SECOND DIVISION

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

SAURA IMPORT & EXPORT CO., INC., Plaintiff-Appellee, v. DEVELOPMENT

BANK OF THE PHILIPPINES, Defendant-Appellant.

Mabanag, Eliger & Associates & Saura, Magno & Associates for Plaintiff-
Appellee.

Jesus A. Avaceña and Hilario G. Orsolino, for Defendant-Appellant.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS; PERFECTION UPON

ACCEPTANCE OF PROMISE TO DELIVER SOMETHING BY WAY OF SIMPLE LOAN;
ART. 1954 OF THE CIVIL CODE. — Where the application of Saura Inc. for a loan of
P500,000.00 was approved by resolution of the defendant, and the corresponding
mortgage executed and registered, there is undoubtedly offer and acceptance and
We hold that there was indeed a perfected consensual contract as recognized in
Article 1954 of the Civil Code.

2. ID.; ID.; ID.; ID.; DEFENDANT DID NOT DEVIATE FROM PERFECTED CONTRACT
IN CASE AT BAR. — The terms laid down in RFC Resolution No. 145 passed on Jan.
7, 1954 which resolution approved the loan application state 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." There
is no serious dispute 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 . It was in line with such assumption that when RFC, by
Resolution 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 RFC Resolution No. 145.

3. ID.; ID.; ID.; ID.; DEVIATION MADE BY PLAINTIFF. — Evidently Saura Inc.,
realized that it could not meet the conditions required by RFC in Resolution 9083,
and so wrote its letter of January 21, 1955, stating that local jute "will not be
available 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.

4. ID.; ID.; EXTINGUISHMENT OF OBLIGATION BY MUTUAL DESISTANCE; IN

INSTANT CASE. — When RFC turned down the request of Saura Inc., 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 of mutual
desistance — what Manresa terms "mutuo disenso" — which is a mode of
extinguishing obligations. It is a concept that derives from the principle that since
mutual agreement by the parties can create a contract, mutual disagreement by
the parties can cause its extinguishment.

DECISION

MAKALINTAL, J.:

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 buildings 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:jgc:chanrobles.com.ph
"1. That the proceeds of the loan shall be utilized exclusively for the following
purposes:chanrob1es virtual 1aw library

For construction of factory building P250,000.00

For payment of the balance of purchase

price of machinery & 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."cralaw virtua1aw library

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 re-examination 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 re-examination 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:jgc:chanrobles.com.ph

"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."cralaw
virtua1aw library

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 co-
signers, wrote RFC that his company no longer wished to avail of the loan and
therefore considered the same 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 cancelled insofar as they are concerned."cralaw virtua1aw
library

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."cralaw virtua1aw library

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:jgc:chanrobles.com.ph

"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:chanrob1es virtual 1aw library

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."cralaw virtua1aw library

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
the Island of Mindanao where the proposed jutemill is located . . ."cralaw virtua1aw
library

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:chanrob1es virtual 1aw library

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 P182,413.91

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:jgc:chanrobles.com.ph

"Dear Sirs:chanrob1es virtual 1aw library

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 purposes 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."cralaw virtua1aw library

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, almost 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:jgc:chanrobles.com.ph

"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 perfected until the delivery
of the object of the contract."cralaw virtua1aw library

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 that 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. 9033 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 available 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 of 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
noncompliance. 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.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 174269 May 8, 2009

POLO S. PANTALEON, Petitioner,

vs.
AMERICAN EXPRESS INTERNATIONAL, INC., Respondent.

DECISION

TINGA, J.:

The petitioner, lawyer Polo Pantaleon, his wife Julialinda, daughter Anna Regina and
son Adrian Roberto, joined an escorted tour of Western Europe organized by
Trafalgar Tours of Europe, Ltd., in October of 1991. The tour group arrived in
Amsterdam in the afternoon of 25 October 1991, the second to the last day of the
tour. As the group had arrived late in the city, they failed to engage in any sight-
seeing. Instead, it was agreed upon that they would start early the next day to see
the entire city before ending the tour.

The following day, the last day of the tour, the group arrived at the Coster Diamond
House in Amsterdam around 10 minutes before 9:00 a.m. The group had agreed
that the visit to Coster should end by 9:30 a.m. to allow enough time to take in a
guided city tour of Amsterdam. The group was ushered into Coster shortly before
9:00 a.m., and listened to a lecture on the art of diamond polishing that lasted for
around ten minutes.1 Afterwards, the group was led to the store’s showroom to
allow them to select items for purchase. Mrs. Pantaleon had already planned to
purchase even before the tour began a 2.5 karat diamond brilliant cut, and she
found a diamond close enough in approximation that she decided to buy.2 Mrs.
Pantaleon also selected for purchase a pendant and a chain,3 all of which totaled
U.S. $13,826.00.

To pay for these purchases, Pantaleon presented his American Express credit card
together with his passport to the Coster sales clerk. This occurred at around 9:15
a.m., or 15 minutes before the tour group was slated to depart from the store. The
sales clerk took the card’s imprint, and asked Pantaleon to sign the charge slip. The
charge purchase was then referred electronically to respondent’s Amsterdam office
at 9:20 a.m.
Ten minutes later, the store clerk informed Pantaleon that his AmexCard
had not yet been approved. His son, who had already boarded the tour bus,
soon returned to Coster and informed the other members of the Pantaleon
family that the entire tour group was waiting for them. As it was already
9:40 a.m., and he was already worried about further inconveniencing the
tour group, Pantaleon asked the store clerk to cancel the sale. The store
manager though asked plaintiff to wait a few more minutes. After 15
minutes, the store manager informed Pantaleon that respondent had
demanded bank references. Pantaleon supplied the names of his
depositary banks, then instructed his daughter to return to the bus and
apologize to the tour group for the delay.

At around 10:00 a.m, or around 45 minutes after Pantaleon had presented

his AmexCard, and 30 minutes after the tour group was supposed to have
left the store, Coster decided to release the items even without
respondent’s approval of the purchase. The spouses Pantaleon returned to the
bus. It is alleged that their offers of apology were met by their tourmates with
stony silence.4 The tour group’s visible irritation was aggravated when the
tour guide announced that the city tour of Amsterdam was to be canceled
due to lack of remaining time, as they had to catch a 3:00 p.m. ferry at
Calais, Belgium to London.5 Mrs. Pantaleon ended up weeping, while her
husband had to take a tranquilizer to calm his nerves.

It later emerged that Pantaleon’s purchase was first transmitted for

approval to respondent’s Amsterdam office at 9:20 a.m., Amsterdam time,
then referred to respondent’s Manila office at 9:33 a.m, then finally
approved at 10:19 a.m., Amsterdam time.6 The Approval Code was
transmitted to respondent’s Amsterdam office at 10:38 a.m., several
minutes after petitioner had already left Coster, and 78 minutes from the
time the purchases were electronically transmitted by the jewelry store to
respondent’s Amsterdam office.

After the star-crossed tour had ended, the Pantaleon family proceeded to the
United States before returning to Manila on 12 November 1992. While in the United
States, Pantaleon continued to use his AmEx card, several times without hassle or
delay, but with two other incidents similar to the Amsterdam brouhaha. On 30
October 1991, Pantaleon purchased golf equipment amounting to US $1,475.00
using his AmEx card, but he cancelled his credit card purchase and borrowed
money instead from a friend, after more than 30 minutes had transpired without
the purchase having been approved. On 3 November 1991, Pantaleon used the card
to purchase children’s shoes worth $87.00 at a store in Boston, and it took 20
minutes before this transaction was approved by respondent.

On 4 March 1992, after coming back to Manila, Pantaleon sent a letter7 through
counsel to the respondent, demanding an apology for the "inconvenience,
humiliation and embarrassment he and his family thereby suffered" for
respondent’s refusal to provide credit authorization for the aforementioned
purchases.8 In response, respondent sent a letter dated 24 March 1992,9 stating
among others that the delay in authorizing the purchase from Coster was
attributable to the circumstance that the charged purchase of US $13,826.00 "was
out of the usual charge purchase pattern established."10 Since respondent refused
to accede to Pantaleon’s demand for an apology, the aggrieved cardholder
instituted an action for damages with the Regional Trial Court (RTC) of Makati City,
Branch 145.11 Pantaleon prayed that he be awarded ₱2,000,000.00, as moral
damages; ₱500,000.00, as exemplary damages; ₱100,000.00, as attorney’s fees;
and ₱50,000.00 as litigation expenses.12

On 5 August 1996, the Makati City RTC rendered a decision13 in favor of Pantaleon,
awarding him ₱500,000.00 as moral damages, ₱300,000.00 as exemplary
damages, ₱100,000.00 as attorney’s fees, and ₱85,233.01 as expenses of litigation.
Respondent filed a Notice of Appeal, while Pantaleon moved for partial
reconsideration, praying that the trial court award the increased amount of moral
and exemplary damages he had prayed for.14 The RTC denied Pantaleon’s motion
for partial reconsideration, and thereafter gave due course to respondent’s Notice of
Appeal.15

On 18 August 2006, the Court of Appeals rendered a decision16 reversing the

award of damages in favor of Pantaleon, holding that respondent had not breached
its obligations to petitioner. Hence, this petition.

The key question is whether respondent, in connection with the aforementioned

transactions, had committed a breach of its obligations to Pantaleon. In addition,
Pantaleon submits that even assuming that respondent had not been in breach of
its obligations, it still remained liable for damages under Article 21 of the Civil Code.

The RTC had concluded, based on the testimonial representations of Pantaleon and
respondent’s credit authorizer, Edgardo Jaurigue, that the normal approval time for
purchases was "a matter of seconds." Based on that standard, respondent had been
in clear delay with respect to the three subject transactions. As it appears, the
Court of Appeals conceded that there had been delay on the part of respondent in
approving the purchases. However, it made two critical conclusions in favor of
respondent. First, the appellate court ruled that the delay was not attended by bad
faith, malice, or gross negligence. Second, it ruled that respondent "had exercised
diligent efforts to effect the approval" of the purchases, which were "not in
accordance with the charge pattern" petitioner had established for himself, as
exemplified by the fact that at Coster, he was "making his very first single charge
purchase of US$13,826," and "the record of [petitioner]’s past spending with
[respondent] at the time does not favorably support his ability to pay for such
purchase."17

On the premise that there was an obligation on the part of respondent "to approve
or disapprove with dispatch the charge purchase," petitioner argues that the failure
to timely approve or disapprove the purchase constituted mora solvendi on the part
of respondent in the performance of its obligation. For its part, respondent
characterizes the depiction by petitioner of its obligation to him as "to approve
purchases instantaneously or in a matter of seconds."
Petitioner correctly cites that under mora solvendi, the three requisites for a finding
of default are that the obligation is demandable and liquidated; the debtor delays
performance; and the creditor judicially or extrajudicially requires the debtor’s
performance.18 Petitioner asserts that the Court of Appeals had wrongly applied
the principle of mora accipiendi, which relates to delay on the part of the obligee in
accepting the performance of the obligation by the obligor. The requisites of mora
accipiendi are: an offer of performance by the debtor who has the required
capacity; the offer must be to comply with the prestation as it should be
performed; and the creditor refuses the performance without just cause.19 The
error of the appellate court, argues petitioner, is in relying on the invocation by
respondent of "just cause" for the delay, since while just cause is determinative of
mora accipiendi, it is not so with the case of mora solvendi.

We can see the possible source of confusion as to which type of mora to appreciate.
Generally, the relationship between a credit card provider and its card
holders is that of creditor-debtor,20 with the card company as the creditor
extending loans and credit to the card holder, who as debtor is obliged to
repay the creditor. This relationship already takes exception to the general rule
that as between a bank and its depositors, the bank is deemed as the debtor while
the depositor is considered as the creditor.21 Petitioner is asking us, not baselessly,
to again shift perspectives and again see the credit card company as the
debtor/obligor, insofar as it has the obligation to the customer as creditor/obligee
to act promptly on its purchases on credit.

Ultimately, petitioner’s perspective appears more sensible than if we were to still

regard respondent as the creditor in the context of this cause of action. If there
was delay on the part of respondent in its normal role as creditor to the
cardholder, such delay would not have been in the acceptance of the
performance of the debtor’s obligation (i.e., the repayment of the debt),
but it would be delay in the extension of the credit in the first place. Such
delay would not fall under mora accipiendi, which contemplates that the
obligation of the debtor, such as the actual purchases on credit, has
already been constituted. Herein, the establishment of the debt itself
(purchases on credit of the jewelry) had not yet been perfected, as it
remained pending the approval or consent of the respondent credit card
company.

Still, in order for us to appreciate that respondent was in mora solvendi, we will
have to first recognize that there was indeed an obligation on the part of
respondent to act on petitioner’s purchases with "timely dispatch," or for the
purposes of this case, within a period significantly less than the one hour it
apparently took before the purchase at Coster was finally approved.

The findings of the trial court, to our mind, amply established that the tardiness on
the part of respondent in acting on petitioner’s purchase at Coster did constitute
culpable delay on its part in complying with its obligation to act promptly on its
customer’s purchase request, whether such action be favorable or unfavorable. We
quote the trial court, thus:

As to the first issue, both parties have testified that normal approval time for
purchases was a matter of seconds.

Plaintiff testified that his personal experience with the use of the card was that
except for the three charge purchases subject of this case, approvals of his charge
purchases were always obtained in a matter of seconds.

Defendant’s credit authorizer Edgardo Jaurique likewise testified:

Q. – You also testified that on normal occasions, the normal approval time for
charges would be 3 to 4 seconds?

A. – Yes, Ma’am.

Both parties likewise presented evidence that the processing and approval of
plaintiff’s charge purchase at the Coster Diamond House was way beyond the
normal approval time of a "matter of seconds".

Plaintiff testified that he presented his AmexCard to the sales clerk at Coster, at
9:15 a.m. and by the time he had to leave the store at 10:05 a.m., no approval
had yet been received. In fact, the Credit Authorization System (CAS) record of
defendant at Phoenix Amex shows that defendant’s Amsterdam office received the
request to approve plaintiff’s charge purchase at 9:20 a.m., Amsterdam time or
01:20, Phoenix time, and that the defendant relayed its approval to Coster at 10:38
a.m., Amsterdam time, or 2:38, Phoenix time, or a total time lapse of one hour and
[18] minutes. And even then, the approval was conditional as it directed in
computerese [sic] "Positive Identification of Card holder necessary further charges
require bank information due to high exposure. By Jack Manila."

The delay in the processing is apparent to be undue as shown from the frantic
successive queries of Amexco Amsterdam which reads: "US$13,826. Cardmember
buying jewels. ID seen. Advise how long will this take?" They were sent at 01:33,
01:37, 01:40, 01:45, 01:52 and 02:08, all times Phoenix. Manila Amexco could be
unaware of the need for speed in resolving the charge purchase referred to it, yet it
sat on its hand, unconcerned.

xxx

To repeat, the Credit Authorization System (CAS) record on the Amsterdam

transaction shows how Amexco Netherlands viewed the delay as unusually
frustrating. In sequence expressed in Phoenix time from 01:20 when the charge
purchased was referred for authorization, defendants own record shows:

01:22 – the authorization is referred to Manila Amexco

01:32 – Netherlands gives information that the identification of the cardmember
has been presented and he is buying jewelries worth US $13,826.

01:33 – Netherlands asks "How long will this take?"

02:08 – Netherlands is still asking "How long will this take?"

The Court is convinced that defendants delay constitute[s] breach of its

contractual obligation to act on his use of the card abroad "with special
handling."22 (Citations omitted)

xxx

Notwithstanding the popular notion that credit card purchases are approved "within
seconds," there really is no strict, legally determinative point of demarcation on
how long must it take for a credit card company to approve or disapprove a
customer’s purchase, much less one specifically contracted upon by the parties. Yet
this is one of those instances when "you’d know it when you’d see it," and one hour
appears to be an awfully long, patently unreasonable length of time to approve or
disapprove a credit card purchase. It is long enough time for the customer to walk
to a bank a kilometer away, withdraw money over the counter, and return to the
store.

Notably, petitioner frames the obligation of respondent as "to approve or

disapprove" the purchase "in timely dispatch," and not "to approve the
purchase instantaneously or within seconds." Certainly, had respondent
disapproved petitioner’s purchase "within seconds" or within a timely manner, this
particular action would have never seen the light of day. Petitioner and his family
would have returned to the bus without delay – internally humiliated perhaps over
the rejection of his card – yet spared the shame of being held accountable by
newly-made friends for making them miss the chance to tour the city of
Amsterdam.

We do not wish do dispute that respondent has the right, if not the obligation, to
verify whether the credit it is extending upon on a particular purchase was indeed
contracted by the cardholder, and that the cardholder is within his means to make
such transaction. The culpable failure of respondent herein is not the failure
to timely approve petitioner’s purchase, but the more elemental failure to
timely act on the same, whether favorably or unfavorably. Even assuming
that respondent’s credit authorizers did not have sufficient basis on hand to make a
judgment, we see no reason why respondent could not have promptly informed
petitioner the reason for the delay, and duly advised him that resolving the same
could take some time. In that way, petitioner would have had informed basis on
whether or not to pursue the transaction at Coster, given the attending
circumstances. Instead, petitioner was left uncomfortably dangling in the chilly
autumn winds in a foreign land and soon forced to confront the wrath of foreign
folk.
Moral damages avail in cases of breach of contract where the defendant
acted fraudulently or in bad faith, and the court should find that under the
circumstances, such damages are due. The findings of the trial court are ample
in establishing the bad faith and unjustified neglect of respondent, attributable in
particular to the "dilly-dallying" of respondent’s Manila credit authorizer, Edgardo
Jaurique.23 Wrote the trial court:

While it is true that the Cardmembership Agreement, which defendant prepared, is

silent as to the amount of time it should take defendant to grant authorization for a
charge purchase, defendant acknowledged that the normal time for approval should
only be three to four seconds. Specially so with cards used abroad which requires
"special handling", meaning with priority. Otherwise, the object of credit or charge
cards would be lost; it would be so inconvenient to use that buyers and consumers
would be better off carrying bundles of currency or traveller’s checks, which can be
delivered and accepted quickly. Such right was not accorded to plaintiff in the
instances complained off for reasons known only to defendant at that time. This, to
the Court’s mind, amounts to a wanton and deliberate refusal to comply with its
contractual obligations, or at least abuse of its rights, under the contract.24

xxx

The delay committed by defendant was clearly attended by unjustified

neglect and bad faith, since it alleges to have consumed more than one
hour to simply go over plaintiff’s past credit history with defendant, his
payment record and his credit and bank references, when all such data are
already stored and readily available from its computer. This Court also takes
note of the fact that there is nothing in plaintiff’s billing history that would warrant
the imprudent suspension of action by defendant in processing the purchase.
Defendant’s witness Jaurique admits:

Q. – But did you discover that he did not have any outstanding account?

A. – Nothing in arrears at that time.

Q. – You were well aware of this fact on this very date?

A. – Yes, sir.

Mr. Jaurique further testified that there were no "delinquencies" in plaintiff’s

account.25

It should be emphasized that the reason why petitioner is entitled to

damages is not simply because respondent incurred delay, but because the
delay, for which culpability lies under Article 1170, led to the particular
injuries under Article 2217 of the Civil Code for which moral damages are
remunerative.26 Moral damages do not avail to soothe the plaints of the simply
impatient, so this decision should not be cause for relief for those who time the
length of their credit card transactions with a stopwatch. The somewhat unusual
attending circumstances to the purchase at Coster – that there was a deadline for
the completion of that purchase by petitioner before any delay would redound to
the injury of his several traveling companions – gave rise to the moral shock,
mental anguish, serious anxiety, wounded feelings and social humiliation sustained
by the petitioner, as concluded by the RTC.27 Those circumstances are fairly
unusual, and should not give rise to a general entitlement for damages under a
more mundane set of facts.

We sustain the amount of moral damages awarded to petitioner by the RTC. There
is no hard-and-fast rule in determining what would be a fair and reasonable amount
of moral damages, since each case must be governed by its own peculiar facts,
however, it must be commensurate to the loss or injury suffered.28 Petitioner’s
original prayer for ₱5,000,000.00 for moral damages is excessive under the
circumstances, and the amount awarded by the trial court of ₱500,000.00 in moral
damages more seemly.1avvphi1

Likewise, we deem exemplary damages available under the circumstances, and the
amount of ₱300,000.00 appropriate. There is similarly no cause though to disturb
the determined award of ₱100,000.00 as attorney’s fees, and ₱85,233.01 as
expenses of litigation.

WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of

Appeals is REVERSED and SET ASIDE. The Decision of the Regional Trial Court of
Makati, Branch 145 in Civil Case No. 92-1665 is hereby REINSTATED. Costs against
respondent.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-43191             November 13, 1935

PAULINO GULLAS, plaintiff-appellant,
vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.

Gullas, Lopez, Tuaño and Leuterio for plaintiff-appellant.

Jose Delgado for defendant-appellant.
MALCOLM, J.:

Both parties to this case appealed from a judgment of the Court of First Instance of
Cebu, which sentenced the defendant to return to the account of the plaintiff the
sum of P5098, with legal interest and costs, the plaintiff to secure damages in the
amount of P10,000 more or less, and the defendant to be absolved totally from the
amended complaint. As it is conceded that the plaintiff has already received the
sum represented by the United States treasury, warrant, which is in question, the
appeal will thus determine the amount, if any, which should be paid to the plaintiff
by the defendant.

The parties to the case are Paulino Gullas and the Philippine National Bank. The first
named is a member of the Philippine Bar, resident in the City of Cebu. The second
named is a banking corporation with a branch in the same city. Attorney Gullas has
had a current account with the bank.

It appears from the record that on August 2, 1933, the Treasurer of the United
States for the United States Veterans Bureau issued a Warrant in the amount of
$361, payable to the order of Francisco Sabectoria Bacos. Paulino Gullas and Pedro
Lopez signed as endorsers of this check. Thereupon it was cashed by the Philippine
National Bank. Subsequently the treasury warrant was dishonored by the Insular
Treasurer.

At that time the outstanding balance of Attorney Gullas on the books of the bank
was P509. Against this balance he had issued certain cheeks which could not be
paid when the money was sequestered by the On August 20, 1933, Attorney Gullas
left his residence for Manila.

The bank on learning of the dishonor of the treasury warrant sent notices by mail to
Mr. Gullas which could not be delivered to him at that time because he was in
Manila. In the bank's letter of August 21, 1933, addressed to Messrs. Paulino Gulla
and Pedro Lopez, they were informed that the United States Treasury warrant No.
20175 in the name of Francisco Sabectoria Bacos for $361 or P722, the payment
for which had been received has been returned by our Manila office with the
notation that the payment of his check has been stopped by the Insular Treasurer.
"In view of this therefore we have applied the outstanding balances of your current
accounts with us to the part payment of the foregoing check", namely, Mr. Paulino
Gullas P509. On the return of Attorney Gullas to Cebu on August 31, 1933, notice of
dishonor was received and the unpaid balance of the United States Treasury
warrant was immediately paid by him.

As a consequence of these happenings, two occurrences transpired which

inconvenienced Attorney Gullas. In the first place, as above indicated, checks
including one for his insurance were not paid because of the lack of funds standing
to his credit in the bank. In the second place, periodicals in the vicinity gave
prominence to the news to the great mortification of Gullas.lawphil.net
A variety of incidental questions have been suggested on the record which it can be
taken for granted as having been adversely disposed of in this opinion. The main
issues are two, namely, (1) as to the right of Philippine National Bank, and to apply
a deposit to the debt of depositor to the bank and (2) as to the amount damages, if
any, which should be awarded Gullas.

The Civil Code contains provisions regarding compensation (set off) and
deposit. (Articles 1195 et seq., 1758 et seq.  The portions of Philippine law provide
that compensation shall take place when two persons are reciprocally
creditor and debtor of each other (Civil Code, article 1195). In his
connection, it has been held that the relation existing between a depositor
and a bank is that of creditor and debtor. (Fulton Iron Works Co. vs. China
Banking Corporation [1933], 59 Phil., 59.)

The Negotiable Instruments Law contains provisions establishing the liability of a

general indorser and giving the procedure for a notice of dishonor. The general
indorser of negotiable instrument engages that if he be dishonored and the,
necessary proceedings of dishonor be duly taken, he will pay the amount thereof to
the holder. (Negotiable Instruments Law, sec. 66.) In this connection, it has been
held a long line of authorities that notice of dishonor is in order to charge all
indorser and that the right of action against him does not accrue until the notice is
given. (Asia Banking Corporation vs. Javier [1923] 44 Phil., 777; 5 Uniform Laws
Annotated.)

As a general rule, a bank has a right of set off of the deposits in its hands
for the payment of any indebtedness to it on the part of a depositor. In
Louisiana, however, a civil law jurisdiction, the rule is denied, and it is held that a
bank has no right, without an order from or special assent of the depositor to retain
out of his deposit an amount sufficient to meet his indebtedness. The basis of the
Louisiana doctrine is the theory of confidential contracts arising from irregular
deposits, e. g., the deposit of money with a banker. With freedom of selection and
after full preference to the minority rule as more in harmony with modern banking
practice. (1 Morse on Banks and Banking, 5th ed., sec. 324; Garrison vs. Union
Trust Company [1905], 111 A.S.R., 407; Louisiana Civil Code Annotated, arts.
2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L. Ann., 604; 8
Manresa, Comentarios al Codigo Civil Español, 4th ed., 359 et seq., 11 Manresa pp.
694 et seq.)

Starting, therefore, from the premise that the Philippine National Bank had with
respect to the deposit of Gullas a right of set off, we next consider if that remedy
was enforced properly. The fact we believe is undeniable that prior to the
mailing of notice of dishonor, and without waiting for any action by Gullas,
the bank made use of the money standing in his account to make good for
the treasury warrant. At this point recall that Gullas was merely an indorser and
had issued in good faith.

As to a depositor who has funds sufficient to meet payment of a check drawn by

him in favor of a third party, it has been held that he has a right of action
against the bank for its refusal to pay such a check in the absence of notice
to him that the bank has applied the funds so deposited in extinguishment
of past due claims held against him. (Callahan vs.  Bank of Anderson [1904], 2
Ann. Cas., 203.) The decision cited represents the minority doctrine, for on principle
it would seem that notice is not necessary to a maker because the right is
based on the doctrine that the relationship is that of creditor and debtor.
However this may be, as to an indorser the situation is different, and
notice should actually have been given him in order that he mighnt protect
his interests.

We accordingly are of the opinion that the action of the bank was prejudicial to
Gullas. But to follow up that statement with others proving exact damages is not so
easy. For instance, for alleged libelous articles the bank would not be primarily
liable. The same remark could be made relative to the loss of business which Gullas
claims but which could not be traced definitely to this occurrence. Also Gullas
having eventually been reimbursed lost little through the actual levy by the bank on
his funds. On the other hand, it was not agreeable for one to draw checks in all
good faith, then, leave for Manila, and on return find that those checks had not
been cashed because of the action taken by the bank. That caused a disturbance in
Gullas' finances, especially with reference to his insurance, which was injurious to
him. All facts and circumstances considered, we are of the opinion that Gullas
should be awarded nominal damages because of the premature action of the bank
against which Gullas had no means of protection, and have finally determined that
the amount should be P250.

Agreeable to the foregoing, the errors assigned by the parties will in the main be
overruled, with the result that the judgment of the trial court will be modified by
sentencing the defendant to pay the plaintiff the sum of P250, and the costs of both
instances.

Republic of the Philippines

SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 90676 June 19, 1991

STATE INVESTMENT HOUSE, INC., petitioner,

vs.

THE HONORABLE COURT OF APPEALS, HON. JUDGE PERLITA J. TRIA TIRONA,

Presiding Judge of the Regional Trial Court of Quezon City, Branch CII and SPS.
RAFAEL and REFUGIO AQUINO, respondents.

Padilla Law Office for petitioner.

Rodolfo T. Galing and Chaves, Hechanova & Lim Law Offices for private
respondents.

FELICIANO, J.:

On 5 April 1982, respondent spouses Rafael and Refugio Aquino pledged certain
shares of stock to petitioner State Investment House, Inc. ("State") in order to
secure a loan of P120,000.00 designated as Account No. IF-82-0631-AA. Prior to
the execution of the pledge, respondent-spouses, as an accommodation to and
together with the spouses Jose and Marcelina Aquino, signed an agreement
(Account No. IF-82-1379-AA) with petitioner State for the latter's purchase of
receivables amounting to P375,000.00. When Account No. IF-82-0631-AA fell due,
respondent spouses paid the same partly with their own funds and partly from the
proceeds of another loan which they obtained also from petitioner State designated
as Account No. IF-82-0904-AA. This new loan was secured by the same pledge
agreement executed in relation to Account No. IF-820631-AA. When the new loan
matured, State demanded payment. Respondents expressed willingness to pay,
requesting that upon payment, the shares of stock pledged be released. Petitioner
State denied the request on the ground that the loan which it had extended to the
spouses Jose and Marcelina Aquino (Account No. IF-82-1379- AA) had remained
unpaid.

On 29 June 1984, Atty. Rolando Salonga sent to respondent spouses a Notice of

Notarial Sale stating that upon request of State and by virtue of the pledge
agreement, he would sell at public auction the shares of stock pledged to
State. This prompted respondents to file a case before the Regional Trial
Court of Quezon City alleging that the intended foreclosure sale was illegal
because from the time the obligation under Account No. IF-82-0904-AA
became due, they had been able and willing to pay the same, but petitioner
had insisted that respondents pay even the loan account of Jose and
Marcelina Aquino which had not been secured by the pledge. It was further
alleged that their failure to pay their loan (Account No. IF-82-0904-AA) was
excused because the petitioner State itself had prevented the satisfaction of the
obligation.

The trial court, in a decision dated 14 December 1984 rendered by Judge Willelmo
Fortun, initially dismissed the complaint. Respondent spouses filed a motion for
reconsideration praying for a new decision ordering petitioner State to release the
shares upon payment of respondents' loan "without interest," as the latter had not
been in delay in the performance of their obligation. State countered that the
pledge executed by respondent spouses also covered the loan extended to Jose and
Marcelina Aquino, which too should be paid before the shares may be released.

Acting on the motion for reconsideration, Judge Fortun set aside his original
decision and rendered a new judgment dated 29 January 1985, ordering State to
immediately release the pledge and to deliver to respondents the share of stock
"upon payment of the loan under Code No. 82-0904-AA."

On appeal, the Court of Appeals affirmed in toto the new decision of the trial court,
holding that the loan extended to Jose and Marcelina Aquino, having been executed
prior to the pledge was not covered by the pledge which secured only loans
executed subsequently. Thus, upon payment of the loan under Code No. IF-0904-
AA, the shares of stock should be released. The decisions of the Court of Appeals
and of Judge Fortun became final and executory.

Upon remand of the records of the case to the trial court for execution, there
developed disagreement over the amount which respondent spouses Rafael and
Refugio Aquino should pay to secure the release of the shares of stock — petitioner
State contending that respondents should also pay interest and respondents
arguing they should not. Respondent spouses then filed a motion with the trial
court to clarify the Fortun decision praying that an order issue clarifying the phrase
"upon payment of plaintiffs' loan" to mean upon payment of plaintiff' loan in the
principal amount of P110,000.00 alone, "without interest, penalties and other
charges."
On 17 February 1989, the trial court, speaking this time through Judge Perlita Tria
Tirona, rendered a decision purporting to clarify the decision of Judge Fortun
and ruling that petitioner State shall release respondents' shares of stock
upon payment by respondents of the principal of the loan as set forth in PN
No. 82-0904-AA in the amount of P110,000.00, without interest, penalties
and other charges.

Petitioner State appealed Judge Tirona's decision to the Court of Appeals; the
appeal was dismissed. The Court of Appeals agreed with Judge Tirona that no
interest need be paid and added that the clarificatory (Tirona) decision of the trial
court merely restated what had been provided for in the earlier (Fortun) decision;
that the Tirona decision did not go beyond what had been adjudged in the earlier
decision. The motion for reconsideration filed by petitioner was accordingly denied.

Hence, this Petition for Review contending that no manifest ambiguity existed in the
decision penned by Judge Fortun; that the trial court through Judge Tirona, erred in
clarifying the decision of Judge Fortun; and that the amendment sought to be
introduced in the Fortun decision by respondents may not be made as the
same was substantial in nature and the Fortun decision had become final.

We begin by noting that the trial court has asserted authority to issue the
clarificatory order in respect of the decision of Judge Fortun, even though that
judgment had become final and executory. In Reinsurance Company of the Orient,
Inc. v. Court of Appeals,1 this Court had occasion to deal with the applicable
doctrine to some extent:

- - - [E]ven a judgment which has become final and executory may be clarified
under certain circumstances. The dispositive portion of the judgment may, for
instance, contain an error clearly clerical in nature (perhaps best illustrated by an
error in arithmetical computation) or an ambiguity arising from inadvertent
omission, which error may be rectified or ambiguity clarified and the omission
supplied by reference primarily to the body of the decision itself Supplementary
reference to the pleadings previously filed in the case may also be resorted to by
way of corroboration of the existence of the error or of the ambiguity in the
dispositive part of the judgment. In Locsin, et al. v. Parades, et al., this Court
allowed a judgment which had become final and executory to be clarified by
supplying a word which had been inadvertently omitted and which, when supplied,
in effect changed the literal import of the original phraseology:
. . . it clearly appears from the allegations of the complaint, the promissory note
reproduced therein and made a part thereof, the prayer and the conclusions of fact
and of law contained in the decision of the respondent judge, that the obligation
contracted by the petitioners is joint and several and that the parties as well as the
trial judge so understood it. Under the juridical rule that the judgment should be in
accordance with the allegations, the evidence and the conclusions of fact and law,
the dispositive part of the judgment under consideration should have ordered that
the debt be paid 'severally' and in omitting the word or adverb 'severally'
inadvertently, said judgment became ambiguous. This ambiguity may be clarified at
any time after the decision is rendered and even after it had become final (34
Corpus Juris, 235, 326). This respondent judge did not, therefore, exceed his
jurisdiction in clarifying the dispositive part of the judgment by supplying the
omission. (Emphasis supplied)

In Filipino Legion Corporation vs. Court of Appeals, et al., the applicable principle
was set out in the following terms:

[W]here there is ambiguity caused by an omission or mistake in the dispositive

portion of a decision, the court may clarify such ambiguity by an amendment even
after the judgment had become final, and for this purpose it may resort to the
pleadings filed by the parties, the court's findings of facts and conclusions of law as
expressed in the body of the decision. (Emphasis supplied)

In Republic Surety and Insurance Company, Inc. v. Intermediate Appellate Court,

the Court, in applying the above doctrine, said:

. . . We clarify, in other words, what we did affirm. That is involved here is not what
is ordinarily regarded as a clerical error in the dispositive part of the decision of the
Court of First Instance, . . . At the same time, what is involved here is not a
correction of an erroneous judgment or dispositive portion of a judgment. What we
believe is involved here is in the nature of an inadvertent omission on the part of
the Court of First Instance (which should have been noticed by private respondents'
counsel who had prepared the complaint), of what might be described as a logical
follow-through of something set forth both in the body of the decision and in the
dispositive portion thereof; the inevitable follow-through, or translation into,
operational or behavioral terms, of the annulment of the Deed of Sale with
Assumption of Mortgage, from which petitioners' title or claim of title embodied in
TCT 133153 flows. (Emphasis supplied)2 (Underscoring in the original; citations
omitted)

The question we must resolve is thus whether or not there is an ambiguity or

clerical error or inadvertent omission in the dispositive portion of the decision of
Judge Fortun which may be legitimately clarified by referring to the body of the
decision and perhaps even the pleadings filed before him. The decision of Judge
Fortun disposing of the motion for reconsideration filed by respondent spouses
Rafael and Refugio Aquino consisted basically of quoting practically the whole
motion for reconsideration. In its dispositive portion, Judge Fortun's decision
stated:

WHEREFORE, plaintiffs "Motion for Reconsideration" dated January 3, 1985, is

granted and the decision of this Court dated December 14, 1984 is hereby revoked
and set aside and another judgment is hereby rendered in favor of plaintiffs as
follows:

(1) Ordering defendants to immediately release the pledge on, and to deliver to
plaintiffs, the shares of stocks enumerated and described in paragraph 4 of
plaintiffs' complaint dated July 17, 1984, upon payment of plaintiffs loan under
Code No. 82-0904-AA to defendants;

(2) Ordering defendant State Investment House, Inc. to pay to plaintiffs

P10,000.00 as moral damages, P5,000.00 as exemplary damages, P6,000.00 as
attorney's fees, plus costs;

(3) Dismissing defendants' counterclaim, for lack of merit and making the
preliminary injunction permanent.

SO ORDERED.3

Judge Fortun evidently meant to act favorably on the motion for

reconsideration of the respondent Aquino spouses and in effect accepted
respondent spouses' argument that they had not incurred mora
considering that their failure to pay PN No. IF82-0904-AA on time had
been due to petitioner State's unjustified refusal to release the shares
pledged to it. It is not, however, clear to what precise extent Judge Fortun meant
to grant the motion for reconsideration. The promissory note in Account No. IF-82-
0904-AA had three (3) components: (a) principal of the loan in the amount of
P110,000.00; (b) regular interest in the amount of seventeen percent (17%) per
annum; and (c) additional or penalty interest in case of non-payment at maturity,
at the rate of two percent (2%) per month or twenty-four percent (24%) per
annum. In the dispositive part of his resolution, Judge Fortun did not specify which
of these components of the loan he was ordering respondent spouses to pay and
which component or components he was in effect deleting. We cannot assume that
Judge Fortun meant to grant the relief prayed for by respondent spouses in all its
parts. For one thing, respondent spouses in their motion for reconsideration asked
for "at least P50,000.00" for moral damages and "at least P50,000.00" for
exemplary damages, as well as P20,000.00 by way of attorney's fees and litigation
expenses. Judge Fortun granted respondent spouses only P10,000.00 as moral
damages and P5,000.00 as exemplary damages, plus P6,000.00 as attorney's fees
and costs. For another, respondent spouses asked Judge Fortun to order the
release of the shares pledged "upon payment of [respondent spouses'] loan under
Code No. 82-0904-AA without interest, as plaintiffs were not in delay in accordance
with Article 69 of the New Civil Code –– " (Emphasis supplied). In other words,
respondent spouses did not themselves become very clear what they were asking
Judge Fortun to grant them; they did not apparently distinguish between regular
interest or "monetary interest" in the amount of seventeen percent (17%) per
annum and penalty charges or "compensatory interest" in the amount of two
percent (2%) per month or twenty-four percent (24%) per annum.

It thus appears that the Fortun decision was ambiguous in the sense that it was
cryptic. We believe that in these circumstances, we must assume that Judge Fortun
meant to decide in accordance with law, that we cannot fairly assume that Judge
Fortun was grossly ignorant of the law, or that he intended to grant the respondent
spouses relief to which they were not entitled under law. Thus, the ultimate
question which arises is: if respondent Aquino spouses were not in delay, what
should they have been held liable for in accordance with law?

