FIRST DIVISION

CAROLYN M. GARCIA, G.R. No. 154878

Petitioner,
Present:

PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
AZCUNA and
GARCIA, JJ.

RICA MARIE S. THIO,

Respondent. Promulgated:

March 16, 2007

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DECISION

CORONA, J.:

Assailed in this petition for review on certiorari[1] are the June 19, 2002 decision[2] and August 20,
2002 resolution[3] of the Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside the February
28, 1997 decision of the Regional Trial Court (RTC) of Makati City, Branch 58.
Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M.
Garcia a crossed check[4] dated February 24, 1995 in the amount of US$100,000 payable to the order of
a certain Marilou Santiago.[5] Thereafter, petitioner received from respondent every month (specifically,
on March 24, April 26, June 26 and July 26, all in 1995) the amount of US$3,000 [6] and P76,500[7] on
July 26,[8] August 26, September 26 and October 26, 1995.

In June 1995, respondent received from petitioner another crossed check[9] dated June 29, 1995 in
the amount of P500,000, also payable to the order of Marilou Santiago. [10] Consequently, petitioner
received from respondent the amount of P20,000 every month on August 5, September 5, October 5
and November 5, 1995.[11]

According to petitioner, respondent failed to pay the principal amounts of the loans (US$100,000
and P500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a complaint for sum of
money and damages in the RTC of Makati City, Branch 58 against respondent, seeking to collect the
sums of US$100,000, with interest thereon at 3% a month from October 26, 1995 and P500,000, with
interest thereon at 4% a month from November 5, 1995, plus attorneys fees and actual damages. [12]

Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of
US$100,000 with interest thereon at the rate of 3% per month, which loan would mature on October 26,
1995.[13] The amount of this loan was covered by the first check. On June 29, 1995, respondent again
borrowed the amount of P500,000 at an agreed monthly interest of 4%, the maturity date of which was
on November 5, 1995.[14] The amount of this loan was covered by the second check. For both loans, no
promissory note was executed since petitioner and respondent were close friends at the
time.[15] Respondent paid the stipulated monthly interest for both loans but on their maturity dates, she
failed to pay the principal amounts despite repeated demands. [16]

Respondent denied that she contracted the two loans with petitioner and countered that it was
Marilou Santiago to whom petitioner lent the money. She claimed she was merely asked by petitioner to
give the crossed checks to Santiago.[17] She issued the checks for P76,000 and P20,000 not as payment
of interest but to accommodate petitioners request that respondent use her own checks instead of
Santiagos.[18]

In a decision dated February 28, 1997, the RTC ruled in favor of petitioner. [19] It found that
respondent borrowed from petitioner the amounts of US$100,000 with monthly interest of 3%
and P500,000 at a monthly interest of 4%:[20]

WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is

hereby rendered in favor of [petitioner], sentencing [respondent] to pay the former the amount of:

1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month

from October 26, 1995 until fully paid;

2. P500,000.00 with interest thereon at 4% per month from November 5, 1995 until
fully paid.

3. P100,000.00 as and for attorneys fees; and

4. P50,000.00 as and for actual damages.

For lack of merit, [respondents] counterclaim is perforce dismissed.

With costs against [respondent].

IT IS SO ORDERED.[21]

On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan

between the parties:

A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that
[respondent] indeed borrowed money from her. There is nothing in the record that shows that
[respondent] received money from [petitioner]. What is evident is the fact that [respondent] received a
MetroBank [crossed] check dated February 24, 1995 in the sum of US$100,000.00, payable to the order of
Marilou Santiago and a CityTrust [crossed] check dated June 29, 1995 in the amount of P500,000.00,
again payable to the order of Marilou Santiago, both of which were issued by [petitioner]. The checks
received by [respondent], being crossed, may not be encashed but only deposited in the bank by the
payee thereof, that is, by Marilou Santiago herself.

It must be noted that crossing a check has the following effects: (a) the check may not be encashed
but only deposited in the bank; (b) the check may be negotiated only onceto one who has an account with
the bank; (c) and the act of crossing the check serves as warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose,
otherwise, he is not a holder in due course.

Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and delivery to
the payee in contemplation of law since the latter is not the person who could take the checks as a holder,
i.e., as a payee or indorsee thereof, with intent to transfer title thereto. Neither could she be deemed as an
agent of Marilou Santiago with respect to the checks because she was merely facilitating the transactions
between the former and [petitioner].
 With the foregoing circumstances, it may be fairly inferred that there were really no contracts of
loan that existed between the parties. x x x (emphasis supplied) [22]

Hence this petition.[23]

As a rule, only questions of law may be raised in a petition for review on certiorari under Rule 45

of the Rules of Court. However, this case falls under one of the exceptions, i.e., when the factual

findings of the CA (which held that there were no contracts of loan between petitioner and respondent)

and the RTC (which held that there were contracts of loan) are contradictory.[24]

The petition is impressed with merit.

A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the

object of the contract.[25] This is evident in Art. 1934 of the Civil Code which provides:

An accepted promise to deliver something by way of commodatum or simple loan is

binding upon the parties, but the commodatum or simple loan itself shall not be perfected
until the delivery of the object of the contract. (Emphasis supplied)

Upon delivery of the object of the contract of loan (in this case the money received by the debtor when

the checks were encashed) the debtor acquires ownership of such money or loan proceeds and is bound

to pay the creditor an equal amount. [26]

It is undisputed that the checks were delivered to respondent. However, these checks were

crossed and payable not to the order of respondent but to the order of a certain Marilou Santiago. Thus

the main question to be answered is: who borrowed money from petitioner respondent or Santiago?

Petitioner insists that it was upon respondents instruction that both checks were made payable
to Santiago.[27] She maintains that it was also upon respondents instruction that both checks were
delivered to her (respondent) so that she could, in turn, deliver the same to Santiago.[28] Furthermore,
she argues that once respondent received the checks, the latter had possession and control of them such
that she had the choice to either forward them to Santiago (who was already her debtor), to retain them
or to return them to petitioner.[29]

We agree with petitioner. Delivery is the act by which the res or substance thereof is placed

within the actual or constructive possession or control of another.[30] Although respondent did not

physically receive the proceeds of the checks, these instruments were placed in her control and

possession under an arrangement whereby she actually re-lent the amounts to Santiago.

Several factors support this conclusion.

First, respondent admitted that petitioner did not personally know Santiago.[31] It was highly

improbable that petitioner would grant two loans to a complete stranger without requiring as much as
promissory notes or any written acknowledgment of the debt considering that the amounts involved

were quite big. Respondent, on the other hand, already had transactions with Santiago at that time.[32]

Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in

both parties list of witnesses) testified that respondents plan was for petitioner to lend her money at a

monthly interest rate of 3%, after which respondent would lend the same amount to Santiago at a higher

rate of 5% and realize a profit of 2%.[33] This explained why respondent instructed petitioner to make

the checks payable to Santiago. Respondent has not shown any reason why Ruiz testimony should not

be believed.

Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount

of P76,000 each (peso equivalent of US$3,000) for eight months to cover the monthly interest. For

the P500,000 loan, she also issued her own checks in the amount of P20,000 each for four

months.[34] According to respondent, she merely accommodated petitioners request for her to issue her

own checks to cover the interest payments since petitioner was not personally acquainted with

Santiago.[35] She claimed, however, that Santiago would replace the checks with cash. [36] Her

explanation is simply incredible. It is difficult to believe that respondent would put herself in a position

where she would be compelled to pay interest, from her own funds, for loans she allegedly did not

contract. We declared in one case that:

In the assessment of the testimonies of witnesses, this Court is guided by the rule that for evidence to be
believed, it must not only proceed from the mouth of a credible witness, but must be credible in itself such
as the common experience of mankind can approve as probable under the circumstances. We have no test
of the truth of human testimony except its conformity to our knowledge, observation, and experience.
Whatever is repugnant to these belongs to the miraculous, and is outside of juridical cognizance. [37]

Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not

petitioner, who was listed as one of her (Santiagos) creditors. [38]

Last, respondent inexplicably never presented Santiago as a witness to corroborate her

story.[39] The presumption is that evidence willfully suppressed would be adverse if

produced.[40] Respondent was not able to overturn this presumption.

We hold that the CA committed reversible error when it ruled that respondent did not borrow the

amounts of US$100,000 and P500,000 from petitioner. We instead agree with the ruling of the RTC

making respondent liable for the principal amounts of the loans.

We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the
US$100,000 and P500,000 loans respectively. There was no written proof of the interest payable except

for the verbal agreement that the loans would earn 3% and 4% interest per month. Article 1956 of the

Civil Code provides that [n]o interest shall be due unless it has been expressly stipulated in writing.
 Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant to
Article 2209 of the Civil Code. It is well-settled that:

When the obligation is breached, and it consists in the payment of a sum of money, i.e.,
a loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.[41]

Hence, respondent is liable for the payment of legal interest per annum to be computed from
November 21, 1995, the date when she received petitioners demand letter. [42]From the finality of the
decision until it is fully paid, the amount due shall earn interest at 12% per annum, the interim period
being deemed equivalent to a forbearance of credit. [43]

The award of actual damages in the amount of P50,000 and P100,000 attorneys fees is deleted

since the RTC decision did not explain the factual bases for these damages.

WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August
20, 2002 resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET
ASIDE. The February 28, 1997 decision of the Regional Trial Court in Civil Case No. 96-266
is AFFIRMED with the MODIFICATION that respondent is directed to pay petitioner the amounts of
US$100,000 and P500,000 at 12% per annum interest from November 21, 1995 until the finality of the
decision. The total amount due as of the date of finality will earn interest of 12% per annum until fully
paid. The award of actual damages and attorneys fees is deleted.

SO ORDERED.

Republic of the Philippines

Supreme Court

Manila

SPECIAL SECOND DIVISION

POLO S. PANTALEON, G.R. No. 174269
Petitioner,

Present:

- versus - CARPIO MORALES, J.,

Acting Chairperson,

VELASCO, JR.,

AMERICAN EXPRESS LEONARDO-DE CASTRO,

INTERNATIONAL, INC.,
BRION, and
Respondent. 
BERSAMIN, JJ.

Promulgated:

August 25, 2010

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RESOLUTION

BRION, J.:

We resolve the motion for reconsideration filed by respondent American Express International, Inc.
(AMEX) dated June 8, 2009,[1] seeking to reverse our Decision dated May 8, 2009 where we ruled that
AMEX was guilty of culpable delay in fulfilling its obligation to its cardholder petitioner Polo
Pantaleon. Based on this conclusion, we held AMEX liable for moral and exemplary damages, as well
as attorneys fees and costs of litigation.[2]

FACTUAL ANTECEDENTS

The established antecedents of the case are narrated below.

AMEX is a resident foreign corporation engaged in the business of providing credit services through
the operation of a charge card system. Pantaleon has been an AMEX cardholder since 1980.[3]

In October 1991, Pantaleon, together with his wife (Julialinda), daughter (Regina), and son
(Adrian Roberto), went on a guided European tour. On October 25, 1991, the tour group arrived
in Amsterdam. Due to their late arrival, they postponed the tour of the city for the following day.[4]

The next day, the group began their sightseeing at around 8:50 a.m. with a trip to the Coster
Diamond House (Coster). To have enough time for take a guided city tour of Amsterdam before their
departure scheduled on that day, the tour group planned to leave Coster by 9:30 a.m. at the latest.
 While at Coster, Mrs. Pantaleon decided to purchase some diamond pieces worth a total of
US$13,826.00. Pantaleon presented his American Express credit card to the sales clerk to pay for this
purchase. He did this at around 9:15 a.m. The sales clerk swiped the credit card and asked Pantaleon
to sign the charge slip, which was then electronically referred to AMEXs Amsterdam office at 9:20
a.m.[5]

At around 9:40 a.m., Coster had not received approval from AMEX for the purchase so Pantaleon
asked the store clerk to cancel the sale. The store manager, however, convinced Pantaleon to wait a
few more minutes. Subsequently, the store manager informed Pantaleon that AMEX was asking for
bank references; Pantaleon responded by giving the names of his Philippine depository banks.

At around 10 a.m., or 45 minutes after Pantaleon presented his credit card, AMEX still had not
approved the purchase. Since the city tour could not begin until the Pantaleons were onboard the tour
bus, Coster decided to release at around 10:05 a.m. the purchased items to Pantaleon even without
AMEXs approval.

When the Pantaleons finally returned to the tour bus, they found their travel companions visibly
irritated. This irritation intensified when the tour guide announced that they would have to cancel the
tour because of lack of time as they all had to be in Calais, Belgium by 3 p.m. to catch the ferry
to London.[6]

From the records, it appears that after Pantaleons purchase was transmitted for approval to
AMEXs Amsterdam office at 9:20 a.m.; was referred to AMEXs Manila office at 9:33 a.m.; and was
approved by the Manila office at 10:19 a.m. At 10:38 a.m., AMEXs Manila office finally transmitted the
Approval Code to AMEXs Amsterdam office. In all, it took AMEX a total of 78 minutes to approve
Pantaleons purchase and to transmit the approval to the jewelry store.[7]

After the trip to Europe, the Pantaleon family proceeded to the United States. Again, Pantaleon
experienced delay in securing approval for purchases using his American Express credit card on two
separate occasions. He experienced the first delay when he wanted to purchase golf equipment in the
amount of US$1,475.00 at the Richard Metz Golf Studio in New York on October 30, 1991. Another
delay occurred when he wanted to purchase childrens shoes worth US$87.00 at the Quiency Market
in Boston on November 3, 1991.

Upon return to Manila, Pantaleon sent AMEX a letter demanding an apology for the humiliation and
inconvenience he and his family experienced due to the delays in obtaining approval for his credit card
purchases. AMEX responded by explaining that the delay in Amsterdam was due to the amount
involved the charged purchase of US$13,826.00 deviated from Pantaleons established charge
purchase pattern. Dissatisfied with this explanation, Pantaleon filed an action for damages against the
credit card company with the Makati City Regional Trial Court (RTC).

On August 5, 1996, the RTC found AMEX guilty of delay, and awarded Pantaleon P500,000.00 as
moral damages, P300,000.00 as exemplary damages, P100,000.00 as attorneys fees, and P85,233.01
as litigation expenses.

On appeal, the CA reversed the awards.[8] While the CA recognized that delay in the nature
of mora accipiendi or creditors default attended AMEXs approval of Pantaleons purchases, it disagreed
with the RTCs finding that AMEX had breached its contract, noting that the delay was not attended by
bad faith, malice or gross negligence.The appellate court found that AMEX exercised diligent efforts to
effect the approval of Pantaleons purchases; the purchase at Coster posed particularly a problem
because it was at variance with Pantaleons established charge pattern. As there was no proof that
AMEX breached its contract, or that it acted in a wanton, fraudulent or malevolent manner, the
appellate court ruled that AMEX could not be held liable for any form of damages.

Pantaleon questioned this decision via a petition for review on certiorari with this Court.

In our May 8, 2009 decision, we reversed the appellate courts decision and held that AMEX was
guilty of mora solvendi, or debtors default. AMEX, as debtor, had an obligation as the credit provider
to act on Pantaleons purchase requests, whether to approve or disapprove them, with timely dispatch.
Based on the evidence on record, we found that AMEX failed to timely act on Pantaleons purchases.

Based on the testimony of AMEXs credit authorizer Edgardo Jaurique, the approval time for
credit card charges would be three to four seconds under regular circumstances. In Pantaleons case, it
took AMEX 78 minutes to approve the Amsterdam purchase. We attributed this delay to
AMEXs Manila credit authorizer, Edgardo Jaurique, who had to go over Pantaleons past credit history,
his payment record and his credit and bank references before he approved the purchase. Finding this
delay unwarranted, we reinstated the RTC decision and awarded Pantaleon moral and exemplary
damages, as well as attorneys fees and costs of litigation.

THE MOTION FOR RECONSIDERATION

In its motion for reconsideration, AMEX argues that this Court erred when it found AMEX guilty of
culpable delay in complying with its obligation to act with timely dispatch on Pantaleons purchases.
While AMEX admits that it normally takes seconds to approve charge purchases, it emphasizes that
Pantaleon experienced delay in Amsterdam because his transaction was not a normal one. To recall,
Pantaleon sought to charge in a single transaction jewelry items purchased from Coster in the total
amount of US$13,826.00 or P383,746.16. While the total amount of Pantaleons previous purchases
using his AMEX credit card did exceed US$13,826.00, AMEX points out that these purchases were
made in a span of more than 10 years, not in a single transaction.

Because this was the biggest single transaction that Pantaleon ever made using his AMEX credit
card, AMEX argues that the transaction necessarily required the credit authorizer to carefully review
Pantaleons credit history and bank references. AMEX maintains that it did this not only to ensure
Pantaleons protection (to minimize the possibility that a third party was fraudulently using his credit
card), but also to protect itself from the risk that Pantaleon might not be able to pay for his purchases
on credit. This careful review, according to AMEX, is also in keeping with the extraordinary degree of
diligence required of banks in handling its transactions. AMEX concluded that in these lights, the
thorough review of Pantaleons credit record was motivated by legitimate concerns and could not be
evidence of any ill will, fraud, or negligence by AMEX.

AMEX further points out that the proximate cause of Pantaleons humiliation and
embarrassment was his own decision to proceed with the purchase despite his awareness that the
tour group was waiting for him and his wife. Pantaleon could have prevented the humiliation had he
cancelled the sale when he noticed that the credit approval for the Coster purchase was unusually
delayed.

In his Comment dated February 24, 2010, Pantaleon maintains that AMEX was guilty of mora
solvendi, or delay on the part of the debtor, in complying with its obligation to him. Based on
jurisprudence, a just cause for delay does not relieve the debtor in delay from the consequences of
delay; thus, even if AMEX had a justifiable reason for the delay, this reason would not relieve it from
the liability arising from its failure to timely act on Pantaleons purchase.

In response to AMEXs assertion that the delay was in keeping with its duty to perform its
obligation with extraordinary diligence, Pantaleon claims that this duty includes the timely or prompt
performance of its obligation.

As to AMEXs contention that moral or exemplary damages cannot be awarded absent a finding
of malice, Pantaleon argues that evil motive or design is not always necessary to support a finding of
bad faith; gross negligence or wanton disregard of contractual obligations is sufficient basis for the
award of moral and exemplary damages.

OUR RULING

We GRANT the motion for reconsideration.

Brief historical background

A credit card is defined as any card, plate, coupon book, or other credit device existing for the
purpose of obtaining money, goods, property, labor or services or anything of value on credit. [9] It traces
its roots to the charge card first introduced by the Diners Club in New York City in 1950.[10] American
Express followed suit by introducing its own charge card to the American market in 1958.[11]

In the Philippines, the now defunct Pacific Bank was responsible for bringing the first credit card
into the country in the 1970s.[12] However, it was only in the early 2000s that credit card use gained
wide acceptance in the country, as evidenced by the surge in the number of credit card holders
then.[13]

Nature of Credit Card Transactions

To better understand the dynamics involved in credit card transactions, we turn to the United
States case of Harris Trust & Savings Bank v. McCray[14] which explains:

The bank credit card system involves a tripartite relationship between the issuer bank,
the cardholder, and merchants participating in the system. The issuer bank establishes an
 account on behalf of the person to whom the card is issued, and the two parties enter into an
agreement which governs their relationship. This agreement provides that the bank will pay
for cardholders account the amount of merchandise or services purchased through the use of
the credit card and will also make cash loans available to the cardholder. It also states that
the cardholder shall be liable to the bank for advances and payments made by the bank and
that the cardholders obligation to pay the bank shall not be affected or impaired by any
dispute, claim, or demand by the cardholder with respect to any merchandise or service
purchased.

The merchants participating in the system agree to honor the banks credit cards. The
bank irrevocably agrees to honor and pay the sales slips presented by the merchant if the
merchant performs his undertakings such as checking the list of revoked cards before
accepting the card. x x x.

These slips are forwarded to the member bank which originally issued the card. The
cardholder receives a statement from the bank periodically and may then decide whether to
make payment to the bank in full within a specified period, free of interest, or to defer
payment and ultimately incur an interest charge.

We adopted a similar view in CIR v. American Express International, Inc. (Philippine

branch),[15] where we also recognized that credit card issuers are not limited to banks. We said:

Under RA 8484, the credit card that is issued by banks in general, or by non-banks in
particular, refers to any card x x x or other credit device existing for the purpose of
obtaining x x x goods x x x or services x x x on credit; and is being used usually on a revolving
basis. This means that the consumer-credit arrangement that exists between the issuer and
the holder of the credit card enables the latter to procure goods or services on a continuing
basis as long as the outstanding balance does not exceed a specified limit. The card holder is,
therefore, given the power to obtain present control of goods or service on a promise to pay
for them in the future.

Business establishments may extend credit sales through the use of the credit card facilities
of a non-bank credit card company to avoid the risk of uncollectible accounts from their
customers. Under this system, the establishments do not deposit in their bank accounts the
credit card drafts that arise from the credit sales. Instead, they merely record their
receivables from the credit card company and periodically send the drafts evidencing those
receivables to the latter.

The credit card company, in turn, sends checks as payment to these business
establishments, but it does not redeem the drafts at full price. The agreement between
them usually provides for discounts to be taken by the company upon its redemption of the
drafts. At the end of each month, it then bills its credit card holders for their respective drafts
redeemed during the previous month. If the holders fail to pay the amounts owed, the
company sustains the loss.
 Simply put, every credit card transaction involves three contracts, namely: (a) the sales
contract between the credit card holder and the merchant or the business establishment which
accepted the credit card; (b) the loan agreement between the credit card issuer and the credit card
holder; and lastly, (c) the promise to pay between the credit card issuer and the merchant or business
establishment.[16]
Credit card issuer cardholder relationship

When a credit card company gives the holder the privilege of charging items at establishments
associated with the issuer,[17] a necessary question in a legal analysis is when does this relationship
begin? There are two diverging views on the matter. In City Stores Co. v.
[18]
Henderson, another U.S. decision, held that:

The issuance of a credit card is but an offer to extend a line of open account credit. It is unilateral
and supported by no consideration. The offer may be withdrawn at any time, without prior notice, for any
reason or, indeed, for no reason at all, and its withdrawal breaches no duty for there is no duty to
continue it and violates no rights.

Thus, under this view, each credit card transaction is considered a separate offer and acceptance.

Novack v. Cities Service Oil Co.[19] echoed this view, with the court ruling that the mere issuance
of a credit card did not create a contractual relationship with the cardholder.

On the other end of the spectrum is Gray v. American Express Company[20] which recognized the card
membership agreement itself as a binding contract between the credit card issuer and the card holder.
Unlike in the Novack and the City Stores cases, however, the cardholder in Gray paid an annual fee for
the privilege of being an American Express cardholder.

In our jurisdiction, we generally adhere to the Gray ruling, recognizing the relationship between the
credit card issuer and the credit card holder as a contractual one that is governed by the terms and
conditions found in the card membership agreement.[21] This contract provides the rights and liabilities
of a credit card company to its cardholders and vice versa.

We note that a card membership agreement is a contract of adhesion as its terms are
prepared solely by the credit card issuer, with the cardholder merely affixing his signature
signifying his adhesion to these terms.[22] This circumstance, however, does not render the
agreement void; we have uniformly held that contracts of adhesion are as binding as ordinary
contracts, the reason being that the party who adheres to the contract is free to reject it
entirely.[23] The only effect is that the terms of the contract are construed strictly against the party
who drafted it.[24]

On AMEXs obligations to Pantaleon

We begin by identifying the two privileges that Pantaleon assumes he is entitled to with the issuance
of his AMEX credit card, and on which he anchors his claims. First, Pantaleon presumes that since his
credit card has no pre-set spending limit, AMEX has the obligation to approve all his charge requests.
Conversely, even if AMEX has no such obligation, at the very least it is obliged to act on his charge
requests within a specific period of time.

i. Use of credit card a mere offer to enter into loan agreements

Although we recognize the existence of a relationship between the credit card issuer and the
credit card holder upon the acceptance by the cardholder of the terms of the card membership
agreement (customarily signified by the act of the cardholder in signing the back of the credit
card), we have to distinguish this contractual relationship from the creditor-debtor relationship
which only arises after the credit card issuer has approved the cardholders purchase request. The
first relates merely to an agreement providing for credit facility to the cardholder. The latter
involves the actual credit on loan agreement involving three contracts, namely: the sales
contract between the credit card holder and the merchant or the business establishment which
accepted the credit card; the loan agreement between the credit card issuer and the credit card
holder; and the promise to pay between the credit card issuer and the merchant or business
establishment.

From the loan agreement perspective, the contractual relationship begins to exist only upon the
meeting of the offer[25] and acceptance of the parties involved. In more concrete terms, when
cardholders use their credit cards to pay for their purchases, they merely offer to enter into loan
agreements with the credit card company. Only after the latter approves the purchase requests that
the parties enter into binding loan contracts, in keeping with Article 1319 of the Civil Code, which
provides:

Article 1319. Consent is manifested by the meeting of the offer and the acceptance
upon the thing and the cause which are to constitute the contract. The offer must be certain
and the acceptance absolute. A qualified acceptance constitutes a counter-offer.

This view finds support in the reservation found in the card membership agreement itself, particularly
paragraph 10, which clearly states that AMEX reserve[s] the right to deny authorization for any
requested Charge. By so providing, AMEX made its position clear that it has no obligation to approve
any and all charge requests made by its card holders.

ii. AMEX not guilty of culpable delay

Since AMEX has no obligation to approve the purchase requests of its credit cardholders,
Pantaleon cannot claim that AMEX defaulted in its obligation. Article 1169 of the Civil Code, which
provides the requisites to hold a debtor guilty of culpable delay, states:

Article 1169. Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation. x xx.
 The three requisites for a finding of default are: (a) that the obligation is demandable and
liquidated; (b) the debtor delays performance; and (c) the creditor judicially or extrajudicially requires
the debtors performance.[26]

Based on the above, the first requisite is no longer met because AMEX, by the express terms of
the credit card agreement, is not obligated to approve Pantaleons purchase request. Without a
demandable obligation, there can be no finding of default.

Apart from the lack of any demandable obligation, we also find that Pantaleon failed to make
the demand required by Article 1169 of the Civil Code.

As previously established, the use of a credit card to pay for a purchase is only an offer to the
credit card company to enter a loan agreement with the credit card holder. Before the credit card
issuer accepts this offer, no obligation relating to the loan agreement exists between them. On the
other hand, a demand is defined as the assertion of a legal right; xxx an asking with authority, claiming
or challenging as due.[27] A demand presupposes the existence of an obligation between the parties.

Thus, every time that Pantaleon used his AMEX credit card to pay for his purchases, what the
stores transmitted to AMEX were his offers to execute loan contracts. These obviously could not be
classified as the demand required by law to make the debtor in default, given that no obligation could
arise on the part of AMEX until after AMEX transmitted its acceptance of Pantaleons offers.
Pantaleons act of insisting on and waiting for the charge purchases to be approved by AMEX [28] is not
the demand contemplated by Article 1169 of the Civil Code.

For failing to comply with the requisites of Article 1169, Pantaleons charge that AMEX is guilty of
culpable delay in approving his purchase requests must fail.

iii. On AMEXs obligation to act on the offer within a specific period of time

Even assuming that AMEX had the right to review his credit card history before it approved his
purchase requests, Pantaleon insists that AMEX had an obligation to act on his purchase requests,
either to approve or deny, in a matter of seconds or in timely dispatch. Pantaleon impresses upon us
the existence of this obligation by emphasizing two points: (a) his card has no pre-set spending limit;
and (b) in his twelve years of using his AMEX card, AMEX had always approved his charges in a matter
of seconds.

Pantaleons assertions fail to convince us.

We originally held that AMEX was in culpable delay when it acted on the Coster transaction, as
well as the two other transactions in the United States which took AMEX approximately 15 to 20
minutes to approve. This conclusion appears valid and reasonable at first glance, comparing the time it
took to finally get the Coster purchase approved (a total of 78 minutes), to AMEXs normal approval
time of three to four seconds (based on the testimony of Edgardo Jaurigue, as well as Pantaleons
previous experience). We come to a different result, however, after a closer look at the factual and
legal circumstances of the case.

AMEXs credit authorizer, Edgardo Jaurigue, explained that having no pre-set spending limit in a
credit card simply means that the charges made by the cardholder are approved based on his ability to
pay, as demonstrated by his past spending, payment patterns, and personal
resources.[29] Nevertheless, every time Pantaleon charges a purchase on his credit card, the credit
card company still has to determine whether it will allow this charge, based on his past credit
history. This right to review a card holders credit history, although not specifically set out in the card
membership agreement, is a necessary implication of AMEXs right to deny authorization for any
requested charge.

As for Pantaleons previous experiences with AMEX (i.e., that in the past 12 years, AMEX has
always approved his charge requests in three or four seconds), this record does not establish that
Pantaleon had a legally enforceable obligation to expect AMEX to act on his charge requests within a
matter of seconds. For one, Pantaleon failed to present any evidence to support his assertion that
AMEX acted on purchase requests in a matter of three or four seconds as an established practice.
More importantly, even if Pantaleon did prove that AMEX, as a matter of practice or custom, acted on
its customers purchase requests in a matter of seconds, this would still not be enough to establish a
legally demandable right; as a general rule, a practice or custom is not a source of a legally
demandable or enforceable right.[30]

We next examine the credit card membership agreement, the contract that primarily governs
the relationship between AMEX and Pantaleon. Significantly, there is no provision in this agreement
that obligates AMEX to act on all cardholder purchase requests within a specifically defined period
of time. Thus, regardless of whether the obligation is worded was to act in a matter of seconds or to
act in timely dispatch, the fact remains that no obligation exists on the part of AMEX to act within a
specific period of time. Even Pantaleon admits in his testimony that he could not recall any provision
in the Agreement that guaranteed AMEXs approval of his charge requests within a matter of
minutes.[31]

Nor can Pantaleon look to the law or government issuances as the source of AMEXs alleged
obligation to act upon his credit card purchases within a matter of seconds. As the following survey of
Philippine law on credit card transactions demonstrates, the State does not require credit card
companies to act upon its cardholders purchase requests within a specific period of time.

Republic Act No. 8484 (RA 8484), or the Access Devices Regulation Act of 1998, approved
on February 11, 1998, is the controlling legislation
[32]
that regulates the issuance and use of access devices, including credit cards. The more salient
portions of this law include the imposition of the obligation on a credit card company to disclose
certain important financial information[33] to credit card applicants, as well as a definition of the acts
that constitute access device fraud.

As financial institutions engaged in the business of providing credit, credit card companies fall
under the supervisory powers of the Bangko Sentral ng Pilipinas (BSP).[34]BSP Circular No. 398
dated August 21, 2003 embodies the BSPs policy when it comes to credit cards
 The Bangko Sentral ng Pilipinas (BSP) shall foster the development of consumer credit
through innovative products such as credit cards under conditions of fair and sound
consumer credit practices. The BSP likewise encourages competition and transparency to
ensure more efficient delivery of services and fair dealings with customers. (Emphasis
supplied)

Based on this Circular, x x x [b]efore issuing credit cards, banks and/or their subsidiary credit
card companies must exercise proper diligence by ascertaining that applicants possess good credit
standing and are financially capable of fulfilling their credit commitments. [35] As the above-quoted
policy expressly states, the general intent is to foster fair and sound consumer credit practices.

Other than BSP Circular No. 398, a related circular is BSP Circular No. 454, issued on September
24, 2004, but this circular merely enumerates the unfair collection practices of credit card companies a
matter not relevant to the issue at hand.

In light of the foregoing, we find and so hold that AMEX is neither contractually bound nor
legally obligated to act on its cardholders purchase requests within any specific period of time, much
less a period of a matter of seconds that Pantaleon uses as his standard. The standard therefore is
implicit and, as in all contracts, must be based on fairness and reasonableness, read in relation to the
Civil Code provisions on human relations, as will be discussed below.

AMEX acted with good faith

Thus far, we have already established that: (a) AMEX had neither a contractual nor a legal
obligation to act upon Pantaleons purchases within a specific period of time; and (b) AMEX has a right
to review a cardholders credit card history. Our recognition of these entitlements, however, does not
give AMEX an unlimited right to put off action on cardholders purchase requests for indefinite
periods of time. In acting on cardholders purchase requests, AMEX must take care not to abuse its
rights and cause injury to its clients and/or third persons. We cite in this regard Article 19, in
conjunction with Article 21, of the Civil Code, which provide:

Article 19. Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due and observe honesty and good faith.

Article 21. Any person who willfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the
damage.

Article 19 pervades the entire legal system and ensures that a person suffering damage in the
course of anothers exercise of right or performance of duty, should find himself without relief.[36] It
sets the standard for the conduct of all persons, whether artificial or natural, and requires that
everyone, in the exercise of rights and the performance of obligations, must: (a) act with justice, (b)
give everyone his due, and (c) observe honesty and good faith. It is not because a person invokes his
rights that he can do anything, even to the prejudice and disadvantage of another.[37]
 While Article 19 enumerates the standards of conduct, Article 21 provides the remedy for the
person injured by the willful act, an action for damages. We explained how these two provisions
correlate with each other in GF Equity, Inc. v. Valenzona:[38]

[Article 19], known to contain what is commonly referred to as the principle of abuse
of rights, sets certain standards which must be observed not only in the exercise of one's
rights but also in the performance of one's duties. These standards are the following: to act
with justice; to give everyone his due; and to observe honesty and good faith. The law,
therefore, recognizes a primordial limitation on all rights; that in their exercise, the norms of
human conduct set forth in Article 19 must be observed. A right, though by itself legal
because recognized or granted by law as such, may nevertheless become the source of
some illegality. When a right is exercised in a manner which does not conform with the
norms enshrined in Article 19 and results in damage to another, a legal wrong is thereby
committed for which the wrongdoer must be held responsible. But while Article 19 lays
down a rule of conduct for the government of human relations and for the maintenance of
social order, it does not provide a remedy for its violation. Generally, an action for damages
under either Article 20 or Article 21 would be proper.

In the context of a credit card relationship, although there is neither a contractual stipulation nor a
specific law requiring the credit card issuer to act on the credit card holders offer within a definite
period of time, these principles provide the standard by which to judge AMEXs actions.

According to Pantaleon, even if AMEX did have a right to review his charge purchases, it abused this
right when it unreasonably delayed the processing of the Coster charge purchase, as well as his
purchase requests at the Richard Metz Golf Studio and Kids Unlimited Store; AMEX should have known
that its failure to act immediately on charge referrals would entail inconvenience and result in
humiliation, embarrassment, anxiety and distress to its cardholders who would be required to wait
before closing their transactions.[39]

It is an elementary rule in our jurisdiction that good faith is presumed and that the burden of
proving bad faith rests upon the party alleging it.[40] Although it took AMEX some time before it
approved Pantaleons three charge requests, we find no evidence to suggest that it acted with
deliberate intent to cause Pantaleon any loss or injury, or acted in a manner that was contrary to
morals, good customs or public policy. We give credence to AMEXs claim that its review procedure
was done to ensure Pantaleons own protection as a cardholder and to prevent the possibility that the
credit card was being fraudulently used by a third person.

Pantaleon countered that this review procedure is primarily intended to protect AMEXs
interests, to make sure that the cardholder making the purchase has enough means to pay for the
credit extended. Even if this were the case, however, we do not find any taint of bad faith in such
motive. It is but natural for AMEX to want to ensure that it will extend credit only to people who will
have sufficient means to pay for their purchases. AMEX, after all, is running a business, not a charity,
and it would simply be ludicrous to suggest that it would not want to earn profit for its services. Thus,
so long as AMEX exercises its rights, performs its obligations, and generally acts with good faith, with
no intent to cause harm, even if it may occasionally inconvenience others, it cannot be held liable for
damages.
 We also cannot turn a blind eye to the circumstances surrounding the Coster transaction which,
in our opinion, justified the wait. In Edgardo Jaurigues own words:

Q 21: With reference to the transaction at the Coster Diamond House covered by Exhibit H,
also Exhibit 4 for the defendant, the approval came at 2:19 a.m. after the request was
relayed at 1:33 a.m., can you explain why the approval came after about 46 minutes, more or
less?

A21: Because we have to make certain considerations and evaluations of [Pantaleons] past
spending pattern with [AMEX] at that time before approving plaintiffs request because
[Pantaleon] was at that time making his very first single charge purchase of US$13,826 [this
is below the US$16,112.58 actually billed and paid for by the plaintiff because the difference
was already automatically approved by [AMEX] office in Netherland[s] and the record of
[Pantaleons] past spending with [AMEX] at that time does not favorably support his ability
to pay for such purchase. In fact, if the foregoing internal policy of [AMEX] had been strictly
followed, the transaction would not have been approved at all considering that the past
spending pattern of the plaintiff with [AMEX] at that time does not support his ability to pay
for such purchase.[41]

xxxx

Q: Why did it take so long?

A: It took time to review the account on credit, so, if there is any delinquencies [sic] of the
cardmember. There are factors on deciding the charge itself which are standard measures in
approving the authorization. Now in the case of Mr. Pantaleon although his account is single
charge purchase of US$13,826. [sic] this is below the US$16,000. plus actually billed x x x we
would have already declined the charge outright and asked him his bank account to support
his charge. But due to the length of his membership as cardholder we had to make a decision
on hand.[42]

As Edgardo Jaurigue clarified, the reason why Pantaleon had to wait for AMEXs approval was
because he had to go over Pantaleons credit card history for the past twelve months. [43] It would
certainly be unjust for us to penalize AMEX for merely exercising its right to review Pantaleons credit
history meticulously.

Finally, we said in Garciano v. Court of Appeals that the right to recover [moral damages] under
Article 21 is based on equity, and he who comes to court to demand equity, must come with clean
hands. Article 21 should be construed as granting the right to recover damages to injured persons who
are not themselves at fault.[44] As will be discussed below, Pantaleon is not a blameless party in all this.

Pantaleons action was the proximate cause for his injury

 Pantaleon mainly anchors his claim for moral and exemplary damages on the embarrassment
and humiliation that he felt when the European tour group had to wait for him and his wife for
approximately 35 minutes, and eventually had to cancel the Amsterdam city tour. After thoroughly
reviewing the records of this case, we have come to the conclusion that Pantaleon is the proximate
cause for this embarrassment and humiliation.

As borne by the records, Pantaleon knew even before entering Coster that the tour group would
have to leave the store by 9:30 a.m. to have enough time to take the city tour of Amsterdam before
they left the country. After 9:30 a.m., Pantaleons son, who had boarded the bus ahead of his family,
returned to the store to inform his family that they were the only ones not on the bus and that the
entire tour group was waiting for them. Significantly, Pantaleon tried to cancel the sale at 9:40
a.m. because he did not want to cause any inconvenience to the tour group. However, when Costers
sale manager asked him to wait a few more minutes for the credit card approval, he agreed, despite
the knowledge that he had already caused a 10-minute delay and that the city tour could not start
without him.

In Nikko Hotel Manila Garden v. Reyes,[45] we ruled that a person who knowingly and voluntarily
exposes himself to danger cannot claim damages for the resulting injury:

The doctrine of volenti non fit injuria (to which a person assents is not esteemed in law as
injury) refers to self-inflicted injury or to the consent to injury which precludes the recovery
of damages by one who has knowingly and voluntarily exposed himself to danger, even if he
is not negligent in doing so.

This doctrine, in our view, is wholly applicable to this case. Pantaleon himself testified that the
most basic rule when travelling in a tour group is that you must never be a cause of any delay because
the schedule is very strict.[46] When Pantaleon made up his mind to push through with his purchase, he
must have known that the group would become annoyed and irritated with him. This was the natural,
foreseeable consequence of his decision to make them all wait.

We do not discount the fact that Pantaleon and his family did feel humiliated and embarrassed
when they had to wait for AMEX to approve the Coster purchase in Amsterdam. We have to
acknowledge, however, that Pantaleon was not a helpless victim in this scenario at any time, he could
have cancelled the sale so that the group could go on with the city tour. But he did not.

More importantly, AMEX did not violate any legal duty to Pantaleon under the circumstances
under the principle of damnum absque injuria, or damages without legal wrong, loss without
injury.[47] As we held in BPI Express Card v. CA:[48]
We do not dispute the findings of the lower court that private respondent suffered damages as a
result of the cancellation of his credit card. However, there is a material distinction between damages and
injury. Injury is the illegal invasion of a legal right; damage is the loss, hurt, or harm which results from
the injury; and damages are the recompense or compensation awarded for the damage
suffered. Thus, there can be damage without injury in those instances in which the loss or harm was
not the result of a violation of a legal duty. In such cases, the consequences must be borne by the
injured person alone, the law affords no remedy for damages resulting from an act which does not
amount to a legal injury or wrong. These situations are often called damnum absque injuria.
 In other words, in order that a plaintiff may maintain an action for the injuries of
which he complains, he must establish that such injuries resulted from a breach of duty
which the defendant owed to the plaintiff - a concurrence of injury to the plaintiff and legal
responsibility by the person causing it. The underlying basis for the award of tort damages is
the premise that an individual was injured in contemplation of law. Thus, there must first
be a breach of some duty and the imposition of liability for that breach before damages may
be awarded; and the breach of such duty should be the proximate cause of the injury.

Pantaleon is not entitled to damages

Because AMEX neither breached its contract with Pantaleon, nor acted with culpable delay or
the willful intent to cause harm, we find the award of moral damages to Pantaleon unwarranted.

Similarly, we find no basis to award exemplary damages. In contracts, exemplary damages can
only be awarded if a defendant acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner.[49] The plaintiff must also show that he is entitled to moral, temperate, or compensatory
damages before the court may consider the question of whether or not exemplary damages should be
awarded.[50]

As previously discussed, it took AMEX some time to approve Pantaleons purchase requests
because it had legitimate concerns on the amount being charged; no malicious intent was ever
established here. In the absence of any other damages, the award of exemplary damages clearly lacks
legal basis.

Neither do we find any basis for the award of attorneys fees and costs of litigation. No premium
should be placed on the right to litigate and not every winning party is entitled to an automatic grant
of attorney's fees.[51] To be entitled to attorneys fees and litigation costs, a party must show that he
falls under one of the instances enumerated in Article 2208 of the Civil Code.[52] This, Pantaleon failed
to do. Since we eliminated the award of moral and exemplary damages, so must we delete the award
for attorney's fees and litigation expenses.

Lastly, although we affirm the result of the CA decision, we do so for the reasons stated in this
Resolution and not for those found in the CA decision.

WHEREFORE, premises considered, we SET ASIDE our May 8, 2009 Decision and GRANT the
present motion for reconsideration. The Court of Appeals Decision dated August 18, 2006 is
hereby AFFIRMED. No costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION
G.R. No. 115324 February 19, 2003

PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK), petitioner,

vs.
HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision1 of the Court of Appeals dated June 25, 1991 in CA-G.R. CV No.
11791 and of its Resolution2 dated May 5, 1994, denying the motion for reconsideration of said decision filed by petitioner
Producers Bank of the Philippines.

Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles Sanchez to help her
friend and townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela Marketing and Services ("Sterela" for
brevity). Specifically, Sanchez asked private respondent to deposit in a bank a certain amount of money in the bank account
of Sterela for purposes of its incorporation. She assured private respondent that he could withdraw his money from said
account within a month’s time. Private respondent asked Sanchez to bring Doronilla to their house so that they could discuss
Sanchez’s request.3

On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronilla’s private secretary, met
and discussed the matter. Thereafter, relying on the assurances and representations of Sanchez and Doronilla, private
respondent issued a check in the amount of Two Hundred Thousand Pesos (P200,000.00) in favor of Sterela. Private
respondent instructed his wife, Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account in
the name of Sterela in the Buendia, Makati branch of Producers Bank of the Philippines. However, only Sanchez, Mrs. Vives
and Dumagpi went to the bank to deposit the check. They had with them an authorization letter from Doronilla authorizing
Sanchez and her companions, "in coordination with Mr. Rufo Atienza," to open an account for Sterela Marketing Services in
the amount of P200,000.00. In opening the account, the authorized signatories were Inocencia Vives and/or Angeles
Sanchez. A passbook for Savings Account No. 10-1567 was thereafter issued to Mrs. Vives.4

Subsequently, private respondent learned that Sterela was no longer holding office in the address previously given to him.
Alarmed, he and his wife went to the Bank to verify if their money was still intact. The bank manager referred them to Mr. Rufo
Atienza, the assistant manager, who informed them that part of the money in Savings Account No. 10-1567 had been
withdrawn by Doronilla, and that only P90,000.00 remained therein. He likewise told them that Mrs. Vives could not withdraw
said remaining amount because it had to answer for some postdated checks issued by Doronilla. According to Atienza, after
Mrs. Vives and Sanchez opened Savings Account No. 10-1567, Doronilla opened Current Account No. 10-0320 for Sterela
and authorized the Bank to debit Savings Account No. 10-1567 for the amounts necessary to cover overdrawings in Current
Account No. 10-0320. In opening said current account, Sterela, through Doronilla, obtained a loan of P175,000.00 from the
Bank. To cover payment thereof, Doronilla issued three postdated checks, all of which were dishonored. Atienza also said
that Doronilla could assign or withdraw the money in Savings Account No. 10-1567 because he was the sole proprietor of
Sterela.5

Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he received a letter from Doronilla,
assuring him that his money was intact and would be returned to him. On August 13, 1979, Doronilla issued a postdated
check for Two Hundred Twelve Thousand Pesos (P212,000.00) in favor of private respondent. However, upon presentment
thereof by private respondent to the drawee bank, the check was dishonored. Doronilla requested private respondent to
present the same check on September 15, 1979 but when the latter presented the check, it was again dishonored. 6

Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the return of his client’s
money. Doronilla issued another check for P212,000.00 in private respondent’s favor but the check was again dishonored for
insufficiency of funds.7

Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC) in Pasig, Metro Manila
against Doronilla, Sanchez, Dumagpi and petitioner. The case was docketed as Civil Case No. 44485. He also filed criminal
actions against Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez passed away on March 16, 1985 while the
case was pending before the trial court. On October 3, 1995, the RTC of Pasig, Branch 157, promulgated its Decision in Civil
Case No. 44485, the dispositive portion of which reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J. Doronila, Estrella Dumagpi
and Producers Bank of the Philippines to pay plaintiff Franklin Vives jointly and severally –

(a) the amount of P200,000.00, representing the money deposited, with interest at the legal rate from the filing of the
complaint until the same is fully paid;

(b) the sum of P50,000.00 for moral damages and a similar amount for exemplary damages;

(c) the amount of P40,000.00 for attorney’s fees; and

(d) the costs of the suit.

SO ORDERED.8

Petitioner appealed the trial court’s decision to the Court of Appeals. In its Decision dated June 25, 1991, the appellate court
affirmed in toto the decision of the RTC. 9 It likewise denied with finality petitioner’s motion for reconsideration in its Resolution
dated May 5, 1994.10

On June 30, 1994, petitioner filed the present petition, arguing that –
 I.

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION BETWEEN THE
DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN AND NOT ACCOMMODATION;

II.

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONER’S BANK MANAGER, MR. RUFO
ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should be PRIVATE
RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER SHOULD BE HELD LIABLE UNDER THE PRINCIPLE OF
NATURAL JUSTICE;

III.

THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF THE REGIONAL TRIAL
COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS THE FINDINGS OF THE REGIONAL TRIAL COURT
WERE BASED ON A MISAPPREHENSION OF FACTS;

IV.

THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION IN SALUDARES VS.
MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR ACTS COMMITTED BY AN EMPLOYEE
IS APPLICABLE;

V.

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE LOWER COURT THAT
HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER DEFENDANTS FOR THE
AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS ACCOUNT DEPOSIT, P50,000.00 FOR MORAL DAMAGES,
P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00 FOR ATTORNEY’S FEES AND THE COSTS OF SUIT. 11

Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto on September 25, 1995. The
Court then required private respondent to submit a rejoinder to the reply. However, said rejoinder was filed only on April 21,
1997, due to petitioner’s delay in furnishing private respondent with copy of the reply12 and several substitutions of counsel on
the part of private respondent.13 On January 17, 2001, the Court resolved to give due course to the petition and required the
parties to submit their respective memoranda. 14 Petitioner filed its memorandum on April 16, 2001 while private respondent
submitted his memorandum on March 22, 2001.

Petitioner contends that the transaction between private respondent and Doronilla is a simple loan (mutuum) since all the
elements of a mutuum are present: first, what was delivered by private respondent to Doronilla was money, a consumable
thing; and second, the transaction was onerous as Doronilla was obliged to pay interest, as evidenced by the check issued by
Doronilla in the amount of P212,000.00, or P12,000 more than what private respondent deposited in Sterela’s bank
account.15 Moreover, the fact that private respondent sued his good friend Sanchez for his failure to recover his money from
Doronilla shows that the transaction was not merely gratuitous but "had a business angle" to it. Hence, petitioner argues that it
cannot be held liable for the return of private respondent’s P200,000.00 because it is not privy to the transaction between the
latter and Doronilla.16

It argues further that petitioner’s Assistant Manager, Mr. Rufo Atienza, could not be faulted for allowing Doronilla to withdraw
from the savings account of Sterela since the latter was the sole proprietor of said company. Petitioner asserts that Doronilla’s
May 8, 1979 letter addressed to the bank, authorizing Mrs. Vives and Sanchez to open a savings account for Sterela, did not
contain any authorization for these two to withdraw from said account. Hence, the authority to withdraw therefrom remained
exclusively with Doronilla, who was the sole proprietor of Sterela, and who alone had legal title to the savings
account.17 Petitioner points out that no evidence other than the testimonies of private respondent and Mrs. Vives was
presented during trial to prove that private respondent deposited his P200,000.00 in Sterela’s account for purposes of its
incorporation.18 Hence, petitioner should not be held liable for allowing Doronilla to withdraw from Sterela’s savings account. 1a\^/phi1.net

Petitioner also asserts that the Court of Appeals erred in affirming the trial court’s decision since the findings of fact therein
were not accord with the evidence presented by petitioner during trial to prove that the transaction between private
respondent and Doronilla was a mutuum, and that it committed no wrong in allowing Doronilla to withdraw from Sterela’s
savings account.19

Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable for the actual damages
suffered by private respondent, and neither may it be held liable for moral and exemplary damages as well as attorney’s
fees.20

Private respondent, on the other hand, argues that the transaction between him and Doronilla is not a mutuum but an
accommodation,21 since he did not actually part with the ownership of his P200,000.00 and in fact asked his wife to deposit
said amount in the account of Sterela so that a certification can be issued to the effect that Sterela had sufficient funds for
purposes of its incorporation but at the same time, he retained some degree of control over his money through his wife who
was made a signatory to the savings account and in whose possession the savings account passbook was given. 22

He likewise asserts that the trial court did not err in finding that petitioner, Atienza’s employer, is liable for the return of his
money. He insists that Atienza, petitioner’s assistant manager, connived with Doronilla in defrauding private respondent since
it was Atienza who facilitated the opening of Sterela’s current account three days after Mrs. Vives and Sanchez opened a
savings account with petitioner for said company, as well as the approval of the authority to debit Sterela’s savings account to
cover any overdrawings in its current account. 23

There is no merit in the petition.

At the outset, it must be emphasized that only questions of law may be raised in a petition for review filed with this Court. The
Court has repeatedly held that it is not its function to analyze and weigh all over again the evidence presented by the parties
during trial.24 The Court’s jurisdiction is in principle limited to reviewing errors of law that might have been committed by the
Court of Appeals.25 Moreover, factual findings of courts, when adopted and confirmed by the Court of Appeals, are final and
conclusive on this Court unless these findings are not supported by the evidence on record. 26 There is no showing of any
misapprehension of facts on the part of the Court of Appeals in the case at bar that would require this Court to review and
overturn the factual findings of that court, especially since the conclusions of fact of the Court of Appeals and the trial court
are not only consistent but are also amply supported by the evidence on record.

No error was committed by the Court of Appeals when it ruled that the transaction between private respondent and Doronilla
was a commodatum and not a mutuum. A circumspect examination of the records reveals that the transaction between them
was a commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise:

By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the
same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable
thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply
called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower.

The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as money, the contract
would be a mutuum. However, there are some instances where a commodatum may have for its object a consumable thing.
Article 1936 of the Civil Code provides:

Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as
when it is merely for exhibition.

Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend
consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is a
commodatum and not a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual
character of a contract.27 In case of doubt, the contemporaneous and subsequent acts of the parties shall be considered in
such determination.28

As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private respondent agreed
to deposit his money in the savings account of Sterela specifically for the purpose of making it appear "that said firm had
sufficient capitalization for incorporation, with the promise that the amount shall be returned within thirty (30) days." 29 Private
respondent merely "accommodated" Doronilla by lending his money without consideration, as a favor to his good friend
Sanchez. It was however clear to the parties to the transaction that the money would not be removed from Sterela’s savings
account and would be returned to private respondent after thirty (30) days.

Doronilla’s attempts to return to private respondent the amount of P200,000.00 which the latter deposited in Sterela’s account
together with an additional P12,000.00, allegedly representing interest on the mutuum, did not convert the transaction from a
commodatum into a mutuum because such was not the intent of the parties and because the additional P12,000.00
corresponds to the fruits of the lending of the P200,000.00. Article 1935 of the Civil Code expressly states that "[t]he bailee in
commodatum acquires the use of the thing loaned but not its fruits." Hence, it was only proper for Doronilla to remit to private
respondent the interest accruing to the latter’s money deposited with petitioner.

Neither does the Court agree with petitioner’s contention that it is not solidarily liable for the return of private respondent’s
money because it was not privy to the transaction between Doronilla and private respondent. The nature of said transaction,
that is, whether it is a mutuum or a commodatum, has no bearing on the question of petitioner’s liability for the return of
private respondent’s money because the factual circumstances of the case clearly show that petitioner, through its employee
Mr. Atienza, was partly responsible for the loss of private respondent’s money and is liable for its restitution.

Petitioner’s rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of Sterela for Savings Account
No. 10-1567 expressly states that—

"2. Deposits and withdrawals must be made by the depositor personally or upon his written authority duly authenticated, and
neither a deposit nor a withdrawal will be permitted except upon the production of the depositor savings bank book in which
will be entered by the Bank the amount deposited or withdrawn."30

Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant Branch Manager for the
Buendia Branch of petitioner, to withdraw therefrom even without presenting the passbook (which Atienza very well knew was
in the possession of Mrs. Vives), not just once, but several times. Both the Court of Appeals and the trial court found that
Atienza allowed said withdrawals because he was party to Doronilla’s "scheme" of defrauding private respondent:

XXX

But the scheme could not have been executed successfully without the knowledge, help and cooperation of Rufo Atienza,
assistant manager and cashier of the Makati (Buendia) branch of the defendant bank. Indeed, the evidence indicates that
Atienza had not only facilitated the commission of the fraud but he likewise helped in devising the means by which it can be
done in such manner as to make it appear that the transaction was in accordance with banking procedure.
To begin with, the deposit was made in defendant’s Buendia branch precisely because Atienza was a key officer therein. The
records show that plaintiff had suggested that the P200,000.00 be deposited in his bank, the Manila Banking Corporation, but
Doronilla and Dumagpi insisted that it must be in defendant’s branch in Makati for "it will be easier for them to get a
certification". In fact before he was introduced to plaintiff, Doronilla had already prepared a letter addressed to the Buendia
branch manager authorizing Angeles B. Sanchez and company to open a savings account for Sterela in the amount
of P200,000.00, as "per coordination with Mr. Rufo Atienza, Assistant Manager of the Bank x x x" (Exh. 1). This is a clear
manifestation that the other defendants had been in consultation with Atienza from the inception of the scheme. Significantly,
there were testimonies and admission that Atienza is the brother-in-law of a certain Romeo Mirasol, a friend and business
associate of Doronilla.1awphi1.nét

Then there is the matter of the ownership of the fund. Because of the "coordination" between Doronilla and Atienza, the latter
knew before hand that the money deposited did not belong to Doronilla nor to Sterela. Aside from such foreknowledge, he
was explicitly told by Inocencia Vives that the money belonged to her and her husband and the deposit was merely to
accommodate Doronilla. Atienza even declared that the money came from Mrs. Vives.

