee was upheld by the lower court; and the decision
of the lower court is supported by the ruling of this Court in
the case of Hilado vs. De la Costa (G.R. No. L-150, April
30, 1949; 46 O.G. 5472), which states:
... Contracts stipulating for payments presumably
in Japanese war notes may be enforced in our
Courts after the liberation to the extent of the just
obligation of the contracting parties and, as said
notes have become worthless, in order that
justice may be done and the party entitled to be
paid can recover their actual value in Philippine
Currency, what the debtor or defendant bank
should return or pay is the value of the Japanese
military notes in relation to the peso in Philippine
Currency obtaining on the date when and at the
place where the obligation was incurred unless
the parties had agreed otherwise. ... . (italics
supplied)
IN VIEW OF THE FOREGOING, the decision appealed
from is affirmed, with costs against the appellant.
Inasmuch as the appellant Jose Grijaldo died during the
pendency of this appeal, his estate must answer in the
execution of the judgment in the present case.
Bengzon, C.J., Concepcion, Barrera, Regala, Bautista
Angelo, Reyes, J.B.L., Makalintal and Bengzon, J.P.,
JJ.,concur.
G.R. No. L-32644
October 4, 1930
CU UNJIENG E HIJOS, plaintiff-appelle,
vs.
THE MABALACAT SUGAR CO., ET AL., defendants.
THE MABALACAT SUGAR CO., appellant.
Romeo Mercado for appellant.
Araneta and Zaragoza for plaintiff-appellee.
Duran and Lim for defendant-appellee Siuliong and Co.

STREET, J.:
This action was instituted in the Court of First Instance of
Pampanga by Cu Unjieng e Hijos, for the purpose of
recovering from the Mabalacat Sugar Company an
indebtedness amounting to more than P163,00, with
interest, and to foreclose a mortgage given by the debtor
to secure the same, as well as to recover stipulated
attorney's fee and the sum of P1,206, paid by the plaintiff
for insurance upon the mortgaged property, with incidental
relief. In the complaint Siuliong & Co., Inc., was joined as
defendant, as a surety of the Mabalacat Sugar Company,
and as having a third mortgage on the mortgaged
property. The Philippine National Bank was also joined by
reason of its interest as second mortgagee of the land
covered by the mortgage to the plaintiff. After the cause
had been brought to issue by the answers of the several
defendants, the cause was heard and judgment rendered,
the dispositive portion of the decision being as follows:
Por las consideraciones expuestas, el Juzgado
condena a The Mabalacat Sugar Company a
pagar a la demandante la suma de P163,534.73,
con sus intereses de 12 por ciento al ano,
compuestos mensualmente desde el 1. de mayo
de 1929. Tambien se le condena a pagar a dicha
demandante la suma de P2,412 por las primas
de seguros abonadas por esta, con sus intereses
de 12 por ciento al ano, compuestos tambien
mensualmente desde el 15 de mayo de 1928,
mas la de P7,500 por honorarios de abogados y
las costas del juicio. Y si esta deuda no se
pagare dentro del plazo de tres meses, se
ejecutaran los bienes hipotecados de acuerdo
con la ley.
Si del producto de la venta hubiese algun
remanente, este se destinara al pago del credito
del Banco Nacional, o sea de P32,704.69, con
sus intereses de 9 por ciento al ano desde el 7
de junio de 1929, sin perjuicio de la orden de
ejecucion que pudiera expedirse en el asundo
No. 26435 del Juzgado de Primera Instancia de
Manila.
Se condena ademas a The Mabalacat Sugar
Company al pago de la suma de P3,205.78
reclamada por Siuliong & Co., con sus intereses
de 9 por ciento al ano desde el 29 de julio de
1926 hasta su completo pago, ordenandola que
rinda cuentas del azucar por ella producido y
pague la comision correspondiente bajo la base
de 5 por ciento de su valor, descontandose,
desde luego, las cantidades ya pagadas.
Se absuelve de la demanda de Cu Unjieng e
Hijos a Siuliong & Co., Inc.
From this judgment the defendant, the Mabalacat Sugar
Company, appealed.
The first point assigned as error has relation to the
question whether the action was prematurely stated. In
this connection we note that the mortgage executed by the
Mabalacat Sugar Company contains, in paragraph 5, a
provision to the effect that non-compliance on the part of
the mortgage debtor with any of the obligations assumed
in virtue of this contract will cause the entire debt to
become due and give occasion for the foreclosure of the
mortgage. The debtor party failed to comply with the
obligation, imposed upon it in the mortgage, to pay the
mortgage debt in the stipulated installments at the time
specified in the contract. It results that the creditor was
justified in treating the entire mortgage debt as having
been accelerated by such failure of the debtor in paying
the installments.
It appears, however, that on or about October 20, 1928,
the mortgage creditor, Cu Unjieng e Hijos, agreed to
extend the time for payment of the mortgage indebtedness
1awph!l.net

