THIRD DIVISION

G.R. No. L-66826 August 19, 1988

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. THE INTERMEDIATE APPELLATE

COURT and ZSHORNACK respondents.

Pacis & Reyes Law Office for petitioner.

Ernesto T. Zshornack, Jr. for private respondent.

CORTES, J.:

The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust Company of the Philippines [hereafter
referred to as "COMTRUST."] In 1980, the Bank of the Philippine Islands (hereafter referred to as BPI absorbed COMTRUST through a
corporate merger, and was substituted as party to the case.

Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instance of
Rizal — Caloocan City a complaint against COMTRUST alleging four causes of action. Except for
the third cause of action, the CFI ruled in favor of Zshornack. The bank appealed to the
Intermediate Appellate Court which modified the CFI decision absolving the bank from liability on
the fourth cause of action. The pertinent portions of the judgment, as modified, read:

IN VIEW OF THE FOREGOING, the Court renders judgment as follows:

1. Ordering the defendant COMTRUST to restore to the dollar savings account of

plaintiff (No. 25-4109) the amount of U.S $1,000.00 as of October 27, 1975 to earn
interest together with the remaining balance of the said account at the rate fixed by
the bank for dollar deposits under Central Bank Circular 343;

2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S.

$3,000.00 immediately upon the finality of this decision, without interest for the
reason that the said amount was merely held in custody for safekeeping, but was
not actually deposited with the defendant COMTRUST because being cash
currency, it cannot by law be deposited with plaintiffs dollar account and
defendant's only obligation is to return the same to plaintiff upon demand;

xxx xxx xxx

5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as

damages in the concept of litigation expenses and attorney's fees suffered by
plaintiff as a result of the failure of the defendant bank to restore to his (plaintiffs)
account the amount of U.S. $1,000.00 and to return to him (plaintiff) the U.S.
$3,000.00 cash left for safekeeping.

Costs against defendant COMTRUST.

SO ORDERED. [Rollo, pp. 47-48.]

Undaunted, the bank comes to this Court praying that it be totally absolved from any liability to
Zshornack. The latter not having appealed the Court of Appeals decision, the issues facing this
Court are limited to the bank's liability with regard to the first and second causes of action and its
liability for damages.

1. We first consider the first cause of action, On the dates material to this case, Rizaldy Zshornack
and his wife, Shirley Gorospe, maintained in COMTRUST, Quezon City Branch, a dollar savings
account and a peso current account.

On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia,
Assistant Branch Manager of COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon
in the amount of $1,000.00. In the application, Garcia indicated that the amount was to be charged
to Dollar Savings Acct. No. 25-4109, the savings account of the Zshornacks; the charges for
commission, documentary stamp tax and others totalling P17.46 were to be charged to Current
Acct. No. 210465-29, again, the current account of the Zshornacks. There was no indication of the
name of the purchaser of the dollar draft.
On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia, issued
a check payable to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on the Chase
Manhattan Bank, New York, with an indication that it was to be charged to Dollar Savings Acct.
No. 25-4109.

When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an
explanation from the bank. In answer, COMTRUST claimed that the peso value of the withdrawal
was given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy, on October 27, 1975 when he
(Ernesto) encashed with COMTRUST a cashier's check for P8,450.00 issued by the Manila
Banking Corporation payable to Ernesto.

Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both
the trial court and the Appellate Court on the first cause of action. Petitioner must be held liable for
the unauthorized withdrawal of US$1,000.00 from private respondent's dollar account.

In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the
bank has adopted inconsistent theories. First, it still maintains that the peso value of the amount
withdrawn was given to Atty. Ernesto Zshornack, Jr. when the latter encashed the Manilabank
Cashier's Check. At the same time, the bank claims that the withdrawal was made pursuant to an
agreement where Zshornack allegedly authorized the bank to withdraw from his dollar savings
account such amount which, when converted to pesos, would be needed to fund his peso current
account. If indeed the peso equivalent of the amount withdrawn from the dollar account was
credited to the peso current account, why did the bank still have to pay Ernesto?

At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank
has not shown how the transaction involving the cashier's check is related to the transaction
involving the dollar draft in favor of Dizon financed by the withdrawal from Rizaldy's dollar account.
The two transactions appear entirely independent of each other. Moreover, Ernesto Zshornack, Jr.,
possesses a personality distinct and separate from Rizaldy Zshornack. Payment made to Ernesto
cannot be considered payment to Rizaldy.

As to the second explanation, even if we assume that there was such an agreement, the evidence
do not show that the withdrawal was made pursuant to it. Instead, the record reveals that the
amount withdrawn was used to finance a dollar draft in favor of Leovigilda D. Dizon, and not to
fund the current account of the Zshornacks. There is no proof whatsoever that peso Current
Account No. 210-465-29 was ever credited with the peso equivalent of the US$1,000.00 withdrawn
on October 27, 1975 from Dollar Savings Account No. 25-4109.

2. As for the second cause of action, the complaint filed with the trial court alleged that on
December 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia, US
$3,000.00 cash (popularly known as greenbacks) for safekeeping, and that the agreement was
embodied in a document, a copy of which was attached to and made part of the complaint. The
document reads:

Makati Cable Address:

Philippines "COMTRUST"

COMMERCIAL BANK AND TRUST COMPANY

of the Philippines

Quezon City Branch

Decembe
r 8, 1975

MR. RIZALDY T. ZSHORNACK

&/OR MRS SHIRLEY E. ZSHORNACK

Sir/Madam:
 We acknowledged (sic) having received from you today the sum of
US DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for
safekeeping.

Recei
ved
by:

(Sgd.
)
VIRG
ILIO
V.
GAR
CIA

It was also alleged in the complaint that despite demands, the bank refused to return the money.

In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current
account at prevailing conversion rates.

It must be emphasized that COMTRUST did not deny specifically under oath the authenticity and
due execution of the above instrument.

During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank
US $3,000 for safekeeping. When he requested the return of the money on May 10, 1976,
COMTRUST explained that the sum was disposed of in this manner: US$2,000.00 was sold on
December 29, 1975 and the peso proceeds amounting to P14,920.00 were deposited to
Zshornack's current account per deposit slip accomplished by Garcia; the remaining US$1,000.00
was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00 were deposited to
his current account per deposit slip also accomplished by Garcia.

Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at
prevailing conversion rates, BPI now posits another ground to defeat private respondent's claim. It
now argues that the contract embodied in the document is the contract of depositum (as defined in
Article 1962, New Civil Code), which banks do not enter into. The bank alleges that Garcia
exceeded his powers when he entered into the transaction. Hence, it is claimed, the bank cannot
be liable under the contract, and the obligation is purely personal to Garcia.

Before we go into the nature of the contract entered into, an important point which arises on the
pleadings, must be considered.

The second cause of action is based on a document purporting to be signed by COMTRUST, a

copy of which document was attached to the complaint. In short, the second cause of action was
based on an actionable document. It was therefore incumbent upon the bank to specifically deny
under oath the due execution of the document, as prescribed under Rule 8, Section 8, if it desired:
(1) to question the authority of Garcia to bind the corporation; and (2) to deny its capacity to enter
into such contract. [See, E.B. Merchant v. International Banking Corporation, 6 Phil. 314 (1906).]
No sworn answer denying the due execution of the document in question, or questioning the
authority of Garcia to bind the bank, or denying the bank's capacity to enter into the contract, was
ever filed. Hence, the bank is deemed to have admitted not only Garcia's authority, but also the
bank's power, to enter into the contract in question.

In the past, this Court had occasion to explain the reason behind this procedural requirement.

The reason for the rule enunciated in the foregoing authorities will, we think, be
readily appreciated. In dealing with corporations the public at large is bound to rely
to a large extent upon outward appearances. If a man is found acting for a
corporation with the external indicia of authority, any person, not having notice of
want of authority, may usually rely upon those appearances; and if it be found that
the directors had permitted the agent to exercise that authority and thereby held
him out as a person competent to bind the corporation, or had acquiesced in a
contract and retained the benefit supposed to have been conferred by it, the
corporation will be bound, notwithstanding the actual authority may never have
been granted
 ... Whether a particular officer actually possesses the authority which he assumes
to exercise is frequently known to very few, and the proof of it usually is not readily
accessible to the stranger who deals with the corporation on the faith of the
ostensible authority exercised by some of the corporate officers. It is therefore
reasonable, in a case where an officer of a corporation has made a contract in its
name, that the corporation should be required, if it denies his authority, to state
such defense in its answer. By this means the plaintiff is apprised of the fact that
the agent's authority is contested; and he is given an opportunity to adduce
evidence showing either that the authority existed or that the contract was ratified
and approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634, 645- 646
(1918).]

Petitioner's argument must also be rejected for another reason. The practical effect of absolving a
corporation from liability every time an officer enters into a contract which is beyond corporate
powers, even without the proper allegation or proof that the corporation has not authorized nor
ratified the officer's act, is to cast corporations in so perfect a mold that transgressions and wrongs
by such artificial beings become impossible [Bissell v. Michigan Southern and N.I.R. Cos 22 N.Y
258 (1860).] "To say that a corporation has no right to do unauthorized acts is only to put forth a
very plain truism but to say that such bodies have no power or capacity to err is to impute to them
an excellence which does not belong to any created existence with which we are acquainted. The
distinction between power and right is no more to be lost sight of in respect to artificial than in
respect to natural persons." [Ibid.]

Having determined that Garcia's act of entering into the contract binds the corporation, we now
determine the correct nature of the contract, and its legal consequences, including its
enforceability.

The document which embodies the contract states that the US$3,000.00 was received by the bank
for safekeeping. The subsequent acts of the parties also show that the intent of the parties was
really for the bank to safely keep the dollars and to return it to Zshornack at a later time, Thus,
Zshornack demanded the return of the money on May 10, 1976, or over five months later.

The above arrangement is that contract defined under Article 1962, New Civil Code, which reads:

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 of 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.

Note that the object of the contract between Zshornack and COMTRUST was foreign exchange.
Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and
Foreign Exchange Transactions, promulgated on December 9, 1949, which was in force at the
time the parties entered into the transaction involved in this case. The circular provides:

xxx xxx xxx

2. Transactions in the assets described below and all dealings in them of whatever
nature, including, where applicable their exportation and importation, shall NOT be
effected, except with respect to deposit accounts included in sub-paragraphs (b)
and (c) of this paragraph, when such deposit accounts are owned by and in the
name of, banks.

(a) Any and all assets, provided they are held through, in, or with
banks or banking institutions located in the Philippines,
including money, checks, drafts, bullions bank drafts, deposit
accounts (demand, time and savings), all debts, indebtedness or
obligations, financial brokers and investment houses, notes,
debentures, stocks, bonds, coupons, bank acceptances,
mortgages, pledges, liens or other rights in the nature of
security, expressed in foreign currencies, or if payable abroad,
irrespective of the currency in which they are expressed, and
belonging to any person, firm, partnership, association, branch
office, agency, company or other unincorporated body or
corporation residing or located within the Philippines;
 (b) Any and all assets of the kinds included and/or described in
subparagraph (a) above, whether or not held through, in, or with
banks or banking institutions, and existent within the Philippines,
which belong to any person, firm, partnership, association, branch
office, agency, company or other unincorporated body or
corporation not residing or located within the Philippines;

(c) Any and all assets existent within the Philippines including
money, checks, drafts, bullions, bank drafts, all debts, indebtedness
or obligations, financial securities commonly dealt in by bankers,
brokers and investment houses, notes, debentures, stock, bonds,
coupons, bank acceptances, mortgages, pledges, liens or other
rights in the nature of security expressed in foreign currencies, or if
payable abroad, irrespective of the currency in which they are
expressed, and belonging to any person, firm, partnership,
association, branch office, agency, company or other
unincorporated body or corporation residing or located within the
Philippines.

xxx xxx xxx

4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by

those authorized to deal in foreign exchange. All receipts of foreign exchange by
any person, firm, partnership, association, branch office, agency, company or other
unincorporated body or corporation shall be sold to the authorized agents of the
Central Bank by the recipients within one business day following the receipt of
such foreign exchange. Any person, firm, partnership, association, branch office,
agency, company or other unincorporated body or corporation, residing or located
within the Philippines, who acquires on and after the date of this Circular foreign
exchange shall not, unless licensed by the Central Bank, dispose of such foreign
exchange in whole or in part, nor receive less than its full value, nor delay taking
ownership thereof except as such delay is customary; Provided, further, That within
one day upon taking ownership, or receiving payment, of foreign exchange the
aforementioned persons and entities shall sell such foreign exchange to
designated agents of the Central Bank.

xxx xxx xxx

8. Strict observance of the provisions of this Circular is enjoined; and any person,
firm or corporation, foreign or domestic, who being bound to the observance
thereof, or of such other rules, regulations or directives as may hereafter be issued
in implementation of this Circular, shall fail or refuse to comply with, or abide by, or
shall violate the same, shall be subject to the penal sanctions provided in the
Central Bank Act.

xxx xxx xxx

Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations
on Foreign Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippine
residents only. Section 6 provides:

SEC. 6. All receipts of foreign exchange by any resident person, firm, company or

corporation shall be sold to authorized agents of the Central Bank by the recipients
within one business day following the receipt of such foreign exchange.
Any resident person, firm, company or corporation residing or located within the
Philippines, who acquires foreign exchange shall not, unless authorized by the
Central Bank, dispose of such foreign exchange in whole or in part, nor receive
less than its full value, nor delay taking ownership thereof except as such delay is
customary; Provided, That, within one business day upon taking ownership or
receiving payment of foreign exchange the aforementioned persons and entities
shall sell such foreign exchange to the authorized agents of the Central Bank.

As earlier stated, the document and the subsequent acts of the parties show that they intended the
bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his
complaint that he is a Philippine resident. The parties did not intended to sell the US dollars to the
Central Bank within one business day from receipt. Otherwise, the contract of depositum would
never have been entered into at all.

Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one
business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must
be considered as one which falls under the general class of prohibited transactions. Hence,
pursuant to Article 5 of the Civil Code, it is void, having been executed against the provisions of a
mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action
against the other. "When the nullity proceeds from the illegality of the cause or object of the
contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall
have no cause of action against each other. . ." [Art. 1411, New Civil Code.] The only remedy is
one on behalf of the State to prosecute the parties for violating the law.

We thus rule that Zshornack cannot recover under the second cause of action.

3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of
litigation expenses and attorney's fees to be reasonable. The award is sustained.

WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to
the dollar savings account of private respondent the amount of US$1,000.00 as of October 27,
1975 to earn interest at the rate fixed by the bank for dollar savings deposits. Petitioner is further
ordered to pay private respondent the amount of P8,000.00 as damages. The other causes of
action of private respondent are ordered dismissed.

SO ORDERED.

FIRST DIVISION

[G.R. No. 6913. November 21, 1913.]

THE ROMAN CATHOLIC BISHOP OF JARO, Plaintiff-Appellee, v. GREGORIO DE

LA PEÑA, administrator of the estate of Father Agustin de la
Peña, Defendant-Appellant.

J. Lopez Vito for Appellant.

Arroyo & Horrilleno for Appellee.

SYLLABUS

1. TRUST FUNDS; LIABILITY OF TRUSTEE. — One who, having in his possession trust
funds, deposits them in his personal account in a bank and mixes them with his own
funds, does not thereby assume an obligation different from that under which he
would have lain in such deposit had not been made; not does he thereby become
liable to repay the money at all hazards; and where such funds are taken from the
bank by fuerza mayor, he is relieved from responsibility in relation thereto.

2. ID.; ID.; ENGLISH AND AMERICAN LAW OF TRUSTS NOT APPLICABLE. — That
branch of the law, known in England and America as the law of trusts, has no
counterpart in the Roman law and none under the Spanish law.

DECISION
MORELAND, J. :

This is an appeal by the defendant from a judgment of the Court of First Instance of
Iloilo, awarding to the plaintiff the sum of P6,641, with interest at the legal rate from
the beginning of the action.

It is established in this case that the plaintiff is the trustee of a charitable bequest
made for the construction of a leper hospital and that Father Agustin de la Peña was
the duly authorized representative of the plaintiff to receive the legacy. The defendant
is the administrator of the estate of Father De la Peña.
In the year 1898 the books of Father de la Peña, as trustee, shoed that he had on
hand as such trustee the sum of P6,641, collected by him for the charitable purposes
aforesaid. In the same year he deposited in his personal account P19,000 in the
Hongkong and Shanghai Bank at Iloilo. Shortly thereafter and during the war of the
revolution, Father dela Peña was arrested by the military authorities as a political
prisoner, and while thus detained made an order on said bank in favor of the United
States Army officer under whose charge he then was so for the sum thus deposited in
said bank. The arrest of Father de la Peña and the confiscation of the funds in the
bank were the result of the claim of the military authorities that he was an insurgent
and that the funds thus deposited had been collected by him for revolutionary
purposes. The money was taken from the bank by the military authorities by virtue of
such order, was confiscated and turned over to the Government.