We believe and so hold that since respondent Aquino spouses were held not to have
been in delay, they were properly liable only for: (a) the principal of the loan or
P110,000.00; and (b) regular or monetary interest in the amount of seventeen
percent (17%) per annum. They were not liable for penalty or compensatory
interest, fixed by the promissory note in Account No. IF-82-0904-AA at two percent
(2%) per month or twenty-four (24%) per annum. It must be stressed in this
connection that under Article 2209 of the Civil Code which provides that
. . . [i]f the obligation consists in the payment of a sum of money, and the debtor
incurs in delay. the indemnity for damages, there being no stimulation 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.

the appropriate measure for damages in case of delay in discharging an

obligation consisting of the payment of a sum or money, is the payment of
penalty interest at the rate agreed upon; and in the absence of a stipulation of
a particular rate of penalty interest, then the payment of additional interest at a
rate equal to the regular monetary interest; and if no regular interest had been
agreed upon, then payment of legal interest or six percent (6%) per annum.4

The fact that the respondent Aquino spouses were not in default did not mean that
they, as a matter of law, were relieved from the payment not only of penalty or
compensatory interest at the rate of twenty-four percent (24%) per annum but also
of regular or monetary interest of seventeen percent (17%) per annum. The regular
or monetary interest continued to accrue under the terms of the relevant
promissory note until actual payment is effected. The payment of regular interest
constitutes the price or cost of the use of money and thus, until the principal sum
due is returned to the creditor, regular interest continues to accrue since the debtor
continues to use such principal amount. The relevant rule is set out in Article 1256
of the Civil Code which provides as follows:

Art. 1256. If the creditor to whom tender of payment has been made refuses
without just cause to accept it, the debtor shall be released from
responsibility by the consignation of the thing or sum due.

Consignation alone shall produce the same effect in the following cases:

(1) When the creditor is absent or unknown, or does not appear at the place of
payment;

(2) When he is incapacitated to receive the payment at the time it is due;

(3) When, without just cause, he refuses to give a receipt;

(4) When two or more persons claim the same right to collect;

(5) When the title of the obligation has been lost. (Emphasis supplied)

Where the creditor unjustly refuses to accept payment, the debtor desirous
of being released from his obligation must comply with two (2) conditions:
(a) tender of payment; and (b) consignation of the sum due. Tender of
payment must be accompanied or followed by consignation in order that the effects
of payment may be produced. Thus, in Llamas v. Abaya,5 the Supreme Court
stressed that a written tender of payment alone, without consignation in
court of the sum due, does not suspend the accruing of regular or
monetary interest.

In the instant case, respondent spouses Aquino, while they are properly
regarded as having made a written tender of payment to petitioner State,
failed to consign in court the amount due at the time of the maturity of
Account No. IF-820904-AA. It follows that their obligation to pay principal-
cum-regular or monetary interest under the terms and conditions of
Account No. IF-82-0904-AA was not extinguished by such tender of
payment alone.

For the respondent spouses to continue in possession of the principal of the loan
amounting to P110,000.00 and to continue to use the same after maturity of the
loan without payment of regular or monetary interest, would constitute unjust
enrichment on the part of the respondent spouses at the expense of petitioner
State even though the spouses had not been guilty of mora. It is precisely this
unjust enrichment which Article 1256 of the Civil Code prevents by requiring, in
addition to tender of payment, the consignation of the amount due in court which
amount would thereafter be deposited by the Clerk of Court in a bank and earn
interest to which the creditor would be entitled.
WHEREFORE, the Petition for Review is hereby GRANTED DUE COURSE. The
Decision of the Court of Appeals dated 30 August 1989 in C.A.-G.R. No. 17954 and
the Decision of the Regional Trial Court dated 17 February 1989 in Civil Case No. Q-
42188 are hereby REVERSED and SET ASIDE. The dispositive portion of the
decision of Judge Fortun is hereby clarified so as to read as follows:

(1) Ordering defendants to immediately release the pledge and to deliver to the
plaintiff spouses Rafael and Refugio Aquino the shares of stock enumerated and
described in paragraph 4 of said spouses' complaint dated 17 July 1984, upon full
payment of the amount of P110,000.00 plus seventeen percent (17%) per
annum regular interest computed from the time of maturity of the
plaintiffs' loan (Account No. IF-82-0904-AA) and until full payment of such
principal and interest to defendants;

(2) Ordering defendant State Investment House, Inc. to pay to the plaintiff spouses
Rafael and Refugio Aquino P10,000.00 as moral damages, P5,000.00 as exemplary
damages, P6,000.00 as attorney's fees, plus costs; and

(3) Dismissing defendants' counterclaim for lack of merit and making the
preliminary injunction permanent."

No pronouncement as to costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 193178               May 30, 2011

PHILIPPINE SAVINGS BANK, Petitioner,

vs.
SPOUSES ALFREDO M. CASTILLO AND ELIZABETH C. CASTILLO, and
SPOUSES ROMEO B. CAPATI and AQUILINA M. LOBO, Respondents.
 DECISION

NACHURA, J.:

This is a petition for review on certiorari1 under Rule 45 of the Rules of Court,

seeking to partially reconsider and modify the Decision 2 dated August 27, 2009 and
the Resolution3 dated August 4, 2010 of the Court of Appeals (CA) in CA-G.R. CV
No. 86445.

Respondent spouses Alfredo M. Castillo and Elizabeth Capati-Castillo were the

registered owners of a lot located in Tondo, Manila, covered by Transfer Certificate
of Title (TCT) No. 233242. Respondent spouses Romeo B. Capati and Aquilina M.
Lobo were the registered owners of another lot, covered by TCT No. 227858, also
located in Tondo, Manila.

On May 7, 1997, respondents obtained a loan, with real estate mortgage over the
said properties, from petitioner Philippine Savings Bank, as evidenced by a
Promissory Note with a face value of ₱2,500,000.00. The Promissory Note, in part,
reads:

FOR VALUE RECEIVED, I/We, solidarily, jointly and severally, promise to pay to the
order of PHILIPPINE SAVINGS BANK, at its head office or at the above stated
Branch the sum of TWO MILLION FIVE HUNDRED THOUSAND PESOS ONLY
(₱2,500,000.00), Philippine currency, with interest at the rate of seventeen per
centum (17%) per annum, from date until paid, as follows:

₱43,449.41 (principal and interest) monthly for fifty nine (59) months starting June
07, 1997 and every 7th day of the month thereafter with balloon payment on May
07, 2002.

Also, the rate of interest herein provided shall be subject to review and/or
adjustment every ninety (90) days.

All amortizations which are not paid on due date shall bear a penalty equivalent to
three percent (3%) of the amount due for every month or fraction of a month’s
delay.

The rate of interest and/or bank charges herein stipulated, during the terms of this
promissory note, its extensions, renewals or other modifications, may be increased,
decreased or otherwise changed from time to time within the rate of interest and
charges allowed under present or future law(s) and/or government regulation(s) as
the PHILIPPINE SAVINGS BANK may prescribe for its debtors.

Upon default of payment of any installment and/or interest when due, all
other installments and interest remaining unpaid shall immediately
become due and payable. Also, said interest not paid when due shall be
added to, and become part of the principal and shall likewise bear interest
at the same rate herein provided.4
From the release of the loan in May 1997 until December 1999, petitioner
had increased and decreased the rate of interest, the highest of which was
29% and the lowest was 15.5% per annum, per the Promissory Note.

Respondents were notified in writing of these changes in the interest rate. They
neither gave their confirmation thereto nor did they formally question the changes.
However, respondent Alfredo Castillo sent several letters to petitioner requesting
for the reduction of the interest rates.5 Petitioner denied these requests.

Respondents regularly paid their amortizations until December 1999, when they
defaulted due to financial constraints. Per petitioner’s table of application of
payment, respondents’ outstanding balance was ₱2,231,798.11. 6 Petitioner claimed
that as of February 11, 2000, respondents had a total outstanding obligation of
₱2,525,910.29.7 Petitioner sent them demand letters. Respondents failed to pay.

Thus, petitioner initiated an extrajudicial foreclosure sale of the mortgaged

properties. The auction sale was conducted on June 16, 2000, with the properties
sold for ₱2,778,611.27 and awarded to petitioner as the only bidder. Being the
mortgagee, petitioner no longer paid the said amount but rather credited it to the
loan amortizations and arrears, past due interest, penalty charges, attorney’s fees,
all legal fees and expenses incidental to the foreclosure and sale, and partial
payment of the mortgaged debt. On even date, a certificate of sale was issued and
submitted to the Clerk of Court and to the Ex-Officio Sheriff of Manila.

On July 3, 2000, the certificate of sale, sans the approval of the Executive Judge of
the Regional Trial Court (RTC), was registered with the Registry of Deeds of Manila.

Respondents failed to redeem the property within the one-year redemption

period. However, on July 18, 2001, Alfredo Castillo sent a letter to
petitioner requesting for an extension of 60 days before consolidation of
its title so that they could redeem the properties, offering ₱3,000,000.00
as redemption price. Petitioner conceded to Alfredo Castillo’s request, but
respondents still failed to redeem the properties.

On October 1, 2001, respondents filed a case for Reformation of Instruments,

Declaration of Nullity of Notarial Foreclosure Proceedings and Certificate of Sale,
Cancellation of Annotations on TCT Nos. 233242 and 227858, and Damages, with a
plea for the issuance of a temporary restraining order (TRO) and/or writ of
preliminary prohibitory injunction, with the RTC, Branch 14, Manila.

On October 5, 2001, the RTC issued a TRO. Eventually, on October 25, 2001, it
issued a writ of preliminary injunction.

After trial, the RTC rendered its decision dated July 30, 2005, the dispositive
portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs, and against the
defendants in the following manner:
 1. Declaring the questioned increases of interest as unreasonable,
excessive and arbitrary and ordering the defendant Philippine
Savings Bank to refund to the plaintiffs, the amount of interest
collected in excess of seventeen percent (17%) per annum;

2. Declaring the Extrajudicial Foreclosure conducted by the defendants on

June 16, 2000 and the subsequent proceedings taken thereafter to be void
ab initio. In this connection, defendant Register of Deeds is hereby ordered
to cause the cancellation of the corresponding annotations at the back of
Transfer Certificates of Title No. 227858 and 233242 in the name of Spouses
Alfredo and Elizabeth Castillo and Spouses Romeo Capati and Aquilina M.
Lobo;

3. Defendant Philippine Savings Bank is adjudged to pay plaintiffs the

amount of Php50,000.00 as moral damages; Php50,000.00 as exemplary
damages; and attorney’s fees in the amount of Php30,000.00 and
Php3,000.00 per appearance.

4. Defendants’ counterclaims are hereby DISMISSED for lack of merit.

With costs against the defendant Philippine Savings Bank, Inc.

SO ORDERED.8

Petitioner filed a motion for reconsideration. The RTC partially granted the motion in
its November 30, 2005 Order, modifying the interest rate from 17% to 24% per
annum.9

Petitioner appealed to the CA. The CA modified the decision of the RTC, thus—

WHEREFORE, in view of the foregoing, the Decision of the Regional Trial Court is
hereby AFFIRMED WITH MODIFICATIONS. The fallo shall now read:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the
defendants in the following manner:

1. Declaring the questioned increases of interest as unreasonable, excessive

and arbitrary and ordering the defendant Philippine Savings Bank to refund
to the plaintiffs, the amount of interest collected in excess of seventeen
percent (17%) per annum;

2. Declaring the Extrajudicial Foreclosure conducted by the

defendants on June 16, 2000 and the subsequent proceedings taken
thereafter to be valid[;]

3. Defendant Philippine Savings Bank is adjudged to pay plaintiffs the

amount of Php 25,000.00 as moral damages; Php 50,000.00 as exemplary
 damages; and attorney’s fees in the amount of Php 30,000.00 and Php
3,000.00 per appearance;

4. Defendants’ counterclaims are hereby DISMISSED for lack of merit.

With costs against the defendant Philippine Savings Bank, Inc.

SO ORDERED.10

Hence, this petition anchored on the contention that the CA erred in: (1) declaring
that the modifications in the interest rates are unreasonable; and (2) sustaining the
award of damages and attorney’s fees.

The petition should be partially granted.

The unilateral determination and imposition of the increased rates is violative of the
principle of mutuality of contracts under Article 1308 of the Civil Code, which
provides that "[t]he contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them."11 A perusal of the Promissory
Note will readily show that the increase or decrease of interest rates hinges solely
on the discretion of petitioner. It does not require the conformity of the maker
before a new interest rate could be enforced. Any contract which appears to be
heavily weighed in favor of one of the parties so as to lead to an unconscionable
result, thus partaking of the nature of a contract of adhesion, is void. Any
stipulation regarding the validity or compliance of the contract left solely to the will
of one of the parties is likewise invalid.

Petitioner contends that respondents acquiesced to the imposition of the modified

interest rates; thus, there was no violation of the principle of mutuality of contracts.
To buttress its position, petitioner points out that the exhibits presented by
respondents during trial contained a uniform provision, which states:

The interest rate adjustment is in accordance with the Conformity Letter you have
signed amending your account’s interest rate review period from ninety (90) to
thirty days.12

It further claims that respondents requested several times for the reduction of the
interest rates, thus, manifesting their recognition of the legality of the said rates. It
also asserts that the contractual provision on the interest rates cannot be said to be
lopsided in its favor, considering that it had, on several occasions, lowered the
interest rates.

We disagree. The above-quoted provision of respondents’ exhibits readily shows

that the conformity letter signed by them does not pertain to the modification of
the interest rates, but rather only to the amendment of the interest rate review
period from 90 days to 30 days. Verily, the conformity of respondents with respect
to the shortening of the interest rate review period from 90 days to 30 days is
separate and distinct from and cannot substitute for the required conformity of
respondents with respect to the modification of the interest rate itself.

Moreover, respondents’ assent to the modifications in the interest rates cannot be

implied from their lack of response to the memos sent by petitioner, informing
them of the amendments. The said memos were in the nature of a proposal to
change the contract with respect to one of its significant components, i.e., the
interest rates. As we have held, no one receiving a proposal to change a contract is
obliged to answer the proposal.13 Therefore, respondents could neither be faulted,
nor could they be deemed to have assented to the modified interest rates, for not
replying to the said memos from petitioner.

We likewise disagree with petitioner’s assertion that respondents recognized the

legality of the imposed interest rates through the letters requesting for the
reduction of the rates. The request for reduction of the interest does not translate
to consent thereto. To be sure, a cursory reading of the said letters would clearly
show that Alfredo Castillo was, in fact, questioning the propriety of the interest
rates imposed on their loan, viz.:

The undersigned is a mortgagor of Philippine Savings Bank with an outstanding

balance of TWO MILLION FOUR HUNDRED THIRTY EIGHT THOUSAND SIX HUNDRED
SIX and 63/100 (₱2,438,606.63) at an interest rate of 26% per annum (as per April
6, 1997 inquiry to Leo of the Accounting Dep’t.) and with a monthly amortization of
FIFTY EIGHT THOUSAND THREE HUNDRED FIFTY EIGHT AND 38/100 (₱58,358.38).

I understand that the present interest rate is lower than the last month’s 27%.
However, it does not give our company any break from coping with our receivables.
Our clients, Mercure Philippine Village Hotel, Puerto Azul Beach Hotel, Grand Air
Caterer, to name a few, did not settle their obligation to us inspite of what was
agreed upon during our meeting held last February 1998. Their pledge of paying us
at least ONE MILLION PESOS PER AFFILIATION, which we allocate to pay our
balance to your bank, was not a reliable deal to foresee because, as of this very
day, not even half of the amount assured to us was settled. This situation puts the
company in critical condition since we will again shoulder all the interests imposed
on our loans, while, we ourselves, did not impose any surcharge with our
receivables.

In connection with this, may I request for a reduction of interest rate, in my favor,
i.e., from 26% to 21% per annum. If such appeal is granted to us, we are assuring
you of our prompt payment and keen observance to your rules and regulations. 14

The undersigned is a mortgagor of Philippine Savings Bank with an outstanding

balance of TWO MILLION FOUR HUNDRED THIRTY THREE THOUSAND EIGHTY FOUR
and 73/100 (₱2,433,084.73) at an interest rate of 22.5% per annum (as per April
24, 1998 memo faxed to us) and with a monthly amortization of FIFTY TWO
THOUSAND FIVE HUNDRED FIFTY EIGHT AND 01/100 (₱52,55[8].01).
Such reduction of interest rate is an effect of our currency’s development. But
based on our inquiries and research to different financial institutions, the rate your
bank is imposing to us is still higher compared to the eighteen and a half percent
(18.5%) others are asking. With this situation, we are again requesting for a
decrease on the interest rate, that is, from 22.5% to 18.5%. This figure stated is
not fictitious since other bank’s advertising are published to leading newspapers.
The difference between your rate is visibly greater and has an immense effect on
our financial obligations.15

The undersigned is a mortgagor at Philippine Savings Bank with an outstanding

balance of TWO MILLION FOUR HUNDRED THOUSAND EIGHT HUNDRED ELEVEN
and 03/100 (Php 2,40[0],811.03) at an interest rate of 21% per annum.

Letters of reconsideration were constantly sent to you to grant us lower interest

rate. However, no assistance with regard to that request has been extended to us.
In view of this, I am requesting for a transfer of our loan from PSBank Head Office
to PSBank Mabini Branch. This transfer is purposely intended for an appeal [for] a
lower interest rate.16

Being a mortgagor of PSBank, I have [been] repeatedly asking for a reduction of

your interest rate. However, my request has been denied since the term I started.
Many banks offer a much lower interest rate and fair business transactions (e.g.
Development Bank of Singapore [which] offers 13% p.a. interest rate).

In this connection, once more, I am requesting for a reduction of the interest rate
applied to my loan to maintain our business relationship.17

Basic is the rule that there can be no contract in its true sense without the
mutual assent of the parties. If this consent is absent on the part of one
who contracts, the act has no more efficacy than if it had been done under
duress or by a person of unsound mind. Similarly, contract changes must be
made with the consent of the contracting parties. The minds of all the parties must
meet as to the proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan contracts, the interest rate is
undeniably always a vital component, for it can make or break a capital venture.
Thus, any change must be mutually agreed upon, otherwise, it produces no binding
effect.18

Escalation clauses are generally valid and do not contravene public policy.
They are common in credit agreements as means of maintaining fiscal
stability and retaining the value of money on long-term contracts. To
prevent any one-sidedness that these clauses may cause, we have held in Banco
Filipino Savings and Mortgage Bank v. Judge Navarro19 that there should be a
corresponding de-escalation clause that would authorize a reduction in the interest
rates corresponding to downward changes made by law or by the Monetary Board.
As can be gleaned from the parties’ loan agreement, a de-escalation clause is
provided, by virtue of which, petitioner had lowered its interest rates.1avvphi1
Nevertheless, the validity of the escalation clause did not give petitioner the
unbridled right to unilaterally adjust interest rates. The adjustment should
have still been subjected to the mutual agreement of the contracting
parties. In light of the absence of consent on the part of respondents to the
modifications in the interest rates, the adjusted rates cannot bind them
notwithstanding the inclusion of a de-escalation clause in the loan
agreement.

The order of refund was based on the fact that the increases in the interest rate
were null and void for being violative of the principle of mutuality of contracts. The
amount to be refunded refers to that paid by respondents when they had no
obligation to do so. Simply put, petitioner should refund the amount of interest that
it has illegally imposed upon respondents. Any deficiency in the payment of the
obligation can be collected by petitioner in a foreclosure proceeding, which it
already did.

On the matter of damages, we agree with petitioner. Moral damages are not
recoverable simply because a contract has been breached. They are recoverable
only if the party from whom it is claimed acted fraudulently or in bad faith or in
wanton disregard of his contractual obligations. The breach must be wanton,
reckless, malicious or in bad faith, and oppressive or abusive. Likewise, a breach of
contract may give rise to exemplary damages only if the guilty party acted in a
fraudulent or malevolent manner.20

In this case, we are not sufficiently convinced that fraud, bad faith, or wanton
disregard of contractual obligations can be imputed to petitioner simply because it
unilaterally imposed the changes in interest rates, which can be attributed merely
to bad business judgment or attendant negligence. Bad faith pertains to a dishonest
purpose, to some moral obliquity, or to the conscious doing of a wrong, a breach of
a known duty attributable to a motive, interest or ill will that partakes of the nature
of fraud. Respondents failed to sufficiently establish this requirement. Thus, the
award of moral and exemplary damages is unwarranted. In the same vein,
respondents cannot recover attorney’s fees and litigation expenses. Accordingly,
these awards should be deleted.21

However, as regards the above mentioned award for refund to respondents of their
interest payments in excess of 17% per annum, the same should include legal
interest. In Eastern Shipping Lines, Inc. v. Court of Appeals, 22 we have held that
when an obligation is breached, and it consists in the payment of a sum of money,
the interest on the amount of damages shall be at the rate of 12% per annum,
reckoned from the time of the filing of the complaint.23

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

August 27, 2009 and the Resolution dated August 4, 2010 of the Court of Appeals
in CA-G.R. CV No. 86445 are AFFIRMED WITH MODIFICATIONS, such that the
award for moral damages, exemplary damages, attorney’s fees, and litigation
expenses is DELETED, and the order of refund in favor of respondents of interest
payments made in excess of 17% per annum shall bear interest of 12% per annum
from the time of the filing of the complaint until its full satisfaction.

SO ORDERED.

G.R. No. 192986               January 15, 2013

ADVOCATES FOR TRUTH IN LENDING, INC. and EDUARDO B.

OLAGUER, Petitioners,
vs.
BANGKO SENTRAL MONETARY BOARD, represented by its Chairman,
GOVERNOR ARMANDO M. TETANGCO, JR., and its incumbent members:
JUANITA D. AMATONG, ALFREDO C. ANTONIO, PETER FA VILA, NELLY F.
VILLAFUERTE, IGNACIO R. BUNYE and CESAR V. PURISIMA, Respondents.

DECISION

REYES, J.:

Petitioners, claiming that they are raising issues of transcendental importance to

the public, filed directly with this Court this Petition for Certiorari under Rule 65 of
the 1997 Rules of Court, seeking to declare that the Bangko Sentral ng Pilipinas
Monetary Board (BSP-MB), replacing the Central Bank Monetary Board (CB-MB) by
virtue of Republic Act (R.A.) No. 7653, has no authority to continue enforcing
Central Bank Circular No. 905,1 issued by the CB-MB in 1982, which "suspended"
Act No. 2655, or the Usury Law of 1916.

Factual Antecedents

Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a non-profit, non-stock

corporation organized to engage in pro bono concerns and activities relating to
money lending issues. It was incorporated on July 9, 2010, 2 and a month later, it
filed this petition, joined by its founder and president, Eduardo B. Olaguer, suing as
a taxpayer and a citizen.

R.A. No. 265, which created the Central Bank (CB) of the Philippines on June 15,
1948, empowered the CB-MB to, among others, set the maximum interest
rates which banks may charge for all types of loans and other credit
operations, within limits prescribed by the Usury Law. Section 109 of R.A.
No. 265 reads:

Sec. 109. Interest Rates, Commissions and Charges. — The Monetary Board may
fix the maximum rates of interest which banks may pay on deposits and on other
obligations.

The Monetary Board may, within the limits prescribed in the Usury Law fix the
maximum rates of interest which banks may charge for different types of loans and
for any other credit operations, or may fix the maximum differences which may
exist between the interest or rediscount rates of the Central Bank and the rates
which the banks may charge their customers if the respective credit documents are
not to lose their eligibility for rediscount or advances in the Central Bank.

Any modifications in the maximum interest rates permitted for the borrowing or
lending operations of the banks shall apply only to future operations and not to
those made prior to the date on which the modification becomes effective.

In order to avoid possible evasion of maximum interest rates set by the Monetary
Board, the Board may also fix the maximum rates that banks may pay to or collect
from their customers in the form of commissions, discounts, charges, fees or
payments of any sort. (Underlining ours)

On March 17, 1980, the Usury Law was amended by Presidential Decree (P.D.) No.
1684, giving the CB-MB authority to prescribe different maximum rates of interest
which may be imposed for a loan or renewal thereof or the forbearance of any
money, goods or credits, provided that the changes are effected gradually and
announced in advance. Thus, Section 1-a of Act No. 2655 now reads:

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate
or rates of interest for the loan or renewal thereof or the forbearance of any money,
goods or credits, and to change such rate or rates whenever warranted by
prevailing economic and social conditions: Provided, That changes in such rate or
rates may be effected gradually on scheduled dates announced in advance.

In the exercise of the authority herein granted the Monetary Board may prescribe
higher maximum rates for loans of low priority, such as consumer loans or renewals
thereof as well as such loans made by pawnshops, finance companies and other
similar credit institutions although the rates prescribed for these institutions need
not necessarily be uniform. The Monetary Board is also authorized to prescribe
different maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries. (Underlining
and emphasis ours)

In its Resolution No. 2224 dated December 3, 1982, 3 the CB-MB issued CB Circular
No. 905, Series of 1982, effective on January 1, 1983. Section 1 of the Circular,
under its General Provisions, removed the ceilings on interest rates on loans
or forbearance of any money, goods or credits, to wit:

Sec. 1. The rate of interest, including commissions, premiums, fees and other
charges, on a loan or forbearance of any money, goods, or credits, regardless of
maturity and whether secured or unsecured, that may be charged or collected by
any person, whether natural or juridical, shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law, as amended. (Underscoring
and emphasis ours)

The Circular then went on to amend Books I to IV of the CB’s "Manual of

Regulations for Banks and Other Financial Intermediaries" (Manual of Regulations)
by removing the applicable ceilings on specific interest rates. Thus, Sections 5, 9
and 10 of CB Circular No. 905 amended Book I, Subsections 1303, 1349, 1388.1 of
the Manual of Regulations, by removing the ceilings for interest and other charges,
commissions, premiums, and fees applicable to commercial banks; Sections 12 and
17 removed the interest ceilings for thrift banks (Book II, Subsections 2303, 2349);
Sections 19 and 21 removed the ceilings applicable to rural banks (Book III,
Subsection 3152.3-c); and, Sections 26, 28, 30 and 32 removed the ceilings for
non-bank financial intermediaries (Book IV, Subsections 4303Q.1 to 4303Q.9,
4303N.1, 4303P).4

On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653
establishing the Bangko Sentral ng Pilipinas (BSP) to replace the CB. The repealing
clause thereof, Section 135, reads:

Sec. 135. Repealing Clause. — Except as may be provided for in Sections 46 and
132 of this Act, Republic Act No. 265, as amended, the provisions of any other law,
special charters, rule or regulation issued pursuant to said Republic Act No. 265, as
amended, or parts thereof, which may be inconsistent with the provisions of this
Act are hereby repealed. Presidential Decree No. 1792 is likewise repealed.

Petition for Certiorari

To justify their skipping the hierarchy of courts and going directly to this Court to
secure a writ of certiorari, petitioners contend that the transcendental importance
of their Petition can readily be seen in the issues raised therein, to wit:

a) Whether under R.A. No. 265 and/or P.D. No. 1684, the CB-MB had the
statutory or constitutional authority to prescribe the maximum rates of
interest for all kinds of credit transactions and forbearance of money, goods
or credit beyond the limits prescribed in the Usury Law;

b) If so, whether the CB-MB exceeded its authority when it issued CB Circular
No. 905, which removed all interest ceilings and thus suspended Act No.
2655 as regards usurious interest rates;

c) Whether under R.A. No. 7653, the new BSP-MB may continue to enforce
CB Circular No. 905.5

Petitioners attached to their petition copies of several Senate Bills and Resolutions
of the 10th Congress, which held its sessions from 1995 to 1998, calling for
investigations by the Senate Committee on Banks and Financial Institutions into
alleged unconscionable commercial rates of interest imposed by these entities.
Senate Bill (SB) Nos. 376 and 1860,7 filed by Senator Vicente C. Sotto III and the
late Senator Blas F. Ople, respectively, sought to amend Act No. 2655 by fixing the
rates of interest on loans and forbearance of credit; Philippine Senate Resolution
(SR) No. 1053,8 10739 and 1102,10 filed by Senators Ramon B. Magsaysay, Jr.,
Gregorio B. Honasan and Franklin M. Drilon, respectively, urged the aforesaid
Senate Committee to investigate ways to curb the high commercial interest rates
then obtaining in the country; Senator Ernesto Maceda filed SB No. 1151 to prohibit
the collection of more than two months of advance interest on any loan of money;
and Senator Raul Roco filed SR No. 114411 seeking an investigation into an alleged
cartel of commercial banks, called "Club 1821", reportedly behind the regime of
high interest rates. The petitioners also attached news clippings 12 showing that in
February 1998 the banks’ prime lending rates, or interests on loans to their best
borrowers, ranged from 26% to 31%.

Petitioners contend that under Section 1-a of Act No. 2655, as amended by P.D.
No. 1684, the CB-MB was authorized only to prescribe or set the maximum rates of
interest for a loan or renewal thereof or for the forbearance of any money, goods or
credits, and to change such rates whenever warranted by prevailing economic and
social conditions, the changes to be effected gradually and on scheduled dates; that
nothing in P.D. No. 1684 authorized the CB-MB to lift or suspend the limits
of interest on all credit transactions, when it issued CB Circular No. 905.
They further insist that under Section 109 of R.A. No. 265, the authority of the
CB-MB was clearly only to fix the banks’ maximum rates of interest, but
always within the limits prescribed by the Usury Law.

Thus, according to petitioners, CB Circular No. 905, which was promulgated

without the benefit of any prior public hearing, is void because it violated
Article 5 of the New Civil Code, which provides that "Acts executed against
the provisions of mandatory or prohibitory laws shall be void, except when
the law itself authorizes their validity."

They further claim that just weeks after the issuance of CB Circular No. 905, the
benchmark 91-day Treasury bills (T-bills),13 then known as "Jobo" bills14 shot up to
40% per annum, as a result. The banks immediately followed suit and re-priced
their loans to rates which were even higher than those of the "Jobo" bills.
Petitioners thus assert that CB Circular No. 905 is also unconstitutional in light of
Section 1 of the Bill of Rights, which commands that "no person shall be deprived of
life, liberty or property without due process of law, nor shall any person be denied
the equal protection of the laws."

Finally, petitioners point out that R.A. No. 7653 did not re-enact a provision
similar to Section 109 of R.A. No. 265, and therefore, in view of the
repealing clause in Section 135 of R.A. No. 7653, the BSP-MB has been
stripped of the power either to prescribe the maximum rates of interest
which banks may charge for different kinds of loans and credit
transactions, or to suspend Act No. 2655 and continue enforcing CB
Circular No. 905.

Ruling

The petition must fail.

A. The Petition is procedurally infirm.

The decision on whether or not to accept a petition for certiorari, as well as to grant
due course thereto, is addressed to the sound discretion of the court. 15 A petition
for certiorari being an extraordinary remedy, the party seeking to avail of the same
must strictly observe the procedural rules laid down by law, and non-observance
thereof may not be brushed aside as mere technicality. 16

As provided in Section 1 of Rule 65, a writ of certiorari is directed against a tribunal

exercising judicial or quasi-judicial functions.17 Judicial functions are exercised by a
body or officer clothed with authority to determine what the law is and what the
legal rights of the parties are with respect to the matter in controversy. Quasi-
judicial function is a term that applies to the action or discretion of public
administrative officers or bodies given the authority to investigate facts or ascertain
the existence of facts, hold hearings, and draw conclusions from them as a basis for
their official action using discretion of a judicial nature.18

The CB-MB (now BSP-MB) was created to perform executive functions with respect
to the establishment, operation or liquidation of banking and credit institutions, and
branches and agencies thereof.19 It does not perform judicial or quasi-judicial
functions. Certainly, the issuance of CB Circular No. 905 was done in the exercise of
an executive function. Certiorari will not lie in the instant case. 20

B. Petitioners have no locus standi to file the Petition

Locus standi is defined as "a right of appearance in a court of justice on a given

question." In private suits, Section 2, Rule 3 of the 1997 Rules of Civil Procedure
provides that "every action must be prosecuted or defended in the name of the real
party in interest," who is "the party who stands to be benefited or injured by the
judgment in the suit or the party entitled to the avails of the suit." Succinctly put, a
party’s standing is based on his own right to the relief sought. 21

Even in public interest cases such as this petition, the Court has generally adopted
the "direct injury" test that the person who impugns the validity of a statute must
have "a personal and substantial interest in the case such that he has sustained, or
will sustain direct injury as a result."22 Thus, while petitioners assert a public right
to assail CB Circular No. 905 as an illegal executive action, it is nonetheless
required of them to make out a sufficient interest in the vindication of the public
order and the securing of relief. It is significant that in this petition, the petitioners
do not allege that they sustained any personal injury from the issuance of CB
Circular No. 905.

Petitioners also do not claim that public funds were being misused in the
enforcement of CB Circular No. 905. In Kilosbayan, Inc. v. Morato, 23 involving the
on-line lottery contract of the PCSO, there was no allegation that public funds were
being misspent, which according to the Court would have made the action a public
one, "and justify relaxation of the requirement that an action must be prosecuted in
the name of the real party-in-interest." The Court held, moreover, that the status of
Kilosbayan as a people’s organization did not give it the requisite personality to
question the validity of the contract. Thus:
Petitioners do not in fact show what particularized interest they have for bringing
this suit. It does not detract from the high regard for petitioners as civic leaders to
say that their interest falls short of that required to maintain an action under the
Rule 3, Sec. 2.24

C. The Petition raises no issues of transcendental importance.

In the 1993 case of Joya v. Presidential Commission on Good Government, 25 it was
held that no question involving the constitutionality or validity of a law or
governmental act may be heard and decided by the court unless there is
compliance with the legal requisites for judicial inquiry, namely: (a) that the
question must be raised by the proper party; (b) that there must be an actual case
or controversy; (c) that the question must be raised at the earliest possible
opportunity; and (d) that the decision on the constitutional or legal question must
be necessary to the determination of the case itself.

In Prof. David v. Pres. Macapagal-Arroyo,26 the Court summarized the requirements

before taxpayers, voters, concerned citizens, and legislators can be accorded a
standing to sue, viz:

(1) the cases involve constitutional issues;

(2) for taxpayers, there must be a claim of illegal disbursement of public

funds or that the tax measure is unconstitutional;

(3) for voters, there must be a showing of obvious interest in the validity of
the election law in question;

(4) for concerned citizens, there must be a showing that the issues raised are
of transcendental importance which must be settled early; and

(5) for legislators, there must be a claim that the official action complained of
infringes upon their prerogatives as legislators.

While the Court may have shown in recent decisions a certain toughening in its
attitude concerning the question of legal standing, it has nonetheless always made
an exception where the transcendental importance of the issues has been
established, notwithstanding the petitioners’ failure to show a direct injury. 27 In
CREBA v. ERC,28 the Court set out the following instructive guides as determinants
on whether a matter is of transcendental importance, namely: (1) the character of
the funds or other assets involved in the case; (2) the presence of a clear case of
disregard of a constitutional or statutory prohibition by the public respondent
agency or instrumentality of the government; and (3) the lack of any other party
with a more direct and specific interest in the questions being raised. Further, the
Court stated in Anak Mindanao Party-List Group v. The Executive Secretary 29 that
the rule on standing will not be waived where these determinants are not
established.
In the instant case, there is no allegation of misuse of public funds in the
implementation of CB Circular No. 905. Neither were borrowers who were actually
affected by the suspension of the Usury Law joined in this petition. Absent any
showing of transcendental importance, the petition must fail.

More importantly, the Court notes that the instant petition adverted to the regime
of high interest rates which obtained at least 15 years ago, when the banks’ prime
lending rates ranged from 26% to 31%,30 or even 29 years ago, when the 91-day
Jobo bills reached 40% per annum. In contrast, according to the BSP, in the first
two (2) months of 2012 the bank lending rates averaged 5.91%, which implies that
the banks’ prime lending rates were lower; moreover, deposit interests on savings
and long-term deposits have also gone very low, averaging 1.75% and 1.62%,
respectively.31

Judging from the most recent auctions of T-bills, the savings rates must be
approaching 0%.1âwphi1 In the auctions held on November 12, 2012, the rates of
3-month, 6-month and 1-year T-bills have dropped to 0.150%, 0.450% and
0.680%, respectively.32 According to Manila Bulletin, this very low interest regime
has been attributed to "high liquidity and strong investor demand amid positive
economic indicators of the country."33

While the Court acknowledges that cases of transcendental importance demand

that they be settled promptly and definitely, brushing aside, if we must,
technicalities of procedure,34 the delay of at least 15 years in the filing of the instant
petition has actually rendered moot and academic the issues it now raises.

For its part, BSP-MB maintains that the petitioners’ allegations of constitutional and
statutory violations of CB Circular No. 905 are really mere challenges made by
petitioners concerning the wisdom of the Circular. It explains that it was in view of
the global economic downturn in the early 1980’s that the executive department
through the CB-MB had to formulate policies to achieve economic recovery, and
among these policies was the establishment of a market-oriented interest rate
structure which would require the removal of the government-imposed interest rate
ceilings.35

D. The CB-MB merely suspended the effectivity of the Usury Law when it issued CB
Circular No. 905.

The power of the CB to effectively suspend the Usury Law pursuant to P.D. No.
1684 has long been recognized and upheld in many cases. As the Court explained
in the landmark case of Medel v. CA,36 citing several cases, CB Circular No. 905
"did not repeal nor in anyway amend the Usury Law but simply suspended
the latter’s effectivity;"37 that "a CB Circular cannot repeal a law, [for] only
a law can repeal another law;"38 that "by virtue of CB Circular No. 905, the
Usury Law has been rendered ineffective;"39 and "Usury has been legally
non-existent in our jurisdiction. Interest can now be charged as lender and
borrower may agree upon."40
In First Metro Investment Corp. v. Este Del Sol Mountain Reserve, Inc. 41 cited in
DBP v. Perez,42 we also belied the contention that the CB was engaged in self-
legislation. Thus:

Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law
but simply suspended the latter’s effectivity. The illegality of usury is wholly the
creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can
repeal another law. x x x.43

In PNB v. Court of Appeals,44 an escalation clause in a loan agreement authorized

the PNB to unilaterally increase the rate of interest to 25% per annum, plus a
penalty of 6% per annum on past dues, then to 30% on October 15, 1984, and to
42% on October 25, 1984. The Supreme Court invalidated the rate increases made
by the PNB and upheld the 12% interest imposed by the CA, in this wise:

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to
stipulate freely regarding any subsequent adjustment in the interest rate that shall
accrue on a loan or forbearance of money, goods or credits. In fine, they can agree
to adjust, upward or downward, the interest previously stipulated. x x x. 45

Thus, according to the Court, by lifting the interest ceiling, CB Circular No.
905 merely upheld the parties’ freedom of contract to agree freely on the
rate of interest. It cited Article 1306 of the New Civil Code, under which
the contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy.

E. The BSP-MB has authority to enforce CB Circular No. 905.

Section 1 of CB Circular No. 905 provides that "The rate of interest, including
commissions, premiums, fees and other charges, on a loan or forbearance of any
money, goods, or credits, regardless of maturity and whether secured or
unsecured, that may be charged or collected by any person, whether natural or
juridical, shall not be subject to any ceiling prescribed under or pursuant to
the Usury Law, as amended." It does not purport to suspend the Usury Law
only as it applies to banks, but to all lenders.