until June 30, 1929, with certain interim payments to be

made upon specified dates prior to the contemplated final
liquidation of the whole indebtedness. But the debtor party
failed to make the interim payments due on February 25,
1929, March 25, 1929, and April 25, 1929, and failed
altogether to pay the balance due, according to the terms
of this extension, on June 30, 1929. Notwithstanding the
failure of the debtor to comply with the terms of this
extension, it is insisted for the appellant that this
agreement for the extension of the time of payment had
the effect of abrogating the stipulation of the original
contract with respect to the acceleration of the maturity of
the debt by non-compliance with the terms of the
mortgage. As the trial court pointed out, this contention is
untenable. The agreement to extend the time of payment
was voluntary and without consideration so far as the
creditor is concerned; and the failure of the debtor to
comply with the terms of the extension justified the creditor
in treating it as of no effect. The first error is therefore
without merit.
The second error is directed to the propriety of the interest
charges made by the plaintiff in estimating the amount of
the indebtedness. In this connection we note that, under
the second clause of the mortgage, interest should be
calculated upon the indebtedness at the rate of 12 per
cent per annum. In the same clause, but in a separate
paragraph, there is another provision with respect to the
payment of interest expressed in Spanish in the following
words:
Los intereses seran pagados mensualmente a fin
de cada mes, computados teniendo en cuenta el
capital del prestamo aun no pagado.
Translated into English this provision reads substantially
as follows: "Interest, to be computed upon the still unpaid
capital of the loan, shall be paid monthly, at the end of
each month."
It is well settled that, under article 1109 of the Civil Code,
as well as under section 5 of the Usury Law (Act No.
2655), the parties may stipulate that interest shall be
compounded; and rests for the computation of compound
interest can certainly be made monthly, as well as
quarterly, semiannually, or annually. But in the absence of
express stipulation for the accumulation of compound
interest, no interest can be collected upon interest until the
debt is judicially claimed, and then the rate at which
interest upon accrued interest must be computed is fixed
at 6 per cent per annum.
In the present case, however, the language which we have
quoted above does not justify the charging of interest
upon interest, so far as interest on the capital is
concerned. The provision quoted merely requires the
debtor to pay interest monthly at the end of each month,
such interest to be computed upon the capital of the loan
not already paid. Clearly this provision does not justify the
charging of compound interest upon the interest accruing
upon the capital monthly. It is true that in subsections (a),
(b) and (c) of article IV of the mortgage, it is stipulated that
the interest can be thus computed upon sums which the
creditor would have to pay out (a) to maintain insurance
upon the mortgaged property, (b) to pay the land tax upon
the same property, and (c) upon disbursements that might
be made by the mortgagee to maintain the property in
good condition. But the chief thing is that interest cannot
be thus accumulated on unpaid interest accruing upon the
capital of the debt.
The trial court was of the opinion that interest could be so
charged, because of the Exhibit 1 of the Mabalacat Sugar
Company, which the court considered as an interpretation
by the parties to the contract and a recognition by the
debtor of the propriety of compounding the interest earned
by the capital. But the exhibit referred to is merely a
receipt showing that the sum of P256.28 was, on March
19, 1928, paid by the debtor to the plaintiff as interest