While there is considerable dispute in the case over the question whether the P6,641
of trust funds was included in the P19,000 deposited as aforesaid, nevertheless, a
careful examination of the case leads us to the conclusion that said trust funds were a
part of the funds deposited and which were removed and confiscated by the military
authorities of the United States.

Branch of the law know in England and America as the law of the trusts had no exact
counterpart in the Roman law and is more has none under the Spanish law, In this
jurisdiction, therefore, Father dela Peña’s liability is determined by those portions of
the Civil Code which relate to obligations (Book 4, Title 1.)

Although the Civil Code states that a "person obliged to give something is also bound
to preserve it with the diligence pertaining to a good father of a family" (art. 1094), it
also provides, following the principle of the Roman law, major casus est, cui humana
infirmitas resistere non potest, that "no one shall be liable for events which could not
be foreseen, or which having been foreseen were inevitable, with the exceptions of
the cases expressly mentioned in the law of those in which the obligation so
declares." (Art. 1105).

By placing the money in the bank and mixing it with his personal funds De la Peña did
not thereby assume an obligation different from that under which he would have lain
if such deposit had not been made, nor did he thereby make himself liable to repay
the money at all hazards. If the money had been forcibly take from his pocket or from
his house by the military forces of one of the combatants during a state of war, it is
clear that under the provisions of the Civil Code he would have been exempt from
responsibility. The fact that he placed the trust fund in the bank is his personal
account does not add to his responsibility. Such deposit did not make him a debtor
who must respond at all the hazards.

We do not enter into a discussion for the purpose of determining whether he acted
more or less negligently by depositing the money in the bank than he would if had left
it in his home: or whether he was more or less negligent by depositing the money in
his personal account than he would have been if had deposited it in a separate
account as trustee. We regard such discussion as substantially fruitless, inasmuch as
the precise question is not one of the negligence. There was no law prohibiting him
from depositing it as he did and there was no law which changed his responsibility by
reason of the deposit, While it may be true that one who is under obligation to do or
give a things is in duty bound, when he sees events approaching the results of which
will be dangerous to his trust, to take all reasonable means and measures to escape
or, if unavoidable, to temper the effects of those events, we do not been constrained
to hold that, in choosing between two means equally legal, he is culpably negligent in
selecting negligent in selecting one whereas he would not have been if he had
selected the other.

The court, therefore, finds and declares that the money which is the subject matter of
this action was deposited by Father De la Peña in the Hongkong and Shanghai
Banking Corporation of Iloilo; that said money was forcibly taken from the bank by
the armed forces of the United States during the war of the insurrection; and that
said Father De la Peña was not responsible for its loss.

The judgment is therefore reversed, and it is decreed that the plaintiff shall take
nothing by his complaint.

[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]  dated October 21, 2003
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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]  the Court of Appeals dismissed petitioner's
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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]  A deposit may be constituted
cralaw

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]  On the basis of such item, the trial court concluded that the
cralaw

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]  Thus, having indemnified CRISPA for the
cralaw

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]
 This is not so in the case at bar. For, we have ourselves reviewed the records and find
cralaw

no justification to deviate from the trial court's findings.

WHEREFORE, petition is hereby DENIED DUE COURSE.

THIRD DIVISION

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 complaint  for 2

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,  respondent Bank alleged that the petitioner has no cause of
3

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  adverse to the petitioner on 8 December 1986, the
5

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 reconsideration  having been denied, petitioner appealed from the adverse decision
7

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,  respondent Court affirmed the appealed decision
9

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   which provides:
10

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   — which held that the owner of the property loses his
11

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."   The appellate court was quick to add, however, that
12

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   having been denied in the respondent Court's Resolution of 28
14

August 1989,   petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to
15

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.   Accordingly, it is claimed that the respondent Bank is liable for the loss of the
16

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   which is supposed to

17

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   which states that a contract for the rental of a
18

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;   the contract in the case at bar is a special kind of deposit.
19

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   on this point do not apply. Neither could
20

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.   This is just the prevailing view because:
21

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.   (citations omitted)
22

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   pertinently provides:
23

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. . . .   (emphasis supplied)
24
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   and, pursuant to
25

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.   In the absence of any stipulation
26

prescribing the degree of diligence required, that of a good father of a family is to be

observed.   Hence, any stipulation exempting the depositary from any liability arising from the loss
27

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.   (citations omitted)
30

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.

SECOND DIVISION

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 Decision dated 19 October 1995 of the
1 

Court of Appeals which affirmed the Decision dated 16 December 1991 of the Regional Trial Court
2 

(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. McLoughlin left the other
6 

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. Since he had no idea whether somebody else had
7 

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. McLoughlin went
11 

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. Lopez also told McLoughlin that Tan stole the key assigned to McLoughlin
12 

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," specifically paragraphs (2) and (4) thereof, to wit:
15 

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. The Office of the President referred
17 

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
Complaint dated 10 June 1991 which included another incident of loss of money and jewelry in
20 

the safety deposit box rented by McLoughlin in the same hotel which took place prior to 16 April
1988. The trial court admitted the Amended/Supplemental Complaint.
21 

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. Thus, there being fraud or wanton conduct on the part
27 

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.  We adhere to the findings of the trial court as affirmed by the appellate
l^vvphi1.net

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. The trial court is in the best position to assess the credibility of witnesses and their
31 

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. This only
33 

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. In light of the
34 

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. Thus, given the fact that the loss of McLoughlin's money was consummated
35 

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 2001 is 37 

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, the Court of Appeals through its then Presiding Justice (later Associate Justice of
38 

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. With greater reason should
39 

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. Evidently, the undertaking was
40 

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. It is the loss through force 41 

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 which exempts the hotel-keeper from
43 

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. There 45 

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, being the amounts duly proven by evidence. The alleged loss that took
47  48 

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; one-half of ₱336,207.05 or ₱168,103.52 representing payment to
49 

Tropicana; one-half of ₱152,683.57 or ₱76,341.785 representing payment to Echelon

50 

Tower; one-half of ₱179,863.20 or ₱89,931.60 for the taxi or transportation expenses from
51 

McLoughlin's residence to Sydney Airport and from MIA to the hotel here in Manila, for the eleven
(11) trips; one-half of ₱7,801.94 or ₱3,900.97 representing Meralco power expenses; one-half of
52  53 

₱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.  Moral damages are not l^vvphi1.net

intended to enrich a complainant at the expense of a defendant.  They are awarded only to enable
l^vvphi1.net

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.

SECOND DIVISION

[G.R. NO. 146717: November 22, 2004]

TRANSFIELD PHILIPPINES, INC., Petitioner, v. LUZON HYDRO

CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP
LIMITED and SECURITY BANK CORPORATION, Respondents.

DECISION

TINGA, J.:

Subject of this case is the letter of credit which has evolved as the
ubiquitous and most important device in international trade. A creation of
commerce and businessmen, the letter of credit is also unique in the
number of parties involved and its supranational character.

Petitioner has appealed from the Decision1 of the Court of Appeals in CA-
G.R. SP No. 61901 entitled "Transfield Philippines, Inc. v. Hon. Oscar
Pimentel, et al.," promulgated on 31 January 2001. 2

On 26 March 1997, petitioner and respondent Luzon Hydro Corporation

(hereinafter, LHC) entered into a Turnkey Contract 3 whereby petitioner, as
Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy
(70)-Megawatt hydro-electric power station at the Bakun River in the
provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner
was given the sole responsibility for the design, construction,
commissioning, testing and completion of the Project. 4

The Turnkey Contract provides that: (1) the target completion date of the
Project shall be on 1 June 2000, or such later date as may be agreed upon
between petitioner and respondent LHC or otherwise determined in
accordance with the Turnkey Contract; and (2) petitioner is entitled to
claim extensions of time (EOT) for reasons enumerated in the Turnkey
Contract, among which are variations, force majeure, and delays caused by
LHC itself.5 Further, in case of dispute, the parties are bound to settle their
differences through mediation, conciliation and such other means
enumerated under Clause 20.3 of the Turnkey Contract.6

To secure performance of petitioner's obligation on or before the target

completion date, or such time for completion as may be determined by the
parties' agreement, petitioner opened in favor of LHC two (2) standby
letters of credit both dated 20 March 2000 (hereinafter referred to as "the
Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the
local branch of respondent Australia and New Zealand Banking Group
Limited (ANZ Bank)7 and Standby Letter of Credit No. IBDIDSB-00/4 with
respondent Security Bank Corporation (SBC) 8 each in the amount of
US$8,988,907.00.9

In the course of the construction of the project, petitioner sought various

EOT to complete the Project. The extensions were requested allegedly due
to several factors which prevented the completion of the Project on target
date, such as force majeure occasioned by typhoon Zeb, barricades and
demonstrations. LHC denied the requests, however. This gave rise to a
series of legal actions between the parties which culminated in the instant
petition.

The first of the actions was a Request for Arbitration which LHC filed before
the Construction Industry Arbitration Commission (CIAC) on 1 June
1999.10 This was followed by another Request for Arbitration, this time filed
by petitioner before the International Chamber of Commerce (ICC) 11 on 3
November 2000. In both arbitration proceedings, the common issues
presented were: [1) whether typhoon Zeb and any of its associated events
constituted force majeure to justify the extension of time sought by
petitioner; and [2) whether LHC had the right to terminate the Turnkey
Contract for failure of petitioner to complete the Project on target date.

Meanwhile, foreseeing that LHC would call on the Securities pursuant to the
pertinent provisions of the Turnkey Contract, 12 petitioner in two separate
letters13 both dated 10 August 2000 advised respondent banks of the
arbitration proceedings already pending before the CIAC and ICC in
connection with its alleged default in the performance of its obligations.
Asserting that LHC had no right to call on the Securities until the resolution
of disputes before the arbitral tribunals, petitioner warned respondent
banks that any transfer, release, or disposition of the Securities in favor of
LHC or any person claiming under LHC would constrain it to hold
respondent banks liable for liquidated damages.

As petitioner had anticipated, on 27 June 2000, LHC sent notice to

petitioner that pursuant to Clause 8.2 14 of the Turnkey Contract, it failed to
comply with its obligation to complete the Project. Despite the letters of
petitioner, however, both banks informed petitioner that they would pay on
the Securities if and when LHC calls on them.15

LHC asserted that additional extension of time would not be warranted;

accordingly it declared petitioner in default/delay in the performance of its
obligations under the Turnkey Contract and demanded from petitioner the
payment of US$75,000.00 for each day of delay beginning 28 June 2000
until actual completion of the Project pursuant to Clause 8.7.1 of the
Turnkey Contract. At the same time, LHC served notice that it would call on
the securities for the payment of liquidated damages for the delay. 16

On 5 November 2000, petitioner as plaintiff filed a Complaint for

Injunction, with prayer for temporary restraining order and writ of
preliminary injunction, against herein respondents as defendants before
the Regional Trial Court (RTC) of Makati. 17 Petitioner sought to restrain
respondent LHC from calling on the Securities and respondent banks from
transferring, paying on, or in any manner disposing of the Securities or any
renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour
temporary restraining order on the same day. The case was docketed as
Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati.

After appropriate proceedings, the trial court issued an Order on 9

November 2000, extending the temporary restraining order for a period of
seventeen (17) days or until 26 November 2000.18

The RTC, in its Order 19 dated 24 November 2000, denied petitioner's

application for a writ of preliminary injunction. It ruled that petitioner had
no legal right and suffered no irreparable injury to justify the issuance of
the writ. Employing the principle of "independent contract" in letters of
credit, the trial court ruled that LHC should be allowed to draw on the
Securities for liquidated damages. It debunked petitioner's contention that
the principle of "independent contract" could be invoked only by
respondent banks since according to it respondent LHC is the ultimate
beneficiary of the Securities. The trial court further ruled that the banks
were mere custodians of the funds and as such they were obligated to
transfer the same to the beneficiary for as long as the latter could submit
the required certification of its claims.

Dissatisfied with the trial court's denial of its application for a writ of
preliminary injunction, petitioner elevated the case to the Court of Appeals
via a Petition for Certiorari under Rule 65, with prayer for the issuance of a
temporary restraining order and writ of preliminary injunction. 20 Petitioner
submitted to the appellate court that LHC's call on the Securities was
premature considering that the issue of its default had not yet been
resolved with finality by the CIAC and/or the ICC. It asserted that until the
fact of delay could be established, LHC had no right to draw on the
Securities for liquidated damages.

Refuting petitioner's contentions, LHC claimed that petitioner had no right

to restrain its call on and use of the Securities as payment for liquidated
damages. It averred that the Securities are independent of the main
contract between them as shown on the face of the two Standby Letters of
Credit which both provide that the banks have no responsibility to
investigate the authenticity or accuracy of the certificates or the declarant's
capacity or entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a
temporary restraining order, enjoining LHC from calling on the Securities or
any renewals or substitutes thereof and ordering respondent banks to
cease and desist from transferring, paying or in any manner disposing of
the Securities.

However, the appellate court failed to act on the application for preliminary
injunction until the temporary restraining order expired on 27 January
2001. Immediately thereafter, representatives of LHC trooped to ANZ Bank
and withdrew the total amount of US$4,950,000.00, thereby reducing the
balance in ANZ Bank to US$1,852,814.00.

On 2 February 2001, the appellate court dismissed the petition

for certiorari . The appellate court expressed conformity with the trial
court's decision that LHC could call on the Securities pursuant to the first
principle in credit law that the credit itself is independent of the underlying
transaction and that as long as the beneficiary complied with the credit, it
was of no moment that he had not complied with the underlying contract.
Further, the appellate court held that even assuming that the trial court's
denial of petitioner's application for a writ of preliminary injunction was
erroneous, it constituted only an error of judgment which is not correctible
by certiorari , unlike error of jurisdiction.

Undaunted, petitioner filed the instant Petition for Review raising the
following issues for resolution:

WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY

BE INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARY'S
CALL THEREON IS WRONGFUL OR FRAUDULENT.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES
BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S DISPUTES BY THE
APPROPRIATE TRIBUNAL.

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING

THE AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED
THAT LHC'S CALL THEREON IS WRONGFUL.

WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE

DAMAGE IN THE EVENT THAT:

A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND
SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING BALANCE
OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE DISPUTES
BETWEEN PETITIONER AND LHC.

B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN

FROM THE SECURITIES.21

Petitioner contends that the courts below improperly relied on the

"independence principle" on letters of credit when this case falls squarely
within the "fraud exception rule." Respondent LHC deliberately
misrepresented the supposed existence of delay despite its knowledge that
the issue was still pending arbitration, petitioner continues.

Petitioner asserts that LHC should be ordered to return the proceeds of the
Securities pursuant to the principle against unjust enrichment and that,
under the premises, injunction was the appropriate remedy obtainable
from the competent local courts.

On 25 August 2003, petitioner filed a Supplement to the Petition 22 and

Supplemental Memorandum,23 alleging that in the course of the
proceedings in the ICC Arbitration, a number of documentary and
testimonial evidence came out through the use of different modes of
discovery available in the ICC Arbitration. It contends that after the filing of
the petition facts and admissions were discovered which demonstrate that
LHC knowingly misrepresented that petitioner had incurred delays'
notwithstanding its knowledge and admission that delays were excused
under the Turnkey Contract to be able to draw against the Securities.
Reiterating that fraud constitutes an exception to the independence
principle, petitioner urges that this warrants a ruling from this Court that
the call on the Securities was wrongful, as well as contrary to law and basic
principles of equity. It avers that it would suffer grave irreparable damage
if LHC would be allowed to use the proceeds of the Securities and not
ordered to return the amounts it had wrongfully drawn thereon.

In its Manifestation dated 8 September 2003, 24 LHC contends that the

supplemental pleadings filed by petitioner present erroneous and
misleading information which would change petitioner's theory on appeal.

In yet another Manifestation dated 12 April 2004, 25 petitioner alleges that

on 18 February 2004, the ICC handed down its Third Partial Award,
declaring that LHC wrongfully drew upon the Securities and that petitioner
was entitled to the return of the sums wrongfully taken by LHC for
liquidated damages.

LHC filed a Counter-Manifestation dated 29 June 2004, 26 stating that

petitioner's Manifestation dated 12 April 2004 enlarges the scope of its
Petition for Review of the 31 January 2001 Decision of the Court of
Appeals. LHC notes that the Petition for Review essentially dealt only with
the issue of whether injunction could issue to restrain the beneficiary of an
irrevocable letter of credit from drawing thereon. It adds that petitioner
has filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW,
entitled "Transfield Philippines Inc. v. Luzon Hydro Corporation," in which
the parties made claims and counterclaims arising from petitioner's
performance/misperformance of its obligations as contractor for LHC; and
(2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon
Hydro Corporation" before Branch 56 of the RTC of Makati, which is an
action to enforce and obtain execution of the ICC's partial award mentioned
in petitioner's Manifestation of 12 April 2004.