Although the savings account was in the name of Sterela, the bank records disclose that the only ones empowered to
withdraw the same were Inocencia Vives and Angeles B. Sanchez. In the signature card pertaining to this account (Exh. J),
the authorized signatories were Inocencia Vives &/or Angeles B. Sanchez. Atienza stated that it is the usual banking
procedure that withdrawals of savings deposits could only be made by persons whose authorized signatures are in the
signature cards on file with the bank. He, however, said that this procedure was not followed here because Sterela was
owned by Doronilla. He explained that Doronilla had the full authority to withdraw by virtue of such ownership. The Court is
not inclined to agree with Atienza. In the first place, he was all the time aware that the money came from Vives and did not
belong to Sterela. He was also told by Mrs. Vives that they were only accommodating Doronilla so that a certification can be
issued to the effect that Sterela had a deposit of so much amount to be sued in the incorporation of the firm. In the second
place, the signature of Doronilla was not authorized in so far as that account is concerned inasmuch as he had not signed the
signature card provided by the bank whenever a deposit is opened. In the third place, neither Mrs. Vives nor Sanchez had
given Doronilla the authority to withdraw.

Moreover, the transfer of fund was done without the passbook having been presented. It is an accepted practice that
whenever a withdrawal is made in a savings deposit, the bank requires the presentation of the passbook. In this case, such
recognized practice was dispensed with. The transfer from the savings account to the current account was without the
submission of the passbook which Atienza had given to Mrs. Vives. Instead, it was made to appear in a certification signed by
Estrella Dumagpi that a duplicate passbook was issued to Sterela because the original passbook had been surrendered to the
Makati branch in view of a loan accommodation assigning the savings account (Exh. C). Atienza, who undoubtedly had a
hand in the execution of this certification, was aware that the contents of the same are not true. He knew that the passbook
was in the hands of Mrs. Vives for he was the one who gave it to her. Besides, as assistant manager of the branc h and the
bank official servicing the savings and current accounts in question, he also was aware that the original passbook was never
surrendered. He was also cognizant that Estrella Dumagpi was not among those authorized to withdraw so her certification
had no effect whatsoever.

The circumstance surrounding the opening of the current account also demonstrate that Atienza’s active participation in the
perpetration of the fraud and deception that caused the loss. The records indicate that this account was opened three days
later after the P200,000.00 was deposited. In spite of his disclaimer, the Court believes that Atienza was mindful and posted
regarding the opening of the current account considering that Doronilla was all the while in "coordination" with him. That it was
he who facilitated the approval of the authority to debit the savings account to cover any overdrawings in the current account
(Exh. 2) is not hard to comprehend.

Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case. x x x.31

Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for damages caused by their
employees acting within the scope of their assigned tasks. To hold the employer liable under this provision, it must be shown
that an employer-employee relationship exists, and that the employee was acting within the scope of his assigned task when
the act complained of was committed.32 Case law in the United States of America has it that a corporation that entrusts a
general duty to its employee is responsible to the injured party for damages flowing from the employee’s wrongful act done in
the course of his general authority, even though in doing such act, the employee may have failed in its duty to the employer
and disobeyed the latter’s instructions. 33

There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not deny that Atienza was acting
within the scope of his authority as Assistant Branch Manager when he assisted Doronilla in withdrawing funds from Sterela’s
Savings Account No. 10-1567, in which account private respondent’s money was deposited, and in transferring the money
withdrawn to Sterela’s Current Account with petitioner. Atienza’s acts of helping Doronilla, a customer of the petitioner, were
obviously done in furtherance of petitioner’s interests 34 even though in the process, Atienza violated some of petitioner’s rules
such as those stipulated in its savings account passbook. 35 It was established that the transfer of funds from Sterela’s savings
account to its current account could not have been accomplished by Doronilla without the invaluable assistance of Atienza,
and that it was their connivance which was the cause of private respondent’s loss.

The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil Code, petitioner is liable for
private respondent’s loss and is solidarily liable with Doronilla and Dumagpi for the return of the P200,000.00 since it is clear
that petitioner failed to prove that it exercised due diligence to prevent the unauthorized withdrawals from Sterela’s savings
account, and that it was not negligent in the selection and supervision of Atienza. Accordingly, no error was committed by the
appellate court in the award of actual, moral and exemplary damages, attorney’s fees and costs of suit to private respondent.

WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of Appeals are AFFIRMED.

SO ORDERED.

FIRST DIVISION
 [G.R. No. 146364. June 3, 2004]

COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE

GUEVARRA, respondents.

DECISION
CARPIO, J.:

The Case

Before us is a petition for review of the 21 June 2000 Decision and 14 December 2000
[1] [2]

Resolution of the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the
11 November 1996 decision of the Regional Trial Court of Quezon City, Branch 81, affirming the
[3] [4]

15 December 1995 decision of the Metropolitan Trial Court of Quezon City, Branch 31.
[5] [6]

The Antecedents

In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a certain Pedro Perez for the
rights over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a
house made of light materials on the lot. Pajuyo and his family lived in the house from 1979 to 7
December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra (Guevarra) executed
a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house
for free provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra
promised that he would voluntarily vacate the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that
Guevarra vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon
City, Branch 31 (MTC).
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the
lot where the house stands because the lot is within the 150 hectares set aside by Proclamation
No. 137 for socialized housing. Guevarra pointed out that from December 1985 to September
1994, Pajuyo did not show up or communicate with him. Guevarra insisted that neither he nor
Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive
portion of the MTC decision reads:

WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against defendant,
ordering the latter to:

A) vacate the house and lot occupied by the defendant or any other person or persons claiming any right under
him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00) monthly as reasonable compensation for
the use of the premises starting from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and
D) pay the cost of suit.

SO ORDERED. [7]

Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 (RTC).
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the
RTC decision reads:

WHEREFORE, premises considered, the Court finds no reversible error in the decision appealed from,
being in accord with the law and evidence presented, and the same is hereby affirmed en toto.

SO ORDERED. [8]
 Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14
December 1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with the
Court of Appeals, Guevarra filed with the Supreme Court a Motion for Extension of Time to File
Appeal by Certiorari Based on Rule 42 (motion for extension). Guevarra theorized that his appeal
raised pure questions of law. The Receiving Clerk of the Supreme Court received the motion for
extension on 13 December 1996 or one day before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution referring the
[9]

motion for extension to the Court of Appeals which has concurrent jurisdiction over the case. The
case presented no special and important matter for the Supreme Court to take cognizance of at
the first instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a
Resolution granting the motion for extension conditioned on the timeliness of the filing of the
[10]

motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevaras petition
for review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The
dispositive portion of the decision reads:

WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case No. Q-96-
26943 is REVERSED and SET ASIDE; and it is hereby declared that the ejectment case filed against
defendant-appellant is without factual and legal basis.

SO ORDERED. [11]

Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of
Appeals should have dismissed outright Guevarras petition for review because it was filed out of
time. Moreover, it was Guevarras counsel and not Guevarra who signed the certification against
forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos motion for
reconsideration. The dispositive portion of the resolution reads:

WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.

SO ORDERED. [12]

The Ruling of the MTC

The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house
and not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house only
by tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos demand made Guevarras
continued possession of the house illegal.

The Ruling of the RTC

The RTC upheld the Kasunduan, which established the landlord and tenant relationship
between Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return
possession of the house on demand.
The RTC rejected Guevarras claim of a better right under Proclamation No. 137, the Revised
National Government Center Housing Project Code of Policies and other pertinent laws. In an
ejectment suit, the RTC has no power to decide Guevarras rights under these laws. The RTC
declared that in an ejectment case, the only issue for resolution is material or physical
possession, not ownership.

The Ruling of the Court of Appeals

 The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra
illegally occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no
right or title over the lot because it is public land. The assignment of rights between Perez and
Pajuyo, and the Kasunduan between Pajuyo and Guevarra, did not have any legal effect. Pajuyo
and Guevarra are in pari delicto or in equal fault. The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that
the Kasunduan between Pajuyo and Guevarra created a legal tie akin to that of a landlord and
tenant relationship. The Court of Appeals ruled that the Kasunduan is not a lease contract but
a commodatum because the agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate
court held that Guevarra has a better right over the property under Proclamation No.
137.President Corazon C. Aquino (President Aquino) issued Proclamation No. 137 on 7
September 1987. At that time, Guevarra was in physical possession of the property. Under Article
VI of the Code of Policies Beneficiary Selection and Disposition of Homelots and Structures in the
National Housing Project (the Code), the actual occupant or caretaker of the lot shall have first
priority as beneficiary of the project. The Court of Appeals concluded that Guevarra is first in the
hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate court debunked Pajuyos claim
that Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for extension filed before the
Supreme Court was stamped 13 December 1996 at 4:09 PM by the Supreme Courts Receiving
Clerk. The Court of Appeals concluded that the motion for extension bore a date, contrary to
Pajuyos claim that the motion for extension was undated. Guevarra filed the motion for extension
on time on 13 December 1996 since he filed the motion one day before the expiration of the
reglementary period on 14 December 1996. Thus, the motion for extension properly complied with
the condition imposed by the Court of Appeals in its 28 January 1997 Resolution. The Court of
Appeals explained that the thirty-day extension to file the petition for review was deemed granted
because of such compliance.
The Court of Appeals rejected Pajuyos argument that the appellate court should have
dismissed the petition for review because it was Guevarras counsel and not Guevarra who signed
the certification against forum-shopping. The Court of Appeals pointed out that Pajuyo did not
raise this issue in his Comment. The Court of Appeals held that Pajuyo could not now seek the
dismissal of the case after he had extensively argued on the merits of the case. This technicality,
the appellate court opined, was clearly an afterthought.

The Issues

Pajuyo raises the following issues for resolution:

WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND DISCRETION
TANTAMOUNT TO LACK OF JURISDICTION:

1) in GRANTING, instead of denying, Private Respondents Motion for an Extension of thirty days to
file petition for review at the time when there was no more period to extend as the decision of the
Regional Trial Court had already become final and executory.
2) in giving due course, instead of dismissing, private respondents Petition for Review even though
the certification against forum-shopping was signed only by counsel instead of by petitioner
himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact a commodatum,
instead of a Contract of Lease as found by the Metropolitan Trial Court and in holding that the
ejectment case filed against defendant-appellant is without legal and factual basis.
4) in reversing and setting aside the Decision of the Regional Trial Court in Civil Case No. Q-96-
26943 and in holding that the parties are in pari delicto being both squatters, therefore, illegal
occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code of Policies of the National
Government Center Housing Project instead of deciding the same under the Kasunduan voluntarily
executed by the parties, the terms and conditions of which are the laws between themselves. [13]

The Ruling of the Court

 The procedural issues Pajuyo is raising are baseless. However, we find merit in the
substantive issues Pajuyo is submitting for resolution.

Procedural Issues

Pajuyo insists that the Court of Appeals should have dismissed outright Guevarras petition for
review because the RTC decision had already become final and executory when the appellate
court acted on Guevarras motion for extension to file the petition. Pajuyo points out that Guevarra
had only one day before the expiry of his period to appeal the RTC decision.Instead of filing the
petition for review with the Court of Appeals, Guevarra filed with this Court an undated motion for
extension of 30 days to file a petition for review. This Court merely referred the motion to the
Court of Appeals. Pajuyo believes that the filing of the motion for extension with this Court did not
toll the running of the period to perfect the appeal. Hence, when the Court of Appeals received the
motion, the period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are
appealable to the Court of Appeals by petition for review in cases involving questions of fact or
mixed questions of fact and law. Decisions of the regional trial courts involving pure questions of
[14]

law are appealable directly to this Court by petition for review. These modes of appeal are now
[15]

embodied in Section 2, Rule 41 of the 1997 Rules of Civil Procedure.

Guevarra believed that his appeal of the RTC decision involved only questions of
law. Guevarra thus filed his motion for extension to file petition for review before this Court on 14
December 1996. On 3 January 1997, Guevarra then filed his petition for review with this Court. A
perusal of Guevarras petition for review gives the impression that the issues he raised were pure
questions of law. There is a question of law when the doubt or difference is on what the law is on
a certain state of facts. There is a question of fact when the doubt or difference is on the truth or
[16]

falsity of the facts alleged. [17]

In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarras
petition for review raised these questions: (1) Do ejectment cases pertain only to possession of a
structure, and not the lot on which the structure stands? (2) Does a suit by a squatter against a
fellow squatter constitute a valid case for ejectment? (3) Should a Presidential Proclamation
governing the lot on which a squatters structure stands be considered in an ejectment suit filed by
the owner of the structure?
These questions call for the evaluation of the rights of the parties under the law on ejectment
and the Presidential Proclamation. At first glance, the questions Guevarra raised appeared purely
legal. However, some factual questions still have to be resolved because they have a bearing on
the legal questions raised in the petition for review. These factual matters refer to the metes and
bounds of the disputed property and the application of Guevarra as beneficiary of Proclamation
No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for
review. In Lacsamana v. Second Special Cases Division of the Intermediate Appellate
Court, we declared that the Court of Appeals could grant extension of time in appeals by petition
[18]

for review. In Liboro v. Court of Appeals, we clarified that the prohibition against granting an
[19]

extension of time applies only in a case where ordinary appeal is perfected by a mere notice of
appeal. The prohibition does not apply in a petition for review where the pleading needs
verification. A petition for review, unlike an ordinary appeal, requires preparation and research to
present a persuasive position. The drafting of the petition for review entails more time and effort
[20]

than filing a notice of appeal. Hence, the Court of Appeals may allow an extension of time to file
[21]

a petition for review.

In the more recent case of Commissioner of Internal Revenue v. Court of Appeals, we [22]

held that Liboros clarification of Lacsamana is consistent with the Revised Internal Rules of the
Court of Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for
filing petitions for review with the Court of Appeals. The extension, however, should be limited to
only fifteen days save in exceptionally meritorious cases where the Court of Appeals may grant a
longer period.
A judgment becomes final and executory by operation of law. Finality of judgment becomes a
fact on the lapse of the reglementary period to appeal if no appeal is perfected. The RTC
[23]
decision could not have gained finality because the Court of Appeals granted the 30-day
extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarras
motion for extension. The Court of Appeals gave due course to the motion for extension because
it complied with the condition set by the appellate court in its resolution dated 28 January
1997. The resolution stated that the Court of Appeals would only give due course to the motion for
extension if filed on time. The motion for extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for
extension are (1) the date of receipt of the judgment or final order or resolution subject of the
petition, and (2) the date of filing of the motion for extension. It is the date of the filing of the
[24]

motion or pleading, and not the date of execution, that determines the timeliness of the filing of
that motion or pleading. Thus, even if the motion for extension bears no date, the date of filing
stamped on it is the reckoning point for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed
his motion for extension before this Court on 13 December 1996, the date stamped by this Courts
Receiving Clerk on the motion for extension. Clearly, Guevarra filed the motion for extension
exactly one day before the lapse of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarras appeal on technical
grounds, Pajuyo did not ask the appellate court to deny the motion for extension and dismiss the
petition for review at the earliest opportunity. Instead, Pajuyo vigorously discussed the merits of
the case. It was only when the Court of Appeals ruled in Guevarras favor that Pajuyo raised the
procedural issues against Guevarras petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision
on the merits, is estopped from attacking the jurisdiction of the court. Estoppel sets in not
[25]

because the judgment of the court is a valid and conclusive adjudication, but because the practice
of attacking the courts jurisdiction after voluntarily submitting to it is against public policy.
[26]

In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarras failure to
sign the certification against forum shopping. Instead, Pajuyo harped on Guevarras counsel
signing the verification, claiming that the counsels verification is insufficient since it is based only
on mere information.
A partys failure to sign the certification against forum shopping is different from the partys
failure to sign personally the verification. The certificate of non-forum shopping must be signed by
the party, and not by counsel. The certification of counsel renders the petition defective.
[27] [28]

On the other hand, the requirement on verification of a pleading is a formal and not a
jurisdictional requisite. It is intended simply to secure an assurance that what are alleged in the
[29]

pleading are true and correct and not the product of the imagination or a matter of speculation,
and that the pleading is filed in good faith. The party need not sign the verification. A partys
[30]

representative, lawyer or any person who personally knows the truth of the facts alleged in the
pleading may sign the verification. [31]

We agree with the Court of Appeals that the issue on the certificate against forum shopping
was merely an afterthought. Pajuyo did not call the Court of Appeals attention to this defect at the
early stage of the proceedings. Pajuyo raised this procedural issue too late in the proceedings.

Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to
Resolve the Issue of Possession

Settled is the rule that the defendants claim of ownership of the disputed property will not
divest the inferior court of its jurisdiction over the ejectment case. Even if the pleadings raise the
[32]

issue of ownership, the court may pass on such issue to determine only the question of
possession, especially if the ownership is inseparably linked with the possession. The [33]

adjudication on the issue of ownership is only provisional and will not bar an action between the
same parties involving title to the land. This doctrine is a necessary consequence of the nature
[34]

of the two summary actions of ejectment, forcible entry and unlawful detainer, where the only
issue for adjudication is the physical or material possession over the real property. [35]

In this case, what Guevarra raised before the courts was that he and Pajuyo are not the
owners of the contested property and that they are mere squatters. Will the defense that the
parties to the ejectment case are not the owners of the disputed lot allow the courts to renounce
their jurisdiction over the case? The Court of Appeals believed so and held that it would just leave
the parties where they are since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for
recovery of possession. The parties cannot present evidence to prove ownership or right to legal
possession except to prove the nature of the possession when necessary to resolve the issue of
physical possession. The same is true when the defendant asserts the absence of title over the
[36]

property. The absence of title over the contested lot is not a ground for the courts to withhold relief
from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is entitled to
the physical possession of the premises, that is, to the possession de facto and not to the
possession de jure. It does not even matter if a partys title to the property is questionable, or
[37] [38]

when both parties intruded into public land and their applications to own the land have yet to be
approved by the proper government agency. Regardless of the actual condition of the title to the
[39]

property, the party in peaceable quiet possession shall not be thrown out by a strong hand,
violence or terror. Neither is the unlawful withholding of property allowed. Courts will always
[40]

uphold respect for prior possession.

Thus, a party who can prove prior possession can recover such possession even against the
owner himself. Whatever may be the character of his possession, if he has in his favor prior
[41]

possession in time, he has the security that entitles him to remain on the property until a person
with a better right lawfully ejects him. To repeat, the only issue that the court has to settle in an
[42]

ejectment suit is the right to physical possession.

In Pitargue v. Sorilla, the government owned the land in dispute. The government did not
[43]

authorize either the plaintiff or the defendant in the case of forcible entry case to occupy the
land. The plaintiff had prior possession and had already introduced improvements on the public
land. The plaintiff had a pending application for the land with the Bureau of Lands when the
defendant ousted him from possession. The plaintiff filed the action of forcible entry against the
defendant. The government was not a party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of possession
because while the application of the plaintiff was still pending, title remained with the government,
and the Bureau of Public Lands had jurisdiction over the case. We disagreed with the
defendant. We ruled that courts have jurisdiction to entertain ejectment suits even before the
resolution of the application. The plaintiff, by priority of his application and of his entry, acquired
prior physical possession over the public land applied for as against other private claimants. That
prior physical possession enjoys legal protection against other private claimants because only a
court can take away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue as squatters, strictly
[44]

speaking, their entry into the disputed land was illegal. Both the plaintiff and defendant entered
the public land without the owners permission. Title to the land remained with the government
because it had not awarded to anyone ownership of the contested public land. Both the plaintiff
and the defendant were in effect squatting on government property. Yet, we upheld the courts
jurisdiction to resolve the issue of possession even if the plaintiff and the defendant in the
ejectment case did not have any title over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession because
of the public need to preserve the basic policy behind the summary actions of forcible entry and
unlawful detainer. The underlying philosophy behind ejectment suits is to prevent breach of the
peace and criminal disorder and to compel the party out of possession to respect and resort to the
law alone to obtain what he claims is his. The party deprived of possession must not take the
[45]

law into his own hands. Ejectment proceedings are summary in nature so the authorities can
[46]

settle speedily actions to recover possession because of the overriding need to quell social
disturbances. [47]

We further explained in Pitargue the greater interest that is at stake in actions for recovery of
possession. We made the following pronouncements in Pitargue:

The question that is before this Court is: Are courts without jurisdiction to take cognizance of possessory
actions involving these public lands before final award is made by the Lands Department, and before title is
given any of the conflicting claimants? It is one of utmost importance, as there are public lands everywhere
and there are thousands of settlers, especially in newly opened regions. It also involves a matter of policy,
as it requires the determination of the respective authorities and functions of two coordinate branches of the
Government in connection with public land conflicts.

Our problem is made simple by the fact that under the Civil Code, either in the old, which was in force in
this country before the American occupation, or in the new, we have a possessory action, the aim and
purpose of which is the recovery of the physical possession of real property, irrespective of the question as
to who has the title thereto. Under the Spanish Civil Code we had the accion interdictal, a summary
proceeding which could be brought within one year from dispossession (Roman Catholic Bishop of Cebu
vs. Mangaron, 6 Phil. 286, 291); and as early as October 1, 1901, upon the enactment of the Code of Civil
Procedure (Act No. 190 of the Philippine Commission) we implanted the common law action of forcible
entry (section 80 of Act No. 190), the object of which has been stated by this Court to be to prevent
breaches of the peace and criminal disorder which would ensue from the withdrawal of the remedy, and
the reasonable hope such withdrawal would create that some advantage must accrue to those persons
who, believing themselves entitled to the possession of property, resort to force to gain possession rather
than to some appropriate action in the court to assert their claims. (Supia and Batioco vs. Quintero and
Ayala, 59 Phil. 312, 314.) So before the enactment of the first Public Land Act (Act No. 926) the action of
forcible entry was already available in the courts of the country. So the question to be resolved is, Did the
Legislature intend, when it vested the power and authority to alienate and dispose of the public lands in the
Lands Department, to exclude the courts from entertaining the possessory action of forcible entry between
rival claimants or occupants of any land before award thereof to any of the parties? Did Congress intend
that the lands applied for, or all public lands for that matter, be removed from the jurisdiction of the judicial
Branch of the Government, so that any troubles arising therefrom, or any breaches of the peace or disorders
caused by rival claimants, could be inquired into only by the Lands Department to the exclusion of the
courts? The answer to this question seems to us evident. The Lands Department does not have the means to
police public lands; neither does it have the means to prevent disorders arising therefrom, or contain
breaches of the peace among settlers; or to pass promptly upon conflicts of possession. Then its power is
clearly limited to disposition and alienation, and while it may decide conflicts of possession in order to
make proper award, the settlement of conflicts of possession which is recognized in the court herein has
another ultimate purpose, i.e., the protection of actual possessors and occupants with a view to the
prevention of breaches of the peace. The power to dispose and alienate could not have been intended to
include the power to prevent or settle disorders or breaches of the peace among rival settlers or claimants
prior to the final award. As to this, therefore, the corresponding branches of the Government must continue
to exercise power and jurisdiction within the limits of their respective functions. The vesting of the Lands
Department with authority to administer, dispose, and alienate public lands, therefore, must not be
understood as depriving the other branches of the Government of the exercise of the respective functions
or powers thereon, such as the authority to stop disorders and quell breaches of the peace by the police,
the authority on the part of the courts to take jurisdiction over possessory actions arising therefrom not
involving, directly or indirectly, alienation and disposition.

Our attention has been called to a principle enunciated in American courts to the effect that courts have no
jurisdiction to determine the rights of claimants to public lands, and that until the disposition of the land has
passed from the control of the Federal Government, the courts will not interfere with the administration of
matters concerning the same. (50 C. J. 1093-1094.) We have no quarrel with this principle. The
determination of the respective rights of rival claimants to public lands is different from the determination
of who has the actual physical possession or occupation with a view to protecting the same and preventing
disorder and breaches of the peace. A judgment of the court ordering restitution of the possession of a
parcel of land to the actual occupant, who has been deprived thereof by another through the use of force or
in any other illegal manner, can never be prejudicial interference with the disposition or alienation of public
lands. On the other hand, if courts were deprived of jurisdiction of cases involving conflicts of
possession, that threat of judicial action against breaches of the peace committed on public lands would
be eliminated, and a state of lawlessness would probably be produced between applicants, occupants or
squatters, where force or might, not right or justice, would rule.

It must be borne in mind that the action that would be used to solve conflicts of possession between rivals
or conflicting applicants or claimants would be no other than that of forcible entry. This action, both in
England and the United States and in our jurisdiction, is a summary and expeditious remedy whereby one in
peaceful and quiet possession may recover the possession of which he has been deprived by a stronger
hand, by violence or terror; its ultimate object being to prevent breach of the peace and criminal disorder.
(Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere possession
as a fact, of physical possession, not a legal possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or
right to possession is never in issue in an action of forcible entry; as a matter of fact, evidence thereof is
expressly banned, except to prove the nature of the possession. (Second 4, Rule 72, Rules of Court.) With
this nature of the action in mind, by no stretch of the imagination can conclusion be arrived at that the use
of the remedy in the courts of justice would constitute an interference with the alienation, disposition, and
control of public lands. To limit ourselves to the case at bar can it be pretended at all that its result would in
any way interfere with the manner of the alienation or disposition of the land contested? On the contrary, it
would facilitate adjudication, for the question of priority of possession having been decided in a final
manner by the courts, said question need no longer waste the time of the land officers making the
adjudication or award. (Emphasis ours)

The Principle of Pari Delicto is not Applicable to Ejectment Cases

The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code embody the principle of pari delicto. We explained
[48]

the principle of pari delicto in these words:

The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio and in pari delicto potior
est conditio defedentis. The law will not aid either party to an illegal agreement. It leaves the parties where
it finds them.[49]

The application of the pari delicto principle is not absolute, as there are exceptions to its
application. One of these exceptions is where the application of the pari delicto rule would violate
well-established public policy. [50]

In Drilon v. Gaurana, we reiterated the basic policy behind the summary actions of forcible
[51]

entry and unlawful detainer. We held that:

It must be stated that the purpose of an action of forcible entry and detainer is that, regardless of the actual
condition of the title to the property, the party in peaceable quiet possession shall not be turned out by
strong hand, violence or terror. In affording this remedy of restitution the object of the statute is to prevent
breaches of the peace and criminal disorder which would ensue from the withdrawal of the remedy, and the
reasonable hope such withdrawal would create that some advantage must accrue to those persons who,
believing themselves entitled to the possession of property, resort to force to gain possession rather than to
some appropriate action in the courts to assert their claims. This is the philosophy at the foundation of all
these actions of forcible entry and detainer which are designed to compel the party out of possession to
respect and resort to the law alone to obtain what he claims is his. [52]

Clearly, the application of the principle of pari delicto to a case of ejectment between squatters
is fraught with danger. To shut out relief to squatters on the ground of pari delicto would openly
invite mayhem and lawlessness. A squatter would oust another squatter from possession of the
lot that the latter had illegally occupied, emboldened by the knowledge that the courts would leave
them where they are. Nothing would then stand in the way of the ousted squatter from re-claiming
his prior possession at all cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for
recovery of possession seek to prevent. Even the owner who has title over the disputed property
[53]

cannot take the law into his own hands to regain possession of his property. The owner must go
to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are
squatters. The determination of priority and superiority of possession is a serious and urgent
matter that cannot be left to the squatters to decide. To do so would make squatters receive
better treatment under the law. The law restrains property owners from taking the law into their
own hands. However, the principle of pari delicto as applied by the Court of Appeals would give
squatters free rein to dispossess fellow squatters or violently retake possession of properties
usurped from them. Courts should not leave squatters to their own devices in cases involving
recovery of possession.

Possession is the only Issue for Resolution in an Ejectment Case

The case for review before the Court of Appeals was a simple case of ejectment. The Court of
Appeals refused to rule on the issue of physical possession. Nevertheless, the appellate court
held that the pivotal issue in this case is who between Pajuyo and Guevarra has the priority right
as beneficiary of the contested land under Proclamation No. 137. According to the Court of
[54]

Appeals, Guevarra enjoys preferential right under Proclamation No. 137 because Article VI of the
Code declares that the actual occupant or caretaker is the one qualified to apply for socialized
housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a relocation
site under Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the
land that it declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation
No. 137. Guevarra had the burden to prove that the disputed lot is within the coverage of
Proclamation No. 137. He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarras unsubstantiated
claim that he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the
survey the project administrator conducted, he and not Pajuyo appeared as the actual occupant
of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No.
137. Pajuyo allowed Guevarra to occupy the disputed property in 1985. President Aquino signed
Proclamation No. 137 into law on 11 March 1986. Pajuyo made his earliest demand for Guevarra
to vacate the property in September 1994.
During the time that Guevarra temporarily held the property up to the time that Proclamation
No. 137 allegedly segregated the disputed lot, Guevarra never applied as beneficiary of
Proclamation No. 137. Even when Guevarra already knew that Pajuyo was reclaiming possession
of the property, Guevarra did not take any step to comply with the requirements of Proclamation
No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137
and Guevarra has a pending application over the lot, courts should still assume jurisdiction and
resolve the issue of possession. However, the jurisdiction of the courts would be limited to the
issue of physical possession only.
In Pitargue, we ruled that courts have jurisdiction over possessory actions involving public
[55]

land to determine the issue of physical possession. The determination of the respective rights of
rival claimants to public land is, however, distinct from the determination of who has the actual
physical possession or who has a better right of physical possession. The administrative
[56]

disposition and alienation of public lands should be threshed out in the proper government
agency. [57]

The Court of Appeals determination of Pajuyo and Guevarras rights under Proclamation No.
137 was premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law.
Courts should not preempt the decision of the administrative agency mandated by law to
determine the qualifications of applicants for the acquisition of public lands. Instead, courts should
expeditiously resolve the issue of physical possession in ejectment cases to prevent disorder and
breaches of peace. [58]

Pajuyo is Entitled to Physical Possession of the Disputed Property

Guevarra does not dispute Pajuyos prior possession of the lot and ownership of the house
built on it. Guevarra expressly admitted the existence and due execution of
the Kasunduan.The Kasunduan reads:

Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay
pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing bahay at lote ng walang
bayad.Kaugnay nito, kailangang panatilihin nila ang kalinisan at kaayusan ng bahay at lote.

Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng walang reklamo.

Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of
rent, but Guevarra was under obligation to maintain the premises in good condition. Guevarra
promised to vacate the premises on Pajuyos demand but Guevarra broke his promise and
refused to heed Pajuyos demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding
by a person from another of the possession of real property to which the latter is entitled after the
expiration or termination of the formers right to hold possession under a contract, express or
implied. [59]

Where the plaintiff allows the defendant to use his property by tolerance without any contract,
the defendant is necessarily bound by an implied promise that he will vacate on demand, failing
which, an action for unlawful detainer will lie. The defendants refusal to comply with the demand
[60]

makes his continued possession of the property unlawful. The status of the defendant in such a
[61]

case is similar to that of a lessee or tenant whose term of lease has expired but whose occupancy
continues by tolerance of the owner. [62]

This principle should apply with greater force in cases where a contract embodies the
permission or tolerance to use the property. The Kasunduan expressly articulated Pajuyos
forbearance. Pajuyo did not require Guevarra to pay any rent but only to maintain the house and
lot in good condition. Guevarra expressly vowed in the Kasunduan that he would vacate the
property on demand. Guevarras refusal to comply with Pajuyos demand to vacate made
Guevarras continued possession of the property unlawful.
We do not subscribe to the Court of Appeals theory that the Kasunduan is one
of commodatum.
In a contract of commodatum, one of the parties delivers to another something not
consumable so that the latter may use the same for a certain time and return it. An essential [63]

feature of commodatum is that it is gratuitous. Another feature of commodatum is that the use of
the thing belonging to another is for a certain period. Thus, the bailor cannot demand the return
[64]

of the thing loaned until after expiration of the period stipulated, or after accomplishment of the
use for which the commodatum is constituted. If the bailor should have urgent need of the thing,
[65]

he may demand its return for temporary use. If the use of the thing is merely tolerated by the
[66]

bailor, he can demand the return of the thing at will, in which case the contractual relation is called
a precarium. Under the Civil Code, precarium is a kind of commodatum.
[67] [68]

The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him
to maintain the property in good condition. The imposition of this obligation makes
the Kasunduan a contract different from a commodatum. The effects of the Kasunduan are also
different from that of a commodatum. Case law on ejectment has treated relationship based on
tolerance as one that is akin to a landlord-tenant relationship where the withdrawal of permission
would result in the termination of the lease. The tenants withholding of the property would then
[69]

be unlawful. This is settled jurisprudence.

Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum,
Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo, the
bailor. The obligation to deliver or to return the thing received attaches to contracts for
safekeeping, or contracts of commission, administration and commodatum. These contracts [70]

certainly involve the obligation to deliver or return the thing received. [71]

Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a
squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land they
illegally occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely
entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited
from it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra
has a right to physical possession of the contested property. The Kasunduan is the undeniable
evidence of Guevarras recognition of Pajuyos better right of physical possession. Guevarra is
clearly a possessor in bad faith. The absence of a contract would not yield a different result, as
there would still be an implied promise to vacate.
Guevarra contends that there is a pernicious evil that is sought to be avoided, and that is
allowing an absentee squatter who (sic) makes (sic) a profit out of his illegal act. Guevarra [72]

bases his argument on the preferential right given to the actual occupant or caretaker under
Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the
property without paying any rent. There is also no proof that Pajuyo is a professional squatter who
rents out usurped properties to other squatters. Moreover, it is for the proper government agency
to decide who between Pajuyo and Guevarra qualifies for socialized housing. The only issue that
we are addressing is physical possession.
Prior possession is not always a condition sine qua non in ejectment. This is one of the
[73]

distinctions between forcible entry and unlawful detainer. In forcible entry, the plaintiff is deprived
[74]

of physical possession of his land or building by means of force, intimidation, threat, strategy or
stealth. Thus, he must allege and prove prior possession. But in unlawful detainer, the defendant
[75]

unlawfully withholds possession after the expiration or termination of his right to possess under
any contract, express or implied. In such a case, prior physical possession is not required. [76]

Pajuyos withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarras

transient right to possess the property ended as well. Moreover, it was Pajuyo who was in actual
possession of the property because Guevarra had to seek Pajuyos permission to temporarily hold
the property and Guevarra had to follow the conditions set by Pajuyo in the Kasunduan. Control
over the property still rested with Pajuyo and this is evidence of actual possession.
Pajuyos absence did not affect his actual possession of the disputed property. Possession in
the eyes of the law does not mean that a man has to have his feet on every square meter of the
ground before he is deemed in possession. One may acquire possession not only by physical
[77]

occupation, but also by the fact that a thing is subject to the action of ones will. Actual or physical
[78]

occupation is not always necessary. [79]

Ruling on Possession Does not Bind Title to the Land in Dispute

We are aware of our pronouncement in cases where we declared that squatters and intruders
who clandestinely enter into titled government property cannot, by such act, acquire any legal
right to said property. We made this declaration because the person who had title or who had
[80]

the right to legal possession over the disputed property was a party in the ejectment suit and that
party instituted the case against squatters or usurpers.
In this case, the owner of the land, which is the government, is not a party to the ejectment
case. This case is between squatters. Had the government participated in this case, the courts
could have evicted the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in this case,
we cannot evict on our own the parties. Such a ruling would discourage squatters from seeking
the aid of the courts in settling the issue of physical possession. Stripping both the plaintiff and the
defendant of possession just because they are squatters would have the same dangerous
implications as the application of the principle of pari delicto. Squatters would then rather settle
the issue of physical possession among themselves than seek relief from the courts if the plaintiff
and defendant in the ejectment case would both stand to lose possession of the disputed
property. This would subvert the policy underlying actions for recovery of possession.
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on
the property until a person who has title or a better right lawfully ejects him. Guevarra is certainly
not that person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from
introducing evidence and presenting arguments before the proper administrative agency to
establish any right to which they may be entitled under the law. [81]

In no way should our ruling in this case be interpreted to condone squatting. The ruling on the
issue of physical possession does not affect title to the property nor constitute a binding and
conclusive adjudication on the merits on the issue of ownership. The owner can still go to court
[82]

to recover lawfully the property from the person who holds the property without legal title. Our
ruling here does not diminish the power of government agencies, including local governments, to
condemn, abate, remove or demolish illegal or unauthorized structures in accordance with
existing laws.

Attorneys Fees and Rentals

The MTC and RTC failed to justify the award of P3,000 attorneys fees to Pajuyo. Attorneys
fees as part of damages are awarded only in the instances enumerated in Article 2208 of the Civil
Code. Thus, the award of attorneys fees is the exception rather than the rule. Attorneys fees
[83] [84]

are not awarded every time a party prevails in a suit because of the policy that no premium should
be placed on the right to litigate. We therefore delete the attorneys fees awarded to Pajuyo.
[85]
 We sustain the P300 monthly rentals the MTC and RTC assessed against
Guevarra. Guevarra did not dispute this factual finding of the two courts. We find the amount
reasonable compensation to Pajuyo. The P300 monthly rental is counted from the last demand to
vacate, which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution
dated 14 December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE.The
Decision dated 11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil
Case No. Q-96-26943, affirming the Decision dated 15 December 1995 of the Metropolitan Trial
Court of Quezon City, Branch 31 in Civil Case No. 12432, is REINSTATED with MODIFICATION.
The award of attorneys fees is deleted. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-17474 October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

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

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

Office of the Solicitor General for plaintiff-appellee.

PADILLA, J.:

The Court of Appeals certified this case to this Court because only questions of law are raised.

On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three
bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one
year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a government charge of breeding fee of 10% of the
book value of the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another
period of one year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof of only one bull
for another year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25 March 1950 Jose V. Bagtas
wrote to the Director of Animal Industry that he would pay the value of the three bulls. On 17 October 1950 he reiterated his
desire to buy them at a value with a deduction of yearly depreciation to be approved by the Auditor General. On 19 October
1950 the Director of Animal Industry advised him that the book value of the three bulls could not be reduced and that they
either be returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book value of the
three bulls or to return them. So, on 20 December 1950 in the Court of First Instance of Manila the Republic of the Philippines
commenced an action against him praying that he be ordered to return the three bulls loaned to him or to pay their book value
in the total sum of P3,241.45 and the unpaid breeding fee in the sum of P199.62, both with interests, and costs; and that other
just and equitable relief be granted in (civil No. 12818).

On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the bad peace and
order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the pending appeal he had taken to the
Secretary of Agriculture and Natural Resources and the President of the Philippines from the refusal by the Director of Animal
Industry to deduct from the book value of the bulls corresponding yearly depreciation of 8% from the date of acquisition, to
which depreciation the Auditor General did not object, he could not return the animals nor pay their value and prayed for the
dismissal of the complaint.

After hearing, on 30 July 1956 the trial court render judgment —

. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus the breeding
fees in the amount of P626.17 with interest on both sums of (at) the legal rate from the filing of this complaint and
costs.

On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18 October and issued on
11 November 1958. On 2 December 1958 granted an ex-parte motion filed by the plaintiff on November 1958 for the
appointment of a special sheriff to serve the writ outside Manila. Of this order appointing a special sheriff, on 6 December
1958, Felicidad M. Bagtas, the surviving spouse of the defendant Jose Bagtas who died on 23 October 1951 and as
administratrix of his estate, was notified. On 7 January 1959 she file a motion alleging that on 26 June 1952 the two bull
Sindhi and Bhagnari were returned to the Bureau Animal of Industry and that sometime in November 1958 the third bull, the
Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda Felicidad Intal, and praying that the writ of
execution be quashed and that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her
motion. On 6 February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied her motion. Hence, this
appeal certified by the Court of Appeals to this Court as stated at the beginning of this opinion.

It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned the Sindhi and
Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal Industry, Bayombong, Nueva
Vizcaya, as evidenced by a memorandum receipt signed by the latter (Exhibit 2). That is why in its objection of 31 January
1959 to the appellant's motion to quash the writ of execution the appellee prays "that another writ of execution in the sum of
P859.53 be issued against the estate of defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls
which already had been returned to and received by the appellee.

The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in November 1953 upon the
surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and that as such death was
due to force majeure she is relieved from the duty of returning the bull or paying its value to the appellee. The contention is
without merit. The loan by the appellee to the late defendant Jose V. Bagtas of the three bulls for breeding purposes for a
period of one year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was subject to the
payment by the borrower of breeding fee of 10% of the book value of the bulls. The appellant contends that the contract
was commodatum and that, for that reason, as the appellee retained ownership or title to the bull it should suffer its loss due
to force majeure. A contract of commodatum is essentially gratuitous.1 If the breeding fee be considered a compensation, then
the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the
responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry of the contract.
And even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides that a
bailee in a contract of commodatum —

. . . is liable for loss of the things, even if it should be through a fortuitous event:

(2) If he keeps it longer than the period stipulated . . .

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee
from responsibility in case of a fortuitous event;

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another period of
one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it was
killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had each an
appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not
stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt from
liability.

The appellant's contention that the demand or prayer by the appellee for the return of the bull or the payment of its value
being a money claim should be presented or filed in the intestate proceedings of the defendant who died on 23 October 1951,
is not altogether without merit. However, the claim that his civil personality having ceased to exist the trial court lost
jurisdiction over the case against him, is untenable, because section 17 of Rule 3 of the Rules of Court provides that —

After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal
representative of the deceased to appear and to be substituted for the deceased, within a period of thirty (30) days, or
within such time as may be granted. . . .

and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule 3 which provides that
—

Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court promptly of such
death . . . and to give the name and residence of the executory administrator, guardian, or other legal representative
of the deceased . . . .

The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had been issue letters of
administration of the estate of the late Jose Bagtas and that "all persons having claims for monopoly against the deceased
Jose V. Bagtas, arising from contract express or implied, whether the same be due, not due, or contingent, for funeral
expenses and expenses of the last sickness of the said decedent, and judgment for monopoly against him, to file said claims
with the Clerk of this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the date of the first
publication of this order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed administratrix of
the estate of the said deceased," is not a notice to the court and the appellee who were to be notified of the defendant's death
in accordance with the above-quoted rule, and there was no reason for such failure to notify, because the attorney who
appeared for the defendant was the same who represented the administratrix in the special proceedings instituted for the
administration and settlement of his estate. The appellee or its attorney or representative could not be expected to know of
the death of the defendant or of the administration proceedings of his estate instituted in another court that if the attorney for
the deceased defendant did not notify the plaintiff or its attorney of such death as required by the rule.

As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is only liable for the sum
of P859.63, the value of the bull which has not been returned to the appellee, because it was killed while in the custody of the
administratrix of his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959 to the motion
filed on 7 January 1959 by the appellant for the quashing of the writ of execution.

Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having been instituted
in the Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the appellee cannot be enforced by
means of a writ of execution but must be presented to the probate court for payment by the appellant, the administratrix
appointed by the court.

ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs.

THIRD DIVISION
BPI FAMILY BANK, G.R. No. 123498

Petitioner,
Present:

YNARES-SANTIAGO, J.,

Chairperson,

AUSTRIA-MARTINEZ,
- versus -
CHICO-NAZARIO,

NACHURA, and

REYES, JJ.

Promulgated:
AMADO FRANCO and COURT OF APPEALS,

Respondents.
November 23, 2007

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

Banks are exhorted to treat the accounts of their depositors with meticulous care and utmost
fidelity. We reiterate this exhortation in the case at bench.

Before us is a Petition for Review on Certiorari seeking the reversal of the Court of Appeals (CA)
Decision[1] in CA-G.R. CV No. 43424 which affirmed with modification the judgment[2] of the Regional
Trial Court, Branch 55, Manila (Manila RTC), in Civil Case No. 90-53295.

This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI Family Bank (BPI-FB)
allegedly by respondent Amado Franco (Franco) in conspiracy with other individuals, [3] some of whom
opened and maintained separate accounts with BPI-FB, San Francisco del Monte (SFDM) branch, in a
series of transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a savings and
current account with BPI-FB. Soon thereafter, or on August 25, 1989, First Metro Investment
Corporation (FMIC) also opened a time deposit account with the same branch of BPI-FB with a deposit
of P100,000,000.00, to mature one year thence.

Subsequently, on August 31, 1989, Franco opened three accounts, namely, a current,[4] savings,[5] and
time deposit,[6] with BPI-FB. The current and savings accounts were respectively funded with an initial
deposit of P500,000.00 each, while the time deposit account had P1,000,000.00 with a maturity date
of August 31, 1990. The total amount of P2,000,000.00 used to open these accounts is traceable to a
check issued by Tevesteco allegedly in consideration of Francos introduction of Eladio Teves, [7] who
was looking for a conduit bank to facilitate Tevestecos business transactions, to Jaime Sebastian, who
was then BPI-FB SFDMs Branch Manager. In turn, the funding for the P2,000,000.00 check was part of
the P80,000,000.00 debited by BPI-FB from FMICs time deposit account and credited to Tevestecos
current account pursuant to an Authority to Debit purportedly signed by FMICs officers.

It appears, however, that the signatures of FMICs officers on the Authority to Debit were
forged.[8] On September 4, 1989, Antonio Ong,[9] upon being shown the Authority to Debit, personally
declared his signature therein to be a forgery. Unfortunately, Tevesteco had already effected several
withdrawals from its current account (to which had been credited the P80,000,000.00 covered by the
forged Authority to Debit) amounting to P37,455,410.54, including the P2,000,000.00 paid to Franco.

On September 8, 1989, impelled by the need to protect its interests in light of FMICs forgery
claim, BPI-FB, thru its Senior Vice-President, Severino Coronacion, instructed Jesus Arangorin[10] to
debit Francos savings and current accounts for the amounts remaining therein.[11] However, Francos
time deposit account could not be debited due to the capacity limitations of BPI-FBs computer.[12]

In the meantime, two checks[13] drawn by Franco against his BPI-FB current account were dishonored
upon presentment for payment, and stamped with a notation account under garnishment. Apparently,
Francos current account was garnished by virtue of an Order of Attachment issued by the Regional Trial
Court of Makati (Makati RTC) in Civil Case No. 89-4996 (Makati Case), which had been filed by BPI-
FB against Franco et al.,[14] to recover the P37,455,410.54 representing Tevestecos total withdrawals
from its account.

Notably, the dishonored checks were issued by Franco and presented for payment at BPI-FB
prior to Francos receipt of notice that his accounts were under garnishment. [15] In fact, at the time the
Notice of Garnishment dated September 27, 1989 was served on BPI-FB, Franco had yet to be
impleaded in the Makati case where the writ of attachment was issued.

It was only on May 15, 1990, through the service of a copy of the Second Amended Complaint in Civil
Case No. 89-4996, that Franco was impleaded in the Makati case.[16]Immediately, upon receipt of such
copy, Franco filed a Motion to Discharge Attachment which the Makati RTC granted on May 16,
1990. The Order Lifting the Order of Attachment was served on BPI-FB on even date, with Franco
demanding the release to him of the funds in his savings and current accounts. Jesus Arangorin, BPI-
FBs new manager, could not forthwith comply with the demand as the funds, as previously stated, had
already been debited because of FMICs forgery claim. As such, BPI-FBs computer at the SFDM
Branch indicated that the current account record was not on file.

With respect to Francos savings account, it appears that Franco agreed to an arrangement, as a favor to
Sebastian, whereby P400,000.00 from his savings account was temporarily transferred to Domingo
Quiaoits savings account, subject to its immediate return upon issuance of a certificate of deposit which
Quiaoit needed in connection with his visa application at the Taiwan Embassy. As part of the
arrangement, Sebastian retained custody of Quiaoits savings account passbook to ensure that no
withdrawal would be effected therefrom, and to preserve Francos deposits.
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB deducted the amount
of P63,189.00 from the remaining balance of the time deposit account representing advance interest
paid to him.

These transactions spawned a number of cases, some of which we had already resolved.

FMIC filed a complaint against BPI-FB for the recovery of the amount of P80,000,000.00 debited from
its account.[17] The case eventually reached this Court, and in BPI Family Savings Bank, Inc. v. First
Metro Investment Corporation,[18] we upheld the finding of the courts below that BPI-FB failed to
exercise the degree of diligence required by the nature of its obligation to treat the accounts of its
depositors with meticulous care. Thus, BPI-FB was found liable to FMIC for the debited amount in its
time deposit. It was ordered to pay P65,332,321.99 plus interest at 17% per annum from August 29,
1989 until fully restored. In turn, the 17% shall itself earn interest at 12% from October 4, 1989 until
fully paid.

In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica (Buenaventura, et
[19]
al.), recipients of a P500,000.00 check proceeding from the P80,000,000.00 mistakenly credited to
Tevesteco, likewise filed suit. Buenaventura et al., as in the case of Franco, were also prevented from
effecting withdrawals[20] from their current account with BPI-FB, Bonifacio Market, Edsa, Caloocan
City Branch. Likewise, when the case was elevated to this Court docketed as BPI Family Bank v.
Buenaventura,[21] we ruled that BPI-FB had no right to freeze Buenaventura, et al.s accounts and
adjudged BPI-FB liable therefor, in addition to damages.

Meanwhile, BPI-FB filed separate civil and criminal cases against those believed to be the perpetrators
of the multi-million peso scam.[22] In the criminal case, Franco, along with the other accused, except for
Manuel Bienvenida who was still at large, were acquitted of the crime of Estafa as defined and
penalized under Article 351, par. 2(a) of the Revised Penal Code. [23] However, the civil case[24] remains
under litigation and the respective rights and liabilities of the parties have yet to be adjudicated.

Consequently, in light of BPI-FBs refusal to heed Francos demands to unfreeze his accounts and release
his deposits therein, the latter filed on June 4, 1990 with the Manila RTC the subject suit. In his
complaint, Franco prayed for the following reliefs: (1) the interest on the remaining balance[25] of his
current account which was eventually released to him on October 31, 1991; (2) the balance [26] on his
savings account, plus interest thereon; (3) the advance interest[27] paid to him which had been deducted
when he pre-terminated his time deposit account; and (4) the payment of actual, moral and exemplary
damages, as well as attorneys fees.

BPI-FB traversed this complaint, insisting that it was correct in freezing the accounts of Franco and
refusing to release his deposits, claiming that it had a better right to the amounts which consisted of part
of the money allegedly fraudulently withdrawn from it by Tevesteco and ending up in Francos accounts.
BPI-FB asseverated that the claimed consideration of P2,000,000.00 for the introduction facilitated by
Franco between George Daantos and Eladio Teves, on the one hand, and Jaime Sebastian, on the other,
spoke volumes of Francos participation in the fraudulent transaction.

On August 4, 1993, the Manila RTC rendered judgment, the dispositive portion of which reads as
follows:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of [Franco] and against
[BPI-FB], ordering the latter to pay to the former the following sums:

1. P76,500.00 representing the legal rate of interest on the amount of P450,000.00 from May 18,
1990 to October 31, 1991;

2. P498,973.23 representing the balance on [Francos] savings account as of May 18, 1990, together with
the interest thereon in accordance with the banks guidelines on the payment therefor;

3. P30,000.00 by way of attorneys fees; and

4. P10,000.00 as nominal damages.

The counterclaim of the defendant is DISMISSED for lack of factual and legal anchor.

Costs against [BPI-FB].

 SO ORDERED.[28]

Unsatisfied with the decision, both parties filed their respective appeals before the CA. Franco confined
his appeal to the Manila RTCs denial of his claim for moral and exemplary damages, and the diminutive
award of attorneys fees. In affirming with modification the lower courts decision, the appellate court
decreed, to wit:

WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with modification
ordering [BPI-FB] to pay [Franco] P63,189.00 representing the interest deducted from the time deposit of
plaintiff-appellant. P200,000.00 as moral damages and P100,000.00 as exemplary damages, deleting the
award of nominal damages (in view of the award of moral and exemplary damages) and increasing the
award of attorneys fees from P30,000.00 to P75,000.00.

Cost against [BPI-FB].

SO ORDERED.[29]

In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1) Franco had a better right to the
deposits in the subject accounts which are part of the proceeds of a forged Authority to Debit; (2)
Franco is entitled to interest on his current account; (3) Franco can recover the P400,000.00 deposit in
Quiaoits savings account; (4) the dishonor of Francos checks was not legally in order; (5) BPI-FB is
liable for interest on Francos time deposit, and for moral and exemplary damages; and (6) BPI-FBs
counter-claim has no factual and legal anchor.

The petition is partly meritorious.

We are in full accord with the common ruling of the lower courts that BPI-FB cannot unilaterally freeze
Francos accounts and preclude him from withdrawing his deposits.However, contrary to the appellate
courts ruling, we hold that Franco is not entitled to unearned interest on the time deposit as well as to
moral and exemplary damages.

First. On the issue of who has a better right to the deposits in Francos accounts, BPI-FB urges us that
the legal consequence of FMICs forgery claim is that the money transferred by BPI-FB to Tevesteco is
its own, and considering that it was able to recover possession of the same when the money was
redeposited by Franco, it had the right to set up its ownership thereon and freeze Francos accounts.

BPI-FB contends that its position is not unlike that of an owner of personal property who regains
possession after it is stolen, and to illustrate this point, BPI-FB gives the following example: where Xs
television set is stolen by Y who thereafter sells it to Z, and where Z unwittingly entrusts possession of
the TV set to X, the latter would have the right to keep possession of the property and preclude Z from
recovering possession thereof. To bolster its position, BPI-FB cites Article 559 of the Civil Code, which
provides:

Article 559. The possession of movable property acquired in good faith is equivalent to a title.
Nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may
recover it from the person in possession of the same.

If the possessor of a movable lost or of which the owner has been unlawfully deprived, has
acquired it in good faith at a public sale, the owner cannot obtain its return without
reimbursing the price paid therefor.
BPI-FBs argument is unsound. To begin with, the movable property mentioned in Article 559 of the
Civil Code pertains to a specific or determinate thing.[30] A determinate or specific thing is one that is
individualized and can be identified or distinguished from others of the same kind.[31]

In this case, the deposit in Francos accounts consists of money which, albeit characterized as a
movable, is generic and fungible.[32] The quality of being fungible depends upon the possibility of the
property, because of its nature or the will of the parties, being substituted by others of the same kind,
not having a distinct individuality.[33]

Significantly, while Article 559 permits an owner who has lost or has been unlawfully deprived
of a movable to recover the exact same thing from the current possessor, BPI-FB simply claims
ownership of the equivalent amount of money, i.e., the value thereof, which it had mistakenly debited
from FMICs account and credited to Tevestecos, and subsequently traced to Francos account. In fact,
this is what BPI-FB did in filing the Makati Case against Franco, et al. It staked its claim on the money
itself which passed from one account to another, commencing with the forged Authority to Debit.

It bears emphasizing that money bears no earmarks of peculiar ownership,[34] and this
characteristic is all the more manifest in the instant case which involves money in a banking
transaction gone awry. Its primary function is to pass from hand to hand as a medium of exchange,
without other evidence of its title. [35] Money, which had passed through various transactions in the
general course of banking business, even if of traceable origin, is no exception.

Thus, inasmuch as what is involved is not a specific or determinate personal property, BPI-FBs
illustrative example, ostensibly based on Article 559, is inapplicable to the instant case.

There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but not as a
legal consequence of its unauthorized transfer of FMICs deposits to Tevestecos account. BPI-FB
conveniently forgets that the deposit of money in banks is governed by the Civil Code provisions on
simple loan or mutuum.[36] As there is a debtor-creditor relationship between a bank and its depositor,
BPI-FB ultimately acquired ownership of Francos deposits, but such ownership is coupled with a
corresponding obligation to pay him an equal amount on demand. [37] Although BPI-FB owns the
deposits in Francos accounts, it cannot prevent him from demanding payment of BPI-FBs obligation by
drawing checks against his current account, or asking for the release of the funds in his savings
account. Thus, when Franco issued checks drawn against his current account, he had every right as
creditor to expect that those checks would be honored by BPI-FB as debtor.