upon interest. But where interest is improperly charged, at

an unlawful rate, the mere voluntary payment of it to the
creditor by the debtor is not binding. Such payment, in the
case before us, was usurious, being in excess of 12 per
cent which is allowed to be charged, under section 2 of
the Usury Law, when a debt is secured by mortgage upon
real property. The Exhibit 1 therefore adds no support to
the contention of the plaintiff that interest upon interest can
be accumulated in the manner adopter by the creditor in
this case. The point here ruled is in exact conformity with
the decision of this court in Bachrach Garage and Taxicab
Co. vs. Golingco (39 Phil., 192), where this court held that
interest cannot be allowed in the absence of stipulation, or
in default thereof, except when the debt is judicially
claimed; and when the debt is judicially claimed, the
interest upon the interest can only be computed at the rate
of 6 per cent per annum.
It results that the appellant's second assignment of error is
well taken, and the compound interest must be eliminated
from the judgment. With respect to the amount improperly
charged, we accept the estimate submitted by the
president and manager of the Mabalacat Sugar Company,
who says that the amount improperly included in the
computation made by the plaintiff's bookkeeper is
P879.84, in addition to the amount of P256.28 covered by
Exhibit 1 of the Mabalacat Sugar Company. But the
plaintiff creditor had the right to charge interest, in the
manner adopted by it, upon insurance premiums which it
had paid out; and if any discrepancy of importance is
discoverable by the plaintiff in the result here reached, it
will be at liberty to submit a revised computation in this
court, upon motion for reconsideration, wherein interest
shall be computed in accordance with this opinion, that is
to say, that no accumulation of interest will be permitted at
monthly intervals, as regards the capital of the debt, but
such unpaid interest shall draw interest at the rate of 6 per
cent from the date of the institution of the action.
In the third assignment of error the appellant complains,
as excessive, of the attorney's fees allowed by the court in
accordance with stipulation in the mortgage. The
allowance made on the principal debt was around 4 per
cent, and about the same upon the fee allowed to the
bank. Under the circumstances we think the debtor has no
just cause for complaint upon this score.
The fourth assignment of error complains of the failure of
the trial court to permit an amendment to be filed by the
debtor to its answer, the application therefore having been
made on the day when the cause had been set for trial,
with notice that the period was non-extendible. The point
was a matter in the discretion of the court, and no abuse
of discretion is shown.
From what has been stated, it follows that the appealed
judgment must be modified by deducting the sum of
P1,136.12 from the principal debt, so that the amount of
said indebtedness shall be P162,398.61, with interest at
12 per cent per annum, from May 1, 1929. In other
respects the judgment will be affirmed, and it is so
ordered, with cost against the appellant.
Avancea, C.J., Malcolm, Villamor, Ostrand, Johns,
Romualdez and Villa-Real, JJ., concur.
G.R. No. L-28497
November 6, 1928
THE BACHRACH MOTOR CO., INC., plaintiff-appellee,
vs.
FAUSTINO ESPIRITU, defendant-appellant.
-----------------------------G.R. No. L-28498
November 6, 1928
THE BACHRACH MOTOR CO., INC., plaintiff-appellee,
vs.
FAUSTINO ESPIRITU, defendant-appellant, and
ROSARIO ESPIRITU, intervenor-appellant.
Ernesto Zaragoza and Simeon Ramos for defendantappellant.
Benito Soliven and Jose Varela Calderon for intervenor-

appellant.
B. Francisco for appellee.
AVANCEA, C. J.:
These two cases, Nos. 28497 and 28948, were tried
together.
It appears, in connection with case 28497; that on July 28,
1925 the defendant Faustino Espiritu purchased of the
plaintiff corporation a two-ton White truck for P11,983.50,
paying P1,000 down to apply on account of this price, and
obligating himself to pay the remaining P10,983.50 within
the periods agreed upon. To secure the payment of this
sum, the defendants mortgaged the said truck purchased
and, besides, three others, two of which are numbered
77197 and 92744 respectively, and all of the White make
(Exhibit A). These two trucks had been purchased from
the same plaintiff and were fully paid for by the defendant
and his brother Rosario Espiritu. The defendant failed to
pay P10,477.82 of the price secured by this mortgage.
In connection with case 28498, it appears that on
February 18, 1925 the defendant bought a oneton White truck of the plaintiff corporation for the sum of
P7,136.50, and after having deducted the P500 cash
payment and the 12 per cent annual interest on the unpaid
principal, obligated himself to make payment of this sum
within the periods agreed upon. To secure this payment
the defendant mortgaged to the plaintiff corporation the
said truck purchased and two others, numbered 77197
and 92744, respectively, the same that were mortgaged in
the purchase of the other truck referred to in the other
case. The defendant failed to pay P4,208.28 of this sum.
In both sales it was agreed that 12 per cent interest would
be paid upon the unpaid portion of the price at the
executon of the contracts, and in case of non-payment of
the total debt upon its maturity, 25 per cent thereon, as
penalty.
In addition to the mortagage deeds referred to, which the
defendant executed in favor of the plaintiff, the defendant
at the same time also signed a promissory note solidarily
with his brother Rosario Espiritu for the several sums
secured by the two mortgages (Exhibits B and D).
Rosario Espiritu appeared in these two cases as
intervenor, alleging to be the exclusive owner of the two
White trucks Nos. 77197 and 92744, which appear to have
been mortgaged by the defendants to the plaintiff.
While these two cases were pending in the lower court the
mortgaged trucks were sold by virtue of the mortgage, all
of them together bringing in, after deducting the sheriff's
fees and transportation charges to Manila, the net sum of
P3,269.58.
The judgment appealed from ordered the defendants and
the intervenor to pay plaintiff in case 28497 the sum of
P7,732.09 with interest at the rate of 12 per cent per
annum from May 1, 1926 until fully paid, and 25 per cent
thereof in addition as penalty. In case 28498, the trial court
ordered the defendant and the intervenor to pay plaintiff
the sum of P4,208.28 with interest at 12 per cent per
annum from December 1, 1925 until fully paid, and 25 per
cent thereon as penalty.
The appellants contend that trucks 77197 and 92744 were
not mortgaged, because, when the defendant signed the
mortgage deeds these trucks were not included in those
documents, and were only put in later, without defendant's
knowledge. But there is positive proof that they were
included at the time the defendant signed these
documents. Besides, there were presented two of
defendant's letters to Hidalgo, an employee of the
plaintiff's written a few days before the transaction,
acquiescing in the inclusion of all his White trucks already
paid for, in the mortgage (Exhibit H-I).
Appellants also alleged that on February 4, 1925, the
defendant sold his rights in said trucks Nos. 77197 and
92744 to the intervenor, and that as the latter did not sign
the mortgage deeds, such trucks cannot be considered as
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mortgaged. But the evidence shows that while the