In its Comment to petitioner's Motion for Leave to File Addendum to

Petitioner's Memorandum, LHC stresses that the question of whether the
funds it drew on the subject letters of credit should be returned is outside
the issue in this appeal. At any rate, LHC adds that the action to enforce
the ICC's partial award is now fully within the Makati RTC's jurisdiction in
Civil Case No. 04-332. LHC asserts that petitioner is engaged in forum-
shopping by keeping this appeal and at the same time seeking the suit for
enforcement of the arbitral award before the Makati court.

Respondent SBC in its Memorandum, dated 10 March 2003 27 contends that

the Court of Appeals correctly dismissed the petition for certiorari .
Invoking the independence principle, SBC argues that it was under no
obligation to look into the validity or accuracy of the certification submitted
by respondent LHC or into the latter's capacity or entitlement to so certify.
It adds that the act sought to be enjoined by petitioner was already fait
accompli and the present petition would no longer serve any remedial
purpose.

In a similar fashion, respondent ANZ Bank in its Memorandum dated 13

March 200328 posits that its actions could not be regarded as unjustified in
view of the prevailing independence principle under which it had no
obligation to ascertain the truth of LHC's allegations that petitioner
defaulted in its obligations. Moreover, it points out that since the Standby
Letter of Credit No. E001126/8400 had been fully drawn, petitioner's
prayer for preliminary injunction had been rendered moot and academic.

At the core of the present controversy is the applicability of the

"independence principle" and "fraud exception rule" in letters of credit.
Thus, a discussion of the nature and use of letters of credit, also referred to
simply as "credits," would provide a better perspective of the case.

The letter of credit evolved as a mercantile specialty, and the only way to
understand all its facets is to recognize that it is an entity unto itself. The
relationship between the beneficiary and the issuer of a letter of credit is
not strictly contractual, because both privity and a meeting of the minds
are lacking, yet strict compliance with its terms is an enforceable right. Nor
is it a third-party beneficiary contract, because the issuer must honor
drafts drawn against a letter regardless of problems subsequently arising in
the underlying contract. Since the bank's customer cannot draw on the
letter, it does not function as an assignment by the customer to the
beneficiary. Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default. Finally,
it is not in itself a negotiable instrument, because it is not payable to order
or bearer and is generally conditional, yet the draft presented under it is
often negotiable.29

In commercial transactions, a letter of credit is a financial device developed

by merchants as a convenient and relatively safe mode of dealing with
sales of goods to satisfy the seemingly irreconcilable interests of a seller,
who refuses to part with his goods before he is paid, and a buyer, who
wants to have control of the goods before paying. 30 The use of credits in
commercial transactions serves to reduce the risk of nonpayment of the
purchase price under the contract for the sale of goods. However, credits
are also used in non-sale settings where they serve to reduce the risk of
nonperformance. Generally, credits in the non-sale settings have come to
be known as standby credits.31

There are three significant differences between commercial and standby

credits. First, commercial credits involve the payment of money under a
contract of sale. Such credits become payable upon the presentation by the
seller-beneficiary of documents that show he has taken affirmative steps to
comply with the sales agreement. In the standby type, the credit is
payable upon certification of a party's nonperformance of the agreement.
The documents that accompany the beneficiary's draft tend to show that
the applicant has not performed. The beneficiary of a commercial credit
must demonstrate by documents that he has performed his contract. The
beneficiary of the standby credit must certify that his obligor has not
performed the contract.32
By definition, a letter of credit is a written instrument whereby the writer
requests or authorizes the addressee to pay money or deliver goods to a
third person and assumes responsibility for payment of debt therefor to the
addressee.33 A letter of credit, however, changes its nature as different
transactions occur and if carried through to completion ends up as a
binding contract between the issuing and honoring banks without any
regard or relation to the underlying contract or disputes between the
parties thereto.34

Since letters of credit have gained general acceptability in international

trade transactions, the ICC has published from time to time updates on the
Uniform Customs and Practice (UCP) for Documentary Credits to
standardize practices in the letter of credit area. The vast majority of
letters of credit incorporate the UCP.35 First published in 1933, the UCP for
Documentary Credits has undergone several revisions, the latest of which
was in 1993.36

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 37 this

Court ruled that the observance of the UCP is justified by Article 2 of the
Code of Commerce which provides that in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be
governed by usages and customs generally observed. More recently, in
Bank of America, NT & SA v. Court of Appeals, 38 this Court ruled that there
being no specific provisions which govern the legal complexities arising
from transactions involving letters of credit, not only between or among
banks themselves but also between banks and the seller or the buyer, as
the case may be, the applicability of the UCP is undeniable.

Article 3 of the UCP provides that credits, by their nature, are separate
transactions from the sales or other contract(s) on which they may be
based and banks are in no way concerned with or bound by such
contract(s), even if any reference whatsoever to such contract(s) is
included in the credit. Consequently, the undertaking of a bank to pay,
accept and pay draft(s) or negotiate and/or fulfill any other obligation
under the credit is not subject to claims or defenses by the applicant
resulting from his relationships with the issuing bank or the beneficiary. A
beneficiary can in no case avail himself of the contractual relationships
existing between the banks or between the applicant and the issuing bank.

Thus, the engagement of the issuing bank is to pay the seller or beneficiary
of the credit once the draft and the required documents are presented to it.
The so-called "independence principle" assures the seller or the beneficiary
of prompt payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main contract is
actually accomplished or not. Under this principle, banks assume no
liability or responsibility for the form, sufficiency, accuracy, genuineness,
falsification or legal effect of any documents, or for the general and/or
particular conditions stipulated in the documents or superimposed thereon,
nor do they assume any liability or responsibility for the description,
quantity, weight, quality, condition, packing, delivery, value or existence of
the goods represented by any documents, or for the good faith or acts
and/or omissions, solvency, performance or standing of the consignor, the
carriers, or the insurers of the goods, or any other person whomsoever. 39

The independent nature of the letter of credit may be: (a) independence in
toto where the credit is independent from the justification aspect and is a
separate obligation from the underlying agreement like for instance a
typical standby; or (b) independence may be only as to the justification
aspect like in a commercial letter of credit or repayment standby, which is
identical with the same obligations under the underlying agreement. In
both cases the payment may be enjoined if in the light of the purpose of
the credit the payment of the credit would constitute fraudulent abuse of
the credit.40

Can the beneficiary invoke the independence principle? chanroblesvirtualawlibrary

Petitioner insists that the independence principle does not apply to the
instant case and assuming it is so, it is a defense available only to
respondent banks. LHC, on the other hand, contends that it would be
contrary to common sense to deny the benefit of an independent contract
to the very party for whom the benefit is intended. As beneficiary of the
letter of credit, LHC asserts it is entitled to invoke the principle.

As discussed above, in a letter of credit transaction, such as in this case,

where the credit is stipulated as irrevocable, there is a definite undertaking
by the issuing bank to pay the beneficiary provided that the stipulated
documents are presented and the conditions of the credit are complied
with.41 Precisely, the independence principle liberates the issuing bank from
the duty of ascertaining compliance by the parties in the main contract. As
the principle's nomenclature clearly suggests, the obligation under the
letter of credit is independent of the related and originating contract. In
brief, the letter of credit is separate and distinct from the underlying
transaction.

Given the nature of letters of credit, petitioner's argument that it is only

the issuing bank that may invoke the independence principle on letters of
credit does not impress this Court. To say that the independence principle
may only be invoked by the issuing banks would render nugatory the
purpose for which the letters of credit are used in commercial transactions.
As it is, the independence doctrine works to the benefit of both the issuing
bank and the beneficiary.

Letters of credit are employed by the parties desiring to enter into

commercial transactions, not for the benefit of the issuing bank but mainly
for the benefit of the parties to the original transactions. With the letter of
credit from the issuing bank, the party who applied for and obtained it may
confidently present the letter of credit to the beneficiary as a security to
convince the beneficiary to enter into the business transaction. On the
other hand, the other party to the business transaction, i.e., the
beneficiary of the letter of credit, can be rest assured of being empowered
to call on the letter of credit as a security in case the commercial
transaction does not push through, or the applicant fails to perform his part
of the transaction. It is for this reason that the party who is entitled to the
proceeds of the letter of credit is appropriately called "beneficiary."

Petitioner's argument that any dispute must first be resolved by the

parties, whether through negotiations or arbitration, before the beneficiary
is entitled to call on the letter of credit in essence would convert the letter
of credit into a mere guarantee. Jurisprudence has laid down a clear
distinction between a letter of credit and a guarantee in that the settlement
of a dispute between the parties is not a pre-requisite for the release of
funds under a letter of credit. In other words, the argument is incompatible
with the very nature of the letter of credit. If a letter of credit is drawable
only after settlement of the dispute on the contract entered into by the
applicant and the beneficiary, there would be no practical and beneficial
use for letters of credit in commercial transactions.

Professor John F. Dolan, the noted authority on letters of credit, sheds

more light on the issue:

The standby credit is an attractive commercial device for many of the same
reasons that commercial credits are attractive. Essentially, these credits
are inexpensive and efficient. Often they replace surety contracts, which
tend to generate higher costs than credits do and are usually triggered by
a factual determination rather than by the examination of documents.

Because parties and courts should not confuse the different functions of the
surety contract on the one hand and the standby credit on the other, the
distinction between surety contracts and credits merits some reflection.
The two commercial devices share a common purpose. Both ensure against
the obligor's nonperformance. They function, however, in distinctly
different ways.

Traditionally, upon the obligor's default, the surety undertakes to complete

the obligor's performance, usually by hiring someone to complete that
performance. Surety contracts, then, often involve costs of determining
whether the obligor defaulted (a matter over which the surety and the
beneficiary often litigate) plus the cost of performance. The benefit of the
surety contract to the beneficiary is obvious. He knows that the surety,
often an insurance company, is a strong financial institution that will
perform if the obligor does not. The beneficiary also should understand that
such performance must await the sometimes lengthy and costly
determination that the obligor has defaulted. In addition, the surety's
performance takes time.

The standby credit has different expectations. He reasonably expects that

he will receive cash in the event of nonperformance, that he will receive it
promptly, and that he will receive it before any litigation with the obligor
(the applicant) over the nature of the applicant's performance takes place.
The standby credit has this opposite effect of the surety contract: it
reverses the financial burden of parties during litigation.

In the surety contract setting, there is no duty to indemnify the beneficiary

until the beneficiary establishes the fact of the obligor's performance. The
beneficiary may have to establish that fact in litigation. During the
litigation, the surety holds the money and the beneficiary bears most of the
cost of delay in performance.

In the standby credit case, however, the beneficiary avoids that litigation
burden and receives his money promptly upon presentation of the required
documents. It may be that the applicant has, in fact, performed and that
the beneficiary's presentation of those documents is not rightful. In that
case, the applicant may sue the beneficiary in tort, in contract, or in breach
of warranty; but, during the litigation to determine whether the applicant
has in fact breached the obligation to perform, the beneficiary, not the
applicant, holds the money. Parties that use a standby credit and courts
construing such a credit should understand this allocation of burdens.
There is a tendency in some quarters to overlook this distinction between
surety contracts and standby credits and to reallocate burdens by
permitting the obligor or the issuer to litigate the performance question
before payment to the beneficiary.42

While it is the bank which is bound to honor the credit, it is the beneficiary
who has the right to ask the bank to honor the credit by allowing him to
draw thereon. The situation itself emasculates petitioner's posture that LHC
cannot invoke the independence principle and highlights its puerility, more
so in this case where the banks concerned were impleaded as parties by
petitioner itself.

Respondent banks had squarely raised the independence principle to justify

their releases of the amounts due under the Securities. Owing to the
nature and purpose of the standby letters of credit, this Court rules that
the respondent banks were left with little or no alternative but to honor the
credit and both of them in fact submitted that it was "ministerial" for them
to honor the call for payment.43

Furthermore, LHC has a right rooted in the Contract to call on the

Securities. The relevant provisions of the Contract read, thus:

4.2.1. In order to secure the performance of its obligations under this

Contract, the Contractor at its cost shall on the Commencement Date
provide security to the Employer in the form of two irrevocable and
confirmed standby letters of credit (the "Securities"), each in the amount
of US$8,988,907, issued and confirmed by banks or financial institutions
acceptable to the Employer. Each of the Securities must be in form and
substance acceptable to the Employer and may be provided on an annually
renewable basis.44

8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall
pay to the Employer by way of liquidated damages ("Liquidated Damages
for Delay") the amount of US$75,000 for each and every day or part of a
day that shall elapse between the Target Completion Date and the
Completion Date, provided that Liquidated Damages for Delay payable by
the Contractor shall in the aggregate not exceed 20% of the Contract Price.
The Contractor shall pay Liquidated Damages for Delay for each day of the
delay on the following day without need of demand from the Employer.

8.7.2 The Employer may, without prejudice to any other method of

recovery, deduct the amount of such damages from any monies due, or to
become due to the Contractor and/or by drawing on the Security." 45

A contract once perfected, binds the parties not only to the fulfillment of
what has been expressly stipulated but also to all the consequences which
according to their nature, may be in keeping with good faith, usage, and
law.46 A careful perusal of the Turnkey Contract reveals the intention of the
parties to make the Securities answerable for the liquidated damages
occasioned by any delay on the part of petitioner. The call upon the
Securities, while not an exclusive remedy on the part of LHC, is certainly
an alternative recourse available to it upon the happening of the
contingency for which the Securities have been proffered. Thus, even
without the use of the "independence principle," the Turnkey Contract itself
bestows upon LHC the right to call on the Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle. It avers that LHC's
call on the Securities is wrongful because it fraudulently misrepresented to
ANZ Bank and SBC that there is already a breach in the Turnkey Contract
knowing fully well that this is yet to be determined by the arbitral tribunals.
It asserts that the "fraud exception" exists when the beneficiary, for the
purpose of drawing on the credit, fraudulently presents to the confirming
bank, documents that contain, expressly or by implication, material
representations of fact that to his knowledge are untrue. In such a
situation, petitioner insists, injunction is recognized as a remedy available
to it.

Citing Dolan's treatise on letters of credit, petitioner argues that the

independence principle is not without limits and it is important to fashion
those limits in light of the principle's purpose, which is to serve the
commercial function of the credit. If it does not serve those functions,
application of the principle is not warranted, and the commonlaw principles
of contract should apply.

It is worthy of note that the propriety of LHC's call on the Securities is

largely intertwined with the fact of default which is the self-same issue
pending resolution before the arbitral tribunals. To be able to declare the
call on the Securities wrongful or fraudulent, it is imperative to resolve,
among others, whether petitioner was in fact guilty of delay in the
performance of its obligation. Unfortunately for petitioner, this Court is not
called upon to rule upon the issue of default'such issue having been
submitted by the parties to the jurisdiction of the arbitral tribunals
pursuant to the terms embodied in their agreement. 47

Would injunction then be the proper remedy to restrain the alleged

wrongful draws on the Securities? chanroblesvirtualawlibrary

Most writers agree that fraud is an exception to the independence principle.

Professor Dolan opines that the untruthfulness of a certificate
accompanying a demand for payment under a standby credit may qualify
as fraud sufficient to support an injunction against payment. 48 The remedy
for fraudulent abuse is an injunction. However, injunction should not be
granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes
fraudulent abuse of the independent purpose of the letter of credit and not
only fraud under the main agreement; and (c) irreparable injury might
follow if injunction is not granted or the recovery of damages would be
seriously damaged.49

In its complaint for injunction before the trial court, petitioner alleged that
it is entitled to a total extension of two hundred fifty-three (253) days
which would move the target completion date. It argued that if its claims
for extension would be found meritorious by the ICC, then LHC would not
be entitled to any liquidated damages.50

Generally, injunction is a preservative remedy for the protection of one's

substantive right or interest; it is not a cause of action in itself but merely
a provisional remedy, an adjunct to a main suit. The issuance of the writ of
preliminary injunction as an ancillary or preventive remedy to secure the
rights of a party in a pending case is entirely within the discretion of the
court taking cognizance of the case, the only limitation being that this
discretion should be exercised based upon the grounds and in the manner
provided by law.51
Before a writ of preliminary injunction may be issued, there must be a
clear showing by the complaint that there exists a right to be protected and
that the acts against which the writ is to be directed are violative of the
said right.52 It must be shown that the invasion of the right sought to be
protected is material and substantial, that the right of complainant is clear
and unmistakable and that there is an urgent and paramount necessity for
the writ to prevent serious damage.53 Moreover, an injunctive remedy may
only be resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard
compensation.54

In the instant case, petitioner failed to show that it has a clear and
unmistakable right to restrain LHC's call on the Securities which would
justify the issuance of preliminary injunction. By petitioner's own
admission, the right of LHC to call on the Securities was contractually
rooted and subject to the express stipulations in the Turnkey
Contract.55 Indeed, the Turnkey Contract is plain and unequivocal in that it
conferred upon LHC the right to draw upon the Securities in case of
default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:

4.2.5 The Employer shall give the Contractor seven days' notice of calling
upon any of the Securities, stating the nature of the default for which the
claim on any of the Securities is to be made, provided that no notice will be
required if the Employer calls upon any of the Securities for the payment of
Liquidated Damages for Delay or for failure by the Contractor to renew or
extend the Securities within 14 days of their expiration in accordance with
Clause 4.2.2.56

8.7.2 The Employer may, without prejudice to any other method of

recovery, deduct the amount of such damages from any monies due, or to
become due, to the Contractor and/or by drawing on the Security. 57

The pendency of the arbitration proceedings would not per se make LHC's
draws on the Securities wrongful or fraudulent for there was nothing in the
Contract which would indicate that the parties intended that all disputes
regarding delay should first be settled through arbitration before LHC
would be allowed to call upon the Securities. It is therefore premature and
absurd to conclude that the draws on the Securities were outright
fraudulent given the fact that the ICC and CIAC have not ruled with finality
on the existence of default.