Petitioners contend that, granting that the CB had power to "suspend" the Usury
Law, the new BSP-MB did not retain this power of its predecessor, in view of
Section 135 of R.A. No. 7653, which expressly repealed R.A. No. 265. The
petitioners point out that R.A. No. 7653 did not reenact a provision similar to
Section 109 of R.A. No. 265.

A closer perusal shows that Section 109 of R.A. No. 265 covered only loans
extended by banks, whereas under Section 1-a of the Usury Law, as amended, the
BSP-MB may prescribe the maximum rate or rates of interest for all loans or
renewals thereof or the forbearance of any money, goods or credits, including those
for loans of low priority such as consumer loans, as well as such loans made by
pawnshops, finance companies and similar credit institutions. It even authorizes the
BSP-MB to prescribe different maximum rate or rates for different types of
borrowings, including deposits and deposit substitutes, or loans of financial
intermediaries.

Act No. 2655, an earlier law, is much broader in scope, whereas R.A. No. 265, now
R.A. No. 7653, merely supplemented it as it concerns loans by banks and other
financial institutions. Had R.A. No. 7653 been intended to repeal Section 1-a of Act
No. 2655, it would have so stated in unequivocal terms.

Moreover, the rule is settled that repeals by implication are not favored, because
laws are presumed to be passed with deliberation and full knowledge of all laws
existing pertaining to the subject.46 An implied repeal is predicated upon the
condition that a substantial conflict or repugnancy is found between the new and
prior laws. Thus, in the absence of an express repeal, a subsequent law cannot be
construed as repealing a prior law unless an irreconcilable inconsistency and
repugnancy exists in the terms of the new and old laws. 47 We find no such conflict
between the provisions of Act 2655 and R.A. No. 7653.

F. The lifting of the ceilings for interest rates does not authorize stipulations
charging excessive, unconscionable, and iniquitous interest.

It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche
authority to raise interest rates to levels which will either enslave their borrowers or
lead to a hemorrhaging of their assets. 48 As held in Castro v. Tan:49

The imposition of an unconscionable rate of interest on a money debt, even if

knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a
repugnant spoliation and an iniquitous deprivation of property, repulsive to the
common sense of man. It has no support in law, in principles of justice, or in the
human conscience nor is there any reason whatsoever which may justify such
imposition as righteous and as one that may be sustained within the sphere of
public or private morals.50

Stipulations authorizing iniquitous or unconscionable interests have been invariably

struck down for being contrary to morals, if not against the law. 51 Indeed, under
Article 1409 of the Civil Code, these contracts are deemed inexistent and void ab
initio, and therefore cannot be ratified, nor may the right to set up their illegality as
a defense be waived.

Nonetheless, the nullity of the stipulation of usurious interest does not affect the
lender’s right to recover the principal of a loan, nor affect the other terms
thereof.52 Thus, in a usurious loan with mortgage, the right to foreclose the
mortgage subsists, and this right can be exercised by the creditor upon failure by
the debtor to pay the debt due. The debt due is considered as without the
stipulated excessive interest, and a legal interest of 12% per annum will be added
in place of the excessive interest formerly imposed,53following the guidelines laid
down in the landmark case of Eastern Shipping Lines, Inc. v. Court of
Appeals,54 regarding the manner of computing legal interest:

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

1. When the obligation is breached, and it consists in the payment of a sum

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

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

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

3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.55 (Citations omitted)

The foregoing rules were further clarified in Sunga-Chan v. Court of Appeals, 56 as

follows:

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if
proper, and the applicable rate, as follows: The 12% per annum rate under CB
Circular No. 416 shall apply only to loans or forbearance of money, goods, or
credits, as well as to judgments involving such loan or forbearance of money,
goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code applies
"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," with the application of both rates reckoned "from the time the complaint
was filed until the [adjudged] amount is fully paid." In either instance, the
reckoning period for the commencement of the running of the legal interest shall be
subject to the condition "that the courts are vested with discretion, depending on
the equities of each case, on the award of interest." 57 (Citations omitted)

WHEREFORE, premises considered, the Petition for certiorari is DISMISSED.

SO ORDERED.

Courts can equitably reduce exorbitant interest

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 175490               September 17, 2009

ILEANA DR. MACALINAO, Petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.

DECISION

VELASCO, JR., J.:

The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
seeking to reverse and set aside the June 30, 2006 Decision 1 of the Court of
Appeals (CA) and its November 21, 2006 Resolution 2 denying petitioner’s motion for
reconsideration.

The Facts

Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of

the credit card facilities of respondent Bank of the Philippine Islands
(BPI).3 Petitioner Macalinao made some purchases through the use of the said
credit card and defaulted in paying for said purchases. She subsequently received a
letter dated January 5, 2004 from respondent BPI, demanding payment of the
amount of one hundred forty-one thousand five hundred eighteen pesos and thirty-
four centavos (PhP 141,518.34), as follows:

Statement Previous Purchases Penalty Finance Balance

Date Balance (Payments) Interest Charges Due
 10/27/2002 94,843.70   559.72 3,061.99 98,456.41

11/27/2002 98,465.41 (15,000) 0 2,885.61 86,351.02

12/31/2002 86,351.02 30,308.80 259.05 2,806.41 119,752.28

1/27/2003 119,752.28   618.23 3,891.07 124,234.58

2/27/2003 124,234.58   990.93 4,037.62 129,263.13

3/27/2003 129,263.13 (18,000.00) 298.72 3,616.05 115,177.90

4/27/2003 115,177.90   644.26 3,743.28 119,565.44

5/27/2003 119,565.44 (10,000.00) 402.95 3,571.71 113,540.10

8,362.50
6/29/2003 113,540.10 323.57 3,607.32 118,833.49
(7,000.00)

7/27/2003 118,833.49   608.07 3,862.09 123,375.65

8/27/2003 123,375.65   1,050.20 4,009.71 128,435.56

9/28/2003 128,435.56   1,435.51 4,174.16 134,045.23

10/28/2003          

11/28/2003          

12/28/2003          

1/27/2004 141,518.34   8,491.10 4,599.34 154,608.78

Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit
and BPI Mastercard, the charges or balance thereof remaining unpaid after the
payment due date indicated on the monthly Statement of Accounts shall bear
interest at the rate of 3% per month and an additional penalty fee equivalent to
another 3% per month. Particularly:

8. PAYMENT OF CHARGES – BCC shall furnish the Cardholder a monthly Statement

of Account (SOA) and the Cardholder agrees that all charges made through the use
of the CARD shall be paid by the Cardholder as stated in the SOA on or before the
last day for payment, which is twenty (20) days from the date of the said SOA, and
such payment due date may be changed to an earlier date if the Cardholder’s
account is considered overdue and/or with balances in excess of the approved
credit limit, or to such other date as may be deemed proper by the CARD issuer
with notice to the Cardholder on the same monthly SOA. If the last day fall on a
Saturday, Sunday or a holiday, the last day for the payment automatically becomes
the last working day prior to said payment date. However, notwithstanding the
absence or lack of proof of service of the SOA of the Cardholder, the latter shall pay
any and all charges made through the use of the CARD within thirty (30) days from
date or dates thereof. Failure of the Cardholder to pay the charges made through
the CARD within the payment period as stated in the SOA or within thirty (30) days
from actual date or dates of purchase whichever occur earlier, shall render him in
default without the necessity of demand from BCC, which the Cardholder expressly
waives. The charges or balance thereof remaining unpaid after the payment due
date indicated on the monthly Statement of Accounts shall bear interest at the rate
of 3% per month for BPI Express Credit, BPI Gold Mastercard and an additional
penalty fee equivalent to another 3% of the amount due for every month or a
fraction of a month’s delay. PROVIDED that if there occurs any change on the
prevailing market rates, BCC shall have the option to adjust the rate of interest
and/or penalty fee due on the outstanding obligation with prior notice to the
cardholder. The Cardholder hereby authorizes BCC to correspondingly increase the
rate of such interest [in] the event of changes in the prevailing market rates, and to
charge additional service fees as may be deemed necessary in order to maintain its
service to the Cardholder. A CARD with outstanding balance unpaid after thirty (30)
days from original billing statement date shall automatically be suspended, and
those with accounts unpaid after ninety (90) days from said original
billing/statement date shall automatically be cancel (sic), without prejudice to BCC’s
right to suspend or cancel any card anytime and for whatever reason. In case of
default in his obligation as provided herein, Cardholder shall surrender his/her card
to BCC and in addition to the interest and penalty charges aforementioned , pay the
following liquidated damages and/or fees (a) a collection fee of 25% of the amount
due if the account is referred to a collection agency or attorney; (b) service fee for
every dishonored check issued by the cardholder in payment of his account without
prejudice, however, to BCC’s right of considering Cardholder’s account, and (c) a
final fee equivalent to 25% of the unpaid balance, exclusive of litigation expenses
and judicial cost, if the payment of the account is enforced though court action.
Venue of all civil suits to enforce this Agreement or any other suit directly or
indirectly arising from the relationship between the parties as established herein,
whether arising from crimes, negligence or breach thereof, shall be in the process
of courts of the City of Makati or in other courts at the option of BCC. 4 (Emphasis
supplied.)1avvphi1

For failure of petitioner Macalinao to settle her obligations, respondent BPI filed with
the Metropolitan Trial Court (MeTC) of Makati City a complaint for a sum of money
against her and her husband, Danilo SJ. Macalinao. This was raffled to Branch 66 of
the MeTC and was docketed as Civil Case No. 84462 entitled Bank of the Philippine
Islands vs. Spouses Ileana Dr. Macalinao and Danilo SJ. Macalinao. 5

In said complaint, respondent BPI prayed for the payment of the amount of one
hundred fifty-four thousand six hundred eight pesos and seventy-eight
centavos (PhP 154,608.78) plus 3.25% finance charges and late payment
charges equivalent to 6% of the amount due from February 29, 2004 and
an amount equivalent to 25% of the total amount due as attorney’s fees,
and of the cost of suit.6

After the summons and a copy of the complaint were served upon petitioner
Macalinao and her husband, they failed to file their Answer. 7 Thus, respondent BPI
moved that judgment be rendered in accordance with Section 6 of the Rule on
Summary Procedure.8 This was granted in an Order dated June 16,
2004.9 Thereafter, respondent BPI submitted its documentary evidence. 101avvphi1

In its Decision dated August 2, 2004, the MeTC ruled in favor of respondent BPI and
ordered petitioner Macalinao and her husband to pay the amount of PhP
141,518.34 plus interest and penalty charges of 2% per month, to wit:

WHEREFORE, finding merit in the allegations of the complaint supported by

documentary evidence, judgment is hereby rendered in favor of the plaintiff, Bank
of the Philippine Islands and against defendant-spouses Ileana DR Macalinao and
Danilo SJ Macalinao by ordering the latter to pay the former jointly and severally
the following:

1. The amount of PESOS: ONE HUNDRED FORTY ONE THOUSAND FIVE

HUNDRED EIGHTEEN AND 34/100 (P141,518.34) plus interest and penalty
charges of 2% per month from January 05, 2004 until fully paid;

2. P10,000.00 as and by way of attorney’s fees; and

3. Cost of suit.

SO ORDERED.11

Only petitioner Macalinao and her husband appealed to the Regional Trial Court
(RTC) of Makati City, their recourse docketed as Civil Case No. 04-1153. In its
Decision dated October 14, 2004, the RTC affirmed in toto the decision of the MeTC
and held:

In any event, the sum of P141,518.34 adjudged by the trial court appeared to be
the result of a recomputation at the reduced rate of 2% per month. Note that the
total amount sought by the plaintiff-appellee was P154,608.75 exclusive of finance
charge of 3.25% per month and late payment charge of 6% per month.

WHEREFORE, the appealed decision is hereby affirmed in toto.

No pronouncement as to costs.

SO ORDERED.12

Unconvinced, petitioner Macalinao filed a petition for review with the CA, which was
docketed as CA-G.R. SP No. 92031. The CA affirmed with modification the Decision
of the RTC:

WHEREFORE, the appealed decision is AFFIRMED but MODIFIED with respect to the
total amount due and interest rate. Accordingly, petitioners are jointly and severally
ordered to pay respondent Bank of the Philippine Islands the following:
 1. The amount of One Hundred Twenty Six Thousand Seven Hundred Six
Pesos and Seventy Centavos plus interest and penalty charges of 3% per
month from January 5, 2004 until fully paid;

2. P10,000.00 as and by way of attorney’s fees; and

3. Cost of Suit.

SO ORDERED.13

Although sued jointly with her husband, petitioner Macalinao was the only one who
filed the petition before the CA since her husband already passed away on October
18, 2005.14

In its assailed decision, the CA held that the amount of PhP 141,518.34 (the
amount sought to be satisfied in the demand letter of respondent BPI) is clearly not
the result of the re-computation at the reduced interest rate as previous higher
interest rates were already incorporated in the said amount. Thus, the said amount
should not be made as basis in computing the total obligation of petitioner
Macalinao. Further, the CA also emphasized that respondent BPI should not
compound the interest in the instant case absent a stipulation to that
effect. The CA also held, however, that the MeTC erred in modifying the amount of
interest rate from 3% monthly to only 2% considering that petitioner Macalinao
freely availed herself of the credit card facility offered by respondent BPI to the
general public. It explained that contracts of adhesion are not invalid per se and are
not entirely prohibited.

Petitioner Macalinao’s motion for reconsideration was denied by the CA in its

Resolution dated November 21, 2006. Hence, petitioner Macalinao is now before
this Court with the following assigned errors:

I.

THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%, SHOULD BE UPHELD

SINCE THE STIPULATED RATE OF INTEREST WAS UNCONSCIONABLE AND
INIQUITOUS, AND THUS ILLEGAL.

II.

THE COURT OF APPEALS ARBITRARILY MODIFIED THE REDUCED RATE OF

INTEREST FROM 2% TO 3%, CONTRARY TO THE TENOR OF ITS OWN DECISION.

III.

THE COURT A QUO, INSTEAD OF PROCEEDING WITH A RECOMPUTATION, SHOULD

HAVE DISMISSED THE CASE FOR FAILURE OF RESPONDENT BPI TO PROVE
THE CORRECT AMOUNT OF PETITIONER’S OBLIGATION, OR IN THE
ALTERNATIVE, REMANDED THE CASE TO THE LOWER COURT FOR
RESPONDENT BPI TO PRESENT PROOF OF THE CORRECT AMOUNT
THEREOF.

Our Ruling

The petition is partly meritorious.

The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum
Should Be Reduced to 2% Per Month or 24% Per Annum

In its Complaint, respondent BPI originally imposed the interest and penalty
charges at the rate of 9.25% per month or 111% per annum. This was declared
as unconscionable by the lower courts for being clearly excessive, and was
thus reduced to 2% per month or 24% per annum. On appeal, the CA
modified the rate of interest and penalty charge and increased them to 3%
per month or 36% per annum based on the Terms and Conditions
Governing the Issuance and Use of the BPI Credit Card, which governs the
transaction between petitioner Macalinao and respondent BPI.

In the instant petition, Macalinao claims that the interest rate and penalty charge of
3% per month imposed by the CA is iniquitous as the same translates to 36%
per annum or thrice the legal rate of interest. 15 On the other hand,
respondent BPI asserts that said interest rate and penalty charge are
reasonable as the same are based on the Terms and Conditions Governing
the Issuance and Use of the BPI Credit Card.16

We find for petitioner. We are of the opinion that the interest rate and penalty
charge of 3% per month should be equitably reduced to 2% per month or 24% per
annum.

Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI
Credit Card, there was a stipulation on the 3% interest rate. Nevertheless, it
should be noted that this is not the first time that this Court has considered
the interest rate of 36% per annum as excessive and unconscionable. We
held in Chua vs. Timan:17

The stipulated interest rates of 7% and 5% per month imposed on respondents’

loans must be equitably reduced to 1% per month or 12% per annum. We need not
unsettle the principle we had affirmed in a plethora of cases that stipulated interest
rates of 3% per month and higher are excessive, iniquitous, unconscionable and
exorbitant. Such stipulations are void for being contrary to morals, if not against
the law. While C.B. Circular No. 905-82, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and unsecured
loans, regardless of maturity, nothing in the said circular could possibly be read as
granting carte blanche authority to lenders to raise interest rates to levels which
would either enslave their borrowers or lead to a hemorrhaging of their assets.
(Emphasis supplied.)
Since the stipulation on the interest rate is void, it is as if there was no
express contract thereon. Hence, courts may reduce the interest rate as
reason and equity demand.18

The same is true with respect to the penalty charge. Notably, under the Terms and
Conditions Governing the Issuance and Use of the BPI Credit Card, it was also
stated therein that respondent BPI shall impose an additional penalty charge of 3%
per month. Pertinently, Article 1229 of the Civil Code states:

Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even
if there has been no performance, the penalty may also be reduced by the courts if
it is iniquitous or unconscionable.

In exercising this power to determine what is iniquitous and unconscionable, courts

must consider the circumstances of each case since what may be iniquitous and
unconscionable in one may be totally just and equitable in another. 19

In the instant case, the records would reveal that petitioner Macalinao made partial
payments to respondent BPI, as indicated in her Billing Statements. 20 Further, the
stipulated penalty charge of 3% per month or 36% per annum, in addition to
regular interests, is indeed iniquitous and unconscionable.

Thus, under the circumstances, the Court finds it equitable to reduce the
interest rate pegged by the CA at 1.5% monthly to 1% monthly and
penalty charge fixed by the CA at 1.5% monthly to 1% monthly or a total
of 2% per month or 24% per annum in line with the prevailing
jurisprudence and in accordance with Art. 1229 of the Civil Code.

There Is No Basis for the Dismissal of the Case,

Much Less a Remand of the Same for Further Reception of Evidence

Petitioner Macalinao claims that the basis of the re-computation of the CA, that is,
the amount of PhP 94,843.70 stated on the October 27, 2002 Statement of
Account, was not the amount of the principal obligation. Thus, this allegedly
necessitates a re-examination of the evidence presented by the parties. For this
reason, petitioner Macalinao further contends that the dismissal of the case or its
remand to the lower court would be a more appropriate disposition of the case.

Such contention is untenable. Based on the records, the summons and a copy of
the complaint were served upon petitioner Macalinao and her husband on May 4,
2004. Nevertheless, they failed to file their Answer despite such service. Thus,
respondent BPI moved that judgment be rendered accordingly. 21 Consequently, a
decision was rendered by the MeTC on the basis of the evidence submitted by
respondent BPI. This is in consonance with Sec. 6 of the Revised Rule on Summary
Procedure, which states:
Sec. 6. Effect of failure to answer. — Should the defendant fail to answer the
complaint within the period above provided, the court, motu proprio, or on motion
of the plaintiff, shall render judgment as may be warranted by the facts alleged in
the complaint and limited to what is prayed for therein: Provided, however, that the
court may in its discretion reduce the amount of damages and attorney’s fees
claimed for being excessive or otherwise unconscionable. This is without prejudice
to the applicability of Section 3(c), Rule 10 of the Rules of Court, if there are two or
more defendants. (As amended by the 1997 Rules of Civil Procedure; emphasis
supplied.)

Considering the foregoing rule, respondent BPI should not be made to suffer for
petitioner Macalinao’s failure to file an answer and concomitantly, to allow the latter
to submit additional evidence by dismissing or remanding the case for further
reception of evidence. Significantly, petitioner Macalinao herself admitted the
existence of her obligation to respondent BPI, albeit with reservation as to the
principal amount. Thus, a dismissal of the case would cause great injustice to
respondent BPI. Similarly, a remand of the case for further reception of evidence
would unduly prolong the proceedings of the instant case and render inutile the
proceedings conducted before the lower courts.

Significantly, the CA correctly used the beginning balance of PhP 94,843.70 as basis
for the re-computation of the interest considering that this was the first amount
which appeared on the Statement of Account of petitioner Macalinao. There is no
other amount on which the re-computation could be based, as can be gathered
from the evidence on record. Furthermore, barring a showing that the factual
findings complained of are totally devoid of support in the record or that they are so
glaringly erroneous as to constitute serious abuse of discretion, such findings must
stand, for this Court is not expected or required to examine or contrast the
evidence submitted by the parties.22

In view of the ruling that only 1% monthly interest and 1% penalty charge can be
applied to the beginning balance of PhP 94,843.70, this Court finds the following
computation more appropriate:

Total
Purchases Penalty Amount
Statemen Previous Interest
(Payment Balance Charge Due for
t Date Balance (1%)
s) (1%) the
Month

10/27/20 94,843.7 94,843.7 96,740.5

  948.44 948.44
02 0 0 8

11/27/20 94,843.7 79,843.7 81,440.5

(15,000) 798.44 798.44
02 0 0 8

12/31/20 79,843.7 110,152. 1,101.5 1,101.5 112,355.

30,308.80
02 0 50 3 3 56
 1/27/200 110,152. 110,152. 1,101.5 1,101.5 112,355.
 
3 50 50 3 3 56

2/27/200 110,152. 110,152. 1,101.5 1,101.5 112,355.

 
3 50 50 3 3 56

3/27/200 110,152. (18,000.0 92,152.5 93,995.5

921.53 921.53
3 50 0) 0 6

4/27/200 92,152.5 92,152.5 93,995.5

  921.53 921.53
3 0 0 6

5/27/200 92,152.5 (10,000.0 82,152.5 83,795.5

821.53 821.53
3 0 0) 0 6

8,362.50
6/29/200 82,152.5 83,515.0 85,185.3
(7,000.00 835.15 835.15
3 0 0 0
)

7/27/200 83,515.0 83,515.0 85,185.3

  835.15 835.15
3 0 0 0

8/27/200 83,515.0 83,515.0 85,185.3

  835.15 835.15
3 0 0 0

9/28/200 83,515.0 83,515.0 85,185.3

  835.15 835.15
3 0 0 0

10/28/20 83,515.0 83,515.0 85,185.3

  835.15 835.15
03 0 0 0

11/28/20 83,515.0 83,515.0 85,185.3

  835.15 835.15
03 0 0 0

12/28/20 83,515.0 83,515.0 85,185.3

  835.15 835.15
03 0 0 0

1/27/200 83,515.0 83,515.0 85,185.3

  835.15 835.15
4 0 0 0

83,515.0 14,397. 14,397. 112,309.

TOTAL    
0 26 26 52

WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated June 30,
2006 in CA-G.R. SP No. 92031 is hereby MODIFIED with respect to the total
amount due, interest rate, and penalty charge. Accordingly, petitioner Macalinao is
ordered to pay respondent BPI the following:
 (1) The amount of one hundred twelve thousand three hundred nine pesos
and fifty-two centavos (PhP 112,309.52) plus interest and penalty charges of
2% per month from January 5, 2004 until fully paid;

(2) PhP 10,000 as and by way of attorney’s fees; and

(3) Cost of suit.

SO ORDERED.

G.R. No. L-25704             April 24, 1968

ANGEL JOSE WAREHOUSING CO., INC., plaintiff-appellee,

vs.
CHELDA ENTERPRISES and DAVID SYJUECO, defendants-appellants.

Luis A. Guerrero for plaintiff-appellee.

Burgos and Sarte for defendants-appellants.

BENGZON, J.P., J.:

Plaintiff corporation filed suit in the Court of First Instance of Manila on May 29,
1964 against the partnership Chelda Enterprises and David Syjueco, its capitalist
partner, for recovery of alleged unpaid loans in the total amount of P20,880.00,
with legal interest from the filing of the complaint, plus attorney's fees of
P5,000.00. Alleging that post dated checks issued by defendants to pay said
account were dishonored, that defendants' industrial partner, Chellaram I.
Mohinani, had left the country, and that defendants have removed or disposed of
their property, or are about to do so, with intent to defraud their creditors,
preliminary attachment was also sought.

Answering, defendants averred that they obtained four loans from plaintiff in the
total amount of P26,500.00, of which P5,620.00 had been paid, leaving a balance
of P20,880.00; that plaintiff charged and deducted from the loan usurious interests
thereon, at rates of 2% and 2.5% per month, and, consequently, plaintiff has no
cause of action against defendants and should not be permitted to recover under
the law. A counterclaim for P2,000.00 attorney's fees was interposed.

Plaintiff filed on June 25, 1964 an answer to the counterclaim, specifically denying
under oath the allegations of usury.

After trial, decision was rendered, on November 10, 1965. The court found that
there remained due from defendants an unpaid principal amount of
P20,287.50; that plaintiff charged usurious interests, of which P1,048.15
had actually been deducted in advance by plaintiff from the loan; that said
amount of P1,048.15 should therefore be deducted from the unpaid
principal of P20,287.50, leaving a balance of P19,247.35 1 still payable to
the plaintiff. Said court held that notwithstanding the usurious interests
charged, plaintiff is not barred from collecting the principal of the loan or
its balance of P19,247.35. Accordingly, it stated, in the dispositive portion of the
decision, thus:

WHEREFORE, judgment is hereby rendered, ordering the defendant

partnership to pay to the plaintiff the amount of P19,247.35, with legal
interest thereon from May 29, 1964 until paid, plus an additional sum of
P2,000.00 as damages for attorney's fee; and, in case the assets of
defendant partnership be insufficient to satisfy this judgment in full, ordering
the defendant David Syjueco to pay to the plaintiff one-half (1/2) of the
unsatisfied portion of this judgment.

With costs against the defendants.1äwphï1.ñët

Appealing directly to Us, defendants raise two questions of law: (1) In a loan with
usurious interest, may the creditor recover the principal of the loan? (2) Should
attorney's fees be awarded in plaintiff's favor?

To refute the lower court's decision which is based on the doctrine laid down by this
Court in Lopez v. El Hogar Filipino, 47 Phil. 249, holding that a contract of loan with
usurious interest is valid as to the loan but void as to the usurious interest,
appellants argue that in light of the New Civil Code provisions said doctrine no
longer applies. In support thereof, they cite the case decided by the Court of
Appeals in Sebastian v. Bautista, 58 O.G. No. 15, p. 3146.

The Sebastian case was an action for recovery of a parcel of land. The Court of First
Instance therein decided in plaintiff's favor, on the ground that the so-called sale
with pacto de retro of said land was in fact only an equitable mortgage. In affirming
the trial court, the writer of the opinion of the Court of Appeals went further to
state the view that the loan secured by said mortgage was usurious in nature, and,
thus, totally void. Such reasoning of the writer, however, was not concurred in by
the other members of the Court, who concurred in the result and voted for
affirmance on the grounds stated by the trial court. Furthermore, the affirmance of
the existence of equitable mortgage necessarily implies the existence of a valid
contract of loan, because the former is an accessory contract to the latter.

Great reliance is made by appellants on Art. 1411 of the New Civil Code which
states:

Art. 1411. When the nullity proceeds from the illegality of the cause or object
of the contract, and the act constitutes criminal offense, both parties being
in  pari delicto, they shall have no action against each other, and both shall
be prosecuted. Moreover, the provisions of the Penal Code relative to the
 disposal of effects or instruments of a crime shall be applicable to the things
or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the
innocent one may claim what he has given, and shall not be bound to comply
with his promise.

Since, according to the appellants, a usurious loan is void due to illegality of cause
or object, the rule of pari delicto expressed in Article 1411, supra, applies, so that
neither party can bring action against each other. Said rule, however, appellants
add, is modified as to the borrower, by express provision of the law (Art. 1413, New
Civil Code), allowing the borrower to recover interest paid in excess of the interest
allowed by the Usury Law. As to the lender, no exception is made to the rule;
hence, he cannot recover on the contract. So — they continue — the New Civil Code
provisions must be upheld as against the Usury Law, under which a loan with
usurious interest is not totally void, because of Article 1961 of the New Civil Code,
that: "Usurious contracts shall be governed by the Usury Law and other special
laws, so far as they are not inconsistent with this Code." (Emphasis ours.)

We do not agree with such reasoning. Article 1411 of the New Civil Code is not
new; it is the same as Article 1305 of the Old Civil Code. Therefore, said provision
is no warrant for departing from previous interpretation that, as provided in the
Usury Law (Act No. 2655, as amended), a loan with usurious interest is not totally
void only as to the interest.

True, as stated in Article 1411 of the New Civil Code, the rule of pari delicto  applies
where a contract's nullity proceeds from illegality of the cause or object of said
contract.

However, appellants fail to consider that a contract of loan with usurious interest
consists of principal and accessory stipulations; the principal one is to pay the debt;
the accessory stipulation is to pay interest thereon.2

And said two stipulations are divisible in the sense that the former can still stand
without the latter. Article 1273, Civil Code, attests to this: "The renunciation of the
principal debt shall extinguish the accessory obligations; but the waiver of the latter
shall leave the former in force."

The question therefore to resolve is whether the illegal terms as to payment of

interest likewise renders a nullity the legal terms as to payments of the principal
debt. Article 1420 of the New Civil Code provides in this regard: "In case of a
divisible contract, if the illegal terms can be separated from the legal ones, the
latter may be enforced."

In simple loan with stipulation of usurious interest, the prestation of the debtor to
pay the principal debt, which is the cause of the contract (Article 1350, Civil Code),
is not illegal. The illegality lies only as to the prestation to pay the stipulated
interest; hence, being separable, the latter only should be deemed void, since it is
the only one that is illegal.

Neither is there a conflict between the New Civil Code and the Usury Law. Under
the latter, in Sec. 6, any person who for a loan shall have paid a higher rate or
greater sum or value than is allowed in said law, may recover the whole
interest paid. The New Civil Code, in Article 1413 states: "Interest paid in excess of
the interest allowed by the usury laws may be recovered by the debtor, with
interest thereon from the date of payment." Article 1413, in speaking of "interest
paid in excess of the interest allowed by the usury laws" means the whole usurious
interest; that is, in a loan of P1,000, with interest of P20% per annum P200 for one
year, if the borrower pays said P200, the whole P200 is the usurious interest, not
just that part thereof in excess of the interest allowed by law. It is in this case that
the law does not allow division. The whole stipulation as to interest is void, since
payment of said interest is the cause or object and said interest is illegal. The only
change effected, therefore, by Article 1413, New Civil Code, is not to provide for the
recovery of the interest paid in excess of that allowed by law, which the Usury Law
already provided for, but to add that the same can be recovered "with interest
thereon from the date of payment."

The foregoing interpretation is reached with the philosophy of usury legislation in

mind; to discourage stipulations on usurious interest, said stipulations are treated
as wholly void, so that the loan becomes one without stipulation as to payment of
interest. It should not, however, be interpreted to mean forfeiture even of the
principal, for this would unjustly enrich the borrower at the expense of the lender.
Furthermore, penal sanctions are available against a usurious lender, as a further
deterrence to usury.

The principal debt remaining without  stipulation for payment of interest can thus be
recovered by judicial action. And in case of such demand, and the debtor incurs in
delay, the debt earns interest from the date of the demand (in this case from the
filing of the complaint). Such interest is not due to stipulation, for there was none,
the same being void. Rather, it is due to the general provision of law that in
obligations to pay money, where the debtor incurs in delay, he has to pay interest
by way of damages (Art. 2209, Civil Code). The court a quo therefore, did not err in
ordering defendants to pay the principal debt with interest thereon at the legal rate,
from the date of filing of the complaint.

As regards, however, the attorney's fees, the court a quo stated no basis for its
award, beyond saying that as a result of defendants' refusal to pay the amount of
P19,247.35 notwithstanding repeated demands, plaintiff was obliged to retain the
services of counsel. The rule as to attorney's fees is that the same are not
recoverable, in the absence of stipulation. Several exceptions to this rule are
provided (Art. 2208, Civil Code). Unless shown to fall under an exception, the act of
plaintiff in engaging counsel's services due to refusal of defendants to pay his
demand, does not justify award of attorney's fees (Estate of Buan v. Camaganacan,
L-21569, Feb. 28, 1966). Defendants, moreover, had reason to resist the claim,
since there was yet no definite ruling of this Court on the point of law involved
herein in light of the New Civil Code. Said award should therefore be deleted.

WHEREFORE, with the modification that the award of attorney's fees in plaintiff's
favor is deleted therefrom, and the correction of the clerical error as to the principal
still recoverable, from P19,247.35 to P19,239.35, the appealed judgment is hereby
affirmed. No costs. So ordered.

G.R. No. 131622 November 27, 1998

LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners,

vs.
COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G.
GONZALES, JR. doing lending business under the trade name and style
"GONZALES CREDIT ENTERPRISES", respondents.

PARDO, J.:

The case before the Court is a petition for review on certiorari, under Rule 45 of the
Revised Rules of Court, seeking to set aside the decision of the Court of
Appeals,1 and its resolution denying reconsideration, 2 the dispositive
portion of which decision reads as follows:

WHEREFORE, the appealed judgment is hereby MODIFIED such

that defendants are hereby-ordered to pay the plaintiff: the
sum of P500,000.00, plus 5.5% per month interest and 2%
service charge per annum effective July 23, 1986, plus 1% per
month of the total amount due and demandable as penalty
charges effective August 23, 1986, until the entire amount is
fully paid.

The award to the plaintiff of P50,000.00 as attorney's fees is

affirmed. And so is the imposition of costs against the
defendants.

SO ORDERED. 3

The Court required the respondents to comment on the petition,4 which

was filed on April 3, 1998,5 and the petitioners to reply thereto, which was
filed on May 29, 1998.6 We now resolve to give due course to the petition
and decide the case.

The facts of the case, as found by the Court of Appeals in its decision,
which are considered binding and conclusive on the parties herein, as the
appeal is limited to questions of law, are as follows:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter
Servando and Leticia) obtained a loan from Veronica R. Gonzales
(hereafter Veronica), who was engaged in the money lending business
under the name "Gonzales Credit Enterprises", in the amount of
P50,000.00, payable in two months. Veronica gave only the amount of
P47,000.00, to the borrowers, as she retained P3,000.00, as advance
interest for one month at 6% per month. Servando and Leticia executed a
promissory note for P50,000.00, to evidence the loan, payable on January
7, 1986.

On November 19, 1985, Servando and Liticia obtained from Veronica

another loan in the amount of P90,000.00, payable in two months, at 6%
interest per month. They executed a promissory note to evidence the loan,
maturing on Janaury 19, 1986. They received only P84,000.00, out of the
proceeds of the loan.

On maturity of the two promissory notes, the borrowers failed to pay the
indebtedness.

On June 11, 1986, Servando and Leticia secured from Veronica still another
loan in the amout of P300,000.00, maturing in one month, secured by a
real estate mortgage over a property belonging to Leticia Makalintal
Yaptinchay, who issued a special power of attorney in favor of Leticia
Medel, authorizing her to execute the mortgage. Servando and Leticia
executed a promissory note in favor of Veronica to pay the sum of
P300,000.00, after a month, or on July 11, 1986. However, only the sum of
P275.000.00, was given to them out of the proceeds of the loan.

Like the previous loans, Servando and Medel failed to pay the third loan on
maturity.

On July 23, 1986, Servando and Leticia with the latter's husband, Dr.
Rafael Medel, consolidated all their previous unpaid loans totaling
P440,000.00, and sought from Veronica another loan in the amount of
P60,000.00, bringing their indebtedness to a total of P500,000.00, payable
on August 23, 1986. They executed a promissory note, reading as follows:

Baliwag, Bulacan July 23, 1986

Maturity Date Augsut 23, 1986

P500,000.00

FOR VALUE RECEIVED, I/WE jointly and severally promise to

pay to the order of VERONICA R. GONZALES doing business in
the business style of GONZALES CREDIT ENTERPRISES, Filipino,
of legal age, married to Danilo G. Gonzales, Jr., of Baliwag,
Bulacan, the sum of PESOS . . . FIVE HUNDRED THOUSAND . . .
 (P500,000.00) Philippine Currency with interest thereon at the
rate of 5.5 PER CENT per month plus 2% service charge per
annum from date hereof until fully paid according to the
amortization schedule contained herein. (Emphasis supplied)

Payment will be made in full at the maturity date.

Should I/WE fail to pay any amortization or portion hereof

when due, all the other installments together with all interest
accrued shall immediately be due and payable and I/WE
hereby agree to pay an additional amount equivalent to one
per cent (1%) per month of the amount due and demandable
as penalty charges in the form of liquidated damages until fully
paid; and the further  sum of TWENTY FIVE PER CENT (25%)
thereof in full,  without deductions as Attorney's Fee  whether
actually incurred or not, of the total amount due and
demandable, exclusive of costs and judicial or extra judicial
expenses. (Emphasis supplied).

I, WE further agree that in the event the present rate of

interest on loan is increased by law or the Central Bank of the
Philippines, the holder shall have the option to apply and
collect the increased interest charges without notice although
the original interest have already been collected wholly or
partially unless the contrary is required by law.

It is also a special condition of this contract that the parties

herein agree that the amount of peso-obligation under this
agreement is based on the present value of the peso, and if
there be any change in the value thereof, due to extraordinary
inflation or deflation, or any other cause or reason, then the
peso-obligation herein contracted shall be adjusted in
accordance with the value of the peso then prevailing at the
time of the complete fulfillment of the obligation.

Demand and notice of dishonor waived. Holder may accept

partial payments and grant renewals of this note or extension
of payments, reserving rights against each and all indorsers
and all parties to this note.

IN CASE OF JUDICIAL Execution of this obligation, or any part

of it, the debtors waive all his/their rights under the provisions
of Section 12, Rule 39, of the Revised Rules of Court.

On maturity of the loan, the borrowers failed to pay the indebtedness of

P500,000.00, plus interests and penalties, evidenced by the above-quoted
promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo
G. Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at
Malolos, Bulacan, a complaint for collection of the full amount of the loan
including interests and other charges.

In his answer to the complaint filed with the trial court on April 5, 1990,
defendant Servando alleged that he did not obtain any loan from the
plaintiffs; that it was defendants Leticia and Dr. Rafael Medel who
borrowed from the plaintiffs the sum of P500,000.00, and actually received
the amount and benefited therefrom; that the loan was secured by a real
estate mortgage executed in favor of the plaintiffs, and that he (Servando
Franco) signed the promissory note only as a witness.

In their separate answer filed on April 10, 1990, defendants Leticia and
Rafael Medel alleged that the loan was the transaction of Leticia
Yaptinchay, who executed a mortgage in favor of the plaintiffs over a
parcel of real estate situated in San Juan, Batangas; that the interest rate
is excessive at 5.5% per month with additional service charge of 2% per
annum, and penalty charge of 1% per month; that the stipulation for
attorney's fees of 25% of the amount due is unconscionable, illegal and
excessive, and that substantial payments made were applied to interest,
penalties and other charges.

After due trial, the lower court declared that the due execution and
genuineness of the four promissory notes had been duly proved, and ruled
that although the Usury Law had been repealed, the interest charged by
the plaintiffs on the loans was unconscionable and "revolting to the
conscience". Hence, the trial court applied "the provision of the New [Civil]
Code" that the "legal rate of interest for loan or forbearance of money,
goods or credit is 12% per annum." 7

Accordingly, on December 9, 1991, the trial court rendered judgment, the

dispositive portion of which reads as follows:

WHEREFORE, premises considered, judgment is hereby

rendered, as follows:

1. Ordering the defendants Servando Franco and Leticia Medel,

jointly and severally, to pay plaintiffs the amount of P47,000.00
plus 12% interest per annum from November 7, 1985 and 1%
per month as penalty, until the entire amount is paid in full.