intervenor Rosario Espiritu did not sign the two mortgage
deeds (Exhibits A and C), yet, together with the
defendants Faustino Espiritu, he signed the two
promissory notes (Exhibits B and D) secured by these two
mortgages. All these instruments were executed at the
same time, and when the trucks 77197 and 92744 were
included in the mortgages, the intervenor Rosario Espiritu
was aware of it and consented to such inclusion. These
facts are supported by the testimony of Bachrach,
manager of the plaintiff corporation, of Agustin Ramirez,
who witnessed the execution of all these documents, and
of Angel Hidalgo, who witnessed the execution of Exhibits
B and D.
We do not find the statement of the intervenor Rosario
Espiritu that he did not sign promissory notes Exhibits B
and C to be sufficient to overthrow this evidence. A
comparison of his genuine signature on Exhibit AA with
those appearing on promissory notes B and C, convinces
us that the latter are his signatures. And such is our
conclusion, notwithstanding the evidence presented to
establish that on the date when Exhibits B appears to
have been signed, that is July 25, 1925, the intervenor
was in Batac, Ilocos Norte, many miles away from Manila.
And the fact that on the 24th of said month of July, the
plaintiff sent some truck accessory parts by rail to Ilocos
for the intervenor does not necessarily prove that the latter
could not have been in Manila on the 25th of that month.
In view of his conclusion that the intervenor signed the
promissory notes secured by trucks 77197 and 92744 and
consented to the mortgage of the same, it is immaterial
whether he was or was not the exclusive owner thereof.
It is finally contended that the 25 per cent penalty upon the
debt, in addition to the interest of 12 per cent per annum,
makes the contract usurious. Such a contention is not well
founded. Article 1152 of the Civil Code permits the
agreement upon a penalty apart from the interest. Should
there be such an agreemnet, the penalty, as was held in
the case of Lopez vs. Hernaez (32 Phil., 631), does not
include the interest, and which may be demamded
separetely. According to this, the penalty is not to be
added to the interest for the determination of whether the
interest exceeds the rate fixed by the law, since said rate
was fixed only for the interest. But considering that the
obligation was partly performed, and making use of the
power given to the court by article 1154 of the Civil Code,
this penalty is reduced to 10 per cent of the unpaid debt.
With the sole modification that instead of 25 per cent upon
the sum owed, the defendants need pay only 10 per cent
thereon as penalty, the judgment appealed from is affired
in all other respects without special pronouncement as to
costs. So ordered.
Spouses PONCIANO ALMEDA and EUFEMIA P.
ALMEDA, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE NATIONAL
BANK, respondents.
KAPUNAN, J.:p
On various dates in 1981, the Philippine National Bank
granted to herein petitioners, the spouses Ponciano L.
Almeda and Eufemia P. Almeda several loan/credit
accommodations totaling P18.0 Million pesos payable in a
period of six years at an interest rate of 21% per annum.
To secure the loan, the spouses Almeda executed a Real
Estate Mortgage Contract covering a 3,500 square meter
parcel of land, together with the building erected thereon
(the Marvin Plaza) located at Pasong Tamo, Makati, Metro
Manila. A credit agreement embodying the terms and
conditions of the loan was executed between the parties.
Pertinent portions of the said agreement are quoted
below:
SPECIAL CONDITIONS