Nowhere in its complaint before the trial court or in its pleadings filed
before the appellate court, did petitioner invoke the fraud exception rule as
a ground to justify the issuance of an injunction. 58 What petitioner did
assert before the courts below was the fact that LHC's draws on the
Securities would be premature and without basis in view of the pending
disputes between them. Petitioner should not be allowed in this instance to
bring into play the fraud exception rule to sustain its claim for the issuance
of an injunctive relief. Matters, theories or arguments not brought out in
the proceedings below will ordinarily not be considered by a reviewing
court as they cannot be raised for the first time on appeal. 59 The lower
courts could thus not be faulted for not applying the fraud exception rule
not only because the existence of fraud was fundamentally interwoven with
the issue of default still pending before the arbitral tribunals, but more so,
because petitioner never raised it as an issue in its pleadings filed in the
courts below. At any rate, petitioner utterly failed to show that it had a
clear and unmistakable right to prevent LHC's call upon the Securities.

Of course, prudence should have impelled LHC to await resolution of the

pending issues before the arbitral tribunals prior to taking action to enforce
the Securities. But, as earlier stated, the Turnkey Contract did not require
LHC to do so and, therefore, it was merely enforcing its rights in
accordance with the tenor thereof. Obligations arising from contracts have
the force of law between the contracting parties and should be complied
with in good faith.60 More importantly, pursuant to the principle of
autonomy of contracts embodied in Article 1306 of the Civil
Code,61 petitioner could have incorporated in its Contract with LHC, a
proviso that only the final determination by the arbitral tribunals that
default had occurred would justify the enforcement of the Securities.
However, the fact is petitioner did not do so; hence, it would have to live
with its inaction.

With respect to the issue of whether the respondent banks were justified in
releasing the amounts due under the Securities, this Court reiterates that
pursuant to the independence principle the banks were under no obligation
to determine the veracity of LHC's certification that default has occurred.
Neither were they bound by petitioner's declaration that LHC's call thereon
was wrongful. To repeat, respondent banks' undertaking was simply to pay
once the required documents are presented by the beneficiary.

At any rate, should petitioner finally prove in the pending arbitration

proceedings that LHC's draws upon the Securities were wrongful due to the
non-existence of the fact of default, its right to seek indemnification for
damages it suffered would not normally be foreclosed pursuant to general
principles of law.

Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this

Court that the subject letters of credit had been fully drawn. This fact alone
would have been sufficient reason to dismiss the instant petition.

Settled is the rule that injunction would not lie where the acts sought to be
enjoined have already become fait accompli or an accomplished or
consummated act.63 In Ticzon v. Video Post Manila, Inc.64 this Court ruled
that where the period within which the former employees were prohibited
from engaging in or working for an enterprise that competed with their
former employer the very purpose of the preliminary injunction 'has
expired, any declaration upholding the propriety of the writ would be
entirely useless as there would be no actual case or controversy between
the parties insofar as the preliminary injunction is concerned.

In the instant case, the consummation of the act sought to be restrained

had rendered the instant petition moot for any declaration by this Court as
to propriety or impropriety of the non-issuance of injunctive relief could
have no practical effect on the existing controversy. 65 The other issues
raised by petitioner particularly with respect to its right to recover the
amounts wrongfully drawn on the Securities, according to it, could properly
be threshed out in a separate proceeding.

One final point. LHC has charged petitioner of forum-shopping. It raised

the charge on two occasions. First, in its Counter-Manifestation dated 29
June 200466 LHC alleges that petitioner presented before this Court the
same claim for money which it has filed in two other proceedings, to wit:
ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC of
Makati. LHC argues that petitioner's acts constitutes forum-shopping which
should be punished by the dismissal of the claim in both forums. Second, in
its Comment to Petitioner's Motion for Leave to File Addendum to
Petitioner's Memorandum dated 8 October 2004, LHC alleges that by
maintaining the present appeal and at the same time pursuing Civil Case
No. 04-332 wherein petitioner pressed for judgment on the issue of
whether the funds LHC drew on the Securities should be returned
petitioner resorted to forum-shopping. In both instances, however,
petitioner has apparently opted not to respond to the charge.

Forum-shopping is a very serious charge. It exists when a party

repetitively avails of several judicial remedies in different courts,
simultaneously or successively, all substantially founded on the same
transactions and the same essential facts and circumstances, and all
raising substantially the same issues either pending in, or already resolved
adversely, by some other court.67 It may also consist in the act of a party
against whom an adverse judgment has been rendered in one forum, of
seeking another and possibly favorable opinion in another forum other than
by appeal or special civil action of certiorari , or the institution of two or
more actions or proceedings grounded on the same cause on the
supposition that one or the other court might look with favor upon the
other party.68 To determine whether a party violated the rule against
forum-shopping, the test applied is whether the elements of litis
pendentia are present or whether a final judgment in one case will amount
to res judicata in another.69 Forum-shopping constitutes improper conduct
and may be punished with summary dismissal of the multiple petitions and
direct contempt of court.70

Considering the seriousness of the charge of forum-shopping and the

severity of the sanctions for its violation, the Court will refrain from making
any definitive ruling on this issue until after petitioner has been given
ample opportunity to respond to the charge.

WHEREFORE, the instant petition is DENIED, with costs against petitioner.

Petitioner is hereby required to answer the charge of forum-shopping

within fifteen (15) days from notice.

SO ORDERED.

FIRST DIVISION

G.R. No. 90828               September 5, 2000

MELVIN COLINARES and LORDINO VELOSO, petitioners, vs. HONORABLE COURT

OF APPEALS, and THE PEOPLE OF THE PHILIPPINES, respondents.

DECISION

DAVIDE, JR., C.J.:

In 1979 Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for a
consideration of ₱40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the
latter’s convent at Camaman-an, Cagayan de Oro City.
On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical board 2’x4’x½",
300 SF tanguile wood tiles 12"x12", 260 SF Marcelo economy tiles and 2 gallons UMYLIN
cement adhesive from CM Builders Centre for the construction project. The following day,
1 

31 October 1979, Petitioners applied for a commercial letter of credit with the Philippine
2 

Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of CM

Builders Centre. PBC approved the letter of credit for ₱22,389.80 to cover the full invoice
3 

value of the goods. Petitioners signed a pro-forma trust receipt as security. The loan was
4 

due on 29 January 1980.

On 31 October 1979, PBC debited ₱6,720 from Petitioners’ marginal deposit as partial
payment of the loan. 5

On 7 May 1980, PBC wrote to Petitioners demanding that the amount be paid within
6 

seven days from notice. Instead of complying with PBC’s demand, Veloso confessed that
they lost ₱19,195.83 in the Carmelite Monastery Project and requested for a grace period
of until 15 June 1980 to settle the account. 7

PBC sent a new demand letter to Petitioners on 16 October 1980 and informed them that
8 

their outstanding balance as of 17 November 1979 was ₱20,824.40 exclusive of

attorney’s fees of 25%. 9

On 2 December 1980, Petitioners proposed that the terms of payment of the loan be
10 

modified as follows: ₱2,000 on or before 3 December 1980, and ₱1,000 per month
starting 31 January 1980 until the account is fully paid. Pending approval of the proposal,
Petitioners paid ₱1,000 to PBC on 4 December 1980, and thereafter ₱500 on 11
11 

February 1981, 16 March 1981, and 20 April 1981. Concurrently with the separate
12  13  14 

demand for attorney’s fees by PBC’s legal counsel, PBC continued to demand payment of
the balance.15

On 14 January 1983, Petitioners were charged with the violation of P.D. No. 115 (Trust
Receipts Law) in relation to Article 315 of the Revised Penal Code in an Information which
was filed with Branch 18, Regional Trial Court of Cagayan de Oro City. The accusatory
portion of the Information reads:

That on or about October 31, 1979, in the City of Cagayan de Oro, Philippines, and within
the jurisdiction of this Honorable Court, the above-named accused entered into a trust
receipt agreement with the Philippine Banking Corporation at Cagayan de Oro City
wherein the accused, as entrustee, received from the entruster the following goods to wit:

Solatone Acoustical board

Tanguile Wood Tiles
Marcelo Cement Tiles
Umylin Cement Adhesive

with a total value of P22,389.80, with the obligation on the part of the accused-entrustee
to hold the aforesaid items in trust for the entruster and/or to sell on cash basis or
otherwise dispose of the said items and to turn over to the entruster the proceeds of the
sale of said goods or if there be no sale to return said items to the entruster on or before
January 29, 1980 but that the said accused after receipt of the goods, with intent to
defraud and cause damage to the entruster, conspiring, confederating together and
mutually helping one another, did then and there wilfully, unlawfully and feloniously fail
and refuse to remit the proceeds of the sale of the goods to the entruster despite repeated
demands but instead converted, misappropriated and misapplied the proceeds to their
own personal use, benefit and gain, to the damage and prejudice of the Philippine
Banking Corporation, in the aforesaid sum of P22,389.80, Philippine Currency.

Contrary to PD 115 in relation to Article 315 of the Revised Penal Code. 16

The case was docketed as Criminal Case No. 1390.

During trial, petitioner Veloso insisted that the transaction was a "clean loan" as per verbal
guarantee of Cayo Garcia Tuiza, PBC’s former manager. He and petitioner Colinares
signed the documents without reading the fine print, only learning of the trust receipt
implication much later. When he brought this to the attention of PBC, Mr. Tuiza assured
him that the trust receipt was a mere formality. 17

On 7 July 1986, the trial court promulgated its decision convicting Petitioners of estafa for
18 

violating P.D. No. 115 in relation to Article 315 of the Revised Penal Code and sentencing
each of them to suffer imprisonment of two years and one day of prision correccional as
minimum to six years and one day of prision mayor as maximum, and to solidarily
indemnify PBC the amount of ₱20,824.44, with legal interest from 29 January 1980, 12 %
penalty charge per annum, 25% of the sums due as attorney’s fees, and costs.

The trial court considered the transaction between PBC and Petitioners as a trust receipt
transaction under Section 4, P.D. No. 115. It considered Petitioners’ use of the goods in
their Carmelite monastery project an act of "disposing" as contemplated under Section 13,
P.D. No. 115, and treated the charge invoice for goods issued by CM Builders Centre as
19 

a "document" within the meaning of Section 3 thereof. It concluded that the failure of
Petitioners to turn over the amount they owed to PBC constituted estafa.

Petitioners appealed from the judgment to the Court of Appeals which was docketed as
CA-G.R. CR No. 05408. Petitioners asserted therein that the trial court erred in ruling that
they violated the Trust Receipt Law, and in holding them criminally liable therefor. In the
alternative, they contend that at most they can only be made civilly liable for payment of
the loan.

In its decision 6 March 1989, the Court of Appeals modified the judgment of the trial court
20 

by increasing the penalty to six years and one day of prision mayor as minimum to
fourteen years eight months and one day of reclusion temporal as maximum. It held that
the documentary evidence of the prosecution prevails over Veloso’s testimony, discredited
Petitioners’ claim that the documents they signed were in blank, and disbelieved that they
were coerced into signing them.

On 25 March 1989, Petitioners filed a Motion for New Trial/Reconsideration alleging that
21 

the "Disclosure Statement on Loan/Credit Transaction" (hereafter Disclosure Statement)

22 

signed by them and Tuiza was suppressed by PBC during the trial. That document would
have proved that the transaction was indeed a loan as it bears a 14% interest as opposed
to the trust receipt which does not at all bear any interest. Petitioners further maintained
that when PBC allowed them to pay in installment, the agreement was novated and a
creditor-debtor relationship was created.

In its resolution of 16 October 1989 the Court of Appeals denied the Motion for New
23 

Trial/Reconsideration because the alleged newly discovered evidence was actually

forgotten evidence already in existence during the trial, and would not alter the result of
the case.

Hence, Petitioners filed with us the petition in this case on 16 November 1989. They
raised the following issues:

1. WHETHER OR NOT THE DENIAL OF THE MOTION FOR NEW TRIAL ON

THE GROUND OF NEWLY DISCOVERED EVIDENCE, NAMELY, "DISCLOSURE
ON LOAN/CREDIT TRANSACTION," WHICH IF INTRODUCED AND ADMITTED,
WOULD CHANGE THE JUDGMENT, DOES NOT CONSTITUTE A DENIAL OF
DUE PROCESS.

2. ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR NOT

THE ACCUSED WERE PROPERLY CHARGED, TRIED AND CONVICTED FOR
VIOLATION OF SEC. 13, PD NO. 115 IN RELATION TO ARTICLE 315
PARAGRAPH (I) (B) NOTWITHSTANDING THE NOVATION OF THE SO-
CALLED TRUST RECEIPT CONVERTING THE TRUSTOR-TRUSTEE
RELATIONSHIP TO CREDITOR-DEBTOR SITUATION.
In its Comment of 22 January 1990, the Office of the Solicitor General urged us to deny
the petition for lack of merit.

On 28 February 1990 Petitioners filed a Motion to Dismiss the case on the ground that
they had already fully paid PBC on 2 February 1990 the amount of ₱70,000 for the
balance of the loan, including interest and other charges, as evidenced by the different
receipts issued by PBC, and that the PBC executed an Affidavit of desistance.
24  25

We required the Solicitor General to comment on the Motion to Dismiss.

In its Comment of 30 July 1990, the Solicitor General opined that payment of the loan was
akin to a voluntary surrender or plea of guilty which merely serves to mitigate Petitioners’
culpability, but does not in any way extinguish their criminal liability.

In the Resolution of 13 August 1990, we gave due course to the Petition and required the
parties to file their respective memoranda.

The parties subsequently filed their respective memoranda.

It was only on 18 May 1999 when this case was assigned to the ponente. Thereafter, we
required the parties to move in the premises and for Petitioners to manifest if they are still
interested in the further prosecution of this case and inform us of their present
whereabouts and whether their bail bonds are still valid.

Petitioners submitted their Compliance.

The core issues raised in the petition are the denial by the Court of Appeals of Petitioners’
Motion for New Trial and the true nature of the contract between Petitioners and the PBC.
As to the latter, Petitioners assert that it was an ordinary loan, not a trust receipt
agreement under the Trust Receipts Law.

The grant or denial of a motion for new trial rests upon the discretion of the judge. New
trial may be granted if: (1) errors of law or irregularities have been committed during the
trial prejudicial to the substantial rights of the accused; or (2) new and material evidence
has been discovered which the accused could not with reasonable diligence have
discovered and produced at the trial, and which, if introduced and admitted, would
probably change the judgment. 26

For newly discovered evidence to be a ground for new trial, such evidence must be (1)
discovered after trial; (2) could not have been discovered and produced at the trial even
with the exercise of reasonable diligence; and (3) material, not merely cumulative,
corroborative, or impeaching, and of such weight that, if admitted, would probably change
the judgment. It is essential that the offering party exercised reasonable diligence in
27 

seeking to locate the evidence before or during trial but nonetheless failed to secure it.
28

We find no indication in the pleadings that the Disclosure Statement is a newly discovered
evidence.

Petitioners could not have been unaware that the two-page document exists. The
Disclosure Statement itself states, "NOTICE TO BORROWER: YOU ARE ENTITLED TO
A COPY OF THIS PAPER WHICH YOU SHALL SIGN." Assuming Petitioners’ copy was
29 

then unavailable, they could have compelled its production in court, which they never did.
30 

Petitioners have miserably failed to establish the second requisite of the rule on newly
discovered evidence.