2. Ordering the defendants Servando Franco and Leticia Y.

Medel to plaintiffs, jointly and severally the amount of
P84,000.00 with 12% interest per annum and 1% per cent per
month as penalty from November 19, 1985 until the whole
amount is fully paid;
 3. Ordering the defendants to pay the plaintiffs, jointly and
severally, the amount of P285,000.00 plus 12% interest per
annum and 1% per month as penalty from July 11, 1986, until
the whole amount is fully paid;

4. Ordering the defendants to pay plaintiffs, jointly and

severally, the amount of P50,000.00 as attorney's fees;

5. All counterclaims are hereby dismissed.

With costs against the defendants.8

In due time, both plaintiffs and defendants appealed to the Court of

Appeals.

In their appeal, plaintiffs-appellants argued that the promissory note,

which consolidated all the unpaid loans of the defendants, is the law that
governs the parties. They further argued that Circular No. 416 of the
Central Bank prescribing the rate of interest for loans or forbearance of
money, goods or credit at 12% per annum, applies only in the absence of a
stipulation on interest rate, but not when the parties agreed thereon.

The Court of Appeals sustained the plaintiffs-appellants' contention. It

ruled that "the Usury Law having become 'legally inexistent' with the
promulgation by the Central Bank in 1982 of Circular No. 905, the lender
and borrower could agree on any interest that may be charged on the
loan".9 The Court of Appeals further held that "the imposition of 'an
additional amount equivalent to 1% per month of the amount due and
demandable as penalty charges in the form of liquidated damages until
fully paid' was allowed by
law". 10

Accordingly, on March 21, 1997, the Court of Appeals promulgated its

decision reversing that of the Regional Trial Court, disposing as follows:

WHEREFORE, the appealed judgment is hereby MODIFIED such

that defendants are hereby ordered to pay the plaintiffs the
sum of P500,000.00, plus 5.5% per month interest and 2%
service charge per annum effective July 23, 1986, plus 1% per
month of the total amount due and demandable as penalty
charges effective August 24, 1986, until the entire amount is
fully paid.

The award to the plaintiffs of P50,000.00 as attorney's fees is

affirmed. And so is the imposition of costs against the
defendants.

SO ORDERED. 11
On April 15, 1997, defendants-appellants filed a motion for reconsideration
of the said decision. By resolution dated November 25, 1997, the Court of
Appeals denied the motion. 12

Hence, defendants interposed the present recourse via petition for review

on  certiorari. 13

We find the petition meritorious.

Basically, the issue revolves on the validity of the interest rate stipulated
upon. Thus, the question presented is whether or not the stipulated rate of
interest at 5.5% per month on the loan in the sum of P500,000.00, that
plaintiffs extended to the defendants is usurious. In other words, is the
Usury Law still effective, or has it been repealed by Central Bank Circular
No. 905, adopted on December 22, 1982, pursuant to its powers under P.D.
No. 116, as amended by P.D. No. 1684?

We agree with petitioners that the stipulated rate of interest at 5.5% per
month on the P500,000.00 loan is excessive, iniquitous, unconscionable
and exorbitant. 13 However, we can not consider the rate "usurious"
because this Court has consistently held that Circular No. 905 of the
Central Bank, adopted on December 22, 1982, has expressly removed the
interest ceilings prescribed by the Usury Law 14 and that the Usury Law is
now "legally inexistent". 15

In Security Bank and Trust Company vs. Regional Trial Court of Makati,
Branch 61 16 the Court held that CB Circular No. 905 "did not repeal nor in
anyway amend the Usury Law but simply suspended the latter's
effectivity." Indeed, we have held that "a Central Bank Circular can not
repeal a law. Only a law can repeal another law." 17 In the recent case
of  Florendo vs. Court of Appeals 18, the Court reiterated the ruling that "by
virtue of CB Circular 905, the Usury Law has been rendered ineffective".
"Usury has been legally non-existent in our jurisdiction. Interest can now
be charged as lender and borrower may agree upon." 19

Nevertheless, we find the interest at 5.5% per month, or 66% per annum,
stipulated upon by the parties in the promissory note iniquitous or
unconscionable, and, hence, contrary to morals ("contra bonos mores"), if
not against the law. 20 The stipulation is void. 21 The courts shall reduce
equitably liquidated damages, whether intended as an indemnity or a
penalty if they are iniquitous or unconscionable. 22

Consequently, the Court of Appeals erred in upholding the stipulation of

the parties. Rather, we agree with the trial court that, under the
circumstances, interest at 12% per annum, and an additional 1% a month
penalty charge as liquidated damages may be more reasonable.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of
the Court of Appeals promulgated on March 21, 1997, and its resolution
dated November 25, 1997. Instead, we render judgment REVIVING and
AFFIRMING the decision dated December 9, 1991, of the Regional Trial
Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90,
involving the same parties.

No pronouncement as to costs in this instance.

SO ORDERED.

THIRD DIVISION

G.R.No. 213939, October 12, 2016

LYLITH B. FAUSTO, JONATHAN FAUSTO, RICO ALVIA, ARSENIA TOCLOY,

LOURDES ADOLFO AND ANECITA MANCITA, Petitioners, v. MULTI AGRI-
FOREST AND COMMUNITY DEVELOPMENT COOPERATIVE (FORMERLY MAF
CAMARINES SUR EMPLOYEES COOPERATIVE, INC.), Respondent.

RESOLUTION

REYES, J.:

This is a petition for review on certiorari1 under Rule 45 of the Rules of Court,

assailing the Decision2 dated March 17, 2014 and the Resolution3 dated August 4,
2014 of the Court of Appeals (CA) in CA-GR. SP No.
123602.chanroblesvirtuallawlibrary

Factual Antecedents

(QUESTION: How come they applied the 6% per annum rate when it was effective
2013 pa, while the loan was made late 1990s)

Multi Agri-Forest and Community Development Cooperative 4 (respondent) is a

registered credit cooperative wherein Lylith Fausto (Lylith), Jonathan Fausto
(Jonathan), Rico Alvia (Rico), Arsenia Tocloy (Arsenia), Lourdes Adolfo (Lourdes)
and Anecita Mancita (Anecita)5 (collectively, the petitioners) are active members.6

On September 10, 1998, Lylith obtained a loan from the respondent in the amount
of P80,000.00, with due date on January 8, 1999. 7 Subsequently, she secured
another loan in the amount of P50,000.00 which will fall due on March 14,
1999.8 Shortly thereafter, she procured a third loan from the respondent also in the
amount of P50,000.00.9 All of the mentioned transactions were evidenced by
separate promissory notes, with Anecita and Lourdes signing as co-makers in the
first and second loans, and Rico and Glicerio Barce (Glicerio) in the third loan.

Similarly, on October 27, 1998, Jonathan obtained a loan from the respondent in
the amount of P60,000.00 to fall due on February 24, 1999, with Lylith and Glicerio
as co-makers.10 Thereafter, on December 10, 1998, he obtained a second loan in
the amount of P100,000.00, with Lylith and Arsenia as his co-makers. 11 All five
loans obtained by Lylith and Jonathan were imposed with an interest of
2.3% per month, with surcharge of 2% in case of default in payment of
any installment due.

Lylith and Jonathan, however, failed to pay their loans despite repeated demands.
Thus, on December 12, 2000, the respondent, through its Acting Manager Ma.
Lucila G. Nacario (Nacario), filed five separate complaints 12 for Collection of Sum of
Money before the Municipal Trial Court in Cities (MTCC) of Naga City against the
petitioners.

After the respondent rested its case, Rico, Glicerio, Lourdes, Arsenia and Anecita
filed a motion to dismiss by way of a demurrer to evidence on the ground of lack of
authority of Nacario to file the complaints and to sign the verification against forum
shopping. They likewise claimed that the complaints were prematurely filed since no
demand letters were sent to them.13

The respondent filed an opposition to the demurrer to evidence alleging that the
petitioners expressly waived the need for notice or demand for payment in the
promissory notes. It likewise averred that there was a subsequent board resolution
confirming the authority of Nacario to file the complaints on behalf of the
respondent.14

In an Order15 dated July 24, 2009, the MTCC of Naga City, Branch 1 denied the
petitioners' demurrer to evidence for lack of merit. It pointed out that the
petitioners failed to raise the supposed lack of authority of Nacario in their Answer;
hence, the said defense was deemed waived. As regards the lack of notice, it noted
that the promissory notes evidencing the loans stipulated a waiver on the need for
notice or demand in case of default in payment of any installment due, in which
case the entire balance immediately becomes due and payable.

Subsequently, in a Decision16 dated August 1, 2011, the MTCC ruled in favor of the

respondent and held the petitioners liable for the payment of specified amount of
loans, which include interests, penalties and surcharges, plus 12% interest thereon.
The dispositive portion of the decision reads, as follows:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the Court finds for the [respondent], ordering
the following:cralawlawlibrary

1. In Civil Case No. 11318, [Jonathan, Lylith and Glicerio] are hereby
ordered jointly and severally to pay to [the respondent] the amount of
Php 129,881.60 plus 12% interest thereon from the filing of the case
until the whole amount is fully paid.

2. In Civil Case No. 11319, [Lylith, Lourdes and Anecita] are hereby
ordered jointly and severally to pay to [the respondent] the amount of
 Php 178,564.79 plus 12% interest thereon from the filing of the case
until the whole amount is fully paid.

3. In Civil Case No. 11438, [Jonathan, Lylith and Arsenia] are hereby
ordered jointly and severally to pay to [the respondent] the amount of
Php 166,756.39 plus 12% interest thereon from the filing of the case
until the whole amount is fully paid.

4. In Civil Case No. 11439, [Lylith, Rico and Glicerio] are hereby ordered
jointly and severally to pay to [the respondent] the amount of Php
30,700.00 plus 12% interest thereon from the filing of the case until
the whole amount is fully paid.

5. In Civil Case No. 11440, [Lylith, Lourdes and Anecita] are hereby
ordered jointly and severally to pay to [the respondent] the amount of
Php 111,526.34 plus 12% interest thereon from the filing of the case
until the whole amount is fully paid.

SO ORDERED.17
chanrobleslaw
Unyielding, the petitioners appealed the foregoing decision with the Regional Trial
Court (RTC) of Naga City. After the parties submitted their respective memoranda,
the RTC rendered a Joint Decision 18 dated December 12, 2011, affirming with
modification the decision of the MTCC. It reverted the liability of the
petitioners to the original amount of the loan stated in the promissory
notes and reduced the interest and surcharge to 12% per
annum, respectively. The dispositive portion of the decision reads,
thus:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the assailed August 1, 2011 joint decision of the
[MTCC] of Naga City, Branch 1 is hereby MODIFIED as
follows:chanRoblesvirtualLawlibrary
1. In Civil Case No. 2011-0100 (MTCC 11318), [Jonathan, Lylith and Glicerio] are
ordered jointly and severally to pay [the respondent] the Principal of loan under
promissory note in the amount of P60,000.00 plus the following: a) 12% per
annum on the said principal as interest and b) 12% per annum on the said principal
as surcharge, both to be computed from the time of filing of this case until the
whole amount is fully paid, AND c) attorney[']s fees in the amount of P6,000.00.

2. In Civil Case No. 2011-0101 (MTCC 11319), [Lylith, Lourdes and Anecita] are
ordered jointly and severally to pay the Principal of loan under promissory note in
the amount of P80,000.00 plus the following: a) 12% per annum on the said
principal as interest and b) 12% per annum on the said principal as surcharge, both
to be computed from the time of filing of this case until the whole amount is fully
paid, AND c) attorney[']s fees in the amount of P8,000.00.

3. In Civil Case No. 2011-0102 (MTCC 11438), [Jonathan & Lylith and Arsenia] are
ordered jointly and severally to pay [the respondent] the Principal of loan under
promissory note in the amount of P100,000.00 plus the following: a) 12% per
annum on the said principal as interest and b) 12% per annum on the said principal
as surcharge, both to be computed from the time of filing of this case until the
whole amount is fully paid, AND c) attorney[']s fees in the amount of P 10,000.00.

4. In Civil Case No. 2011-0103 (MTCC 11439), [Lylith, Rico and Glicerio] are
hereby ordered jointly and severally to pay [the respondent] the  Principal of loan
under promissory note in the amount of P50,000.00 plus the following: a) 12% per
annum on the said principal as interest and b) 12% per annum on the said principal
as surcharge, both to be computed from the time of filing of this case until the
whole amount is fully paid, AND c) attorney[']s fees in the amount of P5,000.00.

5. In Civil Case No. 2011-0104 (MTCC 11440), [Lylith, Lourdes and Anecita] are
ordered to pay jointly and severally to pay [sic] [the respondent] the  Principal of
loan under promissory note in the amount of "P50,000.00 plus the following: a)
12% per annum on the said principal as interest and b) 12% per annum on the
said principal as surcharge, both to be computed from the time of filing of this case
until the whole amount is fully paid, AND c) attorney[']s fees in the amount of
P5,000.00.
chanrobleslaw
SO ORDERED.19
chanrobleslaw
On December 28, 2011, the petitioners filed a motion for reconsideration of the
decision of the RTC. Thereafter, on February 2, 2012, the RTC issued a Joint
Order,20 specifically modifying its ruling in Civil Case No. 2011-0103, the dispositive
portion of which reads, as follows:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, with respect to a) Civil Case No. 2011-0100; b)
Civil Case No. 2011-0101; c) Civil Case No. 2011-0102; d) Civil Case No. 2011-
0104, the instant motion for reconsideration, dated December 27, 2011 is DENIED,
and consequently, the joint decision, dated December 12, 2011 in these cases is
hereby AFFIRMED.

Nonetheless, the decision in Civil Case No. 2011-0103 (MTCC Civil Case No. 11439)
is hereby MODIFIED as to the Principal of loan from P50,000.00 to only
P16,667.01. Consequently, with respect to this case, [Lylith, Rico and
Glicerio] are hereby ordered jointly and severally to pay [the respondent]
the Principal of loan under promissory note in the amount of
P16,667.01, plus the following: a) 12% per annum on the said principal as
interest and b) 12% per annum on the said principal as surcharge, both to
be computed from the time of filing of this case until the whole amount is
fully paid, AND c) attorney[']s fees in the amount of P1,667.70.

SO ORDERED.21
chanrobleslaw
On February 22, 2012, the petitioners filed a petition for review with the CA. 22 They
reiterated their claim that Nacario lacked the authority to file the complaints on
behalf of the respondent in the absence of a board resolution authorizing her to do
so. They farther questioned the respondent's failure to resort to mediation or
conciliation before filing the cases in court.23 They also pointed out that the RTC
overlooked the fact that the respondent sent demand letters only to Lylith and
Jonathan, to the exclusion of their co-makers.24 Finally, they contended that the
MTCC had no jurisdiction over the complaints considering that the total amount
involved was way over its jurisdictional amount of P100,000.00 nor to the increase
in the same in the amount of P200,000.00, brought about by the amendment
provided in Republic Act (R.A.) No. 7691.25cralawred

On March 17, 2014, the CA rendered a Decision, 26 affirming the decision of the RTC,
the dispositive portion of which reads, as follows:chanRoblesvirtualLawlibrary
WHEREFORE, in view of the foregoing, the Petition for Review is DENIED. The
Joint Decision dated December 12, 2011, and Joint Order dated February 2, 2012,
rendered by the [RTC] of Naga City, Branch 24 in Civil Cases Nos. 2011-0100,
2011-0101, 2011-0102, 2011-0103 and 2011-0104, are AFFIRMED.

SO ORDERED.27 (Citations omitted)
chanrobleslaw
The CA ruled that the MTCC had jurisdiction over the case considering that pursuant
to R.A. No. 7691, the jurisdictional amount pertaining to its authority had been
increased to P200,000.00, and each of the complaints filed by the respondent  are
within this stated amount. It pointed out that the totality rule raised by the
petitioners does not apply since the respondent filed separate complaints pertaining
to different loan transactions.28 As regards the authority of Nacario to initiate the
filing of the complaints, the same had been confirmed by a board resolution
recognizing her authority to do so.29 It also ruled that the lack of mediation does
not affect the cases since resort to conciliation is not a pre-requisite to the filing of
a case in court.30 Finally, it dismissed the petitioners' argument on the lack of
extrajudicial demand on each of the co-makers, holding that the same was not
necessary since there was a stipulation in the promissory notes on the waiver of
notice or demand.31

The petitioners filed a Motion for Reconsideration 32 but the CA, in its
Resolution33 dated August 4, 2014, denied the same.

On September 11, 2014, the petitioners interposed the present appeal with this
Court. The petitioners contend that the CA erred in upholding the jurisdiction of the
MTCC to hear the cases in contravention to the totality rule. They maintain that the
MTCC has no jurisdiction over the complaints since the total amount of the claims
exceeds the jurisdictional amount that pertains to the MTCC. They likewise point
out the lack of authority of Nacario to act on behalf of the respondent, there being
no board resolution empowering her to do so at the time she filed the complaints.
Further, they argue that the respondent failed to resort to mediation or conciliation
before filing the cases with the MTCC. Finally, they asseverate that the CA erred in
overlooking the lack of demand or notice upon the co-makers of Lylith and
Jonathan.chanroblesvirtuallawlibrary

Ruling of the Court

The petition lacks merit.

The MTCC has jurisdiction over the

complaints

A reading of the petition shows that the issues raised herein had been thoroughly
discussed and passed upon by the CA. On the issue of jurisdiction, the CA correctly
upheld the jurisdiction of the MTCC of Naga City to hear the cases. R.A. No. 7691,
which amended Section 33 of Batas Pambansa Bilang 129 (BP 129), increased the
jurisdictional amount pertaining to the MTCC. Pertinently, Section 5 of R.A. No.
7691 reads:chanRoblesvirtualLawlibrary
Sec. 5. After five (5) years from the effectivity of this Act, the jurisdictional
amounts mentioned in Sec. 19(3), (4), and (8); and Sec. 33(1) of Batas Pambansa
Blg. 129 as amended by this Act, shall be adjusted to Two hundred thousand pesos
(P200,000.00). Five (5) years thereafter, such jurisdictional amounts shall be
adjusted further to Three hundred thousand pesos (P300,000.00): Provided,
however, That in the case of Metro Manila, the abovementioned jurisdictional
amounts shall be adjusted after five (5) years from the effectivity of this Act to Four
hundred thousand pesos (P400,000.00).
chanrobleslaw
It was emphasized in Crisostomo v. De Guzman,34 that the intent of R.A. No. 7691
was to expand the jurisdiction of the Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts by amending the pertinent provisions of BP
129 or the Judiciary Reorganization Act of 1980. Under Section 5 of the said law,
the increase in jurisdictional amount for all kinds of claims before first level courts
outside of Metro Manila was to be implemented in a staggered basis over a period
of 10 years. The first adjustment was to take place five years after the effectivity of
the law. The second and final adjustment, on the other hand, would be made five
years thereafter.35 In particular, the first adjustment in jurisdictional amount of first
level courts outside of Metro Manila from P100,000.00 to P200,000.00 took effect
on March 20, 1999. Meanwhile, the second adjustment from P200,000.00 to
P300,000.00 became effective on February 22, 2004 in accordance with Circular
No. 65-2004 issued by the Office of the Court Administrator on May 13, 2004. 36

Considering that the complaints were filed in 2000, the jurisdictional amount to be
applied is P200,000.00, exclusive of interests, surcharges, damages, attorney's fees
and litigation costs. This jurisdictional amount pertains to the totality of all the
claims between the parties embodied in the same complaint or to each of the
several claims should they be contained in separate complaints. This is the
unequivocal meaning of the last proviso in Section 33(1) of B.P. 129, which
reads:chanRoblesvirtualLawlibrary
Sec. 33. Jurisdiction of Metropolitan Trial Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts in civil cases. -  Metropolitan Trial Courts, Municipal
Trial Courts, and Municipal Circuit Trial Courts shall
exercise:chanRoblesvirtualLawlibrary
(1) Exclusive original jurisdiction over civil actions and probate proceedings, testate
and intestate, including the grant of provisional remedies in proper cases, where
the value of the personal property, estate, or amount of the demand does not
exceed One hundred thousand pesos (P100,000.00) or, in Metro Manila where such
personal property, estate, or amount of the demand does not exceed Two hundred
thousand pesos (P200,000.00) exclusive of interest damages of whatever kind,
attorney's fees, litigation expenses, and costs, the amount of which must be
specifically alleged: Provided, That where there are several claims or causes
of action between the same or different parties, embodied in the same
complaint, the amount of the demand shall be the totality of the claims in
all the causes of action, irrespective of whether the causes of action arose out of
the same or different transactions [.]

x x x x (Emphasis ours)
chanrobleslaw
Therefore, the CA correctly ruled that the totality rule does not apply in the case.
As, can be deduced from the above stated provision, the totality of claims rule
applies only when there are several claims or causes of action between the same or
different parties embodied in the same  complaint, in which case the total amount
of the claims shall be determinative of the proper court which has jurisdiction over
the case. The instant case, however, does not call for the application of the rule
since there are five complaints, each pertaining to a distinct and separate claim not
exceeding P200,000.00. The petitioners' act of lumping altogether the amount of
the claims in all of the complaints and arguing that the total amount of
P1,216,342.91 exceeds the jurisdictional amount that pertains to the MTCC is a
gross misinterpretation of the provision.

The Board of Directors (BOD)

ratified the acts of Nacario.

The petitioners asseverate that Nacario has no authority to file the complaints on
behalf of the respondent. They argue that it is only by the authority of a board
resolution that Nacario may be able to validly pursue acts in representation of the
cooperative. They also contend that the applicable law is R.A. No. 6938 or the
Cooperative Code of the Philippines (Cooperative Code),37 and not the Corporation
Code of the Philippines (Corporation Code).

That the applicable law should be the Cooperative Code and not the Corporation
Code is not sufficient to warrant a different resolution of this case. Verily, both
codes recognize the authority of the BOD, through a duly-issued board resolution,
to act and represent the corporation or the cooperative, as the case maybe, in the
conduct of official business. In Section 2338 of the Corporation Code, it is provided
that all corporate powers of all corporations formed under the Code shall be
exercised by the BOD. All businesses are conducted and all properties of
corporations are controlled and held by the same authority. In the same manner,
under Section 39 of the Cooperative Code, the BOD is given the power to direct and
supervise the business, manages the property of the cooperative and may, by
resolution, exercise all such powers of the cooperative. The BOD, however, may
authorize a responsible officer to act on its behalf through the issuance of a board
resolution attesting to its consent to the representation and providing for the scope
of authority.

Nevertheless, there were instances when the Court recognized the authority of
some officers to file a case on behalf of the corporation even without the
presentation of the board resolution. In Cagayan Valley Drug Corporation v.
Commissioner of Internal Revenue,39 it was noted, thus:chanRoblesvirtualLawlibrary
In a slew of cases, however, we have recognized the authority of some corporate
officers to sign the verification and certification against forum shopping. In Mactan-
Cebu International Airport Authority v. CA, we recognized the authority of a general
manager or acting general manager to sign the verification and certificate against
forum shopping; in Pfizer v. Galan, we upheld the validity of a verification signed by
an "employment specialist" who had not even presented any proof of her authority
to represent the company; in Novelty Philippines, Inc., v. CA,  we ruled that a
personnel officer who signed the petition but did not attach the authority from the
company is authorized to sign the verification and non-forum shopping certificate;
and in Lepanto Consolidated Mining Company v. WMC Resources International Pty.
Ltd. (Lepanto), we ruled that the Chairperson of the Board and President of the
Company can sign the verification and certificate against non-forum shopping even
without the submission of the board's authorization.

In sum, we have held that the following officials or employees of the

company can sign the verification and certification without need of a board
resolution: (1) the Chairperson of the Board of Directors, (2) the President of a
corporation, (3) the General Manager or Acting General Manager, (4)
Personnel Officer, and (5) an Employment Specialist in a labor case. 40 (Citation
omitted and emphasis ours)
chanrobleslaw
In the abovementioned cases, however, the Court clarified that the determination
of the sufficiency of the authority of the concerned officers was done on a case to
case basis. The rationale in justifying the authority of corporate officers or
representatives of the corporation to sign the verification or certificate against
forum shopping is that they are in the best position to verify the truthfulness and
correctness of the allegations in the petition.41 Nonetheless, this was not meant to
trump the established rule of issuing a board resolution and appending a copy
thereof to the complaint or petition so as to preclude any question on the authority
to file the petition, particularly in signing the verification and certification against
forum shopping.

Apart from the foregoing, the lack of authority of a corporate officer to undertake
an action on behalf of the corporation or cooperative may be cured by ratification
through the subsequent issuance of a board resolution, recognizing the validity of
the action or the authority of the concerned officer. In Yasuma v. Heirs of Cecilio S.
de Villa,42 the Court emphasized, thus:chanRoblesvirtualLawlibrary
[T]he corporation may ratify the unauthorized act of its corporate officer.
Ratification means that the principal voluntarily adopts, confirms and gives sanction
to some unauthorized act of its agent on its behalf. It is this voluntary choice,
knowingly made, which amounts to a ratification of what was theretofore
unauthorized and becomes the authorized act of the party so making the
ratification. The substance of the doctrine is confirmation after conduct, amounting
to a substitute for a prior authority. Ratification can be made either expressly or
impliedly. Implied ratification may take various forms—like silence or acquiescence,
acts showing approval or adoption of the act, or acceptance and retention of
benefits flowing therefrom.43 (Citations omitted)
chanrobleslaw
In this case, the respondent expressly recognized the authority of Nacario to file the
complaints in Resolution No. 47, Series of 2008, 44 in which the BOD resolved to
recognize, ratify and affirm as if the same were fully authorized by the BOD, the
filing of the complaints before the MTCC of Naga City by Nacario. In a similar issue
raised in Swedish Match Philippines, Inc. v. The Treasurer of the City of
Manila,45 the Court upheld the subsequent issuance of a board resolution
recognizing the authority of the corporation's finance manager as sufficient to
acknowledge the authority of the said officer to file a petition with the RTC on
behalf of the corporation. It ratiocinated that, by virtue of the issuance of the board
resolution, the corporation ratified the authority of the concerned corporate officer
to represent it in the petition filed before the RTC and consequently to sign the
verification and certification of non-forum shopping on behalf of the
corporation.46 Here, considering that Nacario's authority had been ratified by the
BOD, there is no reason for the Court not to uphold said authority.

Mediation before the Cooperative

Development Authority (CDA) is not
compulsory

The petitioners likewise raised an issue with respect to the lack of effort on the part
of the respondent to resort to mediation before the CDA prior to filing the
complaints in court.

Indeed, expressed in Section 121 of the Cooperative Code is the preference for the
amicable settlement of disputes before the CDA. It does not appear, however, that
mediation or conciliation is a mandatory requirement that is considered fatal to a
case directly filed in a regular court. The provision reads as
follows:chanRoblesvirtualLawlibrary
Sec. 121. Settlement of Disputes. Disputes among members, officers, directors and
committee members, and intra-cooperative disputes shall, as far as practicable, be
settled amicably in accordance with the conciliation or mediation mechanisms
embodied in the by-laws of the cooperative, and in applicable laws.

Should such a conciliation/mediation proceeding fail, the matter shall be settled in a

court of competent jurisdiction.
chanrobleslaw
The non-compulsory nature of the resort to mediation is evident from the language
of the provision. The decision to mediate depends on the submission of one or both
parties to undergo the procedure by requesting the CDA to mediate, coupled with
the parties' mutual agreement to recognize its authority. The procedure therefore is
optional and rests on the parties' agreement to submit to the same. Clearly, it is
not mandatory to undergo mediation first before seeking recourse to regular courts.
This being the case, the respondent's direct resort to the court is not fatal to its
cases.

The requirement for demand or

notice may be waived.

Anent the petitioners' claim that no notice or demand was sent to them, the CA
correctly ruled that the instant case falls under the exceptions to the necessity of
demand. Specifically, Article 1169, paragraph 1 of the Civil Code provides that
demand is not necessary when the obligation or the law expressly so declares. In
the promissory notes signed by the petitioners, there is a uniform provision which
states that "[i]n case of default in payment of any installment due as herein agreed,
the entire balance of this note shall immediately become due and payable at the
option of the [respondent] without any notice or demand."  This amounts to the
express waiver of the need for demand before the debtor incurs in delay.

The petitioners cannot evade liability by invoking that the stipulation on the waiver
of notice applies only to the principal. It bears noting that the promissory notes
state that the petitioners bound themselves jointly and severally liable with the
principal debtor for the entire amount of the obligation. A solidary or joint and
several obligation is one in which each debtor is liable for the entire
obligation.47 The petitioners being co-makers, their liability is immediate and
absolute as the principal debtor. The terms of the promissory notes apply to co-
makers in equal force as with the principal debtors. This includes stipulation on the
waiver of notice from the creditor before the obligation becomes due and
demandable.

The interest imposed on the money

judgment must he modified to
conform to prevailing jurisprudence.

The RTC, in its decision, ruled that the stipulated interest rates of 2.3% per
month and 2% surcharge per month are excessive and unconscionable as
the combination of these rates already amounted to 51.6% of the
principal. Finding such stipulation void for being exorbitant and therefore
contrary to morals, if not against the law, it reduced the rate of interest
and surcharge to 1% per month or twelve percent (12%) per
annum, which was then the prevailing rate of legal interest.

Such ruling of the RTC finds support in a plethora of cases where this Court ruled
that the imposition of iniquitous and unconscionable interest rate renders the same
void and warrants the imposition of the legal interest rate. In Ruiz v. CA,48 the
Court found the 3% interest imposed on four promissory notes as excessive and
equitably reduced the same to 12% per annum.  Likewise, in Chua, et al. v. Timan,
et al.,49 the Court ruled that the stipulated interest rates of 7% and 5% per month
imposed on loans are excessive and reduced the same to the legal rate of 1% per
month or 12% per annum. And, in Macalinao v. Bank of the Philippine Islands,50 the
Court further reduced the 3% interest imposed by the CA on purchases made using
Bank of the Philippine Islands credit card to 1% per month, finding that 36% per
annum  of interest, which even excludes penalty charges, is excessive and
unconscionable.

In this case, the RTC correctly ruled that the stipulated interest rate of
2.3% per month on the promissory notes and 2% per month surcharge are
excessive, iniquitous, exorbitant and unconscionable, thus, rendering the
same void. Since the stipulation on the interest rate is void, it is as if there
was no express contract thereon, in which case, courts may reduce the
interest rate as reason and equity demand.51 Thus, it is only just and
reasonable for the RTC to reduce the interest to the acceptable legal rate
of 1% per month or 12% per annum. This ruling was affirmed by the CA.

In view, however, of the ruling of this Court in Nacar v. Gallery Frames, et

al.,52 there is a need to modify the rate of legal interest imposed on the money
judgment in order to conform to the prevailing jurisprudence. In the said case, the
Court discussed the modification on the rules in the imposition or computation of
legal interest laid down in the landmark case of Eastern Shipping Lines, Inc. v.
Court of Appeals,53 brought about by Resolution No. 796 dated May 16, 2013 issued
by the Bangko Sentral ng Pilipinas Monetary Board. The pertinent portion
in Nacar  reads as follows:chanRoblesvirtualLawlibrary
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its
Resolution No. 796 dated May 16, 2013, approved the amendment of Section 2 of
Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799, Series of
2013, effective July 1, 2013, the pertinent portion of which
reads:chanRoblesvirtualLawlibrary
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the
following revisions governing the rate of interest in the absence of stipulation in
loan contracts, thereby amending Section 2 of Circular No. 905, Series of
1982:chanRoblesvirtualLawlibrary
Section 1. The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be six percent (6%) per
annum.

Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations
for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of
Regulations for Non-Bank Financial Institutions are hereby amended
accordingly. ChanRoblesVirtualawlibrary

This Circular shall take effect on 1 July 2013.

chanrobleslaw
Thus, from the foregoing, in the absence of an express stipulation as to the
rate of interest that would govern the parties, the rate of legal interest for
loans or forbearance of any money, goods or credits and the rate allowed
in judgments shall no longer be twelve percent (12%) per annum - as
reflected in the case of Eastern Shipping Lines  and Subsection X305.1 of the
Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of
the Manual of Regulations for Non-Bank Financial Institutions, before its
amendment by BSP-MB Circular No. 799 - but will now be six percent (6%) per
annum  effective July 1, 2013. x x x.54 (Citations omitted and emphasis ours)
chanrobleslaw
Consistent with the foregoing, the Court hereby reduces the rate of interest on the
principal loans to six percent (6%) per annum  and the surcharge imposed thereon
also to the prevailing legal rate of six percent (6%) per annum.

WHEREFORE, premises considered, the Decision dated March 17, 2014 and the
Resolution dated August 4, 2014 of the Court of Appeals, in CA-GR. SP No. 123602,
are hereby AFFIRMED with MODIFICATION in that the interest rate on the
principal amount of the loans stated in the promissory notes and the corresponding
surcharge for default in payment are respectively reduced to the prevailing legal
rate of six percent (6%) per annum.

SO ORDERED

[G.R. No. 160544.  February 21, 2005]

TRIPLE-V vs. FILIPINO MERCHANTS

THIRD DIVISION

Gentlemen:

Quoted hereunder, for your information, is a resolution of this Court dated FEB 21

2005.

G.R. No. 160544 (Triple-V Food Services, Inc. vs. Filipino Merchants Insurance
Company, Inc.)

Assailed in this petition for review on certiorari is the decision [1]cralaw dated

October 21, 2003 of the Court of Appeals in CA-G.R. CV No. 71223, affirming an
earlier decision of the Regional Trial Court at Makati City, Branch 148, in its Civil
Case No. 98-838, an action for damages thereat filed by respondent Filipino
Merchants Insurance, Company, Inc., against the herein petitioner, Triple-V Food
Services, Inc.

On March 2, 1997, at around 2:15 o'clock in the afternoon, a certain Mary Jo-Anne
De Asis (De Asis) dined at petitioner's Kamayan Restaurant at 15 West Avenue,
Quezon City. De Asis was using a Mitsubishi Galant Super Saloon Model 1995 with
plate number UBU 955, assigned to her by her employer Crispa Textile Inc.
(Crispa). On said date, De Asis availed of the valet parking service of petitioner and
entrusted her car key to petitioner's valet counter. A corresponding parking ticket
was issued as receipt for the car. The car was then parked by petitioner's valet
attendant, a certain Madridano, at the designated parking area. Few minutes later,
Madridano noticed that the car was not in its parking slot and its key no longer in
the box where valet attendants usually keep the keys of cars entrusted to them.
The car was never recovered. Thereafter, Crispa filed a claim against its
insurer, herein respondent Filipino Merchants Insurance Company, Inc.
(FMICI). Having indemnified Crispa in the amount of P669.500 for the loss
of the subject vehicle, FMICI, as subrogee to Crispa's rights, filed with the
RTC at Makati City an action for damages against petitioner Triple-V Food
Services, Inc., thereat docketed as Civil Case No. 98-838 which was raffled to
Branch 148.

In its answer, petitioner argued that the complaint failed to aver facts to
support the allegations of recklessness and negligence committed in the
safekeeping and custody of the subject vehicle, claiming that it and its
employees wasted no time in ascertaining the loss of the car and in
informing De Asis of the discovery of the loss. Petitioner further argued that in
accepting the complimentary valet parking service, De Asis received a parking
ticket whereunder it is so provided that "[Management and staff will not be
responsible for any loss of or damage incurred on the vehicle nor of valuables
contained therein", a provision which, to petitioner's mind, is an explicit waiver of
any right to claim indemnity for the loss of the car; and that De Asis knowingly
assumed the risk of loss when she allowed petitioner to park her vehicle, adding
that its valet parking service did not include extending a contract of insurance or
warranty for the loss of the vehicle.

During trial, petitioner challenged FMICI's subrogation to Crispa's right to file a

claim for the loss of the car, arguing that theft is not a risk insured against under
FMICI's Insurance Policy No. PC-5975 for the subject vehicle.

In a decision dated June 22, 2001, the trial court rendered judgment for respondent
FMICI, thus:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the

plaintiff (FMICI) and against the defendant Triple V (herein petitioner) and the
latter is hereby ordered to pay plaintiff the following:

1.  The amount of P669,500.00, representing actual damages plus compounded

(sic);

2.  The amount of P30,000.00 as acceptance fee plus the amount equal to 25% of
the total amount due as attorney's fees;

3.  The amount of P50,000.00 as exemplary damages;

4.  Plus, cost of suit.

Defendant Triple V is not therefore precluded from taking appropriate action against
defendant Armando Madridano.
SO ORDERED.

Obviously displeased, petitioner appealed to the Court of Appeals reiterating its

argument that it was not a depositary of the subject car and that it exercised due
diligence and prudence in the safe keeping of the vehicle, in handling the car-
napping incident and in the supervision of its employees. It further argued that
there was no valid subrogation of rights between Crispa and respondent FMICI.

In a decision dated October 21, 2003,[2]cralaw the Court of Appeals dismissed

petitioner's appeal and affirmed the appealed decision of the trial court, thus:

WHEREFORE, based on the foregoing premises, the instant appeal is hereby

DISMISSED. Accordingly, the assailed June 22, 2001 Decision of the RTC of Makati
City - Branch 148 in Civil Case No. 98-838 is AFFIRMED.

SO ORDERED.

In so dismissing the appeal and affirming the appealed decision, the appellate court
agreed with the findings and conclusions of the trial court that: (a) petitioner was a
depositary of the subject vehicle; (b) petitioner was negligent in its duties as a
depositary thereof and as an employer of the valet attendant; and (c) there was a
valid subrogation of rights between Crispa and respondent FMICI.

Hence, petitioner's present recourse.

We agree with the two (2) courts below.

When De Asis entrusted the car in question to petitioners valet attendant while
eating at petitioner's Kamayan Restaurant, the former expected the car's safe
return at the end of her meal. Thus, petitioner was constituted as a depositary of
the same car. Petitioner cannot evade liability by arguing that neither a contract of
deposit nor that of insurance, guaranty or surety for the loss of the car was
constituted when De Asis availed of its free valet parking service.

In a contract of deposit, a person receives an object belonging to another

with the obligation of safely keeping it and returning the same. [3]cralaw A
deposit may be constituted even without any consideration. It is not
necessary that the depositary receives a fee before it becomes obligated to
keep the item entrusted for safekeeping and to return it later to the
depositor.

Specious is petitioner's insistence that the valet parking claim stub it issued to De
Asis contains a clear exclusion of its liability and operates as an explicit waiver by
the customer of any right to claim indemnity for any loss of or damage to the
vehicle.