More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco
based on its mere suspicion that the funds therein were proceeds of the multi-million peso scam
Franco was allegedly involved in. To grant BPI-FB, or any bank for that matter, the right to take
whatever action it pleases on deposits which it supposes are derived from shady transactions, would
open the floodgates of public distrust in the banking industry.

Our pronouncement in Simex International (Manila), Inc. v. Court of Appeals[38] continues to

resonate, thus:
 The banking system is an indispensable institution in the modern world and plays a vital role
in the economic life of every civilized nation. Whether as mere passive entities for the
safekeeping and saving of money or as active instruments of business and commerce, banks
have become an ubiquitous presence among the people, who have come to regard them
with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-
earner has not hesitated to entrust his lifes savings to the bank of his choice, knowing that
they will be safe in its custody and will even earn some interest for him. The ordinary person,
with equal faith, usually maintains a modest checking account for security and convenience
in the settling of his monthly bills and the payment of ordinary expenses. x x x.

In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank must
record every single transaction accurately, down to the last centavo, and as promptly as
possible. This has to be done if the account is to reflect at any given time the amount of
money the depositor can dispose of as he sees fit, confident that the bank will deliver it as
and to whomever directs. A blunder on the part of the bank, such as the dishonor of the
check without good reason, can cause the depositor not a little embarrassment if not also
financial loss and perhaps even civil and criminal litigation.

The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship. x x x.

Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the signatures of
its customers. Having failed to detect the forgery in the Authority to Debit and in the process
inadvertently facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now shift liability thereon to
Franco and the other payees of checks issued by Tevesteco, or prevent withdrawals from their
respective accounts without the appropriate court writ or a favorable final judgment.

Further, it boggles the mind why BPI-FB, even without delving into the authenticity of the
signature in the Authority to Debit, effected the transfer of P80,000,000.00 from FMICs to Tevestecos
account, when FMICs account was a time deposit and it had already paid advance interest to FMIC.
Considering that there is as yet no indubitable evidence establishing Francos participation in the
forgery, he remains an innocent party. As between him and BPI-FB, the latter, which made possible
the present predicament, must bear the resulting loss or inconvenience.

Second. With respect to its liability for interest on Francos current account, BPI-FB argues that
its non-compliance with the Makati RTCs Order Lifting the Order of Attachment and the legal
consequences thereof, is a matter that ought to be taken up in that court.

The argument is tenuous. We agree with the succinct holding of the appellate court in this
respect. The Manila RTCs order to pay interests on Francos current account arose from BPI-FBs
unjustified refusal to comply with its obligation to pay Franco pursuant to their contract of mutuum. In
other words, from the time BPI-FB refused Francos demand for the release of the deposits in his
current account, specifically, from May 17, 1990, interest at the rate of 12% began to accrue
thereon.[39]

Undeniably, the Makati RTC is vested with the authority to determine the legal consequences of
BPI-FBs non-compliance with the Order Lifting the Order of Attachment. However, such authority does
not preclude the Manila RTC from ruling on BPI-FBs liability to Franco for payment of interest based on
its continued and unjustified refusal to perform a contractual obligation upon demand. After all, this
was the core issue raised by Franco in his complaint before the Manila RTC.

Third. As to the award to Franco of the deposits in Quiaoits account, we find no reason to depart
from the factual findings of both the Manila RTC and the CA.

Noteworthy is the fact that Quiaoit himself testified that the deposits in his account are actually
owned by Franco who simply accommodated Jaime Sebastians request to temporarily
transfer P400,000.00 from Francos savings account to Quiaoits account.[40] His testimony cannot be
characterized as hearsay as the records reveal that he had personal knowledge of the arrangement
made between Franco, Sebastian and himself.[41]

BPI-FB makes capital of Francos belated allegation relative to this particular arrangement. It
insists that the transaction with Quiaoit was not specifically alleged in Francos complaint before the
Manila RTC. However, it appears that BPI-FB had impliedly consented to the trial of this issue given its
extensive cross-examination of Quiaoit.

Section 5, Rule 10 of the Rules of Court provides:

Section 5. Amendment to conform to or authorize presentation of evidence. When issues not

raised by the pleadings are tried with the express or implied consent of the parties, they
shall be treated in all respects as if they had been raised in the pleadings. Such amendment
of the pleadings as may be necessary to cause them to conform to the evidence and to
raise these issues may be made upon motion of any party at any time, even after
judgment; but failure to amend does not affect the result of the trial of these issues. If
evidence is objected to at the trial on the ground that it is now within the issues made by the
pleadings, the court may allow the pleadings to be amended and shall do so with liberality if
the presentation of the merits of the action and the ends of substantial justice will be
subserved thereby. The court may grant a continuance to enable the amendment to be
made. (Emphasis supplied)

In all, BPI-FBs argument that this case is not the right forum for Franco to recover the P400,000.00
begs the issue. To reiterate, Quiaoit, testifying during the trial, unequivocally disclaimed ownership of
the funds in his account, and pointed to Franco as the actual owner thereof. Clearly, Francos action for
the recovery of his deposits appropriately covers the deposits in Quiaoits account.
Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that the dishonor of Francos
checks respectively dated September 11 and 18, 1989 was legally in order in view of the Makati RTCs
supplemental writ of attachment issued on September 14, 1989. It posits that as the party that applied
for the writ of attachment before the Makati RTC, it need not be served with the Notice of
Garnishment before it could place Francos accounts under garnishment.

The argument is specious. In this argument, we perceive BPI-FBs clever but transparent ploy to
circumvent Section 4,[42] Rule 13 of the Rules of Court. It should be noted that the strict requirement
on service of court papers upon the parties affected is designed to comply with the elementary
requisites of due process. Franco was entitled, as a matter of right, to notice, if the requirements of
due process are to be observed. Yet, he received a copy of the Notice of Garnishment only
on September 27, 1989, several days after the two checks he issued were dishonored by BPI-FB on
September 20 and 21, 1989. Verily, it was premature for BPI-FB to freeze Francos accounts without
even awaiting service of the Makati RTCs Notice of Garnishment on Franco.

Additionally, it should be remembered that the enforcement of a writ of attachment cannot be made
without including in the main suit the owner of the property attached by virtue thereof. Section 5,
Rule 13 of the Rules of Court specifically provides that no levy or attachment pursuant to the writ
issued x x x shall be enforced unless it is preceded, or contemporaneously accompanied, by service of
summons, together with a copy of the complaint, the application for attachment, on the defendant
within the Philippines.

Franco was impleaded as party-defendant only on May 15, 1990. The Makati RTC had yet to acquire
jurisdiction over the person of Franco when BPI-FB garnished his accounts.[43] Effectively, therefore,
the Makati RTC had no authority yet to bind the deposits of Franco through the writ of attachment,
and consequently, there was no legal basis for BPI-FB to dishonor the checks issued by Franco.

Fifth. Anent the CAs finding that BPI-FB was in bad faith and as such liable for the advance interest it
deducted from Francos time deposit account, and for moral as well as exemplary damages, we find it
proper to reinstate the ruling of the trial court, and allow only the recovery of nominal damages in the
amount of P10,000.00. However, we retain the CAs award of P75,000.00 as attorneys fees.

In granting Francos prayer for interest on his time deposit account and for moral and exemplary
damages, the CA attributed bad faith to BPI-FB because it (1) completely disregarded its obligation to
Franco; (2) misleadingly claimed that Francos deposits were under garnishment; (3) misrepresented
that Francos current account was not on file; and (4) refused to return the P400,000.00 despite the
fact that the ostensible owner, Quiaoit, wanted the amount returned to Franco.

In this regard, we are guided by Article 2201 of the Civil Code which provides:

Article 2201. In contracts and quasi-contracts, the damages for which the obligor who acted
in good faith is liable shall be those that are the natural and probable consequences of the
breach of the obligation, and which the parties have foreseen or could have reasonable
foreseen at the time the obligation was constituted.
 In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for
all damages which may be reasonably attributed to the non-performance of the
obligation.(Emphasis supplied.)

We find, as the trial court did, that BPI-FB acted out of the impetus of self-protection and not out of
malevolence or ill will. BPI-FB was not in the corrupt state of mind contemplated in Article 2201 and
should not be held liable for all damages now being imputed to it for its breach of obligation. For the
same reason, it is not liable for the unearned interest on the time deposit.

Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of wrong; it partakes of the nature of fraud. [44] We have
held that it is a breach of a known duty through some motive of interest or ill will.[45] In the instant
case, we cannot attribute to BPI-FB fraud or even a motive of self-enrichment. As the trial court found,
there was no denial whatsoever by BPI-FB of the existence of the accounts. The computer-generated
document which indicated that the current account was not on file resulted from the prior debit by
BPI-FB of the deposits. The remedy of freezing the account, or the garnishment, or even the outright
refusal to honor any transaction thereon was resorted to solely for the purpose of holding on to the
funds as a security for its intended court action,[46] and with no other goal but to ensure the integrity
of the accounts.

We have had occasion to hold that in the absence of fraud or bad faith,[47] moral damages cannot be
awarded; and that the adverse result of an action does not per se make the action wrongful, or the
party liable for it. One may err, but error alone is not a ground for granting such damages.[48]

An award of moral damages contemplates the existence of the following requisites: (1) there must be
an injury clearly sustained by the claimant, whether physical, mental or psychological; (2) there must
be a culpable act or omission factually established; (3) the wrongful act or omission of the defendant is
the proximate cause of the injury sustained by the claimant; and (4) the award for damages is
predicated on any of the cases stated in Article 2219 of the Civil Code. [49]

Franco could not point to, or identify any particular circumstance in Article 2219 of the Civil
Code,[50] upon which to base his claim for moral damages.

Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral damages under Article 2220
of the Civil Code for breach of contract.[51]

We also deny the claim for exemplary damages. Franco should show that he is entitled to moral,
temperate, or compensatory damages before the court may even consider the question of whether
exemplary damages should be awarded to him.[52] As there is no basis for the award of moral
damages, neither can exemplary damages be granted.

While it is a sound policy not to set a premium on the right to litigate,[53] we, however, find that Franco
is entitled to reasonable attorneys fees for having been compelled to go to court in order to assert his
right. Thus, we affirm the CAs grant of P75,000.00 as attorneys fees.
Attorneys fees may be awarded when a party is compelled to litigate or incur expenses to protect his
interest,[54] or when the court deems it just and equitable.[55] In the case at bench, BPI-FB refused to
unfreeze the deposits of Franco despite the Makati RTCs Order Lifting the Order of Attachment and
Quiaoits unwavering assertion that the P400,000.00 was part of Francos savings account. This refusal
constrained Franco to incur expenses and litigate for almost two (2) decades in order to protect his
interests and recover his deposits. Therefore, this Court deems it just and equitable to grant
Franco P75,000.00 as attorneys fees. The award is reasonable in view of the complexity of the issues
and the time it has taken for this case to be resolved.[56]

Sixth. As for the dismissal of BPI-FBs counter-claim, we uphold the Manila RTCs ruling, as affirmed by
the CA, that BPI-FB is not entitled to recover P3,800,000.00 as actual damages. BPI-FBs alleged loss of
profit as a result of Francos suit is, as already pointed out, of its own making. Accordingly, the denial of
its counter-claim is in order.

WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals Decision dated November 29,
1995 is AFFIRMED with the MODIFICATION that the award of unearned interest on the time deposit
and of moral and exemplary damages is DELETED.

No pronouncement as to costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 155223 April 4, 2007

BOBIE ROSE V. FRIAS, represented by her Attorney-in-fact, MARIE F. FUJITA, Petitioner,

vs.
FLORA SAN DIEGO-SISON, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before us is a Petition for Review on Certiorari filed by Bobie Rose V. Frias represented by her Attorney-in-fact, Marie Regine
F. Fujita (petitioner) seeking to annul the Decision1 dated June 18, 2002 and the Resolution2 dated September 11, 2002 of the
Court of Appeals (CA) in CA-G.R. CV No. 52839.

Petitioner is the owner of a house and lot located at No. 589 Batangas East, Ayala Alabang, Muntinlupa, Metro Manila, which
she acquired from Island Masters Realty and Development Corporation (IMRDC) by virtue of a Deed of Sale dated Nov. 16,
1990.3 The property is covered by TCT No. 168173 of the Register of Deeds of Makati in the name of IMRDC. 4

On December 7, 1990, petitioner, as the FIRST PARTY, and Dra. Flora San Diego-Sison (respondent), as the SECOND
PARTY, entered into a Memorandum of Agreement 5 over the property with the following terms:

NOW, THEREFORE, for and in consideration of the sum of THREE MILLION PESOS (P3,000,000.00) receipt of which is
hereby acknowledged by the FIRST PARTY from the SECOND PARTY, the parties have agreed as follows:

1. That the SECOND PARTY has a period of Six (6) months from the date of the execution of this contract within
which to notify the FIRST PARTY of her intention to purchase the aforementioned parcel of land together within (sic)
the improvements thereon at the price of SIX MILLION FOUR HUNDRED THOUSAND PESOS (P6,400,000.00).
Upon notice to the FIRST PARTY of the SECOND PARTY’s intention to purchase the same, the latter has a period of
another six months within which to pay the remaining balance of P3.4 million.

2. That prior to the six months period given to the SECOND PARTY within which to decide whether or not to purchase
the above-mentioned property, the FIRST PARTY may still offer the said property to other persons who may be
interested to buy the same provided that the amount of P3,000,000.00 given to the FIRST PARTY BY THE SECOND
 PARTY shall be paid to the latter including interest based on prevailing compounded bank interest plus the amount of
the sale in excess of P7,000,000.00 should the property be sold at a price more than P7 million.

3. That in case the FIRST PARTY has no other buyer within the first six months from the execution of this contract, no
interest shall be charged by the SECOND PARTY on the P3 million however, in the event that on the sixth month the
SECOND PARTY would decide not to purchase the aforementioned property, the FIRST PARTY has a period of
another six months within which to pay the sum of P3 million pesos provided that the said amount shall earn
compounded bank interest for the last six months only. Under this circumstance, the amount of P3 million given by the
SECOND PARTY shall be treated as [a] loan and the property shall be considered as the security for the mortgage
which can be enforced in accordance with law.

x x x x.6

Petitioner received from respondent two million pesos in cash and one million pesos in a post-dated check dated February 28,
1990, instead of 1991, which rendered said check stale. 7 Petitioner then gave respondent TCT No. 168173 in the name of
IMRDC and the Deed of Absolute Sale over the property between petitioner and IMRDC.

Respondent decided not to purchase the property and notified petitioner through a letter 8 dated March 20, 1991, which
petitioner received only on June 11, 1991, 9 reminding petitioner of their agreement that the amount of two million pesos which
petitioner received from respondent should be considered as a loan payable within six months. Petitioner subsequently failed
to pay respondent the amount of two million pesos.

On April 1, 1993, respondent filed with the Regional Trial Court (RTC) of Manila, a complaint 10 for sum of money with
preliminary attachment against petitioner. The case was docketed as Civil Case No. 93-65367 and raffled to Branch 30.
Respondent alleged the foregoing facts and in addition thereto averred that petitioner tried to deprive her of the security for
the loan by making a false report11 of the loss of her owner’s copy of TCT No. 168173 to the Tagig Police Station on June 3,
1991, executing an affidavit of loss and by filing a petition12 for the issuance of a new owner’s duplicate copy of said title with
the RTC of Makati, Branch 142; that the petition was granted in an Order 13 dated August 31, 1991; that said Order was
subsequently set aside in an Order dated April 10, 199214where the RTC Makati granted respondent’s petition for relief from
judgment due to the fact that respondent is in possession of the owner’s duplicate copy of TCT No. 168173, and ordered the
provincial public prosecutor to conduct an investigation of petitioner for perjury and false testimony. Respondent prayed for
the ex-parte issuance of a writ of preliminary attachment and payment of two million pesos with interest at 36% per annum
from December 7, 1991, P100,000.00 moral, corrective and exemplary damages and P200,000.00 for attorney’s fees.

In an Order dated April 6, 1993, the Executive Judge of the RTC of Manila issued a writ of preliminary attachment upon the
filing of a bond in the amount of two million pesos.15

Petitioner filed an Amended Answer16 alleging that the Memorandum of Agreement was conceived and arranged by her
lawyer, Atty. Carmelita Lozada, who is also respondent’s lawyer; that she was asked to sign the agreement without being
given the chance to read the same; that the title to the property and the Deed of Sale between her and the IMRDC were
entrusted to Atty. Lozada for safekeeping and were never turned over to respondent as there was no consummated sale yet;
that out of the two million pesos cash paid, Atty. Lozada took the one million pesos which has not been returned, thus
petitioner had filed a civil case against her; that she was never informed of respondent’s decision not to purchase the property
within the six month period fixed in the agreement; that when she demanded the return of TCT No. 168173 and the Deed of
Sale between her and the IMRDC from Atty. Lozada, the latter gave her these documents in a brown envelope on May 5,
1991 which her secretary placed in her attache case; that the envelope together with her other personal things were lost when
her car was forcibly opened the following day; that she sought the help of Atty. Lozada who advised her to secure a police
report, to execute an affidavit of loss and to get the services of another lawyer to file a petition for the issuance of an owner’s
duplicate copy; that the petition for the issuance of a new owner’s duplicate copy was filed on her behalf without her
knowledge and neither did she sign the petition nor testify in court as falsely claimed for she was abroad; that she was a
victim of the manipulations of Atty. Lozada and respondent as shown by the filing of criminal charges for perjury and false
testimony against her; that no interest could be due as there was no valid mortgage over the property as the principal
obligation is vitiated with fraud and deception. She prayed for the dismissal of the complaint, counter-claim for damages and
attorney’s fees.

Trial on the merits ensued. On January 31, 1996, the RTC issued a decision, 17 the dispositive portion of which reads:

WHEREFORE, judgment is hereby RENDERED:

1) Ordering defendant to pay plaintiff the sum of P2 Million plus interest thereon at the rate of thirty two (32%) per cent
per annum beginning December 7, 1991 until fully paid.

2) Ordering defendant to pay plaintiff the sum of P70,000.00 representing premiums paid by plaintiff on the
attachment bond with legal interest thereon counted from the date of this decision until fully paid.

3) Ordering defendant to pay plaintiff the sum of P100,000.00 by way of moral, corrective and exemplary damages.

4) Ordering defendant to pay plaintiff attorney’s fees of P100,000.00 plus cost of litigation.18

The RTC found that petitioner was under obligation to pay respondent the amount of two million pesos with compounded
interest pursuant to their Memorandum of Agreement; that the fraudulent scheme employed by petitioner to deprive
respondent of her only security to her loaned money when petitioner executed an affidavit of loss and instituted a petition for
the issuance of an owner’s duplicate title knowing the same was in respondent’s possession, entitled respondent to moral
damages; and that petitioner’s bare denial cannot be accorded credence because her testimony and that of her witness did
not appear to be credible.

The RTC further found that petitioner admitted that she received from respondent the two million pesos in cash but the fact
that petitioner gave the one million pesos to Atty. Lozada was without respondent’s knowledge thus it is not binding on
respondent; that respondent had also proven that in 1993, she initially paid the sum of P30,000.00 as premium for the
issuance of the attachment bond, P20,000.00 for its renewal in 1994, and P20,000.00 for the renewal in 1995, thus plaintiff
should be reimbursed considering that she was compelled to go to court and ask for a writ of preliminary attachment to protect
her rights under the agreement.

Petitioner filed her appeal with the CA. In a Decision dated June 18, 2002, the CA affirmed the RTC decision with
modification, the dispositive portion of which reads:

WHEREFORE, premises considered, the decision appealed from is MODIFIED in the sense that the rate of interest is
reduced from 32% to 25% per annum, effective June 7, 1991 until fully paid. 19

The CA found that: petitioner gave the one million pesos to Atty. Lozada partly as her commission and partly as a loan;
respondent did not replace the mistakenly dated check of one million pesos because she had decided not to buy the property
and petitioner knew of her decision as early as April 1991; the award of moral damages was warranted since even granting
petitioner had no hand in the filing of the petition for the issuance of an owner’s copy, she executed an affidavit of loss of TCT
No. 168173 when she knew all along that said title was in respondent’s possession; petitioner’s claim that she thought the title
was lost when the brown envelope given to her by Atty. Lozada was stolen from her car was hollow; that such deceitful
conduct caused respondent serious anxiety and emotional distress.

The CA concluded that there was no basis for petitioner to say that the interest should be charged for six months only and no
more; that a loan always bears interest otherwise it is not a loan; that interest should commence on June 7, 1991 20 with
compounded bank interest prevailing at the time the two million was considered as a loan which was in June 1991; that the
bank interest rate for loans secured by a real estate mortgage in 1991 ranged from 25% to 32% per annum as certified to by
Prudential Bank,21 that in fairness to petitioner, the rate to be charged should be 25% only.

Petitioner’s motion for reconsideration was denied by the CA in a Resolution dated September 11, 2002.

Hence the instant Petition for Review on Certiorari filed by petitioner raising the following issues:

(A) WHETHER OR NOT THE COMPOUNDED BANK INTEREST SHOULD BE LIMITED TO SIX (6) MONTHS AS
CONTAINED IN THE MEMORANDUM OF AGREEMENT.

(B) WHETHER OR NOT THE RESPONDENT IS ENTITLED TO MORAL DAMAGES.

(C) WHETHER OR NOT THE GRANT OF CORRECTIVE AND EXEMPLARY DAMAGES AND ATTORNEY’S FEES
IS PROPER EVEN IF NOT MENTIONED IN THE TEXT OF THE DECISION.22

Petitioner contends that the interest, whether at 32% per annum awarded by the trial court or at 25% per annum as modified
by the CA which should run from June 7, 1991 until fully paid, is contrary to the parties’ Memorandum of Agreement; that the
agreement provides that if respondent would decide not to purchase the property, petitioner has the period of another six
months to pay the loan with compounded bank interest for the last six months only; that the CA’s ruling that a loan always
bears interest otherwise it is not a loan is contrary to Art. 1956 of the New Civil Code which provides that no interest shall be
due unless it has been expressly stipulated in writing.

We are not persuaded.

While the CA’s conclusion, that a loan always bears interest otherwise it is not a loan, is flawed since a simple loan may be
gratuitous or with a stipulation to pay interest, 23 we find no error committed by the CA in awarding a 25% interest per annum
on the two-million peso loan even beyond the second six months stipulated period.

The Memorandum of Agreement executed between the petitioner and respondent on December 7, 1990 is the law between
the parties. In resolving an issue based upon a contract, we must first examine the contract itself, especially the provisions
thereof which are relevant to the controversy. 24 The general rule is that if the terms of an agreement are clear and leave no
doubt as to the intention of the contracting parties, the literal meaning of its stipulations shall prevail.25 It is further required that
the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result
from all of them taken jointly.26

In this case, the phrase "for the last six months only" should be taken in the context of the entire agreement. We agree with
and adopt the CA’s interpretation of the phrase in this wise:

Their agreement speaks of two (2) periods of six months each. The first six-month period was given to plaintiff-appellee
(respondent) to make up her mind whether or not to purchase defendant-appellant’s (petitioner's) property. The second six-
month period was given to defendant-appellant to pay the P2 million loan in the event that plaintiff-appellee decided not to buy
the subject property in which case interest will be charged "for the last six months only", referring to the second six-month
period. This means that no interest will be charged for the first six-month period while appellee was making up her mind
whether to buy the property, but only for the second period of six months after appellee had decided not to buy the property.
This is the meaning of the phrase "for the last six months only". Certainly, there is nothing in their agreement that suggests
that interest will be charged for six months only even if it takes defendant-appellant an eternity to pay the loan.27

The agreement that the amount given shall bear compounded bank interest for the last six months only, i.e., referring to the
second six-month period, does not mean that interest will no longer be charged after the second six-month period since such
stipulation was made on the logical and reasonable expectation that such amount would be paid within the date stipulated.
Considering that petitioner failed to pay the amount given which under the Memorandum of Agreement shall be considered as
a loan, the monetary interest for the last six months continued to accrue until actual payment of the loaned amount.

The payment of regular interest constitutes the price or cost of the use of money and thus, until the principal sum due is
returned to the creditor, regular interest continues to accrue since the debtor continues to use such principal amount. 28 It has
been held that for a debtor to continue in possession of the principal of the loan and to continue to use the same after maturity
of the loan without payment of the monetary interest, would constitute unjust enrichment on the part of the debtor at the
expense of the creditor.29
Petitioner and respondent stipulated that the loaned amount shall earn compounded bank interests, and per the certification
issued by Prudential Bank, the interest rate for loans in 1991 ranged from 25% to 32% per annum. The CA reduced the
interest rate to 25% instead of the 32% awarded by the trial court which petitioner no longer assailed. 1awphi1.nét

In Bautista v. Pilar Development Corp.,30 we upheld the validity of a 21% per annum interest on a P142,326.43 loan. In Garcia
v. Court of Appeals,31 we sustained the agreement of the parties to a 24% per annum interest on an P8,649,250.00 loan.
Thus, the interest rate of 25% per annum awarded by the CA to a P2 million loan is fair and reasonable.

Petitioner next claims that moral damages were awarded on the erroneous finding that she used a fraudulent scheme to
deprive respondent of her security for the loan; that such finding is baseless since petitioner was acquitted in the case for
perjury and false testimony filed by respondent against her.

We are not persuaded.

Article 31 of the Civil Code provides that when the civil action is based on an obligation not arising from the act or omission
complained of as a felony, such civil action may proceed independently of the criminal proceedings and regardless of the
result of the latter.32

While petitioner was acquitted in the false testimony and perjury cases filed by respondent against her, those actions are
entirely distinct from the collection of sum of money with damages filed by respondent against petitioner.

We agree with the findings of the trial court and the CA that petitioner’s act of trying to deprive respondent of the security of
her loan by executing an affidavit of loss of the title and instituting a petition for the issuance of a new owner’s duplicate copy
of TCT No. 168173 entitles respondent to moral damages. Moral damages may be awarded in culpa contractual or breach of
1a\^/phi1.net

contract cases when the defendant acted fraudulently or in bad faith. Bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It partakes of the nature of
fraud.33

The Memorandum of Agreement provides that in the event that respondent opts not to buy the property, the money given by
respondent to petitioner shall be treated as a loan and the property shall be considered as the security for the mortgage. It
was testified to by respondent that after they executed the agreement on December 7, 1990, petitioner gave her the owner’s
copy of the title to the property, the Deed of Sale between petitioner and IMRDC, the certificate of occupancy, and the
certificate of the Secretary of the IMRDC who signed the Deed of Sale. 34 However, notwithstanding that all those documents
were in respondent’s possession, petitioner executed an affidavit of loss that the owner’s copy of the title and the Deed of
Sale were lost.

Although petitioner testified that her execution of the affidavit of loss was due to the fact that she was of the belief that since
she had demanded from Atty. Lozada the return of the title, she thought that the brown envelope with markings which Atty.
Lozada gave her on May 5, 1991 already contained the title and the Deed of Sale as those documents were in the same
brown envelope which she gave to Atty. Lozada prior to the transaction with respondent. 35 Such statement remained a bare
statement. It was not proven at all since Atty. Lozada had not taken the stand to corroborate her claim. In fact, even
petitioner’s own witness, Benilda Ynfante (Ynfante), was not able to establish petitioner's claim that the title was returned by
Atty. Lozada in view of Ynfante's testimony that after the brown envelope was given to petitioner, the latter passed it on to her
and she placed it in petitioner’s attaché case36 and did not bother to look at the envelope. 37

It is clear therefrom that petitioner’s execution of the affidavit of loss became the basis of the filing of the petition wit h the RTC
for the issuance of new owner’s duplicate copy of TCT No. 168173. Petitioner’s actuation would have deprived respondent of
the security for her loan were it not for respondent’s timely filing of a petition for relief whereby the RTC set aside its previous
order granting the issuance of new title. Thus, the award of moral damages is in order.

The entitlement to moral damages having been established, the award of exemplary damages is proper. 38Exemplary
damages may be imposed upon petitioner by way of example or correction for the public good.39 The RTC awarded the
amount of P100,000.00 as moral and exemplary damages. While the award of moral and exemplary damages in an
aggregate amount may not be the usual way of awarding said damages, 40 no error has been committed by CA. There is no
question that respondent is entitled to moral and exemplary damages.

Petitioner argues that the CA erred in awarding attorney’s fees because the trial court’s decision did not explain the findings of
facts and law to justify the award of attorney’s fees as the same was mentioned only in the dispositive portion of the RTC
decision.

We agree.

Article 220841 of the New Civil Code enumerates the instances where such may be awarded and, in all cases, it must be
reasonable, just and equitable if the same were to be granted. 42 Attorney's fees as part of damages are not meant to enrich
the winning party at the expense of the losing litigant. They are not awarded every time a party prevails in a suit because of
the policy that no premium should be placed on the right to litigate. 43 The award of attorney's fees is the exception rather than
the general rule. As such, it is necessary for the trial court to make findings of facts and law that would bring the case within
the exception and justify the grant of such award. The matter of attorney's fees cannot be mentioned only in the dispositive
portion of the decision.44 They must be clearly explained and justified by the trial court in the body of its decision. On appeal,
the CA is precluded from supplementing the bases for awarding attorney’s fees when the trial court failed to discuss in its
Decision the reasons for awarding the same. Consequently, the award of attorney's fees should be deleted.

WHEREFORE, in view of all the foregoing, the Decision dated June 18, 2002 and the Resolution dated September 11, 2002
of the Court of Appeals in CA-G.R. CV No. 52839 are AFFIRMED with MODIFICATION that the award of attorney’s fees
is DELETED.

No pronouncement as to costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 122079 June 27, 1997

SPOUSES ANTONIO E.A. CONCEPCION and MANUELA S. CONCEPCION, petitioners,

vs.
HON. COURT OF APPEALS, HOME SAVINGS BANK AND TRUST COMPANY, and as nominal party-defendants, THE
SHERIFF ASSIGNED TO SAN JUAN, METRO MANILA, and who conducted the auction sale and the REGISTER OF
DEEDS or his representative of San Juan, Metro Manila, and ASAJE REALTY CORPORATION, respondents.

VITUG, J.:

The spouses Antonio E.A. Concepcion and Manuela S. Concepcion assail, via the instant petition for review on certiorari, the
decision, 1 dated 15 September 1995, of the Court of Appeals, affirming with modification the judgment of the Regional Trial Court
("RTC"), 2 Branch 157, of Pasig City, 3 that dismissed the complaint of herein petitioners against private respondents.

The facts, hereunder narrated, are culled from the findings of the appellate court.

On 17 January 1979, the Home Savings Bank and Trust Company (now Insular Life Savings and Trust Company) granted to
the Concepcions a loan amounting to P1,400,000.00. The Concepcions, in turn, executed in favor of the bank a promissory
note and a real estate mortgage over their property located at 11 Albany St., Greenhills, San Juan, Metro Manila. The loan
was payable in equal quarterly amortizations for a period of fifteen (15) years and carried an interest rate of sixteen percent
(16%) per annum. The promissory note provided that the Concepcions had authorized —

. . . the Bank to correspondingly increase the interest rate presently stipulated in this transaction without
advance notice to me/us in the event the Central Bank of the Philippines raises its rediscount rate to member
banks, and/or the interest rate on savings and time deposit, and/or the interest rate on such loans and/or
advances. 4

In accordance with the above provision, the bank unilaterally increased the interest rate from 16% to 21% effective 17
February 1980; from 21% to 30% effective 17 October 1984; and from 30% to 38% effective 17 November 1984,
increasing the quarterly amortizations from P67,830.00 to, respectively, P77,619.72, P104,661.10, and P123,797.05
for the periods aforestated. The Concepcions paid, under protest, the increased amortizations of P77,619.72 and
P104,661.10 until January 1985 but thereafter failed to pay the quarterly amortization of P123,797.05 (starting due
date of 17 April 1985).

In a letter, dated 15 July 1985, the bank's President made a demand on the Concepcions for the payment of the arrearages.
The Concepcions failed to pay, constraining the bank's counsel to send a final demand letter, dated 26 August 1985, for the
payment of P393,878.81, covering the spouses' due account for three quarterly payments plus interest, penalty, and service
charges. Still, no payment was received.

On 14 April 1986, the bank finally filed with the Office of the Provincial Sheriff of Pasig City a petition for extrajudicial
foreclosure of the real estate mortgage executed by the Concepcions. A notice of sale was issued on 15 May 1986, setting
the public auction sale on 11 June 1986. The notice was published in the newspaper "Mabuhay." A copy of the notice was
sent to the Concepcions at 59 Whitefield St., White Plains Subdivision, Quezon City and/or at 11 Albany St., Greenhills
Subdivision, San Juan, Metro Manila. The public auction sale went on as scheduled with the bank emerging as the highest
bidder. A Certificate of Sale was issued in favor of the bank.

The Concepcions were unable to exercise their right of redemption within the one-year period provided under Act No. 3135.
The bank thus consolidated its title over the property and, after the cancellation of the title in the name of the Concepcions, a
new transfer certificate of title (No. 090-R) was issued in the name of Home Savings Bank and Trust Company.

On 31 July 1987, the bank executed a Deed of Absolute Sale in favor of Asaje Realty Corporation and a new certificate of title
was issued in the latter's name.

Meanwhile, on 29 July 1987, the Concepcions filed an action against Home Savings Bank and Trust Company, the Sheriff of
San Juan, Metro Manila, and the Register of Deeds of San Juan, Metro Manila, for the cancellation of the foreclosure sale, the
declaration of nullity of the consolidation of title in favor of the bank, and the declaration of nullity of the unilateral increases of
the interest rates on their loan. The spouses likewise claimed damages against the defendants. The Concepcions, having
learned of the sale of the property to Asaje Realty Corporation, filed an amended complaint impleading the realty corporation
and so praying as well for the cancellation of the sale executed between said corporation and the bank and the cancellation of
the certificate of title issued in the name of Asaje.

On 31 August 1992, the trial court found for the defendants and ruled:

In view of all the foregoing premises, this Court finally concludes that the plaintiffs have no cause of action
either against defendant Home Savings Bank & Trust Company or defendant Asaje Realty Corporation; and
under the circumstances of this case, it deems it just and equitable that attorney's fees and expenses of
litigation should be recovered by said defendants.
 WHEREFORE, judgment is hereby rendered dismissing the amended complaint of plaintiffs Spouses Antonio
E.A. Concepcion and Manuela S. Concepcion against the defendants for lack of merit, and ordering the said
plaintiffs to pay attorney's fees and expenses of litigation in the sum of P30,000.00 to defendant Home
Savings Bank & Trust Company and in the amount of P25,000.00 to defendant Asaje Realty Corporation, in
addition to their respective costs of suit.

SO ORDERED. 5

The Concepcions went to the Court of Appeals.

On 15 September 1995, the appellate court affirmed the trial court's decision, with modification, as follows:

Under the facts and circumstances of the case at bench, the award of attorney's fees, expenses of litigation
and costs of suit in favor of defendant-appellee should be deleted. It is not a sound policy to place a penalty
on the right to litigate, nor should counsel's fees be awarded everytime a party wins a suit (Arenas vs. Court of
Appeals, 169 SCRA 558).

WHEREFORE, the appealed judgment is AFFIRMED with the modification that the award of attorneys fees,
litigation expenses and costs of suit in favor of defendant-appellees are deleted from the dispositive portion.

SO ORDERED. 6

The Concepcions forthwith filed with this Court a petition for review on certiorari, contending that they have been denied their
contractually stipulated right to be personally notified of the foreclosure proceedings on the mortgaged property.

There is some merit in the petition.

The three common types of forced sales arising from a failure to pay a mortgage debt include (a) an extrajudicial foreclosure
sale, governed by Act No. 3135; (b) a judicial foreclosure sale, regulated by Rule 68 of the Rules of Court; and (c) an ordinary
execution sale, covered by Rule 39 of the Rules of Court. 7 Each mode, peculiarly, has its own requirements.

In an extrajudicial foreclosure, such as here, Section 3 of Act No. 3135 8 is the law applicable; 9 the provision reads:

Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public
places of the municipality or city where the property is situated, and if such property is worth more than four
hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a
newspaper of general circulation in the municipality or city.

The Act only requires (1) the posting of notices of sale in three
10
public places, and (2) the publication of the same in a newspaper of general circulation. Personal notice to the
11
mortgagor is not necessary. , Nevertheless, the parties to the mortgage contract are not precluded from exacting
additional requirements.

In the case at bar, the mortgage contract stipulated that —

All correspondence relative to this Mortgage, including demand letters, summons, subpoenas, or notifications
of any judicial or extrajudicial actions shall be sent to the Mortgagor at the address given above or at the
address that may hereafter be given in writing by the Mortgagor to the Mortgagee, and the mere act of
sending any correspondence by mail or by personal delivery to the said address shall be valid and effective
notice to the Mortgagor for all legal purposes, and fact that any communication is not actually received by the
Mortgagor, or that it has been returned unclaimed to the Mortgagee, or that no person was found at the
address given, or that the address is fictitious or cannot be located, shall not excuse or relieve Mortgagor from
the effects of such notice. 12

The stipulation, not being contrary to law, morals, good customs, public order or public policy, is the law between the
contracting parties and should be faithfully complied with. 13

Private respondent bank maintains that the stipulation that "all correspondence relative to (the) Mortgage . . . shall be sent to
the Mortgagor at the address given above or at the address that may hereafter be given in writing by the Mortgagor to the
Mortgagee" 14 gives the mortgagee an alternative to send its correspondence either at the old or the new address given. 15 This
stand is illogical. It could not have been the intendment of the parties to defeat the very purpose of the provision referred to which is
obviously to apprise the mortgagors of the bank's action that might affect the property and to accord to them an opportunity to
safeguard their rights. The Court finds the bank's failure to comply with its agreement with petitioners an inexcusable breach of the
mortgagee's covenant. Neither petitioners' subsequent opportunity to redeem the property nor their failed negotiations with the bank
for a new schedule of payments, 16 can be a valid justification for the breach.

The foregoing notwithstanding, petitioners may no longer seek the reconveyance of the property from private respondent
Asaje Realty Corporation, the latter having been, evidently, an innocent purchaser in good faith. 17The realty corporation
purchased the property when the title was already in the name of the bank. It was under no obligation to investigate the titl e of the
bank or to look beyond what clearly appeared to be on the face of the certificate. 18

Private respondent bank, however, can still be held to account for the bid price of Asaje Realty Corporation over and above, if
any, the amount due the bank on the basis of the original interest rate, the unilateral increases made by the bank having been
correctly invalidated by the Court of Appeals.

The validity of "escalation" or "escalator" clauses in contracts, in general, was upheld by the Supreme Court in Banco Filipino
Savings and Mortgage Bank vs. Hen. Navarro and Del Valle. 19 Hence:
 Some contracts contain what is known as an "escalator clause," which is defined as one in which the contract
fixes a base price but contains a provision that in the event of specified cost increases, the seller or contractor
may raise the price up to a fixed percentage of the base. Attacks on such a clause have usually been based
on the claim that, because of the open price-provision, the contract was too indefinite to be enforceable and
did not evidence actual meeting of the minds of the parties or that the arrangement left the price to be
determined arbitrarily by one party so that the contract lacked mutuality. In most instances, however, these
attacks have been unsuccessful.

The Court further finds as a matter of law that the cost of living index adjustment, or substantively
unconscionable.

Cost of living index adjustment clauses are widely used in commercial contracts in an effort to maintain fiscal
stability and to retain "real dollar" value to the price terms of long term contracts. The provision is a common
one, and has been universally upheld and enforced. Indeed, the Federal government has recognized the
efficacy of escalator clauses in tying Social Security benefits to the cost of living index, 42 U.S.C.s 415(i).
Pension benefits and labor contracts negotiated by most of the major labor unions are other examples. That
inflation, expected or otherwise, will cause a particular bargain to be more costly in terms of total dollars than
originally contemplated can be of little solace to the plaintiffs. 20

In Philippine National Bank vs. Court of Appeals, 21 the Court further elucidated, as follows:

It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of
mutual assent of the parties. If this assent is wanting on the part of one who contracts his act has no more
efficacy than if it had been done under duress or by a person of unsound mind.

Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the
parties must meet as to the proposed modification especially when it affects an important aspect of the
agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is component, for it can
make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of
any binding effect.

We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right
to unilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from
private respondents the right to assent to an important modification in their agreement, and would negate the
element of mutuality in contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-
545 (1991) we held —

. . . (T)he unilateral action of the PNB in increasing the interest rate on the private respondent's loan violated
the mutuality of contracts ordained in Article 1308 of the Civil Code:

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

In order that obligations arising from contracts may have the force or law between the parties, there must be
mutuality between the parties based on their essential equality. A contract containing a condition which makes
its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void . . .
Hence, even assuming that the
. . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact
there was none) to increase the interest rate at will during the term of the loan, that license would have been
null and void for being violative of the principle of mutuality essential in contracts. It would have invested the
loan agreement with the character of a contract of adhesion, where the parties do not equal footing the weaker
party's (the debtor) participation being reduced to the alternative to take it or leave it'
. . . Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against
abuse and imposition. (Citations
omitted.) 22

Even if we were to consider that petitioners were bound by their agreement allowing an increase in the interest rate despite
the lack of advance notice to them, the escalation should still be subject, as so contractually stipulated, to a corresponding
increase by the Central Bank of its rediscount rate to member banks, or of the interest rate on savings and time deposit, or of
the interest rate on such loans and advances. The notices sent to petitioners merely read:

Letter of 19 July 1984:

Please be informed that the Bank has increased the interest rate of your existing loan from 21 to 30% per
annum beginning October 17, 1984. This increase of interest rate is in accordance with the provision of
Section 2 of Presidential Decree No. 1684 23 amending Act No. 2655. This provision of the decree is reiterated
under paragraph 1 of your Promissory Note. Your quarterly amortization has been increased to P104,661.10.

24
We trust that you will be guided accordingly.

Letter of 14 November 1984:

On account of the prevailing business and economic condition, we are compelled to increase the interest rate
of your existing loan from 30% to 38 % per annum effective November 17, 1984. This increase is in
accordance with your agreement (escalation clause) in your promissory note/s.

In view of this increase in the interest rate of your loan, your Quarterly amortization correspondingly increased
to P123,797.05 commencing on April 17, 1985.
 25
We trust that you will understand our position and please be guided accordingly.

Given the circumstances, the Court sees no cogent reasons to fault the appellate court in its finding that there are no sufficient
valid justifications aptly shown for the unilateral increases by private respondent bank of the interest rates on the loan.

WHEREFORE, the, decision of the appellate court is AFFIRMED subject to the MODIFICATION that private respondent
Home Savings Bank and Trust Company shall pay to petitioners the excess, if any, of the bid price it received from Asaje
Realty Corporation for the foreclosed property in question over and above the unpaid balance of the loan computed at the
original interest rate. This case is REMANDED to the trial court for the above determination. No costs.

SO ORDERED.

SECOND DIVISION

SPS. ISAGANI CASTRO and G.R. No. 168940

DIOSDADA CASTRO,
Petitioners, Present:

- versus - CARPIO, J.,

Chairperson,
ANGELINA DE LEON TAN, LEONARDO-DE CASTRO,
SPS. CONCEPCION T. CLEMENTE BRION,
and ALEXANDER C. CLEMENTE, DEL CASTILLO, and
SPS. ELIZABETH T. CARPIO and ABAD, JJ.
ALVIN CARPIO, SPS. MARIE ROSE
T. SOLIMAN and ARVIN SOLIMAN Promulgated:
and JULIUS AMIEL TAN, November 24, 2009
Respondents.
x---------------------------------------------------------------------x

DECISION

DEL CASTILLO, J.:

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily
assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of
property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human
conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that
may be sustained within the sphere of public or private morals.[1]

In this Petition for Review on Certiorari,[2] petitioners assail the October 29, 2004 Decision[3] and July 18,
2005 Resolution[4] of the Court of Appeals (CA) in CA-G.R. CV No. 76842, affirming the June 11, 2002
Decision[5] of the Regional Trial Court of Bulacan, Branch 79, which equitably reduced the stipulated interest rate
in an agreement entered into by the parties from 60% per annum (or 5% per month) to 12% per annum, with the
modification that herein respondents may redeem the mortgaged property notwithstanding the lapse of
redemption period on grounds of equity and substantial justice.
Factual antecedents

Respondent Angelina de Leon Tan, and her husband Ruben Tan were the former registered owners of a
240-square meter residential lot, situated at Barrio Canalate, Malolos, Bulacan and covered by Transfer
Certificate of Title No. T-8540. On February 17, 1994, they entered into an agreement with petitioners spouses
Isagani and Diosdada Castro denominated as Kasulatan ng Sanglaan ng Lupa at Bahay (Kasulatan) to secure a
loan of P30,000.00 they obtained from the latter. Under the Kasulatan, the spouses Tan undertook to pay the
mortgage debt within six months or until August 17, 1994, with an interest rate of 5% per month, compounded
monthly.
 When her husband died on September 2, 1994, respondent Tan was left with the responsibility of paying
the loan. However, she failed to pay the same upon maturity. Thereafter, she offered to pay petitioners the
principal amount of P30,000.00 plus a portion of the interest but petitioners refused and instead demanded
payment of the total accumulated sum of P359,000.00.

On February 5, 1999, petitioners caused the extrajudicial foreclosure of the real estate mortgage and
emerged as the only bidder in the auction sale that ensued. The period of redemption expired without respondent
Tan having redeemed the property; thus title over the same was consolidated in favor of petitioners. After a writ of
possession was issued, the Sheriff ejected respondents from the property and delivered the possession thereof to
petitioners.

Proceedings before the Regional Trial Court

On September 26, 2000, respondent Tan, joined by respondents Sps. Concepcion T. Clemente and
Alexander C. Clemente, Sps. Elizabeth T. Carpio and Alvin Carpio, Sps. Marie Rose T. Soliman and Arvin
Soliman and Julius Amiel Tan filed a Complaint for Nullification of Mortgage and Foreclosure and/or Partial
Rescission of Documents and Damages[6] before the Regional Trial Court of Malolos, Bulacan. They
alleged, inter alia, that the interest rate imposed on the principal amount of P30,000.00 is unconscionable.[7]

On June 11, 2002, the trial court rendered judgment in favor of respondents, viz:

PREMISES CONSIDERED, this Court cannot declare the mortgage and foreclosure null and void but
the x x x Kasulatan ng Sanglaan ng Lupa x x x herebelow quoted:

2. Na ang nasabing pagkakautang ay aming babayaran sa loob ng anim (6) na buwan simula sa petsa ng
kasulatang ito o dili kaya ay sa bago dumating ang Agosto 17, 1994 na may pakinabang na 5% bawat
buwan.Na ang tubo ay aani pa rin ng tubong 5% bawat buwan.

Is partially rescinded to only 12% interest per annum and additional one percent a month penalty
charges as liquidated damages beginning February 17, 1994 up to June 21, 2000 per Delivery of
Possession x x x and/or for the defendants to accept the offer of P200,000.00 by the plaintiffs to redeem
or reacquire the property in litis.

The Court is not inclined to award moral damages since plaintiffs failed to buttress her claim of moral
damages and/or proof of moral damages. x x x
No award of attorneys fees because the general rule is that no [premium] should be placed on the right
to litigate. x x x

The counterclaim of the defendants is hereby DISMISSED for lack of merit.

Costs against the defendants.

SO ORDERED.[8]

Proceedings before the Court of Appeals

Petitioners appealed to the Court of Appeals which affirmed the trial courts finding that the interest rate
stipulated in the Kasulatan is iniquitous or unconscionable and, thus, its equitable reduction to the legal rate of
12% per annum is warranted.[9] At the same time, the appellate court declared that respondents may redeem the
mortgaged property notwithstanding the expiration of the period of redemption, in the interest of substantial
justice and equity.[10] The dispositive portion of said Decision reads:

WHEREFORE, the appealed judgment is hereby AFFIRMED with the MODIFICATION that
plaintiffs-appellees may redeem the mortgaged property by paying the defendants-appellants spouses
Isagani and Diosdada Castro the amount of P30,000.00, with interest thereon at 12% per annum
from February 17, 1994 until fully paid plus penalty charges at the same rate from February 17,
1994 to June 21, 2000.
 SO ORDERED.[11]

Petitioners Motion for Reconsideration was denied by the Court of Appeals in a Resolution dated July 18,
2005.

Issues

Hence, the present Petition for Review on Certiorari raising the following issues:

1. THE COURT OF APPEALS GROSSLY ERRED IN NULLIFYING THE INTEREST RATE

VOLUNTARILY AGREED UPON BY THE PETITIONERS AND RESPONDENTS AND
EXPRESSLY STIPULATED IN THE CONTRACT OF MORTGAGE ENTERED INTO
BETWEEN THEM.

2. THE COURT OF APPEALS GROSSLY ERRED IN MAKING A CONTRACT BETWEEN THE

PETITIONERS AND RESPONDENTS BY UNILATERALLY CHANGING THE TERMS AND
CONDITIONS OF THE CONTRACT OF MORTGAGE ENTERED INTO BETWEEN THEM.

3. THE COURT OF APPEALS GROSSLY ERRED IN EXTENDING THE PERIOD OF

REDEMPTION IN FAVOR OF THE RESPONDENTS IN VIOLATION OF THE CLEAR AND
UNEQUIVOCAL PROVISIONS OF ACT NO. 3135 PROVIDING A PERIOD OF ONLY ONE
YEAR FOR THE REDEMPTION OF A FORECLOSED REAL PROPERTY.[12]

Petitioners Arguments

Petitioners contend that with the removal by the Bangko Sentral of the ceiling on the rate of interest that
may be stipulated in a contract of loan,[13] the lender and the borrower could validly agree on any interest rate on
loans. Thus, the Court of Appeals gravely erred when it declared the stipulated interest in the Kasulatan as null as
if there was no express stipulation on the compounded interest.[14]

Respondents Arguments

On the other hand, respondents assert that the appellate court correctly struck down the said stipulated
interest for being excessive and contrary to morals, if not against the law.[15] They also point out that a contract has
the force of law between the parties, but only when the terms, clauses and conditions thereof are not contrary to
law, morals, public order or public policy.[16]

Our Ruling

The petition lacks merit.

The Court of Appeals correctly found that the 5% monthly

interest, compounded monthly, is unconscionable and should be
equitably reduced to the legal rate of 12% per annum.

While we agree with petitioners that parties to a loan agreement have wide latitude to stipulate on any
interest rate in view of the Central Bank Circular No. 905 s. 1982 which suspended the Usury Law ceiling on
interest effective January 1, 1983, it is also worth stressing that interest rates whenever unconscionable may still
be declared illegal. There is certainly nothing in said circular which grants lenders carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.[17]

In several cases, we have ruled that stipulations authorizing iniquitous or unconscionable interests are
contrary to morals, if not against the law. In Medel v. Court of Appeals,[18] we annulled a stipulated 5.5% per
month or 66% per annum interest on a P500,000.00 loan and a 6% per month or 72% per annum interest on
a P60,000.00 loan, respectively, for being excessive, iniquitous, unconscionable and exorbitant. In Ruiz v. Court of
Appeals,[19] we declared a 3% monthly interest imposed on four separate loans to be excessive. In both cases, the
interest rates were reduced to 12% per annum.

In this case, the 5% monthly interest rate, or 60% per annum, compounded monthly, stipulated in
the Kasulatan is even higher than the 3% monthly interest rate imposed in the Ruiz case.Thus, we similarly hold
the 5% monthly interest to be excessive, iniquitous, unconscionable and exorbitant, contrary to morals, and the
law. It is therefore void ab initio for being violative of Article 1306[20] of the Civil Code. With this, and in accord
with the Medel and Ruiz cases, we hold that the Court of Appeals correctly imposed the legal interest of 12% per
annum in place of the excessive interest stipulated in the Kasulatan.

The Court of Appeals did not unilaterally change the terms and
conditions of the Contract of Mortgage entered into between the
petitioners and the respondents.

Petitioners allege that the Kasulatan was entered into by the parties freely and voluntarily.[21] They
maintain that there was already a meeting of the minds between the parties as regards the principal amount of the
loan, the interest thereon and the property given as security for the payment of the loan, which must be complied
with in good faith.[22] Hence, they assert that the Court of Appeals should have given due respect to the provisions
of the Kasulatan.[23] They also stress that it is a settled principle that the law will not relieve a party from the
effects of an unwise, foolish or disastrous contract, entered into with all the required formalities and with full
awareness of what he was doing.[24]

Petitioners contentions deserve scant consideration. In Abe v. Foster Wheeler Corporation,[25] we held that
the freedom of contract is not absolute. The same is understood to be subject to reasonable legislative regulation
aimed at the promotion of public health, morals, safety and welfare. One such legislative regulation is found in
Article 1306 of the Civil Code which allows the contracting parties to 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.

To reiterate, we fully agree with the Court of Appeals in holding that the compounded interest rate of 5%
per month, is iniquitous and unconscionable. Being a void stipulation, it is deemed inexistent from the
beginning. The debt is to be considered without the stipulation of the iniquitous and unconscionable interest
rate. Accordingly, the legal interest of 12% per annum must be imposed in lieu of the excessive interest stipulated
in the agreement, in line with our ruling in Ruiz v. Court of Appeals,[26] thus:

The foregoing rates of interests and surcharges are in accord with Medel vs. Court of
Appeals, Garcia vs. Court of Appeals, Bautista vs. Pilar Development Corporation, and the recent case
of Spouses Solangon vs. Salazar. This Court invalidated a stipulated 5.5% per month or 66% per annum
interest on a P500,000.00 loan in Medel and a 6% per month or 72% per annum interest on
a P60,000.00 loan in Solangon for being excessive, iniquitous, unconscionable and exorbitant. In both
cases, we reduced the interest rate to 12% per annum. We held that while the Usury Law has been
suspended by Central Bank Circular No. 905, s. 1982, effective on January 1, 1983, and parties to a loan
agreement have been given wide latitude to agree on any interest rate, still stipulated interest rates are
illegal if they are unconscionable. Nothing in the said circular grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets. On the other hand, in Bautista vs. Pilar Development Corp., this Court upheld the validity of a
21% per annum interest on a P142,326.43 loan, and in Garcia vs. Court of Appeals, sustained the
agreement of the parties to a 24% per annum interest on an P8,649,250.00 loan. It is on the basis of
these cases that we reduce the 36% per annum interest to 12%. An interest of 12% per annum is
deemed fair and reasonable. While it is true that this Court invalidated a much higher interest rate of
66% per annum in Medel and 72% in Solangon it has sustained the validity of a much lower interest
rate of 21% in Bautista and 24% in Garcia. We still find the 36% per annum interest rate in the case at
bar to be substantially greater than those upheld by this Court in the two (2) aforecited cases. (Emphasis
supplied, citations omitted)
 From the foregoing, it is clear that there is no unilateral alteration of the terms and conditions of
the Kasulatan entered into by the parties. Surely, it is more consonant with justice that the subject interest rate be
equitably reduced and the legal interest of 12% per annum is deemed fair and reasonable.[27]
The additional 1% per month penalty awarded as liquidated
damages does not have any legal basis.

In its June 11, 2002 Decision,[28] the trial court granted an additional 1% per month penalty as liquidated
damages[29] beginning February 17, 1994 up to June 21, 2000.[30] Since respondents did not file their appellees
brief despite notice, the appellate court declared this to be not in issue.[31]

Although the issue of the liquidated damages was not presented squarely in either Memorandum of the
parties, this does not prevent us from ruling on the matter. In the exercise of our appellate jurisdiction, we are
clothed with ample authority to review findings and rulings of lower courts even if they are not assigned as
errors. This is especially so if we find that their consideration is necessary in arriving at a just decision of the
case. We have consistently held that an unassigned error closely related to an error properly assigned, or upon
which a determination of the question raised by the error properly assigned is dependent, will be considered
notwithstanding the failure to assign it as an error.[32] On this premise, we deem it proper to pass upon the matter
of liquidated damages.