Petitioners themselves admitted that "they searched again their voluminous records,
meticulously and patiently, until they discovered this new and material evidence" only
upon learning of the Court of Appeals’ decision and after they were "shocked by the
penalty imposed." Clearly, the alleged newly discovered evidence is mere forgotten
31 

evidence that jurisprudence excludes as a ground for new trial. 32

However, the second issue should be resolved in favor of Petitioners.

Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt transaction as any
transaction by and between a person referred to as the entruster, and another person
referred to as the entrustee, whereby the entruster who owns or holds absolute title or
security interest over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latter’s execution and delivery to the
entruster of a signed document called a "trust receipt" wherein the entrustee binds himself
to hold the designated goods, documents or instruments with the obligation to turn over to
the entruster the proceeds thereof to the extent of the amount owing to the entruster or as
appears in the trust receipt or the goods, documents or instruments themselves if they are
unsold or not otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt.

There are two possible situations in a trust receipt transaction. The first is covered by the
provision which refers to money received under the obligation involving the duty to deliver
it (entregarla) to the owner of the merchandise sold. The second is covered by the
provision which refers to merchandise received under the obligation to "return" it
(devolvera) to the owner. 33

Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the
trust receipt to the entruster or to return said goods if they were not disposed of in
accordance with the terms of the trust receipt shall be punishable as estafa under Article
315 (1) of the Revised Penal Code, without need of proving intent to defraud.
34 

A thorough examination of the facts obtaining in the case at bar reveals that the
transaction intended by the parties was a simple loan, not a trust receipt agreement.

Petitioners received the merchandise from CM Builders Centre on 30 October 1979. On

that day, ownership over the merchandise was already transferred to Petitioners who
were to use the materials for their construction project. It was only a day later, 31 October
1979, that they went to the bank to apply for a loan to pay for the merchandise.

This situation belies what normally obtains in a pure trust receipt transaction where goods
are owned by the bank and only released to the importer in trust subsequent to the grant
of the loan. The bank acquires a "security interest" in the goods as holder of a security title
for the advances it had made to the entrustee. The ownership of the merchandise
35 

continues to be vested in the person who had advanced payment until he has been paid
in full, or if the merchandise has already been sold, the proceeds of the sale should be
turned over to him by the importer or by his representative or successor in interest. To 36 

secure that the bank shall be paid, it takes full title to the goods at the very beginning and
continues to hold that title as his indispensable security until the goods are sold and the
vendee is called upon to pay for them; hence, the importer has never owned the goods
and is not able to deliver possession. In a certain manner, trust receipts partake of the
37 

nature of a conditional sale where the importer becomes absolute owner of the imported
merchandise as soon as he has paid its price. 38

Trust receipt transactions are intended to aid in financing importers and retail dealers who
do not have sufficient funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except through utilization, as
collateral, of the merchandise imported or purchased. 39

The antecedent acts in a trust receipt transaction consist of the application and approval
of the letter of credit, the making of the marginal deposit and the effective importation of
goods through the efforts of the importer. 40

PBC attempted to cover up the true delivery date of the merchandise, yet the trial court
took notice even though it failed to attach any significance to such fact in the judgment.
Despite the Court of Appeals’ contrary view that the goods were delivered to Petitioners
previous to the execution of the letter of credit and trust receipt, we find that the records of
the case speak volubly and this fact remains uncontroverted. It is not uncommon for us to
peruse through the transcript of the stenographic notes of the proceedings to be satisfied
that the records of the case do support the conclusions of the trial court. After such
41 

perusal Grego Mutia, PBC’s credit investigator, admitted thus:

ATTY. CABANLET: (continuing)

Q Do you know if the goods subject matter of this letter of credit and trust receipt
agreement were received by the accused?

A Yes, sir

Q Do you have evidence to show that these goods subject matter of this letter of credit
and trust receipt were delivered to the accused?

A Yes, sir.

Q I am showing to you this charge invoice, are you referring to this document?

A Yes, sir.

xxx

Q What is the date of the charge invoice?

A October 31, 1979.

COURT:

Make it of record as appearing in Exhibit D, the zero in 30 has been superimposed with
numeral 1. 42

During the cross and re-direct examinations he also impliedly admitted that the transaction
was indeed a loan. Thus:

Q In short the amount stated in your Exhibit C, the trust receipt was a loan to the accused
you admit that?

A Because in the bank the loan is considered part of the loan.

xxx

RE-DIRECT BY ATTY. CABANLET:

ATTY. CABANLET (to the witness)

Q What do you understand by loan when you were asked?

A Loan is a promise of a borrower from the value received. The borrower will pay the bank
on a certain specified date with interest
43

Such statement is akin to an admission against interest binding upon PBC.

Petitioner Veloso’s claim that they were made to believe that the transaction was a loan
was also not denied by PBC. He declared:

Q Testimony was given here that that was covered by trust receipt. In short it was a
special kind of loan.  What can you say as to that?
1âwphi1

A I don’t think that would be a trust receipt because we were made to understand by the
manager who encouraged us to avail of their facilities that they will be granting us a loan
44
PBC could have presented its former bank manager, Cayo Garcia Tuiza, who contracted
with Petitioners, to refute Veloso’s testimony, yet it only presented credit investigator
Grego Mutia. Nowhere from Mutia’s testimony can it be gleaned that PBC represented to
Petitioners that the transaction they were entering into was not a pure loan but had trust
receipt implications.

The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes
the dishonesty and abuse of confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is the owner. Here, it is crystal clear
45 

that on the part of Petitioners there was neither dishonesty nor abuse of confidence in the
handling of money to the prejudice of PBC. Petitioners continually endeavored to meet
their obligations, as shown by several receipts issued by PBC acknowledging payment of
the loan.

The Information charges Petitioners with intent to defraud and misappropriating the
money for their personal use. The mala prohibita nature of the alleged offense
notwithstanding, intent as a state of mind was not proved to be present in Petitioners’
situation. Petitioners employed no artifice in dealing with PBC and never did they evade
payment of their obligation nor attempt to abscond. Instead, Petitioners sought favorable
terms precisely to meet their obligation.

Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-
sale, contrary to the express provision embodied in the trust receipt. They are contractors
who obtained the fungible goods for their construction project. At no time did title over the
construction materials pass to the bank, but directly to the Petitioners from CM Builders
Centre. This impresses upon the trust receipt in question vagueness and ambiguity, which
should not be the basis for criminal prosecution in the event of violation of its provisions. 46

The practice of banks of making borrowers sign trust receipts to facilitate collection of
loans and place them under the threats of criminal prosecution should they be unable to
pay it may be unjust and inequitable, if not reprehensible. Such agreements are contracts
of adhesion which borrowers have no option but to sign lest their loan be disapproved.
The resort to this scheme leaves poor and hapless borrowers at the mercy of banks, and
is prone to misinterpretation, as had happened in this case. Eventually, PBC showed its
true colors and admitted that it was only after collection of the money, as manifested by its
Affidavit of Desistance.

WHEREFORE, the challenged Decision of 6 March 1989 and the Resolution of 16

October 1989 of the Court of Appeals in CA-GR. No. 05408 are REVERSED and
SET ASIDE. Petitioners are hereby ACQUITTED of the crime charged, i.e., for violation of
P.D. No. 115 in relation to Article 315 of the Revised Penal Code.

No costs.

SO ORDERED.

THIRD DIVISION

G.R. No. 159912               August 17, 2007

UNITED COCONUT PLANTERS BANK, Petitioner, vs. SPOUSES SAMUEL and ODETTE

BELUSO, Respondents.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which seeks to
annul the Court of Appeals Decision 1 dated 21 January 2003 and its Resolution 2 dated 9
September 2003 in CA-G.R. CV No. 67318. The assailed Court of Appeals Decision and
Resolution affirmed in turn the Decision 3 dated 23 March 2000 and Order 4 dated 8 May 2000 of the
Regional Trial Court (RTC), Branch 65 of Makati City, in Civil Case No. 99-314, declaring void the
interest rate provided in the promissory notes executed by the respondents Spouses Samuel and
Odette Beluso (spouses Beluso) in favor of petitioner United Coconut Planters Bank (UCPB).

The procedural and factual antecedents of this case are as follows:

On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a Credit
Agreement whereby the latter could avail from the former credit of up to a maximum amount of
₱1.2 Million pesos for a term ending on 30 April 1997. The spouses Beluso constituted, other than
their promissory notes, a real estate mortgage over parcels of land in Roxas City, covered by
Transfer Certificates of Title No. T-31539 and T-27828, as additional security for the obligation.
The Credit Agreement was subsequently amended to increase the amount of the Promissory
Notes Line to a maximum of ₱2.35 Million pesos and to extend the term thereof to 28 February
1998.

The spouses Beluso availed themselves of the credit line under the following Promissory Notes:

PN # Date of PN Maturity Date Amount Secured

8314-96-00083-3 29 April 1996 27 August 1996 ₱ 700,000

8314-96-00085-0 2 May 1996 30 August 1996 ₱ 500,000

8314-96-000292-2 20 November 1996 20 March 1997 ₱ 800,000

The three promissory notes were renewed several times. On 30 April 1997, the payment of the
principal and interest of the latter two promissory notes were debited from the spouses Beluso’s
account with UCPB; yet, a consolidated loan for ₱1.3 Million was again released to the spouses
Beluso under one promissory note with a due date of 28 February 1998.

To completely avail themselves of the ₱2.35 Million credit line extended to them by UCPB, the
spouses Beluso executed two more promissory notes for a total of ₱350,000.00:

PN # Date of PN Maturity Date Amount Secured

97-00363-1 11 December 1997 28 February 1998 ₱ 200,000

98-00002-4 2 January 1998 28 February 1998 ₱ 150,000

However, the spouses Beluso alleged that the amounts covered by these last two promissory
notes were never released or credited to their account and, thus, claimed that the principal
indebtedness was only ₱2 Million.

In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to
34%. From 1996 to February 1998 the spouses Beluso were able to pay the total sum of
₱763,692.03.

From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty on the
obligations of the spouses Beluso, as follows:

PN # Amount Secured Interest Penalty Total

97-00363-1 ₱ 200,000 31% 36% ₱ 225,313.24

97-00366-6 ₱ 700,000 30.17% 32.786% ₱ 795,294.72

(7 days) (102 days)

97-00368-2 ₱ 1,300,000 28% 30.41% ₱ 1,462,124.54

(2 days) (102 days)

98-00002-4 ₱ 150,000 33% 36% ₱ 170,034.71

 (102 days)

The spouses Beluso, however, failed to make any payment of the foregoing amounts.

On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation of
₱2,932,543.00 plus 25% attorney’s fees, but the spouses Beluso failed to comply therewith. On 28
December 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso to secure
their credit line, which, by that time, already ballooned to ₱3,784,603.00.

On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and Damages
against UCPB with the RTC of Makati City.

On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case as follows:

PREMISES CONSIDERED, judgment is hereby rendered declaring the interest rate used by
[UCPB] void and the foreclosure and Sheriff’s Certificate of Sale void. [UCPB] is hereby ordered to
return to [the spouses Beluso] the properties subject of the foreclosure; to pay [the spouses
Beluso] the amount of ₱50,000.00 by way of attorney’s fees; and to pay the costs of suit. [The
spouses Beluso] are hereby ordered to pay [UCPB] the sum of ₱1,560,308.00. 5

On 8 May 2000, the RTC denied UCPB’s Motion for Reconsideration, 6 prompting UCPB to appeal
the RTC Decision with the Court of Appeals. The Court of Appeals affirmed the RTC Decision, to
wit:

WHEREFORE, premises considered, the decision dated March 23, 2000 of the Regional Trial
Court, Branch 65, Makati City in Civil Case No. 99-314 is hereby AFFIRMED subject to the
modification that defendant-appellant UCPB is not liable for attorney’s fees or the costs of suit. 7

On 9 September 2003, the Court of Appeals denied UCPB’s Motion for Reconsideration for lack of
merit. UCPB thus filed the present petition, submitting the following issues for our resolution:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND

REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH
DECLARED VOID THE PROVISION ON INTEREST RATE AGREED UPON BETWEEN
PETITIONER AND RESPONDENTS

II

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND

REVERSIBLE ERROR WHEN IT AFFIRMED THE COMPUTATION BY THE TRIAL COURT OF
RESPONDENTS’ INDEBTEDNESS AND ORDERED RESPONDENTS TO PAY PETITIONER
THE AMOUNT OF ONLY ONE MILLION FIVE HUNDRED SIXTY THOUSAND THREE
HUNDRED EIGHT PESOS (₱1,560,308.00)

III

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND

REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH
ANNULLED THE FORECLOSURE BY PETITIONER OF THE SUBJECT PROPERTIES DUE TO
AN ALLEGED "INCORRECT COMPUTATION" OF RESPONDENTS’ INDEBTEDNESS

IV

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND

REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH
FOUND PETITIONER LIABLE FOR VIOLATION OF THE TRUTH IN LENDING ACT

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND

REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE DISMISSAL OF THE CASE
BECAUSE THE RESPONDENTS ARE GUILTY OF FORUM SHOPPING8
Validity of the Interest Rates

The Court of Appeals held that the imposition of interest in the following provision found in the
promissory notes of the spouses Beluso is void, as the interest rates and the bases therefor were
determined solely by petitioner UCPB:

FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND ODETTE
BELUSO (BORROWER), jointly and severally promise to pay to UNITED COCONUT PLANTERS
BANK (LENDER) or order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the sum of
______________ PESOS, (P_____), Philippine Currency, with interest thereon at the rate
indicative of DBD retail rate or as determined by the Branch Head. 9

UCPB asserts that this is a reversible error, and claims that while the interest rate was not
numerically quantified in the face of the promissory notes, it was nonetheless categorically fixed, at
the time of execution thereof, at the "rate indicative of the DBD retail rate." UCPB contends that
said provision must be read with another stipulation in the promissory notes subjecting to review
the interest rate as fixed:

The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of interest
and charges which other banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER.10

In this regard, UCPB avers that these are valid reference rates akin to a "prevailing rate" or "prime
rate" allowed by this Court in Polotan v. Court of Appeals. 11 Furthermore, UCPB argues that even if
the proviso "as determined by the branch head" is considered void, such a declaration would not
ipso facto render the connecting clause "indicative of DBD retail rate" void in view of the
separability clause of the Credit Agreement, which reads:

Section 9.08 Separability Clause. If any one or more of the provisions contained in this
AGREEMENT, or documents executed in connection herewith shall be declared invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the remaining provisions
hereof shall not in any way be affected or impaired. 12

According to UCPB, the imposition of the questioned interest rates did not infringe on the principle
of mutuality of contracts, because the spouses Beluso had the liberty to choose whether or not to
renew their credit line at the new interest rates pegged by petitioner. 13 UCPB also claims that
assuming there was any defect in the mutuality of the contract at the time of its inception, such
defect was cured by the subsequent conduct of the spouses Beluso in availing themselves of the
credit line from April 1996 to February 1998 without airing any protest with respect to the interest
rates imposed by UCPB. According to UCPB, therefore, the spouses Beluso are in estoppel. 14

We agree with the Court of Appeals, and find no merit in the contentions of UCPB.

Article 1308 of the Civil Code provides:

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left
to the will of one of them.

We applied this provision in Philippine National Bank v. Court of Appeals, 15 where we held:

In order that obligations arising from contracts may have the force of law between the parties,
there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will
of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence,
even assuming that the P1.8 million loan agreement between the PNB and the private respondent
gave the PNB a license (although in fact there was none) to increase the interest rate at will during
the term of the loan, that license would have been null and void for being violative of the principle
of mutuality essential in contracts. It would have invested the loan agreement with the character of
a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the
debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union &
Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the
courts of justice must protect against abuse and imposition.
The provision stating that the interest shall be at the "rate indicative of DBD retail rate or as
determined by the Branch Head" is indeed dependent solely on the will of petitioner UCPB. Under
such provision, petitioner UCPB has two choices on what the interest rate shall be: (1) a rate
indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As UCPB is
given this choice, the rate should be categorically determinable in both choices. If either of these
two choices presents an opportunity for UCPB to fix the rate at will, the bank can easily choose
such an option, thus making the entire interest rate provision violative of the principle of mutuality
of contracts.

Not just one, but rather both, of these choices are dependent solely on the will of UCPB. Clearly, a
rate "as determined by the Branch Head" gives the latter unfettered discretion on what the rate
may be. The Branch Head may choose any rate he or she desires. As regards the rate "indicative
of the DBD retail rate," the same cannot be considered as valid for being akin to a "prevailing rate"
or "prime rate" allowed by this Court in Polotan. The interest rate in Polotan reads:

The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and
Trust Company. x x x.16

In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties
can easily determine the interest rate by applying simple arithmetic. On the other hand, the
provision in the case at bar does not specify any margin above or below the DBD retail rate. UCPB
can peg the interest at any percentage above or below the DBD retail rate, again giving it
unfettered discretion in determining the interest rate.