The parking claim stub embodying the terms and conditions of the parking,
including that of relieving petitioner from any loss or damage to the car, is
essentially a contract of adhesion, drafted and prepared as it is by the
petitioner alone with no participation whatsoever on the part of the
customers, like De Asis, who merely adheres to the printed stipulations
therein appearing. While contracts of adhesion are not void in themselves,
yet this Court will not hesitate to rule out blind adherence thereto if they
prove to be one-sided under the attendant facts and circumstances. [4]cralaw

Hence, and as aptly pointed out by the Court of Appeals, petitioner must not be
allowed to use its parking claim stub's exclusionary stipulation as a shield from any
responsibility for any loss or damage to vehicles or to the valuables contained
therein. Here, it is evident that De Asis deposited the car in question with the
petitioner as part of the latter's enticement for customers by providing them a safe
parking space within the vicinity of its restaurant. In a very real sense, a safe
parking space is an added attraction to petitioner's restaurant business because
customers are thereby somehow assured that their vehicle are safely kept, rather
than parking them elsewhere at their own risk. Having entrusted the subject car to
petitioner's valet attendant, customer De Asis, like all of petitioner's customers,
fully expects the security of her car while at petitioner's premises/designated
parking areas and its safe return at the end of her visit at petitioner's restaurant.

Petitioner's argument that there was no valid subrogation of rights between Crispa
and FMICI because theft was not a risk insured against under FMICI's Insurance
Policy No. PC-5975 holds no water.

Insurance Policy No. PC-5975 which respondent FMICI issued to Crispa contains,
among others things, the following item: "Insured's Estimate of Value of Scheduled
Vehicle- P800.000".[5]cralaw On the basis of such item, the trial court concluded
that the coverage includes a full comprehensive insurance of the vehicle in case of
damage or loss. Besides, Crispa paid a premium of P10,304 to cover theft. This is
clearly shown in the breakdown of premiums in the same policy. [6]cralaw Thus,
having indemnified CRISPA for the stolen car, FMICI, as correctly ruled by the trial
court and the Court of Appeals, was properly subrogated to Crispa's rights against
petitioner, pursuant to Article 2207 of the New Civil Code[7].

Anent the trial court's findings of negligence on the part of the petitioner, which
findings were affirmed by the appellate court, we have consistently ruled that
findings of facts of trial courts, more so when affirmed, as here, by the Court of
Appeals, are conclusive on this Court unless the trial court itself ignored, overlooked
or misconstrued facts and circumstances which, if considered, warrant a reversal of
the outcome of the case.[8]cralaw This is not so in the case at bar. For, we have
ourselves reviewed the records and find no justification to deviate from the trial
court's findings.

WHEREFORE, petition is hereby DENIED DUE COURSE.

SO ORDERED.

Very truly yours,

G.R. No. 179419               January 12, 2011

DURBAN APARTMENTS CORPORATION, doing business under the name and

style of City Garden Hotel, Petitioner,
vs.
PIONEER INSURANCE AND SURETY CORPORATION, Respondent.

DECISION

NACHURA, J.:

For review is the Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 86869,
which affirmed the decision2 of the Regional Trial Court (RTC), Branch 66, Makati
City, in Civil Case No. 03-857, holding petitioner Durban Apartments Corporation
solely liable to respondent Pioneer Insurance and Surety Corporation for the loss of
Jeffrey See’s (See’s) vehicle.

The facts, as found by the CA, are simple.

On July 22, 2003, [respondent] Pioneer Insurance and Surety Corporation x x x, by

right of subrogation, filed [with the RTC of Makati City] a Complaint for Recovery of
Damages against [petitioner] Durban Apartments Corporation, doing business
under the name and style of City Garden Hotel, and [defendant before the RTC]
Vicente Justimbaste x x x. [Respondent averred] that: it is the insurer for loss and
damage of Jeffrey S. See’s [the insured’s] 2001 Suzuki Grand Vitara x x x with
Plate No. XBH-510 under Policy No. MC-CV-HO-01-0003846-00-D in the amount of
₱1,175,000.00; on April 30, 2002, See arrived and checked in at the City Garden
Hotel in Makati corner Kalayaan Avenues, Makati City before midnight, and its
parking attendant, defendant x x x Justimbaste got the key to said Vitara from See
to park it[. O]n May 1, 2002, at about 1:00 o’clock in the morning, See was
awakened in his room by [a] telephone call from the Hotel Chief Security Officer
who informed him that his Vitara was carnapped while it was parked unattended at
the parking area of Equitable PCI Bank along Makati Avenue between the hours of
12:00 [a.m.] and 1:00 [a.m.]; See went to see the Hotel Chief Security Officer,
thereafter reported the incident to the Operations Division of the Makati City Police
Anti-Carnapping Unit, and a flash alarm was issued; the Makati City Police Anti-
Carnapping Unit investigated Hotel Security Officer, Ernesto T. Horlador, Jr. x x x
and defendant x x x Justimbaste; See gave his Sinumpaang Salaysay to the police
investigator, and filed a Complaint Sheet with the PNP Traffic Management Group in
Camp Crame, Quezon City; the Vitara has not yet been recovered since July 23,
2002 as evidenced by a Certification of Non- Recovery issued by the PNP TMG; it
paid the ₱1,163,250.00 money claim of See and mortgagee ABN AMRO Savings
Bank, Inc. as indemnity for the loss of the Vitara; the Vitara was lost due to the
negligence of [petitioner] Durban Apartments and [defendant] Justimbaste because
it was discovered during the investigation that this was the second time that a
similar incident of carnapping happened in the valet parking service of [petitioner]
Durban Apartments and no necessary precautions were taken to prevent its
repetition; [petitioner] Durban Apartments was wanting in due diligence in the
selection and supervision of its employees particularly defendant x x x Justimbaste;
and defendant x x x Justimbaste and [petitioner] Durban Apartments failed and
refused to pay its valid, just, and lawful claim despite written demands.

Upon service of Summons, [petitioner] Durban Apartments and [defendant]

Justimbaste filed their Answer with Compulsory Counterclaim alleging that: See did
not check in at its hotel, on the contrary, he was a guest of a certain Ching Montero
x x x; defendant x x x Justimbaste did not get the ignition key of See’s Vitara, on
the contrary, it was See who requested a parking attendant to park the Vitara at
any available parking space, and it was parked at the Equitable Bank parking area,
which was within See’s view, while he and Montero were waiting in front of the
hotel; they made a written denial of the demand of [respondent] Pioneer Insurance
for want of legal basis; valet parking services are provided by the hotel for the
convenience of its customers looking for a parking space near the hotel premises; it
is a special privilege that it gave to Montero and See; it does not include
responsibility for any losses or damages to motor vehicles and its accessories in the
parking area; and the same holds true even if it was See himself who parked his
Vitara within the premises of the hotel as evidenced by the valet parking customer’s
claim stub issued to him; the carnapper was able to open the Vitara without using
the key given earlier to the parking attendant and subsequently turned over to See
after the Vitara was stolen; defendant x x x Justimbaste saw the Vitara speeding
away from the place where it was parked; he tried to run after it, and blocked its
possible path but to no avail; and See was duly and immediately informed of the
carnapping of his Vitara; the matter was reported to the nearest police precinct;
and defendant x x x Justimbaste, and Horlador submitted themselves to police
investigation.

During the pre-trial conference on November 28, 2003, counsel for [respondent]
Pioneer Insurance was present. Atty. Monina Lee x x x, counsel of record of
[petitioner] Durban Apartments and Justimbaste was absent, instead, a certain
Atty. Nestor Mejia appeared for [petitioner] Durban Apartments and Justimbaste,
but did not file their pre-trial brief.

On November 5, 2004, the lower court granted the motion of [respondent] Pioneer
Insurance, despite the opposition of [petitioner] Durban Apartments and
Justimbaste, and allowed [respondent] Pioneer Insurance to present its evidence ex
parte before the Branch Clerk of Court.

See testified that: on April 30, 2002, at about 11:30 in the evening, he drove his
Vitara and stopped in front of City Garden Hotel in Makati Avenue, Makati City; a
parking attendant, whom he had later known to be defendant x x x Justimbaste,
approached and asked for his ignition key, told him that the latter would park the
Vitara for him in front of the hotel, and issued him a valet parking customer’s claim
stub; he and Montero, thereafter, checked in at the said hotel; on May 1, 2002, at
around 1:00 in the morning, the Hotel Security Officer whom he later knew to be
Horlador called his attention to the fact that his Vitara was carnapped while it was
parked at the parking lot of Equitable PCI Bank which is in front of the hotel; his
Vitara was insured with [respondent] Pioneer Insurance; he together with Horlador
and defendant x x x Justimbaste went to Precinct 19 of the Makati City Police to
report the carnapping incident, and a police officer came accompanied them to the
Anti-Carnapping Unit of the said station for investigation, taking of their sworn
statements, and flashing of a voice alarm; he likewise reported the said incident in
PNP TMG in Camp Crame where another alarm was issued; he filed his claim with
[respondent] Pioneer Insurance, and a representative of the latter, who is also an
adjuster of Vesper Insurance Adjusters-Appraisers [Vesper], investigated the
incident; and [respondent] Pioneer Insurance required him to sign a Release of
Claim and Subrogation Receipt, and finally paid him the sum of ₱1,163,250.00 for
his claim.

Ricardo F. Red testified that: he is a claims evaluator of [petitioner] Pioneer

Insurance tasked, among others, with the receipt of claims and documents from the
insured, investigation of the said claim, inspection of damages, taking of pictures of
insured unit, and monitoring of the processing of the claim until its payment; he
monitored the processing of See’s claim when the latter reported the incident to
[respondent] Pioneer Insurance; [respondent] Pioneer Insurance assigned the case
to Vesper who verified See’s report, conducted an investigation, obtained the
necessary documents for the processing of the claim, and tendered a settlement
check to See; they evaluated the case upon receipt of the subrogation documents
and the adjuster’s report, and eventually recommended for its settlement for the
sum of ₱1,163,250.00 which was accepted by See; the matter was referred and
forwarded to their counsel, R.B. Sarajan & Associates, who prepared and sent
demand letters to [petitioner] Durban Apartments and [defendant] Justimbaste,
who did not pay [respondent] Pioneer Insurance notwithstanding their receipt of
the demand letters; and the services of R.B. Sarajan & Associates were engaged,
for ₱100,000.00 as attorney’s fees plus ₱3,000.00 per court appearance, to
prosecute the claims of [respondent] Pioneer Insurance against [petitioner] Durban
Apartments and Justimbaste before the lower court.

Ferdinand Cacnio testified that: he is an adjuster of Vesper; [respondent] Pioneer

Insurance assigned to Vesper the investigation of See’s case, and he was the one
actually assigned to investigate it; he conducted his investigation of the matter by
interviewing See, going to the City Garden Hotel, required subrogation documents
from See, and verified the authenticity of the same; he learned that it is the
standard procedure of the said hotel as regards its valet parking service to assist
their guests as soon as they get to the lobby entrance, park the cars for their
guests, and place the ignition keys in their safety key box; considering that the
hotel has only twelve (12) available parking slots, it has an agreement with
Equitable PCI Bank permitting the hotel to use the parking space of the bank at
night; he also learned that a Hyundai Starex van was carnapped at the said place
barely a month before the occurrence of this incident because Liberty Insurance
assigned the said incident to Vespers, and Horlador and defendant x x x
Justimbaste admitted the occurrence of the same in their sworn statements before
the Anti-Carnapping Unit of the Makati City Police; upon verification with the PNP
TMG [Unit] in Camp Crame, he learned that See’s Vitara has not yet been
recovered; upon evaluation, Vesper recommended to [respondent] Pioneer
Insurance to settle See’s claim for ₱1,045,750.00; See contested the
recommendation of Vesper by reasoning out that the 10% depreciation should not
be applied in this case considering the fact that the Vitara was used for barely eight
(8) months prior to its loss; and [respondent] Pioneer Insurance acceded to See’s
contention, tendered the sum of ₱1,163,250.00 as settlement, the former accepted
it, and signed a release of claim and subrogation receipt.

The lower court denied the Motion to Admit Pre-Trial Brief and Motion for
Reconsideration field by [petitioner] Durban Apartments and Justimbaste in its
Orders dated May 4, 2005 and October 20, 2005, respectively, for being devoid of
merit.3

Thereafter, on January 27, 2006, the RTC rendered a decision, disposing, as

follows:

WHEREFORE, judgment is hereby rendered ordering [petitioner Durban Apartments

Corporation] to pay [respondent Pioneer Insurance and Surety Corporation] the
sum of ₱1,163,250.00 with legal interest thereon from July 22, 2003 until the
obligation is fully paid and attorney’s fees and litigation expenses amounting to
₱120,000.00.

SO ORDERED.4

On appeal, the appellate court affirmed the decision of the trial court, viz.:

WHEREFORE, premises considered, the Decision dated January 27, 2006 of the
RTC, Branch 66, Makati City in Civil Case No. 03-857 is hereby AFFIRMED insofar as
it holds [petitioner] Durban Apartments Corporation solely liable to [respondent]
Pioneer Insurance and Surety Corporation for the loss of Jeffrey See’s Suzuki Grand
Vitara.

SO ORDERED.5

Hence, this recourse by petitioner.

The issues for our resolution are:

1. Whether the lower courts erred in declaring petitioner as in default for

failure to appear at the pre-trial conference and to file a pre-trial brief;

2. Corollary thereto, whether the trial court correctly allowed respondent to

present evidence ex-parte;

3. Whether petitioner is liable to respondent for attorney’s fees in the amount

of ₱120,000.00; and

4. Ultimately, whether petitioner is liable to respondent for the loss of See’s

vehicle.
The petition must fail.

We are in complete accord with the common ruling of the lower courts that
petitioner was in default for failure to appear at the pre-trial conference and to file a
pre-trial brief, and thus, correctly allowed respondent to present evidence ex-parte.
Likewise, the lower courts did not err in holding petitioner liable for the loss of See’s
vehicle.

Well-entrenched in jurisprudence is the rule that factual findings of the trial court,
especially when affirmed by the appellate court, are accorded the highest degree of
respect and are considered conclusive between the parties. 6 A review of such
findings by this Court is not warranted except upon a showing of highly meritorious
circumstances, such as: (1) when the findings of a trial court are grounded entirely
on speculation, surmises, or conjectures; (2) when a lower court’s inference from
its factual findings is manifestly mistaken, absurd, or impossible; (3) when there is
grave abuse of discretion in the appreciation of facts; (4) when the findings of the
appellate court go beyond the issues of the case, or fail to notice certain relevant
facts which, if properly considered, will justify a different conclusion; (5) when
there is a misappreciation of facts; (6) when the findings of fact are conclusions
without mention of the specific evidence on which they are based, are premised on
the absence of evidence, or are contradicted by evidence on record. 7 None of the
foregoing exceptions permitting a reversal of the assailed decision exists in this
instance.

Petitioner urges us, however, that "strong [and] compelling reason[s]" such as the
prevention of miscarriage of justice warrant a suspension of the rules and excuse
its and its counsel’s non-appearance during the pre-trial conference and their failure
to file a pre-trial brief.

We are not persuaded.

Rule 18 of the Rules of Court leaves no room for equivocation; appearance of

parties and their counsel at the pre-trial conference, along with the filing of a
corresponding pre-trial brief, is mandatory, nay, their duty. Thus, Section 4 and
Section 6 thereof provide:

SEC. 4. Appearance of parties.–It shall be the duty of the parties and their counsel
to appear at the pre-trial. The non-appearance of a party may be excused only if a
valid cause is shown therefor or if a representative shall appear in his behalf fully
authorized in writing to enter into an amicable settlement, to submit to alternative
modes of dispute resolution, and to enter into stipulations or admissions of facts
and documents.

SEC. 6. Pre-trial brief.–The parties shall file with the court and serve on the adverse
party, in such manner as shall ensure their receipt thereof at least three (3) days
before the date of the pre-trial, their respective pre-trial briefs which shall contain,
among others:
xxxx

Failure to file the pre-trial brief shall have the same effect as failure to appear at
the pre-trial.

Contrary to the foregoing rules, petitioner and its counsel of record were not
present at the scheduled pre-trial conference. Worse, they did not file a pre-trial
brief. Their non-appearance cannot be excused as Section 4, in relation to Section
6, allows only two exceptions: (1) a valid excuse; and (2) appearance of a
representative on behalf of a party who is fully authorized in writing to enter into an
amicable settlement, to submit to alternative modes of dispute resolution, and to
enter into stipulations or admissions of facts and documents.

Petitioner is adamant and harps on the fact that November 28, 2003 was merely
the first scheduled date for the pre-trial conference, and a certain Atty. Mejia
appeared on its behalf. However, its assertion is belied by its own admission that,
on said date, this Atty. Mejia "did not have in his possession the Special Power of
Attorney issued by petitioner’s Board of Directors."

As pointed out by the CA, petitioner, through Atty. Lee, received the notice of pre-
trial on October 27, 2003, thirty-two (32) days prior to the scheduled conference.
In that span of time, Atty. Lee, who was charged with the duty of notifying
petitioner of the scheduled pre-trial conference,8 petitioner, and Atty. Mejia should
have discussed which lawyer would appear at the pre-trial conference with
petitioner, armed with the appropriate authority therefor. Sadly, petitioner failed to
comply with not just one rule; it also did not proffer a reason why it likewise failed
to file a pre-trial brief. In all, petitioner has not shown any persuasive reason why it
should be exempt from abiding by the rules.

The appearance of Atty. Mejia at the pre-trial conference, without a pre-trial brief
and with only his bare allegation that he is counsel for petitioner, was correctly
rejected by the trial court. Accordingly, the trial court, as affirmed by the appellate
court, did not err in allowing respondent to present evidence ex-parte.

Former Chief Justice Andres R. Narvasa’s words continue to resonate, thus:

Everyone knows that a pre-trial in civil actions is mandatory, and has been so since
January 1, 1964. Yet to this day its place in the scheme of things is not fully
appreciated, and it receives but perfunctory treatment in many courts. Some courts
consider it a mere technicality, serving no useful purpose save perhaps,
occasionally to furnish ground for non-suiting the plaintiff, or declaring a defendant
in default, or, wistfully, to bring about a compromise. The pre-trial device is not
thus put to full use. Hence, it has failed in the main to accomplish the chief
objective for it: the simplification, abbreviation and expedition of the trial, if not
indeed its dispensation. This is a great pity, because the objective is attainable, and
with not much difficulty, if the device were more intelligently and extensively
handled.
xxxx

Consistently with the mandatory character of the pre-trial, the Rules oblige not only
the lawyers but the parties as well to appear for this purpose before the Court, and
when a party "fails to appear at a pre-trial conference (he) may be non-suited or
considered as in default." The obligation "to appear" denotes not simply the
personal appearance, or the mere physical presentation by a party of one’s self, but
connotes as importantly, preparedness to go into the different subject assigned by
law to a pre-trial. And in those instances where a party may not himself be present
at the pre-trial, and another person substitutes for him, or his lawyer undertakes to
appear not only as an attorney but in substitution of the client’s person, it is
imperative for that representative of the lawyer to have "special authority" to make
such substantive agreements as only the client otherwise has capacity to make.
That "special authority" should ordinarily be in writing or at the very least be "duly
established by evidence other than the self-serving assertion of counsel (or the
proclaimed representative) himself." Without that special authority, the lawyer or
representative cannot be deemed capacitated to appear in place of the party;
hence, it will be considered that the latter has failed to put in an appearance at all,
and he [must] therefore "be non-suited or considered as in default,"
notwithstanding his lawyer’s or delegate’s presence.9

We are not unmindful that defendant’s (petitioner’s) preclusion from presenting

evidence during trial does not automatically result in a judgment in favor of plaintiff
(respondent). The plaintiff must still substantiate the allegations in its
complaint.10 Otherwise, it would be inutile to continue with the plaintiff’s
presentation of evidence each time the defendant is declared in default.

In this case, respondent substantiated the allegations in its complaint, i.e., a

contract of necessary deposit existed between the insured See and petitioner. On
this score, we find no error in the following disquisition of the appellate court:

[The] records also reveal that upon arrival at the City Garden Hotel, See gave
notice to the doorman and parking attendant of the said hotel, x x x Justimbaste,
about his Vitara when he entrusted its ignition key to the latter. x x x Justimbaste
issued a valet parking customer claim stub to See, parked the Vitara at the
Equitable PCI Bank parking area, and placed the ignition key inside a safety key box
while See proceeded to the hotel lobby to check in. The Equitable PCI Bank parking
area became an annex of City Garden Hotel when the management of the said bank
allowed the parking of the vehicles of hotel guests thereat in the evening after
banking hours.11

Article 1962, in relation to Article 1998, of the Civil Code defines a contract of
deposit and a necessary deposit made by persons in hotels or inns:

Art. 1962. A deposit is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it and returning the
same. If the safekeeping of the thing delivered is not the principal purpose of the
contract, there is no deposit but some other contract.
Art. 1998. The deposit of effects made by travelers in hotels or inns shall also be
regarded as necessary.1avvphi1 The keepers of hotels or inns shall be responsible
for them as depositaries, provided that notice was given to them, or to their
employees, of the effects brought by the guests and that, on the part of the latter,
they take the precautions which said hotel-keepers or their substitutes advised
relative to the care and vigilance of their effects.

Plainly, from the facts found by the lower courts, the insured See deposited
his vehicle for safekeeping with petitioner, through the latter’s employee,
Justimbaste. In turn, Justimbaste issued a claim stub to See. Thus, the
contract of deposit was perfected from See’s delivery, when he handed
over to Justimbaste the keys to his vehicle, which Justimbaste received
with the obligation of safely keeping and returning it. Ultimately, petitioner
is liable for the loss of See’s vehicle.

Lastly, petitioner assails the lower courts’ award of attorney’s fees to respondent in
the amount of ₱120,000.00. Petitioner claims that the award is not substantiated by
the evidence on record.

We disagree.

While it is a sound policy not to set a premium on the right to litigate, 12 we find that
respondent is entitled to reasonable attorney’s fees. Attorney’s fees may be
awarded when a party is compelled to litigate or incur expenses to protect its
interest,13 or when the court deems it just and equitable.14 In this case, petitioner
refused to answer for the loss of See’s vehicle, which was deposited with it for
safekeeping. This refusal constrained respondent, the insurer of See, and
subrogated to the latter’s right, to litigate and incur expenses. However, we reduce
the award of ₱120,000.00 to ₱60,000.00 in view of the simplicity of the issues
involved in this case.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-
G.R. CV No. 86869 is AFFIRMED with the MODIFICATION that the award of
attorney’s fees is reduced to ₱60,000.00. Costs against petitioner.

SO ORDERED.

G.R. Nos. L-26948 and L-26949             October 8, 1927

SILVESTRA BARON, plaintiff-appellant,
vs.
PABLO DAVID, defendant-appellant.

And

GUILLERMO BARON, plaintiff-appellant,
vs.
PABLO DAVID, defendant-appellant.
Jose Gutierrez David for plaintiff-appellant in case of No. 26948.
Gregorio Perfecto for defendant-appellant in both cases.
Francisco, Lualhati & Lopez and Jose Gutierrez David for plaintiff-appellant in case
No. 26949.

STREET, J.:

These two actions were instituted in the Court of First Instance of the Province of
Pampanga by the respective plaintiffs, Silvestra Baron and Guillermo Baron, for the
purpose of recovering from the defendant, Pablo David, the value of palay alleged
to have been sold by the plaintiffs to the defendant in the year 1920. Owing to the
fact that the defendant is the same in both cases and that the two cases depend in
part upon the same facts, the cases were heard together in the trial court and
determined in a single opinion. The same course will accordingly be followed here.

In the first case, i. e., that which Silvestra Baron is plaintiff, the court gave
judgment for her to recover of the defendant the sum of P5,238.51, with costs.
From this judgment both the plaintiff and the defendant appealed.

In the second case, i. e., that in which Guillermo Baron, is plaintiff, the court gave
judgment for him to recover of the defendant the sum of P5,734.60, with costs,
from which judgment both the plaintiff and the defendant also appealed. In the
same case the defendant interposed a counterclaim in which he asked credit for the
sum of P2,800 which he had advanced to the plaintiff Guillermo Baron on various
occasions. This credit was admitted by the plaintiff and allowed by the trial court.
But the defendant also interposed a cross-action against Guillermo Baron in which
the defendant claimed compensation for damages alleged to have Ben suffered by
him by reason of the alleged malicious and false statements made by the plaintiff
against the defendant in suing out an attachment against the defendant's property
soon after the institution of the action. In the same cross-action the defendant also
sought compensation for damages incident to the shutting down of the defendant's
rice mill for the period of one hundred seventy days during which the above-
mentioned attachment was in force. The trial judge disallowed these claims for
damages, and from this feature of the decision the defendant appealed. We are
therefore confronted with five distinct appeals in this record.

Prior to January 17, 1921, the defendant Pablo David has been engaged in running
a rice mill in the municipality of Magalang, in the Province of Pampanga, a mill
which was well patronized by the rice growers of the vicinity and almost constantly
running. On the date stated a fire occurred that destroyed the mill and its contents,
and it was some time before the mill could be rebuilt and put in operation again.
Silvestra Baron, the plaintiff in the first of the actions before us, is an aunt of the
defendant; while Guillermo Baron, the plaintiff in the other action; is his uncle. In
the months of March, April, and May, 1920, Silvestra Baron placed a quantity of
palay in the defendant's mill; and this, in connection with some that she took over
from Guillermo Baron, amounted to 1,012 cavans and 24 kilos. During
approximately the same period Guillermo Baron placed other 1,865 cavans and 43
kilos of palay in the mill. No compensation has ever been received by Silvestra
Baron upon account of the palay delivered by Guillermo Baron, he has received
from the defendant advancements amounting to P2,800; but apart from this he has
not been compensated. Both the plaintiffs claim that the palay which was delivered
by them to the defendant was sold to the defendant; while the defendant, on the
other hand, claims that the palay was deposited subject to future withdrawal by the
depositors or subject to some future sale which was never effected. He therefore
supposes himself to be relieved from all responsibility by virtue of the fire of
January 17, 1921, already mentioned.

The plaintiff further say that their palay was delivered to the defendant at his
special request, coupled with a promise on his part to pay for the same at the
highest price per cavan at which palay would sell during the year 1920; and they
say that in August of that year the defendant promised to pay them severally the
price of P8.40 per cavan, which was about the top of the market for the season,
provided they would wait for payment until December. The trial judge found that no
such promise had been given; and the incredulity of the court upon this point
seems to us to be justified. A careful examination of the proof, however, leads us to
the conclusion that the plaintiffs did, some time in the early part of August, 1920,
make demand upon the defendant for a settlement, which he evaded or postponed
leaving the exact amount due to the plaintiffs undetermined.

It should be stated that the palay in question was place by the plaintiffs in the
defendant's mill with the understanding that the defendant was at liberty to convert
it into rice and dispose of it at his pleasure. The mill was actively running during the
entire season, and as palay was daily coming in from many customers and as rice
was being constantly shipped by the defendant to Manila, or other rice markets, it
was impossible to keep the plaintiffs' palay segregated. In fact the defendant
admits that the plaintiffs' palay was mixed with that of others. In view of the nature
of the defendant's activities and the way in which the palay was handled in the
defendant's mill, it is quite certain that all of the plaintiffs' palay, which was put in
before June 1, 1920, been milled and disposed of long prior to the fire of January
17, 1921. Furthermore, the proof shows that when the fire occurred there could not
have been more than about 360 cavans of palay in the mill, none of which by any
reasonable probability could have been any part of the palay delivered by the
plaintiffs. Considering the fact that the defendant had thus milled and doubtless
sold the plaintiffs' palay prior to the date of the fire, it result that he is bound to
account for its value, and his liability was not extinguished by the occurence of the
fire. In the briefs before us it seems to have been assumed by the opposing
attorneys that in order for the plaintiffs to recover, it is necessary that they should
be able to establish that the plaintiffs' palay was delivered in the character of a
sale, and that if, on the contrary, the defendant should prove that the delivery was
made in the character of deposit, the defendant should be absolved. But the case
does not depend precisely upon this explicit alternative; for even supposing that the
palay may have been delivered in the character of deposit, subject to future sale or
withdrawal at plaintiffs' election, nevertheless if it was understood that the
defendant might mill the palay and he has in fact appropriated it to his own use, he
is of course bound to account for its value. Under article 1768 of the Civil Code,
when the depository has permission to make use of the thing deposited, the
contract loses the character of mere deposit and becomes a loan or
a commodatum; and of course by appropriating the thing, the bailee becomes
responsible for its value. In this connection we wholly reject the defendant's
pretense that the palay delivered by the plaintiffs or any part of it was actually
consumed in the fire of January, 1921. Nor is the liability of the defendant in any
wise affected by the circumstance that, by a custom prevailing among rice millers in
this country, persons placing palay with them without special agreement as to price
are at liberty to withdraw it later, proper allowance being made for storage and
shrinkage, a thing that is sometimes done, though rarely.

In view of what has been said it becomes necessary to discover the price which the
defendant should be required to pay for the plaintiffs' palay. Upon this point the
trial judge fixed upon P6.15 per cavan; and although we are not exactly in
agreement with him as to the propriety of the method by which he arrived at this
figure, we are nevertheless of the opinion that, all things considered, the result is
approximately correct. It appears that the price of palay during the months of April,
May, and June, 1920, had been excessively high in the Philippine Islands and even
prior to that period the Government of the Philippine Islands had been attempting
to hold the price in check by executive regulation. The highest point was touched in
this season was apparently about P8.50 per cavan, but the market began to sag in
May or June and presently entered upon a precipitate decline. As we have already
stated, the plaintiffs made demand upon the defendant for settlement in the early
part of August; and, so far as we are able to judge from the proof, the price of
P6.15 per cavan, fixed by the trial court, is about the price at which the defendant
should be required to settle as of that date. It was the date of the demand of
the plaintiffs for settlement that determined the price to be paid by the
defendant, and this is true whether the palay was delivered in the
character of sale with price undetermined or in the character of deposit
subject to use by the defendant. It results that the plaintiffs are respectively
entitle to recover the value of the palay which they had placed with the defendant
during the period referred to, with interest from the date of the filing of their
several complaints.

As already stated, the trial court found that at the time of the fire there were about
360 cavans of palay in the mill and that this palay was destroyed. His Honor
assumed that this was part of the palay delivered by the plaintiffs, and he held that
the defendant should be credited with said amount. His Honor therefore deducted
from the claims of the plaintiffs their respective proportionate shares of this amount
of palay. We are unable to see the propriety of this feature of the decision. There
were many customers of the defendant's rice mill who had placed their palay with
the defendant under the same conditions as the plaintiffs, and nothing can be more
certain than that the palay which was burned did not belong to the plaintiffs. That
palay without a doubt had long been sold and marketed. The assignments of error
of each of the plaintiffs-appellants in which this feature of the decision is attacked
are therefore well taken; and the appealed judgments must be modified by
eliminating the deductions which the trial court allowed from the plaintiffs' claims.

The trial judge also allowed a deduction from the claim of the plaintiff Guillermo
Baron of 167 cavans of palay, as indicated in Exhibit 12, 13, 14, and 16. This was
also erroneous. These exhibits relate to transactions that occurred nearly two years
after the transactions with which we are here concerned, and they were offered in
evidence merely to show the character of subsequent transactions between the
parties, it appearing that at the time said exhibits came into existence the
defendant had reconstructed his mill and that business relations with Guillermo
Baron had been resumed. The transactions shown by these exhibits (which relate to
palay withdrawn by the plaintiff from the defendant's mill) were not made the
subject of controversy in either the complaint or the cross-complaint of the
defendant in the second case. They therefore should not have been taken into
account as a credit in favor of the defendant. Said credit must therefore be likewise
of course be without prejudice to any proper adjustment of the rights of the parties
with respect to these subsequent transactions that they have heretofore or may
hereafter effect.

The preceding discussion disposes of all vital contentions relative to the liability of
the defendant upon the causes of action stated in the complaints. We proceed
therefore now to consider the question of the liability of the plaintiff Guillermo
Baron upon the cross-complaint of Pablo David in case R. G. No. 26949. In this
cross-action the defendant seek, as the stated in the third paragraph of this
opinion, to recover damages for the wrongful suing out of an attachment by the
plaintiff and the levy of the same upon the defendant's rice mill. It appears that
about two and one-half months after said action was begun, the plaintiff, Guillermo
Baron, asked for an attachment to be issued against the property of the defendant;
and to procure the issuance of said writ the plaintiff made affidavit to the effect that
the defendant was disposing, or attempting the plaintiff. Upon this affidavit an
attachment was issued as prayed, and on March 27, 1924, it was levied upon the
defendant's rice mill, and other property, real and personal. 1awph!l.net

Upon attaching the property the sheriff closed the mill and placed it in the care of a
deputy. Operations were not resumed until September 13, 1924, when the
attachment was dissolved by an order of the court and the defendant was permitted
to resume control. At the time the attachment was levied there were, in the
bodega, more than 20,000 cavans of palay belonging to persons who held receipts
therefor; and in order to get this grain away from the sheriff, twenty-four of the
depositors found it necessary to submit third-party claims to the sheriff. When
these claims were put in the sheriff notified the plaintiff that a bond in the amount
of P50,000 must be given, otherwise the grain would be released. The plaintiff,
being unable or unwilling to give this bond, the sheriff surrendered the palay to the
claimants; but the attachment on the rice mill was maintained until September 13,
as above stated, covering a period of one hundred seventy days during which the
mill was idle. The ground upon which the attachment was based, as set forth in the
plaintiff's affidavit was that the defendant was disposing or attempting to dispose of
his property for the purpose of defrauding the plaintiff. That this allegation was
false is clearly apparent, and not a word of proof has been submitted in support of
the assertion. On the contrary, the defendant testified that at the time this
attachment was secured he was solvent and could have paid his indebtedness to
the plaintiff if judgment had been rendered against him in ordinary course. His
financial conditions was of course well known to the plaintiff, who is his uncle. The
defendant also states that he had not conveyed away any of his property, nor had
intended to do so, for the purpose of defrauding the plaintiff. We have before us
therefore a case of a baseless attachment, recklessly sued out upon a false affidavit
and levied upon the defendant's property to his great and needless damage. That
the act of the plaintiff in suing out the writ was wholly unjustifiable is perhaps also
indicated in the circumstance that the attachment was finally dissolved upon the
motion of the plaintiff himself.

The defendant testified that his mill was accustomed to clean from 400 to 450
cavans of palay per day, producing 225 cavans of rice of 57 kilos each. The price
charged for cleaning each cavan rice was 30 centavos. The defendant also stated
that the expense of running the mill per day was from P18 to P25, and that the net
profit per day on the mill was more than P40. As the mill was not accustomed to
run on Sundays and holiday, we estimate that the defendant lost the profit that
would have been earned on not less than one hundred forty work days. Figuring his
profits at P40 per day, which would appear to be a conservative estimate, the
actual net loss resulting from his failure to operate the mill during the time stated
could not have been less than P5,600. The reasonableness of these figures is also
indicated in the fact that the twenty-four customers who intervened with third-party
claims took out of the camarin  20,000 cavans of palay, practically all of which, in
the ordinary course of events, would have been milled in this plant by the
defendant. And of course other grain would have found its way to this mill if it had
remained open during the one hundred forty days when it was closed.

But this is not all. When the attachment was dissolved and the mill again opened,
the defendant found that his customers had become scattered and could not be
easily gotten back. So slow, indeed, was his patronage in returning that during the
remainder of the year 1924 the defendant was able to mill scarcely more than the
grain belonging to himself and his brothers; and even after the next season opened
many of his old customers did not return. Several of these individuals, testifying as
witnesses in this case, stated that, owing to the unpleasant experience which they
had in getting back their grain from the sheriff to the mill of the defendant, though
they had previously had much confidence in him.

As against the defendant's proof showing the facts above stated the plaintiff
submitted no evidence whatever. We are therefore constrained to hold that the
defendant was damaged by the attachment to the extent of P5,600, in profits lost
by the closure of the mill, and to the extent of P1,400 for injury to the good-will of
his business, making a total of P7,000. For this amount the defendant must recover
judgment on his cross-complaint.

The trial court, in dismissing the defendant's cross-complaint for damages resulting
from the wrongful suing out of the attachment, suggested that the closure of the
rice mill was a mere act of the sheriff for which the plaintiff was not responsible and
that the defendant might have been permitted by the sheriff to continue running
the mill if he had applied to the sheriff for permission to operate it. This singular
suggestion will not bear a moment's criticism. It was of course the duty of the
sheriff, in levying the attachment, to take the attached property into his possession,
and the closure of the mill was a natural, and even necessary, consequence of the
attachment. For the damage thus inflicted upon the defendant the plaintiff is
undoubtedly responsible.

One feature of the cross-complaint consist in the claim of the defendant (cross-
complaint) for the sum of P20,000 as damages caused to the defendant by the false
and alleged malicious statements contained in the affidavit upon which the
attachment was procured. The additional sum of P5,000 is also claimed as
exemplary damages. It is clear that with respect to these damages the cross-action
cannot be maintained, for the reason that the affidavit in question was used in
course of a legal proceeding for the purpose of obtaining a legal remedy, and it is
therefore privileged. But though the affidavit is not actionable as a libelous
publication, this fact in no obstacle to the maintenance of an action to recover the
damage resulting from the levy of the attachment.

Before closing this opinion a word should be said upon the point raised in the first
assignment of error of Pablo David as defendant in case R. G. No. 26949. In this
connection it appears that the deposition of Guillermo Baron was presented in court
as evidence and was admitted as an exhibit, without being actually read to the
court. It is supposed in the assignment of error now under consideration that the
deposition is not available as evidence to the plaintiff because it was not actually
read out in court. This connection is not well founded. It is true that in section 364
of the Code of Civil Procedure it is said that a deposition, once taken, may be read
by either party and will then be deemed the evidence of the party reading it. The
use of the word "read" in this section finds its explanation of course in the American
practice of trying cases for the most part before juries. When a case is thus tried
the actual reading of the deposition is necessary in order that the jurymen may
become acquainted with its contents. But in courts of equity, and in all courts where
judges have the evidence before them for perusal at their pleasure, it is not
necessary that the deposition should be actually read when presented as evidence.

From what has been said it result that judgment of the court below must be
modified with respect to the amounts recoverable by the respective plaintiffs in the
two actions R. G. Nos. 26948 and 26949 and must be reversed in respect to the
disposition of the cross-complaint interposed by the defendant in case R. G. No.
26949, with the following result: In case R. G. No. 26948 the plaintiff Silvestra
Baron will recover of the Pablo David the sum of P6,227.24, with interest from
November 21, 1923, the date of the filing of her complaint, and with costs. In case
R. G. No. 26949 the plaintiff Guillermo Baron will recover of the defendant Pablo
David the sum of P8,669.75, with interest from January 9, 1924. In the same case
the defendant Pablo David, as plaintiff in the cross-complaint, will recover of
Guillermo Baron the sum of P7,000, without costs. So ordered.
G.R. No. L-7593            March 27, 1913

THE UNITED STATES, plaintiff-appellee,

vs.
JOSE M. IGPUARA, defendant-appellant.

W. A. Kincaid, Thos. L. Hartigan, and Jose Robles Lahesa for appellant.

Office of the Solicitor-General Harvey for appellee.

ARELLANO, C.J.:

The defendant therein is charged with the crime of estafa, for having swindled
Juana Montilla and Eugenio Veraguth out of P2,498 Philippine currency, which he
had take on deposit from the former to be at the latter's disposal. The document
setting forth the obligation reads:

We hold at the disposal of Eugenio Veraguth the sum of two thousand four hundred
and ninety-eight pesos (P2,498), the balance from Juana Montilla's sugar. — Iloilo,
June 26, 1911, — Jose Igpuara, for Ramirez and Co.