Article 2226 of the Civil Code provides that [L]iquidated damages are those agreed upon by the parties to
a contract, to be paid in case of breach thereof.

In the instant case, a cursory reading of the Kasulatan would show that it is devoid of any stipulation with
respect to liquidated damages. Neither did any of the parties allege or prove the existence of any agreement on
liquidated damages. Hence, for want of any stipulation on liquidated damages in the Kasulatan entered into by the
parties, we hold that the liquidated damages awarded by the trial court and affirmed by the Court of Appeals to be
without legal basis and must be deleted.

The foreclosure proceedings held on March 3, 1999 cannot be

given effect.

The Court of Appeals modified the judgment of the trial court by holding that respondents, in the interest
of substantial justice and equity, may redeem the mortgaged property notwithstanding the lapse of the period of
redemption.

Petitioners argue that this cannot be done because the right of redemption had long expired and same is no
longer possible beyond the one-year period provided under Act No. 3135.[33]

On the other hand, respondents insist that to disallow them to redeem the property would render
meaningless the declaration that the stipulated interest is null and void.

It is undisputed that sometime after the maturity of the loan, respondent Tan attempted to pay the mortgage
debt of P30,000.00 as principal and some interest. Said offer was refused by petitioners because they demanded
payment of the total accumulated amount of P359,000.00.[34] Moreover, the trial court also mentioned an offer by
respondent Tan of the amount of P200,000.00 to petitioners in order for her to redeem or re-acquire the
property in litis.[35]

From these, it is evident that despite considerable effort on her part, respondent Tan failed to redeem the
mortgaged property because she was unable to raise the total amount of P359,000.00, an amount grossly inflated
by the excessive interest imposed. Thus, it is only proper that respondents be given the opportunity to repay the
real amount of their indebtedness.

In the case of Heirs of Zoilo Espiritu v. Landrito,[36] which is on all fours with the instant case, we held that:
 Since the Spouses Landrito, the debtors in this case, were not given an opportunity to settle
their debt, at the correct amount and without the iniquitous interest imposed, no foreclosure
proceedings may be instituted. A judgment ordering a foreclosure sale is conditioned upon a finding
on the correct amount of the unpaid obligation and the failure of the debtor to pay the said amount. In
this case, it has not yet been shown that the Spouses Landrito had already failed to pay the correct
amount of the debt and, therefore, a foreclosure sale cannot be conducted in order to answer for the
unpaid debt. The foreclosure sale conducted upon their failure to pay P874,125.00 in 1990 should be
nullified since the amount demanded as the outstanding loan was overstated; consequently it has not
been shown that the mortgagors the Spouses Landrito, have failed to pay their outstanding obligation. x
xx

As a result, the subsequent registration of the foreclosure sale cannot transfer any rights over the
mortgaged property to the Spouses Espiritu. The registration of the foreclosure sale, herein declared
invalid, cannot vest title over the mortgaged property. x x x (Emphasis supplied)

On this basis, we nullify the foreclosure proceedings held on March 3, 1999 since the amount demanded as
the outstanding loan was overstated. Consequently, it has not been shown that the respondents have failed to pay
the correct amount of their outstanding obligation. Accordingly, we declare the registration of the foreclosure sale
invalid and cannot vest title over the mortgaged property.

Anent the allegation of petitioners that the Court of Appeals erred in extending the period of redemption,
same has been rendered moot in view of the nullification of the foreclosure proceedings.

WHEREFORE, the instant petition is DENIED. The assailed Decision of the Court of Appeals dated
October 29, 2004 as well as the Resolution dated July 18, 2005 are AFFIRMED with
the MODIFICATION that the award of 1% liquidated damages per month be DELETED and that petitioners
are ORDERED to reconvey the subject property to respondents conditioned upon the payment of the loan
together with the rate of interest fixed herein.

SO ORDERED.

THIRD DIVISION

SEBASTIAN SIGA-AN, G.R. No. 173227

Petitioner,
Present:

YNARES-SANTIAGO,
Chairperson,
AUSTRIA-MARTINEZ,
-versus
CHICO-NAZARIO,

NACHURA, and

LEONARDO-DE CASTRO,* JJ.

ALICIA VILLANUEVA,
Respondent.

Promulgated:
 January 20, 2009

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

Before Us is a Petition[1] for Review on Certiorari under Rule 45 of the Rules of Court seeking to
set aside the Decision,[2] dated 16 December 2005, and Resolution,[3]dated 19 June 2006 of the Court
of Appeals in CA-G.R. CV No. 71814, which affirmed in toto the Decision,[4] dated 26 January 2001, of
the Las Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.

The facts gathered from the records are as follows:

On 30 March 1998, respondent Alicia Villanueva filed a complaint[5] for sum of money against
petitioner Sebastian Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch 255,
docketed as Civil Case No. LP-98-0068. Respondent alleged that she was a businesswoman engaged in
supplying office materials and equipments to the Philippine Navy Office (PNO) located at Fort
Bonifacio, Taguig City, while petitioner was a military officer and comptroller of the PNO from 1991 to
1996.

Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered
to loan her the amount of P540,000.00. Since she needed capital for her business transactions with the
PNO, she accepted petitioners proposal. The loan agreement was not reduced in writing. Also, there
was no stipulation as to the payment of interest for the loan. [6]

On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial

payment of the loan. On 31 October 1993, she issued another check in the amount of P200,000.00 to
petitioner as payment of the remaining balance of the loan. Petitioner told her that since she paid a total
amount of P700,000.00 for the P540,000.00 worth of loan, the excess amount of P160,000.00 would be
applied as interest for the loan. Not satisfied with the amount applied as interest, petitioner pestered her
to pay additional interest. Petitioner threatened to block or disapprove her transactions with the PNO if
she would not comply with his demand. As all her transactions with the PNO were subject to the
approval of petitioner as comptroller of the PNO, and fearing that petitioner might block or unduly
influence the payment of her vouchers in the PNO, she conceded. Thus, she paid additional amounts in
cash and checks as interests for the loan. She asked petitioner for receipt for the payments but petitioner
told her that it was not necessary as there was mutual trust and confidence between them. According to
her computation, the total amount she paid to petitioner for the loan and interest accumulated
to P1,200,000.00.[7]

Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan
despite absence of agreement to that effect. Her lawyer told her that petitioner could not validly collect
interest on the loan because there was no agreement between her and petitioner regarding payment of
interest. Since she paid petitioner a total amount of P1,200,000.00 for the P540,000.00 worth of loan,
and upon being advised by her lawyer that she made overpayment to petitioner, she sent a demand letter
to petitioner asking for the return of the excess amount of P660,000.00. Petitioner, despite receipt of the
demand letter, ignored her claim for reimbursement.[8]

Respondent prayed that the RTC render judgment ordering petitioner to pay respondent
(1) P660,000.00 plus legal interest from the time of demand; (2) P300,000.00 as moral damages;
(3) P50,000.00 as exemplary damages; and (4) an amount equivalent to 25% of P660,000.00 as
attorneys fees.[9]

In his answer[10] to the complaint, petitioner denied that he offered a loan to respondent. He
averred that in 1992, respondent approached and asked him if he could grant her a loan, as she needed
money to finance her business venture with the PNO. At first, he was reluctant to deal with respondent,
because the latter had a spotty record as a supplier of the PNO. However, since respondent was an
acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the loan in full.[11]

Subsequently, respondent again asked him to give her a loan. As respondent had been able to pay
the previous loan in full, he agreed to grant her another loan. Later, respondent requested him to
restructure the payment of the loan because she could not give full payment on the due date. He acceded
to her request. Thereafter, respondent pleaded for another restructuring of the payment of the loan. This
time he rejected her plea. Thus, respondent proposed to execute a promissory note wherein she would
acknowledge her obligation to him, inclusive of interest, and that she would issue several postdated
checks to guarantee the payment of her obligation. Upon his approval of respondents request for
restructuring of the loan, respondent executed a promissory note dated 12 September 1994 wherein she
admitted having borrowed an amount of P1,240,000.00, inclusive of interest, from petitioner and that
she would pay said amount in March 1995. Respondent also issued to him six postdated checks
amounting to P1,240,000.00 as guarantee of compliance with her obligation. Subsequently, he
presented the six checks for encashment but only one check was honored. He demanded that respondent
settle her obligation, but the latter failed to do so. Hence, he filed criminal cases for Violation of the
Bouncing Checks Law (Batas Pambansa Blg. 22) against respondent. The cases were assigned to the
Metropolitan Trial Court of Makati City, Branch 65 (MeTC). [12]

Petitioner insisted that there was no overpayment because respondent admitted in the latters
promissory note that her monetary obligation as of 12 September 1994 amounted to P1,240,000.00
inclusive of interests. He argued that respondent was already estopped from complaining that she
should not have paid any interest, because she was given several times to settle her obligation but failed
to do so. He maintained that to rule in favor of respondent is tantamount to concluding that the loan was
given interest-free. Based on the foregoing averments, he asked the RTC to dismiss respondents
complaint.

After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an
overpayment of her loan obligation to petitioner and that the latter should refund the excess amount to
the former. It ratiocinated that respondents obligation was only to pay the loaned amount
of P540,000.00, and that the alleged interests due should not be included in the computation of
respondents total monetary debt because there was no agreement between them regarding payment of
interest. It concluded that since respondent made an excess payment to petitioner in the amount
of P660,000.00 through mistake, petitioner should return the said amount to respondent pursuant to the
principle of solutio indebiti.[13]
 The RTC also ruled that petitioner should pay moral damages for the sleepless nights and
wounded feelings experienced by respondent. Further, petitioner should pay exemplary damages by
way of example or correction for the public good, plus attorneys fees and costs of suit.

The dispositive portion of the RTC Decision reads:

WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and
jurisprudence on the matter, judgment is hereby rendered in favor of the plaintiff and against the defendant
as follows:

(1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal interest of 12%
per annum computed from 3 March 1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral damages;

(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary damages;

(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of P660,000.00 as attorneys
fees; and

(5) Ordering defendant to pay the costs of suit.[14]

Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court
promulgated its Decision affirming in toto the RTC Decision, thus:

WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed
decision [is] AFFIRMED in toto.[15]

Petitioner filed a motion for reconsideration of the appellate courts decision but this was
denied.[16] Hence, petitioner lodged the instant petition before us assigning the following errors:
I.

THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE
TO PETITIONER;

II.

THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO
INDEBITI.[17]

Interest is a compensation fixed by the parties for the use or forbearance of money. This is
referred to as monetary interest. Interest may also be imposed by law or by courts as penalty or
indemnity for damages. This is called compensatory interest. [18] The right to interest arises only by
virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which
interest is demanded.[19]

Article 1956 of the Civil Code, which refers to monetary interest, [20] specifically mandates that no
interest shall be due unless it has been expressly stipulated in writing. As can be gleaned from the
foregoing provision, payment of monetary interest is allowed only if: (1) there was an express
stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required for the payment of monetary interest. Thus,
we have held that collection of interest without any stipulation therefor in writing is prohibited by
law.[21]

It appears that petitioner and respondent did not agree on the payment of interest for the
loan. Neither was there convincing proof of written agreement between the two regarding the payment
of interest. Respondent testified that although she accepted petitioners offer of loan amounting
to P540,000.00, there was, nonetheless, no verbal or written agreement for her to pay interest on the
loan.[22]

Petitioner presented a handwritten promissory note dated 12 September 1994 [23] wherein
respondent purportedly admitted owing petitioner capital and interest.Respondent, however, explained
that it was petitioner who made a promissory note and she was told to copy it in her own handwriting;
that all her transactions with the PNO were subject to the approval of petitioner as comptroller of the
PNO; that petitioner threatened to disapprove her transactions with the PNO if she would not pay
interest; that being unaware of the law on interest and fearing that petitioner would make good of his
threats if she would not obey his instruction to copy the promissory note, she copied the promissory
note in her own handwriting; and that such was the same promissory note presented by petitioner as
alleged proof of their written agreement on interest. [24] Petitioner did not rebut the foregoing
testimony. It is evident that respondent did not really consent to the payment of interest for the loan and
that she was merely tricked and coerced by petitioner to pay interest. Hence, it cannot be gainfully said
that such promissory note pertains to an express stipulation of interest or written agreement of interest
on the loan between petitioner and respondent.

Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and
respondent agreed on the payment of 7% rate of interest on the loan; that the agreed 7% rate of interest
was duly admitted by respondent in her testimony in the Batas Pambansa Blg. 22 cases he filed against
respondent; that despite such judicial admission by respondent, the RTC and the Court of Appeals,
citing Article 1956 of the Civil Code, still held that no interest was due him since the agreement on
interest was not reduced in writing; that the application of Article 1956 of the Civil Code should not be
absolute, and an exception to the application of such provision should be made when the borrower
admits that a specific rate of interest was agreed upon as in the present case; and that it would be unfair
to allow respondent to pay only the loan when the latter very well knew and even admitted in the Batas
Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on the loan. [25]

We have carefully examined the RTC Decision and found that the RTC did not make a ruling
therein that petitioner and respondent agreed on the payment of interest at the rate of 7% for the
loan. The RTC clearly stated that although petitioner and respondent entered into a valid oral contract of
loan amounting to P540,000.00, they, nonetheless, never intended the payment of interest
thereon.[26] While the Court of Appeals mentioned in its Decision that it concurred in the RTCs ruling
that petitioner and respondent agreed on a certain rate of interest as regards the loan, we consider this as
merely an inadvertence because, as earlier elucidated, both the RTC and the Court of Appeals ruled that
petitioner is not entitled to the payment of interest on the loan. The rule is that factual findings of the
trial court deserve great weight and respect especially when affirmed by the appellate court. [27] We
found no compelling reason to disturb the ruling of both courts.

Petitioners reliance on respondents alleged admission in the Batas Pambansa Blg. 22 cases that
they had agreed on the payment of interest at the rate of 7% deserves scant consideration. In the said
case, respondent merely testified that after paying the total amount of loan, petitioner ordered her to pay
interest.[28] Respondent did not categorically declare in the same case that she and respondent made
an express stipulation in writing as regards payment of interest at the rate of 7%. As earlier discussed,
monetary interest is due only if there was an express stipulation in writing for the payment of interest.

There are instances in which an interest may be imposed even in the absence of express
stipulation, verbal or written, regarding payment of interest. Article 2209 of the Civil Code states that if
the obligation consists in the payment of a sum of money, and the debtor incurs delay, a legal interest of
12% per annum may be imposed as indemnity for damages if no stipulation on the payment of interest
was agreed upon. Likewise, Article 2212 of the Civil Code provides that interest due shall earn legal
interest from the time it is judicially demanded, although the obligation may be silent on this point.

All the same, the interest under these two instances may be imposed only as a penalty or damages
for breach of contractual obligations. It cannot be charged as a compensation for the use or forbearance
of money. In other words, the two instances apply only to compensatory interest and not to monetary
interest.[29] The case at bar involves petitioners claim for monetary interest.

Further, said compensatory interest is not chargeable in the instant case because it was not duly
proven that respondent defaulted in paying the loan. Also, as earlier found, no interest was due on the
loan because there was no written agreement as regards payment of interest.

Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not
apply to the instant case. Thus, he cannot be compelled to return the alleged excess amount paid by
respondent as interest.[30]

Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been
no stipulation therefor, the provisions of the Civil Code concerning solutioindebiti shall be
applied. Article 2154 of the Civil Code explains the principle of solutio indebiti. Said provision
provides that if something is received when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises. In such a case, a creditor-debtor relationship is
created under a quasi-contract whereby the payor becomes the creditor who then has the right to
demand the return of payment made by mistake, and the person who has no right to receive such
payment becomes obligated to return the same. The quasi-contract of solutio indebiti harks back to the
ancient principle that no one shall enrich himself unjustly at the expense of another.[31] The principle
of solutio indebiti applies where (1) a payment is made when there exists no binding relation between
the payor, who has no duty to pay, and the person who received the payment; and (2) the payment is
made through mistake, and not through liberality or some other cause. [32] We have held that the
principle of solutio indebiti applies in case of erroneous payment of undue interest. [33]

It was duly established that respondent paid interest to petitioner. Respondent was under no duty
to make such payment because there was no express stipulation in writing to that effect. There was no
binding relation between petitioner and respondent as regards the payment of interest. The payment was
clearly a mistake. Since petitioner received something when there was no right to demand it, he has an
obligation to return it.

We shall now determine the propriety of the monetary award and damages imposed by the RTC
and the Court of Appeals.

Records show that respondent received a loan amounting to P540,000.00 from

petitioner.[34] Respondent issued two checks with a total worth of P700,000.00 in favor of petitioner as
payment of the loan.[35] These checks were subsequently encashed by petitioner.[36] Obviously, there
was an excess of P160,000.00 in the payment for the loan. Petitioner claims that the excess
of P160,000.00 serves as interest on the loan to which he was entitled. Aside from issuing the said two
checks, respondent also paid cash in the total amount of P175,000.00 to petitioner as
interest.[37] Although no receipts reflecting the same were presented because petitioner refused to issue
such to respondent, petitioner, nonetheless, admitted in his Reply-Affidavit[38] in the Batas Pambansa
Blg. 22 cases that respondent paid him a total amount of P175,000.00 cash in addition to the two
checks. Section 26 Rule 130 of the Rules of Evidence provides that the declaration of a party as to a
relevant fact may be given in evidence against him. Aside from the amounts of P160,000.00
and P175,000.00 paid as interest, no other proof of additional payment as interest was presented by
respondent. Since we have previously found that petitioner is not entitled to payment of interest and that
the principle of solutio indebiti applies to the instant case, petitioner should return to respondent the
excess amount of P160,000.00 and P175,000.00 or the total amount of P335,000.00. Accordingly, the
reimbursable amount to respondent fixed by the RTC and the Court of Appeals should be reduced
from P660,000.00 to P335,000.00.

As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22
against respondent. In the said cases, the MeTC found respondent guilty of violating Batas Pambansa
Blg. 22 for issuing five dishonored checks to petitioner. Nonetheless, respondents conviction therein
does not affect our ruling in the instant case. The two checks, subject matter of this case,
totaling P700,000.00 which respondent claimed as payment of the P540,000.00 worth of loan, were not
among the five checks found to be dishonored or bounced in the five criminal cases. Further, the MeTC
found that respondent made an overpayment of the loan by reason of the interest which the latter paid to
petitioner.[39]

Article 2217 of the Civil Code provides that moral damages may be recovered if the party
underwent physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation and similar injury. Respondent testified that she experienced
sleepless nights and wounded feelings when petitioner refused to return the amount paid as interest
despite her repeated demands. Hence, the award of moral damages is justified. However, its
corresponding amount of P300,000.00, as fixed by the RTC and the Court of Appeals, is exorbitant and
should be equitably reduced. Article 2216 of the Civil Code instructs that assessment of damages is left
to the discretion of the court according to the circumstances of each case. This discretion is limited by
the principle that the amount awarded should not be palpably excessive as to indicate that it was the
result of prejudice or corruption on the part of the trial court. [40] To our mind, the amount
of P150,000.00 as moral damages is fair, reasonable, and proportionate to the injury suffered by
respondent.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary
damages may be imposed if the defendant acted in an oppressive manner. Petitioner acted oppressively
when he pestered respondent to pay interest and threatened to block her transactions with the PNO if
she would not pay interest. This forced respondent to pay interest despite lack of agreement
thereto. Thus, the award of exemplary damages is appropriate. The amount of P50,000.00 imposed as
exemplary damages by the RTC and the Court is fitting so as to deter petitioner and other lenders from
committing similar and other serious wrongdoings. [41]

Jurisprudence instructs that in awarding attorneys fees, the trial court must state the factual, legal
or equitable justification for awarding the same. [42] In the case under consideration, the RTC stated in its
Decision that the award of attorneys fees equivalent to 25% of the amount paid as interest by
respondent to petitioner is reasonable and moderate considering the extent of work rendered by
respondents lawyer in the instant case and the fact that it dragged on for several years. [43] Further,
respondent testified that she agreed to compensate her lawyer handling the instant case such
amount.[44] The award, therefore, of attorneys fees and its amount equivalent to 25% of the amount paid
as interest by respondent to petitioner is proper.

Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount
refundable to respondent computed from 3 March 1998 until its full payment. This is erroneous.
 We held in Eastern Shipping Lines, Inc. v. Court of Appeals, [45] that when an obligation, not
constituting a loan or forbearance of money is breached, an interest on the amount of damages awarded
may be imposed at the rate of 6% per annum. We further declared that when the judgment of the court
awarding a sum of money becomes final and executory, the rate of legal interest, whether it is a
loan/forbearance of money or not, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed equivalent to a forbearance of credit.

In the present case, petitioners obligation arose from a quasi-contract of solutio indebiti and not
from a loan or forbearance of money. Thus, an interest of 6% per annum should be imposed on the
amount to be refunded as well as on the damages awarded and on the attorneys fees, to be computed
from the time of the extra-judicial demand on 3 March 1998,[46] up to the finality of this Decision. In
addition, the interest shall become 12% per annum from the finality of this Decision up to its
satisfaction.

WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16
December 2005, is hereby AFFIRMED with the following MODIFICATIONS: (1) the amount
of P660,000.00 as refundable amount of interest is reduced to THREE HUNDRED THIRTY FIVE
THOUSAND PESOS (P335,000.00); (2) the amount of P300,000.00 imposed as moral damages is
reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an interest of 6% per
annum is imposed on the P335,000.00, on the damages awarded and on the attorneys fees to be
computed from the time of the extra-judicial demand on 3 March 1998 up to the finality of this
Decision; and (4) an interest of 12% per annum is also imposed from the finality of this Decision up to
its satisfaction. Costs against petitioner.

SO ORDERED.

SECOND DIVISION

[G.R. No. 116285. October 19, 2001]

ANTONIO TAN, petitioner, vs. COURT OF APPEALS and the CULTURAL CENTER OF THE
PHILIPPINES, respondents.

DECISION
DE LEON, JR., J.:

Before us is a petition for review of the Decision [1] dated August 31, 1993 and Resolution[2] dated July 13, 1994 of the
Court of Appeals affirming the Decision[3] dated May 8, 1991 of the Regional Trial Court (RTC) of Manila, Branch 27.
The facts are as follows:
On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount of
Two Million Pesos (P2,000,000.00), or in the total principal amount of Four Million Pesos (P4,000,000.00) from
respondent Cultural Center of the Philippines (CCP, for brevity) evidenced by two (2) promissory notes with maturity
dates on May 14, 1979 and July 6, 1979, respectively.Petitioner defaulted but after a few partial payments he had the
loans restructured by respondent CCP, and petitioner accordingly executed a promissory note (Exhibit A) on August 31,
1979 in the amount of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two
Centavos (P3,411,421.32) payable in five (5) installments. Petitioner Tan failed to pay any installment on the said
restructured loan of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two
Centavos (P3,411,421.32), the last installment falling due on December 31, 1980. In a letter dated January 26, 1982,
petitioner requested and proposed to respondent CCP a mode of paying the restructured loan, i.e., (a) twenty percent
(20%) of the principal amount of the loan upon the respondent giving its conformity to his proposal; and (b) the balance
on the principal obligation payable in thirty-six (36) equal monthly installments until fully paid. On October 20, 1983,
petitioner again sent a letter to respondent CCP requesting for a moratorium on his loan obligation until the following
year allegedly due to a substantial deduction in the volume of his business and on account of the peso devaluation. No
favorable response was made to said letters. Instead, respondent CCP, through counsel, wrote a letter dated May 30, 1984
to the petitioner demanding full payment, within ten (10) days from receipt of said letter, of the petitioners restructured
loan which as of April 30, 1984 amounted to Six Million Eighty-Eight Thousand Seven Hundred Thirty-Five Pesos and
Three Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money,
docketed as Civil Case No. 84-26363, against the petitioner after the latter failed to settle his said restructured loan
obligation. The petitioner interposed the defense that he merely accommodated a friend, Wilson Lucmen, who allegedly
asked for his help to obtain a loan from respondent CCP.Petitioner claimed that he has not been able to locate Wilson
Lucmen. While the case was pending in the trial court, the petitioner filed a Manifestation wherein he proposed to settle
his indebtedness to respondent CCP by proposing to make a down payment of One Hundred Forty Thousand Pesos
(P140,000.00) and to issue twelve (12) checks every beginning of the year to cover installment payments for one year,
and every year thereafter until the balance is fully paid. However, respondent CCP did not agree to the petitioners
proposals and so the trial of the case ensued.
On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, ordering defendant
to pay plaintiff, the amount of P7,996,314.67, representing defendants outstanding account as of August 28,
1986, with the corresponding stipulated interest and charges thereof, until fully paid, plus attorneys fees in
an amount equivalent to 25% of said outstanding account, plus P50,000.00, as exemplary damages, plus
costs.

Defendants counterclaims are ordered dismissed, for lack of merit.

SO ORDERED. [4]

The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to the petitioners
contention that the loan was merely for the accommodation of Wilson Lucmen for the reason that the defense
propounded was not credible in itself. Second, assuming, arguendo, that the petitioner did not personally benefit from the
said loan, he should have filed a third party complaint against Wilson Lucmen, the alleged accommodated party but he
did not. Third, for three (3) times the petitioner offered to settle his loan obligation with respondent CCP. Fourth,
petitioner may not avoid his liability to pay his obligation under the promissory note (Exh. A) which he must comply
with in good faith pursuant to Article 1159 of the New Civil Code. Fifth, petitioner is estopped from denying his liability
or loan obligation to the private respondent.
The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged interest,
surcharges, attorneys fees and exemplary damages against the petitioner. In his appeal, the petitioner asked for the
reduction of the penalties and charges on his loan obligation. He abandoned his alleged defense in the trial court that he
merely accommodated his friend, Wilson Lucmen, in obtaining the loan, and instead admitted the validity of the
same. On August 31, 1993, the appellate court rendered a decision, the dispositive portion of which reads:

WHEREFORE, with the foregoing modification, the judgment appealed from is hereby AFFIRMED.

SO ORDERED. [5]

In affirming the decision of the trial court imposing surcharges and interest, the appellate court held that:

We are unable to accept appellants (petitioners) claim for modification on the basis of alleged partial or
irregular performance, there being none. Appellants offer or tender of payment cannot be deemed as a
partial or irregular performance of the contract, not a single centavo appears to have been paid by the
defendant.

However, the appellate court modified the decision of the trial court by deleting the award for exemplary damages
and reducing the amount of awarded attorneys fees to five percent (5%), by ratiocinating as follows:

Given the circumstances of the case, plus the fact that plaintiff was represented by a government lawyer,
We believe the award of 25% as attorneys fees and P500,000.00 as exemplary damages is out of proportion
to the actual damage caused by the non-performance of the contract and is excessive, unconscionable and
iniquitous.

In a Resolution dated July 13, 1994, the appellate court denied the petitioners motion for reconsideration of the said
decision.
Hence, this petition anchored on the following assigned errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR TO THE
DECISION OF THE TRIAL COURT WHICH COMPOUNDED INTEREST ON SURCHARGES.
II
 THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF INTEREST FOR
THE PERIOD OF TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST PETITIONER IN APPLYING
FOR RELIEF OF LIABILITY THROUGH THE COMMISSION ON AUDIT AND THE OFFICE OF THE
PRESIDENT.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEYS FEES AND
IN REDUCING PENALTIES.
Significantly, the petitioner does not question his liability for his restructured loan under the promissory note marked
Exhibit A. The first question to be resolved in the case at bar is whether there are contractual and legal bases for the
imposition of the penalty, interest on the penalty and attorneys fees.
The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorneys fees
and in not reducing the penalties considering that the petitioner, contrary to the appellate courts findings, has allegedly
made partial payments on the loan. And if penalty is to be awarded, the petitioner is asking for the non-imposition of
interest on the surcharges inasmuch as the compounding of interest on surcharges is not provided in the promissory note
marked Exhibit A. The petitioner takes exception to the computation of the private respondent whereby the interest,
surcharge and the principal were added together and that on the total sum interest was imposed. Petitioner also claims
that there is no basis in law for the charging of interest on the surcharges for the reason that the New Civil Code is devoid
of any provision allowing the imposition of interest on surcharges.
We find no merit in the petitioners contention. Article 1226 of the New Civil Code provides that:

In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment
of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall
be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

In the case at bar, the promissory note (Exhibit A) expressly provides for the imposition of both interest and
penalties in case of default on the part of the petitioner in the payment of the subjectrestructured loan. The
pertinent[6] portion of the promissory note (Exhibit A) imposing interest and penalties provides that:

For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE
PHILIPPINES at its office in Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN
THOUSAND FOUR HUNDRED + PESOS (P3,411,421.32) Philippine Currency, xxx.

xxx xxx xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid. PLUS
THREE PERCENT (3%) SERVICE CHARGE.

In case of non-payment of this note at maturity/on demand or upon default of payment of any portion of it
when due, I/We jointly and severally agree to pay additional penalty charges at the rate of TWO per cent
(2%) per month on the total amount due until paid, payable and computed monthly. Default of payment of
this note or any portion thereof when due shall render all other installments and all existing promissory
notes made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES immediately due and
demandable. (Underscoring supplied)

xxx xxx xxx

The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the
monetary interest on the note and is allowed under Article 1956 of the New Civil Code. [7] On the other hand, the
stipulated two percent (2%) per month penalty is in the form of penalty charge which is separate and distinct from the
monetary interest on the principal of the loan.
Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of
Appeals,[8] this Court has ruled that the New Civil Code permits an agreement upon a penalty apart from the monetary
interest. If the parties stipulate this kind of agreement, the penalty does not include the monetary interest, and as such the
two are different and distinct from each other and may be demanded separately. Quoting Equitable Banking Corp. v.
Liwanag,[9] the GSIS case went on to state that such a stipulation about payment of an additional interest rate partakes of
the nature of a penalty clause which is sanctioned by law, more particularly under Article 2209 of the New Civil Code
which provides that:

If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and
in the absence of stipulation, the legal interest, which is six per cent per annum.

The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the
petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated
penalty charge. The penalty charge is also called penalty or compensatory interest. Having clarified the same, the next
issue to be resolved is whether interest may accrue on the penalty or compensatory interest without violating the
provisions of Article 1959 of the New Civil Code, which provides 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.

According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the reason
that the law only allows imposition of interest on monetary interest but not the charging of interest on penalty. He claims
that since there is no law that allows imposition of interest on penalties, the penalties should not earn interest. But as we
have already explained, penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding
of the penalty or compensatory interest is sanctioned by and allowed pursuant to the above-quoted provision of Article
1959 of the New Civil Code considering that:
First, there is an express stipulation in the promissory note (Exhibit A) permitting the compounding of interest. The
fifth paragraph of the said promissory note provides that: Any interest which may be due if not paid shall be added to the
total amount when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by
law.[10] Therefore, any penalty interest not paid, when due, shall earn the legal interest of twelve percent (12%) per
annum,[11] in the absence of express stipulation on the specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this point. In the instant case, interest likewise began to
run on the penalty interest upon the filing of the complaint in court by respondent CCP on August 29, 1984. Hence, the
courts a quo did not err in ruling that the petitioner is bound to pay the interest on the total amount of the principal, the
monetary interest and the penalty interest.
The petitioner seeks the elimination of the compounded interest imposed on the total amount based allegedly on the
case of National Power Corporation v. National Merchandising Corporation, [12]wherein we ruled that the imposition of
interest on the damages from the filing of the complaint is unjust where the litigation was prolonged for twenty-five (25)
years through no fault of the defendant.However, the ruling in the said National Power Corporation (NPC) case is not
applicable to the case at bar inasmuch as our ruling on the issue of interest in that NPC case was based on equitable
considerations and on the fact that the said case lasted for twenty-five (25) years through no fault of the defendant. In the
case at bar, however, equity cannot be considered inasmuch as there is a contractual stipulation in the promissory note
whereby the petitioner expressly agreed to the compounding of interest in case of failure on his part to pay the loan at
maturity. Inasmuch as the said stipulation on the compounding of interest has the force of law between the parties and
does not appear to be inequitable or unjust, the said written stipulation should be respected.
The private respondents Statement of Account (marked Exhibits C to C-2)[13] shows the following breakdown of the
petitioners indebtedness as of August 28, 1986:

Principal P2,838,454.68

Interest P 576,167.89

Surcharge P4,581,692.10

P7,996,314.67

The said statement of account also shows that the above amounts stated therein are net of the partial payments amounting
to a total of Four Hundred Fifty-Two Thousand Five Hundred Sixty-One Pesos and Forty-Three Centavos (P452,561.43)
which were made during the period from May 13, 1983 to September 30, 1983. [14] The petitioner now seeks the reduction
of the penalty due to the said partial payments.The principal amount of the promissory note (Exhibit A) was Three
Million Four Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32)
when the loan was restructured on August 31, 1979. As of August 28, 1986, the principal amount of the said restructured
loan has been reduced to Two Million Eight Hundred Thirty-Eight Thousand Four Hundred Fifty-Four Pesos and Sixty-
Eight Centavos (P2,838,454.68). Thus, petitioner contends that reduction of the penalty is justifiable pursuant to Article
1229 of the New Civil Code which provides that: The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable. Petitioner insists that the penalty should be
reduced to ten percent (10%) of the unpaid debt in accordance with Bachrach Motor Company v. Espiritu.[15]
There appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent (10%) of
the unpaid balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial payments which
showed his good faith, a reduction of the penalty charge from two percent (2%) per month on the total amount due,
compounded monthly, until paid can indeed be justified under the said provision of Article 1229 of the New Civil Code.
In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the total amount
due to be unconscionable inasmuch as the same appeared to have been compounded monthly.
Considering petitioners several partial payments and the fact he is liable under the note for the two percent (2%)
penalty charge per month on the total amount due, compounded monthly, for twenty-one (21) years since his default in
1980, we find it fair and equitable to reduce the penalty charge to a straight twelve percent (12%) per annum on the total
amount due starting August 28, 1986, the date of the last Statement of Account (Exhibits C to C-2). We also took into
consideration the offers of the petitioner to enter into a compromise for the settlement of his debt by presenting proposed
payment schemes to respondent CCP. The said offers at compromise also showed his good faith despite difficulty in
complying with his loan obligation due to his financial problems. However, we are not unmindful of the respondents long
overdue deprivation of the use of its money collectible from the petitioner.
The petitioner also imputes error on the part of the appellate court for not declaring the suspension of the running of
the interest during that period when the respondent allegedly failed to assist the petitioner in applying for relief from
liability. In this connection, the petitioner referred to the private respondents letter[16] dated September 28, 1988 addressed
to petitioner which partially reads:

Dear Mr. Tan:

xxx xxx xxx

With reference to your appeal for condonation of interest and surcharge, we wish to inform you that the
center will assist you in applying for relief of liability through the Commission on Audit and Office of the
President xxx.

While your application is being processed and awaiting approval, the center will be accepting your
proposed payment scheme with the downpayment of P160,000.00 and monthly remittances of P60,000.00
xxx.

xxx xxx xxx

The petitioner alleges that his obligation to pay the interest and surcharge should have been suspended because the
obligation to pay such interest and surcharge has become conditional, that is dependent on a future and uncertain event
which consists of whether the petitioners request for condonation of interest and surcharge would be recommended by
the Commission on Audit and the Office of the President to the House of Representatives for approval as required under
Section 36 of Presidential Decree No. 1445. Since the condition has not happened allegedly due to the private
respondents reneging on its promise, his liability to pay the interest and surcharge on the loan has not arisen. This is the
petitioners contention.
It is our view, however, that the running of the interest and surcharge was not suspended by the private respondents
promise to assist the petitioners in applying for relief therefrom through the Commission on Audit and the Office of the
President.
First, the letter dated September 28, 1988 alleged to have been sent by the respondent CCP to the petitioner is not
part of the formally offered documentary evidence of either party in the trial court. That letter cannot be considered
evidence pursuant to Rule 132, Section 34 of the Rules of Court which provides that: The court shall consider no
evidence which has not been formally offered xxx. Besides, the said letter does not contain any categorical agreement on
the part of respondent CCP that the payment of the interest and surcharge on the loan is deemed suspended while his
appeal for condonation of the interest and surcharge was being processed.
Second, the private respondent correctly asserted that it was the primary responsibility of petitioner to inform the
Commission on Audit and the Office of the President of his application for condonation of interest and surcharge. It was
incumbent upon the petitioner to bring his administrative appeal for condonation of interest and penalty charges to the
attention of the said government offices.
On the issue of attorneys fees, the appellate court ruled correctly and justly in reducing the trial courts award of
twenty-five percent (25%) attorneys fees to five percent (5%) of the total amount due.
WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION in that
the penalty charge of two percent (2%) per month on the total amount due, compounded monthly, is hereby reduced to a
straight twelve percent (12%) per annum starting from August 28, 1986. With costs against the petitioner.
SO ORDERED.

SECOND DIVISION
SPOUSES DAVID B. CARPO G.R. Nos. 150773 &

and RECHILDA S. CARPO, 153599

Petitioners,

Present:

- versus - PUNO, J.,

 Chairman,

AUSTRIA-MARTINEZ,

CALLEJO, SR.,

ELEANOR CHUA and TINGA, and

ELMA DY NG, CHICO-NAZARIO, JJ.

Respondents.

Promulgated:

September 30, 2005

x-------------------------------------------------------------------x

DECISION

TINGA, J.:

Before this Court are two consolidated petitions for review. The first, docketed
as G.R. No. 150773, assails the Decision[1] of the Regional Trial Court (RTC), Branch
26 of Naga City dated 26 October 2001 in Civil Case No. 99-4376. RTC Judge
Filemon B. Montenegro dismissed the complaint[2] for annulment of real estate
mortgage and consequent foreclosure proceedings filed by the spouses David B.
Carpo and Rechilda S. Carpo (petitioners).

The second, docketed as G.R. No. 153599, seeks to annul the Court of
Appeals Decision[3] dated 30 April 2002 in CA-G.R. SP No. 57297. The Court of
Appeals Third Division annulled and set aside the orders of Judge Corazon A.
Tordilla to suspend the sheriffs enforcement of the writ of possession.

The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they
borrowed from Eleanor Chua and Elma Dy Ng (respondents) the amount of One
Hundred Seventy-Five Thousand Pesos (P175,000.00), payable within six (6) months
with an interest rate of six percent (6%) per month. To secure the payment of the
loan, petitioners mortgaged their residential house and lot situated at San Francisco,
Magarao, Camarines Sur, which lot is covered by Transfer Certificate of Title (TCT)
No. 23180. Petitioners failed to pay the loan upon demand. Consequently, the real
estate mortgage was extrajudicially foreclosed and the mortgaged property sold at a
public auction on 8 July 1996. The house and lot was awarded to respondents, who
were the only bidders, for the amount of Three Hundred Sixty-Seven Thousand Four
Hundred Fifty-Seven Pesos and Eighty Centavos (P367,457.80).

Upon failure of petitioners to exercise their right of redemption, a certificate of

sale was issued on 5 September 1997 by Sheriff Rolando A. Borja. TCT No. 23180
was cancelled and in its stead, TCT No. 29338 was issued in the name of
respondents.

Despite the issuance of the TCT, petitioners continued to occupy the said house
and lot, prompting respondents to file a petition for writ of possession with the RTC
docketed as Special Proceedings (SP) No. 98-1665. On 23 March 1999, RTC Judge
Ernesto A. Miguel issued an Order[4]for the issuance of a writ of possession.

On 23 July 1999, petitioners filed a complaint for annulment of real estate

mortgage and the consequent foreclosure proceedings, docketed as Civil Case No.
99-4376 of the RTC. Petitioners consigned the amount of Two Hundred Fifty-Seven
Thousand One Hundred Ninety-Seven Pesos and Twenty-Six Centavos (P257,197.26)
with the RTC.

Meanwhile, in SP No. 98-1665, a temporary restraining order was issued upon

motion on 3 August 1999, enjoining the enforcement of the writ of possession. In
an Order[5] dated 6 January 2000, the RTC suspended the enforcement of the writ of
possession pending the final disposition of Civil Case No. 99-4376. Against
this Order, respondents filed a petition for certiorari and mandamus before the Court
of Appeals, docketed as CA-G.R. SP No. 57297.

During the pendency of the case before the Court of Appeals, RTC Judge
Filemon B. Montenegro dismissed the complaint in Civil Case No. 99-4376 on the
ground that it was filed out of time and barred by laches. The RTC proceeded from
the premise that the complaint was one for annulment of a voidable contract and
thus barred by the four-year prescriptive period. Hence, the first petition for review
now under consideration was filed with this Court, assailing the dismissal of the
complaint.

The second petition for review was filed with the Court after the Court of
Appeals on 30 April 2002 annulled and set aside the RTC orders in SP No. 98-1665
on the ground that it was the ministerial duty of the lower court to issue the writ of
possession when title over the mortgaged property had been consolidated in the
mortgagee.

This Court ordered the consolidation of the two cases, on motion of petitioners.

In G.R. No. 150773, petitioners claim that following the Courts ruling in Medel v.
Court of Appeals[6] the rate of interest stipulated in the principal loan agreement is
clearly null and void. Consequently, they also argue that the nullity of the agreed
interest rate affects the validity of the real estate mortgage. Notably, while petitioners
were silent in their petition on the issues of prescription and laches on which the
RTC grounded the dismissal of the complaint, they belatedly raised the matters in
their Memorandum. Nonetheless, these points warrant brief comment.
On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not
commit any grave abuse of discretion when it issued the orders dated 3 August 1999
and 6 January 2000, and that these orders could not have been the proper subjects
of a petition for certiorari and mandamus. More accurately, the justiciable issues
before us are whether the Court of Appeals could properly entertain the petition for
certiorari from the timeliness aspect, and whether the appellate court correctly
concluded that the writ of possession could no longer be stayed.

We first resolve the petition in G.R. No. 150773.

Petitioners contend that the agreed rate of interest of 6% per month or 72% per
annum is so excessive, iniquitous, unconscionable and exorbitant that it should
have been declared null and void. Instead of dismissing their complaint, they aver
that the lower court should have declared them liable to respondents for the original
amount of the loan plus 12% interest per annum and 1% monthly penalty charge as
liquidated damages,[7] in view of the ruling in Medel v. Court of Appeals.[8]

In Medel, the Court found that the interest stipulated at 5.5% per month or
66% per annum was so iniquitous or unconscionable as to render the stipulation
void.

Nevertheless, we find the interest at 5.5% per month, or 66% per

annum, stipulated upon by the parties in the promissory note iniquitous or
unconscionable, and, hence, contrary to morals (contra bonos mores), if not
against the law. The stipulation is void. The Court shall reduce equitably
liquidated damages, whether intended as an indemnity or a penalty if they
are iniquitous or unconscionable.[9]

In a long line of cases, this Court has invalidated similar stipulations on

interest rates for being excessive, iniquitous, unconscionable and exorbitant.
In Solangon v. Salazar,[10] we annulled the stipulation of 6% per month or 72% per
annum interest on a P60,000.00 loan. In Imperial v. Jaucian,[11] we reduced the
interest rate from 16% to 1.167% per month or 14% per annum. In Ruiz v. Court of
Appeals,[12] we equitably reduced the agreed 3% per month or 36% per annum
interest to 1% per month or 12% per annum interest. The 10% and 8% interest rates
per month on a P1,000,000.00 loan were reduced to 12% per annum in Cuaton v.
Salud.[13] Recently, this Court, in Arrofo v. Quino,[14] reduced the 7% interest per
month on a P15,000.00 loan amounting to 84% interest per annum to 18% per
annum.

There is no need to unsettle the principle affirmed in Medel and like cases. From that
perspective, it is apparent that the stipulated interest in the subject loan is
excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of
contract principle embodied in Article 1306 of the Civil Code, contracting parties may
establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy. In the ordinary course, the codal provision may be invoked to
annul the excessive stipulated interest.

In the case at bar, the stipulated interest rate is 6% per month, or 72% per
annum. By the standards set in the above-cited cases, this stipulation is similarly
invalid. However, the RTC refused to apply the principle cited and employed
in Medel on the ground that Medel did not pertain to the annulment of a real estate
mortgage,[15] as it was a case for annulment of the loan contract itself. The question
thus sensibly arises whether the invalidity of the stipulation on interest carries with
it the invalidity of the principal obligation.

The question is crucial to the present petition even if the subject thereof is not
the annulment of the loan contract but that of the mortgage contract. The
consideration of the mortgage contract is the same as that of the principal contract
from which it receives life, and without which it cannot exist as an independent
contract. Being a mere accessory contract, the validity of the mortgage contract
would depend on the validity of the loan secured by it. [16]

Notably in Medel, the Court did not invalidate the entire loan obligation despite the
inequitability of the stipulated interest, but instead reduced the rate of interest to the
more reasonable rate of 12% per annum. The same remedial approach to the
wrongful interest rates involved was employed or affirmed by the Court
in Solangon, Imperial, Ruiz, Cuaton, and Arrofo.

The Courts ultimate affirmation in the cases cited of the validity of the principal loan
obligation side by side with the invalidation of the interest rates thereupon is
congruent with the rule that a usurious loan transaction is not a complete nullity
but defective only with respect to the agreed interest.

We are aware that the Court of Appeals, on certain occasions, had ruled that a
usurious loan is wholly null and void both as to the loan and as to the usurious
interest.[17] However, this Court adopted the contrary rule,

as comprehensively discussed in Briones v. Cammayo:[18]

In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise
declared that, in any event, the debtor in a usurious contract of loan should pay
the creditor the amount which he justly owes him, citing in support of this
ruling its previous decisions in Go Chioco, Supra, Aguilar vs. Rubiato, et al., 40
Phil. 570, and Delgado vs. Duque Valgona, 44 Phil. 739.

....
 Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We also
held that the standing jurisprudence of this Court on the question under
consideration was clearly to the effect that the Usury Law, by its letter and
spirit, did not deprive the lender of his right to recover from the borrower the
money actually loaned to and enjoyed by the latter. This Court went further to
say that the Usury Law did not provide for the forfeiture of the capital in favor of
the debtor in usurious contracts, and that while the forfeiture might appear to
be convenient as a drastic measure to eradicate the evil of usury, the legal
question involved should not be resolved on the basis of convenience.

Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil.
919 and Pascua vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202.
In the latter We expressly held that when a contract is found to be tainted with
usury "the only right of the respondent (creditor) . . . was merely to collect the
amount of the loan, plus interest due thereon."

The view has been expressed, however, that the ruling thus consistently
adhered to should now be abandoned because Article 1957 of the new Civil
Code a subsequent law provides that contracts and stipulations, under any
cloak or device whatever, intended to circumvent the laws against usury, shall
be void, and that in such cases "the borrower may recover in accordance with
the laws on usury." From this the conclusion is drawn that the whole contract
is void and that, therefore, the creditor has no right to recover not even his
capital.

The meaning and scope of our ruling in the cases mentioned heretofore is
clearly stated, and the view referred to in the preceding paragraph is adequately
answered, in Angel Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April 24,
1968). On the question of whether a creditor in a usurious contract may or may
not recover the principal of the loan, and, in the affirmative, whether or not he
may also recover interest thereon at the legal rate, We said the following:

....

Appealing directly to Us, defendants raise two questions of law:

(1) In a loan with usurious interest, may the creditor recover the
principal of the loan? (2) Should attorney's fees be awarded in
plaintiff's favor?"

Great reliance is made by appellants on Art. 1411 of the New

Civil Code . . . .

Since, according to the appellants, a usurious loan is void due to

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

We do not agree with such reasoning. Article 1411 of the New

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

. . . [a]ppellants fail to consider that a contract of loan with

usurious interest consists of principal and accessory
stipulations; the principal one is to pay the debt; the accessory
stipulation is to pay interest thereon.

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

The question therefore to resolve is whether the illegal

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

In simple loan with stipulation of usurious interest, the

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

....
 The principal debt remaining without stipulation for payment of
interest can thus be recovered by judicial action. And in case of such
demand, and the debtor incurs in delay, the debt earns interest from
the date of the demand (in this case from the filing of the complaint).
Such interest is not due to stipulation, for there was none, the same
being void. Rather, it is due to the general provision of law that in
obligations to pay money, where the debtor incurs in delay, he has to
pay interest by way of damages (Art. 2209, Civil Code). The court a
quo therefore, did not err in ordering defendants to pay the principal
debt with interest thereon at the legal rate, from the date of filing of
the complaint."[19]

The Courts wholehearted affirmation of the rule that the principal obligation subsists
despite the nullity of the stipulated interest is evinced by its subsequent rulings,
cited above, in all of which the main obligation was upheld and the offending interest
rate merely corrected. Hence, it is clear and settled that the principal loan obligation
still stands and remains valid. By the same token, since the mortgage contract
derives its vitality from the validity of the principal obligation, the invalid stipulation
on interest rate is similarly insufficient to render void the ancillary mortgage
contract.

It should be noted that had the Court declared the loan and mortgage agreements
void for being contrary to public policy, no prescriptive period could have
run.[20] Such benefit is obviously not available to petitioners.

Yet the RTC pronounced that the complaint was barred by the four-year
prescriptive period provided in Article 1391 of the Civil Code, which governs voidable
contracts. This conclusion was derived from the allegation in the complaint that the
consent of petitioners was vitiated through undue influence. While the RTC correctly
acknowledged the rule of prescription for voidable contracts, it erred in applying the
rule in this case. We are hard put to conclude in this case that there was any undue
influence in the first place.

There is ultimately no showing that petitioners consent to the loan and

mortgage agreements was vitiated by undue influence. The financial condition of
petitioners may have motivated them to contract with respondents, but undue
influence cannot be attributed to respondents simply because they had lent money.
Article 1391, in relation to Article 1390 of the Civil Code, grants the aggrieved party
the right to obtain the annulment of contract on account of factors which vitiate
consent. Article 1337 defines the concept of undue influence, as follows:

There is undue influence when a person takes improper advantage of his

power over the will of another, depriving the latter of a reasonable freedom of
choice. The following circumstances shall be considered: the confidential,
family, spiritual and other relations between the parties or the fact that the
person alleged to have been unduly influenced was suffering from mental
weakness, or was ignorant or in financial distress.
While petitioners were allegedly financially distressed, it must be proven that there is
deprivation of their free agency. In other words, for undue influence to be present,
the influence exerted must have so overpowered or subjugated the mind of a
contracting party as to destroy his free agency, making him express the will of
another rather than his own.[21] The alleged lingering financial woes of petitioners per
se cannot be equated with the presence of undue influence.

The RTC had likewise concluded that petitioners were barred by laches from
assailing the validity of the real estate mortgage. We wholeheartedly agree. If indeed
petitioners unwillingly gave their consent to the agreement, they should have raised
this issue as early as in the foreclosure proceedings. It was only when the writ of
possession was issued did petitioners challenge the stipulations in the loan contract
in their action for annulment of mortgage. Evidently, petitioners slept on their rights.
The Court of Appeals succinctly made the following observations:

In all these proceedings starting from the foreclosure, followed by the

issuance of a provisional certificate of sale; then the definite certificate of sale;
then the issuance of TCT No. 29338 in favor of the defendants and finally the
petition for the issuance of the writ of possession in favor of the defendants,
there is no showing that plaintiffs questioned the validity of these
proceedings. It was only after the issuance of the writ of possession in favor of
the defendants, that plaintiffs allegedly tendered to the defendants the
amount of P260,000.00 which the defendants refused. In all these
proceedings, why did plaintiffs sleep on their rights?[22]

Clearly then, with the absence of undue influence, petitioners have no cause of
action. Even assuming undue influence vitiated their consent to the loan contract,
their action would already be barred by prescription when they filed it. Moreover,
petitioners had clearly slept on their rights as they failed to timely assail the validity
of the mortgage agreement. The denial of the petition in G.R. No. 150773 is
warranted.

We now resolve the petition in G.R. No. 153599.

Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January
2000 could no longer be questioned in a special civil action for certiorari and
mandamus as the reglementary period for such action had already elapsed.

It must be noted that the Order dated 3 August 1999 suspending the enforcement of
the writ of possession had a period of effectivity of only twenty (20) days from 3
August 1999, or until 23 August 1999. Thus, upon the expiration of the twenty (20)-
day period, the said Order became functus officio. Thus, there is really no sense in
assailing the validity of this Order, mooted as it was. For the same reason, the
validity of the order need not have been assailed by respondents in their special civil
action before the Court of Appeals.

On the other hand, the Order dated 6 January 2000 is in the nature of a writ of
injunction whose period of efficacy is indefinite. It may be properly assailed by way of
the special civil action for certiorari, as it is interlocutory in nature.
As a rule, the special civil action for certiorari under Rule 65 must be filed not later
than sixty (60) days from notice of the judgment or order.[23]Petitioners argue that the
3 August 1999 Order could no longer be assailed by respondents in a special civil
action for certiorari before the Court of Appeals, as the petition was filed beyond
sixty (60) days following respondents receipt of the Order. Considering that the 3
August 1999 Orderhad become functus officio in the first place, this argument
deserves scant consideration.

Petitioners further claim that the 6 January 2000 Order could not have likewise been
the subject of a special civil action for certiorari, as it is according to them a final
order, as opposed to an interlocutory order. That the 6 January 2000 Order is
interlocutory in nature should be beyond doubt. An order is interlocutory if its effects
would only be provisional in character and would still leave substantial proceedings
to be further had by the issuing court in order to put the controversy to rest. [24] The
injunctive relief granted by the order is definitely final, but merely provisional, its
effectivity hinging on the ultimate outcome of the then pending action for annulment
of real estate mortgage. Indeed, an interlocutory order hardly puts to a close, or
disposes of, a case or a disputed issue leaving nothing else to be done by the court in
respect thereto, as is characteristic of a final order.

Since the 6 January 2000 Order is not a final order, but rather interlocutory in
nature, we cannot agree with petitioners who insist that it may be assailed only
through an appeal perfected within fifteen (15) days from receipt thereof by
respondents. It is axiomatic that an interlocutory order cannot be challenged by an
appeal,

but is susceptible to review only through the special civil action of certiorari. [25] The
sixty (60)-day reglementary period for special civil actions under Rule 65 applies, and
respondents petition was filed with the Court of Appeals well within the period.

Accordingly, no error can be attributed to the Court of Appeals in granting the

petition for certiorari and mandamus. As pointed out by respondents, the remedy of
mandamus lies to compel the performance of a ministerial duty. The issuance of a
writ of possession to a purchaser in an extrajudicial foreclosure is merely a
ministerial function.[26]

Thus, we also affirm the Court of Appeals ruling to set aside the RTC orders
enjoining the enforcement of the writ of possession.[27] The purchaser in a foreclosure
sale is entitled as a matter of right to a writ of possession, regardless of whether or
not there is a pending suit for annulment of the mortgage or the foreclosure
proceedings. An injunction to prohibit the issuance or enforcement of the writ is
entirely out of place.[28]

One final note. The issue on the validity of the stipulated interest rates,
regrettably for petitioners, was not raised at the earliest possible opportunity. It
should be pointed out though that since an excessive stipulated interest rate may be
void for being contrary to public policy, an action to annul said interest rate does not
prescribe. Such indeed is the remedy; it is not the action for annulment of the
ancillary real estate mortgage. Despite the nullity of the stipulated interest rate, the
principal loan obligation subsists, and along with it the mortgage that serves as
collateral security for it.

WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against
petitioners.

SO ORDERED.

SECOND DIVISION

PRISMA CONSTRUCTION & G.R. No. 160545

DEVELOPMENT CORPORATION
and ROGELIO S. PANTALEON,
Petitioners,
Present:


NACHURA, J.,

BRION, Acting Chairperson,

- versus -
DEL CASTILLO,

ABAD, and

PEREZ, JJ.