The stipulation in the promissory notes subjecting the interest rate to review does not render the
imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According to
said stipulation:

The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of interest
and charges which other banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER.17

It should be pointed out that the authority to review the interest rate was given UCPB alone as the
lender. Moreover, UCPB may apply the considerations enumerated in this provision as it wishes.
As worded in the above provision, UCPB may give as much weight as it desires to each of the
following considerations: (1) the prevailing financial and monetary condition; (2) the rate of interest
and charges which other banks or financial institutions charge or offer to charge for similar
accommodations; and/or (3) the resulting profitability to the LENDER (UCPB) after due
consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case of
the interest rate provision, there is no fixed margin above or below these considerations.

In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as
to the interest to be imposed, as both options violate the principle of mutuality of contracts.

UCPB likewise failed to convince us that the spouses Beluso were in estoppel.

Estoppel cannot be predicated on an illegal act. As between the parties to a contract, validity
cannot be given to it by estoppel if it is prohibited by law or is against public policy. 18

The interest rate provisions in the case at bar are illegal not only because of the provisions of the
Civil Code on mutuality of contracts, but also, as shall be discussed later, because they violate the
Truth in Lending Act. Not disclosing the true finance charges in connection with the extensions of
credit is, furthermore, a form of deception which we cannot countenance. It is against the policy of
the State as stated in the Truth in Lending Act:

Sec. 2. Declaration of Policy. – It is hereby declared to be the policy of the State to protect its
citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure
of such cost with a view of preventing the uninformed use of credit to the detriment of the national
economy.19

Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending
provisions are found in the promissory notes themselves, not in the credit line. In fixing the interest
rates in the promissory notes to cover the renewed credit line, UCPB still reserved to itself the
same two options – (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the
Branch Head.

Error in Computation

UCPB asserts that while both the RTC and the Court of Appeals voided the interest rates imposed
by UCPB, both failed to include in their computation of the outstanding obligation of the spouses
Beluso the legal rate of interest of 12% per annum. Furthermore, the penalty charges were also
deleted in the decisions of the RTC and the Court of Appeals. Section 2.04, Article II on "Interest
and other Bank Charges" of the subject Credit Agreement, provides:

Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01 of this
ARTICLE, any principal obligation of the CLIENT hereunder which is not paid when due shall be
subject to a penalty charge of one percent (1%) of the amount of such obligation per month
computed from due date until the obligation is paid in full. If the bank accelerates teh (sic) payment
of availments hereunder pursuant to ARTICLE VIII hereof, the penalty charge shall be used on the
total principal amount outstanding and unpaid computed from the date of acceleration until the
obligation is paid in full.20

Paragraph 4 of the promissory notes also states:

In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly and severally,
agree to pay an additional sum equivalent to twenty-five percent (25%) of the total due on the Note
as attorney’s fee, aside from the expenses and costs of collection whether actually incurred or not,
and a penalty charge of one percent (1%) per month on the total amount due and unpaid from date
of default until fully paid.21

Petitioner further claims that it is likewise entitled to attorney’s fees, pursuant to Section 9.06 of the
Credit Agreement, thus:

If the BANK shall require the services of counsel for the enforcement of its rights under this
AGREEMENT, the Note(s), the collaterals and other related documents, the BANK shall be
entitled to recover attorney’s fees equivalent to not less than twenty-five percent (25%) of the total
amounts due and outstanding exclusive of costs and other expenses. 22

Another alleged computational error pointed out by UCPB is the negation of the Compounding
Interest agreed upon by the parties under Section 2.02 of the Credit Agreement:

Section 2.02 Compounding Interest. Interest not paid when due shall form part of the principal and
shall be subject to the same interest rate as herein stipulated. 23 and paragraph 3 of the subject
promissory notes:

Interest not paid when due shall be added to, and become part of the principal and shall likewise
bear interest at the same rate.24

UCPB lastly avers that the application of the spouses Beluso’s payments in the disputed
computation does not reflect the parties’ agreement.  The RTC deducted the payment made by
1avvphi1

the spouses Beluso amounting to ₱763,693.00 from the principal of ₱2,350,000.00. This was
allegedly inconsistent with the Credit Agreement, as well as with the agreement of the parties as to
the facts of the case. In paragraph 7 of the spouses Beluso’s Manifestation and Motion on
Proposed Stipulation of Facts and Issues vis-à-vis UCPB’s Manifestation, the parties agreed that
the amount of ₱763,693.00 was applied to the interest and not to the principal, in accord with
Section 3.03, Article II of the Credit Agreement on "Order of the Application of Payments," which
provides:

Section 3.03 Application of Payment. Payments made by the CLIENT shall be applied in
accordance with the following order of preference:

1. Accounts receivable and other out-of-pocket expenses

2. Front-end Fee, Origination Fee, Attorney’s Fee and other expenses of collection;
 3. Penalty charges;

4. Past due interest;

5. Principal amortization/Payment in arrears;

6. Advance interest;

7. Outstanding balance; and

8. All other obligations of CLIENT to the BANK, if any.25

Thus, according to UCPB, the interest charges, penalty charges, and attorney’s fees had been
erroneously excluded by the RTC and the Court of Appeals from the computation of the total
amount due and demandable from spouses Beluso.

The spouses Beluso’s defense as to all these issues is that the demand made by UCPB is for a
considerably bigger amount and, therefore, the demand should be considered void. There being
no valid demand, according to the spouses Beluso, there would be no default, and therefore the
interests and penalties would not commence to run. As it was likewise improper to foreclose the
mortgaged properties or file a case against the spouses Beluso, attorney’s fees were not
warranted.

We agree with UCPB on this score. Default commences upon judicial or extrajudicial
demand.26 The excess amount in such a demand does not nullify the demand itself, which is valid
with respect to the proper amount. A contrary ruling would put commercial transactions in disarray,
as validity of demands would be dependent on the exactness of the computations thereof, which
are too often contested.

There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are
considered in default with respect to the proper amount and, therefore, the interests and the
penalties began to run at that point.

As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized that
said legal interest should be imposed, thus: "There being no valid stipulation as to interest, the
legal rate of interest shall be charged." 27 It seems that the RTC inadvertently overlooked its non-
inclusion in its computation.

The spouses Beluso had even originally asked for the RTC to impose this legal rate of interest in
both the body and the prayer of its petition with the RTC:

12. Since the provision on the fixing of the rate of interest by the sole will of the respondent Bank is
null and void, only the legal rate of interest which is 12% per annum can be legally charged and
imposed by the bank, which would amount to only about P599,000.00 since 1996 up to August 31,
1998.

xxxx

WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order:

xxxx

2. By way of example for the public good against the Bank’s taking unfair advantage of the weaker
party to their contract, declaring the legal rate of 12% per annum, as the imposable rate of interest
up to February 28, 1999 on the loan of 2.350 million. 28

All these show that the spouses Beluso had acknowledged before the RTC their obligation to pay
a 12% legal interest on their loans. When the RTC failed to include the 12% legal interest in its
computation, however, the spouses Beluso merely defended in the appellate courts this non-
inclusion, as the same was beneficial to them. We see, however, sufficient basis to impose a 12%
legal interest in favor of petitioner in the case at bar, as what we have voided is merely the
stipulated rate of interest and not the stipulation that the loan shall earn interest.

We must likewise uphold the contract stipulation providing the compounding of interest. The
provisions in the Credit Agreement and in the promissory notes providing for the compounding of
interest were neither nullified by the RTC or the Court of Appeals, nor assailed by the spouses
Beluso in their petition with the RTC. The compounding of interests has furthermore been declared
by this Court to be legal. We have held in Tan v. Court of Appeals, 29 that:

Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn
interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid,
which as added principal, shall earn new interest.

As regards the imposition of penalties, however, although we are likewise upholding the imposition
thereof in the contract, we find the rate iniquitous. Like in the case of grossly excessive interests,
the penalty stipulated in the contract may also be reduced by the courts if it is iniquitous or
unconscionable.30

We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous considering
the fact that this penalty is already over and above the compounded interest likewise imposed in
the contract. If a 36% interest in itself has been declared unconscionable by this Court, 31 what
more a 30.41% to 36% penalty, over and above the payment of compounded interest? UCPB itself
must have realized this, as it gave us a sample computation of the spouses Beluso’s obligation if
both the interest and the penalty charge are reduced to 12%.

As regards the attorney’s fees, the spouses Beluso can actually be liable therefor even if there had
been no demand. Filing a case in court is the judicial demand referred to in Article 1169 32 of the
Civil Code, which would put the obligor in delay.

The RTC, however, also held UCPB liable for attorney’s fees in this case, as the spouses Beluso
were forced to litigate the issue on the illegality of the interest rate provision of the promissory
notes. The award of attorney’s fees, it must be recalled, falls under the sound discretion of the
court.33 Since both parties were forced to litigate to protect their respective rights, and both are
entitled to the award of attorney’s fees from the other, practical reasons dictate that we set off or
compensate both parties’ liabilities for attorney’s fees. Therefore, instead of awarding attorney’s
fees in favor of petitioner, we shall merely affirm the deletion of the award of attorney’s fees to the
spouses Beluso.

In sum, we hold that spouses Beluso should still be held liable for a compounded legal interest of
12% per annum and a penalty charge of 12% per annum. We also hold that, instead of awarding
attorney’s fees in favor of petitioner, we shall merely affirm the deletion of the award of attorney’s
fees to the spouses Beluso.

Annulment of the Foreclosure Sale

Properties of spouses Beluso had been foreclosed, titles to which had already been consolidated
on 19 February 2001 and 20 March 2001 in the name of UCPB, as the spouses Beluso failed to
exercise their right of redemption which expired on 25 March 2000. The RTC, however, annulled
the foreclosure of mortgage based on an alleged incorrect computation of the spouses Beluso’s
indebtedness.

UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present in the
case at bar. Furthermore, the annulment of the foreclosure proceedings and the certificates of sale
were mooted by the subsequent issuance of new certificates of title in the name of said bank.
UCPB claims that the spouses Beluso’s action for annulment of foreclosure constitutes a collateral
attack on its certificates of title, an act proscribed by Section 48 of Presidential Decree No. 1529,
otherwise known as the Property Registration Decree, which provides:

Section 48. Certificate not subject to collateral attack. – A certificate of title shall not be subject to
collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding in
accordance with law.

The spouses Beluso retort that since they had the right to refuse payment of an excessive demand
on their account, they cannot be said to be in default for refusing to pay the same. Consequently,
according to the spouses Beluso, the "enforcement of such illegal and overcharged demand
through foreclosure of mortgage" should be voided.

We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we already
found that a valid demand was made by UCPB upon the spouses Beluso, despite being excessive,
the spouses Beluso are considered in default with respect to the proper amount of their obligation
to UCPB and, thus, the property they mortgaged to secure such amounts may be foreclosed.
Consequently, proceeds of the foreclosure sale should be applied to the extent of the amounts to
which UCPB is rightfully entitled.

As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are present in
this case. The grounds for the proper annulment of the foreclosure sale are the following: (1) that
there was fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the
purchaser; (2) that the sale had not been fairly and regularly conducted; or (3) that the price was
inadequate and the inadequacy was so great as to shock the conscience of the court. 34

Liability for Violation of Truth in Lending Act

The RTC, affirmed by the Court of Appeals, imposed a fine of ₱26,000.00 for UCPB’s alleged
violation of Republic Act No. 3765, otherwise known as the Truth in Lending Act.

UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in Lending Act
which mandates the filing of an action to recover such penalty must be made under the following
circumstances:

Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any
person any information in violation of this Act or any regulation issued thereunder shall be liable to
such person in the amount of ₱100 or in an amount equal to twice the finance charge required by
such creditor in connection with such transaction, whichever is greater, except that such liability
shall not exceed ₱2,000 on any credit transaction. Action to recover such penalty may be brought
by such person within one year from the date of the occurrence of the violation, in any court of
competent jurisdiction. x x x (Emphasis ours.)

According to UCPB, the Court of Appeals even stated that "[a]dmittedly the original complaint did
not explicitly allege a violation of the ‘Truth in Lending Act’ and no action to formally admit the
amended petition [which expressly alleges violation of the Truth in Lending Act] was made either
by [respondents] spouses Beluso and the lower court. x x x."35

UCPB further claims that the action to recover the penalty for the violation of the Truth in Lending
Act had been barred by the one-year prescriptive period provided for in the Act. UCPB asserts that
per the records of the case, the latest of the subject promissory notes had been executed on 2
January 1998, but the original petition of the spouses Beluso was filed before the RTC on 9
February 1999, which was after the expiration of the period to file the same on 2 January 1999.

On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appeals ruled:

Admittedly the original complaint did not explicitly allege a violation of the ‘Truth in Lending Act’
and no action to formally admit the amended petition was made either by [respondents] spouses
Beluso and the lower court. In such transactions, the debtor and the lending institutions do not deal
on an equal footing and this law was intended to protect the public from hidden or undisclosed
charges on their loan obligations, requiring a full disclosure thereof by the lender. We find that its
infringement may be inferred or implied from allegations that when [respondents] spouses Beluso
executed the promissory notes, the interest rate chargeable thereon were left blank. Thus,
[petitioner] UCPB failed to discharge its duty to disclose in full to [respondents] Spouses Beluso
the charges applicable on their loans.36

We agree with the Court of Appeals. The allegations in the complaint, much more than the title
thereof, are controlling. Other than that stated by the Court of Appeals, we find that the allegation
of violation of the Truth in Lending Act can also be inferred from the same allegation in the
complaint we discussed earlier:

b.) In unilaterally imposing an increased interest rates (sic) respondent bank has relied on the
provision of their promissory note granting respondent bank the power to unilaterally fix the interest
rates, which rate was not determined in the promissory note but was left solely to the will of the
Branch Head of the respondent Bank, x x x.37

The allegation that the promissory notes grant UCPB the power to unilaterally fix the interest rates
certainly also means that the promissory notes do not contain a "clear statement in writing" of "(6)
the finance charge expressed in terms of pesos and centavos; and (7) the percentage that the
finance charge bears to the amount to be financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation." 38 Furthermore, the spouses Beluso’s prayer "for
such other reliefs just and equitable in the premises" should be deemed to include the civil penalty
provided for in Section 6(a) of the Truth in Lending Act.
UCPB’s contention that this action to recover the penalty for the violation of the Truth in Lending
Act has already prescribed is likewise without merit. The penalty for the violation of the act is ₱100
or an amount equal to twice the finance charge required by such creditor in connection with such
transaction, whichever is greater, except that such liability shall not exceed ₱2,000.00 on any
credit transaction.39 As this penalty depends on the finance charge required of the borrower, the
borrower’s cause of action would only accrue when such finance charge is required. In the case at
bar, the date of the demand for payment of the finance charge is 2 September 1998, while the
foreclosure was made on 28 December 1998. The filing of the case on 9 February 1999 is
therefore within the one-year prescriptive period.

UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be
inferred nor implied from the allegations made in the complaint. 40 Pertinent provisions of the Act
read:

Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any
person any information in violation of this Act or any regulation issued thereunder shall be liable to
such person in the amount of ₱100 or in an amount equal to twice the finance charge required by
such creditor in connection with such transaction, whichever is the greater, except that such
liability shall not exceed ₱2,000 on any credit transaction. Action to recover such penalty may be
brought by such person within one year from the date of the occurrence of the violation, in any
court of competent jurisdiction. In any action under this subsection in which any person is entitled
to a recovery, the creditor shall be liable for reasonable attorney’s fees and court costs as
determined by the court.

xxxx

(c) Any person who willfully violates any provision of this Act or any regulation issued thereunder
shall be fined by not less than ₱1,000 or more than ₱5,000 or imprisonment for not less than 6
months, nor more than one year or both.

As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said
Act gives rise to both criminal and civil liabilities. Section 6(c) considers a criminal offense the
willful violation of the Act, imposing the penalty therefor of fine, imprisonment or both. Section 6(a),
on the other hand, clearly provides for a civil cause of action for failure to disclose any information
of the required information to any person in violation of the Act. The penalty therefor is an amount
of ₱100 or in an amount equal to twice the finance charge required by the creditor in connection
with such transaction, whichever is greater, except that the liability shall not exceed ₱2,000.00 on
any credit transaction. The action to recover such penalty may be instituted by the aggrieved
private person separately and independently from the criminal case for the same offense.