xxx xxx xxx

The loan shall be subject to interest at
the rate of twenty one per cent
(21%) per annum, payable semiannually in arrears, the first interest
payment to become due and payable six
(6) months from date of initial release of
the loan. The loan shall likewise be
subject to the appropriate service
charge and a penalty charge of three
per cent (30%) per annum to be
imposed on any amount remaining
unpaid or not rendered when due.
xxx xxx xxx
III. OTHER CONDITIONS
(c) Interest and Charges
(1) The Bank reserves
the right to increase
the interest rate within
the limits allowed by
law at any time
depending on
whatever policy it may
adopt in the future;
provided, that the
interest rate on
this/these
accommodations shall
be correspondingly
decreased in the
event that the
applicable maximum
interest rate is
reduced by law or by
the Monetary Board.
In either case, the
adjustment in
the interest rate agree
d upon shall take
effect on the effectivity
date of the increase or
decrease of the
maximum interest
rate. 1
Between 1981 and 1984, petitioners made several partial
payments on the loan totaling. P7,735,004.66, 2 a

substantial portion of which was applied to accrued

interest. 3 On March 31, 1984, respondent bank, over
petitioners' protestations, raised the interest rate to
28%, allegedly pursuant to Section III-c (1) of its
credit agreement. Said interest rate thereupon
increased from an initial 21% to a high of 68%
between March of 1984 to September, 1986. 4
Petitioner protested the increase in interest rates, to no
avail. Before the loan was to mature in March, 1988, the
spouses filed on February 6, 1988 a petition for
declaratory relief with prayer for a writ of preliminary
injunction and temporary restraining order with the
Regional Trial Court of Makati, docketed as Civil Case No.
18872. In said petition, which was raffled to Branch 134
presided by Judge Ignacio Capulong, the spouses sought
clarification as to whether or not the PNB could unilaterally
raise interest rates on the loan, pursuant to the credit
agreement's escalation clause, and in relation to Central
Bank Circular No. 905. As a preliminary measure, the
lower court, on March 3, 1988, issued a writ of preliminary
injunction enjoining the Philippine National Bank from
enforcing an interest rate above the 21% stipulated in the
credit agreement. By this time the spouses were already in
default of their loan obligations.
Invoking the Law on Mandatory Foreclosure (Act 3135, as
amended and P.D. 385), the PNB countered by ordering

the extrajudicial foreclosure of petitioner's mortgaged

properties and scheduled an auction sale for March 14,
1989. Upon motion by petitioners, however, the lower
court, on April 5, 1989, granted a supplemental writ of
preliminary injunction, staying the public auction of the
mortgaged property.
On January 15, 1990, upon the posting of a counterbond
by the PNB, the trial court dissolved the supplemental writ
of preliminary injunction. Petitioners filed a motion for
reconsideration. In the interim, respondent bank once
more set a new date for the foreclosure sale of Marvin
Plaza which was March 12, 1990. Prior to the scheduled
date, however, petitioners tendered to respondent bank
the amount of P40,142,518.00, consisting of the principal
(P18,000,000.00) and accrued interest calculated at the
originally stipulated rate of 21%. The PNB refused to
accept the payment. 5
As a result of PNB's refusal of the tender of payment,
petitioners, on March 8, 1990, formally consigned the
amount of P40,142,518.00 with the Regional Trial Court in
Civil Case No. 90-663. They prayed therein for a writ of
preliminary injunction with a temporary restraining order.
The case was raffled to Branch 147, presided by Judge
Teofilo Guadiz. On March 15, 1990, respondent bank
sought the dismissal of the case.
On March 30, 1990 Judge Guadiz in Civil Case No. 90663 issued an order granting the writ of preliminary
injunction enjoining the foreclosure sale of "Marvin Plaza"
scheduled on March 12, 1990. On April 17, 1990
respondent bank filed a motion for reconsideration of the
said order.
On August 16, 1991, Civil Case No. 90-663 we transferred
to Branch 66 presided by Judge Eriberto Rosario who
issued an order consolidating said case with Civil Case
18871 presided by Judge Ignacio Capulong.
For Judge Ignacio's refusal to lift the writ of preliminary
injunction issued March 30, 1990, respondent bank filed a
petition for Certiorari, Prohibition and Mandamus with
respondent Court of Appeals, assailing the following
orders of the Regional Trial Court:
1. Order dated March 30, 1990 of Judge
Guadiz granting the writ of preliminary
injunction restraining the foreclosure
sale of Mavin Plaza set on March 12,
1990;
2. Order of Judge Ignacio Capulong
dated January 10, 1992 denying
respondent bank's motion to lift the writ
of injunction issued by Judge Guadiz as
well as its motion to dismiss Civil Case
No. 90-663;
3. Order of Judge Capulong dated July
3, 1992 denying respondent bank's
subsequent motion to lift the writ of
preliminary injunction; and
4. Order of Judge Capulong dated
October 20, 1992 denying respondent
bank's motion for reconsideration.
On August 27, 1993, respondent court rendered its
decision setting aside the assailed orders and upholding
respondent bank's right to foreclose the mortgaged
property pursuant to Act 3135, as amended and P.D. 385.
Petitioners' Motion for Reconsideration and Supplemental
Motion for Reconsideration, dated September 15, 1993
and October 28, 1993, respectively, were denied by
respondent court in its resolution dated January 10, 1994.
Hence the instant petition.
This appeal by certiorari from the respondent court's
decision dated August 27, 1993 raises two principal issues
namely: 1) Whether or not respondent bank was
authorized to raise its interest rates from 21% to as high
as 68% under the credit agreement; and 2) Whether or not
respondent bank is granted the authority to foreclose the