ARTHUR F. MENCHAVEZ ,

Respondent.
Promulgated:

March 9, 2010

x------------------------------------------------------------------------------------------x
DECISION

BRION, J.:

We resolve in this Decision the petition for review on certiorari[1] filed by petitioners Prisma
Construction & Development Corporation (PRISMA) and Rogelio S. Pantaleon (Pantaleon)
(collectively, petitioners) who seek to reverse and set aside the Decision[2] dated May 5, 2003 and the
Resolution[3] dated October 22, 2003 of the Former Ninth Division of the Court of Appeals (CA) in CA-
G.R. CV No. 69627. The assailed CA Decision affirmed the Decision of the Regional Trial Court (RTC),
Branch 73, Antipolo City in Civil Case No. 97-4552 that held the petitioners liable for payment
of P3,526,117.00 to respondent Arthur F. Menchavez (respondent), but modified the interest rate
from 4% per month to 12% per annum, computed from the filing of the complaint to full payment. The
assailed CA Resolution denied the petitioners Motion for Reconsideration.

FACTUAL BACKGROUND

The facts of the case, gathered from the records, are briefly summarized below.

On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA, obtained
a P1,000,000.00[4] loan from the respondent, with a monthly interest of P40,000.00 payable for six
months, or a total obligation of P1,240,000.00 to be paid within six (6) months,[5] under the following
schedule of payments:

January 8, 1994 . P40,000.00

February 8, 1994 ... P40,000.00

March 8, 1994 ... P40,000.00

April 8, 1994 . P40,000.00

May 8, 1994 .. P40,000.00

June 8, 1994 P1,040,000.00[6]

Total P1,240,000.00
To secure the payment of the loan, Pantaleon issued a promissory note[7] that states:

I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO HUNDRED FORTY

THOUSAND PESOS (P1,240,000), Philippine Currency, from Mr. Arthur F. Menchavez, representing a six-month

loan payable according to the following schedule:

January 8, 1994 . P40,000.00

February 8, 1994 ... P40,000.00

March 8, 1994 ... P40,000.00

April 8, 1994 . P40,000.00

May 8, 1994 .. P40,000.00

June 8, 1994 P1,040,000.00

The checks corresponding to the above amounts are hereby acknowledged. [8]

and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed the
promissory note in his personal capacity,[9] and as duly authorized by the Board of Directors of
PRISMA.[10] The petitioners failed to completely pay the loan within the stipulated six (6)-month
period.

From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to the
respondent:

September 8, 1994 P320,000.00

October 8, 1995.P600,000.00

November 8, 1995.....P158,772.00

January 4, 1997 P30,000.00[11]

As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00. However, the
respondent found that the petitioners still had an outstanding balance of P1,364,151.00 as of January
4, 1997, to which it applied a 4% monthly interest.[12] Thus, on August 28, 1997, the respondent filed a
complaint for sum of money with the RTC to enforce the unpaid balance, plus 4% monthly
interest, P30,000.00 in attorneys fees, P1,000.00 per court appearance and costs of suit.[13]

In their Answer dated October 6, 1998, the petitioners admitted the loan of P1,240,000.00, but denied
the stipulation on the 4% monthly interest, arguing that the interest was not provided in the
promissory note. Pantaleon also denied that he made himself personally liable and that he made
representations that the loan would be repaid within six (6) months.[14]

THE RTC RULING

The RTC rendered a Decision on October 27, 2000 finding that the respondent issued a check
for P1,000,000.00 in favor of the petitioners for a loan that would earn an interest of 4% or P40,000.00
per month, or a total of P240,000.00 for a 6-month period. It noted that the petitioners made several
payments amounting to P1,228,772.00, but they were still indebted to the respondent
for P3,526,117.00 as of February 11,[15] 1999 after considering the 4% monthly interest. The RTC
observed that PRISMA was a one-man corporation of Pantaleon and used this circumstance to justify
the piercing of the veil of corporate fiction. Thus, the RTC ordered the petitioners to jointly and
severally pay the respondent the amount of P3,526,117.00 plus 4% per month interest from February
11, 1999 until fully paid.[16]

The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of the Rules of Court,
insisting that there was no express stipulation on the 4% monthly interest.

THE CA RULING

The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to a 4% monthly
interest principally based on the board resolution that authorized Pantaleon to transact a loan with an
approved interest of not more than 4% per month. The appellate court, however, noted that the
interest of 4% per month, or 48% per annum, was unreasonable and should be reduced to 12% per
annum. The CA affirmed the RTCs finding that PRISMA was a mere instrumentality of Pantaleon that
justified the piercing of the veil of corporate fiction. Thus, the CA modified the RTC Decision by
imposing a 12% per annum interest, computed from the filing of the complaint until finality of
judgment, and thereafter, 12% from finality until fully paid.[17]

After the CA's denial[18] of their motion for reconsideration,[19] the petitioners filed the present petition
for review on certiorari under Rule 45 of the Rules of Court.

THE PETITION

The petitioners submit that the CA mistakenly relied on their board resolution to conclude that the
parties agreed to a 4% monthly interest because the board resolution was not an evidence of a loan or
forbearance of money, but merely an authorization for Pantaleon to perform certain acts, including
the power to enter into a contract of loan. The expressed mandate of Article 1956 of the Civil Code is
that interest due should be stipulated in writing, and no such stipulation exists. Even assuming that the
loan is subject to 4% monthly interest, the interest covers the six (6)-month period only and cannot be
interpreted to apply beyond it. The petitioners also point out the glaring inconsistency in the CA
Decision, which reduced the interest from 4% per month or 48% per annum to 12% per annum, but
failed to consider that the amount of P3,526,117.00 that the RTC ordered them to pay includes the
compounded 4% monthly interest.

THE CASE FOR THE RESPONDENT

The respondent counters that the CA correctly ruled that the loan is subject to a 4% monthly interest
because the board resolution is attached to, and an integral part of, the promissory note based on
which the petitioners obtained the loan. The respondent further contends that the petitioners are
estopped from assailing the 4% monthly interest, since they agreed to pay the 4% monthly interest on
the principal amount under the promissory note and the board resolution.

THE ISSUE

The core issue boils down to whether the parties agreed to the 4% monthly interest on the loan. If so,
does the rate of interest apply to the 6-month payment period only or until full payment of the loan?

OUR RULING

We find the petition meritorious.

Interest due should be stipulated in writing; otherwise,

12% per annum

Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith.[20] When the terms of a contract are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning of its stipulations governs.[21] In such cases,
courts have no authority to alter the contract by construction or to make a new contract for the
parties; a court's duty is confined to the interpretation of the contract the parties made for themselves
without regard to its wisdom or folly, as the court cannot supply material stipulations or read into the
contract words the contract does not contain.[22] It is only when the contract is vague and ambiguous
that courts are permitted to resort to the interpretation of its terms to determine the parties intent.

In the present case, the respondent issued a check for P1,000,000.00.[23] In turn, Pantaleon, in his
personal capacity and as authorized by the Board, executed the promissory note quoted above. Thus,
the P1,000,000.00 loan shall be payable within six (6) months, or from January 8, 1994 up to June 8,
1994. During this period, the loan shall earn an interest of P40,000.00 per month, for a total obligation
of P1,240,000.00 for the six-month period. We note that this agreed sum can be computed at 4%
interest per month, but no such rate of interest was stipulated in the promissory note; rather a fixed
sum equivalent to this rate was agreed upon.

Article 1956 of the Civil Code specifically mandates that no interest shall be due unless it has been
expressly stipulated in writing. Under this provision, the payment of interest in loans or forbearance of
money is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the
agreement for the payment of interest was reduced in writing. The concurrence of the two conditions
is required for the payment of interest at a stipulated rate. Thus, we held in Tan v.
Valdehueza[24] and Ching v. Nicdao[25] that collection of interest without any stipulation in writing is
prohibited by law.

Applying this provision, we find that the interest of P40,000.00 per month corresponds only to the six
(6)-month period of the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in
the promissory note. Thereafter, the interest on the loan should be at the legal interest rate of
12% per annum, consistent with our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals:[26]

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of

money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due

shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of

interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under

and subject to the provisions of Article 1169 of the Civil Code. (Emphasis supplied)

We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61,[27] Sulit v. Court of
Appeals,[28] Crismina Garments, Inc. v. Court of Appeals,[29] Eastern Assurance and Surety Corporation v.
Court of Appeals,[30] Sps. Catungal v. Hao,[31] Yong v. Tiu,[32] and Sps. Barrera v. Sps. Lorenzo.[33] Thus,
the RTC and the CA misappreciated the facts of the case; they erred in finding that the parties agreed
to a 4% interest, compounded by the application of this interest beyond the promissory notes six (6)-
month period. The facts show that the parties agreed to the payment of a specific sum of
money of P40,000.00 per month for six months, not to a 4% rate of interest payable within a six (6)-
month period.

Medel v. Court of Appeals not applicable

 The CA misapplied Medel v. Court of Appeals[34] in finding that a 4% interest per month was
unconscionable.

In Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5% per
month, a service charge of 2% per annum, and a penalty charge of 1% per month, plus attorneys fee
equivalent to 25% of the amount due, until the loan is fully paid. Taken in conjunction with the
stipulated service charge and penalty, we found the interest rate of 5.5% to be excessive, iniquitous,
unconscionable, exorbitant and hence, contrary to morals, thereby rendering the stipulation null and
void.

Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon v.
Salazar[35] of 6% per month or 72% per annum interest on a P60,000.00 loan; in Ruiz v. Court of
Appeals,[36] of 3% per month or 36% per annum interest on a P3,000,000.00 loan; in Imperial v.
Jaucian,[37] of 16% per month or 192% per annum interest on a P320,000.00 loan; in Arrofo v.
Quio,[38] of 7% interest per month or 84% per annum interest on a P15,000.00 loan; in Bulos, Jr. v.
Yasuma,[39] of 4% per month or 48% per annum interest on a P2,500,000.00 loan; and in Chua v.
Timan,[40] of 7% and 5% per month for loans totalling P964,000.00. We note that in all these cases, the
terms of the loans were open-ended; the stipulated interest rates were applied for an indefinite
period.

Medel finds no application in the present case where no other stipulation exists for the payment
of any extra amount except a specific sum of P40,000.00 per month on the principal of a loan payable
within six months. Additionally, no issue on the excessiveness of the stipulated amount of P40,000.00
per month was ever put in issue by the petitioners; [41] they only assailed the application of a 4%
interest rate, since it was not agreed upon.

It is a familiar doctrine in obligations and contracts that the parties are bound by the
stipulations, clauses, terms and conditions they have agreed to, which is the law between them, the
only limitation being that these stipulations, clauses, terms and conditions are not contrary to law,
morals, public order or public policy.[42] The payment of the specific sum of money of P40,000.00 per
month was voluntarily agreed upon by the petitioners and the respondent. There is nothing from the
records and, in fact, there is no allegation showing that petitioners were victims of fraud when they
entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00 per month
for a period of six (6) months, or from December 8, 1993 to June 8, 1994, for a total principal and
interest amount of P1,240,000.00. Thereafter, interest at the rate of 12% per annum shall apply. The
amounts already paid by the petitioners during the pendency of the suit, amounting to P1,228,772.00
as of February 12, 1999,[43] should be deducted from the total amount due, computed as indicated
above. We remand the case to the trial court for the actual computation of the total amount due.

Doctrine of Estoppel not applicable

The respondent submits that the petitioners are estopped from disputing the 4% monthly interest
beyond the six-month stipulated period, since they agreed to pay this interest on the principal amount
under the promissory note and the board resolution.
We disagree with the respondents contention.

We cannot apply the doctrine of estoppel in the present case since the facts and circumstances, as
established by the record, negate its application. Under the promissory note,[44]what the petitioners
agreed to was the payment of a specific sum of P40,000.00 per month for six months not a 4% rate of
interest per month for six (6) months on a loan whose principal is P1,000,000.00, for the total
amount of P1,240,000.00. Thus, no reason exists to place the petitioners in estoppel, barring them
from raising their present defenses against a 4% per month interest after the six-month period of the
agreement. The board resolution,[45] on the other hand, simply authorizes Pantaleon to contract for a
loan with a monthly interest of not more than 4%. This resolution merely embodies the extent of
Pantaleons authority to contract and does not create any right or obligation except as between
Pantaleon and the board. Again, no cause exists to place the petitioners in estoppel.

Piercing the corporate veil unfounded

We find it unfounded and unwarranted for the lower courts to pierce the corporate veil of PRISMA.

The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when
the separate and distinct corporate personality defeats public convenience, as when the corporate
fiction is used as a vehicle for the evasion of an existing obligation; b) in fraud cases, or when the
corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is used in alter
ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.[46] In the absence of malice, bad faith, or a specific provision of law making a corporate
officer liable, such corporate officer cannot be made personally liable for corporate liabilities. [47]

In the present case, we see no competent and convincing evidence of any wrongful, fraudulent or
unlawful act on the part of PRISMA to justify piercing its corporate veil. While Pantaleon denied
personal liability in his Answer, he made himself accountable in the promissory note in his personal
capacity and as authorized by the Board Resolution of PRISMA.[48] With this statement of personal
liability and in the absence of any representation on the part of PRISMA that the obligation is all its
own because of its separate corporate identity, we see no occasion to consider piercing the corporate
veil as material to the case.

WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the Decision dated May
5, 2003 of the Court of Appeals in CA-G.R. CV No. 69627. The petitioners loan of P1,000,000.00 shall
bear interest of P40,000.00 per month for six (6) months from December 8, 1993 as indicated in the
promissory note. Any portion of this loan, unpaid as of the end of the six-month payment period, shall
thereafter bear interest at 12% per annum. The total amount due and unpaid, including accrued
interests, shall bear interest at 12% per annum from the finality of this Decision. Let this case
be REMANDED to the Regional Trial Court, Branch 73, Antipolo City for the proper computation of the
amount due as herein directed, with due regard to the payments the petitioners have already
remitted. Costs against the respondent.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 181045 July 2, 2014

SPOUSES EDUARDO and LYDIA SILOS, Petitioners,

vs.
PHILIPPINE NATIONAL BANK, Respondent.

DECISION

DEL CASTILLO, J.:

In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the most important component.
Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect. Moreover, the Court cannot
consider a stipulation granting a party the option to prepay the loan if said party is not agreeable to the arbitrary interest rates
imposed. Premium may not be placed upon a stipulation in a contract which grants one party the right to choose whether to
continue with or withdraw from the agreement if it discovers that what the other party has been doing all along is improper or
illegal.

This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2 of the Court of Appeals (CA) in CA-G.R. CV No.
79650, which affirmed with modifications the February 28, 2003 Decision3 and the June 4, 2003 Order4 of the Regional Trial
Court (RTC), Branch 6 of Kalibo, Aklan in Civil Case No. 5975.

Factual Antecedents

Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades of operating a department store
and buying and selling of ready-to-wear apparel. Respondent Philippine National Bank (PNB) is a banking corporation
organized and existing under Philippine laws.

To secure a one-year revolving credit line of P150,000.00 obtained from PNB, petitioners constituted in August 1987 a Real
Estate Mortgage5 over a 370-square meter lot in Kalibo, Aklan covered by Transfer Certificate of Title No. (TCT) T-14250. In
July 1988,the credit line was increased to P1.8 million and the mortgage was correspondingly increased to P1.8 million.6

And in July 1989, a Supplement to the Existing Real Estate Mortgage 7 was executed to cover the same credit line, which was
increased to P2.5 million, and additional security was given in the form of a 134-square meter lot covered by TCT T-16208. In
addition, petitioners issued eight Promissory Notes 8 and signed a Credit Agreement.9This July 1989 Credit Agreement
contained a stipulation on interest which provides as follows:

1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum. Interest shall be payable in advance
every one hundred twenty days at the rate prevailing at the time of the renewal.

(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the Bank may
adopt in the future, including without limitation, the shifting from the floating interest rate system to the fixed interest rate
system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per annum, which is equal to the Bank’s
spread over the current floating interest rate, the Borrower hereby agrees that the Bank may, without need of notice to the
Borrower, increase or decrease its spread over the floating interest rate at any time depending on whatever policy it may
adopt in the future.10 (Emphases supplied)

The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the right to increase or reduce interest
rates "within the limits allowed by law or by the Monetary Board." 11

The Real Estate Mortgage agreement provided the same right to increase or reduce interest rates "at any time depending on
whatever policy PNB may adopt in the future." 12

Petitioners religiously paid interest on the notes at the following rates:

1. 1st Promissory Note dated July 24, 1989 – 19.5%;

2. 2nd Promissory Note dated November 22, 1989 – 23%;

3. 3rd Promissory Note dated March 21, 1990 – 22%;

4. 4th Promissory Note dated July 19, 1990 – 24%;

5. 5th Promissory Note dated December 17, 1990 – 28%;

6. 6th Promissory Note dated February 14, 1991 – 32%;

7. 7th Promissory Note dated March 1, 1991 – 30%; and

8. 8th Promissory Note dated July 11, 1991 – 24%.13

In August 1991, an Amendment to Credit Agreement 14 was executed by the parties, with the following stipulation regarding
interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each Availment up
to but not including the date of full payment thereof at the rate per annum which is determined by the Bank to be prime rate
plus applicable spread in effect as of the date of each Availment. 15 (Emphases supplied)

Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following 18 Promissory Notes, which
petitioners settled – except the last (the note covering the principal) – at the following interest rates:

1. 9th Promissory Note dated November 8, 1991 – 26%;

2. 10th Promissory Note dated March 19, 1992 – 25%;

3. 11th Promissory Note dated July 11, 1992 – 23%;

4. 12th Promissory Note dated November 10, 1992 – 21%;

5. 13th Promissory Note dated March 15, 1993 – 21%;

6. 14th Promissory Note dated July 12, 1993 – 17.5%;

7. 15th Promissory Note dated November 17, 1993 – 21%;

8. 16th Promissory Note dated March 28, 1994 – 21%;

9. 17th Promissory Note dated July 13, 1994 – 21%;

10. 18th Promissory Note dated November 16, 1994 – 16%;

11. 19th Promissory Note dated April 10, 1995 – 21%;

12. 20th Promissory Note dated July 19, 1995 – 18.5%;

13. 21st Promissory Note dated December 18, 1995 – 18.75%;

14. 22nd Promissory Note dated April 22, 1996 – 18.5%;

15. 23rd Promissory Note dated July 22, 1996 – 18.5%;

16. 24th Promissory Note dated November 25, 1996 – 18%;

17. 25th Promissory Note dated May 30, 1997 – 17.5%; and

18. 26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.16

The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at any time without
notice, raise within the limits allowed by law x x x."17

On the other hand, the 18th up to the 26th promissory notes – including PN 9707237, which is the 26th promissory note –
carried the following provision:

x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for the
subsequent Interest Periods, with prior notice to the Borrower in the event of changes in interest rate prescribed by law or the
Monetary Board of the Central Bank of the Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the
event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we shall have the option top repay the loan or
credit facility without penalty within ten (10) calendar days from the Interest Setting Date. 18 (Emphasis supplied)

Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on the promissory notes, religiously
paying the interests without objection or fail. But in 1997, petitioners faltered when the interest rates soared due to the Asian
financial crisis. Petitioners’ sole outstanding promissory note for P2.5 million – PN 9707237 executed in July 1997 and due
120 days later or on October 28, 1997 – became past due, and despite repeated demands, petitioners failed to make good on
the note.

Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of default, as follows:

Without need for notice or demand, failure to pay this note or any installment thereon, when due, shall constitute default and
in such cases or in case of garnishment, receivership or bankruptcy or suit of any kind filed against me/us by the Bank, the
outstanding principal of this note, at the option of the Bank and without prior notice of demand, shall immediately become due
and payable and shall be subject to a penalty charge of twenty four percent (24%) per annum based on the defaulted principal
amount. x x x19 (Emphasis supplied)

PNB prepared a Statement of Account20 as of October 12, 1998, detailing the amount due and demandable from petitioners in
the total amount of P3,620,541.60, broken down as follows:

Principal P 2,500,000.00

Interest 538,874.94
Penalties 581,666.66
 Total P 3,620,541.60

Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on the mortgage, and on January 14,
1999, TCTs T-14250 and T-16208 were sold to it at auction for the amount of P4,324,172.96.21 The sheriff’s certificate of sale
was registered on March 11, 1999.

More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975, seeking annulment of the foreclosure sale
and an accounting of the PNB credit. Petitioners theorized that after the first promissory note where they agreed to pay 19.5%
interest, the succeeding stipulations for the payment of interest in their loan agreements with PNB – which allegedly left to the
latter the sole will to determine the interest rate – became null and void. Petitioners added that because the interest rates
were fixed by respondent without their prior consent or agreement, these rates are void, and as a result, petitioners should
only be made liable for interest at the legal rate of 12%. They claimed further that they overpaid interests on the credit, and
concluded that due to this overpayment of steep interest charges, their debt should now be deemed paid, and the foreclosure
and sale of TCTs T-14250 and T-16208 became unnecessary and wrongful. As for the imposed penalty of P581,666.66,
petitioners alleged that since the Real Estate Mortgage and the Supplement thereto did not include penalties as part of the
secured amount, the same should be excluded from the foreclosure amount or bid price, even if such penalties are provided
for in the final Promissory Note, or PN 9707237. 22

In addition, petitioners sought to be reimbursed an alleged overpayment of P848,285.00 made during the period August 21,
1991 to March 5, 1998,resulting from respondent’s imposition of the alleged illegal and steep interest rates. They also prayed
to be awarded P200,000.00 by way of attorney’s fees.23

In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates; that petitioners agreed that without prior notice,
PNB may modify interest rates depending on future policy adopted by it; and that the imposition of penalties was agreed upon
in the Credit Agreement. It added that the imposition of penalties is supported by the all-inclusive clause in the Real Estate
Mortgage agreement which provides that the mortgage shall stand as security for any and all other obligations of whatever
kind and nature owing to respondent, which thus includes penalties imposed upon default or non-payment of the principal and
interest on due date.

On pre-trial, the parties mutually agreed to the following material facts, among others:

a) That since 1991 up to 1998, petitioners had paid PNB the total amount of P3,484,287.00;25 and

b) That PNB sent, and petitioners received, a March 10, 2000 demand letter.26

During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the Amendment to Credit Agreement, Real
Estate Mortgage and the Supplement thereto were all prepared by respondent PNB and were presented to her and her
husband Eduardo only for signature; that she was told by PNB that the latter alone would determine the interest rate; that as
to the Amendment to Credit Agreement, she was told that PNB would fill up the interest rate portion thereof; that at the time
the parties executed the said Credit Agreement, she was not informed about the applicable spread that PNB would impose on
her account; that the interest rate portion of all Promissory Notes she and Eduardo issued were always left in blank when they
executed them, with respondent’s mere assurance that it would be the one to enter or indicate thereon the prevailing interest
rate at the time of availment; and that they agreed to such arrangement. She further testified that the two Real Estate
Mortgage agreements she signed did not stipulate the payment of penalties; that she and Eduardo consulted with a lawyer,
and were told that PNB’s actions were improper, and so on March 20, 2000, they wrote to the latter seeking a recomputation
of their outstanding obligation; and when PNB did not oblige, they instituted Civil Case No. 5975. 27

On cross-examination, Lydia testified that she has been in business for 20 years; that she also borrowed from other
individuals and another bank; that it was only with banks that she was asked to sign loan documents with no indicated interes t
rate; that she did not bother to read the terms of the loan documents which she signed; and that she received several PNB
statements of account detailing their outstanding obligations, but she did not complain; that she assumed instead that what
was written therein is correct.28

For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness for respondent, stated on cross-
examination that as a practice, the determination of the prime rates of interest was the responsibility solely of PNB’s Treasury
Department which is based in Manila; that these prime rates were simply communicated to all PNB branches for
implementation; that there are a multitude of considerations which determine the interest rate, such as the cost of money,
foreign currency values, PNB’s spread, bank administrative costs, profitability, and the practice in the banking industry; that in
every repricing of each loan availment, the borrower has the right to question the rates, but that this was not done by the
petitioners; and that anything that is not found in the Promissory Note may be supplemented by the Credit Agreement. 29

Ruling of the Regional Trial Court

On February 28, 2003, the trial court rendered judgment dismissing Civil Case No. 5975. 30

It ruled that:

1. While the Credit Agreement allows PNB to unilaterally increase its spread over the floating interest rate at any time
depending on whatever policy it may adopt in the future, it likewise allows for the decrease at any time of the same.
Thus, such stipulation authorizing both the increase and decrease of interest rates as may be applicable is valid, 31 as
was held in Consolidated Bank and Trust Corporation (SOLIDBANK) v. Court of Appeals; 32

2. Banks are allowed to stipulate that interest rates on loans need not be fixed and instead be made dependent on
prevailing rates upon which to peg such variable interest rates;33
 3. The Promissory Note, as the principal contract evidencing petitioners’ loan, prevails over the Credit Agreement and
the Real Estate Mortgage.

As such, the rate of interest, penalties and attorney’s fees stipulated in the Promissory Note prevail over those
mentioned in the Credit Agreement and the Real Estate Mortgage agreements; 34

4. Roughly, PNB’s computation of the total amount of petitioners’ obligation is correct; 35

5. Because the loan was admittedly due and demandable, the foreclosure was regularly made; 36

6. By the admission of petitioners during pre-trial, all payments made to PNB were properly applied to the principal,
interest and penalties.37

The dispositive portion of the trial court’s Decision reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the respondent and against the petitioners by
DISMISSING the latter’s petition.

Costs against the petitioners.

SO ORDERED.38

Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the trial court granted only a modification in the
award of attorney’s fees, reducing the same from 10% to 1%. Thus, PNB was ordered to refund to petitioner the excess in
attorney’s fees in the amount of P356,589.90, viz:

WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate charged by the respondent as well as
the extra-judicial foreclosure proceedings and the Certificate of Sale. However, respondent is directed to refund to the
petitioner the amount of P356,589.90 representing the excess interest charged against the latter.

No pronouncement as to costs.

SO ORDERED.40

Ruling of the Court of Appeals

Petitioners appealed to the CA, which issued the questioned Decision with the following decretal portion:

WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The modified Decision of the Regional
Trial Court per Order dated June 4, 2003 is hereby AFFIRMED with MODIFICATIONS, to wit:

1. [T]hat the interest rate to be applied after the expiration of the first 30-day interest period for PN. No. 9707237
should be 12% per annum;

2. [T]hat the attorney’s fees of10% is valid and binding; and

3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid price of P377,505.99 which is the
difference between the total amount due [PNB] and the amount of its bid price.

SO ORDERED.41

On the other hand, respondent did not appeal the June 4,2003 Order of the trial court which reduced its award of attorney’s
fees. It simply raised the issue in its appellee’s brief in the CA, and included a prayer for the reversal of said Order.

In effect, the CA limited petitioners’ appeal to the following issues:

1) Whether x x x the interest rates on petitioners’ outstanding obligation were unilaterally and arbitrarily imposed by
PNB;

2) Whether x x x the penalty charges were secured by the real estate mortgage; and

3) Whether x x x the extrajudicial foreclosure and sale are valid. 42

The CA noted that, based on receipts presented by petitioners during trial, the latter dutifully paid a total of P3,027,324.60 in
interest for the period August 7, 1991 to August 6, 1997, over and above the P2.5 million principal obligation. And this is
exclusive of payments for insurance premiums, documentary stamp taxes, and penalty. All the while, petitioners did not
complain nor object to the imposition of interest; they in fact paid the same religiously and without fail for seven years. The
appellate court ruled that petitioners are thus estopped from questioning the same.

The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB wrongly applied an interest rate of
25.72% instead of the agreed 25%; thus it overcharged petitioners, and the latter paid, an excess of P736.56 in interest.

On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage agreements contemplated the
inclusion of the PN 9707237-stipulated 24% penalty in the amount to be secured by the mortgaged property, thus –

For and in consideration of certain loans, overdrafts and other credit accommodations obtained from the MORTGAGEE and
to secure the payment of the same and those others that the MORTGAGEE may extend to the MORTGAGOR, including
interest and expenses, and other obligations owing by the MORTGAGOR to the MORTGAGEE, whether direct or indirect,
principal or secondary, as appearing in the accounts, books and records of the MORTGAGEE, the MORTGAGOR does
hereby transfer and convey by way of mortgage unto the MORTGAGEE x x x 43 (Emphasis supplied)

The CA believes that the 24% penalty is covered by the phrase "and other obligations owing by the mortgagor to the
mortgagee" and should thus be added to the amount secured by the mortgages.44

The CA then proceeded to declare valid the foreclosure and sale of properties covered by TCTs T-14250 and T-16208, which
came as a necessary result of petitioners’ failure to pay the outstanding obligation upon demand. 45The CA saw fit to increase
the trial court’s award of 1% to 10%, finding the latter rate to be reasonable and citing the Real Estate Mortgage agreement
which authorized the collection of the higher rate.46

Finally, the CA ruled that petitioners are entitled to P377,505.09 surplus, which is the difference between PNB’s bid price
of P4,324,172.96 and petitioners’ total computed obligation as of January 14, 1999, or the date of the auction sale, in the
amount of P3,946,667.87.47

Hence, the present Petition.

Issues

The following issues are raised in this Petition:

A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED IN NOT NULLIFYING THE
INTEREST RATE PROVISION IN THE CREDIT AGREEMENT DATED JULY 24, 1989 X X X AND IN THE
AMENDMENT TO CREDIT AGREEMENT DATEDAUGUST 21, 1991 X X X WHICH LEFT TO THE SOLE
UNILATERAL DETERMINATION OF THE RESPONDENT PNB THE ORIGINAL FIXING OF INTEREST
RATE AND ITS INCREASE, WHICH AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF THE [NEW
CIVIL CODE], AS ENUNCIATED IN PONCIANO ALMEIDA V. COURT OF APPEALS,G.R. [NO.] 113412,
APRIL 17, 1996, AND CONTRARY TO PUBLIC POLICY AND PUBLIC INTEREST, AND IN APPLYING THE
PRINCIPLE OF ESTOPPEL ARISING FROM THE ALLEGED DELAYED COMPLAINT OF PETITIONER[S],
AND [THEIR] PAYMENT OF THE INTEREST CHARGED.

B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT ERRED IN NOT DECLARING
THAT PNB IS NOT AT ALL ENTITLED TO ANY INTEREST EXCEPT THE LEGAL RATE FROM DATE OF
DEMAND, AND IN NOT APPLYING THE EXCESS OVER THE LEGAL RATE OF THE ADMITTED
PAYMENTS MADE BY PETITIONER[S] FROM 1991-1998 IN THE ADMITTED TOTAL AMOUNT
OF P3,484,287.00, TO PAYMENT OF THE PRINCIPAL OF P2,500,000.[00] LEAVING AN OVERPAYMENT
OFP984,287.00 REFUNDABLE BY RESPONDENT TO PETITIONER[S] WITH INTEREST OF 12% PER
ANNUM.

II

THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT PENALTIES ARE INCLUDEDIN THE
SECURED AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO PENALTIES ARE MENTIONED [NOR] PROVIDED FOR
IN THE REAL ESTATE MORTGAGE AS A SECURED AMOUNT AND THEREFORE THE AMOUNT OF PENALTIES
SHOULDHAVE BEEN EXCLUDED FROM [THE] FORECLOSURE AMOUNT.

III

THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER COURT, WHICH REDUCED THE
ATTORNEY’S FEES OF 10% OF THE TOTAL INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL
FORECLOSURE TOONLY 1%, AND [AWARDING] 10% ATTORNEY’S FEES.48

Petitioners’ Arguments

Petitioners insist that the interest rate provision in the Credit Agreement and the Amendment to Credit Agreement should be
declared null and void, for they relegated to PNB the sole power to fix interest rates based on arbitrary criteria or factors such
as bank policy, profitability, cost of money, foreign currency values, and bank administrative costs; spaces for interest rates in
the two Credit Agreements and the promissory notes were left blank for PNB to unilaterally fill, and their consent or agreement
to the interest rates imposed thereafter was not obtained; the interest rate, which consists of the prime rate plus the bank
spread, is determined not by agreement of the parties but by PNB’s Treasury Department in Manila. Petitioners conclude that
by this method of fixing the interest rates, the principle of mutuality of contracts is violated, and public policy as well as
Circular 90549 of the then Central Bank had been breached.

Petitioners question the CA’s application of the principle of estoppel, saying that no estoppel can proceed from an illegal act.
Though they failed to timely question the imposition of the alleged illegal interest rates and continued to pay the loan on the
basis of these rates, they cannot be deemed to have acquiesced, and hence could recover what they erroneously paid. 50

Petitioners argue that if the interest rates were nullified, then their obligation to PNB is deemed extinguished as of July 1997;
moreover, it would appear that they even made an over payment to the bank in the amount of P984,287.00.

Next, petitioners suggest that since the Real Estate Mortgage agreements did not include nor specify, as part of the secured
amount, the penalty of 24% authorized in PN 9707237, such amount of P581,666.66 could not be made answerable by or
collected from the mortgages covering TCTs T-14250 and T-16208. Claiming support from Philippine Bank of
Communications [PBCom] v. Court of Appeals, 51 petitioners insist that the phrase "and other obligations owing by the
mortgagor to the mortgagee"52 in the mortgage agreements cannot embrace the P581,666.66 penalty, because, as held in the
PBCom case, "[a] penalty charge does not belong to the species of obligations enumerated in the mortgage, hence, the said
contract cannot be understood to secure the penalty"; 53while the mortgages are the accessory contracts, what items are
secured may only be determined from the provisions of the mortgage contracts, and not from the Credit Agreement or the
promissory notes.

Finally, petitioners submit that the trial court’s award of 1% attorney’s fees should be maintained, given that in foreclosures, a
lawyer’s work consists merely in the preparation and filing of the petition, and involves minimal study. 54 To allow the imposition
of a staggering P396,211.00 for such work would be contrary to equity. Petitioners state that the purpose of attorney’s fees in
cases of this nature "is not to give respondent a larger compensation for the loan than the law already allows, but to protect it
against any future loss or damage by being compelled to retain counsel x x x to institute judicial proceedings for the collection
of its credit."55 And because the instant case involves a simple extrajudicial foreclosure, attorney’s fees may be equitably
tempered.

Respondent’s Arguments

For its part, respondent disputes petitioners’ claim that interest rates were unilaterally fixed by it, taking relief in the CA
pronouncement that petitioners are deemed estopped by their failure to question the imposed rates and their continued
payment thereof without opposition. It adds that because the Credit Agreement and promissory notes contained both an
escalation clause and a de-escalation clause, it may not be said that the bank violated the principle of mutuality. Besides, the
increase or decrease in interest rates have been mutually agreed upon by the parties, as shown by petitioners’ continuous
payment without protest. Respondent adds that the alleged unilateral imposition of interest rates is not a proper subject for
review by the Court because the issue was never raised in the lower court.

As for petitioners’ claim that interest rates imposed by it are null and void for the reasons that 1) the Credit Agreements and
the promissory notes were signed in blank; 2) interest rates were at short periods; 3) no interest rates could be charged where
no agreement on interest rates was made in writing; 4) PNB fixed interest rates on the basis of arbitrary policies and
standards left to its choosing; and 5) interest rates based on prime rate plus applicable spread are indeterminate and arbitrary
– PNB counters:

a. That Credit Agreements and promissory notes were signed by petitioner[s] in blank – Respondent claims that this
issue was never raised in the lower court. Besides, documentary evidence prevails over testimonial evidence; Lydia
Silos’ testimony in this regard is self-serving, unsupported and uncorroborated, and for being the lone evidence on this
issue. The fact remains that these documents are in proper form, presumed regular, and endure, against arbitrary
claims by Silos – who is an experienced business person – that she signed questionable loan documents whose
provisions for interest rates were left blank, and yet she continued to pay the interests without protest for a number of
years.56

b. That interest rates were at short periods – Respondent argues that the law which governs and prohibits changes in
interest rates made more than once every twelve months has been removed 57 with the issuance of Presidential Decree
No. 858.58

c. That no interest rates could be charged where no agreement on interest rates was made in writing in violation of
Article 1956 of the Civil Code, which provides that no interest shall be due unless it has been expressly stipulated in
writing – Respondent insists that the stipulated 25% per annum as embodied in PN 9707237 should be imposed
during the interim, or the period after the loan became due and while it remains unpaid, and not the legal interest of
12% as claimed by petitioners.59

d. That PNB fixed interest rates on the basis of arbitrary policies and standards left to its choosing – According to
respondent, interest rates were fixed taking into consideration increases or decreases as provided by law or by the
Monetary Board, the bank’s overall costs of funds, and upon agreement of the parties. 60

e. That interest rates based on prime rate plus applicable spread are indeterminate and arbitrary – On this score,
respondent submits there are various factors that influence interest rates, from political events to economic
developments, etc.; the cost of money, profitability and foreign currency transactions may not be discounted.61

On the issue of penalties, respondent reiterates the trial court’s finding that during pre-trial, petitioners admitted that the
Statement of Account as of October 12, 1998 – which detailed and included penalty charges as part of the total outstanding
obligation owing to the bank – was correct. Respondent justifies the imposition and collection of a penalty as a normal
banking practice, and the standard rate per annum for all commercial banks, at the time, was 24%.

Respondent adds that the purpose of the penalty or a penal clause for that matter is to ensure the performance of the
obligation and substitute for damages and the payment of interest in the event of non-compliance.62 And the promissory note –
being the principal agreement as opposed to the mortgage, which is a mere accessory – should prevail. This being the case,
its inclusion as part of the secured amount in the mortgage agreements is valid and necessary.

Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-empting consolidation of its ownership
over TCTs T-14250 and T-16208; that petitioners filed Civil Case No. 5975 ostensibly to question the foreclosure and sale of
properties covered by TCTs T-14250 and T-16208 in a desperate move to retain ownership over these properties, because
they failed to timely redeem them.

Respondent directs the attention of the Court to its petition in G.R. No. 181046, 63 where the propriety of the CA’s ruling on the
following issues is squarely raised:

1. That the interest rate to be applied after the expiration of the first 30-day interest period for PN 9707237 should be
12% per annum; and

2. That PNB should reimburse petitioners the excess in the bid price of P377,505.99 which is the difference between
the total amount due to PNB and the amount of its bid price.

Our Ruling
The Court grants the Petition.

Before anything else, it must be said that it is not the function of the Court to re-examine or re-evaluate evidence adduced by
the parties in the proceedings below. The rule admits of certain well-recognized exceptions, though, as when the lower courts’
findings are not supported by the evidence on record or are based on a misapprehension of facts, or when certain relevant
and undisputed facts were manifestly overlooked that, if properly considered, would justify a different conclusion. This case
falls within such exceptions.

The Court notes that on March 5, 2008, a Resolution was issued by the Court’s First Division denying respondent’s petition in
G.R. No. 181046, due to late filing, failure to attach the required affidavit of service of the petition on the trial court and the
petitioners, and submission of a defective verification and certification of non-forum shopping. On June 25, 2008, the Court
issued another Resolution denying with finality respondent’s motion for reconsideration of the March 5, 2008 Resolution. And
on August 15, 2008, entry of judgment was made. This thus settles the issues, as above-stated, covering a) the interest rate –
or 12% per annum– that applies upon expiration of the first 30 days interest period provided under PN 9707237, and b)the
CA’s decree that PNB should reimburse petitioner the excess in the bid price of P377,505.09.

It appears that respondent’s practice, more than once proscribed by the Court, has been carried over once more to the
petitioners. In a number of decided cases, the Court struck down provisions in credit documents issued by PNB to, or required
of, its borrowers which allow the bank to increase or decrease interest rates "within the limits allowed by law at any time
depending on whatever policy it may adopt in the future." Thus, in Philippine National Bank v. Court of Appeals, 64 such
stipulation and similar ones were declared in violation of Article 1308 65 of the Civil Code. In a second case, Philippine National
Bank v. Court of Appeals,66 the very same stipulations found in the credit agreement and the promissory notes prepared and
issued by the respondent were again invalidated. The Court therein said:

The Credit Agreement provided inter alia, that —

(a) The BANK reserves the right to increase the interest rate within the limits allowed by law at any time depending on
whatever policy it may adopt in the future; Provided, that the interest rate on this accommodation shall be correspondingly
decreased in the event that the applicable maximum interest is reduced by law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in the
maximum interest rate.

The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without notice, beyond the
stipulated rate of 12% but only "within the limits allowed by law."

The Real Estate Mortgage contract likewise provided that —

(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in accordance with the provision hereof, shall
be subject during the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.

xxxx

In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause contained in their credit
agreement which provides, as follows:

The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever
policy it may adopt in the future and provided, that, the interest rate on this accommodation shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case,
the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in
maximum interest rate.

This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further amended Act No. 2655 ("The
Usury Law"), as amended, thus:

Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of
interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased bylaw or by the
Monetary Board; Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate
of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the
Monetary Board; Provided further, That the adjustment in the rate of interest agreed upon shall take effect on or after the
effectivity of the increase or decrease in the maximum rate of interest.

Section 1 of P.D. No. 1684 also empowered the Central Bank’s Monetary Board to prescribe the maximum rates of interest for
loans and certain forbearances. Pursuant to such authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905,
series of 1982, Section 5 of which provides:

Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries) is hereby amended to read
as follows:

Sec. 1303. Interest and Other Charges.

— The rate of interest, including commissions, premiums, fees and other charges, on any loan, or forbearance of any money,
goods or credits, regardless of maturity and whether secured or unsecured, shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent
adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to
adjust, upward or downward, the interest previously stipulated. However, contrary to the stubborn insistence of petitioner
bank, the said law and circular did not authorize either party to unilaterally raise the interest rate without the other’s consent.

It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of
the parties. If this assent is wanting on the part of the one who contracts, his act has no more efficacy than if it had been done
under duress or by a person of unsound mind.

Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet
as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan
contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture.
Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.

We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it unbridled right to unilaterally
upwardly adjust the interest on private respondents’ loan. That would completely take away from private respondents the right
to assent to an important modification in their agreement, and would negate the element of mutuality in contracts. In Philippine
National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —

x x x The unilateral action of the PNB in increasing the interest rate on the private respondent’s loan violated the mutualit y of
contracts ordained in Article 1308 of the Civil Code:

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

In order that obligations arising from contracts may have the force 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 . . . . Hence, even assuming that the . . . loan
agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase
the interest rate at will during the term of the loan, that license would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal footing, the weaker party’s (the debtor) participation being reduced to the
alternative "to take it or leave it" . . . . Such a contract is a veritable trap for the weaker party whom the courts of justice must
protect against abuse and imposition.67 (Emphases supplied)

Then again, in a third case, Spouses Almeda v. Court of Appeals,68 the Court invalidated the very same provisions in the
respondent’s prepared Credit Agreement, declaring thus:

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation
arising from contract has the force of law between the parties; and (2) that there must be mutuality between the parties based
on their essential equality. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will
of one of the parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the terms of its
contract with petitioners by increasing the interest rates on the loan without the prior assent of the latter. In fact, the manner of
agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall be due unless
it has been expressly stipulated in writing." What has been "stipulated in writing" from a perusal of interest rate provision of the
credit agreement signed between the parties is that petitioners were bound merely to pay 21% interest, subject to a possible
escalation or de-escalation, when 1) the circumstances warrant such escalation or de-escalation; 2) within the limits allowed
by law; and 3) upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this case was the 21% rate
stipulated in the interest provision. Any doubt about this is in fact readily resolved by a careful reading of the credit agreement
because the same plainly uses the phrase "interest rate agreed upon," in reference to the original 21% interest rate. x x x

xxxx

Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in contravention to the
tenor of their credit agreement. That an increase in interest rates from 18% to as much as 68% is excessive and
unconscionable is indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to virtually half of the
entire principal (P7,735,004.66) which was applied to interest alone. By the time the spouses tendered the amount
of P40,142,518.00 in settlement of their obligations; respondent bank was demanding P58,377,487.00 over and above those
amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on
reasonable and valid grounds. Here, as clearly demonstrated above, not only [are] the increases of the interest rates on the
basis of the escalation clause patently unreasonable and unconscionable, but also there are no valid and reasonable
standards upon which the increases are anchored.

xxxx

In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the parties to agree to
changes in the interest rate in writing, we hold that the unilateral and progressive increases imposed by respondent PNB were
null and void. Their effect was to increase the total obligation on an eighteen million peso loan to an amount way over three
times that which was originally granted to the borrowers. That these increases, occasioned by crafty manipulations in the
interest rates is unconscionable and neutralizes the salutary policies of extending loans to spur business cannot be
disputed.69 (Emphases supplied)

Still, in a fourth case, Philippine National Bank v. Court of Appeals, 70 the above doctrine was reiterated:
The promissory note contained the following stipulation:

For value received, I/we, [private respondents] jointly and severally promise to pay to the ORDER of the PHILIPPINE
NATIONAL BANK, at its office in San Jose City, Philippines, the sum of FIFTEEN THOUSAND ONLY (P15,000.00),
Philippine Currency, together with interest thereon at the rate of 12% per annum until paid, which interest rate the Bank may
at any time without notice, raise within the limits allowed by law, and I/we also agree to pay jointly and severally ____% per
annum penalty charge, by way of liquidated damages should this note be unpaid or is not renewed on due dated.

Payment of this note shall be as follows:

*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE

On the reverse side of the note the following condition was stamped:

All short-term loans to be granted starting January 1, 1978 shall be made subject to the condition that any and/or all
extensions hereof that will leave any portion of the amount still unpaid after 730 days shall automatically convert the
outstanding balance into a medium or long-term obligation as the case may be and give the Bank the right to charge the
interest rates prescribed under its policies from the date the account was originally granted.

To secure payment of the loan the parties executed a real estate mortgage contract which provided:

(k) INCREASE OF INTEREST RATE:

The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have
been advanced by the MORTGAGEE, in accordance with the provision hereof, shall be subject during the life of this contract
to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.

xxxx

To begin with, PNB’s argument rests on a misapprehension of the import of the appellate court’s ruling. The Court of Appeals
nullified the interest rate increases not because the promissory note did not comply with P.D. No. 1684 by providing for a de-
escalation, but because the absence of such provision made the clause so one-sided as to make it unreasonable.

That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank v. Navarro that although P. D.
No. 1684 is not to be retroactively applied to loans granted before its effectivity, there must nevertheless be a de-escalation
clause to mitigate the one-sidedness of the escalation clause. Indeed because of concern for the unequal status of borrowers
vis-à-vis the banks, our cases after Banco Filipino have fashioned the rule that any increase in the rate of interest made
pursuant to an escalation clause must be the result of agreement between the parties.

Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized PNB to increase the stipulated interest
per annum" within the limits allowed by law at any time depending on whatever policy [PNB] may adopt in the future;
Provided, that the interest rate on this note shall be correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board." The real estate mortgage likewise provided:

The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have
been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject during the life of this contract
to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.

Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to 41% and then to 48%. This
Court declared the increases unilaterally imposed by [PNB] to be in violation of the principle of mutuality as embodied in
Art.1308 of the Civil Code, which provides that "[t]he contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them." As the Court explained:

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.

A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit agreement in that case provided:

The BANK reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever
policy it may adopt in the future: Provided, that the interest rate on this accommodation shall be correspondingly decreased in
the event that the applicable maximum interest is reduced by law or by the Monetary Board. . . .

As in the first case, PNB successively increased the stipulated interest so that what was originally 12% per annum became,
after only two years, 42%. In declaring the increases invalid, we held:

We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it unbridled right to unilaterally
upwardly adjust the interest on private respondents’ loan. That would completely take away from private respondents the right
to assent to an important modification in their agreement, and would negate the element of mutuality in contracts.
Only recently we invalidated another round of interest increases decreed by PNB pursuant to a similar agreement it had with
other borrowers:

[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could possibly be
read as granting respondent bank carte blanche authority to raise interest rates to levels which would either enslave its
borrowers or lead to a hemorrhaging of their assets.

In this case no attempt was made by PNB to secure the conformity of private respondents to the successive increases in the
interest rate. Private respondents’ assent to the increases can not be implied from their lack of response to the letters sent by
PNB, informing them of the increases. For as stated in one case, no one receiving a proposal to change a contract is obliged
to answer the proposal.71 (Emphasis supplied)

We made the same pronouncement in a fifth case, New Sampaguita Builders Construction, Inc. v. Philippine National
Bank,72 thus –

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. This unilateral authority is anathema to the mutuality of contracts and enable lenders
to take undue advantage of borrowers. Although the Usury Law has been effectively repealed, courts may still reduce
iniquitous or unconscionable rates charged for the use of 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.73 (Emphasis supplied)

Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora, 74 the above pronouncements were reiterated
to debunk PNB’s repeated reliance on its invalidated contract stipulations:

We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the 1996 case of PNB v. CA and Spouses
Basco. Taking no heed of these rulings, the escalation clause PNB used in the present case to justify the increased interest
rates is no different from the escalation clause assailed in the 1996 PNB case; in both, the interest rates were increased from
the agreed 12% per annum rate to 42%. x x x

xxxx

On the strength of this ruling, PNB’s argument – that the spouses Rocamora’s failure to contest the increased interest rates
that were purportedly reflected in the statements of account and the demand letters sent by the bank amounted to their
implied acceptance of the increase – should likewise fail.

Evidently, PNB’s failure to secure the spouses Rocamora’s consent to the increased interest rates prompted the lower courts
to declare excessive and illegal the interest rates imposed. Togo around this lower court finding, PNB alleges that
the P206,297.47 deficiency claim was computed using only the original 12% per annum interest rate. We find this unlikely.
Our examination of PNB’s own ledgers, included in the records of the case, clearly indicates that PNB imposed interest rates
higher than the agreed 12% per annum rate. This confirmatory finding, albeit based solely on ledgers found in the records,
reinforces the application in this case of the rule that findings of the RTC, when affirmed by the CA, are binding upon this
Court.75 (Emphases supplied)

Verily, all these cases, including the present one, involve identical or similar provisions found in respondent’s credit
agreements and promissory notes. Thus, the July 1989 Credit Agreement executed by petitioners and respondent contained
the following stipulation on interest:

1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum]. Interest shall be payable in advance
every one hundred twenty days at the rate prevailing at the time of the renewal.

(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the Bank may
adopt in the future, including without limitation, the shifting from the floating interest rate system to the fixed interest rate
system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per annum which is equal to the Bank’s
spread over the current floating interest rate, the Borrower hereby agrees that the Bank may, without need of notice to the
Borrower, increase or decrease its spread over the floating interest rate at any time depending on whatever policy it may
adopt in the future.76 (Emphases supplied)

while the eight promissory notes issued pursuant thereto granted PNB the right to increase or reduce interest rates "within t he
limits allowed by law or the Monetary Board" 77 and the Real Estate Mortgage agreement included the same right to increase or
reduce interest rates "at any time depending on whatever policy PNB may adopt in the future." 78

On the basis of the Credit Agreement, petitioners issued promissory notes which they signed in blank, and respondent later
on entered their corresponding interest rates, as follows:

1st Promissory Note dated July 24, 1989 – 19.5%;

2nd Promissory Note dated November 22, 1989 – 23%;

3rd Promissory Note dated March 21, 1990 – 22%;

4th Promissory Note dated July 19, 1990 – 24%;

5th Promissory Note dated December 17, 1990 – 28%;

6th Promissory Note dated February 14, 1991 – 32%;

 7th Promissory Note dated March 1, 1991 – 30%; and

8th Promissory Note dated July 11, 1991 – 24%.79

On the other hand, the August 1991 Amendment to Credit Agreement contains the following stipulation regarding interest:

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each Availment up
to but not including the date of full payment thereof at the rate per annum which is determined by the Bank to be prime rate
plus applicable spread in effect as of the date of each Availment. 80 (Emphases supplied)

and under this Amendment to Credit Agreement, petitioners again executed and signed the following promissory notes in
blank, for the respondent to later on enter the corresponding interest rates, which it did, as follows:

9th Promissory Note dated November 8, 1991 – 26%;

10th Promissory Note dated March 19, 1992 – 25%;

11th Promissory Note dated July 11, 1992 – 23%;

12th Promissory Note dated November 10, 1992 – 21%;

13th Promissory Note dated March 15, 1993 – 21%;

14th Promissory Note dated July 12, 1993 – 17.5%;

15th Promissory Note dated November 17, 1993 – 21%;

16th Promissory Note dated March 28, 1994 – 21%;

17th Promissory Note dated July 13, 1994 – 21%;

18th Promissory Note dated November 16, 1994 – 16%;

19th Promissory Note dated April 10, 1995 – 21%;

20th Promissory Note dated July 19, 1995 – 18.5%;

21st Promissory Note dated December 18, 1995 – 18.75%;

22nd Promissory Note dated April 22, 1996 – 18.5%;

23rd Promissory Note dated July 22, 1996 – 18.5%;

24th Promissory Note dated November 25, 1996 – 18%;

25th Promissory Note dated May 30, 1997 – 17.5%; and

26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.81

The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at any time without
notice, raise within the limits allowed by law x x x."82 On the other hand, the 18th up to the 26th promissory notes – which
includes PN 9707237 – carried the following provision:

x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for the
subsequent Interest Periods, with prior notice to the Borrower in the event of changes in interest rate prescribed by law or the
Monetary Board of the Central Bank of the Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the
event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we shall have the option to prepay the loan or
credit facility without penalty within ten (10) calendar days from the Interest Setting Date. 83 (Emphasis supplied)

These stipulations must be once more invalidated, as was done in previous cases. The common denominator in these cases
is the lack of agreement of the parties to the imposed interest rates. For this case, this lack of consent by the petitioners has
been made obvious by the fact that they signed the promissory notes in blank for the respondent to fill. We find credible the
testimony of Lydia in this respect. Respondent failed to discredit her; in fact, its witness PNB Kalibo Branch Manager Aspa
admitted that interest rates were fixed solely by its Treasury Department in Manila, which were then simply communicated to
all PNB branches for implementation. If this were the case, then this would explain why petitioners had to sign the promissory
notes in blank, since the imposable interest rates have yet to be determined and fixed by respondent’s Treasury Department
in Manila.

Moreover, in Aspa’s enumeration of the factors that determine the interest rates PNB fixes – such as cost of money, foreign
currency values, bank administrative costs, profitability, and considerations which affect the banking industry – it can be seen
that considerations which affect PNB’s borrowers are ignored. A borrower’s current financial state, his feedback or opinions,
the nature and purpose of his borrowings, the effect of foreign currency values or fluctuations on his business or borrowing,
etc. – these are not factors which influence the fixing of interest rates to be imposed on him. Clearly, respondent’s method of
fixing interest rates based on one-sided, indeterminate, and subjective criteria such as profitability, cost of money, bank costs,
etc. is arbitrary for there is no fixed standard or margin above or below these considerations.
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 institut ions
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.

It should be pointed out that the authority to review the interest rate was given [to] 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. 84 (Emphases supplied)

To repeat what has been said in the above-cited cases, any modification in the contract, such as the interest rates, must be
made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification,
1âwphi1

especially when it affects an important aspect of the agreement. In the case of loan agreements, the rate of interest is a
principal condition, if not the most important component. Thus, any modification thereof must be mutually agreed upon;
otherwise, it has no binding effect.

What is even more glaring in the present case is that, the stipulations in question no longer provide that the parties shall agree
upon the interest rate to be fixed; -instead, they are worded in such a way that the borrower shall agree to whatever interest
rate respondent fixes. In credit agreements covered by the above-cited cases, it is provided that:

The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever
policy it may adopt in the future: Provided, that, the interest rate on this accommodation shall be correspondingly decreased in
the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in maximum
interest rate.85 (Emphasis supplied)

Whereas, in the present credit agreements under scrutiny, it is stated that:

IN THE JULY 1989 CREDIT AGREEMENT

(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending on whatever policy the Bank may
adopt in the future, including without limitation, the shifting from the floating interest rate system to the fixed interest rate
system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per annum, which is equal to the Bank’s
spread over the current floating interest rate, the Borrower hereby agrees that the Bank may, without need of notice to the
Borrower, increase or decrease its spread over the floating interest rate at any time depending on whatever policy it may
adopt in the future.86 (Emphases supplied)

IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each Availment up
to but not including the date of full payment thereof at the rate per annum which is determined by the Bank to be prime rate
plus applicable spread in effect as of the date of each Availment. 87 (Emphasis supplied)

Plainly, with the present credit agreement, the element of consent or agreement by the borrower is now completely lacking,
which makes respondent’s unlawful act all the more reprehensible.

Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for "[e]stoppel 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."88

It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act No. 3765, which was enacted "to
protect x x x citizens from a lack of awareness of the true cost of credit to the user by using a full disclosure of such cost with
a view of preventing the uninformed use of credit to the detriment of the national economy." 89 The law "gives a detailed
enumeration of the specific information required to be disclosed, among which are the interest and other charges incident to
the extension of credit."90 Section 4 thereof provides that a disclosure statement must be furnished prior to the consummation
of the transaction, thus:

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.

Under Section 4(6), "finance charge" represents the amount to be paid by the debtor incident to the extension of credit such
as interest or discounts, collection fees, credit investigation fees, attorney’s fees, and other service charges. The total finance
charge represents the difference between (1) the aggregate consideration (down payment plus installments) on the part of the
debtor, and (2) the sum of the cash price and non-finance charges.91

By requiring the petitioners to sign the credit documents and the promissory notes in blank, and then unilaterally filling them
up later on, respondent violated the Truth in Lending Act, and was remiss in its disclosure obligations. In one case, which the
Court finds applicable here, it was held:

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. 92(Emphases supplied)

However, the one-year period within which an action for violation of the Truth in Lending Act may be filed evidently prescribed
long ago, or sometime in 2001, one year after petitioners received the March 2000 demand letter which contained the illegal
charges.

The fact that petitioners later received several statements of account detailing its outstanding obligations does not cure
respondent’s breach. To repeat, the belated discovery of the true cost of credit does not reverse the ill effects of an already
consummated business decision.93

Neither may the statements be considered proposals sent to secure the petitioners’ conformity; they were sent after the
imposition and application of the interest rate, and not before. And even if it were to be presumed that these are proposals or
offers, there was no acceptance by petitioners. "No one receiving a proposal to modify a loan contract, especially regarding
interest, is obliged to answer the proposal."94

Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low initial interest rates, but actually
accompanied by provisions written in fine print that allow lenders to later on increase or decrease interest rates unilaterally,
without the consent of the borrower, and depending on complex and subjective factors. Because they have been lured into
these contracts by initially low interest rates, borrowers get caught and stuck in the web of subsequent steep rates and
penalties, surcharges and the like. Being ordinary individuals or entities, they naturally dread legal complications and cannot
afford court litigation; they succumb to whatever charges the lenders impose. At the very least, borrowers should be charged
rightly; but then again this is not possible in a one-sided credit system where the temptation to abuse is strong and the
willingness to rectify is made weak by the eternal desire for profit.

Given the above supposition, the Court cannot subscribe to respondent’s argument that in every repricing of petitioners’ loan
availment, they are given the right to question the interest rates imposed. The import of respondent’s line of reasoning cannot
be other than that if one out of every hundred borrowers questions respondent’s practice of unilaterally fixing interest rates,
then only the loan arrangement with that lone complaining borrower will enjoy the benefit of review or re-negotiation; as to the
99 others, the questionable practice will continue unchecked, and respondent will continue to reap the profits from such
unscrupulous practice. The Court can no more condone a view so perverse. This is exactly what the Court meant in the
immediately preceding cited case when it said that "the belated discovery of the true cost of credit does not reverse the ill
effects of an already consummated business decision;" 95 as to the 99 borrowers who did not or could not complain, the illegal
act shall have become a fait accompli– to their detriment, they have already suffered the oppressive rates.

Besides, that petitioners are given the right to question the interest rates imposed is, under the circumstances, irrelevant; we
have a situation where the petitioners do not stand on equal footing with the respondent. It is doubtful that any borrower who
finds himself in petitioners’ position would dare question respondent’s power to arbitrarily modify interest rates at any time. In
the second place, on what basis could any borrower question such power, when the criteria or standards – which are really
one-sided, arbitrary and subjective – for the exercise of such power are precisely lost on him?

For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to the 26th promissory notes,
petitioners are granted the option to prepay the loan or credit facility without penalty within 10 calendar days from the Interest
Setting Date if they are not agreeable to the interest rate fixed. It has been shown that the promissory notes are executed and
signed in blank, meaning that by the time petitioners learn of the interest rate, they are already bound to pay it because they
have already pre-signed the note where the rate is subsequently entered.

Besides, premium may not be placed upon a stipulation in a contract which grants one party the right to choose whether to
continue with or withdraw from the agreement if it discovers that what the other party has been doing all along is improper or
illegal.

Thus said, respondent’s arguments relative to the credit documents – that documentary evidence prevails over testimonial
evidence; that the credit documents are in proper form, presumed regular, and endure, against arbitrary claims by petitioners,
experienced business persons that they are, they signed questionable loan documents whose provisions for interest rates
were left blank, and yet they continued to pay the interests without protest for a number of years – deserve no consideration.

With regard to interest, the Court finds that since the escalation clause is annulled, the principal amount of the loan is subject
to the original or stipulated rate of interest, and upon maturity, the amount due shall be subject to legal interest at the rate of
12% per annum. This is the uniform ruling adopted in previous cases, including those cited here. 96 The interests paid by
petitioners should be applied first to the payment of the stipulated or legal and unpaid interest, as the case may be, and later,
to the capital or principal.97 Respondent should then refund the excess amount of interest that it has illegally imposed upon
petitioners; "[t]he amount to be refunded refers to that paid by petitioners when they had no obligation to do so."98 Thus, the
parties’ original agreement stipulated the payment of 19.5% interest; however, this rate was intended to apply only to the first
promissory note which expired on November 21, 1989 and was paid by petitioners; it was not intended to apply to the whole
duration of the loan. Subsequent higher interest rates have been declared illegal; but because only the rates are found to be
improper, the obligation to pay interest subsists, the same to be fixed at the legal rate of 12% per annum. However, the 12%
interest shall apply only until June 30, 2013. Starting July1, 2013, the prevailing rate of interest shall be 6% per annum
pursuant to our ruling in Nacar v. Gallery Frames 99 and Bangko Sentral ng Pilipinas-Monetary Board Circular No. 799.

Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment thereon, when due, shall constitute
default, and a penalty charge of 24% per annum based on the defaulted principal amount shall be imposed. Petitioners claim
that this penalty should be excluded from the foreclosure amount or bid price because the Real Estate Mortgage and the
Supplement thereto did not specifically include it as part of the secured amount. Respondent justifies its inclusion in the
secured amount, saying that the purpose of the penalty or a penal clause is to ensure the performance of the obligation and
substitute for damages and the payment of interest in the event of non-compliance.100 Respondent adds that the imposition
and collection of a penalty is a normal banking practice, and the standard rate per annum for all commercial banks, at the
time, was 24%. Its inclusion as part of the secured amount in the mortgage agreements is thus valid and necessary.

The Court sustains petitioners’ view that the penalty may not be included as part of the secured amount. Having found the
credit agreements and promissory notes to be tainted, we must accord the same treatment to the mortgages. After all, "[a]
mortgage and a note secured by it are deemed parts of one transaction and are construed together." 101 Being so tainted and
having the attributes of a contract of adhesion as the principal credit documents, we must construe the mortgage contracts
strictly, and against the party who drafted it. An examination of the mortgage agreements reveals that nowhere is it stated that
penalties are to be included in the secured amount. Construing this silence strictly against the respondent, the Court can only
conclude that the parties did not intend to include the penalty allowed under PN 9707237 as part of the secured amount.
Given its resources, respondent could have – if it truly wanted to – conveniently prepared and executed an amended
mortgage agreement with the petitioners, thereby including penalties in the amount to be secured by the encumbered
properties. Yet it did not.

With regard to attorney’s fees, it was plain error for the CA to have passed upon the issue since it was not raised by the
petitioners in their appeal; it was the respondent that improperly brought it up in its appellee’s brief, when it should have
interposed an appeal, since the trial court’s Decision on this issue is adverse to it. It is an elementary principle in the subject of
appeals that an appellee who does not himself appeal cannot obtain from the appellate court any affirmative relief other than
those granted in the decision of the court below.

x x x [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to make counter assignments of
error in ordinary actions, when the purpose is merely to defend himself against an appeal in which errors are alleged to have
been committed by the trial court both in the appreciation of facts and in the interpretation of the law, in order to sustain the
judgment in his favor but not when his purpose is to seek modification or reversal of the judgment, in which case it is
necessary for him to have excepted to and appealed from the judgment.102

Since petitioners did not raise the issue of reduction of attorney’s fees, the CA possessed no authority to pass upon it at the
instance of respondent. The ruling of the trial court in this respect should remain undisturbed.

For the fixing of the proper amounts due and owing to the parties – to the respondent as creditor and to the petitioners who
are entitled to a refund as a consequence of overpayment considering that they paid more by way of interest charges than the
12% per annum103 herein allowed – the case should be remanded to the lower court for proper accounting and computation,
applying the following procedure:

1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;

2. All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall carry an interest rate of only
12% per annum.104 Thus, interest payment made in excess of 12% on the 2nd promissory note shall immediately be
applied to the principal, and the principal shall be accordingly reduced. The reduced principal shall then be subjected
to the 12%105 interest on the 3rd promissory note, and the excess over 12% interest payment on the 3rd promissory
note shall again be applied to the principal, which shall again be reduced accordingly. The reduced principal shall then
be subjected to the 12% interest on the 4th promissory note, and the excess over12% interest payment on the 4th
promissory note shall again be applied to the principal, which shall again be reduced accordingly. And so on and so
forth;

3. After the above procedure is carried out, the trial court shall be able to conclude if petitioners a) still have an
OUTSTANDING BALANCE/OBLIGATION or b) MADE PAYMENTS OVER AND ABOVE THEIR TOTAL
OBLIGATION (principal and interest);

4. Such outstanding balance/obligation, if there be any, shall then be subjected to a 12% per annum interest from
October 28, 1997 until January 14, 1999, which is the date of the auction sale;

5. Such outstanding balance/obligation shall also be charged a 24% per annum penalty from August 14, 1997 until
January 14, 1999. But from this total penalty, the petitioners’ previous payment of penalties in the amount
of P202,000.00made on January 27, 1998106 shall be DEDUCTED;

6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and executory award of 1% attorney’s
fees shall be ADDED;

7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorney’s fees (6.) shall be DEDUCTED from
the bid price of P4,324,172.96. The penalties (5.) are not included because they are not included in the secured
amount;

8. The difference in (7.) [P4,324,172.96 LESS sum total of the outstanding balance (3.), interest (4.), and 1%
attorney’s fees (6.)] shall be DELIVERED TO THE PETITIONERS;

9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208;

10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that petitioners made an
OVERPAYMENT, the interest (4.), penalties (5.), and the award of 1% attorney’s fees (6.) shall be DEDUCTED from
the overpayment. There is no outstanding balance/obligation precisely because petitioners have paid beyond the
amount of the principal and interest;

11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and award of 1% attorney’s fees (6.),
the excess shall be RETURNED to the petitioners, with legal interest, under the principle of solutio indebiti; 107

12. Likewise, if the overpayment exceeds the total amount of interest (4.) and award of 1% attorney’s fees (6.), the
trial court shall INVALIDATE THE EXTRAJUDICIAL FORECLOSURE AND SALE;

13. HOWEVER, if the total amount of interest (4.) and award of 1% attorney’s fees (6.) exceed petitioners’
overpayment, then the excess shall be DEDUCTED from the bid price of P4,324,172.96;

14. The difference in (13.) [P4,324,172.96 LESS sum total of the interest (4.) and 1% attorney’s fees (6.)] shall be
DELIVERED TO THE PETITIONERS;

15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208. The outstanding penalties, if
any, shall be collected by other means.

From the above, it will be seen that if, after proper accounting, it turns out that the petitioners made payments
exceeding what they actually owe by way of principal, interest, and attorney’s fees, then the mortgaged properties
need not answer for any outstanding secured amount, because there is not any; quite the contrary, respondent must
refund the excess to petitioners. In such case, the extrajudicial foreclosure and sale of the properties shall be
1âwphi1

declared null and void for obvious lack of basis, the case being one of solutio indebiti instead. If, on the other hand, it
turns out that petitioners’ overpayments in interests do not exceed their total obligation, then the respondent may
consolidate its ownership over the properties, since the period for redemption has expired. Its only obligation will be to
return the difference between its bid price (P4,324,172.96) and petitioners’ total obligation outstanding – except
penalties – after applying the latter’s overpayments.

WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision of the Court of Appeals in CA-
G.R. CV No. 79650 is ANNULLED and SET ASIDE. Judgment is hereby rendered as follows:

1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory Notes are DECLARED NULL AND
VOID, and such notes shall instead be subject to interest at the rate of twelve percent (12%) per annum up to June
30, 2013, and starting July 1, 2013, six percent (6%) per annum until full satisfaction;

2. The penalty charge imposed in Promissory Note No. 9707237 shall be EXCLUDED from the amounts secured by
the real estate mortgages;

3. The trial court’s award of one per cent (1%) attorney’s fees is REINSTATED;
 4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of Kalibo, Aklan for the computation of
overpayments made by petitioners spouses Eduardo and Lydia Silos to respondent Philippine National Bank, taking
into consideration the foregoing dispositions, and applying the procedure hereinabove set forth;

5. Thereafter, the trial court is ORDERED to make a determination as to the validity of the extrajudicial foreclosure
and sale, declaring the same null and void in case of overpayment and ordering the release and return of Transfer
Certificates of Title Nos. T-14250 and TCT T-16208 to petitioners, or ordering the delivery to the petitioners of the
difference between the bid price and the total remaining obligation of petitioners, if any;

6. In the meantime, the respondent Philippine National Bank is ENJOINED from consolidating title to Transfer
Certificates of Title Nos. T-14250 and T-16208 until all the steps in the procedure above set forth have been taken
and applied;

7. The reimbursement of the excess in the bid price of P377,505.99, which respondent Philippine National Bank is
ordered to reimburse petitioners, should be HELD IN ABEYANCE until the true amount owing to or owed by the
parties as against each other is determined;

8. Considering that this case has been pending for such a long time and that further proceedings, albeit
uncomplicated, are required, the trial court is ORDERED to proceed with dispatch.

SO ORDERED.

SECOND DIVISION

G.R. No. 195166, July 08, 2015

SPOUSES SALVADOR ABELLA AND ALMA ABELLA, Petitioners, v. SPOUSES ROMEO ABELLA AND ANNIE ABELLA, Respondents.

DECISION

LEONEN, J.:

This resolves a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying that judgment be rendered reversing and
setting aside the September 30, 2010 Decision1 and the January 4, 2011 Resolution2 of the Court of Appeals Nineteenth Division in CA-
G.R. CV No. 01388. The Petition also prays that respondents Spouses Romeo and Annie Abella be ordered to pay petitioners Spouses
Salvador and Alma Abella 2.5% monthly interest plus the remaining balance of the amount loaned.

The assailed September 30, 2010 Decision of the Court of Appeals reversed and set aside the December 28, 2005 Decision3 of the
Regional Trial Court, Branch 8, Kalibo, Aklan in Civil Case No. 6627. It directed petitioners to pay respondents P148,500.00 (plus
interest), which was the amount respondents supposedly overpaid. The assailed January 4, 2011 Resolution of the Court of Appeals
denied petitioners' Motion for Reconsideration.

The Regional Trial Court's December 28, 2005 Decision ordered respondents to pay petitioners the supposedly unpaid loan balance of
P300,000.00 plus the allegedly stipulated interest rate of 30% per annum, as well as litigation expenses and attorney's fees. 4 redarclaw

On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a Complaint 5 for sum of money and damages with prayer for
preliminary attachment against respondents Spouses Romeo and Annie Abella before the Regional Trial Court, Branch 8, Kalibo, Aklan.
The case was docketed as Civil Case No. 6627.6 redarclaw

In their Complaint, petitioners alleged that respondents obtained a loan from them in the amount of P500,000.00. The loan was
evidenced by an acknowledgment receipt dated March 22, 1999 and was payable within one (1) year. Petitioners added that
respondents were able to pay a total of P200,000.00—P100,000.00 paid on two separate occasions—leaving an unpaid balance of
P300,000.00.7 redarclaw

In their Answer8 (with counterclaim and motion to dismiss), respondents alleged that the amount involved did not pertain to a loan they
obtained from petitioners but was part of the capital for a joint venture involving the lending of money.9 redarclaw

Specifically, respondents claimed that they were approached by petitioners, who proposed that if respondents were to "undertake the
management of whatever money [petitioners] would give them, [petitioners] would get 2.5% a month with a 2.5% service fee to
[respondents]."10 The 2.5% that each party would be receiving represented their sharing of the 5% interest that the joint venture was
supposedly going to charge against its debtors. Respondents further alleged that the one year averred by petitioners was not a deadline
for payment but the term within which they were to return the money placed by petitioners should the joint venture prove to be not
lucrative. Moreover, they claimed that the entire amount of P500,000.00 was disposed of in accordance with their agreed terms and
conditions and that petitioners terminated the joint venture, prompting them to collect from the joint venture's borrowers. They were,
however, able to collect only to the extent of P200,000.00; hence, the P300,000.00 balance remained unpaid.11 redarclaw

In the Decision12 dated December 28, 2005, the Regional Trial Court ruled in favor of petitioners. It noted that the terms of the
acknowledgment receipt executed by respondents clearly showed that: (a) respondents were indebted to the extent of P500,000.00;
(b) this indebtedness was to be paid within one (1) year; and (c) the indebtedness was subject to interest. Thus, the trial court
concluded that respondents obtained a simple loan, although they later invested its proceeds in a lending enterprise. 13 The Regional
Trial Court adjudged respondents solidarity liable to petitioners. The dispositive portion of its Decision reads:
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WHEREFORE, premises considered, judgment is hereby rendered: LawlibraryofCR Alaw

1. Ordering the defendants jointly and severally to pay the plaintiffs the sum of P300,000.00 with interest at the rate of
30% per annum from the time the complaint was filed on July 31, 2002 until fully paid; chanRoblesvirtualLawlib rary

2. Ordering the defendants to pay the plaintiffs the sum of P2,227.50 as reimbursement for litigation expenses, and
another sum of P5,000.00 as attorney's fees.

For lack of legal basis, plaintiffs' claim for moral and exemplary damages has to be denied, and for lack of merit the counter-claim is
ordered dismissed.14
In the Order dated March 13, 2006,15 the Regional Trial Court denied respondents' Motion for Reconsideration.

On respondents' appeal, the Court of Appeals ruled that while respondents had indeed entered into a simple loan with petitioners,
respondents were no longer liable to pay the outstanding amount of P300,000.00. 16 redarclaw
The Court of Appeals reasoned that the loan could not have earned interest, whether as contractually stipulated interest or as interest
in the concept of actual or compensatory damages. As to the loan's not having earned stipulated interest, the Court of Appeals
anchored its ruling on Article 1956 of the Civil Code, which requires interest to be stipulated in writing for it to be due.17 The Court of
Appeals noted that while the acknowledgement receipt showed that interest was to be charged, no particular interest rate was
specified.18 Thus, at the time respondents were making interest payments of 2.5% per month, these interest payments were invalid for
not being properly stipulated by the parties. As to the loan's not having earned interest in the concept of actual or compensatory
damages, the Court of Appeals, citing Eusebio-Calderon v. People,19 noted that interest in the concept of actual or compensatory
damages accrues only from the time that demand (whether judicial or extrajudicial) is made. It reasoned that since respondents
received petitioners' demand letter only on July 12, 2002, any interest in the concept of actual or compensatory damages due should
be reckoned only from then. Thus, the payments for the 2.5% monthly interest made after the perfection of the loan in 1999 but before
the demand was made in 2002 were invalid.20 redarclaw

Since petitioners' charging of interest was invalid, the Court of Appeals reasoned that all payments respondents made by way of
interest should be deemed payments for the principal amount of P500,000.00. 21 redarclaw

The Court of Appeals further noted that respondents made a total payment of P648,500.00, which, as against the principal amount of
P500,000.00, entailed an overpayment of P148,500.00. Applying the principle of solutio indebiti, the Court of Appeals concluded that
petitioners were liable to reimburse respondents for the overpaid amount of P148,500.00. 22 The dispositive portion of the assailed Court
of Appeals Decision reads:
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WHEREFORE, the Decision of the Regional Trial Court is hereby REVERSED and SET ASIDE, and a new one issued, finding that the
Spouses Salvador and Alma Abella are DIRECTED to jointly and severally pay Spouses Romeo and Annie Abella the amount of
P148,500.00, with interest of 6% interest (sic) per annum to be computed upon receipt of this decision, until full satisfaction thereof.
Upon finality of this judgment, an interest as the rate of 12% per annum, instead of 6%, shall be imposed on the amount due, until full
payment thereof.23
In the Resolution24 dated January 4, 2011, the Court of Appeals denied petitioners' Motion for Reconsideration.

Aggrieved, petitioners filed the present appeal25 where they claim that the Court of Appeals erred in completely striking off interest
despite the parties' written agreement stipulating it, as well as in ordering them to reimburse and pay interest to respondents.

In support of their contentions, petitioners cite Article 1371 of the Civil Code,26 which calls for the consideration of the contracting
parties' contemporaneous and subsequent acts in determining their true intention. Petitioners insist that respondents' consistent
payment of interest in the year following the perfection of the loan showed that interest at 2.5% per month was properly agreed upon
despite its not having been expressly stated in the acknowledgment receipt. They add that during the proceedings before the Regional
Trial Court, respondents admitted that interest was due on the loan.27 redarclaw

In their Comment,28 respondents reiterate the Court of Appeals' findings that no interest rate was ever stipulated by the parties and
that interest was not due and demandable at the time they were making interest payments.29 redarclaw

In their Reply,30 petitioners argue that even though no interest rate was stipulated in the acknowledgment receipt, the case fell under
the exception to the Parol Evidence Rule. They also argue that there exists convincing and sufficiently credible evidence to supplement
the imperfection of the acknowledgment receipt.31 redarclaw

For resolution are the following issues: LawlibraryofCRA law

First, whether interest accrued on respondents' loan from petitioners, If so, at what rate?

Second, whether petitioners are liable to reimburse respondents for the Litter's supposed excess payments and for interest.

As noted by the Court of Appeals and the Regional Trial Court, respondents entered into a simple loan or mutuum, rather than a joint
venture, with petitioners.

Respondents' claims, as articulated in their testimonies before the trial court, cannot prevail over the clear terms of the document
attesting to the relation of the parties. "If the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control."32 redarclaw

Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual relation is one of simple loan
or mutuum:
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Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use
the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable
thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a
loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower.

....

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to
the creditor an equal amount of the same kind and quality. (Emphasis supplied)
On March 22, 1999, respondents executed an acknowledgment receipt to petitioners, which states:
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Batan, Aklan
March 22, 1999

This is to acknowledge receipt of the Amount of Five Hundred Thousand (P500,000.00) Pesos from Mrs. Alma R. Abella, payable within
one (1) year from date hereof with interest.

Annie C. Abella (sgd.) Romeo M. Abella (sgd.)33

(Emphasis supplied)
The text of the acknowledgment receipt is uncomplicated and straightforward. It attests to: first, respondents' receipt of the sum of
P500,000.00 from petitioner Alma Abella; second, respondents' duty to pay tack this amount within one (1) year from March 22, 1999;
and third, respondents' duty to pay interest. Consistent with what typifies a simple loan, petitioners delivered to respondents with the
corresponding condition lat respondents shall pay the same amount to petitioners within one (1) year.

II

Although we have settled the nature of the contractual relation between petitioners and respondents, controversy persists over
respondents' duty to pay conventional interest, i.e., interest as the cost of borrowing money. 34 redarclaw

Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be due unless it has been expressly stipulated in writing."
On the matter of interest, the text of the acknowledgment receipt is simple, plain, and unequivocal. It attests to the contracting parties'
intent to subject to interest the loan extended by petitioners to respondents. The controversy, however, stems from the
acknowledgment receipt's failure to state the exact rate of interest.

Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a rate. In Spouses Toring v. Spouses
Olan,35 this court clarified the effect of Article 1956 of the Civil Code and noted that the legal rate of interest (then at 12%) is to apply:
"In a loan or forbearance of money, according to the Civil Code, the interest due should be that stipulated in writing, and in the absence
thereof, the rate shall be 12% per annum."36 redarclaw

Spouses Toring cites and restates (practically verbatim) what this court settled in Security Bank and Trust Company v. Regional Trial
Court of Makati, Branch 61: "In a loan or forbearance of money, the interest due should be that stipulated in writing, and in the
absence thereof the rate shall be 12% per annum."37 redarclaw

Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of Appeals, which, in turn, stated:38
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1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 39 (Emphasis supplied)
The rule is not only definite; it is cast in mandatory language. From Eastern Shipping to Security Bank to Spouses Toring, jurisprudence
has repeatedly used the word "shall," a term that has long been settled to denote something imperative or operating to impose a
duty.40 Thus, the rule leaves no room for alternatives or otherwise does not allow for discretion. It requires the application of the legal
rate of interest.

Our intervening Decision in Nacar v. Gallery Frames41 recognized that the legal rate of interest has been reduced to 6% per annum:
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Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16, 2013, approved
the amendment of Section 2 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799, Series of 2013, effective July
1, 2013, the pertinent portion of which reads:
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The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing the rate of interest in the
absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905, Series of 1982:
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Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the
absence of an express contract as to such rate of interest, shall be six percent (6%) per annum.

Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and
4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the parties, the rate of
legal interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments shall no longer be twelve
percent (12%) per annum — as reflected in the case of Eastern Shipping Lines and Subsection X305.1 of the Manual of Regulations for
Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its
amendment by BSP-MB Circular No. 799 — but will now be six percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively and not retroactively. Consequently, the twelve percent (12%) per
annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be the
prevailing rate of interest when applicable.42 (Emphasis supplied, citations omitted)
Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013 and Nacar retain the definite and mandatory framing of
the rule articulated in Eastern Shipping, Security Bank, and Spouses Toring. Nacar even restates Eastern Shipping:
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To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines are accordingly modified to
embody BSP-MB Circular No. 799, as follows: LawlibraryofCR Ala w

....

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a Joan or forbearance of money, the
interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code.43 (Emphasis supplied, citations omitted)

Thus, it remains that where interest was stipulated in writing by the debtor and creditor in a simple loan or mutuum, but no exact
interest rate was mentioned, the legal rate of interest shall apply. At present, this is 6% per annum, subject to Nacar's qualification on
prospective application.

Applying this, the loan obtained by respondents from petitioners is deemed subjected to conventional interest at the rate of 12% per
annum, the legal rate of interest at the time the parties executed their agreement. Moreover, should conventional interest still be due
as of July 1, 2013, the rate of 12% per annum shall persist as the rate of conventional interest.

This is so because interest in this respect is used as a surrogate for the parties' intent, as expressed as of the time of the execution of
their contract. In this sense, the legal rate of interest is an affirmation of the contracting parties' intent; that is, by their contract's
silence on a specific rate, the then prevailing legal rate of interest shall be the cost of borrowing money. This rate, which by their
contract the parties have settled on, is deemed to persist regardless of shifts in the legal rate of interest. Stated otherwise, the legal
rate of interest, when applied as conventional interest, shall always be the legal rate at the time the agreement was executed and shall
not be susceptible to shifts in rate.

Petitioners, however, insist on conventional interest at the rate of 2.5% per month or 30% per annum. They argue that the
acknowledgment receipt fails to show the complete and accurate intention of the contracting parties. They rely on Article 1371 of the
Civil Code, which provides that the contemporaneous and subsequent acts of the contracting parties shall be considered should there
be a need to ascertain their intent.44 In addition, they claim that this case falls under the exceptions to the Parol Evidence Rule, as
spelled out in Rule 130, Section 9 of the Revised Rules on Evidence.45 redarclaw

It is a basic precept in legal interpretation and construction that a rule or provision that treats a subject with specificity prevails over a
rule or provision that treats a subject in general terms.46 redarclaw

The rule spelled out in Security Bank and Spouses Toring is anchored on Article 1956 of the Civil Code and specifically governs simple
loans or mutuum. Mutuum is a type of nominate contract that is specifically recognized by the Civil Code and for which the Civil Code
provides a specific set of governing rules: Articles 1953 to 1961. In contrast, Article 11371 is among the Civil Code provisions generally
dealing with contracts. As this case particularly involves a simple loan, the specific rule spelled out in Security Bank and Spouses
Toring finds preferential application as against Article 1371.

Contrary to petitioners' assertions, there is no room for entertaining extraneous (or parol) evidence. In Spouses Bonifacio and Lucia
Paras v. Kimwa Construction and Development Corporation,47 we spelled out the requisites for the admission of parol evidence:
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In sum, two (2) things must be established for parol evidence to be admitted: first, that the existence of any of the four (4) exceptions
has been put in issue in a party's pleading or has not been objected to by the adverse party; and second, that the parol evidence
sought to be presented serves to form the basis of the conclusion proposed by the presenting party.48
The issue of admitting parol evidence is a matter that is proper to the trial, not the appellate, stage of a case. Petitioners raised the
issue of applying the exceptions to the Parol Evidence Rule only in the Reply they filed before this court. This is the last pleading that
either of the parties has filed in the entire string of proceedings culminating in this Decision. It is, therefore, too late for petitioners to
harp on this rule. In any case, what is at issue is not admission of evidence per se, but the appreciation given to the evidence adduced
by the parties. In the Petition they filed before this court, petitioners themselves acknowledged that checks supposedly attesting to
payment of monthly interest at the rate of 2.5% were admitted by the trial court (and marked as Exhibits "2," "3," "4," "5," "6," "7,"
and "8").49 What petitioners have an issue with is not the admission of these pieces of evidence but how these have not been
appreciated in a manner consistent with the conclusions they advance.

Even if it can be shown that the parties have agreed to monthly interest at the rate of 2.5%, this is unconscionable. As emphasized
in Castro v. Tan,50 the willingness of the parties to enter into a relation involving an unconscionable interest rate is inconsequential to
the validity of the stipulated rate:
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The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and
unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It
has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such
imposition as righteous and as one that may be sustained within the sphere of public or private morals. 51
The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals, and the law." 52 redarclaw

In determining whether the rate of interest is unconscionable, the mechanical application of pre-established floors would be wanting.
The lowest rates that have previously been considered unconscionable need not be an impenetrable minimum. What is more crucial is a
consideration of the parties' contexts. Moreover, interest rates must be appreciated in light of the fundamental nature of interest as
compensation to the creditor for money lent to another, which he or she could otherwise have used for his or her own purposes at the
time it was lent. It is not the default vehicle for predatory gain. As such, interest need only be reasonable. It ought not be a supine
mechanism for the creditor's unjust enrichment at the expense of another.

Petitioners here insist upon the imposition of 2.5% monthly or 30% annual interest. Compounded at this rate, respondents' obligation
would have more than doubled—increased to 219.7% of the principal—by the end of the third year after which the loan was contracted
if the entire principal remained unpaid. By the end of the ninth year, it would have multiplied more than tenfold (or increased to
1,060.45%). In 2015, this would have multiplied by more than 66 times (or increased to 6,654.17%). Thus, from an initial loan of only
P500,000.00, respondents would be obliged to pay more than P33 million. This is grossly unfair, especially since up to the fourth year
from when the loan was obtained, respondents had been assiduously delivering payment. This reduces their best efforts to satisfy their
obligation into a protracted servicing of a rapacious loan.

The legal rate of interest is the presumptive reasonable compensation for borrowed money. While parties are free to deviate from this,
any deviation must be reasonable and fair. Any deviation that is far-removed is suspect. Thus, in cases where stipulated interest is
more than twice the prevailing legal rate of interest, it is for the creditor to prove that this rate is required by prevailing market
conditions. Here, petitioners have articulated no such justification.

In sum, Article 1956 of the Civil Code, read in light of established jurisprudence, prevents the application of any interest rate other than
that specifically provided for by the parties in their loan document or, in lieu of it, the legal rate. Here, as the contracting parties failed
to make a specific stipulation, the legal rate must apply. Moreover, the rate that petitioners adverted to is unconscionable. The
conventional interest due on the principal amount loaned by respondents from petitioners is held to be 12% per annum.

III

Apart from respondents' liability for conventional interest at the rate of 12% per annum, outstanding conventional interest—if any is
due from respondents—shall itself earn legal interest from the time judicial demand was made by petitioners, i.e., on July 31, 2002,
when they filed their Complaint. This is consistent with Article 2212 of the Civil Code, which provides:
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Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this
point.
So, too, Nacar states that "the interest due shall itself earn legal interest from the time it is judicially demanded."53 redarclaw

Consistent with Nacar, as well as with our ruling in Rivera v. Spouses Chua,54 the interest due on conventional interest shall be at the
rate of 12% per annum from July 31, 2002 to June 30, 2013. Thereafter, or starting July 1, 2013, this shall be at the rate of 6% per
annum.

IV

Proceeding from these premises, we find that respondents made an overpayment in the amount of P3,379.17.

As acknowledged by petitioner Salvador Abella, respondents paid a total of P200,000.00, which was charged against the principal
amount of P500,000.00. The first payment of P100,000.00 was made on June 30, 2001,55 while the second payment of P100,000.00
was made on December 30, 2001.56 redarclaw

The Court of Appeals' September 30, 2010 Decision stated that respondents paid P6,000.00 in March 1999.57 redarclaw

The Pre-Trial Order dated December 2, 2002,58 stated that the parties admitted that "from the time the principal sum of P500,000.00
was borrowed from [petitioners], [respondents] ha[d] been religiously paying"59 what was supposedly interest "at the rate of 2.5% per
month."60 redarclaw

From March 22, 1999 (after the loan was perfected) to June 22, 2001 (before respondents' payment of P100,000.00 on June 30, 2001,
which was deducted from the principal amount of P500,000.00), the 2.5% monthly "interest" was pegged to the principal amount of
P500,000.00. These monthly interests, thus, amounted to P12,500.00 per month. Considering that the period from March 1999 to June
2001 spanned twenty-seven (27) months, respondents paid a total of P337,500.00.61 redarclaw

From June 22, 2001 up to December 22, 2001 (before respondents' payment of another P100,000.00 on December 30, 2001, which
was deducted from the remaining principal amount of P400,000.00), the 2.5% monthly "interest" was pegged to the remaining
principal amount of P400,000.00. These monthly interests, thus, amounted to P10,000.00 per month. Considering that this period
spanned six (6) months, respondents paid a total of P60,000.00.62 redarclaw

From after December 22, 2001 up to June 2002 (when petitioners filed their Complaint), the 2.5% monthly "interest" was pegged to
the remaining principal amount of P300,000.00. These monthly interests, thus, amounted to P7,500.00 per month. Considering that
this period spanned six (6) months, respondents paid a total of P45,000.00.63 redarclaw

Applying these facts and the properly applicable interest rate (for conventional interest, 12% per annum; for interest on conventional
interest, 12% per annum from July 31, 2002 up to June 30, 2013 and 6% per annum henceforth), the following conclusions may be
drawn: LawlibraryofCRA law

By the end of the first year following the perfection of the loan, or as of March 21, 2000, P560,000.00 was due from respondents. This
consisted cf the principal of P500,000.00 and conventional interest of P60,000.00.

Within this first year, respondents made twelve (12) monthly payments totalling P150,000.00 (P12,500.00 each from April 1999 to
March 2000). This was in addition to their initial payment of P6,000.00 in March 999.

Application of payments must be in accordance with Article 1253 of the Civil Code, which reads:
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Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been
covered.
Thus, the payments respondents made must first be reckoned as interest payments. Thereafter, any excess payments shall be charged
against the principal. As respondents paid a total of P156,000.00 within the first year, the conventional interest of P60,000.00 must be
deemed fully paid and the remaining amount that respondents paid (i.e., P96,000.00) is to be charged against the principal. This yields
a balance of P404,000.00.

By the end of the second year following the perfection of the loan, or as of March 21, 2001, P452,480.00 was due from respondents.
This consisted of the outstanding principal of P404,000.00 and conventional interest of P48,480.00.

Within this second year, respondents completed another round of twelve (12) monthly payments totaling P150,000.00.

Consistent with Article 1253 of the Civil Code, as respondents paid a total of P156,000.00 within the second year, the conventional
interest of P48,480.00 must be deemed fully paid and the remaining amount that respondents paid (i.e., P101,520.00) is to be charged
against the principal. This yields a balance of P302,480.00.

By the end of the third year following the perfection of the loan, or as of March 21, 2002, P338,777.60 was due from respondents. This
consists of he outstanding principal of P302,480.00 and conventional interest of P36,297.60.

Within this third year, respondents paid a total of P320,000.00, as follows: LawlibraryofCR Alaw

(a) Between March 22, 2001 and June 30, 2001, respondents completed three (3) monthly
payments of P12,500.00 each, totaling P37,500.00.
(b) On June 30, 2001, respondents paid P100,000.00, which was charged as principal
payment.
(c) Between June 30, 2001 and December 30, 2001, respondents delivered monthly payments
of P10,000.00 each. At this point, the monthly payments no longer amounted to
P12,500.00 each because the supposed monthly interest payments were pegged to the
supposedly remaining principal of P400,000.00. Thus, during this period, they paid a total
of six (6) monthly payments totaling P60,000.00.
(d) On December 30, 2001, respondents paid P100,000.00, which, like the June 30, 2001
payment, was charged against the principal.
(e) From the end of December 2002 to the end of February 2002, respondents delivered
monthly payments of P7,500.00 each. At this point, the supposed monthly interest
payments were now pegged to the supposedly remaining principal of P300,000.00. Thus,
during this period, they delivered three (3) monthly payments totaling P22,500.00.
Consistent with Article 1253 of the Civil Code, as respondents paid a total of P320,000.00 within the third year, the conventional
interest of P36,927.50 must be deemed fully paid and the remaining amount that respondents paid (i.e., P283,702.40) is to be charged
against the principal. This yields a balance of P18,777.60.

By the end of the fourth year following the perfection of the loan, or as of March 21, 2003, P21,203.51 would have been due from
respondents. This consists of: (a) the outstanding principal of P18,777.60, (b) conventional interest of P2,253.31, and (c) interest due
on conventional interest starting from July 31, 2002, the date of judicial demand, in the amount of P172.60. The last (i.e., interest on
interest) must be pro-rated. There were only 233 days from July 31, 2002 (the date of judicial demand) to March 21, 2003 (the end of
the fourth year); this left 63.83% of the fourth year, within which interest on interest might have accrued. Thus, the full annual interest
on interest of 12% per annum could not have been completed, and only the proportional amount of 7.66% per annum may be properly
imposed for the remainder of the fourth year.

From the end of March 2002 to June 2002, respondents delivered three (3) more monthly payments of P7,500.00 each. Thus, during
this period, they delivered three (3) monthly payments totalling P22,500.00.

At this rate, however, payment would have been completed by respondents even before the end of the fourth year. Thus, for
precision, it is more appropriate to reckon the amounts due as against payments made on monthly, rather than an
annual, basis.

By April 21, 2002, P18,965.38 (i.e., remaining principal of P18,777.60 plus pro-rated monthly conventional interest at 1%, amounting
to P187.78) would have been due from respondents. Deducting the monthly payment of P7,500.00 for the preceding month in a
manner consistent with Article 1253 of the Civil Code would yield a balance of P11,465.38.

By May 21, 2002, P11,580.03 (i.e., remaining principal of P11,465.38 plus pro-rated monthly conventional interest at 1%, amounting
to P114.65) would have been due from respondents. Deducting the monthly payment of P7,500.00 for the preceding month in a
manner consistent with Article 1253 of the Civil Code would yield a balance of P4,080.03.

By June 21, 2002, P4,120.83 (i.e., remaining principal of P4,080.03 plus pro-rated monthly conventional interest at 1%, amounting to
P40.80) would have been due from respondents. Deducting the monthly payment of P7,500.00 for the preceding month in a manner
consistent with Article 1253 of the Civil Code would yield a negative balance of P3,379.17.

Thus, by June 21, 2002, respondents had not only fully paid the principal and all the conventional interest that had accrued on their
loan. By this date, they also overpaid P3,379.17. Moreover, while hypothetically, interest on conventional interest would not have run
from July 31, 2002, no such interest accrued since there was no longer any conventional interest due from respondents by then.

As respondents made an overpayment, the principle of solutio indebiti as provided by Article 2154 of the Civil Code64 applies. Article
2154 reads:
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Article 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation
to return it arises.
In Moreno-Lentfer v. Wolff,65 this court explained the application of solutio indebiti:
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The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself unjustly at the expense of
another. It applies where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and
the person who received the payment, and (2) the payment is made through mistake, and not through liberality or some other cause. 66
As respondents had already fully paid the principal and all conventional interest that had accrued, they were no longer obliged to make
further payments. Any further payment they made was only because of a mistaken impression that they were still due. Accordingly,
petitioners are now bound by a quasi-contractual obligation to return any and all excess payments delivered by respondents.

Nacar provides that "[w]hen an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum."67 This applies to obligations arising
from quasi-contracts such as solutio indebiti.
Further, Article 2159 of the Civil Code provides:
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Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of money is involved, or shall be liable for
fruits received or which should have been received if the thing produces fruits.

He shall furthermore be answerable for any loss or impairment of the thing from any cause, and for damages to the person who
delivered the thing, until it is recovered.
Consistent however, with our finding that the excess payment made by respondents were borne out of a mere mistake that it was due,
we find it in the better interest of equity to no longer hold petitioners liable for interest arising from their quasi-contractual obligation.

Nevertheless, Nacar also provides: LawlibraryofCRAla w

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit. 68

Thus, interest at the rate of 6% per annum may be properly imposed on the total judgment award. This shall be reckoned from the
finality of this Decision until its full satisfaction.

WHEREFORE, the assailed September 30, 2010 Decision and the January 4, 2011 Resolution of the Court of Appeals Nineteenth
Division in CA-G.R. CV No. 01388 are SET ASIDE. Petitioners Spouses Salvador and Alma Abella are DIRECTED to jointly and
severally reimburse respondents Spouses Romeo and Annie Abella the amount of P3,379.17, which respondents have overpaid.

A legal interest of 6% per annum shall likewise be imposed on the total judgment award from the finality of this Decision until its full
satisfaction.

SO ORDERED. cralawlawlibrary

SECOND DIVISION

G.R. No. 195166, July 08, 2015

SPOUSES SALVADOR ABELLA AND ALMA ABELLA, Petitioners, v. SPOUSES ROMEO ABELLA AND ANNIE ABELLA, Respondents.

DECISION

LEONEN, J.:

This resolves a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying that judgment be rendered reversing and
setting aside the September 30, 2010 Decision1 and the January 4, 2011 Resolution2 of the Court of Appeals Nineteenth Division in CA-
G.R. CV No. 01388. The Petition also prays that respondents Spouses Romeo and Annie Abella be ordered to pay petitioners Spouses
Salvador and Alma Abella 2.5% monthly interest plus the remaining balance of the amount loaned.

The assailed September 30, 2010 Decision of the Court of Appeals reversed and set aside the December 28, 2005 Decision3 of the
Regional Trial Court, Branch 8, Kalibo, Aklan in Civil Case No. 6627. It directed petitioners to pay respondents P148,500.00 (plus
interest), which was the amount respondents supposedly overpaid. The assailed January 4, 2011 Resolution of the Court of Appeals
denied petitioners' Motion for Reconsideration.

The Regional Trial Court's December 28, 2005 Decision ordered respondents to pay petitioners the supposedly unpaid loan balance of
P300,000.00 plus the allegedly stipulated interest rate of 30% per annum, as well as litigation expenses and attorney's fees. 4 redarclaw

On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a Complaint5 for sum of money and damages with prayer for
preliminary attachment against respondents Spouses Romeo and Annie Abella before the Regional Trial Court, Branch 8, Kalibo, Aklan.
The case was docketed as Civil Case No. 6627.6 redarclaw

In their Complaint, petitioners alleged that respondents obtained a loan from them in the amount of P500,000.00. The loan was
evidenced by an acknowledgment receipt dated March 22, 1999 and was payable within one (1) year. Petitioners added that
respondents were able to pay a total of P200,000.00—P100,000.00 paid on two separate occasions—leaving an unpaid balance of
P300,000.00.7 redarclaw

In their Answer8 (with counterclaim and motion to dismiss), respondents alleged that the amount involved did not pertain to a loan they
obtained from petitioners but was part of the capital for a joint venture involving the lending of money.9 redarclaw

Specifically, respondents claimed that they were approached by petitioners, who proposed that if respondents were to "undertake the
management of whatever money [petitioners] would give them, [petitioners] would get 2.5% a month with a 2.5% service fee to
[respondents]."10 The 2.5% that each party would be receiving represented their sharing of the 5% interest that the joint venture was
supposedly going to charge against its debtors. Respondents further alleged that the one year averred by petitioners was not a deadline
for payment but the term within which they were to return the money placed by petitioners should the joint venture prove to be not
lucrative. Moreover, they claimed that the entire amount of P500,000.00 was disposed of in accordance with their agreed terms and
conditions and that petitioners terminated the joint venture, prompting them to collect from the joint venture's borrowers. They were,
however, able to collect only to the extent of P200,000.00; hence, the P300,000.00 balance remained unpaid.11 redarclaw

In the Decision12 dated December 28, 2005, the Regional Trial Court ruled in favor of petitioners. It noted that the terms of the
acknowledgment receipt executed by respondents clearly showed that: (a) respondents were indebted to the extent of P500,000.00;
(b) this indebtedness was to be paid within one (1) year; and (c) the indebtedness was subject to interest. Thus, the trial court
concluded that respondents obtained a simple loan, although they later invested its proceeds in a lending enterprise. 13 The Regional
Trial Court adjudged respondents solidarity liable to petitioners. The dispositive portion of its Decision reads:
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WHEREFORE, premises considered, judgment is hereby rendered: LawlibraryofCR Alaw

1. Ordering the defendants jointly and severally to pay the plaintiffs the sum of P300,000.00 with interest at the rate of
30% per annum from the time the complaint was filed on July 31, 2002 until fully paid; chanRoblesvirtualLawlib rary

2. Ordering the defendants to pay the plaintiffs the sum of P2,227.50 as reimbursement for litigation expenses, and
another sum of P5,000.00 as attorney's fees.

For lack of legal basis, plaintiffs' claim for moral and exemplary damages has to be denied, and for lack of merit the counter-claim is
ordered dismissed.14
In the Order dated March 13, 2006,15 the Regional Trial Court denied respondents' Motion for Reconsideration.

On respondents' appeal, the Court of Appeals ruled that while respondents had indeed entered into a simple loan with petitioners,
respondents were no longer liable to pay the outstanding amount of P300,000.00.16 redarclaw
The Court of Appeals reasoned that the loan could not have earned interest, whether as contractually stipulated interest or as interest
in the concept of actual or compensatory damages. As to the loan's not having earned stipulated interest, the Court of Appeals
anchored its ruling on Article 1956 of the Civil Code, which requires interest to be stipulated in writing for it to be due.17 The Court of
Appeals noted that while the acknowledgement receipt showed that interest was to be charged, no particular interest rate was
specified.18 Thus, at the time respondents were making interest payments of 2.5% per month, these interest payments were invalid for
not being properly stipulated by the parties. As to the loan's not having earned interest in the concept of actual or compensatory
damages, the Court of Appeals, citing Eusebio-Calderon v. People,19 noted that interest in the concept of actual or compensatory
damages accrues only from the time that demand (whether judicial or extrajudicial) is made. It reasoned that since respondents
received petitioners' demand letter only on July 12, 2002, any interest in the concept of actual or compensatory damages due should
be reckoned only from then. Thus, the payments for the 2.5% monthly interest made after the perfection of the loan in 1999 but before
the demand was made in 2002 were invalid.20 redarclaw

Since petitioners' charging of interest was invalid, the Court of Appeals reasoned that all payments respondents made by way of
interest should be deemed payments for the principal amount of P500,000.00. 21 redarclaw

The Court of Appeals further noted that respondents made a total payment of P648,500.00, which, as against the principal amount of
P500,000.00, entailed an overpayment of P148,500.00. Applying the principle of solutio indebiti, the Court of Appeals concluded that
petitioners were liable to reimburse respondents for the overpaid amount of P148,500.00. 22 The dispositive portion of the assailed Court
of Appeals Decision reads:
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WHEREFORE, the Decision of the Regional Trial Court is hereby REVERSED and SET ASIDE, and a new one issued, finding that the
Spouses Salvador and Alma Abella are DIRECTED to jointly and severally pay Spouses Romeo and Annie Abella the amount of
P148,500.00, with interest of 6% interest (sic) per annum to be computed upon receipt of this decision, until full satisfaction thereof.
Upon finality of this judgment, an interest as the rate of 12% per annum, instead of 6%, shall be imposed on the amount due, until full
payment thereof.23
In the Resolution24 dated January 4, 2011, the Court of Appeals denied petitioners' Motion for Reconsideration.

Aggrieved, petitioners filed the present appeal25 where they claim that the Court of Appeals erred in completely striking off interest
despite the parties' written agreement stipulating it, as well as in ordering them to reimburse and pay interest to respondents.

In support of their contentions, petitioners cite Article 1371 of the Civil Code,26 which calls for the consideration of the contracting
parties' contemporaneous and subsequent acts in determining their true intention. Petitioners insist that respondents' consistent
payment of interest in the year following the perfection of the loan showed that interest at 2.5% per month was properly agreed upon
despite its not having been expressly stated in the acknowledgment receipt. They add that during the proceedings before the Regional
Trial Court, respondents admitted that interest was due on the loan.27 redarclaw

In their Comment,28 respondents reiterate the Court of Appeals' findings that no interest rate was ever stipulated by the parties and
that interest was not due and demandable at the time they were making interest payments.29 redarclaw

In their Reply,30 petitioners argue that even though no interest rate was stipulated in the acknowledgment receipt, the case fell under
the exception to the Parol Evidence Rule. They also argue that there exists convincing and sufficiently credible evidence to supplement
the imperfection of the acknowledgment receipt.31 redarclaw

For resolution are the following issues: LawlibraryofCRA law

First, whether interest accrued on respondents' loan from petitioners, If so, at what rate?

Second, whether petitioners are liable to reimburse respondents for the Litter's supposed excess payments and for interest.

As noted by the Court of Appeals and the Regional Trial Court, respondents entered into a simple loan or mutuum, rather than a joint
venture, with petitioners.

Respondents' claims, as articulated in their testimonies before the trial court, cannot prevail over the clear terms of the document
attesting to the relation of the parties. "If the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control."32 redarclaw

Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual relation is one of simple loan
or mutuum:
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Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use
the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable
thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a
loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower.

....

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to
the creditor an equal amount of the same kind and quality. (Emphasis supplied)
On March 22, 1999, respondents executed an acknowledgment receipt to petitioners, which states:
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Batan, Aklan
March 22, 1999

This is to acknowledge receipt of the Amount of Five Hundred Thousand (P500,000.00) Pesos from Mrs. Alma R. Abella, payable within
one (1) year from date hereof with interest.

Annie C. Abella (sgd.) Romeo M. Abella (sgd.)33

(Emphasis supplied)
The text of the acknowledgment receipt is uncomplicated and straightforward. It attests to: first, respondents' receipt of the sum of
P500,000.00 from petitioner Alma Abella; second, respondents' duty to pay tack this amount within one (1) year from March 22, 1999;
and third, respondents' duty to pay interest. Consistent with what typifies a simple loan, petitioners delivered to respondents with the
corresponding condition lat respondents shall pay the same amount to petitioners within one (1) year.

II

Although we have settled the nature of the contractual relation between petitioners and respondents, controversy persists over
respondents' duty to pay conventional interest, i.e., interest as the cost of borrowing money. 34 redarclaw
Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be due unless it has been expressly stipulated in writing."

On the matter of interest, the text of the acknowledgment receipt is simple, plain, and unequivocal. It attests to the contracting parties'
intent to subject to interest the loan extended by petitioners to respondents. The controversy, however, stems from the
acknowledgment receipt's failure to state the exact rate of interest.

Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a rate. In Spouses Toring v. Spouses
Olan,35 this court clarified the effect of Article 1956 of the Civil Code and noted that the legal rate of interest (then at 12%) is to apply:
"In a loan or forbearance of money, according to the Civil Code, the interest due should be that stipulated in writing, and in the absence
thereof, the rate shall be 12% per annum."36 redarclaw

Spouses Toring cites and restates (practically verbatim) what this court settled in Security Bank and Trust Company v. Regional Trial
Court of Makati, Branch 61: "In a loan or forbearance of money, the interest due should be that stipulated in writing, and in the
absence thereof the rate shall be 12% per annum."37 redarclaw

Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of Appeals, which, in turn, stated:38
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1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 39 (Emphasis supplied)
The rule is not only definite; it is cast in mandatory language. From Eastern Shipping to Security Bank to Spouses Toring, jurisprudence
has repeatedly used the word "shall," a term that has long been settled to denote something imperative or operating to impose a
duty.40 Thus, the rule leaves no room for alternatives or otherwise does not allow for discretion. It requires the application of the legal
rate of interest.

Our intervening Decision in Nacar v. Gallery Frames41 recognized that the legal rate of interest has been reduced to 6% per annum:
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Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16, 2013, approved
the amendment of Section 2 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799, Series of 2013, effective July
1, 2013, the pertinent portion of which reads:
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The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing the rate of interest in the
absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905, Series of 1982:
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Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the
absence of an express contract as to such rate of interest, shall be six percent (6%) per annum.

Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and
4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the parties, the rate of
legal interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments shall no longer be twelve
percent (12%) per annum — as reflected in the case of Eastern Shipping Lines and Subsection X305.1 of the Manual of Regulations for
Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its
amendment by BSP-MB Circular No. 799 — but will now be six percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively and not retroactively. Consequently, the twelve percent (12%) per
annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be the
prevailing rate of interest when applicable.42 (Emphasis supplied, citations omitted)
Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013 and Nacar retain the definite and mandatory framing of
the rule articulated in Eastern Shipping, Security Bank, and Spouses Toring. Nacar even restates Eastern Shipping:
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To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines are accordingly modified to
embody BSP-MB Circular No. 799, as follows: LawlibraryofCR Ala w

....

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a Joan or forbearance of money, the
interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code.43 (Emphasis supplied, citations omitted)

Thus, it remains that where interest was stipulated in writing by the debtor and creditor in a simple loan or mutuum, but no exact
interest rate was mentioned, the legal rate of interest shall apply. At present, this is 6% per annum, subject to Nacar's qualification on
prospective application.

Applying this, the loan obtained by respondents from petitioners is deemed subjected to conventional interest at the rate of 12% per
annum, the legal rate of interest at the time the parties executed their agreement. Moreover, should conventional interest still be due
as of July 1, 2013, the rate of 12% per annum shall persist as the rate of conventional interest.

This is so because interest in this respect is used as a surrogate for the parties' intent, as expressed as of the time of the execution of
their contract. In this sense, the legal rate of interest is an affirmation of the contracting parties' intent; that is, by their contract's
silence on a specific rate, the then prevailing legal rate of interest shall be the cost of borrowing money. This rate, which by their
contract the parties have settled on, is deemed to persist regardless of shifts in the legal rate of interest. Stated otherwise, the legal
rate of interest, when applied as conventional interest, shall always be the legal rate at the time the agreement was executed and shall
not be susceptible to shifts in rate.