In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of the Truth
in Lending Act had been jointly instituted with (1) the action to declare the interests in the
promissory notes void, and (2) the action to declare the foreclosure void. This joinder is allowed
under Rule 2, Section 5 of the Rules of Court, which provides:

SEC. 5. Joinder of causes of action.—A party may in one pleading assert, in the alternative or
otherwise, as many causes of action as he may have against an opposing party, subject to the
following conditions:

(a) The party joining the causes of action shall comply with the rules on joinder of parties;

(b) The joinder shall not include special civil actions or actions governed by special rules;

(c) Where the causes of action are between the same parties but pertain to different
venues or jurisdictions, the joinder may be allowed in the Regional Trial Court provided
one of the causes of action falls within the jurisdiction of said court and the venue lies
therein; and

(d) Where the claims in all the causes of action are principally for recovery of money, the
aggregate amount claimed shall be the test of jurisdiction.

In attacking the RTC’s disposition on the violation of the Truth in Lending Act since the same was
not alleged in the complaint, UCPB is actually asserting a violation of due process. Indeed, due
process mandates that a defendant should be sufficiently apprised of the matters he or she would
be defending himself or herself against. However, in the 1 July 1999 pre-trial brief filed by the
spouses Beluso before the RTC, the claim for civil sanctions for violation of the Truth in Lending
Act was expressly alleged, thus:

Moreover, since from the start, respondent bank violated the Truth in Lending Act in not informing
the borrower in writing before the execution of the Promissory Notes of the interest rate expressed
as a percentage of the total loan, the respondent bank instead is liable to pay petitioners double
the amount the bank is charging petitioners by way of sanction for its violation. 41

In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:

b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in Lending Act
provision to express the interest rate as a simple annual percentage of the loan? 42

These assertions are so clear and unequivocal that any attempt of UCPB to feign ignorance of the
assertion of this issue in this case as to prevent it from putting up a defense thereto is plainly
hogwash.

Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try and
adjudicate the alleged violation of the Truth in Lending Act, considering that the present action
allegedly involved a single credit transaction as there was only one Promissory Note Line.

We disagree. We have already ruled that the action to recover the penalty under Section 6(a) of
the Truth in Lending Act had been jointly instituted with (1) the action to declare the interests in the
promissory notes void, and (2) the action to declare the foreclosure void. There had been no
question that the above actions belong to the jurisdiction of the RTC. Subsection (c) of the above-
quoted Section 5 of the Rules of Court on Joinder of Causes of Action provides:

(c) Where the causes of action are between the same parties but pertain to different venues or
jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes of
action falls within the jurisdiction of said court and the venue lies therein.

Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since
the former is merely a preparatory contract to the contract of loan or mutuum. Under such credit
line, the bank is merely obliged, for the considerations specified therefor, to lend to the other party
amounts not exceeding the limit provided. The credit transaction thus occurred not when the credit
line was opened, but rather when the credit line was availed of. In the case at bar, the violation of
the Truth in Lending Act allegedly occurred not when the parties executed the Credit Agreement,
where no interest rate was mentioned, but when the parties executed the promissory notes, where
the allegedly offending interest rate was stipulated.

UCPB further argues that since the spouses Beluso were duly given copies of the subject
promissory notes after their execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.

Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure
statement must be furnished prior to the consummation of the transaction:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent applicable
and in accordance with rules and regulations prescribed by the Board, the following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2)

(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and
 (7) the percentage that the finance bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.

The rationale of this provision is to protect users of credit from a lack of awareness of the true cost
thereof, proceeding from the experience that banks are able to conceal such true cost by hidden
charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like.
The law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of
their loan, to enable them to give full consent to the contract, and to properly evaluate their options
in arriving at business decisions. Upholding UCPB’s claim of substantial compliance would defeat
these purposes of the Truth in Lending Act. The belated discovery of the true cost of credit will too
often not be able to reverse the ill effects of an already consummated business decision.

In addition, the promissory notes, the copies of which were presented to the spouses Beluso after
execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate
provision therein does not sufficiently indicate with particularity the interest rate to be applied to the
loan covered by said promissory notes.

Forum Shopping

UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC, Makati City)
on the ground that the spouses Beluso instituted another case (Civil Case No. V-7227) before the
RTC of Roxas City, involving the same parties and issues. UCPB claims that while Civil Case No.
V-7227 initially appears to be a different action, as it prayed for the issuance of a temporary
restraining order and/or injunction to stop foreclosure of spouses Beluso’s properties, it poses
issues which are similar to those of the present case. 43 To prove its point, UCPB cited the spouses
Beluso’s Amended Petition in Civil Case No. V-7227, which contains similar allegations as those in
the present case. The RTC of Makati denied UCPB’s Motion to Dismiss Case No. 99-314 for lack
of merit. Petitioner UCPB raised the same issue with the Court of Appeals, and is raising the same
issue with us now.

The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of Roxas City, a
Petition for Injunction Against Foreclosure, is the propriety of the foreclosure before the true
account of spouses Beluso is determined. On the other hand, the issue in Case No. 99-314 before
the RTC of Makati City is the validity of the interest rate provision. The spouses Beluso claim that
Civil Case No. V-7227 has become moot because, before the RTC of Roxas City could act on the
restraining order, UCPB proceeded with the foreclosure and auction sale. As the act sought to be
restrained by Civil Case No. V-7227 has already been accomplished, the spouses Beluso had to
file a different action, that of Annulment of the Foreclosure Sale, Case No. 99-314 with the RTC,
Makati City.

Even if we assume for the sake of argument, however, that only one cause of action is involved in
the two civil actions, namely, the violation of the right of the spouses Beluso not to have their
property foreclosed for an amount they do not owe, the Rules of Court nevertheless allows the
filing of the second action. Civil Case No. V-7227 was dismissed by the RTC of Roxas City before
the filing of Case No. 99-314 with the RTC of Makati City, since the venue of litigation as provided
for in the Credit Agreement is in Makati City.

Rule 16, Section 5 bars the refiling of an action previously dismissed only in the following
instances:

SEC. 5. Effect of dismissal.—Subject to the right of appeal, an order granting a motion to dismiss
based on paragraphs (f), (h) and (i) of section 1 hereof shall bar the refiling of the same action or
claim. (n)

Improper venue as a ground for the dismissal of an action is found in paragraph (c) of Section 1,
not in paragraphs (f), (h) and (i):

SECTION 1. Grounds.—Within the time for but before filing the answer to the complaint or
pleading asserting a claim, a motion to dismiss may be made on any of the following grounds:

(a) That the court has no jurisdiction over the person of the defending party;

(b) That the court has no jurisdiction over the subject matter of the claim;

(c) That venue is improperly laid;

 (d) That the plaintiff has no legal capacity to sue;

(e) That there is another action pending between the same parties for the same cause;

(f) That the cause of action is barred by a prior judgment or by the statute of limitations;

(g) That the pleading asserting the claim states no cause of action;

(h) That the claim or demand set forth in the plaintiff’s pleading has been paid, waived,
abandoned, or otherwise extinguished;

(i) That the claim on which the action is founded is unenforceable under the provisions of
the statute of frauds; and

(j) That a condition precedent for filing the claim has not been complied with. 44 (Emphases
supplied.)

When an action is dismissed on the motion of the other party, it is only when the ground for the
dismissal of an action is found in paragraphs (f), (h) and (i) that the action cannot be refiled. As
regards all the other grounds, the complainant is allowed to file same action, but should take care
that, this time, it is filed with the proper court or after the accomplishment of the erstwhile absent
condition precedent, as the case may be.

UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed by the
spouses Beluso on 15 January 1999 with the RTC of Roxas City, which Motion had not yet been
ruled upon when the spouses Beluso filed Civil Case No. 99-314 with the RTC of Makati. Hence,
there were allegedly two pending actions between the same parties on the same issue at the time
of the filing of Civil Case No. 99-314 on 9 February 1999 with the RTC of Makati. This will still not
change our findings. It is indeed the general rule that in cases where there are two pending actions
between the same parties on the same issue, it should be the later case that should be dismissed.
However, this rule is not absolute. According to this Court in Allied Banking Corporation v. Court of
Appeals45 :

In these cases, it is evident that the first action was filed in anticipation of the filing of the later
action and the purpose is to preempt the later suit or provide a basis for seeking the dismissal of
the second action.

Even if this is not the purpose for the filing of the first action, it may nevertheless be dismissed if
the later action is the more appropriate vehicle for the ventilation of the issues between the
parties. Thus, in Ramos v. Peralta, it was held:

[T]he rule on litis pendentia does not require that the later case should yield to the earlier case.
What is required merely is that there be another pending action, not a prior pending action.
Considering the broader scope of inquiry involved in Civil Case No. 4102 and the location of the
property involved, no error was committed by the lower court in deferring to the Bataan court's
jurisdiction.

Given, therefore, the pendency of two actions, the following are the relevant considerations in
determining which action should be dismissed: (1) the date of filing, with preference generally
given to the first action filed to be retained; (2) whether the action sought to be dismissed was filed
merely to preempt the later action or to anticipate its filing and lay the basis for its dismissal; and
(3) whether the action is the appropriate vehicle for litigating the issues between the parties.

In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action for
injunction against a foreclosure sale that has already been held, while Civil Case No. 99-314
before the RTC of Makati City includes an action for the annulment of said foreclosure, an action
certainly more proper in view of the execution of the foreclosure sale. The former case was
improperly filed in Roxas City, while the latter was filed in Makati City, the proper venue of the
action as mandated by the Credit Agreement. It is evident, therefore, that Civil Case No. 99-314 is
the more appropriate vehicle for litigating the issues between the parties, as compared to Civil
Case No. V-7227. Thus, we rule that the RTC of Makati City was not in error in not dismissing Civil
Case No. 99-314.

WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the following
MODIFICATIONS:
 1. In addition to the sum of ₱2,350,000.00 as determined by the courts a quo, respondent
spouses Samuel and Odette Beluso are also liable for the following amounts:

a. Penalty of 12% per annum on the amount due46 from the date of demand; and

b. Compounded legal interest of 12% per annum on the amount due 47 from date of
demand;

2. The following amounts shall be deducted from the liability of the spouses Samuel and
Odette Beluso:

a. Payments made by the spouses in the amount of ₱763,692.00. These payments

shall be applied to the date of actual payment of the following in the order that they
are listed, to wit:

i. penalty charges due and demandable as of the time of payment;

ii. interest due and demandable as of the time of payment;

iii. principal amortization/payment in arrears as of the time of payment;

iv. outstanding balance.

b. Penalty under Republic Act No. 3765 in the amount of ₱26,000.00. This amount
shall be deducted from the liability of the spouses Samuel and Odette Beluso on 9
February 1999 to the following in the order that they are listed, to wit:

i. penalty charges due and demandable as of time of payment;

ii. interest due and demandable as of the time of payment;

iii. principal amortization/payment in arrears as of the time of payment;

iv. outstanding balance.

3. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts

which the Regional Trial Court and the Court of Appeals ordered respondents to pay, as
modified in this Decision, shall be deducted from the proceeds of the foreclosure sale.

SO ORDERED.

SECOND DIVISION

G.R. No. 175949, January 30, 2017

UNITED ALLOY PHILIPPINES CORPORATION, SPOUSES DAVID C. CHUA AND

LUTEN CHUA, Petitioners, v. UNITED COCONUT PLANTERS BANK, Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari seeking the reversal and setting
aside of the Decision1 and Resolution2 of the Court of Appeals (CA),  dated September
21, 2006 and December 11, 2006, respectively, in CA-G.R. CV No. 81079. The
assailed Decision affirmed the Decision of the Regional Trial Court (RTC) of Makati
City, Branch 135, in Civil Case No. 01-1332, while the questioned Resolution denied
petitioners' Motion for Reconsideration.

The pertinent factual and procedural antecedents of the case are as follows: chanRoblesvirtualLawlibrary

On December 18, 2000, herein petitioner corporation, United Alloy Philippines

Corporation (UNIALLOY)  applied for and was granted a credit accommodation by
herein respondent United Coconut Planters Bank (UCPB) in the amount of
PhP50,000,000.00, as evidenced by a Credit Agreement. 3 Part of UNIALLOY's
obligation under the Credit Agreement was secured by a Surety Agreement, 4 dated
December 18, 2000, executed by UNIALLOY Chairman, Jakob Van Der Sluis (Van Der
Sluis), UNIALLOY President, David Chua and his spouse, Luten Chua (Spouses
Chua),  and one Yang Kim Eng (Yang). Six (6) Promissory Notes,5 were later executed
by UNIALLOY in UCPB's favor, to wit:chanRoblesvirtualLawlibrary

1) #8111-00-20031-1, executed on December 18, 2000, in the amount of

US$110,000.00;
2) #8111-00-00110-6, executed on December 18, 2000, in the amount of
PhP6,000,000.00;
3) #8111-00-00112-2, executed on December 27, 2000, in the amount of
PhP3,900,000.00;
4) #8111-01-20005-6, executed on February 7, 2001, in the amount of
US$320,000.00;
5) #8111-01-00009-0, executed on February 26, 2001, in the amount of
PhP1,600,000.00;
6) #8111-01-00030-8, executed on April 30, 2001, in the amount of
PhP16,029,320.88.

In addition, as part of the consideration for the credit accommodation, UNIALLOY and
UCPB also entered into a "lease-purchase" contract wherein the former assured the
latter that it will purchase several real properties which UCPB co-owns with the
Development Bank of the Philippines.

Subsequently, UNIALLOY failed to pay its loan obligations. As a result, UCPB filed
against UNIALLOY, the spouses Chua, Yang and Van Der Sluis an action for Sum of
Money with Prayer for Preliminary Attachment 6 on August 27, 2001. The collection
case was filed with the Regional Trial Court of Makati City (RTC of Makati) and
docketed as Civil Case No. 01-1332. Consequently, UCPB also unilaterally rescinded
its lease-purchase contract with UNIALLOY.

On the other hand, on even date, UNIALLOY filed against UCPB, UCPB Vice-President
Robert Chua and Van Der Sluis a complaint for Annulment and/or Reformation of
Contract with Damages, with Prayer for a Writ of Preliminary Injunction or Temporary
Restraining Order.7 Claiming that it holds office and conducts its business operations
in Tagoloan, Misamis Oriental, UNIALLOY filed the case with the Regional Trial Court
of Cagayan De Oro City (RTC of CDO) and was docketed as Civil Case No. 2001-219.
UNIALLOY contended that Van Der Sluis, in cahoots with UCPB Vice-President Robert
Chua, committed fraud, manipulation and misrepresentation to obtain the subject
loan for their own benefit. UNIALLOY prayed, among others, that three (3) of the six
(6) Promissory Notes it executed be annulled or reformed or that it be released from
liability thereon.

On September 12, 2001, UNIALLOY filed an Urgent Motion to Dismiss 8 the collection
case (Civil Case No. 01-1332) filed by UCPB on the ground of litis pendentia  and
forum shopping. UNIALLOY contended that its complaint for annulment of contract
(Civil Case No. 2001-219) and the collection case filed by UCPB involves the same
parties and causes of action. On October 31, 2001, the RTC of Makati issued an
Order9 denying UNIALLOY's motion to dismiss.

In the meantime, UCPB and its co-defendants also filed a Motion to Dismiss
UNIALLOY's complaint for annulment of contract on the grounds of improper venue,
forum shopping, litis pendentia,  and harassment or nuisance suit. On September 13,
2001, the RTC of CDO issued an Order 10 dismissing UNIALLOY's complaint for
annulment of contract. The dispositive portion of the Order reads, thus:
chanRoblesvirtualLawlibrary

ACCORDINGLY, finding meritorious that the venue is improperly laid and the
complain[ant] engaged in forum-shopping and harassment of defendant Jakob Van
Der Sluis, this case is hereby DISMISSED rendering the prayer for issuance of a writ
of preliminary injunction moot and academic, and ordering plaintiff to turn over
possession of the subject premises of the properties in question at Barangay Gracia,
Tagoloan, Misamis Oriental to defendant United Coconut Planters Bank.
SO ORDERED.11

Thereafter, on motion, the RTC of CDO issued an Order of Execution, dated

September 14, 2001, directing UNIALLOY to tum over to UCPB the property subject of
their lease-purchase agreement.

UNIALLOY then filed a petition for certiorari and mandamus with the CA questioning

the September 13 and September 14, 2001 Orders of the RTC of CDO. UNIALLOY also
prayed for the issuance of a writ of preliminary injunction. The case was docketed as
CA G.R. SP. No. 67079.

On February 18, 2002, the CA promulgated a Resolution 12 granting UNIALLOY's prayer

for the issuance of a writ of preliminary injunction. UCPB questioned the above CA
Resolution by filing a petition for certiorari with this Court, which was docketed as
G.R. No. 152238. On March 18, 2002, this Court issued a Resolution which restrained
the CA from enforcing its February 18, 2002 Resolution.