Marvin Plaza under the mandatory foreclosure provisions

of P.D. 385.
In its comment dated April 19, 1994, respondent bank
vigorously denied that the increases in the interest rates
were illegal, unilateral, excessive and arbitrary, it argues
that the escalated rates of interest it imposed was based
on the agreement of the parties. Respondent bank further
contends that it had a right to foreclose the mortgaged
property pursuant to P.D. 385, after petitioners were
unable to pay their loan obligations to the bank based on
the increased rates upon maturity in 1984.
The instant petition is impressed with merit.
The binding effect of any agreement between parties to a
contract is premised on two settled principles: (1) that any
obligation arising from contract has the force of law
between the parties; and (2) that there must be mutuality
between the parties based on their essential
equality. 6 Any contract which appears to be heavily

weighed in favor of one of the parties so as to lead

to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract
which is left solely to the will of one of the parties, is
likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of
the case that respondent bank unilaterally altered the
terms of its contract with petitioners by increasing the
interest rates on the loan without the prior assent of the
latter. In fact, the manner of agreement is itself explicitly
stipulated by the Civil Code when it provides, in Article
1956 that "No interest shall be due unless it has been
expressly stipulated in writing." What has been "stipulated
in writing" from a perusal of interest rate provision of the
credit agreement signed between the parties is that
petitioners were bound merely to pay 21% interest, subject
to a possible escalation or de-escalation, when 1) the
circumstances warrant such escalation or de-escalation;
2) within the limits allowed by law; and 3) upon agreement.
Indeed, the interest rate which appears to have been
agreed upon by the parties to the contract in this case was
the 21% rate stipulated in the interest provision. Any doubt
about this is in fact readily resolved by a careful reading of
the credit agreement because the same plainly uses the
phrase "interest rate agreed upon," in reference to the
original 21% interest rate. The interest provision states:
(c) interest and Charges
(1) The Bank reserves the right to
increase the interest rate within the
limits allowed by law at any time
depending on whatever policy it may
adopt in the future; provided, that the
interest rate on this/these
accommodations shall be
correspondingly decreased in the event
that the applicable maximum interest
rate is reduced by law or by the
Monetary Board. In either case, the
adjustment in the interest rate agreed
upon shall take effect on the effectivity
date of the increase or decrease of the
maximum interest rate.
In Philippine National Bank v. Court of Appeals, 7 this