Petitioners, however, insist on conventional interest at the rate of 2.5% per month or 30% per annum. They argue that the
acknowledgment receipt fails to show the complete and accurate intention of the contracting parties. They rely on Article 1371 of the
Civil Code, which provides that the contemporaneous and subsequent acts of the contracting parties shall be considered should there
be a need to ascertain their intent.44 In addition, they claim that this case falls under the exceptions to the Parol Evidence Rule, as
spelled out in Rule 130, Section 9 of the Revised Rules on Evidence.45 redarclaw

It is a basic precept in legal interpretation and construction that a rule or provision that treats a subject with specificity prevails over a
rule or provision that treats a subject in general terms.46 redarclaw

The rule spelled out in Security Bank and Spouses Toring is anchored on Article 1956 of the Civil Code and specifically governs simple
loans or mutuum. Mutuum is a type of nominate contract that is specifically recognized by the Civil Code and for which the Civil Code
provides a specific set of governing rules: Articles 1953 to 1961. In contrast, Article 11371 is among the Civil Code provisions generally
dealing with contracts. As this case particularly involves a simple loan, the specific rule spelled out in Security Bank and Spouses
Toring finds preferential application as against Article 1371.

Contrary to petitioners' assertions, there is no room for entertaining extraneous (or parol) evidence. In Spouses Bonifacio and Lucia
Paras v. Kimwa Construction and Development Corporation,47 we spelled out the requisites for the admission of parol evidence:
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In sum, two (2) things must be established for parol evidence to be admitted: first, that the existence of any of the four (4) exceptions
has been put in issue in a party's pleading or has not been objected to by the adverse party; and second, that the parol evidence
sought to be presented serves to form the basis of the conclusion proposed by the presenting party.48
The issue of admitting parol evidence is a matter that is proper to the trial, not the appellate, stage of a case. Petitioners raised the
issue of applying the exceptions to the Parol Evidence Rule only in the Reply they filed before this court. This is the last pleading that
either of the parties has filed in the entire string of proceedings culminating in this Decision. It is, therefore, too late for petitioners to
harp on this rule. In any case, what is at issue is not admission of evidence per se, but the appreciation given to the evidence adduced
by the parties. In the Petition they filed before this court, petitioners themselves acknowledged that checks supposedly attesting to
payment of monthly interest at the rate of 2.5% were admitted by the trial court (and marked as Exhibits "2," "3," "4," "5," "6," "7,"
and "8").49 What petitioners have an issue with is not the admission of these pieces of evidence but how these have not been
appreciated in a manner consistent with the conclusions they advance.

Even if it can be shown that the parties have agreed to monthly interest at the rate of 2.5%, this is unconscionable. As emphasized
in Castro v. Tan,50 the willingness of the parties to enter into a relation involving an unconscionable interest rate is inconsequential to
the validity of the stipulated rate:
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The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and
unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It
has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such
imposition as righteous and as one that may be sustained within the sphere of public or private morals. 51
The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals, and the law." 52 redarclaw

In determining whether the rate of interest is unconscionable, the mechanical application of pre-established floors would be wanting.
The lowest rates that have previously been considered unconscionable need not be an impenetrable minimum. What is more crucial is a
consideration of the parties' contexts. Moreover, interest rates must be appreciated in light of the fundamental nature of interest as
compensation to the creditor for money lent to another, which he or she could otherwise have used for his or her own purposes at the
time it was lent. It is not the default vehicle for predatory gain. As such, interest need only be reasonable. It ought not be a supine
mechanism for the creditor's unjust enrichment at the expense of another.

Petitioners here insist upon the imposition of 2.5% monthly or 30% annual interest. Compounded at this rate, respondents' obligation
would have more than doubled—increased to 219.7% of the principal—by the end of the third year after which the loan was contracted
if the entire principal remained unpaid. By the end of the ninth year, it would have multiplied more than tenfold (or increased to
1,060.45%). In 2015, this would have multiplied by more than 66 times (or increased to 6,654.17%). Thus, from an initial loan of only
P500,000.00, respondents would be obliged to pay more than P33 million. This is grossly unfair, especially since up to the fourth year
from when the loan was obtained, respondents had been assiduously delivering payment. This reduces their best efforts to satisfy their
obligation into a protracted servicing of a rapacious loan.

The legal rate of interest is the presumptive reasonable compensation for borrowed money. While parties are free to deviate from this,
any deviation must be reasonable and fair. Any deviation that is far-removed is suspect. Thus, in cases where stipulated interest is
more than twice the prevailing legal rate of interest, it is for the creditor to prove that this rate is required by prevailing market
conditions. Here, petitioners have articulated no such justification.

In sum, Article 1956 of the Civil Code, read in light of established jurisprudence, prevents the application of any interest rate other than
that specifically provided for by the parties in their loan document or, in lieu of it, the legal rate. Here, as the contracting parties failed
to make a specific stipulation, the legal rate must apply. Moreover, the rate that petitioners adverted to is unconscionable. The
conventional interest due on the principal amount loaned by respondents from petitioners is held to be 12% per annum.

III

Apart from respondents' liability for conventional interest at the rate of 12% per annum, outstanding conventional interest—if any is
due from respondents—shall itself earn legal interest from the time judicial demand was made by petitioners, i.e., on July 31, 2002,
when they filed their Complaint. This is consistent with Article 2212 of the Civil Code, which provides:
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Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this
point.
So, too, Nacar states that "the interest due shall itself earn legal interest from the time it is judicially demanded."53 redarclaw

Consistent with Nacar, as well as with our ruling in Rivera v. Spouses Chua,54 the interest due on conventional interest shall be at the
rate of 12% per annum from July 31, 2002 to June 30, 2013. Thereafter, or starting July 1, 2013, this shall be at the rate of 6% per
annum.

IV

Proceeding from these premises, we find that respondents made an overpayment in the amount of P3,379.17.

As acknowledged by petitioner Salvador Abella, respondents paid a total of P200,000.00, which was charged against the principal
amount of P500,000.00. The first payment of P100,000.00 was made on June 30, 2001,55 while the second payment of P100,000.00
was made on December 30, 2001.56 redarclaw

The Court of Appeals' September 30, 2010 Decision stated that respondents paid P6,000.00 in March 1999.57 redarclaw

The Pre-Trial Order dated December 2, 2002,58 stated that the parties admitted that "from the time the principal sum of P500,000.00
was borrowed from [petitioners], [respondents] ha[d] been religiously paying"59 what was supposedly interest "at the rate of 2.5% per
month."60 redarclaw

From March 22, 1999 (after the loan was perfected) to June 22, 2001 (before respondents' payment of P100,000.00 on June 30, 2001,
which was deducted from the principal amount of P500,000.00), the 2.5% monthly "interest" was pegged to the principal amount of
P500,000.00. These monthly interests, thus, amounted to P12,500.00 per month. Considering that the period from March 1999 to June
2001 spanned twenty-seven (27) months, respondents paid a total of P337,500.00.61 redarclaw

From June 22, 2001 up to December 22, 2001 (before respondents' payment of another P100,000.00 on December 30, 2001, which
was deducted from the remaining principal amount of P400,000.00), the 2.5% monthly "interest" was pegged to the remaining
principal amount of P400,000.00. These monthly interests, thus, amounted to P10,000.00 per month. Considering that this period
spanned six (6) months, respondents paid a total of P60,000.00.62 redarclaw

From after December 22, 2001 up to June 2002 (when petitioners filed their Complaint), the 2.5% monthly "interest" was pegged to
the remaining principal amount of P300,000.00. These monthly interests, thus, amounted to P7,500.00 per month. Considering that
this period spanned six (6) months, respondents paid a total of P45,000.00.63 redarclaw

Applying these facts and the properly applicable interest rate (for conventional interest, 12% per annum; for interest on conventional
interest, 12% per annum from July 31, 2002 up to June 30, 2013 and 6% per annum henceforth), the following conclusions may be
drawn: LawlibraryofCRA law

By the end of the first year following the perfection of the loan, or as of March 21, 2000, P560,000.00 was due from respondents. This
consisted cf the principal of P500,000.00 and conventional interest of P60,000.00.

Within this first year, respondents made twelve (12) monthly payments totalling P150,000.00 (P12,500.00 each from April 1999 to
March 2000). This was in addition to their initial payment of P6,000.00 in March 999.

Application of payments must be in accordance with Article 1253 of the Civil Code, which reads:
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Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been
covered.
Thus, the payments respondents made must first be reckoned as interest payments. Thereafter, any excess payments shall be charged
against the principal. As respondents paid a total of P156,000.00 within the first year, the conventional interest of P60,000.00 must be
deemed fully paid and the remaining amount that respondents paid (i.e., P96,000.00) is to be charged against the principal. This yields
a balance of P404,000.00.

By the end of the second year following the perfection of the loan, or as of March 21, 2001, P452,480.00 was due from respondents.
This consisted of the outstanding principal of P404,000.00 and conventional interest of P48,480.00.

Within this second year, respondents completed another round of twelve (12) monthly payments totaling P150,000.00.

Consistent with Article 1253 of the Civil Code, as respondents paid a total of P156,000.00 within the second year, the conventional
interest of P48,480.00 must be deemed fully paid and the remaining amount that respondents paid (i.e., P101,520.00) is to be charged
against the principal. This yields a balance of P302,480.00.

By the end of the third year following the perfection of the loan, or as of March 21, 2002, P338,777.60 was due from respondents. This
consists of he outstanding principal of P302,480.00 and conventional interest of P36,297.60.

Within this third year, respondents paid a total of P320,000.00, as follows: LawlibraryofCR Alaw

(a) Between March 22, 2001 and June 30, 2001, respondents completed three (3) monthly
payments of P12,500.00 each, totaling P37,500.00.
(b) On June 30, 2001, respondents paid P100,000.00, which was charged as principal
payment.
(c) Between June 30, 2001 and December 30, 2001, respondents delivered monthly payments
of P10,000.00 each. At this point, the monthly payments no longer amounted to
P12,500.00 each because the supposed monthly interest payments were pegged to the
supposedly remaining principal of P400,000.00. Thus, during this period, they paid a total
of six (6) monthly payments totaling P60,000.00.
(d) On December 30, 2001, respondents paid P100,000.00, which, like the June 30, 2001
payment, was charged against the principal.
(e) From the end of December 2002 to the end of February 2002, respondents delivered
monthly payments of P7,500.00 each. At this point, the supposed monthly interest
payments were now pegged to the supposedly remaining principal of P300,000.00. Thus,
during this period, they delivered three (3) monthly payments totaling P22,500.00.
Consistent with Article 1253 of the Civil Code, as respondents paid a total of P320,000.00 within the third year, the conventional
interest of P36,927.50 must be deemed fully paid and the remaining amount that respondents paid (i.e., P283,702.40) is to be charged
against the principal. This yields a balance of P18,777.60.

By the end of the fourth year following the perfection of the loan, or as of March 21, 2003, P21,203.51 would have been due from
respondents. This consists of: (a) the outstanding principal of P18,777.60, (b) conventional interest of P2,253.31, and (c) interest due
on conventional interest starting from July 31, 2002, the date of judicial demand, in the amount of P172.60. The last (i.e., interest on
interest) must be pro-rated. There were only 233 days from July 31, 2002 (the date of judicial demand) to March 21, 2003 (the end of
the fourth year); this left 63.83% of the fourth year, within which interest on interest might have accrued. Thus, the full annual interest
on interest of 12% per annum could not have been completed, and only the proportional amount of 7.66% per annum may be properly
imposed for the remainder of the fourth year.

From the end of March 2002 to June 2002, respondents delivered three (3) more monthly payments of P7,500.00 each. Thus, during
this period, they delivered three (3) monthly payments totalling P22,500.00.

At this rate, however, payment would have been completed by respondents even before the end of the fourth year. Thus, for
precision, it is more appropriate to reckon the amounts due as against payments made on monthly, rather than an
annual, basis.

By April 21, 2002, P18,965.38 (i.e., remaining principal of P18,777.60 plus pro-rated monthly conventional interest at 1%, amounting
to P187.78) would have been due from respondents. Deducting the monthly payment of P7,500.00 for the preceding month in a
manner consistent with Article 1253 of the Civil Code would yield a balance of P11,465.38.

By May 21, 2002, P11,580.03 (i.e., remaining principal of P11,465.38 plus pro-rated monthly conventional interest at 1%, amounting
to P114.65) would have been due from respondents. Deducting the monthly payment of P7,500.00 for the preceding month in a
manner consistent with Article 1253 of the Civil Code would yield a balance of P4,080.03.

By June 21, 2002, P4,120.83 (i.e., remaining principal of P4,080.03 plus pro-rated monthly conventional interest at 1%, amounting to
P40.80) would have been due from respondents. Deducting the monthly payment of P7,500.00 for the preceding month in a manner
consistent with Article 1253 of the Civil Code would yield a negative balance of P3,379.17.

Thus, by June 21, 2002, respondents had not only fully paid the principal and all the conventional interest that had accrued on their
loan. By this date, they also overpaid P3,379.17. Moreover, while hypothetically, interest on conventional interest would not have run
from July 31, 2002, no such interest accrued since there was no longer any conventional interest due from respondents by then.

As respondents made an overpayment, the principle of solutio indebiti as provided by Article 2154 of the Civil Code64 applies. Article
2154 reads:
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Article 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation
to return it arises.
In Moreno-Lentfer v. Wolff,65 this court explained the application of solutio indebiti:
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The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself unjustly at the expense of
another. It applies where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and
the person who received the payment, and (2) the payment is made through mistake, and not through liberality or some other cause.66
As respondents had already fully paid the principal and all conventional interest that had accrued, they were no longer obliged to make
further payments. Any further payment they made was only because of a mistaken impression that they were still due. Accordingly,
petitioners are now bound by a quasi-contractual obligation to return any and all excess payments delivered by respondents.

Nacar provides that "[w]hen an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum."67 This applies to obligations arising
from quasi-contracts such as solutio indebiti.
Further, Article 2159 of the Civil Code provides:
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Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of money is involved, or shall be liable for
fruits received or which should have been received if the thing produces fruits.

He shall furthermore be answerable for any loss or impairment of the thing from any cause, and for damages to the person who
delivered the thing, until it is recovered.
Consistent however, with our finding that the excess payment made by respondents were borne out of a mere mistake that it was due,
we find it in the better interest of equity to no longer hold petitioners liable for interest arising from their quasi-contractual obligation.

Nevertheless, Nacar also provides: LawlibraryofCRAla w

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit.68

Thus, interest at the rate of 6% per annum may be properly imposed on the total judgment award. This shall be reckoned from the
finality of this Decision until its full satisfaction.

WHEREFORE, the assailed September 30, 2010 Decision and the January 4, 2011 Resolution of the Court of Appeals Nineteenth
Division in CA-G.R. CV No. 01388 are SET ASIDE. Petitioners Spouses Salvador and Alma Abella are DIRECTED to jointly and
severally reimburse respondents Spouses Romeo and Annie Abella the amount of P3,379.17, which respondents have overpaid.

A legal interest of 6% per annum shall likewise be imposed on the total judgment award from the finality of this Decision until its full
satisfaction.

SO ORDERED. cralawlawlibrary

SECOND DIVISION

DURBAN APARTMENTS CORPORATION, G.R. No. 179419

doing business under the name and style of
City Garden Hotel,
Present:
Petitioner,

CARPIO, J.,

Chairperson,

NACHURA,

PERALTA,
- versus - ABAD, and

MENDOZA, JJ.

PIONEER INSURANCE AND SURETY Promulgated:

CORPORATION,

Respondent.
January 12, 2011

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:
For review is the Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No. 86869, which affirmed the
decision[2] of the Regional Trial Court (RTC), Branch 66, Makati City, in Civil Case No. 03-857, holding
petitioner Durban Apartments Corporation solely liable to respondent Pioneer Insurance and Surety
Corporation for the loss of Jeffrey Sees (Sees) vehicle.

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

On July 22, 2003, [respondent] Pioneer Insurance and Surety Corporation x x x, by right of
subrogation, filed [with the RTC of Makati City] a Complaint for Recovery of Damages against
[petitioner] Durban Apartments Corporation, doing business under the name and style of
City Garden Hotel, and [defendant before the RTC] Vicente Justimbaste x x x. [Respondent
averred] that: it is the insurer for loss and damage of Jeffrey S. Sees [the insureds] 2001
Suzuki Grand Vitara x x x with Plate No. XBH-510 under Policy No. MC-CV-HO-01-0003846-00-
D in the amount of P1,175,000.00; on April 30, 2002, See arrived and checked in at the City
Garden Hotel in Makati corner Kalayaan Avenues, Makati City before midnight, and its
parking attendant, defendant x x x Justimbaste got the key to said Vitara from See to park
it[. O]n May 1, 2002, at about 1:00 oclock in the morning, See was awakened in his room by
[a] telephone call from the Hotel Chief Security Officer who informed him that his Vitara was
carnapped while it was parked unattended at the parking area of Equitable PCI Bank along
Makati Avenue between the hours of 12:00 [a.m.] and 1:00 [a.m.]; See went to see the Hotel
Chief Security Officer, thereafter reported the incident to the Operations Division of the
Makati City Police Anti-Carnapping Unit, and a flash alarm was issued; the Makati City Police
Anti-Carnapping Unit investigated Hotel Security Officer, Ernesto T. Horlador, Jr. x x x and
defendant x x x Justimbaste; See gave his Sinumpaang Salaysay to the police investigator, and
filed a Complaint Sheet with the PNP Traffic Management Group in Camp Crame, Quezon
City; the Vitara has not yet been recovered since July 23, 2002 as evidenced by a Certification
of Non- Recovery issued by the PNP TMG; it paid the P1,163,250.00 money claim of See and
mortgagee ABN AMRO Savings Bank, Inc. as indemnity for the loss of the Vitara; the Vitara
was lost due to the negligence of [petitioner] Durban Apartments and [defendant]
Justimbaste because it was discovered during the investigation that this was the second time
that a similar incident of carnapping happened in the valet parking service of [petitioner]
Durban Apartments and no necessary precautions were taken to prevent its repetition;
[petitioner] Durban Apartments was wanting in due diligence in the selection and supervision
of its employees particularly defendant x x x Justimbaste; and defendant x x x Justimbaste
and [petitioner] Durban Apartments failed and refused to pay its valid, just, and lawful claim
despite written demands.

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

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

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

See testified that: on April 30, 2002, at about 11:30 in the evening, he drove his Vitara and
stopped in front of City Garden Hotel in Makati Avenue, Makati City; a parking attendant,
whom he had later known to be defendant x x x Justimbaste, approached and asked for his
ignition key, told him that the latter would park the Vitara for him in front of the hotel, and
issued him a valet parking customers claim stub; he and Montero, thereafter, checked in at
the said hotel; on May 1, 2002, at around 1:00 in the morning, the Hotel Security Officer
whom he later knew to be Horlador called his attention to the fact that his Vitara was
carnapped while it was parked at the parking lot of Equitable PCI Bank which is in front of the
hotel; his Vitara was insured with [respondent] Pioneer Insurance; he together with Horlador
and defendant x x x Justimbaste went to Precinct 19 of the Makati City Police to report the
carnapping incident, and a police officer came accompanied them to the Anti-Carnapping
Unit of the said station for investigation, taking of their sworn statements, and flashing of a
voice alarm; he likewise reported the said incident in PNP TMG in Camp Crame where
another alarm was issued; he filed his claim with [respondent] Pioneer Insurance, and a
representative of the latter, who is also an adjuster of Vesper Insurance Adjusters-Appraisers
[Vesper], investigated the incident; and [respondent] Pioneer Insurance required him to sign
a Release of Claim and Subrogation Receipt, and finally paid him the sum of P1,163,250.00
for his claim.

Ricardo F. Red testified that: he is a claims evaluator of [petitioner] Pioneer Insurance tasked,
among others, with the receipt of claims and documents from the insured, investigation of
the said claim, inspection of damages, taking of pictures of insured unit, and monitoring of
the processing of the claim until its payment; he monitored the processing of Sees claim
when the latter reported the incident to [respondent] Pioneer Insurance; [respondent]
Pioneer Insurance assigned the case to Vesper who verified Sees report, conducted an
investigation, obtained the necessary documents for the processing of the claim, and
tendered a settlement check to See; they evaluated the case upon receipt of the subrogation
 documents and the adjusters report, and eventually recommended for its settlement for the
sum of P1,163,250.00 which was accepted by See; the matter was referred and forwarded to
their counsel, R.B. Sarajan & Associates, who prepared and sent demand letters to
[petitioner] Durban Apartments and [defendant] Justimbaste, who did not pay [respondent]
Pioneer Insurance notwithstanding their receipt of the demand letters; and the services of
R.B. Sarajan & Associates were engaged, for P100,000.00 as attorneys fees plus P3,000.00
per court appearance, to prosecute the claims of [respondent] Pioneer Insurance against
[petitioner] Durban Apartments and Justimbaste before the lower court.

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

assigned to Vesper the investigation of Sees case, and he was the one actually assigned to
investigate it; he conducted his investigation of the matter by interviewing See, going to the
City Garden Hotel, required subrogation documents from See, and verified the authenticity
of the same; he learned that it is the standard procedure of the said hotel as regards its valet
parking service to assist their guests as soon as they get to the lobby entrance, park the cars
for their guests, and place the ignition keys in their safety key box; considering that the hotel
has only twelve (12) available parking slots, it has an agreement with Equitable PCI Bank
permitting the hotel to use the parking space of the bank at night; he also learned that a
Hyundai Starex van was carnapped at the said place barely a month before the occurrence of
this incident because Liberty Insurance assigned the said incident to Vespers, and Horlador
and defendant x x x Justimbaste admitted the occurrence of the same in their sworn
statements before the Anti-Carnapping Unit of the Makati City Police; upon verification with
the PNP TMG [Unit] in Camp Crame, he learned that Sees Vitara has not yet been recovered;
upon evaluation, Vesper recommended to [respondent] Pioneer Insurance to settle Sees
claim for P1,045,750.00; See contested the recommendation of Vesper by reasoning out that
the 10% depreciation should not be applied in this case considering the fact that the Vitara
was used for barely eight (8) months prior to its loss; and [respondent] Pioneer Insurance
acceded to Sees contention, tendered the sum of P1,163,250.00 as settlement, the former
accepted it, and signed a release of claim and subrogation receipt.

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

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

WHEREFORE, judgment is hereby rendered ordering [petitioner Durban Apartments

Corporation] to pay [respondent Pioneer Insurance and Surety Corporation] the sum
of P1,163,250.00 with legal interest thereon from July 22, 2003 until the obligation is fully
paid and attorneys fees and litigation expenses amounting to P120,000.00.

SO ORDERED.[4]

On appeal, the appellate court affirmed the decision of the trial court, viz.:
 WHEREFORE, premises considered, the Decision dated January 27, 2006 of the RTC, Branch
66, Makati City in Civil Case No. 03-857 is hereby AFFIRMED insofar as it holds [petitioner]
Durban Apartments Corporation solely liable to [respondent] Pioneer Insurance and Surety
Corporation for the loss of Jeffrey Sees Suzuki Grand Vitara.

SO ORDERED.[5]

Hence, this recourse by petitioner.

The issues for our resolution are:

1. Whether the lower courts erred in declaring petitioner as in default for failure to appear at the pre-
trial conference and to file a pre-trial brief;

2. Corollary thereto, whether the trial court correctly allowed respondent to present evidence ex-
parte;

3. Whether petitioner is liable to respondent for attorneys fees in the amount of P120,000.00; and

4. Ultimately, whether petitioner is liable to respondent for the loss of Sees vehicle.

The petition must fail.

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

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

We are not persuaded.

Rule 18 of the Rules of Court leaves no room for equivocation; appearance of parties and their counsel
at the pre-trial conference, along with the filing of a corresponding pre-trial brief, is mandatory, nay,
their duty. Thus, Section 4 and Section 6 thereof provide:

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

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

xxxx

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

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

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

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

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

Former Chief Justice Andres R. Narvasas words continue to resonate, thus:

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

xxxx

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

We are not unmindful that defendants (petitioners) preclusion from presenting evidence during trial
does not automatically result in a judgment in favor of plaintiff (respondent). The plaintiff must still
substantiate the allegations in its complaint.[10] Otherwise, it would be inutile to continue with the
plaintiffs presentation of evidence each time the defendant is declared in default.
In this case, respondent substantiated the allegations in its complaint, i.e., a contract of necessary
deposit existed between the insured See and petitioner. On this score, we find no error in the
following disquisition of the appellate court:

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

Article 1962, in relation to Article 1998, of the Civil Code defines a contract of deposit and a necessary
deposit made by persons in hotels or inns:
Art. 1962. A deposit is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it and returning the same. If the
safekeeping of the thing delivered is not the principal purpose of the contract, there is no
deposit but some other contract.

Art. 1998. The deposit of effects made by travelers in hotels or inns shall also be regarded as
necessary. The keepers of hotels or inns shall be responsible for them as depositaries,
provided that notice was given to them, or to their employees, of the effects brought by the
guests and that, on the part of the latter, they take the precautions which said hotel-keepers
or their substitutes advised relative to the care and vigilance of their effects.

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

Lastly, petitioner assails the lower courts award of attorneys fees to respondent in the amount
of P120,000.00. Petitioner claims that the award is not substantiated by the evidence on record.

We disagree.

While it is a sound policy not to set a premium on the right to litigate,[12] we find that
respondent is entitled to reasonable attorneys fees. Attorneys fees may be awarded when a party is
compelled to litigate or incur expenses to protect its interest,[13] or when the court deems it just and
equitable.[14] In this case, petitioner refused to answer for the loss of Sees vehicle, which was
deposited with it for safekeeping. This refusal constrained respondent, the insurer of See, and
subrogated to the latters right, to litigate and incur expenses. However, we reduce the award
of P120,000.00 to P60,000.00 in view of the simplicity of the issues involved in this case.
 WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No.
86869 is AFFIRMED with the MODIFICATION that the award of attorneys fees is reduced
to P60,000.00. Costs against petitioner.

SO ORDERED.
[G.R. No. 160544. February 21, 2005]

TRIPLE-V vs. FILIPINO MERCHANTS

THIRD DIVISION

Gentlemen:

Quoted hereunder, for your information, is a resolution of this Court dated FEB 21 2005.

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

Assailed in this petition for review on certiorari is the decision[1] dated October 21, 2003 of the Court of Appeals in CA-G.R. CV No.
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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 appeal and affirmed the appealed decision of the
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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 even without any consideration. It is not necessary that the depositary receives a fee before it
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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 coverage includes a
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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 stolen car, FMICI, as
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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 no justification to
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deviate from the trial court's findings.

WHEREFORE, petition is hereby DENIED DUE COURSE.

SO ORDERED.

[G.R. No. 142591. April 30, 2003]

JOSEPH CHAN, WILSON CHAN and LILY CHAN, petitioners, vs. BONIFACIO S.
MACEDA, JR., respondent.

DECISION
SANDOVAL-GUTIERREZ, J.:

A judgment of default does not automatically imply admission by the defendant of the facts
and causes of action of the plaintiff. The Rules of Court require the latter to adduce evidence in
support of his allegations as an indispensable condition before final judgment could be given in
his favor. The trial judge has to evaluate the allegations with the highest degree of objectivity and
[1]

certainty. He may sustain an allegation for which the plaintiff has adduced sufficient evidence,
otherwise, he has to reject it. In the case at bar, judicial review is imperative to avert the award of
damages that is unreasonable and without evidentiary support.
Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, is the Decision dated June 17, 1999 of the Court of Appeals in CA-G.R. CV No.
[2]

57323, entitled Bonifacio S. Maceda, Jr. versus Joseph Chan, et. al., affirming in toto the
Decision dated December 26, 1996 of the Regional Trial Court, Branch 160, Pasig City, in Civil
[3]

Case No. 53044.

The essential antecedents are as follows:
On July 28, 1976, Bonifacio S. Maceda, Jr., herein respondent, obtained a P7.3 million loan
from the Development Bank of the Philippines for the construction of his New Gran Hotel Project
in Tacloban City.
 Thereafter, on September 29, 1976, respondent entered into a building construction contract
with Moreman Builders Co., Inc., (Moreman). They agreed that the construction would be finished
not later than December 22, 1977.
Respondent purchased various construction materials and equipment in Manila. Moreman, in
turn, deposited them in the warehouse of Wilson and Lily Chan, herein petitioners. The deposit
was free of charge.
Unfortunately, Moreman failed to finish the construction of the hotel at the stipulated
time. Hence, on February 1, 1978, respondent filed with the then Court of First Instance (CFI, now
Regional Trial Court), Branch 39, Manila, an action for rescission and damages against Moreman,
docketed as Civil Case No. 113498.

On November 28, 1978, the CFI rendered its Decision rescinding the contract between
[4]

Moreman and respondent and awarding to the latter P 445,000.00 as actual, moral and liquidated
damages; P20,000.00 representing the increase in the construction materials;
and P35,000.00 as attorneys fees. Moreman interposed an appeal to the Court of Appeals but the
same was dismissed on March 7, 1989 for being dilatory. He elevated the case to this Court via a
petition for review on certiorari. In a Decision dated February 21, 1990, we denied the
[5]

petition. On April 23, 1990, an Entry of Judgment was issued.

[6]

Meanwhile, during the pendency of the case, respondent ordered petitioners to return to him
the construction materials and equipment which Moreman deposited in their
warehouse.Petitioners, however, told them that Moreman withdrew those construction materials
in 1977.
Hence, on December 11, 1985, respondent filed with the Regional Trial Court, Branch 160,
Pasig City, an action for damages with an application for a writ of preliminary attachment against
petitioners, docketed as Civil Case No. 53044.
[7]

In the meantime, on October 30, 1986, respondent was appointed Judge of the Regional Trial
Court, Branch 12, San Jose Antique. [8]

On August 25, 1989, or after almost four (4) years, the trial court dismissed respondents
complaint for his failure to prosecute and for lack of interest. On September 6, 1994, or five years
[9]

thereafter, respondent filed a motion for reconsideration, but the same was denied in the Order
dated September 9, 1994 because of the failure of respondent and his counsel to appear on the
scheduled hearing. [10]

On October 14, 1994, respondent filed a second motion for reconsideration. This time,
the motion was granted and the case was ordered reinstated on January 10, 1995, or ten
(10) years from the time the action was originally filed. Thereafter, summons, together with
[11]

the copies of the complaint and its annexes, were served on petitioners.
On March 2, 1995, counsel for petitioners filed a motion to dismiss on several
grounds. Respondent, on the other hand, moved to declare petitioners in default on the ground
[12]

that their motion to dismiss was filed out of time and that it did not contain any notice of hearing. [13]

On April 27, 1995, the trial court issued an order declaring petitioners in default. [14]

Petitioners filed with the Court of Appeals a petition for certiorari to annul the trial courts
[15]

order of default, but the same was dismissed in its Order dated August 31, 1995. The case
[16]

reached this Court, and in a Resolution dated October 25, 1995, we affirmed the assailed order
[17]

of the Court of Appeals. On November 29, 1995, the corresponding Entry of Judgment was
[18]

issued.
Thus, upon the return of the records to the RTC, Branch 160, Pasig City, respondent was
allowed to present his evidence ex-parte.
Upon motion of respondent, which was granted by the trial court in its Order dated April 29,
1996, the depositions of his witnesses, namely, Leonardo Conge, Alfredo Maceda and Engr.
[19]

Damiano Nadera were taken in the Metropolitan Trial Court in Cities, Branch 2, Tacloban
City. Deponent Leonardo Conge, a labor contractor, testified that on December 14 up to
[20]

December 24, 1977, he was contracted by petitioner Lily Chan to get bags of cement from the
New Gran Hotel construction site and to store the same into the latters warehouse in Tacloban
City. Aside from those bags of cement, deponent also hauled about 400 bundles of steel bars
from the same construction site, upon order of petitioners. Corresponding delivery receipts were
presented and marked as Exhibits A, A-1,A-2,A-3 and A-4. [21]
 Deponent Alfredo Maceda testified that he was respondents Disbursement and Payroll Officer
who supervised the construction and kept inventory of the properties of the New Gran
Hotel. While conducting the inventory on November 23, 1977, he found that the approximate total
value of the materials stored in petitioners warehouse was P214,310.00. This amount was
accordingly reflected in the certification signed by Mario Ramos, store clerk and representative of
Moreman who was present during the inventory. [22]

Deponent Damiano Nadera testified on the current cost of the architectural and structural
requirements needed to complete the construction of the New Gran Hotel. [23]

On December 26, 1996, the trial court rendered a decision in favor of respondent, thus:

WHEREFORE, foregoing considered, judgment is hereby rendered ordering defendants to jointly and
severally pay plaintiff:

1) P1,930,000.00 as actual damages;

2) P2,549,000.00 as actual damages;

3) Moral damages of P150,000.00; exemplary damages of P50,000.00 and attorneys fees of P50,000.00 and
to pay the costs.

SO ORDERED.

The trial court ratiocinated as follows:

The inventory of other materials, aside from the steel bars and cement is found highly reliable based on
first, the affidavit of Arthur Edralin dated September 15, 1979, personnel officer of Moreman Builders that
he was assigned with others to guard the warehouse; (Exhs. M & O); secondly, the inventory (Exh. C) dated
November 23, 1977 shows (sic) deposit of assorted materials; thirdly, that there were items in the
warehouse as of February 3, 1978 as shown in the balance sheet of Moremans stock clerk Jose Cedilla.

Plaintiff is entitled to payment of damages for the overhauling of materials from the construction site by
Lily Chan without the knowledge and consent of its owner. Article 20 of the Civil Code provides:

Art. 20. Every person who contrary to law, willfully or negligently caused damage to another, shall
indemnify the latter for the same.

As to the materials stored inside the bodega of defendant Wilson Chan, the inventory (Exh. C) show (sic),
that the same were owned by the New Gran Hotel. Said materials were stored by Moreman Builders Co.,
Inc. since it was attested to by the warehouseman as without any lien or encumbrances, the defendants are
duty bound to release it. Article 21 of the Civil Code provides:

Art. 21. Any person who willfully caused loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the damage.

Plaintiff is entitled to payment of actual damages based on the inventory as of November 23, 1977
amounting to P1,930,080.00 (Exhs. Q & Q-1). The inventory was signed by the agent Moreman Builders
Corporation and defendants.

Plaintiff is likewise entitled to payment of 12,500 bags of cement and 400 bundles of steel bars
totaling P2,549,000.00 (Exhs. S & S-1; Exhs. B & B-3).

Defendants should pay plaintiff moral damages of P150,000.00; exemplary damages of P50,000.00 and
attorneys fees of P50,000.00 and to pay the costs.

The claim of defendant for payment of damages with respect to the materials appearing in the balance
sheets as of February 3, 1978 in the amount of P3,286,690.00, not having been established with enough
preponderance of evidence cannot be given weight. [24]

Petitioners then elevated the case to the Court of Appeals, docketed as CA-G.R. CV No.
57323. On June 17, 1999, the Appellate Court rendered the assailed
Decision affirming intoto the trial courts judgment, ratiocinating as follows:
[25]

Moreover, although the prayer in the complaint did not specify the amount of damages sought, the same
was satisfactorily proved during the trial. For damages to be awarded, it is essential that the claimant
satisfactorily prove during the trial the existence of the factual basis thereof and its causal connection with
the adverse partys act (PAL, Inc. vs. NLRC, 259 SCRA 459. In sustaining appellees claim for damages, the
court a quo held as follows:

The Court finds the contention of plaintiff that materials and equipment of plaintiff were stored in the
warehouse of defendants and admitted by defendants in the certification issued to Sheriff Borja. x x x

Evidence further revealed that assorted materials owned by the New Gran Hotel (Exh. C) were deposited in
the bodega of defendant Wilson Chan with a total market value of P1,930,000.00, current price.

The inventory of other materials, aside from the steel bars and cement, is highly reliable based on first, the
affidavit of Arthur Edralin dated September 15, 1979, personnel officer of Moreman Builders; that he was
assigned, with others to guard the warehouse (Exhs. M & O); secondly, the inventory (Exh. C) November
23, 1977 shows deposit of assorted materials; thirdly, that there were items in the warehouse as of February
3, 1978, as shown in the balance sheet of Moremans stock clerk, Jose Cedilla (pp. 60-61, Rollo).

The Court affirms the above findings.

Well settled is the rule that absent any proper reason to depart from the rule, factual conclusions reached by
the trial court are not to be disturbed (People vs. Dupali, 230 SCRA 62). Hence, in the absence of any
showing that serious and substantial errors were committed by the lower court in the appraisal of the
evidence, the trial judges assessment of the credibility of the witnesses is accorded great weight and respect
(People vs. Jain, 254 SCRA 686). And, there being absolutely nothing on record to show that the court a
quo overlooked, disregarded, or misinterpreted facts of weight and significance, its factual findings and
conclusions must be given great weight and should not be disturbed on appeal.

WHEREFORE, being in accord with law and evidence, the appealed decision is hereby AFFIRMED in
toto.

Hence, this petition for review on certiorari anchored on the following grounds:
I

The Court of Appeals acted with grave abuse of discretion and under a misapprehension of the law
and the facts when it affirmed in toto the award of actual damages made by the trial court in favor of
respondent in this case.

II

The awards of moral and exemplary damages of the trial court to respondent in this case and
affirmed in toto by the Court of Appeals are unwarranted by the evidence presented by respondent at
the ex parte hearing of this case and should, therefore, be eliminated or at least reduced.

III

The award of attorneys fees by the trial court to respondent in this case and affirmed by the Court of
Appeals should be deleted because of the failure of the trial court to state the legal and factual basis
of such award.

Petitioners contend inter alia that the actual damages claimed by respondent in the present
case were already awarded to him in Civil Case No. 113498 and hence, cannot be recovered by
[26]

him again. Even assuming that respondent is entitled to damages, he can not
recover P4,479,000.00 which is eleven (11) times more than the total actual damages
of P365,000.00 awarded to him in Civil Case No. 113498. [27]

In his comment on the petition, respondent maintains that petitioners, as depositaries under
the law, have both the fiduciary and extraordinary obligations not only to safely keep the
construction material deposited, but also to return them with all their products, accessories and
accessions, pursuant to Articles 1972, 1979, 1983, and 1988 of the Civil Code.Considering
[28] [29] [30] [31]

that petitioners duty to return the construction materials in question has already become
impossible, it is only proper that the prices of those construction materials in 1996 should be the
basis of the award of actual damages. This is the only way to fulfill the duty to
return contemplated in the applicable laws. Respondent further claims that petitioners must bear
[32]

the increase in market prices from 1977 to 1996 because liability for fraud includes all damages
which may be reasonably attributed to the non-performance of the obligation. Lastly, respondent
insists that there can be no double recovery because in Civil Case No. 113498, the parties were [33]
respondent himself and Moreman and the cause of action was the rescission of their building
contract. In the present case, however, the parties are respondent and petitioners and the cause
of action between them is for recovery of damages arising from petitioners failure to return the
construction materials and equipment.

Obviously, petitioners assigned errors call for a review of the lower courts findings of fact.
Succinct is the rule that this Court is not a trier of facts and does not normally undertake the
re-examination of the evidence submitted by the contending parties during the trial of the case
considering that findings of fact of the Court of Appeals are generally binding and conclusive on
this Court. The jurisdiction of this Court in a petition for review on certiorari is limited to reviewing
[34]

only errors of law, not of fact, unless it is shown, inter alia, that: (1) the conclusion is a finding
[35]

grounded on speculations, surmises or conjectures; (2) the inference is manifestly mistaken,

absurd and impossible; (3) there is grave abuse of discretion; (4) the judgment is based on
misapprehension of facts; (5) the findings of fact are conflicting; and (6) the Court of Appeals, in
making its findings went beyond the issues of the case and the same is contrary to the admission
of both parties. [36]

Petitioners submit that this case is an exception to the general rule since both the trial court
and the Court of Appeals based their judgments on misapprehension of facts.
We agree.
At the outset, the case should have been dismissed outright by the trial court because of
patent procedural infirmities. It bears stressing that the case was originally filed on December 11,
1985. Four (4) years thereafter, or on August 25, 1989, the case was dismissed for respondents
failure to prosecute. Five (5) years after, or on September 6, 1994, respondent filed his motion for
reconsideration. From here, the trial court already erred in its ruling because it should have
dismissed the motion for reconsideration outright as it was filed far beyond the fifteen-day
reglementary period. Worse, when respondent filed his second motion for reconsideration on
[37]

October 14, 1994, a prohibited pleading, the trial court still granted the same and reinstated the
[38]

case on January 10, 1995. This is a glaring gross procedural error committed by both the trial
court and the Court of Appeals.
Even without such serious procedural flaw, the case should also be dismissed for utter lack of
merit.

It must be stressed that respondents claim for damages is based on petitioners failure to
return or to release to him the construction materials and equipment deposited by Moreman to
their warehouse. Hence, the essential issues to be resolved are: (1) Has respondent presented
proof that the construction materials and equipment were actually in petitioners warehouse when
he asked that the same be turned over to him? (2) If so, does respondent have the right to
demand the release of the said materials and equipment or claim for damages?
Under Article 1311 of the Civil Code, contracts are binding upon the parties (and their assigns
and heirs) who execute them. When there is no privity of contract, there is likewise no obligation
or liability to speak about and thus no cause of action arises. Specifically, in an action against the
depositary, the burden is on the plaintiff to prove the bailment or deposit and the performance of
conditions precedent to the right of action. A depositary is obliged to return the thing to the
[39]

depositor, or to his heirs or successors, or to the person who may have been designated in the
contract.[40]

In the present case, the record is bereft of any contract of deposit, oral or written, between
petitioners and respondent. If at all, it was only between petitioners and Moreman. And
granting arguendo that there was indeed a contract of deposit between petitioners and Moreman,
it is still incumbent upon respondent to prove its existence and that it was executed in his
favor. However, respondent miserably failed to do so. The only pieces of evidence respondent
presented to prove the contract of deposit were the delivery receipts. Significantly, they
[41]

are unsigned and not duly received or authenticated by either Moreman, petitioners or
respondent or any of their authorized representatives. Hence, those delivery receipts have no
probative value at all. While our laws grant a person the remedial right to prosecute or institute a
civil action against another for the enforcement or protection of a right, or the prevention or
redress of a wrong, every cause of action ex-contractu must be founded upon a contract, oral or
[42]

written, express or implied.

Moreover, respondent also failed to prove that there were construction materials and
equipment in petitioners warehouse at the time he made a demand for their return.
 Considering that respondent failed to prove (1) the existence of any contract of deposit
between him and petitioners, nor between the latter and Moreman in his favor, and (2) that there
were construction materials in petitioners warehouse at the time of respondents demand to return
the same, we hold that petitioners have no corresponding obligation or liability to respondent with
respect to those construction materials.
Anent the issue of damages, petitioners are still not liable because, as expressly provided for
in Article 2199 of the Civil Code, actual or compensatory damages cannot be presumed, but
[43]

must be proved with reasonable degree of certainty. A court cannot rely on speculations,
conjectures, or guesswork as to the fact and amount of damages, but must depend upon
competent proof that they have been suffered by the injured party and on the best obtainable
evidence of the actual amount thereof. It must point out specific facts which could afford a basis
for measuring whatever compensatory or actual damages are borne. [44]

Considering our findings that there was no contract of deposit between petitioners and
respondent or Moreman and that actually there were no more construction materials or equipment
in petitioners warehouse when respondent made a demand for their return, we hold that he has
no right whatsoever to claim for damages.
As we stressed in the beginning, a judgment of default does not automatically imply admission
by the defendant of plaintiffs causes of action. Here, the trial court merely adopted respondents
allegations in his complaint and evidence without evaluating them with the highest degree of
objectivity and certainty.
WHEREFORE, the petition is GRANTED. The challenged Decision of the Court of Appeals
dated June 17, 1999 is REVERSED and SET ASIDE. Costs against respondent.
SO ORDERED.
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 2 for damages against the respondent Bank with
the Court of First Instance (now Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.

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

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

WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's complaint.

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

With costs against plaintiff. 6

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

Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse decision to the respondent Court of
Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the challenged
decision because the trial court erred in (a) absolving the respondent Bank from liability from the loss, (b) not declaring as null and
void, for being contrary to law, public order and public policy, the provisions in the contract for lease of the safety deposit box
absolving the Bank from any liability for loss, (c) not concluding that in this jurisdiction, as well as under American jurisprudence, the
liability of the Bank is settled and (d) awarding attorney's fees to the Bank and denying the petitioner's prayer for nominal and
exemplary damages and attorney's fees. 8

In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision principally on the theory that the
contract (Exhibit "2") executed by the petitioner and respondent Bank is in the nature of a contract of lease by virtue of which the
petitioner and its co-renter were given control over the safety deposit box and its contents while the Bank retained no right to open
the said box because it had neither the possession nor control over it and its contents. As such, the contract is governed by Article
1643 of the Civil Code 10 which provides:

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

It invoked Tolentino vs. Gonzales — which held that the owner of the property loses his control over the property leased
11

during the period of the contract — and Article 1975 of the Civil Code which provides:

Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be
bound to collect the latter when it becomes due, and to take such steps as may be necessary in order that the
securities may preserve their value and the rights corresponding to them according to law.

The above provision shall not apply to contracts for the rent of safety deposit boxes.

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

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

Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August 1989, 15petitioner took this
recourse under Rule 45 of the Rules of Court and urges Us to review and set aside the respondent Court's ruling. Petitioner avers
that both the respondent Court and the trial court (a) did not properly and legally apply the correct law in this case, (b) acted with
grave abuse of discretion or in excess of jurisdiction amounting to lack thereof and (c) set a precedent that is contrary to, or is a
departure from precedents adhered to and affirmed by decisions of this Court and precepts in American jurisprudence adopted in
the Philippines. It reiterates the arguments it had raised in its motion to reconsider the trial court's decision, the brief submitted to the
respondent Court and the motion to reconsider the latter's decision. In a nutshell, petitioner maintains that regardless of
nomenclature, the contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of deposit governed by Title XII,
Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of title pursuant to Article
1972 of the said Code which provides:

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

If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the
depositary must observe.

17
Petitioner then quotes a passage from American Jurisprudence which is supposed to expound on the prevailing rule in
the United States, to wit:

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

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

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

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

The petition is partly meritorious.

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

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

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

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

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

Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other
than building and loan associations may perform the following services:

(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes
for the safeguarding of such effects.

xxx xxx xxx

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

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

14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes
absolutely no liability in connection therewith. 28

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

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

Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not
correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the
safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent Bank
keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the Bank
cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing conditions
in the contract in question are void and ineffective. It has been said:

With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the parties,
since the relation is a contractual one, may by special contract define their respective duties or provide for
increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or
public policy. It must clearly appear that there actually was such a special contract, however, in order to vary
the ordinary obligations implied by law from the relationship of the parties; liability of the deposit company will
not be enlarged or restricted by words of doubtful meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or
that of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will
be held ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit
its liability for loss of the contents thereof through its own negligence, the view has been taken that such a
lessor may limits its liability to some extent by agreement or stipulation. 30 (citations omitted)

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

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

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

No pronouncement as to costs.

SO ORDERED.

SECOND DIVISION

G.R. No. L-32974 July 30, 1979

BARTOLOME ORTIZ, petitioner,

vs.
HON. UNION C. KAYANAN, in his capacity as Judge of the Court of First Instance of Quezon, Branch IV; ELEUTERIO
ZAMORA, QUIRINO COMINTAN, VICENTE FERRO, AND GREGORIO PAMISARAN, respondents.
Salonga, Ordoñ;ez, Yap, Sicat & Associates and Salvador, Ulgado & Carbon for petitioner.

Jose A. Cusi for private respondents.

ANTONIO, J.: 1äwphï1.ñët

Petition for certiorari and Prohibition with Preliminary Injunction to nullify the Order of respondent Judge directing the
execution of the final judgment in Civil Case No. C-90, entitled "Bartolome Ortiz vs. Secretary of Agriculture and Natural
Resources, et al.," and the Writ of Execution issued to implement said Order, allegedly for being inconsistent with the
judgment sought to be enforced.

Civil Case No. C-90 was filed by Bartolome Ortiz who sought the review and/or annulment of the decision of the Secretary of
Agriculture and Natural Resources, giving preference to the sales applications of private respondents Quirino Comintan and
Eleuterio Zamora over Lot No. 5785, PLS-45, located at Barrio Cabuluan, Calauag, Quezon.

The factual background of the case, as found by respondent Court, is as follows: têñ.£îhqwâ£

... The lot in controversy was formerly the subject of Homestead Application No. 122417 of Martin Dolorico II,
plaintiff's ward who died on August 20, 1931; that since then it was plaintiff who continued the cultivation and
possession of the property, without however filing any application to acquire title thereon; that in the
Homestead Application No. 122417, Martin Dolorico II named his uncle, Martin Dolorico I as his heir and
successor in interest, so that in 1951 Martin Dolorico I executed an affidavit relinquishing his rights over the
property in favor of defendants Quirino Comintan and Eleuterio Zamora, his grandson and son-in-law,
respectively, and requested the Director of Lands to cancel the homestead application; that on the strength of
the affidavit, Homestead Application No. 122417 was cancelled and thereafter, defendants Comintan and
Zamora filed their respective sales applications Nos. 8433 and 9258; that plaintiff filed his protest on
November 26, 1951 alleging that he should be given preference to purchase the lot inasmuch as he is the
actual occupant and has been in continuous possession of the same since 1931; and inspite of plaintiff's
opposition, "Portion A" of the property was sold at public auction wherein defendant Comintan was the only
bidder; that on June 8, 1957, investigation was conducted on plaintiff's protest by Assistant Public Lands
Inspector Serapion Bauzon who submitted his report to the Regional Land Officer, and who in turn rendered a
decision on April 9, 1958, dismissing plaintiff's claim and giving due course to defendants' sales applications
on the ground that the relinquishment of the homestead rights of Martin Dolorico I in favor of Comintan and
Zamora is proper, the former having been designated as successor in interest of the original homestead
applicant and that because plaintiff failed to participate in the public auction, he is forever barred to claim the
property; that plaintiff filed a motion for reconsideration of this decision which was denied by the Director of
Lands in his order dated June 10, 1959; that, finally, on appeal to the Secretary of Agriculture and Natural
Resources, the decision rendered by the Regional Land Officer was affirmed in toto. 1

On March 22, 1966, respondent Court rendered judgment in the afore-mentioned civil case, the dispositive portion of which
reads as follows: têñ.£îhqwâ£

IN VIEW OF THE FOREGOING CONSIDERATIONS, judgment is hereby rendered awarding Lot No. 5785-A
of PLS-45, (Calauag Public Land Subdivision) one-half portion of the property in litigation located at Bo.
Cabuluan, Calauag, Quezon, in favor of defendant QUIRINO COMINTAN, being the successful bidder in the
public auction conducted by the bureau of Lands on April 18, 1955, and hereby giving due course to the Sales
Application No. 9258 of defendant Eleuterio Zamora over the other half, Lot No. 5785-B of PLS-45, Calauag,
without prejudice to the right of plaintiff BARTOLOME ORTIZ to participate in the public bidding of the same to
be announced by the Bureau of Lands, Manila. However, should plaintiff Bartolome Ortiz be not declared the
successful bidder thereof, defendants Quirino Comintan and Eleuterio Zamora are ordered to reimburse jointly
said plaintiff the improvements he has introduced on the whole property in the amount of THIRTEEN
THOUSAND SIX HUNDRED THIRTY-TWO (P13,632.00) PESOS, the latter having the right to retain the
property until after he has been fully paid therefor, without interest since he enjoys the fruits of the property in
question, with prejudice and with costs again the plaintiff. 2

Plaintiff appealed the decision to the Court of Appeals.

Two (2) years after the rendition of the judgment by the court a quo, while the case was pending appeal and upon petition of
private respondents Quirino Comintan and Eleuterio Zamora, respondent Court appointed respondent Vicente Ferro, Clerk of
Court, as Receiver to collect tolls on a portion of the property used as a diversion road. On August 19, 1969, the Court of
Appeals issued a Resolution annulling the Order appointing the Receiver. Subsequently, on February 19, 1970, the Appellate
Court affirmed the decision of the trial court. A petition for review on certiorari of the decision of the Court of Appeals was
denied by this Court on April 6, 1970. At this point, private respondents filed a petition for appointment of a new receiver with
the court a quo. This petition was granted and the receiver was reappointed. Petitioner sought the annulment of this Order
with the Court of Appeals, but said Court ruled that its decision had already become final and that the records of the case
were to be remanded to the trial court.

Not satisfied with such denial, petitioner filed a petitioner for certiorari, prohibition and mandamus with preliminary injunction
before this Court, 3 praying for the annulment of the Order reappointing the Receiver. On July 13, 1970, the petition was dismissed
by this Court on the ground of insufficient showing of grave abuse of discretion.

II

The judgment having become final and executory private respondents filed a motion for the execution of the same, praying as
follows:têñ.£îhqwâ£
 WHEREFORE, it is respectfully prayed of this Honorable Court to order the issuance of a writ of execution in
accordance with the judgment of this Honorable Court, confirmed by the Court of Appeals and the Supreme
Court, commanding any lawful officer to deliver to defendants Comintan and Zamora the land subject of the
decision in this case but allowing defendants to file a bond in such amount as this Honorable Court may fix, in
lieu of the P13,632.00 required to be paid to plaintiff, conditioned that after the accounting of the tools
collected by plaintiff, there is still an amount due and payable to said plaintiff, then if such amount is not paid
on demand, including the legal interests, said bond shall be held answerable.

Ordering further the plaintiff to render an accounting of the tolls he collected from March of 1967 to December
31, 1968 and from September 1969 to March 31, 1970, and deliver said tolls collected to the receiver and if
judgment is already executed, then to Quirino Comintan and Eleuterio Zamora; and,

Finally, to condemn plaintiff to pay moral damages for withholding the tools which belong to your movant in an
amount this Court may deem just in the premises. 4

Acting upon the foregoing motion, respondent Judge issued an Order, dated September 23, 1970, stating, among others, the
following:têñ.£îhqwâ£

The records further disclosed that from March 1967 to December 31, 1968, piaintiff Bartolome Ortiz collected
tolls on a portion of the propertv in question wherein he has not introduced anv improvement particularlv on
Lot No. 5785-A; PLS-45 awarded to defendant Quirino Comintan, thru which vehicular traffic was detoured or
diverted, and again from September 1969 to March 31, 1970, the plaintiff resumed the collection of tools on
the same portion without rendering any accounting on said tolls to the Receiver, who, was reappointed after
submitting the required bond and specifically authorized only to collect tolls leaving the harvesting of the
improvements to the plaintiff.

xxx xxx xxx

ln virtue of he findings of this Court as contained in the dispositive portion of its decision, the defendants are
jointly obligated to pay the plaintiff in the amount of P13,632.00 as reasonable value of the improvements he
introduced on the whole property in question, and that he has the right of retention until fully paid. It can be
gleaned from the motion of the defendants that if plaintiff submits an accounting of the tolls he collected during
the periods above alluded to, their damages of about P25,000.00 can more than offset their obligation of
P13,362.00 in favor of the plaintiff, thereafter the possession of the land be delivered to the defendants since
the decision of the Supreme Court has already become final and executory, but in the interregnum pending
such accounting and recovery by the Receiver of the tolls collected by the plaintiff, the defendants pray that
they allowed to put up a bond in lieu of the said P13,632.00 to answer for damages of the former, if any.