The Court of First Instance of Iloilo sentenced the defendant to two years
of presidio correccional, to pay Juana Montilla P2,498 Philippine currency, and in
case of insolvency to subsidiary imprisonment at P2.50 per day, not to exceed one-
third of the principal penalty, and the costs.

The defendant appealed, alleging as errors: (1) Holding that the document
executed by him was a certificate of deposit; (2) holding the existence of a deposit,
without precedent transfer or delivery of the P2,498; and (3) classifying the facts in
the case as the crime of estafa.

A deposit is constituted from the time a person receives a thing belonging to

another with the obligation of keeping and returning it. (Art. 1758, Civil
Code.)

That the defendant received P2,498 is a fact proven. The defendant drew up a
document declaring that they remained in his possession, which he could not have
said had he not received them. They remained in his possession, surely in no other
sense than to take care of them, for they remained has no other purpose. They
remained in the defendant's possession at the disposal of Veraguth; but on
August 23 of the same year Veraguth demanded for him through a notarial
instrument restitution of them, and to date he has not restored them.

The appellant says: "Juana Montilla's agent voluntarily accepted the sum of P2,498
in an instrument payable on demand, and as no attempt was made to cash it until
August 23, 1911, he could indorse and negotiate it like any other commercial
instrument. There is no doubt that if Veraguth accepted the receipt for P2,498 it
was because at that time he agreed with the defendant to consider the operation of
sale on commission closed, leaving the collection of said sum until later, which sum
remained as a loan payable upon presentation of the receipt." (Brief, 3 and 4.)

Then, after averring the true facts: (1) that a sales commission was precedent; (2)
that this commission was settled with a balance of P2,498 in favor of the principal,
Juana Montilla; and (3) that this balance remained in the possession of the
defendant, who drew up an instrument payable on demand, he has drawn two
conclusions, both erroneous: One, that the instrument drawn up in the form of
a deposit certificate could be indorsed or negotiated like any other commercial
instrument; and the other, that the sum of P2,498 remained in defendant's
possession as a loan.

It is erroneous to assert that the certificate of deposit in question is

negotiable like any other commercial instrument: First, because every
commercial instrument is not negotiable; and second, because only
instruments payable to order are negotiable. Hence, this instrument not
being to order but to bearer, it is not negotiable.

It is also erroneous to assert that sum of money set forth in said certificate
is, according to it, in the defendant's possession as a loan. In a loan the
lender transmits to the borrower the use of the thing lent, while in a
deposit the use of the thing is not transmitted, but merely possession for
its custody or safe-keeping.

In order that the depositary may use or dispose oft he things deposited, the
depositor's consent is required, and then:

The rights and obligations of the depositary and of the depositor shall cease,
and the rules and provisions applicable to commercial loans, commission, or
contract which took the place of the deposit shall be observed. (Art. 309,
Code of Commerce.)

The defendant has shown no authorization whatsoever or the consent of the

depositary for using or disposing of the P2,498, which the certificate acknowledges,
or any contract entered into with the depositor to convert the deposit into a loan,
commission, or other contract.

That demand was not made for restitution of the sum deposited, which could have
been claimed on the same or the next day after the certificate was signed, does not
operate against the depositor, or signify anything except the intention not to press
it. Failure to claim at once or delay for sometime in demanding restitution
of the things deposited, which was immediately due, does not imply such
permission to use the thing deposited as would convert the deposit into a
loan.

Article 408 of the Code of Commerce of 1829, previous to the one now in force,
provided:
 The depositary of an amount of money cannot use the amount, and if he
makes use of it, he shall be responsible for all damages that may accrue and
shall respond to the depositor for the legal interest on the amount.

Whereupon the commentators say:

In this case the deposit becomes in fact a loan, as a just punishment

imposed upon him who abuses the sacred nature of a deposit and as a
means of preventing the desire of gain from leading him into speculations
that may be disastrous to the depositor, who is much better secured while
the deposit exists when he only has a personal action for recovery.

According to article 548, No. 5, of the Penal Code, those who to the prejudice
of another appropriate or abstract for their own use money, goods, or other
personal property which they may have received as a deposit, on
commission, or for administration, or for any other purpose which produces
the obligation of delivering it or returning it, and deny having received it,
shall suffer the penalty of the preceding article," which punishes such act as
the crime of estafa. The corresponding article of the Penal Code of the
Philippines in 535, No. 5.

In a decision of an appeal, September 28, 1895, the principle was laid down that:
"Since he commits the crime of estafa  under article 548 of the Penal Code of Spain
who to another's detriment appropriates to himself or abstracts money or goods
received on commission for delivery, the court rightly applied this article to the
appellant, who, to the manifest detriment of the owner or owners of the securities,
since he has not restored them, willfully and wrongfully disposed of them by
appropriating them to himself or at least diverting them from the purpose to which
he was charged to devote them."

It is unquestionable that in no sense did the P2,498 which he willfully and

wrongfully disposed of to the detriments of his principal, Juana Montilla, and of the
depositor, Eugenio Veraguth, belong to the defendant.

Likewise erroneous is the construction apparently at tempted to be given to two

decisions of this Supreme Court (U. S. vs. Dominguez, 2 Phil. Rep., 580, and U.
S. vs. Morales and Morco, 15 Phil. Rep., 236) as implying that what
constitutes estafa is not the disposal of money deposited, but denial of having
received same. In the first of said cases there was no evidence that the defendant
had appropriated the grain deposited in his possession.

On the contrary, it is entirely probable that, after the departure of the

defendant from Libmanan on September 20, 1898, two days after the
uprising of the civil guard in Nueva Caceres, the rice was seized by the
revolutionalists and appropriated to their own uses.

In this connection it was held that failure to return the thing deposited was not
sufficient, but that it was necessary to prove that the depositary had appropriated it
to himself or diverted the deposit to his own or another's benefit. He was accused
or refusing to restore, and it was held that the code does not penalize refusal to
restore but denial of having received. So much for the crime of omission; now with
reference to the crime of commission, it was not held in that decision that
appropriation or diversion of the thing deposited would not constitute the crime
of estafa.

In the second of said decisions, the accused "kept none of the proceeds of the
sales. Those, such as they were, he turned over to the owner;" and there being no
proof of the appropriation, the agent could not be found guilty of the crime
of estafa.

Being in accord and the merits of the case, the judgment appealed from is affirmed,
with costs.

G.R. No. 90027 March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,

vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.

Dolorfino & Dominguez Law Offices for petitioner.

Danilo B. Banares for private respondent.

DAVIDE, JR., J.:

Is the contractual relation between a commercial bank and another party in a

contract of rent of a safety deposit box with respect to its contents placed by the
latter one of bailor and bailee or one of lessor and lessee?

This is the crux of the present controversy.

On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses
Ramon and Paula Pugao entered into an agreement whereby the former purchased
from the latter two (2) parcels of land for a consideration of P350,625.00. Of this
amount, P75,725.00 was paid as downpayment while the balance was covered by
three (3) postdated checks. Among the terms and conditions of the agreement
embodied in a Memorandum of True and Actual Agreement of Sale of Land were
that the titles to the lots shall be transferred to the petitioner upon full payment of
the purchase price and that the owner's copies of the certificates of titles thereto,
Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a
safety deposit box of any bank. The same could be withdrawn only upon the joint
signatures of a representative of the petitioner and the Pugaos upon full payment of
the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented
Safety Deposit Box No. 1448 of private respondent Security Bank and Trust
Company, a domestic banking corporation hereinafter referred to as the respondent
Bank. For this purpose, both signed a contract of lease (Exhibit "2") which
contains, inter alia, the following conditions:

13. The bank is not a depositary of the contents of the safe and it has
neither the possession nor control of the same.

14. The bank has no interest whatsoever in said contents, except

herein expressly provided, and it assumes absolutely no liability in
connection therewith.1

After the execution of the contract, two (2) renter's keys were given to the renters
— one to Aguirre (for the petitioner) and the other to the Pugaos. A guard key
remained in the possession of the respondent Bank. The safety deposit box has two
(2) keyholes, one for the guard key and the other for the renter's key, and can be
opened only with the use of both keys. Petitioner claims that the certificates of title
were placed inside the said box.

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the
two (2) lots at a price of P225.00 per square meter which, as petitioner alleged in
its complaint, translates to a profit of P100.00 per square meter or a total of
P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed
of sale which necessarily entailed the production of the certificates of title. In view
thereof, Aguirre, accompanied by the Pugaos, then proceeded to the respondent
Bank on 4 October 1979 to open the safety deposit box and get the certificates of
title. However, when opened in the presence of the Bank's representative, the box
yielded no such certificates. Because of the delay in the reconstitution of the title,
Mrs. Ramos withdrew her earlier offer to purchase the lots; as a consequence
thereof, the petitioner allegedly failed to realize the expected profit of P280,500.00.
Hence, the latter filed on 1 September 1980 a complaint2 for damages against the
respondent Bank with the Court of First Instance (now Regional Trial Court) of
Pasig, Metro Manila which docketed the same as Civil Case No. 38382.

In its Answer with Counterclaim,3 respondent Bank alleged that the petitioner has
no cause of action because of paragraphs 13 and 14 of the contract of lease
(Exhibit "2"); corollarily, loss of any of the items or articles contained in the box
could not give rise to an action against it. It then interposed a counterclaim for
exemplary damages as well as attorney's fees in the amount of P20,000.00.
Petitioner subsequently filed an answer to the counterclaim. 4

In due course, the trial court, now designated as Branch 161 of the Regional Trial
Court (RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner
on 8 December 1986, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered

dismissing plaintiff's complaint.
 On defendant's counterclaim, judgment is hereby rendered ordering
plaintiff to pay defendant the amount of FIVE THOUSAND (P5,000.00)
PESOS as attorney's fees.

With costs against plaintiff.6

The unfavorable verdict is based on the trial court's conclusion that under
paragraphs 13 and 14 of the contract of lease, the Bank has no liability for the loss
of the certificates of title. The court declared that the said provisions are binding on
the parties.

Its motion for reconsideration7 having been denied, petitioner appealed from the
adverse decision to the respondent Court of Appeals which docketed the appeal as
CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the
challenged decision because the trial court erred in (a) absolving the respondent
Bank from liability from the loss, (b) not declaring as null and void, for being
contrary to law, public order and public policy, the provisions in the contract for
lease of the safety deposit box absolving the Bank from any liability for loss, (c) not
concluding that in this jurisdiction, as well as under American jurisprudence, the
liability of the Bank is settled and (d) awarding attorney's fees to the Bank and
denying the petitioner's prayer for nominal and exemplary damages and attorney's
fees.8

In its Decision promulgated on 4 July 1989,9 respondent Court affirmed the

appealed decision principally on the theory that the contract (Exhibit "2") executed
by the petitioner and respondent Bank is in the nature of a contract of lease by
virtue of which the petitioner and its co-renter were given control over the safety
deposit box and its contents while the Bank retained no right to open the said box
because it had neither the possession nor control over it and its contents. As such,
the contract is governed by Article 1643 of the Civil Code 10 which provides:

Art. 1643. In the lease of things, one of the parties binds himself to
give to another the enjoyment or use of a thing for a price certain, and
for a period which may be definite or indefinite. However, no lease for
more than ninety-nine years shall be valid.

It invoked Tolentino vs. Gonzales  11 — which held that the owner of the

property loses his control over the property leased during the period of the
contract — and Article 1975 of the Civil Code which provides:

Art. 1975. The depositary holding certificates, bonds, securities or

instruments which earn interest shall be bound to collect the latter
when it becomes due, and to take such steps as may be necessary in
order that the securities may preserve their value and the rights
corresponding to them according to law.

The above provision shall not apply to contracts for the rent of safety
deposit boxes.
 and then concluded that "[c]learly, the defendant-appellee is not under any
duty to maintain the contents of the box. The stipulation absolving the
defendant-appellee from liability is in accordance with the nature of the
contract of lease and cannot be regarded as contrary to law, public order and
public policy." 12 The appellate court was quick to add, however, that under
the contract of lease of the safety deposit box, respondent Bank is not
completely free from liability as it may still be made answerable in case
unauthorized persons enter into the vault area or when the rented box is
forced open. Thus, as expressly provided for in stipulation number 8 of the
contract in question:

8. The Bank shall use due diligence that no unauthorized person shall
be admitted to any rented safe and beyond this, the Bank will not be
responsible for the contents of any safe rented from it. 13

Its motion for reconsideration 14 having been denied in the respondent Court's

Resolution of 28 August 1989, 15 petitioner took this recourse under Rule 45 of the
Rules of Court and urges Us to review and set aside the respondent Court's ruling.
Petitioner avers that both the respondent Court and the trial court (a) did not
properly and legally apply the correct law in this case, (b) acted with grave abuse of
discretion or in excess of jurisdiction amounting to lack thereof and (c) set a
precedent that is contrary to, or is a departure from precedents adhered to and
affirmed by decisions of this Court and precepts in American jurisprudence adopted
in the Philippines. It reiterates the arguments it had raised in its motion to
reconsider the trial court's decision, the brief submitted to the respondent Court
and the motion to reconsider the latter's decision. In a nutshell, petitioner
maintains that regardless of nomenclature, the contract for the rent of the safety
deposit box (Exhibit "2") is actually a contract of deposit governed by Title XII,
Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the
loss of the certificates of title pursuant to Article 1972 of the said Code which
provides:

Art. 1972. The depositary is obliged to keep the thing safely and to
return it, when required, to the depositor, or to his heirs and
successors, or to the person who may have been designated in the
contract. His responsibility, with regard to the safekeeping and the loss
of the thing, shall be governed by the provisions of Title I of this Book.

If the deposit is gratuitous, this fact shall be taken into account in

determining the degree of care that the depositary must observe.

Petitioner then quotes a passage from American Jurisprudence 17 which is

supposed to expound on the prevailing rule in the United States, to wit:

The prevailing rule appears to be that where a safe-deposit company

leases a safe-deposit box or safe and the lessee takes possession of
the box or safe and places therein his securities or other valuables, the
 relation of bailee and bail or is created between the parties to the
transaction as to such securities or other valuables; the fact that the
safe-deposit company does not know, and that it is not expected that
it shall know, the character or description of the property which is
deposited in such safe-deposit box or safe does not change that
relation. That access to the contents of the safe-deposit box can be
had only by the use of a key retained by the lessee ( whether it is the
sole key or one to be used in connection with one retained by the
lessor) does not operate to alter the foregoing rule. The argument that
there is not, in such a case, a delivery of exclusive possession and
control to the deposit company, and that therefore the situation is
entirely different from that of ordinary bailment, has been generally
rejected by the courts, usually on the ground that as possession must
be either in the depositor or in the company, it should reasonably be
considered as in the latter rather than in the former, since the
company is, by the nature of the contract, given absolute control of
access to the property, and the depositor cannot gain access thereto
without the consent and active participation of the company. . . .
(citations omitted).

and a segment from Words and Phrases 18 which states that a contract for
the rental of a bank safety deposit box in consideration of a fixed amount at
stated periods is a bailment for hire.

Petitioner further argues that conditions 13 and 14 of the questioned contract are
contrary to law and public policy and should be declared null and void. In support
thereof, it cites Article 1306 of the Civil Code which provides that parties to a
contract may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs,
public order or public policy.

After the respondent Bank filed its comment, this Court gave due course to the
petition and required the parties to simultaneously submit their respective
Memoranda.

The petition is partly meritorious.

We agree with the petitioner's contention that the contract for the rent of the safety
deposit box is not an ordinary contract of lease as defined in Article 1643 of the
Civil Code. However, We do not fully subscribe to its view that the same is a
contract of deposit that is to be strictly governed by the provisions in the Civil Code
on deposit; 19 the contract in the case at bar is a special kind of deposit. It cannot
be characterized as an ordinary contract of lease under Article 1643 because the
full and absolute possession and control of the safety deposit box was not given to
the joint renters — the petitioner and the Pugaos. The guard key of the box
remained with the respondent Bank; without this key, neither of the renters could
open the box. On the other hand, the respondent Bank could not likewise open the
box without the renter's key. In this case, the said key had a duplicate which was
made so that both renters could have access to the box.

Hence, the authorities cited by the respondent Court 20 on this point do not apply.
Neither could Article 1975, also relied upon by the respondent Court, be invoked as
an argument against the deposit theory. Obviously, the first paragraph of such
provision cannot apply to a depositary of certificates, bonds, securities or
instruments which earn interest if such documents are kept in a rented safety
deposit box. It is clear that the depositary cannot open the box without the renter
being present.

We observe, however, that the deposit theory itself does not altogether find
unanimous support even in American jurisprudence. We agree with the petitioner
that under the latter, the prevailing rule is that the relation between a bank renting
out safe-deposit boxes and its customer with respect to the contents of the box is
that of a bail or and bailee, the bailment being for hire and mutual
benefit. 21 This is just the prevailing view because:

There is, however, some support for the view that the relationship in
question might be more properly characterized as that of landlord and
tenant, or lessor and lessee. It has also been suggested that it should
be characterized as that of licensor and licensee. The relation between
a bank, safe-deposit company, or storage company, and the renter of
a safe-deposit box therein, is often described as contractual, express
or implied, oral or written, in whole or in part. But there is apparently
no jurisdiction in which any rule other than that applicable to
bailments governs questions of the liability and rights of the parties in
respect of loss of the contents of safe-deposit boxes. 22 (citations
omitted)

In the context of our laws which authorize banking institutions to rent out safety
deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United
States has been adopted. Section 72 of the General Banking Act 23 pertinently
provides:

Sec. 72. In addition to the operations specifically authorized elsewhere

in this Act, banking institutions other than building and loan
associations may perform the following services:

(a) Receive in custody funds, documents, and valuable

objects, and rent safety deposit boxes for the
safeguarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a),
(b) and (c) of this section as depositories or as
agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the parameters of a
contract of deposit, i.e., the receiving in custody of funds, documents and
other valuable objects for safekeeping. The renting out of the safety
deposit boxes is not independent from, but related to or in conjunction
with, this principal function. A contract of deposit may be entered into
orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the
parties thereto may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order or public policy. The depositary's
responsibility for the safekeeping of the objects deposited in the case at bar is
governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be
liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or
contravention of the tenor of the agreement. 26 In the absence of any stipulation
prescribing the degree of diligence required, that of a good father of a family is to
be observed. 27 Hence, any stipulation exempting the depositary from any liability
arising from the loss of the thing deposited on account of fraud, negligence or delay
would be void for being contrary to law and public policy. In the instant case,
petitioner maintains that conditions 13 and 14 of the questioned contract of lease of
the safety deposit box, which read:

13. The bank is not a depositary of the contents of the safe and it has
neither the possession nor control of the same.

14. The bank has no interest whatsoever in said contents, except

herein expressly provided, and it assumes absolutely no liability in
connection therewith. 28

are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are inconsistent
with the respondent Bank's responsibility as a depositary under Section 72(a)
of the General Banking Act. Both exempt the latter from any liability except
as contemplated in condition 8 thereof which limits its duty to exercise
reasonable diligence only with respect to who shall be admitted to any rented
safe, to wit:

8. The Bank shall use due diligence that no unauthorized person shall
be admitted to any rented safe and beyond this, the Bank will not be
responsible for the contents of any safe rented from it. 29

Furthermore, condition 13 stands on a wrong premise and is contrary to the

actual practice of the Bank. It is not correct to assert that the Bank has
neither the possession nor control of the contents of the box since in fact, the
safety deposit box itself is located in its premises and is under its absolute
control; moreover, the respondent Bank keeps the guard key to the said box.
As stated earlier, renters cannot open their respective boxes unless the Bank
cooperates by presenting and using this guard key. Clearly then, to the
extent above stated, the foregoing conditions in the contract in question are
void and ineffective. It has been said:
 With respect to property deposited in a safe-deposit box by a customer
of a safe-deposit company, the parties, since the relation is a
contractual one, may by special contract define their respective duties
or provide for increasing or limiting the liability of the deposit
company, provided such contract is not in violation of law or public
policy. It must clearly appear that there actually was such a special
contract, however, in order to vary the ordinary obligations implied by
law from the relationship of the parties; liability of the deposit
company will not be enlarged or restricted by words of doubtful
meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the
contents by its own fraud or negligence or that of its agents or
servants, and if a provision of the contract may be construed as an
attempt to do so, it will be held ineffective for the purpose. Although it
has been held that the lessor of a safe-deposit box cannot limit its
liability for loss of the contents thereof through its own negligence, the
view has been taken that such a lessor may limits its liability to some
extent by agreement or stipulation. 30 (citations omitted)

Thus, we reach the same conclusion which the Court of Appeals arrived at, that is,
that the petition should be dismissed, but on grounds quite different from those
relied upon by the Court of Appeals. In the instant case, the respondent Bank's
exoneration cannot, contrary to the holding of the Court of Appeals, be based on or
proceed from a characterization of the impugned contract as a contract of lease,
but rather on the fact that no competent proof was presented to show that
respondent Bank was aware of the agreement between the petitioner and the
Pugaos to the effect that the certificates of title were withdrawable from the safety
deposit box only upon both parties' joint signatures, and that no evidence was
submitted to reveal that the loss of the certificates of title was due to the fraud or
negligence of the respondent Bank. This in turn flows from this Court's
determination that the contract involved was one of deposit. Since both
the petitioner and the Pugaos agreed that each should have one (1)
renter's key, it was obvious that either of them could ask the Bank for
access to the safety deposit box and, with the use of such key and the
Bank's own guard key, could open the said box, without the other renter
being present.

Since, however, the petitioner cannot be blamed for the filing of the complaint and
no bad faith on its part had been established, the trial court erred in condemning
the petitioner to pay the respondent Bank attorney's fees. To this extent, the
Decision (dispositive portion) of public respondent Court of Appeals must be
modified.

WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for
attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals in
CA-G.R. CV No. 15150. As modified, and subject to the pronouncement We made
above on the nature of the relationship between the parties in a contract of lease of
safety deposit boxes, the dispositive portion of the said Decision is hereby
AFFIRMED and the instant Petition for Review is otherwise DENIED for lack of merit.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 102970 May 13, 1993

LUZAN SIA, petitioner,
vs.
COURT OF APPEALS and SECURITY BANK and TRUST
COMPANY, respondents.

Asuncion Law Offices for petitioner.

Cauton, Banares, Carpio & Associates for private respondent.

DAVIDE, JR., J.:

The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737,

promulgated on 21 August 1991,1 reversing and setting aside the Decision, dated
19 February 1990, 2 of Branch 47 of the Regional Trial Court (RTC) of Manila in Civil
Case No. 87-42601, entitled "LUZAN SIA  vs.  SECURITY BANK and TRUST CO.," is
challenged in this petition for review on certiorari under Rule 45 of the Rules Court.

Civil Case No. 87-42601 is an action for damages arising out of the destruction or
loss of the stamp collection of the plaintiff (petitioner herein) contained in Safety
Deposit Box No. 54 which had been rented from the defendant pursuant to a
contract denominated as a Lease Agreement. 3 Judgment therein was rendered in
favor of the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in

favor of the plaintiff and against the defendant, Security Bank & Trust
Company, ordering the defendant bank to pay the plaintiff the sum of
—

a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as

actual damages;

b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency,

as moral damages; and
 c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's
fees and legal expenses.

The counterclaim set up by the defendant are hereby dismissed for

lack of merit.

No costs.

SO ORDERED.4

The antecedent facts of the present controversy are summarized by the public
respondent in its challenged decision as follows:

The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54
of the defendant bank at its Binondo Branch located at the Fookien
Times Building, Soler St., Binondo, Manila wherein he placed his
collection of stamps. The said safety deposit box leased by the plaintiff
was at the bottom or at the lowest level of the safety deposit boxes of
the defendant bank at its aforesaid Binondo Branch.

During the floods that took place in 1985 and 1986, floodwater
entered into the defendant bank's premises, seeped into the safety
deposit box leased by the plaintiff and caused, according to the
plaintiff, damage to his stamps collection. The defendant bank rejected
the plaintiff's claim for compensation for his damaged stamps
collection, so, the plaintiff instituted an action for damages against the
defendant bank.

The defendant bank denied liability for the damaged stamps

collection of the plaintiff on the basis of the "Rules and
Regulations Governing the Lease of Safe Deposit Boxes" (Exhs.
"A-1", "1-A"), particularly paragraphs 9 and 13, which reads
(sic):

"9. The liability of the Bank by reason of the lease, is limited to the
exercise of the diligence to prevent the opening of the safe by any
person other than the Renter, his authorized agent or legal
representative;

xxx xxx xxx

"13. The Bank is not a depository of the contents of the safe and it has
neither the possession nor the control of the same. The Bank has no
interest whatsoever in said contents, except as herein provided, and it
assumes absolutely no liability in connection therewith."

The defendant bank also contended that its contract with the
plaintiff over safety deposit box No. 54 was one of lease and
 not of deposit and, therefore, governed by the lease agreement
(Exhs. "A", "L") which should be the applicable law; that the
destruction of the plaintiff's stamps collection was due to a calamity
beyond obligation on its part to notify the plaintiff about the
floodwaters that inundated its premises at Binondo branch which
allegedly seeped into the safety deposit box leased to the plaintiff.

The trial court then directed that an ocular inspection on (sic) the
contents of the safety deposit box be conducted, which was done on
December 8, 1988 by its clerk of court in the presence of the parties
and their counsels. A report thereon was then submitted on December
12, 1988 (Records, p. 98-A) and confirmed in open court by both
parties thru counsel during the hearing on the same date (Ibid., p.
102) stating:

"That the Safety Box Deposit No. 54 was opened by both

plaintiff Luzan Sia and the Acting Branch Manager Jimmy
B. Ynion in the presence of the undersigned, plaintiff's
and defendant's counsel. Said Safety Box when opened
contains two albums of different sizes and thickness,
length and width and a tin box with printed word 'Tai Ping
Shiang Roast Pork in pieces with Chinese designs and
character."

Condition of the above-stated Items —

"Both albums are wet, moldy and badly damaged.

1. The first album measures 10 1/8 inches in length, 8 inches in width

and 3/4 in thick. The leaves of the album are attached to every page
and cannot be lifted without destroying it, hence the stamps contained
therein are no longer visible.

2. The second album measure 12 1/2 inches in length, 9 3/4 in width 1

inch thick. Some of its pages can still be lifted. The stamps therein can
still be distinguished but beyond restoration. Others have lost its
original form.

3. The tin box is rusty inside. It contains an album with several pieces
of papers stuck up to the cover of the box. The condition of the album
is the second abovementioned album."5

The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC,

appealed the trial court's decision to the public respondent Court of Appeals. The
appeal was docketed as CA-G.R. CV No. 26737.

In urging the public respondent to reverse the decision of the trial court, SBTC
contended that the latter erred in (a) holding that the lease agreement is a contract
of adhesion; (b) finding that the defendant had failed to exercise the required
diligence expected of a bank in maintaining the safety deposit box; (c) awarding to
the plaintiff actual damages in the amount of P20,000.00, moral damages in the
amount of P100,000.00 and attorney's fees and legal expenses in the amount of
P5,000.00; and (d) dismissing the counterclaim.

On 21 August 1991, the respondent promulgated its decision the dispositive portion
of which reads:

WHEREFORE, the decision appealed from is hereby REVERSED and

instead the appellee's complaint is hereby DISMISSED. The appellant
bank's counterclaim is likewise DISMISSED. No costs. 6

In reversing the trial court's decision and absolving SBTC from liability, the public
respondent found and ruled that:

a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" ) constitutes the
terms and conditions of the contract of lease which the appellee (now petitioner)
had voluntarily and knowingly executed with SBTC;

b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was
not a contract of deposit wherein the bank became a depositary of the subject
stamp collection; hence, as contended by SBTC, the provisions of Book IV, Title XII
of the Civil Code on deposits do not apply;

c) The following provisions of the questioned lease agreement of the safety deposit
box limiting SBTC's liability:

9. The liability of the bank by reason of the lease, is limited to the

exercise of the diligence to prevent the opening of the Safe by any
person other than the Renter, his authorized agent or legal
representative.

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has
neither the possession nor the control of the same. The Bank has no
interest whatsoever in said contents, except as herein provided, and it
assumes absolutely no liability in connection therewith.

are valid since said stipulations are not contrary to law, morals, good customs,
public order or public policy; and

d) there is no concrete evidence to show that SBTC failed to exercise the required
diligence in maintaining the safety deposit box; what was proven was that the
floods of 1985 and 1986, which were beyond the control of SBTC, caused the
damage to the stamp collection; said floods were fortuitous events which SBTC
should not be held liable for since it was not shown to have participated in the
aggravation of the damage to the stamp collection; on the contrary, it offered its
services to secure the assistance of an expert in order to save most of the stamps,
but the appellee refused; appellee must then bear the lose under the principle of
"res perit domino."

Unsuccessful in his bid to have the above decision reconsidered by the public
respondent, 7 petitioner filed the instant petition wherein he contends that:

IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE PART

OF THE RESPONDENT COURT WHEN IT RULED THAT RESPONDENT
SBTC DID NOT FAIL TO EXERCISE THE REQUIRED DILIGENCE IN
MAINTAINING THE SAFETY DEPOSIT BOX OF THE PETITIONER
CONSIDERING THAT SUBSTANTIAL EVIDENCE EXIST (sic) PROVING
THE CONTRARY.

II

THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING

PRIVATE RESPONDENT FROM ANY LIABILITY WHATSOEVER BY
REASON OF THE PROVISIONS OF PARAGRAPHS 9 AND 13 OF THE
AGREEMENT (EXHS. "A" AND "A-1").

III

THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING THE

AWARDS OF THE TRIAL COURT FOR ACTUAL AND MORAL DAMAGES,
INCLUDING ATTORNEY'S FEES AND LEGAL EXPENSES, IN FAVOR OF
THE PETITIONER.8

We subsequently gave due course the petition and required both parties to submit
their respective memoranda, which they complied with. 9

Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise
the required diligence expected of a bank maintaining such safety deposit box . . .
in the light of the environmental circumstance of said safety deposit box after the
floods of 1985 and 1986." He argues that such a conclusion is supported by the
evidence on record, to wit: SBTC was fully cognizant of the exact location of the
safety deposit box in question; it knew that the premises were inundated by
floodwaters in 1985 and 1986 and considering that the bank is guarded twenty-four
(24) hours a day , it is safe to conclude that it was also aware of the inundation of
the premises where the safety deposit box was located; despite such knowledge,
however, it never bothered to inform the petitioner of the flooding or take any
appropriate measures to insure the safety and good maintenance of the safety
deposit box in question.
SBTC does not squarely dispute these facts; rather, it relies on the rule that
findings of facts of the Court of Appeals, when supported by substantial exidence,
are not reviewable on appeal by certiorari. 10

The foregoing rule is, of course, subject to certain exceptions such as when there
exists a disparity between the factual findings and conclusions of the Court of
Appeals and the trial court. 11 Such a disparity obtains in the present case.

As We see it, SBTC's theory, which was upheld by the public respondent, is
that the "Lease Agreement " covering Safe Deposit Box No. 54 (Exhibit "A
and "1") is just that — a contract of lease — and not a contract of deposit,
and that paragraphs 9 and 13 thereof, which expressly limit the bank's
liability as follows:

9. The liability of the bank by reason of the lease, is limited to the

exercise of the diligence to prevent the opening of the Safe by any
person other than the Renter, his autliorized agent or legal
representative;

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has
neither the possession nor the control of the same. The Bank has no
interest whatsoever said contents, except as herein provided, and it
assumes absolutely no liability in connection therewith. 12

are valid and binding upon the parties. In the challenged decision, the public
respondent further avers that even without such a limitation of liability, SBTC
should still be absolved from any responsibility for the damage sustained by the
petitioner as it appears that such damage was occasioned by a fortuitous event and
that the respondent bank was free from any participation in the aggravation of the
injury.

We cannot accept this theory and ratiocination. Consequently, this Court finds the
petition to be impressed with merit.

In the recent case CA Agro-Industrial Development Corp. vs. Court of

Appeals, 13 this Court explicitly rejected the contention that a contract for the use of
a safety deposit box is a contract of lease governed by Title VII, Book IV of the Civil
Code. Nor did We fully subscribe to the view that it is a contract of deposit to be
strictly governed by the Civil Code provision on deposit; 14 it is, as We declared, a
special kind of deposit. The prevailing rule in American jurisprudence — that the
relation between a bank renting out safe deposit boxes and its customer with
respect to the contents of the box is that of a bailor and bailee, the bailment for
hire and mutual benefit 15 — has been adopted in this jurisdiction, thus:

In the context of our laws which authorize banking institutions to rent

out safety deposit boxes, it is clear that in this jurisdiction, the
prevailing rule in the United States has been adopted. Section 72 of
the General Banking Act [R.A. 337, as amended] pertinently provides:

"Sec. 72. In addition to the operations specifically authorized

elsewhere in this Act, banking institutions other than building and loan
associations may perform the following services:

(a) Receive in custody funds, documents, and valuable

objects, and rent safety deposit boxes for the
safequarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a),
(b) and (c) of this section as depositories or as agents. . . ."(emphasis
supplied)

Note that the primary function is still found within the parameters of a
contract of deposit, i.e., the receiving in custody of funds, documents
and other valuable objects for safekeeping. The renting out of the
safety deposit boxes is not independent from, but related to or in
conjunction with, this principal function. A contract of deposit may be
entered into orally or in writing (Art. 1969, Civil Code] and, pursuant
to Article 1306 of the Civil Code, the parties thereto may establish
such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order or public policy. The depositary's responsibility
for the safekeeping of the objects deposited in the case at bar is
governed by Title I, Book IV of the Civil Code. Accordingly, the
depositary would be liable if, in performing its obligation, it is found
guilty of fraud, negligence, delay or contravention of the tenor of the
agreement [Art. 1170, id.]. In the absence of any stipulation
prescribing the degree of diligence required, that of a good father of a
family is to be observed [Art. 1173, id.]. Hence, any stipulation
exempting the depositary from any liability arising from the loss of the
thing deposited on account of fraud, negligence or delay would be void
for being contrary to law and public policy. In the instant case,
petitioner maintains that conditions 13 and l4 of the questioned
contract of lease of the safety deposit box, which read:

"13. The bank is a depositary of the contents of the safe and it has
neither the possession nor control of the same.

"14. The bank has no interest whatsoever in said contents, except as

herein expressly provided, and it assumes absolutely no liability in
connection therewith."
are void as they are contrary to law and public policy. We find
Ourselves in agreement with this proposition for indeed, said
provisions are inconsistent with the respondent Bank's responsibility as
a depositary under Section 72 (a) of the General Banking Act. Both
exempt the latter from any liability except as contemplated in
condition 8 thereof which limits its duty to exercise reasonable
diligence only with respect to who shall be admitted to any rented
safe, to wit:

"8. The Bank shall use due diligence that no unauthorized

person shall be admitted to any rented safe and beyond
this, the Bank will not be responsible for the contents of
any safe rented from it."

Furthermore condition 13 stands on a wrong premise and is contrary

to the actual practice of the Bank. It is not correct to assert that the
Bank has neither the possession nor control of the contents of the box
since in fact, the safety deposit box itself is located in its premises and
is under its absolute control; moreover, the respondent Bank keeps
the guard key to the said box. As stated earlier, renters cannot open
their respective boxes unless the Bank cooperates by presenting and
using this guard key. Clearly then, to the extent above stated, the
foregoing conditions in the contract in question are void and
ineffective. It has been said:

"With respect to property deposited in a safe-deposit box

by a customer of a safe-deposit company, the parties,
since the relation is a contractual one, may by special
contract define their respective duties or provide for
increasing or limiting the liability of the deposit company,
provided such contract is not in violation of law or public
policy. It must clearly appear that there actually was such
a special contract, however, in order to vary the ordinary
obligations implied by law from the relationship of the
parties; liability of the deposit company will not be
enlarged or restricted by words of doubtful meaning. The
company, in renting safe-deposit boxes, cannot exempt
itself from liability for loss of the contents by its own
fraud or negligence or that, of its agents or servants, and
if a provision of the contract may be construed as an
attempt to do so, it will be held ineffective for the
purpose. Although it has been held that the lessor of a
safe-deposit box cannot limit its liability for loss of the
contents thereof through its own negligence, the view has
been taken that such a lessor may limit its liability to
some extent by agreement or stipulation ."[10 AM JUR
2d., 466]. (citations omitted) 16
It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of
Safety Deposit Box in  CA Agro-Industrial Development Corp. are strikingly similar
to condition No. 13 in the instant case. On the other hand, both condition No. 8
in CA Agro-Industrial Development Corp. and condition No. 9 in the present case
limit the scope of the exercise of due diligence by the banks involved to merely
seeing to it that only the renter, his authorized agent or his legal representative
should open or have access to the safety deposit box. In short, in all other
situations, it would seem that SBTC is not bound to exercise diligence of any kind at
all. Assayed in the light of Our aforementioned pronouncements in CA Agro-
lndustrial Development Corp., it is not at all difficult to conclude that both
conditions No. 9 and No. 13 of the "Lease Agreement" covering the safety
deposit box in question (Exhibits "A" and "1") must be stricken down for
being contrary to law and public policy as they are meant to exempt SBTC
from any liability for damage, loss or destruction of the contents of the
safety deposit box which may arise from its own or its agents' fraud,
negligence or delay. Accordingly, SBTC cannot take refuge under the said
conditions.

Public respondent further postulates that SBTC cannot be held responsible for the
destruction or loss of the stamp collection because the flooding was a fortuitous
event and there was no showing of SBTC's participation in the aggravation of the
loss or injury. It states:

Article 1174 of the Civil Code provides:

"Except in cases expressly specified by the law, or when it

is otherwise declared by stipulation, or when the nature
of the obligation requires the assumption of risk, no
person shall be responsible for those events which could
not be foreseen, or which, though foreseen, were
inevitable.'

In its dissertation of the phrase "caso fortuito"  the Enciclopedia

Jurisdicada Española  17 says: "In a legal sense and, consequently, also
in relation to contracts, a "caso fortuito" prevents (sic) 18 the following
essential characteristics: (1) the cause of the unforeseen ands
unexpected occurrence, or of the failure of the debtor to comply with
his obligation, must be independent of the human will; (2) it must be
impossible to foresee the event which constitutes the "caso
fortuito," or if it can be foreseen, it must be impossible to avoid; (3)
the occurrence must be such as to render it impossible for one debtor
to fulfill his obligation in a normal manner; and (4) the obligor must be
free from any participation in the aggravation of the injury resulting to
the creditor." (cited in Servando vs. Phil., Steam Navigation
Co., supra). 19

Here, the unforeseen or unexpected inundating floods were

independent of the will of the appellant bank and the latter was not
 shown to have participated in aggravating damage (sic) to the stamps
collection of the appellee. In fact, the appellant bank offered its
services to secure the assistance of an expert to save most of the then
good stamps but the appelle refused and let (sic) these recoverable
stamps inside the safety deposit box until they were ruined. 20

Both the law and authority cited are clear enough and require no further
elucidation. Unfortunately, however, the public respondent failed to
consider that in the instant case, as correctly held by the trial court, SBTC
was guilty of negligence. The facts constituting negligence are enumerated in
the petition and have been summarized in this  ponencia.  SBTC's
negligence aggravated  the injury or damage to the stamp collection. SBTC was
aware of the floods of 1985 and 1986; it also knew that the floodwaters inundated
the room where Safe Deposit Box No. 54 was located. In view thereof, it should
have lost no time in notifying the petitioner in order that the box could have been
opened to retrieve the stamps, thus saving the same from further deterioration and
loss. In this respect, it failed to exercise the reasonable care and prudence
expected of a good father of a family, thereby becoming a party to the aggravation
of the injury or loss. Accordingly, the aforementioned fourth characteristic of a
fortuitous event is absent Article 1170 of the Civil Code, which reads:

Those who in the performance of their obligation are guilty of fraud,

negligence, or delay, and those who in any manner contravene the
tenor thereof, are liable for damages,

thus comes to the succor of the petitioner. The destruction or loss of the stamp
collection which was, in the language of the trial court, the "product of 27 years of
patience and diligence" 21 caused the petitioner pecuniary loss; hence, he must be
compensated therefor.