Court disauthorized respondent bank from

unilaterally raising the interest rate in the borrower's
loan from 18% to 32%, 41% and 48% partly
because the aforestated increases violated the
principle of mutuality of contracts expressed in
Article 1308 of the Civil Code. The Court held:
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.
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.
Besides violating P.D. 116, the unilateral
action of the PNB in increasing the
interest rate on the private respondent's
loan, violated the mutuality of contracts
ordained in Article 1308 of the Civil
Code:
Art. 308. The contract must bind both
contracting parties; its validity or
compliance cannot be left to the will of
one of them.
In order that obligations arising from
contracts may have the force of law
between the parties, there must
be mutuality between the parties based
on their essential equality. A contract
containing a condition which makes its
fulfillment dependent exclusively upon
the uncontrolled will of one of the
contracting parties, is void (Garcia vs.
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 party's (the
debtor) participation being reduced to
the alternative "to take it or lease it"
(Qua vs. Law Union & Rock Insurance
Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party whom
the courts of justice must protect against
abuse and imposition.
PNB's successive increases of the
interest rate on the private respondent's
loan, over the latter's 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."
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.
Clearly, the galloping increases in interest rate imposed by
respondent bank on petitioners' loan, over the latter's
vehement protests, were arbitrary.
Moreover, respondent bank's reliance on C.B. Circular No.
905, Series of 1982 did not authorize the bank, or any
lending institution for that matter, to progressively increase
interest rates on borrowings to an extent which would
have made it virtually impossible for debtors to comply
with their own obligations. True, escalation clauses in
credit agreements are perfectly valid and do not
contravene public policy. Such clauses, however, (as are
stipulations in other contracts) are nonetheless still subject
to laws and provisions governing agreements between
parties, which agreements while they may be the law
between the contracting parties implicitly incorporate
provisions of existing law. Consequently, while the Usury
Law ceiling on interest rates was lifted by C.B. Circular
905, nothing in the said circular could possibly be read as
granting respondent bank carte blanche authority to raise
interest rates to levels which would either enslave its
borrowers or lead to a hemorrhaging of their assets.
Borrowing represents a transfusion of capital from lending
institutions to industries and businesses in order to
stimulate growth. This would not, obviously, be the effect
of PNB's unilateral and lopsided policy regarding the
interest rates of petitioners' borrowings in the instant case.
Apart from violating the principle of mutuality of contracts,
there is authority for disallowing the interest rates imposed
by respondent bank, for the credit agreement specifically
requires that the increase be "within the limits allowed by
law". In the case of PNB v. Court of Appeals, cited above,
this Court clearly emphasized that C.B. Circular No. 905
could not be properly invoked to justify the escalation
clauses of such contracts, not being a grant of specific
authority.
Furthermore, the escalation clause of the credit agreement
requires that the same be made "within the limits allowed
by law," obviously referring specifically to legislative
enactments not administrative circulars. Note that the
phrase "limits imposed by law," refers only to the
escalation clause. However, the same agreement allows
reduction on the basis of law or the Monetary Board. Had
the parties intended the word "law" to refer to both
legislative enactments and administrative circulars and
issuances, the agreement would not have gone as far as
making a distinction between "law or the Monetary Board
Circulars" in referring to mutually agreed upon reductions
in interest rates. This distinction was the subject of the
Court's disquisition in the case of Banco Filipino Savings
and Mortgage Bank v. Navarro 8 where the Court held

that:
What should be resolved is whether
BANCO FILIPINO can increase the
interest rate on the LOAN from 12% to
17% per annum under the Escalation
Clause. It is our considered opinion that
it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino
to correspondingly increase.
the interest rate stipulated in this
contract without advance notice to
me/us in the event.
a law
increasing
the lawful rates of interest that may be
charged
on this particular
kind of loan. (Paragraphing and
emphasis supplied)
It is clear from the stipulation between
the parties that the interest rate may be

increased "in the event a law should be

enacted increasing the lawful rate of
interest that may be charged on this
particular kind of loan." The Escalation
Clause was dependent on an increase
of rate made by "law" alone.
CIRCULAR No. 494, although it has the
effect of law, is not a law. "Although a
circular duly issued is not strictly a
statute or a law, it has, however, the
force and effect of law." (Emphasis
supplied). "An administrative regulation
adopted pursuant to law has the force
and effect of law." "That administrative
rules and regulations have the force of
law can no longer be questioned."
The distinction between a law and an
administrative regulation is recognized
in the Monetary Board guidelines quoted
in the latter to the BORROWER of Ms.
Paderes of September 24, 1976 (supra).
According to the guidelines, for a loan's
interest to be subject to the increases
provided in CIRCULAR No. 494, there
must be an Escalation Clause allowing
the increase "in the event that any law
or Central Bank regulation is
promulgated increasing the maximum
rate for loans." The guidelines thus
presuppose that a Central Bank
regulation is not within the term "any
law."
The distinction is again recognized by
P.D. No. 1684, promulgated on March
17, 1980, adding section 7-a to the
Usury Law, providing that parties to an
agreement pertaining to a loan could
stipulate that the rate of interest agreed
upon may be increased in the event that
the applicable maximum rate of interest
is increased "by law or by the Monetary
Board." To quote:
Sec. 7-a. Parties to an
agreement pertaining
to a loan or
forbearance of money,
goods or credits may
stipulate that the rate
of interest agreed
upon may be
increased in the event
that the applicable
maximum rate of
interest
is increased by law or
by the Monetary
Board:
Provided, That such
stipulation shall be
valid only if there is
also a stipulation in
the agreement that
the rate of interest
agreed upon shall be
reduced in the event
that the applicable
maximum rate of
interest is reduced by
law or by the
Monetary Board;
Provided, further, That
the adjustment in the
rate of interest agreed