On January 28, 2005, this Court, rendered its Decision in G.R. No. 152238 denying
UCPB's petition for certiorari  and affirming the CA Resolution granting the writ of
preliminary injunction.

Thereafter, on August 17, 2007, the CA promulgated a Decision dismissing

UNIALLOY's certiorari  petition and affirming the September 13 and September 14,
2001 Orders of the RTC of CDO. UNIALLOY then filed a petition for review
on certiorari challenging the above CA Decision. The case was docketed as G.R. No.
179257.

On November 23, 2015, this Court promulgated a Decision in G.R. No. 179257
denying UNIALLOY's petition. This Court held that the CA did not err in affirming the
dismissal of UNIALLOY's complaint on the grounds of improper venue, forum shopping
and for being a harassment suit. This Court also ruled that the August 17, 2007
Decision of the CA neither violated this Court's January 28, 2005 Decision in G.R. No.
152238 nor contradicted the CA's February 18, 2002 Resolution granting the
preliminary injunction prayed for by UNIALLOY because the dismissal of UNIALLOY's
main action carried with it the dissolution of any ancillary relief previously granted in
the said case, such as the abovementioned preliminary injunction. Subsequently, this
Court's Decision in G.R. No. 179257 became final and executory per Entry of
Judgment dated January 20, 2016.

Meanwhile, on March 15, 2002, UNIALLOY filed with the RTC of Makati an omnibus
motion praying for the suspension of the proceedings of the collection case in the said
court on the ground of pendency of the certiorari petition it filed with this
Court.13 However, the RTC denied UNIALLOY's motion in its Order 14 dated August 19,
2002.

Subsequently, on June 17, 2003, the RTC of Makati rendered Judgment in the
collection case in favor of UCPB. The dispositive portion of the RTC Decision reads,
thus:chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff.

Defendants are hereby ordered to pay plaintiff the following: chanRoblesvirtualLawlibrary

a. The sum of US DOLLARS: (US$435,494.44) with interest and penalty charges from
August 1, 2001 until fully paid.

b. The sum of P26,940,950.80 with interest and penalty charges from August 1, 2001
until fully paid.
c. Attorney's fees in the amount of P1,000,000.00.
d. Costs of suit.

SO ORDERED.15
UNIALLOY appealed the above RTC Decision with the CA.

On September 21, 2006, the CA rendered its assailed judgment denying UNIALLOY's
appeal and affirming the questioned RTC Decision.

Hence, the instant petition raising the following issues: chanRoblesvirtualLawlibrary

5.01 THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS, REVERSIBLE

ERROR, IF NOT GRAVE ABUSE OF DISCRETION, IN REFUSING TO RESOLVE AS TO –

I
WHETHER OR NOT THE TRIAL COURT ERRED IN DENYING PETITIONERS' URGENT
MOTION TO DISMISS

II
WHETHER OR NOT THE TRIAL COURT ERRED IN DENYING PETITIONERS' OMNIBUS
MOTION TO SUSPEND PROCEEDINGS AND TO LIFT WRIT OF PRELIMINARY
ATTACHMENT

III
WHETHER OR NOT THE TRIAL COURT ERRED AND/OR COMMITTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR IN EXCESS OF JURISDICTION IN RENDERING
THE ASSAILED QUESTIONED DECISION WHEN THERE IS A PENDING CIVIL ACTION
BEFORE THE REGIONAL TRIAL COURT OF CAGAYAN DE ORO, BRANCH 40, INVOLVING
THE SAME PARTIES AND SUBJECT MATTER WHICH CASE, IS NOW PENDING AND
ASSAILED BY THE PLAINTIFF-APPELLEE VIA PETITION BEFORE THE HONORABLE
SUPREME COURT.

5.02 THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS, REVERSIBLE

ERROR IF NOT GRAVE ABUSE OF DISCRETION, IN DENYING PETITIONERS' URGENT
MOTION FOR RECONSIDERATION WITHOUT STATING CLEARLY AND DISTINCTLY THE
FACTUAL AND LEGAL BASIS THEREOF.16

Petitioners' basic argument is that the resolution of the instant petition basically
hinges on the outcome of the petition filed under G.R. No. 179257. Considering that
the promissory notes subject of G.R. No. 179257 are among the promissory notes
which are also involved in the present case, petitioner contends that a judgment by
this Court in G.R. No. 179257 that reverses the Decision of the RTC of Cagayan de
Oro City, which in effect would declare the nullity of the subject promissory notes,
may conflict with the Decision of this Court in the present petition, which involves the
collection of the sum being represented in the same promissory notes. Thus,
petitioner prays for the dismissal of the collection case (Civil Case No. 01-1332) filed
by UCPB or the suspension of proceedings therein pending resolution of its petition in
G.R. No. 179257.

However, as mentioned above, on November 23, 2015, the 2 nd Division of this Court
already came up with a Decision in G.R. No. 179257 which affirmed the RTC's
dismissal of UNIALLOY's complaint. Pertinent portions of the said Decision read as
follows:chanRoblesvirtualLawlibrary

CA CDO did not err in

affirming the
dismissal of UniAiloy's
Complaint on the
grounds of improper
venue, forum
shopping and for
being a harassment
suit

The RTC was correct in dismissing UniAlloy's Complaint on the ground of improper
venue. In general, personal actions must be commenced and tried (i) where the
plaintiff or any of the principal plaintiffs resides, (ii) where the defendant or any of the
principal defendants resides, or (III) in the case of a resident defendant where he
may be found, at the election of the plaintiff. Nevertheless, the parties may agree in
writing to limit the venue of future actions between them to a specified place.

In the case at bench, paragraph 18 of the LPA expressly provides that "[a]ny legal
action arising out of or in connection with this Agreement shall be
brought exclusively  in the proper courts of Makati City, Metro Manila." Hence, UniAlloy
should have filed its complaint before the RTC of Makati City, and not with the RTC of
Cagayan de Oro City.

But to justify its choice of venue, UniAlloy insists that the subject matter of its
Complaint in Civil Case No. 2001-219 is not the LPA, but the fictitious loans that
purportedly matured on April 17, 2001.

UniAlloy's insistence lacks merit. Its Complaint unequivocally sought to declare "as
null and void the unilateral rescission made by defendant UCPB of its subsisting Lease
Purchase Agreement with [UniAlloy]." What UCPB unilaterally rescinded is the LPA and
without it there can be no unilateral rescission to speak of. Hence, the LPA is the
subject matter or at least one of the subject matters of the Complaint. Moreover, and
to paraphrase the aforecited paragraph 18 of the LPA, as long as the controversy
arises out of or is connected therewith, any legal action should be filed exclusively
before the proper courts of Makati City. Thus, even assuming that the LPA is not the
main subject matter, considering that what is being sought to be annulled is an act
connected and inseparably related thereto, the Complaint should have been filed
before the proper courts in Makati City.

With regard forum-shopping, our review of the records of this case revealed that
UniAlloy did not disclose in the Verification/Certification of the Complaint the
pendency of Civil Case No. 2001-156 entitled "Ernesto Paraiso and United Alloy
Philippines Corporation v. Jakob Van Der Sluis." The trial court took judicial notice of
its pendency as said case is also assigned and pending before it. Thus, we adopt the
following unrebutted finding of the RTC: chanRoblesvirtualLawlibrary

These two civil cases have identical causes of action or issues against defendant Jakob
Van Der Sluis for having misrepresented to plaintiff and its stockholders that he can
extend financial assistance in running the operation of the corporation, such that on
April 6, 2001 plaintiff adopted a Stockholders Resolution making defendant Jakob
chairman of the corporation for having the financial capability to provide the financial
needs of plaintiff and willing to finance the operational needs thereof; that a
Memorandum of Agreement was subsequently entered between the parties whereby
defendant Jakob obligated to provide sufficient financial loan to plaintiff to make it
profitable; that Jakob maliciously and willfiilly reneged [on] his financial commitments
to plaintiff prompting the stockholders to call his attention and warned him of avoiding
the said agreement; that defendant who had then complete control of plaintiffs bank
account with defendant UCPB, through fraudulent machinations and manipulations,
was able to maliciously convince David C. Chua to pre-sign several checks; that
defendant Jakob facilitated several huge loans purportedly obtained by plaintiff which
defendant himself could not even account and did not even pay the debts of the
corporation but instead abused and maliciously manipulated plaintiffs account.
Forum-shopping indeed exists in this case, for both actions involve the same
transactions and same essential facts and circumstances as well as identical causes of
action, subject matter and issues, x x x

As mentioned above, this Court's Decision m the above case has become final and
executory on January 20, 2016.

Thus, contrary to petitioners' position, there is no longer any possibility that the
Decision of the RTC of CDO may conflict with the disposition of the present case
because UNIALLOY's complaint for annulment of contract has already been dismissed
with finality. This Court will, thus, proceed to resolve the merits of the instant case.
The fundamental issue here is whether or not herein petitioners, together with their
co-defendants Van Der Sluis and Yang, are liable to pay respondent the amounts
awarded by the RTC of Makati City in its June 17, 2003 Decision. 17

The Court rules in the affirmative.

As ruled upon by both the RTC and the CA, UNIALLOY failed to pay its obligations
under the above promissory notes and that herein petitioner Spouses Chua, together
with their co-defendants Van Der Sluis and Yang freely executed a Surety Agreement
whereby they bound themselves jointly and severally with UNIALLOY, to pay the
latter's loan obligations with UCPB. Pertinent portions of the said Surety Agreement
are reproduced hereunder, to wit: chanRoblesvirtualLawlibrary

xxxx

ARTICLE I

LIABILITIES OF SURETIES

Section 1.01. The SURETIES, jointly and severally with the PRINCIPAL, hereby

unconditionally and irrevocably guarantee the full and complete payment when due,
whether at stated maturity, by acceleration or otherwise, of all sums payable by
the PRINCIPAL under the Credit Agreement, the Note/s and other related
documents or instruments referred to therein (hereinafter referred to collectively as
the "Loan Documents") the terms and conditions of which are hereby deemed
incorporated by reference.

The liability of the SURETIES shall not be limited to the aggregate principal amount

of FIFTY MILLION PESOS (P50,000,000.00), Philippine Currency, or its
foreign currency equivalent, but shall include such interest, fees, penalties and
other charges due thereon, as well as any and all renewals, extensions, restructurings
or conversions of the Accommodation or any portion thereof, as may appear in the
books and records of account of the BANK.

Such extension/s, renewal/s, restructuring/s, or conversion/s of

the Accommodation or any portion thereof, including any increase in the principal
amount thereof, or the imposable interest rates and other bank charges, shall be
binding upon the SURETIES under the terms of this SURETY AGREEMENT, without
need of any further notice to or consent or conformity of the SURETIES, all of which
are hereby expressly waived.

Section 1.02. This SURETY AGREEMENT is a guarantee of payment and not merely

of collection and is intended to be a perfect and continuing indemnity in favor of
the BANK for the amounts and to the extent stated above. For this purpose,
the SURETIES hereby commit that for as long as this SURETY AGREEMENT is in
effect, the SURETIES shall not sell, lease, transfer, assign or encumber any of its
present and future properties without the written consent of the BANK, which consent
will not be unreasonably withheld.

The liability of the SURETIES shall be absolute, irrevocable, unconditional, direct,

immediate and not contingent upon the pursuit by the BANK of whatever remedies it
may have against the PRINCIPAL or the other sureties for the Accommodation, and
shall be performed by the SURETIES strictly in accordance with the terms hereof and
under any and all circumstances, including the existence of any claim, set-off, defense
or other rights which the SURETIES or any person or entity may have at any time
against the BANK for any reason whatsoever, whether or not related to this SURETY
AGREEMENT, the Loan Documents or under such other documents executed in
relation thereto, or contemplated hereunder.

ARTICLE II

TERM
Section 2.01. This SURETY AGREEMENT shall remain in full force and effect until
payment in full of all amount for which the PRINCIPAL is or may be liable as set
forth in ARTICLE I hereof, regardless of the absence of any further or other assent or
conformity of, or notice to the SURETIES, or any circumstance, or provision of law
which might otherwise constitute a defense or discharge of the SURETIES, all of
which are hereby expressly waived.

ARTICLE III

DEFAULT

Section 3.01. If the BANK shall declare the obligation of the PRINCIPAL to be due

and payable because of the happening of any of the event of default as defined in
the Credit Agreement, the SURETIES, upon receipt of written notice from the
BANK, shall forthwith pay to the BANK the full amount of the said obligations, without
need of demand, protest or notice of any kind, other than the notice provided herein,
all of which are likewise expressly waived by the SURETIES.

In this connection, the BANK is hereby given full power and authority to apply
whatever moneys or things of value belonging to the SURETIES which may be in the
possession or control of the BANK in payment of the obligations mentioned above.

ARTICLE IV

BINDING EFFECT

Section 4.01. This SURETY AGREEMENT shall except upon the other SURETIES, if

any whose liability(ies) is/are extinguished by way of compromise or otherwise be
binding upon the SURETIES, their heirs and successors in interest and shall inure to
the benefit of and be enforceable by the BANK, its assigns and successors in interest.
For this purpose, the SURETIES have agreed, as they hereby agree, that an
extinguishment of liability(ies) of any of the SURETIES shall not be an obstacle to
the BANK from demanding payment from the other SURETIES, if any, so long as
the Accommodation has not been fully collected.
x x x x18
Petitioners do not deny their liability under the abovequoted Surety Agreement.

As correctly held by both the RTC and the CA, Article 1159 of the Civil Code expressly
provides that "[o]bligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith." The RTC as well as the
CA found nothing which would justify or excuse petitioners from non-compliance with
their obligations under the contract they have entered into. Thus, it becomes
apparent that petitioners are merely attempting to evade or, at least, delay the
inevitable performance of their obligation to pay under the Surety Agreement and the
subject promissory notes which were executed in respondent's favor.

The Court notes, however, that the interest rates imposed on the subject promissory
notes were made subject to review and adjustment at the sole discretion and under
the exclusive will of UCPB. Moreover, aside from the Consolidated Statement of
Account attached to the demand letters addressed to petitioner spouses Chua and
their co-defendants,19 no other competent evidence was shown to prove the total
amount of interest due on the above promissory notes. In fact, based on the attached
Consolidated Statement of Account, UCPB has already imposed a 24% interest rate on
the total amount due on respondents' peso obligation for a short period of six months.
Settled is the rule that any contract which appears to be heavily weighed in favor of
one of the parties so as to lead to an unconscionable result is void. 19 Any stipulation
regarding the validity or compliance of the contract which is left solely to the will of
one of the parties, is likewise, invalid.20

Moreover, courts have the authority to strike down or to modify provisions in

promissory notes that grant the lenders unrestrained power to increase interest rates,
penalties and other charges at the latter's sole discretion and without giving prior
notice to and securing the consent of the borrowers. 21 This unilateral authority is
anathema to the mutuality of contracts and enable lenders to take undue advantage
of borrowers.22 Although the Usury Law has been effectively repealed, courts may still
reduce iniquitous or unconscionable rates charged for the use of
23
money.  Furthermore, excessive interests, penalties and other charges not revealed
in disclosure statements issued by banks, even if stipulated in the promissory notes,
cannot be given effect under the Truth in Lending Act.24

The Court, thus, finds it proper to modify the interest rates imposed on respondents'
obligation. Pursuant to the ruling in Nacar v. Gallery Frames, et. al., 25 the sums of
US$435,494.44 and PhP26,940,950.80 due to UCPB shall earn interest at the rate of
12% per annum from the date of default, on August, 1, 2001, until June 30, 2013 and
thereafter, at the rate of 6% per annum, from July 1, 2013 until finality of this
Decision. The total amount owing to UCPB as set forth in this Decision shall further
earn legal interest at the rate of 6% per annum from its finality until full payment
thereof, this interim period being deemed to be by then an equivalent to a
forbearance of credit.

Finally, pursuant to the parties' Credit Agreement as well as the subject Promissory
Notes, respondents are also liable to pay a penalty charge at the rate of 1% per
month or 12% per annum.

WHEREFORE, the instant petition is DENIED. The Decision and Resolution of the

Court of Appeals, dated September 21, 2006 and December 11, 2006, respectively, in
CA-G.R. CV No. 81079, are AFFIRMED with MODIFICATION by directing petitioners
and their co-defendants to pay respondent UCPB the following: chanRoblesvirtualLawlibrary

(1) the principal amounts of US$435,494.44 and PhP26,940,950.80; chanrobleslaw

(2) legal interest of 12% per annum on the above principal amounts reckoned from
August 1, 2001 until June 30, 2013; chanrobleslaw

(3) penalty charge of 12% per annum from August 1, 2001 until fully paid; and

(4) an interest of 6% from July 1, 2013 until fully paid.

SO ORDERED. chanroblesvirtuallawlibrary