We cannot, however, place Our imprimatur on the trial court's award of moral
damages. Since the relationship between the petitioner and SBTC is based on a
contract, either of them may be held liable for moral damages for breach thereof
only if said party had acted fraudulently or in bad faith. 22 There is here no proof of
fraud or bad faith on the part of SBTC.

WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision and
Resolution of the public respondent Court of Appeals of 21 August 1991 and 21
November 1991, respectively, in CA-G.R. CV No. 26737, are hereby SET ASIDE and
the Decision of 19 February 1990 of Branch 47 of the Regional Trial Court of Manila
in Civil Case No. 87-42601 is hereby REINSTATED in full, except as to the award of
moral damages which is hereby set aside.

Costs against the private respondent.

SO ORDERED.

G.R. No. 189998               August 29, 2012

MAKATI SHANGRI-LA HOTEL AND RESORT, INC., Petitioner,
vs.
ELLEN JOHANNE HARPER, JONATHAN CHRISTOPHER HARPER, and
RIGOBERTO GILLERA, Respondents.

DECISION

BERSAMIN, J.:

The hotel owner is liable for civil damages to the surviving heirs of its hotel guest
whom strangers murder inside his hotel room.

The Case

Petitioner, the owner and operator of the 5-star Shangri-La Hotel in Makati City
(Shangri-La Hotel), appeals the decision promulgated on October 21,
2009,1 whereby the Court of Appeals (CA) affirmed with modification the judgment
rendered on October 25, 2005 by the Regional Trial Court (RTC) in Quezon City
holding petitioner liable for damages for the murder of Christian Fredrik Harper, a
Norwegian national.2 Respondents Ellen Johanne Harper and Jonathan Christopher
Harper are the widow and son of Christian Harper, while respondent Rigoberto
Gillera is their authorized representative in the Philippines.

Antecedents

In the first week of November 1999, Christian Harper came to Manila on a business
trip as the Business Development Manager for Asia of ALSTOM Power Norway AS,
an engineering firm with worldwide operations. He checked in at the Shangri-La
Hotel and was billeted at Room 1428. He was due to check out on November 6,
1999. In the early morning of that date, however, he was murdered inside his hotel
room by still unidentified malefactors. He was then 30 years old.

How the crime was discovered was a story in itself. A routine verification call from
the American Express Card Company to cardholder Harper’s residence in Oslo,
Norway (i.e., Bygdoy Terasse 16, 0287 Oslo, Norway) led to the discovery. It
appears that at around 11:00 am of November 6, 1999, a Caucasian male of about
30–32 years in age, 5’4" in height, clad in maroon long sleeves, black denims and
black shoes, entered the Alexis Jewelry Store in Glorietta, Ayala Center, Makati City
and expressed interest in purchasing a Cartier lady’s watch valued at ₱ 320,000.00
with the use of two Mastercard credit cards and an American Express credit card
issued in the name of Harper. But the customer’s difficulty in answering the queries
phoned in by a credit card representative sufficiently aroused the suspicion of
saleslady Anna Liza Lumba (Lumba), who asked for the customer’s passport upon
suggestion of the credit card representative to put the credit cards on hold.
Probably sensing trouble for himself, the customer hurriedly left the store, and left
the three credit cards and the passport behind.
In the meanwhile, Harper’s family in Norway must have called him at his hotel
room to inform him about the attempt to use his American Express card. Not
getting any response from the room, his family requested Raymond Alarcon, the
Duty Manager of the Shangri-La Hotel, to check on Harper’s room. Alarcon and a
security personnel went to Room 1428 at 11:27 a.m., and were shocked to discover
Harper’s lifeless body on the bed.

Col. Rodrigo de Guzman (de Guzman), the hotel’s Security Manager, initially
investigated the murder. In his incident report, he concluded from the several
empty bottles of wine in the trash can and the number of cigarette butts in the
toilet bowl that Harper and his visitors had drunk that much and smoked that many
cigarettes the night before.3

The police investigation actually commenced only upon the arrival in the hotel of
the team of PO3 Carmelito Mendoza4 and SPO4 Roberto Hizon. Mendoza entered
Harper’s room in the company of De Guzman, Alarcon, Gami Holazo (the hotel’s
Executive Assistant Manager), Norge Rosales (the hotel’s Executive Housekeeper),
and Melvin Imperial (a security personnel of the hotel). They found Harper’s body
on the bed covered with a blanket, and only the back of the head could be seen.
Lifting the blanket, Mendoza saw that the victim’s eyes and mouth had been bound
with electrical and packaging tapes, and his hands and feet tied with a white rope.
The body was identified to be that of hotel guest Christian Fredrik Harper.

Mendoza subsequently viewed the closed circuit television (CCTV) tapes, from
which he found that Harper had entered his room at 12:14 a.m. of November 6,
1999, and had been followed into the room at 12:17 a.m. by a woman; that
another person, a Caucasian male, had entered Harper’s room at 2:48 a.m.; that
the woman had left the room at around 5:33 a.m.; and that the Caucasian male
had come out at 5:46 a.m.

On November 10, 1999, SPO1 Ramoncito Ocampo, Jr. interviewed Lumba about the
incident in the Alexis Jewelry Shop. During the interview, Lumba confirmed that the
person who had attempted to purchase the Cartier lady’s watch on November 6,
1999 had been the person whose picture was on the passport issued under the
name of Christian Fredrik Harper and the Caucasian male seen on the CCTV tapes
entering Harper’s hotel room.

Sr. Insp. Danilo Javier of the Criminal Investigation Division of the Makati City
Police reflected in his Progress Report No. 25 that the police investigation showed
that Harper’s passport, credit cards, laptop and an undetermined amount of cash
had been missing from the crime scene; and that he had learned during the follow-
up investigation about an unidentified Caucasian male’s attempt to purchase a
Cartier lady’s watch from the Alexis Jewelry Store in Glorietta, Ayala Center, Makati
City with the use of one of Harper’s credit cards.

On August 30, 2002, respondents commenced this suit in the RTC to recover
various damages from petitioner,6 pertinently alleging:
 xxx

7. The deceased was to check out and leave the hotel on November 6, 1999, but in
the early morning of said date, while he was in his hotel room, he was stabbed to
death by an (sic) still unidentified male who had succeeded to intrude into his
room.

8. The murderer succeeded to trespass into the area of the hotel’s private rooms
area and into the room of the said deceased on account of the hotel’s gross
negligence in providing the most basic security system of its guests, the lack of
which owing to the acts or omissions of its employees was the immediate cause of
the tragic death of said deceased.

xxx

10. Defendant has prided itself to be among the top hotel chains in the East
claiming to provide excellent service, comfort and security for its guests for which
reason ABB Alstom executives and their guests have invariably chosen this hotel to
stay.7

xxx

Ruling of the RTC

On October 25, 2005, the RTC rendered judgment after trial, 8 viz:

WHEREFORE, finding the defendant hotel to be remiss in its duties and thus liable
for the death of Christian Harper, this Court orders the defendant to pay plaintiffs
the amount of:

PhP 43,901,055.00 as and by way of actual and compensatory damages;

PhP 739,075.00 representing the expenses of transporting the remains of

Harper to Oslo, Norway;

PhP 250,000.00 attorney’s fees;

and to pay the cost of suit.

SO ORDERED.

Ruling of the CA

Petitioner appealed, assigning to the RTC the following errors, to wit:

I
THE TRIAL COURT ERRED IN RULING THAT THE PLAINTIFFS-APPELLEES ARE THE
HEIRS OF THE LATE CHRISTIAN HARPER, AS THERE IS NO COMPETENT EVIDENCE
ON RECORD SUPPORTING SUCH RULING.

II

THE TRIAL COURT ERRED IN RULING THAT THE DEFENDANT-

APPELLANT’SNEGLIGENCE WAS THE PROXIMATE CAUSE OF THE DEATH OF MR.
HARPER, OR IN NOT RULING THAT IT WAS MR. CHRISTIAN HARPER’S OWN
NEGLIGENCE WHICH WAS THE SOLE, PROXIMATE CAUSE OF HIS DEATH.

III

THE TRIAL COURT ERRED IN AWARDING TO THE PLAINTIFFS-APPELLEES THE

AMOUNTOF PH₱ 43,901,055.00, REPRESENTING THE ALLEGED LOST EARNING OF
THE LATE CHRISTIAN HARPER, THERE BEING NO COMPETENT PROOF OF THE
EARNING OF MR. HARPER DURING HIS LIFETIME AND OF THE ALLEGATION THAT
THE PLAINTIFFS-APPELLEES ARE MR. HARPER’S HEIRS.

IV

THE TRIAL COURT ERRED IN AWARDING TO THE PLAINTIFFS-APPELLEES THE

AMOUNT OF PH₱ 739,075.00, REPRESENTING THE ALLEGED COST OF
TRANSPORTING THE REMAINS OF MR. CHRISTIAN HARPER TO OSLO, NORWAY,
THERE BEING NO PROOF ON RECORD THAT IT WAS PLAINTIFFS-APPELLEES WHO
PAID FOR SAID COST.

THE TRIAL COURT ERRED IN AWARDING ATTORNEY’S FEES AND COST OF SUIT TO
THE PLAINTIFFS-APPELLEES, THERE BEING NO PROOF ON RECORD SUPPORTING
SUCH AWARD.

On October 21, 2009, the CA affirmed the judgment of the RTC with
modification,9 as follows:

WHEREFORE, the assailed Decision of the Regional Trial Court dated October 25,
2005 is hereby AFFIRMED with MODIFICATION. Accordingly, defendant-
appellant is ordered to pay plaintiffs-appellees the amounts of ₱ 52,078,702.50, as
actual and compensatory damages; ₱ 25,000.00, as temperate damages; ₱
250,000.00, as attorney’s fees; and to pay the costs of the suit.

SO ORDERED.10

Issues
Petitioner still seeks the review of the judgment of the CA, submitting the following
issues for consideration and determination, namely:

I.

WHETHER OR NOT THE PLAINTIFFS-APPELLEES WERE ABLE TO PROVE WITH

COMPETENT EVIDENCE THE AFFIRMATIVE ALLEGATIONS IN THE COMPLAINT THAT
THEY ARE THE WIDOW AND SON OF MR. CHRISTIAN HARPER.

II.

WHETHER OR NOT THE APPELLEES WERE ABLE TO PROVE WITH COMPETENT

EVIDENCE THE AFFIRMATIVE ALLEGATIONS IN THE COMPLAINT THAT THERE WAS
NEGLIGENCE ON THE PART OF THE APPELLANT AND ITS SAID NEGLIGENCE WAS
THE PROXIMATE CAUSE OF THE DEATH OF MR. CHRISTIAN HARPER.

III.

WHETHER OR NOT THE PROXIMATE CAUSE OF THE DEATH OF MR. CHRISTIAN

HARPER WAS HIS OWN NEGLIGENCE.

Ruling

The appeal lacks merit.

I.
Requirements for authentication of documents
establishing respondents’ legal relationship
with the victim as his heirs were complied with

As to the first issue, the CA pertinently held as follows:

The documentary evidence that plaintiffs-appellees offered relative to their heirship

consisted of the following –

1. Exhibit "Q" - Birth Certificate of Jonathan Christopher Harper, son of

Christian Fredrik Harper and Ellen Johanne Harper;

2. Exhibit "Q-1" - Marriage Certificate of Ellen Johanne Clausen and Christian

Fredrik Harper;

3. Exhibit "R" - Birth Certificate of Christian Fredrick Harper, son of

Christopher Shaun Harper and Eva Harper; and

4. Exhibit "R-1" - Certificate from the Oslo Probate Court stating that Ellen
Harper was married to the deceased, Christian Fredrick Harper and listed
 Ellen Harper and Jonathan Christopher Harper as the heirs of Christian
Fredrik Harper.

Defendant-appellant points out that plaintiffs-appellees committed several mistakes

as regards the above documentary exhibits, resultantly making them incompetent
evidence, to wit, (a) none of the plaintiffs-appellees or any of the witnesses who
testified for the plaintiffs gave evidence that Ellen Johanne Harper and Jonathan
Christopher Harper are the widow and son of the deceased Christian Fredrik
Harper; (b) Exhibit "Q" was labeled as Certificate of Marriage in plaintiffs-appellees’
Formal Offer of Evidence, when it appears to be the Birth Certificate of the late
Christian Harper; (c) Exhibit "Q-1" is a translation of the Marriage Certificate of
Ellen Johanne Harper and Christian Fredrik Harper, the original of which was not
produced in court, much less, offered in evidence. Being a mere translation, it
cannot be a competent evidence of the alleged fact that Ellen Johanne Harper is the
widow of Christian Fredrik Harper, pursuant to the Best Evidence Rule. Even
assuming that it is an original Marriage Certificate, it is not a public document that
is admissible without the need of being identified or authenticated on the witness
stand by a witness, as it appears to be a document issued by the Vicar of the Parish
of Ullern and, hence, a private document; (d) Exhibit "R" was labeled as Probate
Court Certificate in plaintiffs-appellees’ Formal Offer of Evidence, when it appears to
be the Birth Certificate of the deceased, Christian Fredrik Harper; and (e) Exhibit
"R-1" is a translation of the supposed Probate Court Certificate, the original of
which was not produced in court, much less, offered in evidence. Being a mere
translation, it is an incompetent evidence of the alleged fact that plaintiffs-appellees
are the heirs of Christian Fredrik Harper, pursuant to the Best Evidence Rule.

Defendant-appellant further adds that Exhibits "Q-1" and "R-1" were not duly
attested by the legal custodians (by the Vicar of the Parish of Ullern for Exhibit "Q-
1" and by the Judge or Clerk of the Probate Court for Exhibit "R-1") as required
under Sections 24 and 25, Rule 132 of the Revised Rules of Court. Likewise, the
said documents are not accompanied by a certificate that such officer has the
custody as also required under Section 24 of Rule 132. Consequently, defendant-
appellant asseverates that Exhibits "Q-1" and "R-1" as private documents, which
were not duly authenticated on the witness stand by a competent witness, are
essentially hearsay in nature that have no probative value. Therefore, it is obvious
that plaintiffs-appellees failed to prove that they are the widow and son of the late
Christian Harper.

Plaintiffs-appellees make the following counter arguments, viz, (a) Exhibit "Q-1",
the Marriage Certificate of Ellen Johanne Harper and Christian Fredrik Harper, was
issued by the Office of the Vicar of Ullern with a statement that "this certificate is a
transcript from the Register of Marriage of Ullern Church." The contents of Exhibit
"Q-1" were translated by the Government of the Kingdom of Norway, through its
authorized translator, into English and authenticated by the Royal Ministry of
Foreign Affairs of Norway, which in turn, was also authenticated by the Consul,
Embassy of the Republic of the Philippines in Stockholm, Sweden; (b) Exhibit "Q",
the Birth Certificate of Jonathan Christopher Harper, was issued and signed by the
Registrar of the Kingdom of Norway, as authenticated by the Royal Ministry of
Foreign Affairs of Norway, whose signature was also authenticated by the Consul,
Embassy of the Republic of the Philippines in Stockholm, Sweden; and (c) Exhibit
"R-1", the Probate Court Certificate was also authenticated by the Royal Ministry of
Foreign Affairs of Norway, whose signature was also authenticated by the Consul,
Embassy of the Republic of the Philippines in Stockholm, Sweden.

They further argue that since Exhibit "Q-1", Marriage Certificate, was issued by the
vicar or parish priest, the legal custodian of parish records, it is considered as an
exception to the hearsay rule. As for Exhibit "R-1", the Probate Court Certificate,
while the document is indeed a translation of the certificate, it is an official
certification, duly confirmed by the Government of the Kingdom of Norway; its
contents were lifted by the Government Authorized Translator from the official
record and thus, a written official act of a foreign sovereign country.

WE rule for plaintiffs-appellees.

The Revised Rules of Court provides that public documents may be evidenced by a
copy attested by the officer having the legal custody of the record. The attestation
must state, in substance, that the copy is a correct copy of the original, or a specific
part thereof, as the case may be. The attestation must be under the official seal of
the attesting officer, if there be any, or if he be the clerk of a court having a seal,
under the seal of such court.

If the record is not kept in the Philippines, the attested copy must be accompanied
with a certificate that such officer has the custody. If the office in which the record
is kept is in a foreign country, the certificate may be made by a secretary of the
embassy or legation, consul general, consul, vice consul, or consular agent or by
any officer in the foreign service of the Philippines stationed in the foreign country
in which the record is kept, and authenticated by the seal of his office.

The documents involved in this case are all kept in Norway. These documents have
been authenticated by the Royal Norwegian Ministry of Foreign Affairs; they bear
the official seal of the Ministry and signature of one, Tanja Sorlie. The documents
are accompanied by an Authentication by the Consul, Embassy of the Republic of
the Philippines in Stockholm, Sweden to the effect that, Tanja Sorlie is duly
authorized to legalize official documents for the Ministry.

Exhibits "Q" and "R" are extracts of the register of births of both Jonathan
Christopher Harper and the late Christian Fredrik Harper, respectively, wherein the
former explicitly declares that Jonathan Christopher is the son of Christian Fredrik
and Ellen Johanne Harper. Said documents bear the signature of the keeper, Y.
Ayse B. Nordal with the official seal of the Office of the Registrar of Oslo, and the
authentication of Tanja Sorlie of the Royal Ministry of Foreign Affairs, Oslo, which
were further authenticated by Philippine Consul Marian Jocelyn R. Tirol. In addition,
the latter states that said documents are the birth certificates of Jonathan
Christopher Harper and Christian Fredrik Harper issued by the Registrar Office of
Oslo, Norway on March 23, 2004.
Exhibits "Q-1", on the other hand, is the Marriage Certificate of Christian Fredrik
Harper and Ellen Johanne Harper issued by the vicar of the Parish of Ullern while
Exhibit "R-1" is the Probate Court Certificate from the Oslo Probate Court, naming
Ellen Johanne Harper and Jonathan Christopher Harper as the heirs of the deceased
Christian Fredrik Harper. The documents are certified true translations into English
of the transcript of the said marriage certificate and the probate court certificate.
They were likewise signed by the authorized government translator of Oslo with the
seal of his office; attested by Tanja Sorlie and further certified by our own Consul.

In view of the foregoing, WE conclude that plaintiffs-appellees had substantially

complied with the requirements set forth under the rules. WE would also like to
stress that plaintiffs-appellees herein are residing overseas and are litigating locally
through their representative. While they are not excused from complying with our
rules, WE must take into account the attendant reality that these overseas litigants
communicate with their representative and counsel via long distance
communication. Add to this is the fact that compliance with the requirements on
attestation and authentication or certification is no easy process and completion
thereof may vary depending on different factors such as the location of the
requesting party from the consulate and the office of the record custodian, the
volume of transactions in said offices and even the mode of sending these
documents to the Philippines. With these circumstances under consideration, to
OUR minds, there is every reason for an equitable and relaxed application of the
rules on the issuance of the required attestation from the custodian of the
documents to plaintiffs-appellees’ situation. Besides, these questioned documents
were duly signed by the officers having custody of the same. 11

Petitioner assails the CA’s ruling that respondents substantially complied with the
rules on the authentication of the proofs of marriage and filiation set by Section 24
and Section 25 of Rule 132 of the Rules of Court when they presented Exhibit Q,
Exhibit Q-1, Exhibit R and Exhibit R-1, because the legal custodian did not duly
attest that Exhibit Q-1 and Exhibit R-1 were the correct copies of the originals on
file, and because no certification accompanied the documents stating that "such
officer has custody of the originals." It contends that respondents did not
competently prove their being Harper’s surviving heirs by reason of such
documents being hearsay and incompetent.

Petitioner’s challenge against respondents’ documentary evidence on marriage and

heirship is not well-taken.

Section 24 and Section 25 of Rule 132 provide:

Section 24. Proof of official record. — The record of public documents referred to in

paragraph (a) of Section 19, when admissible for any purpose, may be evidenced
by an official publication thereof or by a copy attested by the officer having the
legal custody of the record, or by his deputy, and accompanied, if the record is not
kept in the Philippines, with a certificate that such officer has the custody. If the
office in which the record is kept is in a foreign country, the certificate may be
made by a secretary of the embassy or legation, consul general, consul, vice
consul, or consular agent or by any officer in the foreign service of the Philippines
stationed in the foreign country in which the record is kept, and authenticated by
the seal of his office.

Section 25. What attestation of copy must state. — Whenever a copy of a document

or record is attested for the purpose of evidence, the attestation must state, in
substance, that the copy is a correct copy of the original, or a specific part thereof,
as the case may be. The attestation must be under the official seal of the attesting
officer, if there be any, or if he be the clerk of a court having a seal, under the seal
of such court.

Although Exhibit Q,12 Exhibit Q-1,13 Exhibit R14 and Exhibit R-115 were not attested by

the officer having the legal custody of the record or by his deputy in the manner
required in Section 25 of Rule 132, and said documents did not comply with the
requirement under Section 24 of Rule 132 to the effect that if the record was not
kept in the Philippines a certificate of the person having custody must accompany
the copy of the document that was duly attested stating that such person had
custody of the documents, the deviation was not enough reason to reject the utility
of the documents for the purposes they were intended to serve.

Exhibit Q and Exhibit R were extracts from the registry of births of Oslo, Norway
issued on March 23, 2004 and signed by Y. Ayse B. Nordal, Registrar, and
corresponded to respondent Jonathan Christopher Harper and victim Christian
Fredrik Harper, respectively.16 Exhibit Q explicitly stated that Jonathan was the son
of Christian Fredrik Harper and Ellen Johanne Harper, while Exhibit R attested to
the birth of Christian Fredrik Harper on December 4, 1968. Exhibit Q and Exhibit R
were authenticated on March 29, 2004 by the signatures of Tanja Sorlie of the
Royal Ministry of Foreign Affairs of Norway as well as by the official seal of that
office. In turn, Consul Marian Jocelyn R. Tirol of the Philippine Consulate in
Stockholm, Sweden authenticated the signatures of Tanja Sorlie and the official seal
of the Royal Ministry of Foreign Affairs of Norway on Exhibit Q and Exhibit R,
explicitly certifying to the authority of Tanja Sorlie "to legalize official documents for
the Royal Ministry of Foreign Affairs of Norway."17

Exhibit Q-1,18 the Marriage Certificate of Ellen Johanne Clausen Harper and Christian
Fredrik Harper, contained the following data, namely: (a) the parties were married
on June 29, 1996 in Ullern Church; and (b) the certificate was issued by the Office
of the Vicar of Ullern on June 29, 1996.

Exhibit Q-1 was similarly authenticated by the signature of Tanja Sorlie of the Royal
Ministry of Foreign Affairs of Norway, with the official seal of that office. Philippine
Consul Tirol again expressly certified to the capacity of Sorlie "to legalize official
documents for the Royal Ministry of Foreign Affairs of Norway," 19 and further
certified that the document was a true translation into English of a transcript of a
Marriage Certificate issued to Christian Frederik Harper and Ellen Johanne Clausen
by the Vicar of the Parish of Ullern on June 29, 1996.
Exhibit R-1,20 a Probate Court certificate issued by the Oslo Probate Court on
February 18, 2000 through Morten Bolstad, its Senior Executive Officer, was also
authenticated by the signature of Tanja Sorlie and with the official seal of the Royal
Ministry of Foreign Affairs of Norway. As with the other documents, Philippine
Consul Tirol explicitly certified to the capacity of Sorlie "to legalize official
documents for the Royal Ministry of Foreign Affairs of Norway," and further certified
that the document was a true translation into English of the Oslo Probate Court
certificate issued on February 18, 2000 to the effect that Christian Fredrik Harper,
born on December 4, 1968, had reportedly died on November 6, 1999. 21

The Oslo Probate Court certificate recited that both Ellen Johanne Harper and
Christopher S. Harper were Harper’s heirs, to wit:

The above names surviving spouse has accepted responsibility for the commitments
of the deceased in accordance with the provisions of Section 78 of the Probate
Court Act (Norway), and the above substitute guardian has agreed to the private
division of the estate.

The following heir and substitute guardian will undertake the private division of the
estate:

Ellen Johanne Harper

Christopher S. Harper

This probate court certificate relates to the entire estate.

Oslo Probate Court, 18 February 2000.22

The official participation in the authentication process of Tanja Sorlie of the Royal
Ministry of Foreign Affairs of Norway and the attachment of the official seal of that
office on each authentication indicated that Exhibit Q, Exhibit R, Exhibit Q-1 and
Exhibit R-1 were documents of a public nature in Norway, not merely private
documents. It cannot be denied that based on Philippine Consul Tirol’s official
authentication, Tanja Sorlie was "on the date of signing, duly authorized to legalize
official documents for the Royal Ministry of Foreign Affairs of Norway." Without a
showing to the contrary by petitioner, Exhibit Q, Exhibit R, Exhibit Q-1 and Exhibit
R-1 should be presumed to be themselves official documents under Norwegian law,
and admissible as prima facie evidence of the truth of their contents under
Philippine law.

At the minimum, Exhibit Q, Exhibit R, Exhibit Q-1 and Exhibit R-1 substantially met
the requirements of Section 24 and Section 25 of Rule 132 as a condition for their
admission as evidence in default of a showing by petitioner that the authentication
process was tainted with bad faith. Consequently, the objective of ensuring the
authenticity of the documents prior to their admission as evidence was substantially
achieved. In Constantino-David v. Pangandaman-Gania,23 the Court has said that
substantial compliance, by its very nature, is actually inadequate observance of the
requirements of a rule or regulation that are waived under equitable circumstances
in order to facilitate the administration of justice, there being no damage or injury
caused by such flawed compliance.

The Court has further said in Constantino-David v. Pangandaman-Gania that the

focus in every inquiry on whether or not to accept substantial compliance is always
on the presence of equitable conditions to administer justice effectively and
efficiently without damage or injury to the spirit of the legal obligation. 24 There are,
indeed, such equitable conditions attendant here, the foremost of which is that
respondents had gone to great lengths to submit the documents. As the CA
observed, respondents’ compliance with the requirements on attestation and
authentication of the documents had not been easy; they had to contend with many
difficulties (such as the distance of Oslo, their place of residence, from Stockholm,
Sweden, where the Philippine Consulate had its office; the volume of transactions in
the offices concerned; and the safe transmission of the documents to the
Philippines).25 Their submission of the documents should be presumed to be in good
faith because they did so in due course. It would be inequitable if the sincerity of
respondents in obtaining and submitting the documents despite the difficulties was
ignored.

The principle of substantial compliance recognizes that exigencies and situations do

occasionally demand some flexibility in the rigid application of the rules of
procedure and the laws.26 That rules of procedure may be mandatory in form and
application does not forbid a showing of substantial compliance under justifiable
circumstances,27 because substantial compliance does not equate to a disregard of
basic rules. For sure, substantial compliance and strict adherence are not always
incompatible and do not always clash in discord. The power of the Court to suspend
its own rules or to except any particular case from the operation of the rules
whenever the purposes of justice require the suspension cannot be challenged. 28 In
the interest of substantial justice, even procedural rules of the most mandatory
character in terms of compliance are frequently relaxed. Similarly, the procedural
rules should definitely be liberally construed if strict adherence to their letter will
result in absurdity and in manifest injustice, or where the merits of a party’s cause
are apparent and outweigh considerations of non-compliance with certain formal
requirements.29 It is more in accord with justice that a party-litigant is given the
fullest opportunity to establish the merits of his claim or defense than for him to
lose his life, liberty, honor or property on mere technicalities. Truly, the rules of
procedure are intended to promote substantial justice, not to defeat it, and should
not be applied in a very rigid and technical sense.30

Petitioner urges the Court to resolve the apparent conflict between the rulings
in Heirs of Pedro Cabais v. Court of Appeals31  (Cabais) and in Heirs of Ignacio Conti
v. Court of Appeals32  (Conti) establishing filiation through a baptismal certificate. 33

Petitioner’s urging is not warranted, both because there is no conflict between the
rulings in Cabais and Conti, and because neither Cabais nor Conti is relevant herein.

In Cabais, the main issue was whether or not the CA correctly affirmed the decision
of the RTC that had relied mainly on the baptismal certificate of Felipa C. Buesa to
establish the parentage and filiation of Pedro Cabais. The Court held that the
petition was meritorious, stating:

A birth certificate, being a public document, offers prima facie evidence of filiation

and a high degree of proof is needed to overthrow the presumption of truth
contained in such public document. This is pursuant to the rule that entries in
official records made in the performance of his duty by a public officer are prima
facie evidence of the facts therein stated. The evidentiary nature of such document
must, therefore, be sustained in the absence of strong, complete and conclusive
proof of its falsity or nullity.

On the contrary, a baptismal certificate is a private document, which, being

hearsay, is not a conclusive proof of filiation. It does not have the same probative
value as a record of birth, an official or public document. In US v. Evangelista, this
Court held that church registers of births, marriages, and deaths made subsequent
to the promulgation of General Orders No. 68 and the passage of Act No. 190 are
no longer public writings, nor are they kept by duly authorized public officials. Thus,
in this jurisdiction, a certificate of baptism such as the one herein controversy is no
longer regarded with the same evidentiary value as official records of birth.
Moreover, on this score, jurisprudence is consistent and uniform in ruling that the
canonical certificate of baptism is not sufficient to prove recognition. 34

The Court sustained the Cabais petitioners’ stance that the RTC had apparently
erred in relying on the baptismal certificate to establish filiation, stressing the
baptismal certificate’s limited evidentiary value as proof of filiation inferior to that of
a birth certificate; and declaring that the baptismal certificate did not attest to the
veracity of the statements regarding the kinsfolk of the one baptized. Nevertheless,
the Court ultimately ruled that it was respondents’ failure to present the birth
certificate, more than anything else, that lost them their case, stating that: "The
unjustified failure to present the birth certificate instead of the baptismal certificate
now under consideration or to otherwise prove filiation by any other means
recognized by law weigh heavily against respondents." 35

In Conti, the Court affirmed the rulings of the trial court and the CA to the effect
that the Conti respondents were able to prove by preponderance of evidence their
being the collateral heirs of deceased Lourdes Sampayo. The Conti petitioners
disagreed, arguing that baptismal certificates did not prove the filiation of collateral
relatives of the deceased. Agreeing with the CA, the Court said:

We are not persuaded. Altogether, the documentary and testimonial evidence

submitted xxx are competent and adequate proofs that private respondents are
collateral heirs of Lourdes Sampayo.

xxx

Under Art. 172 of the Family Code, the filiation of legitimate children shall be
proved by any other means allowed by the Rules of Court and special laws, in the
absence of a record of birth or a parent’s admission of such legitimate filiation in a
public or private document duly signed by the parent. Such other proof of one’s
filiation may be a baptismal certificate, a judicial admission, a family Bible in which
his name has been entered, common reputation respecting his pedigree, admission
by silence, the testimonies of witnesses and other kinds of proof admissible under
Rule 130 of the Rules of Court. By analogy, this method of proving filiation may
also be utilized in the instant case.

Public documents are the written official acts, or records of the official act of the
sovereign authority, official bodies and tribunals, and public officers, whether of the
Philippines, or a foreign country. The baptismal certificates presented in evidence
by private respondents are public documents. Parish priests continue to be the legal
custodians of the parish records and are authorized to issue true copies, in the form
of certificates, of the entries contained therein.

The admissibility of baptismal certificates offered by Lydia S. Reyes, absent the

testimony of the officiating priest or the official recorder, was settled in People v.
Ritter, citing U.S. v. de Vera (28 Phil. 105 1914, thus:

.... The entries made in the Registry Book may be considered as entries made in
the course of business under Section 43 of Rule 130, which is an exception to the
hearsay rule. The baptisms administered by the church are one of its transactions
in the exercise of ecclesiastical duties and recorded in the book of the church during
this course of its business.

It may be argued that baptismal certificates are evidence only of the administration
of the sacrament, but in this case, there were four (4) baptismal certificates which,
when taken together, uniformly show that Lourdes, Josefina, Remedios and Luis
had the same set of parents, as indicated therein. Corroborated by the undisputed
testimony of Adelaida Sampayo that with the demise of Lourdes and her brothers
Manuel, Luis and sister Remedios, the only sibling left was Josefina Sampayo
Reyes, such baptismal certificates have acquired evidentiary weight to prove
filiation.36

Obviously, Conti did not treat a baptismal certificate, standing alone, as sufficient to

prove filiation; on the contrary, Conti expressly held that a baptismal certificate had
evidentiary value to prove filiation if considered alongside other evidence of
filiation. As such, a baptismal certificate alone is not sufficient to resolve a disputed
filiation.

Unlike Cabais and Conti, this case has respondents presenting several documents,

like the birth certificates of Harper and respondent Jonathan Harper, the marriage
certificate of Harper and Ellen Johanne Harper, and the probate court certificate, all
of which were presumably regarded as public documents under the laws of Norway.
Such documentary evidence sufficed to competently establish the relationship and
filiation under the standards of our Rules of Court.

II
Petitioner was liable due to its own negligence
Petitioner argues that respondents failed to prove its negligence; that Harper’s
own negligence in allowing the killers into his hotel room was the
proximate cause of his own death; and that hotels were not insurers of the
safety of their guests.

The CA resolved petitioner’s arguments thuswise:

Defendant-appellant contends that the pivotal issue is whether or not it had

committed negligence and corollarily, whether its negligence was the immediate
cause of the death of Christian Harper. In its defense, defendant-appellant mainly
avers that it is equipped with adequate security system as follows: (1) keycards or
vingcards for opening the guest rooms, (2) two CCTV monitoring cameras on each
floor of the hotel and (3) roving guards with handheld radios, the number of which
depends on the occupancy rate of the hotel. Likewise, it reiterates that the
proximate cause of Christian Harper’s death was his own negligence in inviting to
his room the two (2) still unidentified suspects.

Plaintiffs-appellees in their Brief refute, in that, the liability of defendant-appellant

is based upon the fact that it was in a better situation than the injured person,
Christian Harper, to foresee and prevent the happening of the injurious occurrence.
They maintain that there is no dispute that even prior to the untimely demise of
Christian Harper, defendant-appellant was duly forewarned of its security lapses as
pointed out by its Chief Security Officer, Col. Rodrigo De Guzman, who
recommended that one roving guard be assigned on each floor of the hotel
considering the length and shape of the corridors. They posit that defendant-
appellant’s inaction constitutes negligence.

This Court finds for plaintiffs-appellees.

As the action is predicated on negligence, the relevant law is Article 2176 of the
Civil Code, which states that –

"Whoever by act or omission causes damage to another, there being fault or

negligence, is obliged to pay for the damage done. Such fault or negligence, if there
was no pre-existing contractual relation between the parties, is called quasi-delict
and is governed by the provisions of this chapter."

Negligence is defined as the omission to do something which a reasonable man,

guided by those considerations which ordinarily regulate the conduct of human
affairs, would do, or the doing of something which a prudent and reasonable man
would not do. The Supreme Court likewise ruled that negligence is want of care
required by the circumstances. It is a relative or comparative, not an absolute, term
and its application depends upon the situation of the parties and the degree of care
and vigilance which the circumstances reasonably require. In determining whether
or not there is negligence on the part of the parties in a given situation,
jurisprudence has laid down the following test: Did defendant, in doing the alleged
negligent act, use that reasonable care and caution which an ordinarily prudent
person would have used in the same situation? If not, the person is guilty of
negligence. The law, in effect, adopts the standard supposed to be supplied by the
imaginary conduct of the discreet pater familias of the Roman law.

The test of negligence is objective. WE measure the act or omission of the

tortfeasor with a perspective as that of an ordinary reasonable person who is
similarly situated. The test, as applied to the extant case, is whether or not
defendant-appellant, under the attendant circumstances, used that reasonable care
and caution which an ordinary reasonable person would have used in the same
situation.

WE rule in the negative.

In finding defendant-appellant remiss in its duty of exercising the required

reasonable care under the circumstances, the court a quo reasoned-out, to wit:

"Of the witnesses presented by plaintiffs to prove its (sic) case, the only one with
competence to testify on the issue of adequacy or inadequacy of security is Col.
Rodrigo De Guzman who was then the Chief Security Officer of defendant hotel for
the year 1999. He is a retired police officer and had vast experience in security
jobs. He was likewise a member of the elite Presidential Security Group.

He testified that upon taking over the job as the chief of the security force of the
hotel, he made an assessment of the security situation. Col. De Guzman was not
satisfied with the security set-up and told the hotel management of his desire to
improve it. In his testimony, De Guzman testified that at the time he took over, he
noticed that there were few guards in the elevated portion of the hotel where the
rooms were located. The existing security scheme then was one guard for 3 or 4
floors. He likewise testified that he recommended to the hotel management that at
least one guard must be assigned per floor especially considering that the hotel has
a long "L-shaped" hallway, such that one cannot see both ends of the hallway. He
further opined that "even one guard in that hallway is not enough because of the
blind portion of the hallway."

On cross-examination, Col. De Guzman testified that the security of the hotel was
adequate at the time the crime occurred because the hotel was not fully booked. He
qualified his testimony on direct in that his recommendation of one guard per floor
is the "ideal" set-up when the hotel is fully-booked.

Be that as it may, it must be noted that Col. De Guzman also testified that the
reason why the hotel management disapproved his recommendation was that the
hotel was not doing well. It is for this reason that the hotel management did not
heed the recommendation of Col. De Guzman, no matter how sound the
recommendation was, and whether the hotel is fully-booked or not. It was a
business judgment call on the part of the defendant.

Plaintiffs anchor its (sic) case on our law on quasi-delicts.

Article 2176. Whoever by act or omission causes damage to another, there being
fault or negligence, is obliged to pay for the damage done. Such fault or negligence,
if there is no pre-existing contractual relation between the parties, is called quasi-
delict.

Liability on the part of the defendant is based upon the fact that he was in a better
situation than the injured person to foresee and prevent the happening of the
injurious occurrence.

There is no dispute that even prior to the untimely demise of Mr. Harper, defendant
was duly forewarned of the security lapses in the hotel. Col. De Guzman was
particularly concerned with the security of the private areas where the guest rooms
are. He wanted not just one roving guard in every three or four floors. He insisted
there must be at least one in each floor considering the length and the shape of the
corridors. The trained eyes of a security officer was (sic) looking at that deadly
scenario resulting from that wide security breach as that which befell Christian
Harper.