upon shall take effect

on or after the
effectivity of the
increase or decrease
in the maximum rate
of interest.'
(Paragraphing and
emphasis supplied).
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."
Petitioners never agreed in writing to pay the increased
interest rates demanded by respondent bank in
contravention to the tenor of their credit agreement. That
an increase in interest rates from 18% to as much as 68%
is excessive and unconscionable is indisputable. Between
1981 and 1984, petitioners had paid an amount equivalent
to virtually half of the entire principal
(P7,735,004.66) which was applied to interest alone. By
the time the spouses tendered the amount of
P40,142,518.00 in settlement of their obligations;
respondent bank was demanding P58,377,487.00 over
and above those amounts already previously paid by the
spouses.
Escalation clauses are not basically wrong or legally
objectionable so long as they are not solely potestative but
based on reasonable and valid grounds. 9 Here, as

clearly demonstrated above, not only the increases

of the interest rates on the basis of the escalation
clause patently unreasonable and unconscionable,
but also there are no valid and reasonable standards
upon which the increases are anchored.
We go now to respondent bank's claim that the principal
issue in the case at bench involves its right to foreclose
petitioners' properties under P.D. 385. We find
respondent's pretense untenable.
Presidential Decree No. 385 was issued principally to
guarantee that government financial institutions would not
be denied substantial cash inflows necessary to finance
the government's development projects all over the
country by large borrowers who resort to litigation to
prevent or delay the government's collection of their debts
or loans. 10In facilitating collection of debts through its

automatic foreclosure provisions, the government is

however, not exempted from observing basic
principles of law, and ordinary fairness and decency
under the due process clause of the Constitution. 11
In the first place, because of the dispute regarding the
interest rate increases, an issue which was never settled
on merit in the courts below, the exact amount of
petitioner's obligations could not be determined. Thus, the
foreclosure provisions of P.D. 385 could be validly invoked
by respondent only after settlement of the question
involving the interest rate on the loan, and only after the
spouses refused to meet their obligations following such
determination. In Filipinas Marble Corporation
v. Intermediate Appellate Court, 12 involving P.D. 385's

provisions on mandatory foreclosure, we held that:

We cannot, at this point, conclude that
respondent DBP together with the
Bancom people actually
misappropriated and misspent the $5
million loan in whole or in part although
the trial court found that there is

"persuasive" evidence that such acts

were committed by the respondent. This
matter should rightfully be litigated
below in the main action. Pending the
outcome of such litigation, P.D. 385
cannot automatically be applied for if it
is really proven that respondent DBP is
responsible for the misappropriation of
the loan, even if only in part, then the
foreclosure of the petitioner's properties
under the provisions of P.D. 385 to
satisfy the whole amount of the loan
would be a gross mistake. It would
unduly prejudice the petitioner, its
employees and their families.
Only after trial on the merits of the main
case can the true amount of the loan
which was applied wisely or not, for the
benefit of the petitioner be determined.
Consequently, the extent of the loan
where there was no failure of
consideration and which may be
properly satisfied by foreclosure
proceedings under P.D. 385 will have to
await the presentation of evidence in a
trial on the merits.
In Republic Planters Bank v. Court of Appeals 13 the Court

reiterating the dictum in Filipinas Marble

Corporation, held:
The enforcement of P.D. 385 will sweep
under the rug' this iceberg of a scandal
in the sugar industry during the Marcos
Martial Law years. This we can not allow
to happen. For the benefit of future
generations, all the dirty linen in the
PHILSUCUCOM/NASUTRA/RPB

closets have to be exposed in public so

that the same may NEVER be repeated.
It is of paramount national interest, that
we allow the trial court to proceed with
dispatch to allow the parties below to
present their evidence.
Furthermore, petitioners made a valid consignation of
what they, in good faith and in compliance with the letter of
the Credit Agreement, honestly believed to be the real
amount of their remaining obligations with the respondent
bank. The latter could not therefore claim that there was
no honest-to-goodness attempt on the part of the spouse
to settle their obligations. Respondent's rush to inequitably
invoke the foreclosure provisions of P.D. 385 through its
legal machinations in the courts below, in spite of the
unsettled differences in interpretation of the credit
agreement was obviously made in bad faith, to gain the
upper hand over petitioners.
In the face of the unequivocal interest rate provisions in
the credit agreement and in the law requiring the parties to
agree to changes in the interest rate in writing, we hold
that the unilateral and progressive increases imposed by
respondent PNB were null and void. Their effect was to
increase the total obligation on an eighteen million peso
loan to an amount way over three times that which was
originally granted to the borrowers. That these increases,
occasioned by crafty manipulations in the interest rates is
unconscionable and neutralizes the salutary policies of
extending loans to spur business cannot be disputed.
WHEREFORE, PREMISES CONSIDERED, the decision
of the Court of Appeals dated August 27, 1993, as well as
the resolution dated February 10, 1994 is hereby
REVERSED AND SET ASIDE. The case is remanded to
the Regional Trial Court of Makati for further proceedings.
SO ORDERED.