The theory of the defense that the malefactor/s was/were known to Harper or
was/were visitors of Harper and that there was a shindig among [the] three
deserves scant consideration.

The NBI Biology Report (Exh. "C" & "D") and the Toxicology Report (Exh. "E") belie
the defense theory of a joyous party between and among Harper and the
unidentified malefactor/s. Based on the Biology Report, Harper was found negative
of prohibited and regulated drugs. The Toxicology Report likewise revealed that the
deceased was negative of the presence of alcohol in his blood.

The defense even suggests that the malefactor/s gained entry into the private room
of Harper either because Harper allowed them entry by giving them access to the
vingcard or because Harper allowed them entry by opening the door for them, the
usual gesture of a room occupant to his visitors.

While defendant’s theory may be true, it is more likely, under the circumstances
obtaining that the malefactor/s gained entry into his room by simply knocking at
Harper’s door and the latter opening it probably thinking it was hotel personnel,
without an inkling that criminal/s could be in the premises.

The latter theory is more attuned to the dictates of reason. If indeed the female
"visitor" is known to or a visitor of Harper, she should have entered the the room
together with Harper. It is quite unlikely that a supposed "visitor" would wait three
minutes to be with a guest when he/she could go with the guest directly to the
room. The interval of three minutes in Harper’s entry and that of the alleged female
visitor belies the "theory of acquaintanceship". It is most likely that the female
"visitor" was the one who opened the door to the male "visitor", undoubtedly, a co-
conspirator.
In any case, the ghastly incident could have been prevented had there been
adequate security in each of the hotel floors. This, coupled with the earlier
recommendation of Col. De Guzman to the hotel management to act on the security
lapses of the hotel, raises the presumption that the crime was foreseeable.

Clearly, defendant’s inaction constitutes negligence or want of the reasonable care

demanded of it in that particular situation.

In a case, the Supreme Court defined negligence as:

The failure to observe for the protection of the interests of another person that
degree of care, precaution and vigilance, which the circumstances justly demand,
whereby such person suffers injury.

Negligence is want of care required by the circumstances. It is a relative or

comparative, not an absolute term, and its application depends upon the situation
of the parties, and the degree of care and vigilance which the circumstances
reasonably impose. Where the danger is great, a high degree of care is necessary.

Moreover, in applying the premises liability rule in the instant case as it is applied in
some jurisdiction (sic) in the United States, it is enough that guests are injured
while inside the hotel premises to make the hotelkeeper liable. With great caution
should the liability of the hotelkeeper be enforced when a guest died inside the
hotel premises.

It also bears stressing that there were prior incidents that occurred in the hotel
which should have forewarned the hotel management of the security lapses of the
hotel. As testified to by Col. De Guzman, "there were ‘minor’ incidents" (loss of
items) before the happening of the instant case.

These "minor" incidents may be of little significance to the hotel, yet relative to the
instant case, it speaks volume. This should have served as a caveat that the hotel
security has lapses.

Makati Shangri-La Hotel, to stress, is a five-star hotel. The "reasonable care" that it
must exercise for the safety and comfort of its guests should be commensurate with
the grade and quality of the accommodation it offers. If there is such a thing as
"five-star hotel security", the guests at Makati Shangri-La surely deserves just that!

When one registers (as) a guest of a hotel, he makes the establishment the
guardian of his life and his personal belongings during his stay. It is a standard
procedure of the management of the hotel to screen visitors who call on their
guests at their rooms. The murder of Harper could have been avoided had the
security guards of the Shangri-La Hotel in Makati dutifully observed this standard
procedure."

WE concur.
Well settled is the doctrine that "the findings of fact by the trial court are accorded
great respect by appellate courts and should not be disturbed on appeal unless the
trial court has overlooked, ignored, or disregarded some fact or circumstances of
sufficient weight or significance which, if considered, would alter the situation."
After a conscientious sifting of the records, defendant-appellant fails to convince US
to deviate from this doctrine.

It could be gleaned from findings of the trial court that its conclusion of negligence
on the part of defendant-appellant is grounded mainly on the latter’s inadequate
hotel security, more particularly on the failure to deploy sufficient security
personnel or roving guards at the time the ghastly incident happened.

A review of the testimony of Col. De Guzman reveals that on direct examination he

testified that at the time he assumed his position as Chief Security Officer of
defendant-appellant, during the early part of 1999 to the early part of 2000, he
noticed that some of the floors of the hotel were being guarded by a few guards, for
instance, 3 or 4 floors by one guard only on a roving manner. He then made a
recommendation that the ideal-set up for an effective security should be one guard
for every floor, considering that the hotel is L-shaped and the ends of the hallways
cannot be seen. At the time he made the recommendation, the same was denied,
but it was later on considered and approved on December 1999 because of the
Centennial Celebration.

On cross-examination, Col. De Guzman confirmed that after he took over as Chief

Security Officer, the number of security guards was increased during the first part
of December or about the last week of November, and before the incident
happened, the security was adequate. He also qualified that as to his direct
testimony on "ideal-set up", he was referring to one guard for every floor if the
hotel is fully booked. At the time he made his recommendation in the early part of
1999, it was disapproved as the hotel was not doing well and it was not fully
booked so the existing security was adequate enough. He further explained that his
advice was observed only in the late November 1999 or the early part of December
1999.

It could be inferred from the foregoing declarations of the former Chief Security
Officer of defendant-appellant that the latter was negligent in providing adequate
security due its guests. With confidence, it was repeatedly claimed by defendant-
appellant that it is a five-star hotel. Unfortunately, the record failed to show that at
the time of the death of Christian Harper, it was exercising reasonable care to
protect its guests from harm and danger by providing sufficient security
commensurate to it being one of the finest hotels in the country. In so concluding,
WE are reminded of the Supreme Court’s enunciation that the hotel business like
the common carrier’s business is imbued with public interest. Catering to the public,
hotelkeepers are bound to provide not only lodging for hotel guests but also
security to their persons and belongings. The twin duty constitutes the essence of
the business.
It is clear from the testimony of Col. De Guzman that his recommendation was
initially denied due to the fact that the business was then not doing well. The "one
guard, one floor" recommended policy, although ideal when the hotel is fully-
booked, was observed only later in November 1999 or in the early part of
December 1999, or needless to state, after the murder of Christian Harper. The
apparent security lapses of defendant-appellant were further shown when the male
culprit who entered Christian Harper’s room was never checked by any of the
guards when he came inside the hotel. As per interview conducted by the initial
investigator, PO3 Cornelio Valiente to the guards, they admitted that nobody know
that said man entered the hotel and it was only through the monitor that they
became aware of his entry. It was even evidenced by the CCTV that before he
walked to the room of the late Christian Harper, said male suspect even looked at
the monitoring camera. Such act of the man showing wariness, added to the fact
that his entry to the hotel was unnoticed, at an unholy hour, should have aroused
suspicion on the part of the roving guard in the said floor, had there been any.
Unluckily for Christian Harper, there was none at that time.

Proximate cause is defined as that cause, which, in natural and continuous

sequence, unbroken by any efficient intervening cause, produces, the injury, and
without which the result would not have occurred. More comprehensively,
proximate cause is that cause acting first and producing the injury, either
immediately or by setting other events in motion, all constituting a natural and
continuous chain of events, each having a close causal connection with its
immediate predecessor, the final event in the chain immediately effecting the injury
as natural and probable result of the cause which first acted, under such
circumstances that the person responsible for the first event should, as an
ordinarily prudent and intelligent person, have reasonable ground to expect at the
moment of his act or default that an injury to some person might probably result
therefrom.

Defendant-appellant’s contention that it was Christian Harper’s own negligence in

allowing the malefactors to his room that was the proximate cause of his death, is
untenable. To reiterate, defendant-appellant is engaged in a business imbued with
public interest, ergo, it is bound to provide adequate security to its guests. As
previously discussed, defendant-appellant failed to exercise such reasonable care
expected of it under the circumstances. Such negligence is the proximate cause
which set the chain of events that led to the eventual demise of its guest. Had there
been reasonable security precautions, the same could have saved Christian Harper
from a brutal death.

The Court concurs entirely with the findings and conclusions of the CA, which the
Court regards to be thorough and supported by the records of the trial. Moreover,
the Court cannot now review and pass upon the uniform findings of negligence by
the CA and the RTC because doing so would require the Court to delve into and
revisit the factual bases for the finding of negligence, something fully contrary to its
character as not a trier of facts. In that regard, the factual findings of the trial court
that are supported by the evidence on record, especially when affirmed by the CA,
are conclusive on the Court.37 Consequently, the Court will not review unless there
are exceptional circumstances for doing so, such as the following:

(a) When the findings are grounded entirely on speculation, surmises or

conjectures;

(b) When the inference made is manifestly mistaken, absurd or impossible;

(c) When there is grave abuse of discretion;

(d) When the judgment is based on a misapprehension of facts;

(e) When the findings of facts are conflicting;

(f) When in making its findings the Court of Appeals went beyond the issues of the
case, or its findings are contrary to the admissions of both the appellant and the
appellee;

(g) When the findings are contrary to the trial court;

(h) When the findings are conclusions without citation of specific evidence on which
they are based;

(i) When the facts set forth in the petition as well as in the petitioner’s main and
reply briefs are not disputed by the respondent;

(j) When the findings of fact are premised on the supposed absence of evidence
and contradicted by the evidence on record; and

(k) When the Court of Appeals manifestly overlooked certain relevant facts not
disputed by the parties, which, if properly considered, would justify a different
conclusion.38

None of the exceptional circumstances obtains herein. Accordingly, the Court

cannot depart from or disturb the factual findings on negligence of petitioner made
by both the RTC and the CA.39

Even so, the Court agrees with the CA that petitioner failed to provide the basic and
adequate security measures expected of a five-star hotel; and that its omission was
the proximate cause of Harper’s death.

The testimony of Col. De Guzman revealed that the management practice prior to
the murder of Harper had been to deploy only one security or roving guard for
every three or four floors of the building; that such ratio had not been enough
considering the L-shape configuration of the hotel that rendered the hallways not
visible from one or the other end; and that he had recommended to management
to post a guard for each floor, but his recommendation had been disapproved
because the hotel "was not doing well" at that particular time.40

Probably realizing that his testimony had weakened petitioner’s position in the case,
Col. De Guzman soon clarified on cross-examination that petitioner had seen no
need at the time of the incident to augment the number of guards due to the hotel
being then only half-booked. Here is how his testimony went:

ATTY MOLINA:

I just forgot one more point, Your Honor please. Was there ever a time, Mr.
Witness, that your recommendation to post a guard in every floor ever considered
and approved by the hotel?

A: Yes, Sir.

Q: When was this?

A: That was on December 1999 because of the Centennial Celebration when the
hotel accepted so many guests wherein most of the rooms were fully booked and I
recommended that all the hallways should be guarded by one guard. 41

xxx

ATTY COSICO:

Q: So at that time that you made your recommendation, the hotel was half-filled.

A: Maybe.

Q: And even if the hotel is half-filled, your recommendation is that each floor shall
be maintained by one security guard per floors?

A: Yes sir.

Q: Would you agree with me that even if the hotel is half-filled, there is no need to
increase the guards because there were only few customers?

A: I think so.

Q: So you will agree with me that each floor should be maintained by one security
guard if the rooms are filled up or occupied?

A: Yes sir.

Q: Now, you even testified that from January 1999 to November 1999 thereof, only
minor incidents were involved?
A: Yes sir.

Q: So it would be correct to say that the security at that time in February was
adequate?

A: I believe so.

Q: Even up to November when the incident happened for that same reason,
security was adequate?

A: Yes, before the incident.

Q: Now, you testified on direct that the hotel posted one guard each floor?

A: Yes sir.

Q: And it was your own recommendation?

A: Yes, because we are expecting that the hotel will be filled up.

Q: In fact, the hotel was fully booked?

A: Yes sir.42

Petitioner would thereby have the Court believe that Col. De Guzman’s initial
recommendation had been rebuffed due to the hotel being only half-booked; that
there had been no urgency to adopt a one-guard-per-floor policy because security
had been adequate at that time; and that he actually meant by his statement that
"the hotel was not doing well" that the hotel was only half-booked.

We are not convinced.

The hotel business is imbued with public interest. Catering to the public,
hotelkeepers are bound to provide not only lodging for their guests but also security
to the persons and belongings of their guests. The twin duty constitutes the
essence of the business.43 Applying by analogy Article 2000,44 Article 200145 and
Article 200246 of the Civil Code (all of which concerned the hotelkeepers’ degree of
care and responsibility as to the personal effects of their guests), we hold that there
is much greater reason to apply the same if not greater degree of care and
responsibility when the lives and personal safety of their guests are involved.
Otherwise, the hotelkeepers would simply stand idly by as strangers have
unrestricted access to all the hotel rooms on the pretense of being visitors of the
guests, without being held liable should anything untoward befall the unwary
guests. That would be absurd, something that no good law would ever envision.

In fine, the Court sees no reversible-error on the part of the CA.

WHEREFORE, the Court AFFIRMS the judgment of the Court of Appeals;
and ORDERS petitioner to pay the costs of suit.

SO ORDERED.

G.R. No. 126780             February 17, 2005

YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA

PAYAM, petitioners,
vs.
THE COURT OF APPEALS and MAURICE McLOUGHLIN, respondents.

DECISION

TINGA, J.:

The primary question of interest before this Court is the only legal issue in the case:
It is whether a hotel may evade liability for the loss of items left with it for
safekeeping by its guests, by having these guests execute written waivers
holding the establishment or its employees free from blame for such loss in
light of Article 2003 of the Civil Code which voids such waivers.

Before this Court is a Rule 45 petition for review of the Decision1 dated 19 October

1995 of the Court of Appeals which affirmed the Decision2 dated 16 December 1991
of the Regional Trial Court (RTC), Branch 13, of Manila, finding YHT Realty
Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez (Lainez) and Anicia
Payam (Payam) jointly and solidarily liable for damages in an action filed
by Maurice McLoughlin (McLoughlin) for the loss of his American and
Australian dollars deposited in the safety deposit box of Tropicana
Copacabana Apartment Hotel, owned and operated by YHT Realty
Corporation.

The factual backdrop of the case follow.

Private respondent McLoughlin, an Australian businessman-philanthropist, used to

stay at Sheraton Hotel during his trips to the Philippines prior to 1984 when he met
Tan. Tan befriended McLoughlin by showing him around, introducing him to
important people, accompanying him in visiting impoverished street children and
assisting him in buying gifts for the children and in distributing the same to
charitable institutions for poor children. Tan convinced McLoughlin to transfer from
Sheraton Hotel to Tropicana where Lainez, Payam and Danilo Lopez were
employed. Lopez served as manager of the hotel while Lainez and Payam had
custody of the keys for the safety deposit boxes of Tropicana. Tan took care of
McLoughlin's booking at the Tropicana where he started staying during his trips to
the Philippines from December 1984 to September 1987. 3

On 30 October 1987, McLoughlin arrived from Australia and registered with

Tropicana. He rented a safety deposit box as it was his practice to rent a safety
deposit box every time he registered at Tropicana in previous trips. As a tourist,
McLoughlin was aware of the procedure observed by Tropicana relative to its safety
deposit boxes. The safety deposit box could only be opened through the use of two
keys, one of which is given to the registered guest, and the other remaining in the
possession of the management of the hotel. When a registered guest wished to
open his safety deposit box, he alone could personally request the management
who then would assign one of its employees to accompany the guest and assist him
in opening the safety deposit box with the two keys.4

McLoughlin allegedly placed the following in his safety deposit box: Fifteen
Thousand US Dollars (US$15,000.00) which he placed in two envelopes, one
envelope containing Ten Thousand US Dollars (US$10,000.00) and the other
envelope Five Thousand US Dollars (US$5,000.00); Ten Thousand Australian
Dollars (AUS$10,000.00) which he also placed in another envelope; two (2) other
envelopes containing letters and credit cards; two (2) bankbooks; and a checkbook,
arranged side by side inside the safety deposit box.5

On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin

opened his safety deposit box with his key and with the key of the management
and took therefrom the envelope containing Five Thousand US Dollars
(US$5,000.00), the envelope containing Ten Thousand Australian Dollars
(AUS$10,000.00), his passports and his credit cards. 6 McLoughlin left the other
items in the box as he did not check out of his room at the Tropicana during his
short visit to Hongkong. When he arrived in Hongkong, he opened the envelope
which contained Five Thousand US Dollars (US$5,000.00) and discovered upon
counting that only Three Thousand US Dollars (US$3,000.00) were enclosed
therein.7 Since he had no idea whether somebody else had tampered with his safety
deposit box, he thought that it was just a result of bad accounting since he did not
spend anything from that envelope.8

After returning to Manila, he checked out of Tropicana on 18 December 1987 and

left for Australia. When he arrived in Australia, he discovered that the envelope with
Ten Thousand US Dollars (US$10,000.00) was short of Five Thousand US Dollars
(US$5,000). He also noticed that the jewelry which he bought in Hongkong and
stored in the safety deposit box upon his return to Tropicana was likewise missing,
except for a diamond bracelet.9

When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if
some money and/or jewelry which he had lost were found and returned to her or to
the management. However, Lainez told him that no one in the hotel found such
things and none were turned over to the management. He again registered at
Tropicana and rented a safety deposit box. He placed therein one (1) envelope
containing Fifteen Thousand US Dollars (US$15,000.00), another envelope
containing Ten Thousand Australian Dollars (AUS$10,000.00) and other envelopes
containing his traveling papers/documents. On 16 April 1988, McLoughlin requested
Lainez and Payam to open his safety deposit box. He noticed that in the envelope
containing Fifteen Thousand US Dollars (US$15,000.00), Two Thousand US Dollars
(US$2,000.00) were missing and in the envelope previously containing Ten
Thousand Australian Dollars (AUS$10,000.00), Four Thousand Five Hundred
Australian Dollars (AUS$4,500.00) were missing.10

When McLoughlin discovered the loss, he immediately confronted Lainez and Payam
who admitted that Tan opened the safety deposit box with the key assigned to
him.11 McLoughlin went up to his room where Tan was staying and confronted her.
Tan admitted that she had stolen McLoughlin's key and was able to open the safety
deposit box with the assistance of Lopez, Payam and Lainez.12 Lopez also told
McLoughlin that Tan stole the key assigned to McLoughlin while the latter was
asleep.13

McLoughlin requested the management for an investigation of the incident. Lopez

got in touch with Tan and arranged for a meeting with the police and McLoughlin.
When the police did not arrive, Lopez and Tan went to the room of McLoughlin at
Tropicana and thereat, Lopez wrote on a piece of paper a promissory note dated 21
April 1988. The promissory note reads as follows:

I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and

US$2,000.00 or its equivalent in Philippine currency on or before May 5, 1988. 14

Lopez requested Tan to sign the promissory note which the latter did and Lopez
also signed as a witness. Despite the execution of promissory note by Tan,
McLoughlin insisted that it must be the hotel who must assume responsibility
for the loss he suffered. However, Lopez refused to accept the
responsibility relying on the conditions for renting the safety deposit box
entitled "Undertaking For the Use Of Safety Deposit Box,"15 specifically
paragraphs (2) and (4) thereof, to wit:

2. To release and hold free and blameless TROPICANA APARTMENT HOTEL

from any liability arising from any loss in the contents and/or use of the
said deposit box for any cause whatsoever, including but not limited to the
presentation or use thereof by any other person should the key be lost;

...

4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT
HOTEL upon giving up the use of the box.16

On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers
as to the validity of the abovementioned stipulations. They opined that the
stipulations are void for being violative of universal hotel practices and customs. His
lawyers prepared a letter dated 30 May 1988 which was signed by McLoughlin and
sent to President Corazon Aquino.17 The Office of the President referred the letter to
the Department of Justice (DOJ) which forwarded the same to the Western Police
District (WPD).18

After receiving a copy of the indorsement in Australia, McLoughlin came to the

Philippines and registered again as a hotel guest of Tropicana. McLoughlin went to
Malacaňang to follow up on his letter but he was instructed to go to the DOJ. The
DOJ directed him to proceed to the WPD for documentation. But McLoughlin went
back to Australia as he had an urgent business matter to attend to.

For several times, McLoughlin left for Australia to attend to his business and came
back to the Philippines to follow up on his letter to the President but he failed to
obtain any concrete assistance.19

McLoughlin left again for Australia and upon his return to the Philippines on 25
August 1989 to pursue his claims against petitioners, the WPD conducted an
investigation which resulted in the preparation of an affidavit which was forwarded
to the Manila City Fiscal's Office. Said affidavit became the basis of preliminary
investigation. However, McLoughlin left again for Australia without receiving the
notice of the hearing on 24 November 1989. Thus, the case at the Fiscal's Office
was dismissed for failure to prosecute. Mcloughlin requested the reinstatement of
the criminal charge for theft. In the meantime, McLoughlin and his lawyers wrote
letters of demand to those having responsibility to pay the damage. Then he left
again for Australia.

Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate,
Manila. Meetings were held between McLoughlin and his lawyer which resulted to
the filing of a complaint for damages on 3 December 1990 against YHT Realty
Corporation, Lopez, Lainez, Payam and Tan (defendants) for the loss of
McLoughlin's money which was discovered on 16 April 1988. After filing the
complaint, McLoughlin left again for Australia to attend to an urgent business
matter. Tan and Lopez, however, were not served with summons, and trial
proceeded with only Lainez, Payam and YHT Realty Corporation as defendants.

After defendants had filed their Pre-Trial Brief admitting that they had previously
allowed and assisted Tan to open the safety deposit box, McLoughlin filed
an Amended/Supplemental Complaint20 dated 10 June 1991 which included another
incident of loss of money and jewelry in the safety deposit box rented by
McLoughlin in the same hotel which took place prior to 16 April 1988. 21 The trial
court admitted the Amended/Supplemental Complaint.

During the trial of the case, McLoughlin had been in and out of the country to
attend to urgent business in Australia, and while staying in the Philippines to attend
the hearing, he incurred expenses for hotel bills, airfare and other transportation
expenses, long distance calls to Australia, Meralco power expenses, and expenses
for food and maintenance, among others.22

After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the
dispositive portion of which reads:

WHEREFORE, above premises considered, judgment is hereby rendered by this

Court in favor of plaintiff and against the defendants, to wit:
 1. Ordering defendants, jointly and severally, to pay plaintiff the sum of
US$11,400.00 or its equivalent in Philippine Currency of ₱342,000.00, more
or less, and the sum of AUS$4,500.00 or its equivalent in Philippine Currency
of ₱99,000.00, or a total of ₱441,000.00, more or less, with 12% interest
from April 16 1988 until said amount has been paid to plaintiff (Item 1,
Exhibit CC);

2. Ordering defendants, jointly and severally to pay plaintiff the sum of

₱3,674,238.00 as actual and consequential damages arising from the loss of
his Australian and American dollars and jewelries complained against and in
prosecuting his claim and rights administratively and judicially (Items II, III,
IV, V, VI, VII, VIII, and IX, Exh. "CC");

3. Ordering defendants, jointly and severally, to pay plaintiff the sum of

₱500,000.00 as moral damages (Item X, Exh. "CC");

4. Ordering defendants, jointly and severally, to pay plaintiff the sum of

₱350,000.00 as exemplary damages (Item XI, Exh. "CC");

5. And ordering defendants, jointly and severally, to pay litigation expenses

in the sum of ₱200,000.00 (Item XII, Exh. "CC");

6. Ordering defendants, jointly and severally, to pay plaintiff the sum of

₱200,000.00 as attorney's fees, and a fee of ₱3,000.00 for every
appearance; and

7. Plus costs of suit.

SO ORDERED.23

The trial court found that McLoughlin's allegations as to the fact of loss and as to
the amount of money he lost were sufficiently shown by his direct and
straightforward manner of testifying in court and found him to be credible and
worthy of belief as it was established that McLoughlin's money, kept in Tropicana's
safety deposit box, was taken by Tan without McLoughlin's consent. The taking was
effected through the use of the master key which was in the possession of the
management. Payam and Lainez allowed Tan to use the master key without
authority from McLoughlin. The trial court added that if McLoughlin had not lost his
dollars, he would not have gone through the trouble and personal inconvenience of
seeking aid and assistance from the Office of the President, DOJ, police authorities
and the City Fiscal's Office in his desire to recover his losses from the hotel
management and Tan.24

As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth
approximately One Thousand Two Hundred US Dollars (US$1,200.00) which
allegedly occurred during his stay at Tropicana previous to 4 April 1988, no claim
was made by McLoughlin for such losses in his complaint dated 21 November 1990
because he was not sure how they were lost and who the responsible persons were.
But considering the admission of the defendants in their pre-trial brief that on three
previous occasions they allowed Tan to open the box, the trial court opined that it
was logical and reasonable to presume that his personal assets consisting of Seven
Thousand US Dollars (US$7,000.00) and jewelry were taken by Tan from the safety
deposit box without McLoughlin's consent through the cooperation of Payam and
Lainez.25

The trial court also found that defendants acted with gross negligence in
the performance and exercise of their duties and obligations as innkeepers
and were therefore liable to answer for the losses incurred by
McLoughlin.26

Moreover, the trial court ruled that paragraphs (2) and (4) of the
"Undertaking For The Use Of Safety Deposit Box" are not valid for being
contrary to the express mandate of Article 2003 of the New Civil Code and
against public policy.27 Thus, there being fraud or wanton conduct on the
part of defendants, they should be responsible for all damages which may
be attributed to the non-performance of their contractual obligations. 28

The Court of Appeals affirmed the disquisitions made by the lower court except as
to the amount of damages awarded. The decretal text of the appellate court's
decision reads:

THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED but

modified as follows:

The appellants are directed jointly and severally to pay the plaintiff/appellee the
following amounts:

1) ₱153,200.00 representing the peso equivalent of US$2,000.00 and

AUS$4,500.00;

2) ₱308,880.80, representing the peso value for the air fares from Sidney
[sic] to Manila and back for a total of eleven (11) trips;

3) One-half of ₱336,207.05 or ₱168,103.52 representing payment to

Tropicana Apartment Hotel;

4) One-half of ₱152,683.57 or ₱76,341.785 representing payment to Echelon

Tower;

5) One-half of ₱179,863.20 or ₱89,931.60 for the taxi xxx transportation

from the residence to Sidney [sic] Airport and from MIA to the hotel here in
Manila, for the eleven (11) trips;

6) One-half of ₱7,801.94 or ₱3,900.97 representing Meralco power expenses;

 7) One-half of ₱356,400.00 or ₱178,000.00 representing expenses for food
and maintenance;

8) ₱50,000.00 for moral damages;

9) ₱10,000.00 as exemplary damages; and

10) ₱200,000 representing attorney's fees.

With costs.

SO ORDERED.29

Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this
appeal by certiorari.

Petitioners submit for resolution by this Court the following issues: (a) whether the
appellate court's conclusion on the alleged prior existence and subsequent loss of
the subject money and jewelry is supported by the evidence on record; (b) whether
the finding of gross negligence on the part of petitioners in the performance of their
duties as innkeepers is supported by the evidence on record; (c) whether the
"Undertaking For The Use of Safety Deposit Box" admittedly executed by private
respondent is null and void; and (d) whether the damages awarded to private
respondent, as well as the amounts thereof, are proper under the circumstances. 30

The petition is devoid of merit.

It is worthy of note that the thrust of Rule 45 is the resolution only of questions of
law and any peripheral factual question addressed to this Court is beyond the
bounds of this mode of review.

Petitioners point out that the evidence on record is insufficient to prove the fact of
prior existence of the dollars and the jewelry which had been lost while deposited in
the safety deposit boxes of Tropicana, the basis of the trial court and the appellate
court being the sole testimony of McLoughlin as to the contents thereof. Likewise,
petitioners dispute the finding of gross negligence on their part as not supported by
the evidence on record.

We are not persuaded.l^vvphi1.net We adhere to the findings of the trial court as

affirmed by the appellate court that the fact of loss was established by the credible
testimony in open court by McLoughlin. Such findings are factual and therefore
beyond the ambit of the present petition.1awphi1.nét

The trial court had the occasion to observe the demeanor of McLoughlin while
testifying which reflected the veracity of the facts testified to by him. On this score,
we give full credence to the appreciation of testimonial evidence by the trial court
especially if what is at issue is the credibility of the witness. The oft-repeated
principle is that where the credibility of a witness is an issue, the established rule is
that great respect is accorded to the evaluation of the credibility of witnesses by the
trial court.31 The trial court is in the best position to assess the credibility of
witnesses and their testimonies because of its unique opportunity to observe the
witnesses firsthand and note their demeanor, conduct and attitude under grilling
examination.32

We are also not impressed by petitioners' argument that the finding of gross
negligence by the lower court as affirmed by the appellate court is not supported by
evidence. The evidence reveals that two keys are required to open the safety
deposit boxes of Tropicana. One key is assigned to the guest while the other
remains in the possession of the management. If the guest desires to open his
safety deposit box, he must request the management for the other key to open the
same. In other words, the guest alone cannot open the safety deposit box
without the assistance of the management or its employees. With more
reason that access to the safety deposit box should be denied if the one
requesting for the opening of the safety deposit box is a stranger. Thus, in
case of loss of any item deposited in the safety deposit box, it is inevitable
to conclude that the management had at least a hand in the consummation
of the taking, unless the reason for the loss is force majeure.

Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana,
had custody of the master key of the management when the loss took place. In
fact, they even admitted that they assisted Tan on three separate occasions in
opening McLoughlin's safety deposit box.33 This only proves that Tropicana had prior
knowledge that a person aside from the registered guest had access to the safety
deposit box. Yet the management failed to notify McLoughlin of the incident and
waited for him to discover the taking before it disclosed the matter to him.
Therefore, Tropicana should be held responsible for the damage suffered by
McLoughlin by reason of the negligence of its employees.

The management should have guarded against the occurrence of this incident
considering that Payam admitted in open court that she assisted Tan three times in
opening the safety deposit box of McLoughlin at around 6:30 A.M. to 7:30 A.M.
while the latter was still asleep.34 In light of the circumstances surrounding this
case, it is undeniable that without the acquiescence of the employees of Tropicana
to the opening of the safety deposit box, the loss of McLoughlin's money could and
should have been avoided.

The management contends, however, that McLoughlin, by his act, made its
employees believe that Tan was his spouse for she was always with him
most of the time. The evidence on record, however, is bereft of any showing that
McLoughlin introduced Tan to the management as his wife. Such an inference from
the act of McLoughlin will not exculpate the petitioners from liability in the absence
of any showing that he made the management believe that Tan was his wife or was
duly authorized to have access to the safety deposit box. Mere close companionship
and intimacy are not enough to warrant such conclusion considering that what is
involved in the instant case is the very safety of McLoughlin's deposit. If only
petitioners exercised due diligence in taking care of McLoughlin's safety deposit
box, they should have confronted him as to his relationship with Tan considering
that the latter had been observed opening McLoughlin's safety deposit box a
number of times at the early hours of the morning. Tan's acts should have
prompted the management to investigate her relationship with McLoughlin. Then,
petitioners would have exercised due diligence required of them. Failure to do so
warrants the conclusion that the management had been remiss in complying with
the obligations imposed upon hotel-keepers under the law.

Under Article 1170 of the New Civil Code, those who, in the performance of their
obligations, are guilty of negligence, are liable for damages. As to who shall bear
the burden of paying damages, Article 2180, paragraph (4) of the same Code
provides that the owners and managers of an establishment or enterprise are
likewise responsible for damages caused by their employees in the service of the
branches in which the latter are employed or on the occasion of their functions.
Also, this Court has ruled that if an employee is found negligent, it is presumed that
the employer was negligent in selecting and/or supervising him for it is hard for the
victim to prove the negligence of such employer.35 Thus, given the fact that the loss
of McLoughlin's money was consummated through the negligence of Tropicana's
employees in allowing Tan to open the safety deposit box without the guest's
consent, both the assisting employees and YHT Realty Corporation itself, as owner
and operator of Tropicana, should be held solidarily liable pursuant to Article
2193.36

The issue of whether the "Undertaking For The Use of Safety Deposit Box"
executed by McLoughlin is tainted with nullity presents a legal question
appropriate for resolution in this petition. Notably, both the trial court and
the appellate court found the same to be null and void. We find no reason
to reverse their common conclusion. Article 2003 is controlling, thus:

Art. 2003. The hotel-keeper cannot free himself from responsibility by

posting notices to the effect that he is not liable for the articles brought by
the guest. Any stipulation between the hotel-keeper and the guest
whereby the responsibility of the former as set forth in Articles 1998 to
200137 is suppressed or diminished shall be void.

Article 2003 was incorporated in the New Civil Code as an expression of

public policy precisely to apply to situations such as that presented in this
case. The hotel business like the common carrier's business is imbued with
public interest. Catering to the public, hotelkeepers are bound to provide not only
lodging for hotel guests and security to their persons and belongings. The twin duty
constitutes the essence of the business. The law in turn does not allow such duty to
the public to be negated or diluted by any contrary stipulation in so-called
"undertakings" that ordinarily appear in prepared forms imposed by hotel keepers
on guests for their signature.

In an early case,38 the Court of Appeals through its then Presiding Justice (later
Associate Justice of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers or
innkeeper liable for the effects of their guests, it is not necessary that they be
actually delivered to the innkeepers or their employees. It is enough that such
effects are within the hotel or inn.39 With greater reason should the liability of the
hotelkeeper be enforced when the missing items are taken without the guest's
knowledge and consent from a safety deposit box provided by the hotel itself, as in
this case.

Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of
the New Civil Code for they allow Tropicana to be released from liability arising from
any loss in the contents and/or use of the safety deposit box for any cause
whatsoever.40 Evidently, the undertaking was intended to bar any claim against
Tropicana for any loss of the contents of the safety deposit box whether or not
negligence was incurred by Tropicana or its employees. The New Civil Code is
explicit that the responsibility of the hotel-keeper shall extend to loss of, or injury
to, the personal property of the guests even if caused by servants or employees of
the keepers of hotels or inns as well as by strangers, except as it may proceed from
any force majeure.41 It is the loss through force majeure that may spare the hotel-
keeper from liability. In the case at bar, there is no showing that the act of the thief
or robber was done with the use of arms or through an irresistible force to qualify
the same as force majeure.42

Petitioners likewise anchor their defense on Article 2002 43 which exempts the hotel-
keeper from liability if the loss is due to the acts of his guest, his family, or visitors.
Even a cursory reading of the provision would lead us to reject petitioners'
contention. The justification they raise would render nugatory the public interest
sought to be protected by the provision. What if the negligence of the employer or
its employees facilitated the consummation of a crime committed by the registered
guest's relatives or visitor? Should the law exculpate the hotel from liability since
the loss was due to the act of the visitor of the registered guest of the hotel?
Hence, this provision presupposes that the hotel-keeper is not guilty of concurrent
negligence or has not contributed in any degree to the occurrence of the loss. A
depositary is not responsible for the loss of goods by theft, unless his actionable
negligence contributes to the loss.44

In the case at bar, the responsibility of securing the safety deposit box was shared
not only by the guest himself but also by the management since two keys are
necessary to open the safety deposit box. Without the assistance of hotel
employees, the loss would not have occurred. Thus, Tropicana was guilty of
concurrent negligence in allowing Tan, who was not the registered guest, to open
the safety deposit box of McLoughlin, even assuming that the latter was also guilty
of negligence in allowing another person to use his key. To rule otherwise would
result in undermining the safety of the safety deposit boxes in hotels for the
management will be given imprimatur to allow any person, under the pretense of
being a family member or a visitor of the guest, to have access to the safety
deposit box without fear of any liability that will attach thereafter in case such
person turns out to be a complete stranger. This will allow the hotel to evade
responsibility for any liability incurred by its employees in conspiracy with the
guest's relatives and visitors.
Petitioners contend that McLoughlin's case was mounted on the theory of contract,
but the trial court and the appellate court upheld the grant of the claims of the
latter on the basis of tort.45 There is nothing anomalous in how the lower courts
decided the controversy for this Court has pronounced a jurisprudential rule that
tort liability can exist even if there are already contractual relations. The act that
breaks the contract may also be tort.46

As to damages awarded to McLoughlin, we see no reason to modify the amounts

awarded by the appellate court for the same were based on facts and law. It is
within the province of lower courts to settle factual issues such as the proper
amount of damages awarded and such finding is binding upon this Court especially
if sufficiently proven by evidence and not unconscionable or excessive. Thus, the
appellate court correctly awarded McLoughlin Two Thousand US Dollars
(US$2,000.00) and Four Thousand Five Hundred Australian dollars (AUS$4,500.00)
or their peso equivalent at the time of payment,47 being the amounts duly proven
by evidence.48 The alleged loss that took place prior to 16 April 1988 was not
considered since the amounts alleged to have been taken were not sufficiently
established by evidence. The appellate court also correctly awarded the sum of
₱308,880.80, representing the peso value for the air fares from Sydney to Manila
and back for a total of eleven (11) trips;49 one-half of ₱336,207.05 or ₱168,103.52
representing payment to Tropicana;50 one-half of ₱152,683.57 or ₱76,341.785
representing payment to Echelon Tower;51 one-half of ₱179,863.20 or ₱89,931.60
for the taxi or transportation expenses from McLoughlin's residence to Sydney
Airport and from MIA to the hotel here in Manila, for the eleven (11) trips; 52 one-
half of ₱7,801.94 or ₱3,900.97 representing Meralco power expenses; 53 one-half of
₱356,400.00 or ₱178,000.00 representing expenses for food and maintenance. 54

The amount of ₱50,000.00 for moral damages is reasonable. Although trial courts
are given discretion to determine the amount of moral damages, the appellate court
may modify or change the amount awarded when it is palpably and scandalously
excessive.l^vvphi1.net Moral damages are not intended to enrich a complainant at
the expense of a defendant.l^vvphi1.net They are awarded only to enable the
injured party to obtain means, diversion or amusements that will serve to alleviate
the moral suffering he has undergone, by reason of defendants' culpable action. 55

The awards of ₱10,000.00 as exemplary damages and ₱200,000.00 representing

attorney's fees are likewise sustained.

WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals

dated 19 October 1995 is hereby AFFIRMED. Petitioners are directed, jointly and
severally, to pay private respondent the following amounts:

(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of

payment;

(2) ₱308,880.80, representing the peso value for the air fares from Sydney
to Manila and back for a total of eleven (11) trips;
 (3) One-half of ₱336,207.05 or ₱168,103.52 representing payment to
Tropicana Copacabana Apartment Hotel;

(4) One-half of ₱152,683.57 or ₱76,341.785 representing payment to

Echelon Tower;

(5) One-half of ₱179,863.20 or ₱89,931.60 for the taxi or transportation

expense from McLoughlin's residence to Sydney Airport and from MIA to the
hotel here in Manila, for the eleven (11) trips;

(6) One-half of ₱7,801.94 or ₱3,900.97 representing Meralco power

expenses;

(7) One-half of ₱356,400.00 or ₱178,200.00 representing expenses for food

and maintenance;

(8) ₱50,000.00 for moral damages;

(9) ₱10,000.00 as exemplary damages; and

(10) ₱200,000 representing attorney's fees.

With costs.

SO ORDERED.