On the other hand, plaintiff contends in his opposition, admitting that the decision of the Supreme Court has
become final and executory; (1) the offer of a bond in lieu of payment of P13,632.00 does not, and cannot,
satisfy the condition imposed in the decision of this Court which was affirmed in toto; (2) the public sale of
Portion "B" of the land has still to take place as ordained before the decision could be executed; and, (3) that
whatever sums plaintiff may derive from the property cannot be set off against what is due him for the
improvements he made, for which he has to be reimbursed as ordered.

xxx xxx xxx

Let it be known that plaintiff does not dispute his having collected tolls during the periods from March 1967 to
December 31, 1968 and from September 1969 to March 31, 1970. The Supreme Court affirmed the decision
of this Court its findings that said tolls belong to the defendant, considering that the same were collected on a
portion of the land question where the plaintiff did not introduce any improvement. The reimbursement to the
plaintiff pertains only to the value of the improvements, like coconut trees and other plants which he
introduced on the whole property. The tolls collected by the plaintiff on an unimproved portion naturally belong
to the defendants, following the doctrine on accretion. Further, the reappointment of a Receiver by this Court
was upheld by the Supreme Court when it denied the petition for certiorari filed by the plaintiff, bolstering the
legal claim of defendants over said tolls. Thus, the decision of the Supreme Court rendered the decision of this
Court retroactive from March 22, 1966 although pending accounting of the tolls collected by the plaintiff is
justified and will not prejudice anybody, but certainly would substantially satisfy the conditions imposed in the
decision. However, insofar as the one-half portion "B" of the property, the decision may be executed only after
public sale by the Bureau of Lands shall be accomplished.

WHEREFORE, finding the Motion for Execution filed by the defendants to be meritorious, the same is granted;
provided, however, that they put up a bond equal the adjudicated amount of P13,632.00 accruing in favor of
the plaintiff, from a reputable or recognized bonding or surety company, conditioned that after an accounting
of the tolls collected by the plaintiff should there be found out any balance due and payable to him after
reckoning said obligation of P13,632.00 the bond shall be held answerable therefor. 5

Accordingly, a Writ of Execution was issued after private respondent Quirino Comintan had filed the required bond. The writ
directed the Sheriff to enforce the decision of the Court, and stated, part in, the following: têñ.£îhqwâ£

But should there be found any amount collectible after accounting and deducting the amount of P3,632.00,
you are hereby ordered that of the goods and chattels of Bartolome Ortiz of Bo. Kabuluan, Calauag, Quezon,
be caused to be made any excess in the above-metioned amount together with your lawful fees and that you
render same to defendant Quirino Comintan. If sufficient personal property cannot be found thereof to satisfy
this execution and lawful fees thereon, then you are commanded that of the lands and buildings of the said
BARTOLOME ORTIZ you make the said excess amount in the manner required by the Rules of Court, and
make return of your proceedings within this Court within sixty (60) days from date of service.
 You are also ordered to cause Bartolome Ortiz to vacate the property within fifteen (15) days after service
thereof the defendant Quirino Comintan having filed the required bond in the amount of THIRTEEN
THOUSAND SIX HUNDRED THIRTY-TWO (P13,632.00) PESOS. 6

On October 12, 1970, petitioner filed a Motion for Reconsideration of the aforesaid Order and Writ of Execution, alleging: têñ.£îhqwâ£

(a) That the respondent judge has no authority to place respondents in possession of the property;

(b) That the Supreme Court has never affirmed any decision of the trial court that tolls collected from the
diversionary road on the property, which is public land, belong to said respondents;

(c) That to assess petitioner a P25,000.00 liability for damages is purely punitive imposition without factual or
legal justification.

The foregoing Motion for Reconsideration was denied by respondent Judge per Order dated November 18, 1970. Saod Order
states, in part:
têñ.£îhqwâ£

It goes without saying that defendant Comintan is entitled to be placed in possession of lot No. 5785-A of PLS-
45 (Calauag Public Land Subdivision) and enjoyment of the tolls from March, 1967 to March, 1968 and from
September, 1969 to March 31, l970 which were received by plaintiff Bartolome Ortiz, collected from the
property by reason of the diversion road where vehicular traffic was detoured. To defendant Comintan belongs
the tolls thus collected from a portion of the land awarded to him used as a diversionary road by the doctrine
of accretion and his right over the same is ipso jure, there being no need of any action to possess said
addition. It is so because as consistently maintained by the Supreme Court, an applicant who has complied
with all the terms and conditions which entitle him to a patent for a particular tract of publlic land, acquires a
vested right therein and is to be regarded as equitable owner thereof so that even without a patent, a
perfected homestead or sales application is a property right in the fullest sense, unaffectcd by the fact that the
paramount title is still in the Government and no subsequent law can deprive him of that vested right The
question of the actual damages suffered by defendant Comintan by reason of the unaccounted tolls received
by plaintiff had already been fully discussed in the order of September 23, 1970 and the Court is honestly
convinced and believes it to be proper and regular under the circumstances.

Incidentally, the Court stands to correct itself when in the same order, it directed the execution of he decision
with respect to the one-half portion "B" of the property only after the public sale by the Bureau of Lands, the
same being an oversight, it appearing that the Sales Application of defendant Eleuterio Zamora had already
been recognized and full confirmed by the Supreme Court.

In view thereof, finding the motion filed by plaintiff to be without merit, the Court hereby denies the same and
the order of September 23, 1970 shall remain in full force subject to the amendment that the execution of the
decision with respect to the one-half portion "B" shall not be conditioned to the public sale by the Bureau of
Lands.

SO ORDERED. 7

III

Petitioner thus filed the instant petition, contending that in having issued the Order and Writ of Execution, respondent Court
"acted without or in excess of jurisdiction, and/or with grave abuse of discretion, because the said order and writ in effect vary
the terms of the judgment they purportedly seek to enforce." He argued that since said judgment declared the petitioner a
possessor in good faith, he is entitled to the payment of the value of the improvements introduced by him on the whole
property, with right to retain the land until he has been fully paid such value. He likewise averred that no payment for
improvements has been made and, instead, a bond therefor had been filed by defendants (private respondents), which,
according to petitioner, is not the payment envisaged in the decision which would entitle private respondents to the
possession of the property. Furthermore, with respect to portion "B", petitioner alleges that, under the decision, he has the
right to retain the same until after he has participated and lost in the public bidding of the land to be conducted by the Bureau
of Lands. It is claimed that it is only in the event that he loses in the bidding that he can be legally dispossessed thereof.

It is the position of petitioner that all the fruits of the property, including the tolls collected by him from the passing vehicles,
which according to the trial court amounts to P25,000.00, belongs to petitioner and not to defendant/private respondent
Quirino Comintan, in accordance with the decision itself, which decreed that the fruits of the property shall be in lieu of interest
on the amount to be paid to petitioner as reimbursement for improvements. Any contrary opinion, in his view, would be
tantamount to an amendment of a decision which has long become final and executory and, therefore, cannot be lawfully
done.

Petitioner, therefore, prayed that: (1) a Writ of Preliminary Injunction be issued enjoining the enforcement of the Orders of
September 23, 1970 and November 18, 1970, and the Writ of Execution issued thereto, or restoring to petitioner the
possession of the property if the private respondents had been placed in possession thereof; (2) annulling said Orders as well
as the Writ of Execution, dissolving the receivership established over the property; and (3) ordering private respondents to
account to petitioner all the fruits they may have gathered or collected from the property in question from the time of
petitioiier's illegal dispossession thereof.

On January 29, 1971, this Court issued the Writ of Preliminary Injunction. On January 30, 1971, private respondents filed a
Motion for Reconsideration and/or Modification of the Order dated January 29, 1971. This was followed by a Supplemental
Motion for Reconsideration and Manifestation on February 3, 1971. In the latter motion, private respondents manifested that
the amount of P14,040.96, representing the amount decreed in the judgment as reimbursement to petitioner for the
improvements, plus interest for six months, has already been deposited by them in court, "with the understanding that said
amount shall be turned over to the plaintiff after the court a quo shall have determined the improvement on Lot 5785-A, and
subsequently the remaining balance of the deposit shall be delivered to the petitioner (plaintiff therein) in the event he loses
the bid for Lot 5785-B in favor of private respondent Eleuterio Zamora." 8 The deposit is evidenced by a certification made by the
Clerk of the Court a quo. 9 Contending that said deposit was a faithful compliance with the judgment of the trial court, private
respondent Quirino Comintan prayed for the dissolution of the Writ of Injunction.

It appears that as a consequence of the deposit made by private respondents, the Deputy, Sheriff of Calauag, Quezon ousted
petitioner's representative from the land in question and put private respondents in possession thereof. 10

On March 10, 1971, petitioner filed a "Comment on Respondents' 'Motion for Reconsideration' dated January 29, 1971' and
'Supplemental Motion for Reconsideration and Manifestation,'" contending that the tender of deposit mentioned in the
Suplemental Motion was not really and officially made, "inasmuch as the same is not supported by any official receipt from the
lower court, or from its clerk or cashier, as required by law;" that said deposit does not constitute sufficient compliance with
the judgment sought to be enforced, neither was it legally and validly made because the requisites for consignation had not
been complied with; that the tender of legal interest for six months cannot substitute petitioner's enjoyment of the fruits of the
property as long as the judgment in Civil Case No. C-90 has not been implemented in the manner decreed therein; that
contrary to the allegations of private respondents, the value of the improvements on the whole property had been determined
by the lower court, and the segregation of the improvements for each lot should have been raised by them at the opportune
moment by asking for the modification of the decision before it became final and executory; and that the tolls on the property
constituted "civil fruits" to which the petitioner is entitled under the terms of the decision.

IV

The issue decisive of the controvery is—after the rendition by the trial court of its judgment in Civil Case No. C-90 on March
22, 1966 confirming the award of one-half of the property to Quirino Comintan—whether or not petitioner is still entitled to
retain for his own exclusive benefit all the fruits of the property, such as the tolls collected by him from March 1967 to
December 1968, and September 1969 to March 31, 1970, amounting to about P25,000.00. In other words, petitioner
contends that so long as the aforesaid amount of P13,632,00 decreed in the judgment representing the expenses for clearing
the land and the value of the coconuts and fruit trees planted by him remains unpaid, he can appropriate for his exclusive
benefit all the fruits which he may derive from the property, without any obligation to apply any portion thereof to the payment
of the interest and the principal of the debt.

We find this contention untenable.

There is no question that a possessor in good faith is entitled to the fruits received before the possession is legally
interrupted. 11 Possession in good faith ceases or is legally interrupted from the moment defects in the title are made known to the
possessor, by extraneous evidence or by the filing of an action in court by the true owner for the recovery of the property. 12 Hence,
all the fruits that the possessor may receive from the time he is summoned in court, or when he answers the complaint, must be
delivered and paid by him to the owner or lawful possessor. 13

However, even after his good faith ceases, the possessor in fact can still retain the property, pursuant to Article 546 of the
New Civil Code, until he has been fully reimbursed for all the necessary and useful expenses made by him on the property.
This right of retention has been considered as one of the conglomerate of measures devised by the law for the protection of
the possessor in good faith. Its object is to guarantee the reimbursement of the expenses, such as those for the preservation
of the property, 14 or for the enhancement of its utility or productivity. 15It permits the actual possessor to remain in possession while
he has not been reimbursed by the person who defeated him in the possession for those necessary expenses and useful
improvements made by him on the thing possessed. The principal characteristic of the right of retention is its accessory character. It
is accessory to a principal obligation. Considering that the right of the possessor to receive the fruits terminates when his good faith
ceases, it is necessary, in order that this right to retain may be useful, to concede to the creditor the right to secure reimbursement
from the fruits of the property by utilizing its proceeds for the payment of the interest as well as the principal of the debt while he
remains in possession. This right of retention of the property by the creditor, according to Scaevola, in the light of the provisions of
Article 502 of the Spanish Civil Code, 16 is considered not a coercive measure to oblige the debtor to pay, depriving him temporarily
of the enjoyment of the fruits of his property, but as a means of obtainitig compensation for the debt. The right of retention in this
case is analogous to a contract of antichresis and it cati be considered as a means of extinguishing the obligation, inasmuch as the
right to retain the thing lasts only for the period necessary to enable the creditor to be reimbursed from the fruits for the necessary
and useful expenses. 17

According to Manresa, the right of retention is, therefore, analogous to that of a pledge, if the property retained is a movable,
and to that of antichresis, if the property held is immovable. 18 This construction appears to be in harmony with similar provisions
of the civil law which employs the right of retention as a means or device by which a creditor is able to obtain the payment of a debt.
Thus, under Article 1731 of the New Civil Code, any person who has performed work upon a movable has a right to retain it by way
of pledge until he is paid. Similarly, under Article 1914 of the same Code, the agent may retain in pledge the things which are the
object of the agency until the principal effects reimbursement of the funds advanced by the former for the execution of the agency,
or he is indemnified for all damages which he may have suffered as a consequence of the execution of the agency, provided he is
free from fault. To the same effect, the depositary, under Article 1994 of the same Code, may retain the thing in pledge until the full
payment of what may be due him by reason of the deposit. The usufructuary, pursuant to Article 612 of the same Code, may retain
the property until he is reimbursed for the amount paid for taxes levied on the capital (Article 597) and tor extraordinary repairs
(Article 594).

In all of these cases, the right of retention is used as a means of extinguishing the obligation. As amply observed by Manresa:
"El derecho de retencion, lo hemos dicho, es el derecho de prenda o el de anticresis constituido por la ley con independencia
de las partes." 19 In a pledge, if the thing pledged earns or produces fruits, income, dividends or interests, the creditor shall
compensate what he receives with those which are owing him. 20 In the same manner, in a contract of antichresis, the creditor
acquires the right to receive the fruits of an immovable of his debtor with the obligation to apply them to payment of the interest, if
owing, and thereafter to the principal of his credit. 21 The debtor can not reacquire enjoyment of the immovable until he has actually
paid what he owes the creditor. 22

Applying the afore-cited principles to the case at bar, petitioner cannot appropriate for his own exclusive benefit the tolls which
he collected from the property retained by him. It was his duty under the law, after deducting the necessary expenses for his
administration, to apply such amount collected to the payment of the interest, and the balance to the payment of the
obligation.

We hold, therefore, that the disputed tolls, after deducting petitioner's expenses for administration, belong to Quirino
Comintan, owner of the land through which the toll road passed, further considering that the same was on portions of the
property on which petitioner had not introduced any improvement. The trial court itself clarified this matter when it placed the
toll road under receivership. The omission of any mention of the tolls in the decision itself may be attributed to the fact that the
tolls appear to have been collected after the rendition of the judgment of the trial court.

The records further reveal that earnest efforts have been made by private respondents to have the judgment executed in the
most practicable manner. They deposited in court the amount of the judgment in the sum of P13,632.00 in cash, subject only
to the accounting of the tolls collected by the petitioner so that whatever is due from him may be set off with the amount of
reimbursement. This is just and proper under the circumstances and, under the law, compensation or set off may take place,
either totally or partially. Considering that petitioner is the creditor with respect to the judgment obligation and the debtor with
respect to the tolls collected, Comintan being the owner thereof, the trial court's order for an accounting and compensation is
in accord with law. 23

With respect to the amount of reimbursement to be paid by Comintan, it appears that the dispositive portion of the decision
was lacking in specificity, as it merely provided that Comintan and Zamora are jointly liable therefor. When two persons are
liable under a contract or under a judgment, and no words appear in the contract or judgment to make each liable for the
entire obligation, the presumption is that their obligation is joint or mancomunada, and each debtor is liable only for a
proportionate part of the obligation. 24 The judgment debt of P13,632.00 should, therefore, be pro-rated in equal shares to
Comintan and Zamora.

Regarding Lot 5785-B, it appears that no public sale has yet been conducted by the Bureau of Lands and, therefore,
petitioner is entitled to remain in possession thereof. This is not disputed by respondent Eleuterio Zamora. 25 After public sale is
had and in the event that Ortiz is not declared the successful bidder, then he should be reimbursed by respondent Zamora in the
corresponding amount for the improvements on Lot 5785-B.

WHEREFORE, in view hereof, the Order of respondent Court of November 18, 1970 is hereby modified to conform to the
foregoing judgment. The Writ of Preliminary Injunction, dated January 29, 1971, is hereby dissolved. Without special
pronouncement as to costs.

[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[1]

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

Court (RTC), Branch 13, of Manila, finding YHT Realty Corporation, Brunhilda Mata-Tan (Tan),
Erlinda Lainez (Lainez) and Anicia Payam (Payam) jointly and solidarily liable for damages in an
action filed by Maurice McLoughlin (McLoughlin) for the loss of his American and Australian
dollars deposited in the safety deposit box of Tropicana Copacabana Apartment Hotel, owned
and operated by YHT Realty Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-philanthropist, used to stay at
Sheraton Hotel during his trips to the Philippines prior to 1984 when he met Tan. Tan befriended
McLoughlin by showing him around, introducing him to important people, accompanying him in
visiting impoverished street children and assisting him in buying gifts for the children and in
distributing the same to charitable institutions for poor children. Tan convinced McLoughlin to
transfer from Sheraton Hotel to Tropicana where Lainez, Payam and Danilo Lopez were
employed. Lopez served as manager of the hotel while Lainez and Payam had custody of the
keys for the safety deposit boxes of Tropicana. Tan took care of McLoughlins 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 [6]

left the other items in the box as he did not check out of his room at the Tropicana during his short
visit to Hongkong. When he arrived in Hongkong, he opened the envelope which contained Five
Thousand US Dollars (US$5,000.00) and discovered upon counting that only Three Thousand US
Dollars (US$3,000.00) were enclosed therein. 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
McLoughlins 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)
[15]

thereof, to wit:

2. To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability
arising from any loss in the contents and/or use of the said deposit box for any cause whatsoever,
including but not limited to the presentation or use thereof by any other person should the key be
lost;
 ...

4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT HOTEL
upon giving up the use of the box. [16]

On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as to the
validity of the abovementioned stipulations. They opined that the stipulations are void for being
violative of universal hotel practices and customs. His lawyers prepared a letter dated 30 May
1988 which was signed by McLoughlin and sent to President Corazon Aquino. The Office of the [17]

President referred the letter to the Department of Justice (DOJ) which forwarded the same to the
Western Police District (WPD). [18]

After receiving a copy of the indorsement in Australia, McLoughlin came to the Philippines and
registered again as a hotel guest of Tropicana. McLoughlin went to Malacaňang to follow up on
his letter but he was instructed to go to the DOJ. The DOJ directed him to proceed to the WPD for
documentation. But McLoughlin went back to Australia as he had an urgent business matter to
attend to.
For several times, McLoughlin left for Australia to attend to his business and came back to the
Philippines to follow up on his letter to the President but he failed to obtain any concrete
assistance. [19]

McLoughlin left again for Australia and upon his return to the Philippines on 25 August 1989 to
pursue his claims against petitioners, the WPD conducted an investigation which resulted in the
preparation of an affidavit which was forwarded to the Manila City Fiscals 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 Fiscals
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 McLoughlins 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 P342,000.00, more or less, and the sum of AUS$4,500.00 or its equivalent in
Philippine Currency of P99,000.00, or a total of P441,000.00, 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 P3,674,238.00 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 P500,000.00 as moral damages (Item
X, Exh. CC);
4. Ordering defendants, jointly and severally, to pay plaintiff the sum of P350,000.00 as exemplary damages
(Item XI, Exh. CC);
 5. And ordering defendants, jointly and severally, to pay litigation expenses in the sum of P200,000.00 (Item
XII, Exh. CC);
6. Ordering defendants, jointly and severally, to pay plaintiff the sum of P200,000.00 as attorneys fees, and a
fee of P3,000.00 for every appearance; and
7. Plus costs of suit.

SO ORDERED. [23]

The trial court found that McLoughlins 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 McLoughlins
money, kept in Tropicanas safety deposit box, was taken by Tan without McLoughlins 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 Fiscals 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 McLoughlins 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 courts 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) P153,200.00 representing the peso equivalent of US$2,000.00 and AUS$4,500.00;

2) P308,880.80, 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 P336,207.05 or P168,103.52 representing payment to Tropicana Apartment Hotel;

4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;

5) One-half of P179,863.20 or P89,931.60 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 P7,801.94 or P3,900.97 representing Meralco power expenses;

7) One-half of P356,400.00 or P178,000.00 representing expenses for food and maintenance;

8) P50,000.00 for moral damages;

9) P10,000.00 as exemplary damages; and

10) P200,000 representing attorneys 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
courts 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
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.
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
[31]

their testimonies because of its unique opportunity to observe the witnesses firsthand and note
their demeanor, conduct and attitude under grilling examination. [32]

We are also not impressed by petitioners argument that the finding of gross negligence by the
lower court as affirmed by the appellate court is not supported by evidence. The evidence reveals
that two keys are required to open the safety deposit boxes of Tropicana. One key is assigned to
the guest while the other remains in the possession of the management. If the guest desires to
open his safety deposit box, he must request the management for the other key to open the
same. In other words, the guest alone cannot open the safety deposit box without the assistance
of the management or its employees. With more reason that access to the safety deposit box
should be denied if the one requesting for the opening of the safety deposit box is a stranger.
Thus, in case of loss of any item deposited in the safety deposit box, it is inevitable to conclude
that the management had at least a hand in the consummation of the taking, unless the reason
for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had
custody of the master key of the management when the loss took place. In fact, they even
admitted that they assisted Tan on three separate occasions in opening McLoughlins safety
deposit box. This only proves that Tropicana had prior knowledge that a person aside from the
[33]

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
[34]

the circumstances surrounding this case, it is undeniable that without the acquiescence of the
employees of Tropicana to the opening of the safety deposit box, the loss of McLoughlins 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 McLoughlins deposit. If only petitioners exercised due diligence
in taking care of McLoughlins safety deposit box, they should have confronted him as to his
relationship with Tan considering that the latter had been observed opening McLoughlins safety
deposit box a number of times at the early hours of the morning. Tans 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 McLoughlins money
[35]

was consummated through the negligence of Tropicanas employees in allowing Tan to open the
safety deposit box without the guests 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 suppressed or diminished
[37]

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 carriers 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
[38]

Justice of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers or innkeeper liable for the
effects of their guests, it is not necessary that they be actually delivered to the innkeepers or their
employees. It is enough that such effects are within the hotel or inn. With greater reason should
[39]

the liability of the hotelkeeper be enforced when the missing items are taken without the guests
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 [41]

through force majeure that may spare the hotel-keeper from liability. In the case at bar, there is no
showing that the act of the thief or robber was done with the use of arms or through an irresistible
force to qualify the same as force majeure. [42]

Petitioners likewise anchor their defense on Article 2002 which exempts the hotel-keeper
[43]

from liability if the loss is due to the acts of his guest, his family, or visitors. Even a cursory
reading of the provision would lead us to reject petitioners contention. The justification they raise
would render nugatory the public interest sought to be protected by the provision. What if the
negligence of the employer or its employees facilitated the consummation of a crime committed
by the registered guests 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 guests
relatives and visitors.
Petitioners contend that McLoughlins 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 is nothing anomalous in how the lower courts decided the controversy for this Court
[45]

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
[47] [48]

loss that took place prior to 16 April 1988 was not considered since the amounts alleged to have
been taken were not sufficiently established by evidence. The appellate court also correctly
awarded the sum of P308,880.80, representing the peso value for the air fares from Sydney to
Manila and back for a total of eleven (11) trips; one-half of P336,207.05 or P168,103.52
[49]

representing payment to Tropicana; one-half of P152,683.57 or P76,341.785 representing

[50]

payment to Echelon Tower; one-half of P179,863.20 or P89,931.60 for the taxi or transportation
[51]

expenses from McLoughlins residence to Sydney Airport and from MIA to the hotel here in
Manila, for the eleven (11) trips; one-half of P7,801.94 or P3,900.97 representing Meralco power
[52]

expenses; one-half of P356,400.00 or P178,000.00 representing expenses for food and

[53]

maintenance. [54]

The amount of P50,000.00 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
intended to enrich a complainant at the expense of a defendant. They are awarded only to enable
the injured party to obtain means, diversion or amusements that will serve to alleviate the moral
suffering he has undergone, by reason of defendants culpable action. [55]

The awards of P10,000.00 as exemplary damages and P200,000.00 representing attorneys

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) P308,880.80, 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 P336,207.05 or P168,103.52 representing payment to Tropicana Copacabana

Apartment Hotel;
 (4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;

(5) One-half of P179,863.20 or P89,931.60 for the taxi or transportation expense from McLoughlins
residence to Sydney Airport and from MIA to the hotel here in Manila, for the eleven (11) trips;

(6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;

(7) One-half of P356,400.00 or P178,200.00 representing expenses for food and maintenance;

(8) P50,000.00 for moral damages;

(9) P10,000.00 as exemplary damages; and

(10) P200,000 representing attorneys fees.

With costs.

SO ORDERED.
THIRD DIVISION

G.R. No. 89775 November 26, 1992

JACINTO UY DIÑO and NORBERTO UY, petitioners,

vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents.

DAVIDE, JR., J.:

Continuing Suretyship Agreements signed by the petitioners set off this present controversy.

Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No. 17724 1 which reversed the 2 December 1987 Decision of
Branch 45 of the Regional Trial Court (RTC) of Manila in a collection suit entitled "Metropolitan Bank and Trust Company vs. Uy Tiam, doing business under the name of "UY
TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto Uy Diño and Norberto Uy" and docketed as Civil Case No. 82-9303. They likewise challenge public respondent's
2
Resolution of 21 August 1989 denying their motion for the reconsideration of the former.

The impugned Decision of the Court summarizes the antecedent facts as follows:

It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter referred to as UTEFS), thru its
representative Uy Tiam, applied for and obtained credit accommodations (letter of credit and trust receipt
accommodations) from the Metropolitan Bank and Trust Company (hereinafter referred to as METROBANK) in
the sum of P700,000.00 (Original Records, p. 333). To secure the aforementioned credit accommodations
Norberto Uy and Jacinto Uy Diño executed separate Continuing Suretyships (Exhibits "E" and "F"
respectively), dated 25 February 1977, in favor of the latter. Under the aforesaid agreements, Norberto Uy
agreed to pay METROBANK any indebtedness of UTEFS up to the aggregate sum of P300,000.00 while
Jacinto Uy Diño agreed to be bound up to the aggregate sum of P800,000.00.

Having paid the obligation under the above letter of credit in 1977, UTEFS, through Uy Tiam, obtained another
credit accommodation from METROBANK in 1978, which credit accommodation was fully settled before an
irrevocable letter of credit was applied for and obtained by the abovementioned business entity in 1979
(September 8, 1987, tsn, pp. 14-15).

The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum of P815, 600.00, covered
UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It was applied for and
obtain by UTEFS without the participation of Norberto Uy and Jacinto Uy Diño as they did not sign the
document denominated as "Commercial Letter of Credit and Application." Also, they were not asked to
execute any suretyship to guarantee its payment. Neither did METROBANK nor UTEFS inform them that the
1979 Letter of Credit has been opened and the Continuing Suretyships separately executed in February, 1977
shall guarantee its payment (Appellees brief, pp. 2-3; rollo, p. 28).

The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid Planters Products the amount of
P815,600.00 which payment was covered by a Bill of Exchange (Exhibit "C"), dated 4 June 1979, in favor of
(Original Records, p. 331).

Pursuant to the above commercial transaction, UTEFS executed and delivered to METROBANK and Trust
Receipt (Exh. "D"), dated 4 June 1979, whereby the former acknowledged receipt in trust from the latter of the
aforementioned goods from Planters Products which amounted to P815, 600.00. Being the entrusted, the
former agreed to deliver to METROBANK the entrusted goods in the event of non-sale or, if sold, the proceeds
of the sale thereof, on or before September 2, 1979.

However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. As a consequence,
METROBANK sent letters to the said principal obligor and its sureties, Norberto Uy and Jacinto Uy Diño,
 demanding payment of the amount due. Informed of the amount due, UTEFS made partial payments to the
Bank which were accepted by the latter.

Answering one of the demand letters, Diño, thru counsel, denied his liability for the amount demanded and
requested METROBANK to send him copies of documents showing the source of his liability. In its reply, the
bank informed him that the source of his liability is the Continuing Suretyship which he executed on February
25, 1977.

As a rejoinder, Diño maintained that he cannot be held liable for the 1979 credit accommodation because it is
a new obligation contracted without his participation. Besides, the 1977 credit accommodation which he
guaranteed has been fully paid.

Having sent the last demand letter to UTEFS, Diño and Uy and finding resort to extrajudicial remedies to be
futile, METROBANK filed a complaint for collection of a sum of money (P613,339.32, as of January 31, 1982,
inclusive of interest, commission penalty and bank charges) with a prayer for the issuance of a writ of
preliminary attachment, against Uy Tiam, representative of UTEFS and impleaded Diño and Uy as parties-
defendants.

The court issued an order, dated 29 July 1983, granting the attachment writ, which writ was returned unserved
and unsatisfied as defendant Uy Tiam was nowhere to be found at his given address and his commercial
enterprise was already non-operational (Original Records, p. 37).

On April 11, 1984, Norberto Uy and Jacinto Uy Diño (sureties-defendant herein) filed a motion to dismiss the
complaint on the ground of lack of cause of action. They maintained that the obligation which they guaranteed
in 1977 has been extinguished since it has already been paid in the same year. Accordingly, the Continuing
Suretyships executed in 1977 cannot be availed of to secure Uy Tiam's Letter of Credit obtained in 1979
because a guaranty cannot exist without a valid obligation. It was further argued that they can not be held
liable for the obligation contracted in 1979 because they are not privies thereto as it was contracted without
their participation (Records, pp. 42-46).

On April 24, 1984, METROBANK filed its opposition to the motion to dismiss. Invoking the terms and
conditions embodied in the comprehensive suretyships separately executed by sureties-defendants, the bank
argued that sureties-movants bound themselves as solidary obligors of defendant Uy Tiam to both existing
obligations and future ones. It relied on Article 2053 of the new Civil Code which provides: "A guaranty may
also be given as security for future debts, the amount of which is not yet known; . . . ." It was further asserted
that the agreement was in full force and effect at the time the letter of credit was obtained in 1979 as sureties-
defendants did not exercise their right to revoke it by giving notice to the bank. (Ibid., pp. 51-54).

Meanwhile, the resolution of the aforecited motion to dismiss was held in abeyance pending the introduction of
evidence by the parties as per order dated February 21, 1986 (Ibid., p. 71).

Having been granted a period of fifteen (15) days from receipt of the order dated March 7, 1986 within which
to file the answer, sureties-defendants filed their responsive pleading which merely rehashed the arguments in
their motion to dismiss and maintained that they are entitled to the benefit of excussion (Original Records, pp.
88-93).

On February 23, 1987, plaintiff filed a motion to dismiss the complaint against defendant Uy Tiam on the
ground that it has no information as to the heirs or legal representatives of the latter who died sometime in
December, 1986, which motion was granted on the following day (Ibid., pp. 180-182).

After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of which reads:

The evidence and the pleadings, thus, pose the querry (sic):

Are the defendants Jacinto Uy Diñoand Norberto Uy liable for the obligation contracted by Uy
Tiam under the Letter of Credit (Exh. B) issued on March 30, 1987 by virtue of the Continuing
Suretyships they executed on February 25, 1977?

Under the admitted proven facts, the Court finds that they are not.

a) When Uy and Diño executed the continuing suretyships, exhibits E and F, on February 25,
1977, Uy Tiam was obligated to the plaintiff in the amount of P700,000.00 — and this was the
obligation which both obligation which both defendants guaranteed to pay. Uy Tiam paid this
1977 obligation –– and such payment extinguished the obligation they assumed as
guarantors/sureties.

b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of Credit which covered
the 1977 account of Uy Tiam. Thus, the obligation under either is apart and distinct from the
obligation created in the other — as evidenced by the fact that Uy Tiam had to apply anew for
the 1979 transaction (Exh. A). And Diño and Uy, being strangers thereto, cannot be
answerable thereunder.

c) The plaintiff did not serve notice to the defendants Diño and Uy when it extended to Credit
— at least to inform them that the continuing suretyships they executed on February 25, 1977
will be considered by the plaintiff to secure the 1979 transaction of Uy Tiam.

d) There is no sufficient and credible showing that Diño and Uy were fully informed of the
import of the Continuing Suretyships when they affixed their signatures thereon –– that they
are thereby securing all future obligations which Uy Tiam may contract the plaintiff. On the
 contrary, Diño and Uy categorically testified that they signed the blank forms in the office of Uy
Tiam at 623 Asuncion Street, Binondo, Manila, in obedience to the instruction of Uy Tiam, their
former employer. They denied having gone to the office of the plaintiff to subscribe to the
documents (October 1, 1987, tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, 13-16).
(Records, pp. 333-334). 3

xxx xxx xxx

In its Decision, the trial court decreed as follows:

PREMISES CONSIDERED, judgment is hereby rendered:

a) dismissing the COMPLAINT against JACINTO UY DIÑO and NORBERTO UY;

b) ordering the plaintiff to pay to Diño and Uy the amount of P6,000.00 as attorney's fees and expenses of
litigation; and

c) denying all other claims of the parties for want of legal and/or factual basis.

SO ORDERED. (Records, p. 336) 4

From the said Decision, the private respondent appealed to the Court of Appeals. The case was docketed as CA-G.R. CV No.
17724. In support thereof, it made the following assignment of errors in its Brief:

I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING THAT DEFENDANTS-
APPELLEES JACINTO UY DIÑO AND NORBERTO UY ARE SOLIDARILY LIABLE TO PLAINTIFF-
APPELLANT FOR THE OBLIGATION OF DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT
ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY EXECUTED ON
FEBRUARY 25, 1977.

II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS ANSWERABLE TO

DEFENDANTS-APPELLEES JACINTO UY DIÑO AND NORBERTO UY FOR ATTORNEY'S FEES AND
EXPENSES OF LITIGATION. 5

On 22 June 1989, public respondent promulgated the assailed Decision the dispositive portion of which reads:

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED AND SET, ASIDE.
In lieu thereof, another one is rendered:

1) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly and severally,
to appellant METROBANK the amount of P2,397,883.68 which represents the amount due as
of July 17, 1987 inclusive of principal, interest and charges;

2) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly and severally,
appellant METROBANK the accruing interest, fees and charges thereon from July 18, 1987
until the whole monetary obligation is paid; and

3) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly and severally,
to plaintiff P20,000.00 as attorney's fees.

With costs against appellees.

SO ORDERED. 6

In ruling for the herein private respondent (hereinafter METROBANK), public respondent held that the Continuing Suretyship
Agreements separately executed by the petitioners in 1977 were intended to guarantee payment of Uy Tiam's outstanding as
well as future obligations; each suretyship arrangement was intended to remain in full force and effect until METROBANK
would have been notified of its revocation. Since no such notice was given by the petitioners, the suretyships are deemed
outstanding and hence, cover even the 1979 letter of credit issued by METROBANK in favor of Uy Tiam.

Petitioners filed a motion to reconsider the foregoing Decision. They questioned the public respondent's construction of the
suretyship agreements and its ruling with respect to the extent of their liability thereunder. They argued the even if the
agreements were in full force and effect when METROBANK granted Uy Tiam's application for a letter of credit in 1979, the
public respondent nonetheless seriously erred in holding them liable for an amount over and above their respective face
values.

In its Resolution of 21 August 1989, public respondent denied the motion:

. . . considering that the issues raised were substantially the same grounds utilized by the lower court in
rendering judgment for defendants-appellees which We upon appeal found and resolved to be untenable,
thereby reversing and setting aside said judgment and rendering another in favor of plaintiff, and no new or
fresh issues have been posited to justify reversal of Our decision herein, . . . . 7

Hence, the instant petition which hinges on the issue of whether or not the petitioners may be held liable as sureties for the
obligation contracted by Uy Tiam with METROBANK on 30 May 1979 under and by virtue of the Continuing Suretyship
Agreements signed on 25 February 1977.
Petitioners vehemently deny such liability on the ground that the Continuing Suretyship Agreements were automatically
extinguished upon payment of the principal obligation secured thereby, i.e., the letter of credit obtained by Uy Tiam in 1977.
They further claim that they were not advised by either METROBANK or Uy Tiam that the Continuing Suretyship Agreements
would stand as security for the 1979 obligation. Moreover, it is posited that to extend the application of such agreements to
the 1979 obligation would amount to a violation of Article 2052 of the Civil Code which expressly provides that a guaranty
cannot exist without a valid obligation. Petitioners further argue that even granting, for the sake of argument, that the
Continuing Suretyship Agreements still subsisted and thereby also secured the 1979 obligations incurred by Uy Tiam, they
cannot be held liable for more than what they guaranteed to pay because it s axiomatic that the obligations of a surety cannot
extend beyond what is stipulated in the agreement.

On 12 February 1990, this Court resolved to give due course to the petition after considering the allegations, issues and
arguments adduced therein, the Comment thereon by the private respondent and the Reply thereto by the petitioners; the
parties were required to submit their respective Memoranda.

The issues presented for determination are quite simple:

1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to METROBANK by virtue of
the Continuing Suretyship Agreements they separately signed in 1977; and

2. On the assumption that they are, what is the extent of their liabilities for said 1979 obligations.

Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not known at the time
the guaranty is
executed. 8 This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single transaction, but
which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally
intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor
9
becomes liable. Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in the future,
which are within the description or contemplation of the contract, of guaranty, until the expiration or termination thereof. 10 A
guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the
principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is
expressly reserved. Hence, where the contract of guaranty states that the same is to secure advances to be made "from time to
time" the guaranty will be construed to be a continuing one. 11

In other jurisdictions, it has been held that the use of particular words and expressions such as payment of "any debt," "any
indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal
debtor "at any time," or "on such time" that the principal debtor may require, have been construed to indicate a continuing
guaranty. 12

In the case at bar, the pertinent portion of paragraph I of the suretyship agreement executed by petitioner Uy provides thus:

I. For and in consideration of any existing indebtedness to the BANK of UY TIAM (hereinafter called the
"Borrower"), for the payment of which the SURETY is now obligated to the BANK, either as guarantor or
otherwise, and/or in order to induce the BANK, in its discretion, at any time or from time to time hereafter, to
make loans or advances or to extend credit in any other manner to, or at the request, or for the account of the
Borrower, either with or without security, and/or to purchase or discount, or to make any loans or advances
evidence or secured by any notes, bills, receivables, drafts, acceptances, checks, or other instruments or
evidences of indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become
liable as maker, endorser, acceptor, or otherwise, the SURETY agrees to guarantee, and does hereby
guarantee, the punctual payment at maturity to the loans, advances credits and/or other obligations
hereinbefore referred to, and also any and all other indebtedness of every kind which is now or may hereafter
become due or owing to the BANK by the Borrower, together with any and all expenses which may be
incurred by the BANK in collecting all or any such instruments or other indebtedness or obligations herein
before referred to, and/or in enforcing any rights hereunder, and the SURETY also agrees that the BANK may
make or cause any and all such payments to be made strictly in accordance with the terms and provisions of
any agreement(s) express or implied, which has (have) been or may hereafter be made or entered into by the
Borrow in reference thereto, regardless of any law, regulation or decree, unless the same is mandatory and
non-waivable in character, nor or hereafter in effect, which might in any manner affect any of the terms or
provisions of any such agreement(s) or the Bank's rights with respect thereto as against the Borrower, or
cause or permit to be invoked any alteration in the time, amount or manner of payment by the Borrower of any
such instruments, obligations or indebtedness; provided, however, that the liability of the SURETY hereunder
shall not exceed at any one time the aggregate principal sum of PESOS: THREE HUNDRED THOUSAND
ONLY (P300,000.00) (irrespective of the currenc(ies) in which the obligations hereby guaranteed are payable),
and such interest as may accrue thereon either before or after any maturity(ies) thereof and such expenses as
may be incurred by the BANK as referred to above. 13

Paragraph I of the Continuing Suretyship Agreement executed by petitioner Diño contains identical provisions except with
respect to the guaranteed aggregate principal amount which is EIGHT THOUSAND PESOS (P800,000.00). 14

Paragraph IV of both agreements stipulate that:

VI. This is a continuing guaranty and shall remain in full force and effect until written notice shall have been
received by the BANK that it has been revoked by the SURETY, but any such notice shall not release the
SURETY, from any liability as to any instruments, loans, advances or other obligations hereby guaranteed,
which may be held by the BANK, or in which the BANK may have any interest at the time of the receipt (sic) of
such notice. No act or omission of any kind on the BANK'S part in the premises shall in any event affect or
impair this guaranty, nor shall same (sic) be affected by any change which may arise by reason of the death of
the SURETY, or of any partner(s) of the SURETY, or of the Borrower, or of the accession to any such
partnership of any one or more new partners. 15
The foregoing stipulations unequivocally reveal that the suretyship agreement in the case at bar are continuing in nature.
Petitioners do not deny this; in fact, they candidly admitted it. Neither have they denied the fact that they had not revoked the
suretyship agreements. Accordingly, as correctly held by the public respondent:

Undoubtedly, the purpose of the execution of the Continuing Suretyships was to induce appellant to grant any
application for credit accommodation (letter of credit/trust receipt) UTEFS may desire to obtain from appellant
bank. By its terms, each suretyship is a continuing one which shall remain in full force and effect until the bank
is notified of its revocation.

xxx xxx xxx

When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant bank, for the purpose of
obtaining goods (covered by a trust receipt) from Planters Products, the continuing suretyships were in full
force and effect. Hence, even if sureties-appellees did not sign the "Commercial Letter of Credit and
Application, they are still liable as the credit accommodation (letter of credit/trust receipt) was covered by the
said suretyships. What makes them liable thereunder is the condition which provides that the Borrower "is or
may become liable as maker, endorser, acceptor or otherwise." And since UTEFS which (sic) was liable as
principal obligor for having failed to fulfill the obligatory stipulations in the trust receipt, they as insurers of its
obligation, are liable thereunder. 16

Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable to the 1979 obligation
because the latter was not yet in existence when the agreements were executed in 1977; under Article 2052 of the Civil Code,
a guaranty "cannot exist without a valid obligation." We cannot agree. First of all, the succeeding article provides that "[a]
guaranty may also be given as security for future debts, the amount of which is not yet known." Secondly, Article 2052 speaks
about a valid obligation, as distinguished from a void obligation, and not an existing or current obligation. This distinction is
made clearer in the second paragraph of Article 2052 which reads:

Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable

contract. It may also guarantee a natural obligation.

As to the amount of their liability under the Continuing Suretyship Agreements, petitioners contend that the public respondent
gravely erred in finding them liable for more than the amount specified in their respective agreements, to wit: (a) P800,000.00
for petitioner Diño and (b) P300,000.00 for petitioner Uy.

The limit of the petitioners respective liabilities must be determined from the suretyship agreement each had signed. It is
undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule is settled that the
obligation of the surety cannot be extended by implication beyond its specified limits. To the extent, and in the manner, and
under the circumstances pointed out in his obligation, he is bound, and no farther. 17

Indeed, the Continuing Suretyship Agreements signed by petitioner Diño and petitioner Uy fix the aggregate amount of their
liability, at any given time, at P800,000.00 and P300,000.00, respectively. The law is clear that a guarantor may bond himself
for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. 18 In
the case at bar, both agreements provide for liability for interest and expenses, to wit:

. . . and such interest as may accrue thereon either before or after any maturity(ies) thereof and such
expenses as may be incurred by the BANK referred to above. 19

They further provide that:

In the event of judicial proceedings being instituted by the BANK against the SURETY to enforce any of the
terms and conditions of this undertaking, the SURETY further agrees to pay the BANK a reasonable
compensation for and as attorney's fees and costs of collection, which shall not in any event be less than ten
per cent (10%) of the amount due (the same to be due and payable irrespective of whether the case is settled
judicially or extrajudicially). 20

Thus, by express mandate of the Continuing Suretyship Agreements which they had signed, petitioners separately
bound themselves to pay interest, expenses, attorney's fees and costs. The last two items are pegged at not less than
ten percent (10%) of the amount due.

Even without such stipulations, the petitioners would, nevertheless, be liable for the interest and judicial costs. Article 2055 of
the Civil Code provides: 21

Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated
therein.

If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its accessories,
including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those
costs incurred after he has been judicially required to pay.

Interest and damages are included in the term accessories. However, such interest should run only from the date
when the complaint was filed in court. Even attorney's fees may be imposed whenever appropriate, pursuant to Article
2208 of the Civil Code. Thus, in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., 22 this Court
held:

Petitioner objects to the payment of interest and attorney's fees because: (1) they were not mentioned in the
bond; and (2) the surety would become liable for more than the amount stated in the contract of suretyship.

xxx xxx xxx

 The objection has to be overruled, because as far back as the year 1922 this Court held in Tagawa vs.
Aldanese, 43 Phil. 852, that creditors suing on a suretyship bond may recover from the surety as part of their
damages, interest at the legal rate even if the surety would thereby become liable to pay more than the total
amount stipulated in the bond. The theory is that interest is allowed only by way of damages for delay upon
the part of the sureties in making payment after they should have done so. In some states, the interest has
been charged from the date of the interest has been charged from the date of the judgment of the appellate
court. In this jurisdiction, we rather prefer to follow the general practice, which is to order that interest begin to
run from the date when the complaint was filed in court, . . .

Such theory aligned with sec. 510 of the Code of Civil Procedure which was subsequently recognized in the
Rules of Court (Rule 53, section 6) and with Article 1108 of the Civil Code (now Art. 2209 of the New Civil
Code).

In other words the surety is made to pay interest, not by reason of the contract, but by reason of its failure to
pay when demanded and for having compelled the plaintiff to resort to the courts to obtain payment. It should
be observed that interest does not run from the time the obligation became due, but from the filing of the
complaint.

As to attorney's fees. Before the enactment of the New Civil Code, successful litigants could not recover
attorney's fees as part of the damages they suffered by reason of the litigation. Even if the party paid
thousands of pesos to his lawyers, he could not charge the amount to his opponent (Tan Ti vs. Alvear, 26 Phil.
566).

However the New Civil Code permits recovery of attorney's fees in eleven cases enumerated in Article 2208,
among them, "where the court deems it just and equitable that attorney's (sic) fees and expenses of litigation
should be recovered" or "when the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiff's plainly valid, just and demandable claim." This gives the courts discretion in apportioning attorney's
fees.

The records do not reveal the exact amount of the unpaid portion of the principal obligation of Uy Tiam to MERTOBANK
under Irrevocable Letter of Credit No. SN-Loc-309 dated 30 March 1979. In referring to the last demand letter to Mr. Uy Tiam
and the complaint filed in Civil Case No. 82-9303, the public respondent mentions the amount of "P613,339.32, as of January
31, 1982, inclusive of interest commission penalty and bank charges." 23 This is the same amount stated by METROBANK in its
Memorandum. 24 However, in summarizing Uy Tiam's outstanding obligation as of 17 July 1987, public respondent states:

Hence, they are jointly and severally liable to appellant METROBANK of UTEFS' outstanding obligation in the
sum of P2,397,883.68 (as of July 17, 1987) — P651,092.82 representing the principal amount, P825,133.54,
for past due interest (5-31-82 to 7-17-87) and P921,657.32, for penalty charges at 12% per annum (5-31-82 to
7-17-87) as shown in the Statement of Account (Exhibit I). 25

Since the complaint was filed on 18 May 1982, it is obvious that on that date, the outstanding principal obligation of Uy
Tiam, secured by the petitioners' Continuing Suretyship Agreements, was less than P613,339.32. Such amount may
be fully covered by the Continuing Suretyship Agreement executed by petitioner Diño which stipulates an aggregate
principal sum of not exceeding P800,000.00, and partly covered by that of petitioner Uy which pegs his maximum
liability at P300,000.00.

Consequently, the judgment of the public respondent shall have to be modified to conform to the foregoing exposition, to
which extent the instant petition is impressed with partial merit.

WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged decision has to be modified with respect to
the extend of petitioners' liability. As modified, petitioners JACINTO UY DIÑO and NORBERTO UY are hereby declared liable
for and are ordered to pay, up to the maximum limit only of their respective Continuing Suretyship Agreement, the remaining
unpaid balance of the principal obligation of UY TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under Irrevocable
Letter of Credit No. SN-Loc-309, dated 30 March 1979, together with the interest due thereon at the legal rate commencing
from the date of the filing of the complaint in Civil Case No. 82-9303 with Branch 45 of the Regional Trial Court of Manila, as
well as the adjudged attorney's fees and costs.

All other dispositions in the dispositive portion of the challenged decision not inconsistent with the above are affirmed.

SO ORDERED.

SECOND DIVISION

SALVADOR P. ESCAO G. R. No. 151953

and MARIO M. SILOS,
Petitioners,
Present:
QUISUMBING,
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
RAFAEL ORTIGAS, JR., VELASCO, JR., JJ.
Respondent.
 Promulgated:

June 29, 2007

x---------------------------------------------------------------------------------x

DECISION

TINGA, J.:

The main contention raised in this petition is that petitioners are not under obligation to reimburse
respondent, a claim that can be easily debunked. The more perplexing question is whether this
obligation to repay is solidary, as contended by respondent and the lower courts, or merely joint as
argued by petitioners.

On 28 April 1980, Private Development Corporation of the Philippines (PDCP)[1] entered into a
loan agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make available and lend
to Falcon the amount of US$320,000.00, for specific purposes and subject to certain terms and
conditions.[2] On the same day, three stockholders-officers of Falcon, namely: respondent Rafael
Ortigas, Jr. (Ortigas), George A. Scholey and George T. Scholey executed an Assumption of Solidary
Liability whereby they agreed to assume in [their] individual capacity, solidary liability with [Falcon]
for the due and punctual payment of the loan contracted by Falcon with PDCP. [3] In the meantime, two
separate guaranties were executed to guarantee the payment of the same loan by other stockholders and
officers of Falcon, acting in their personal and individual capacities. One Guaranty[4] was executed by
petitioner Salvador Escao (Escao), while the other[5] by petitioner Mario M. Silos (Silos), Ricardo C.
Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez).

Two years later, an agreement developed to cede control of Falcon to Escao, Silos and Joseph M. Matti
(Matti). Thus, contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of
then already deceased George T. Scholey assigned their shares of stock in Falcon to Escao, Silos and
Matti.[6] Part of the consideration that induced the sale of stock was a desire by Ortigas, et al., to relieve
themselves of all liability arising from their previous joint and several undertakings with Falcon,
including those related to the loan with PDCP. Thus, an Undertaking dated 11 June 1982 was executed
by the concerned parties,[7] namely: with Escao, Silos and Matti identified in the document as
SURETIES, on one hand, and Ortigas, Inductivo and the Scholeys as OBLIGORS, on the other. The
Undertaking reads in part:

3. That whether or not SURETIES are able to immediately cause PDCP and PAIC to release
OBLIGORS from their said guarantees [sic], SURETIES hereby irrevocably agree and
undertake to assume all of OBLIGORs said guarantees [sic] to PDCP and PAIC under
the following terms and conditions:

a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP and/or
PAIC for the payment of FALCONs obligations with it, any of [the] OBLIGORS
shall immediately inform SURETIES thereof so that the latter can timely take
appropriate measures;

b. Should suit be impleaded by PDCP and/or PAIC against any and/or all of
OBLIGORS for collection of said loans and/or credit facilities, SURETIES agree
to defend OBLIGORS at their own expense, without prejudice to any and/or all
of OBLIGORS impleading SURETIES therein for contribution, indemnity,
subrogation or other relief in respect to any of the claims of PDCP and/or PAIC;
and
 c. In the event that any of [the] OBLIGORS is for any reason made to pay
any amount to PDCP and/or PAIC, SURETIES shall reimburse OBLIGORS for
said amount/s within seven (7) calendar days from such payment;

4. OBLIGORS hereby waive in favor of SURETIES any and all fees which may be due
from FALCON arising out of, or in connection with, their said guarantees[sic].[8]

Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by PDCP. It
would also execute a Deed of Chattel Mortgage over its personal properties to further secure the loan.
However, Falcon subsequently defaulted in its payments. After PDCP foreclosed on the chattel
mortgage, there remained a subsisting deficiency of P5,031,004.07, which Falcon did not satisfy despite
demand.[9]
On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for sum of
money with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas, Escao, Silos, Silverio
and Inductivo. The case was docketed as Civil Case No. 89-5128. For his part, Ortigas filed together
with his answer a cross-claim against his co-defendants Falcon, Escao and Silos, and also manifested
his intent to file a third-party complaint against the Scholeys and Matti. [10] The cross-claim lodged
against Escao and Silos was predicated on the 1982 Undertaking, wherein they agreed to assume the
liabilities of Ortigas with respect to the PDCP loan.

Escao, Ortigas and Silos each sought to seek a settlement with PDCP. The first to come to terms
with PDCP was Escao, who in December of 1993, entered into a compromise agreement whereby
he agreed to pay the bank P1,000,000.00. In exchange, PDCP waived or assigned in favor of Escao one-
third (1/3) of its entire claim in the complaint against all of the other defendants in the case.[11] The
compromise agreement was approved by the RTC in a Judgment[12] dated 6 January 1994.

Then on 24 February 1994, Ortigas entered into his own compromise agreement[13] with PDCP,
allegedly without the knowledge of Escao, Matti and Silos. Thereby, Ortigas agreed to pay
PDCP P1,300,000.00 as full satisfaction of the PDCPs claim against Ortigas, [14] in exchange for PDCPs
release of Ortigas from any liability or claim arising from the Falcon loan agreement, and a renunciation
of its claims against Ortigas.

In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he agreed to
pay P500,000.00 in exchange for PDCPs waiver of its claims against him. [15]

In the meantime, after having settled with PDCP, Ortigas pursued his claims against Escao, Silos
and Matti, on the basis of the 1982 Undertaking. He initiated a third-party complaint against Matti and
Silos,[16] while he maintained his cross-claim against Escao. In 1995, Ortigas filed a motion for
Summary Judgment in his favor against Escao, Silos and Matti. On 5 October 1995, the RTC issued the
Summary Judgment, ordering Escao, Silos and Matti to pay Ortigas, jointly and severally, the amount
of P1,300,000.00, as well as P20,000.00 in attorneys fees.[17] The trial court ratiocinated that none of the
third-party defendants disputed the 1982 Undertaking, and that the mere denials of defendants with
respect to non-compliance of Ortigas of the terms and conditions of the Undertaking, unaccompanied
by any substantial fact which would be admissible in evidence at a hearing, are not sufficient to raise
genuine issues of fact necessary to defeat a motion for summary judgment, even if such facts were
raised in the pleadings.[18] In an Order dated 7 March 1996, the trial court denied the motion for
reconsideration of the Summary Judgment and awarded Ortigas legal interest of 12% per annum to be
computed from 28 February 1994.[19]

From the Summary Judgment, recourse was had by way of appeal to the Court of Appeals. Escao
and Silos appealed jointly while Matti appealed by his lonesome. In a Decision [20] dated 23 January
2002, the Court of Appeals dismissed the appeals and affirmed the Summary Judgment. The appellate
court found that the RTC did not err in rendering the summary judgment since the three appellants did
not effectively deny their execution of the 1982 Undertaking. The special defenses that were raised,
payment and excussion, were characterized by the Court of Appeals as appear[ing] to be merely sham
in the light of the pleadings and supporting documents and affidavits. [21] Thus, it was concluded that
there was no genuine issue that would still require the rigors of trial, and that the appealed judgment
was decided on the bases of the undisputed and established facts of the case.

Hence, the present petition for review filed by Escao and Silos. [22] Two main issues are raised.
First, petitioners dispute that they are liable to Ortigas on the basis of the 1982 Undertaking, a document
which they do not disavow and have in fact annexed to their petition. Second, on the assumption that
they are liable to Ortigas under the 1982 Undertaking, petitioners argue that they are jointly liable only,
and not solidarily. Further assuming that they are liable, petitioners also submit that they are not liable
for interest and if at all, the proper interest rate is 6% and not 12%.

Interestingly, petitioners do not challenge, whether in their petition or their memorandum before
the Court, the appropriateness of the summary judgment as a relief favorable to Ortigas. Under Section
3, Rule 35 of the 1997 Rules of Civil Procedure, summary judgment may avail if the pleadings,
supporting affidavits, depositions and admissions on file show that, except as to the amount of damages,
there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a
matter of law. Petitioner have not attempted to demonstrate before us that there existed a genuine issue
as to any material fact that would preclude summary judgment. Thus, we affirm with ease the common
rulings of the lower courts that summary judgment is an appropriate recourse in this case.

The vital issue actually raised before us is whether petitioners were correctly held liable to
Ortigas on the basis of the 1982 Undertaking in this Summary Judgment. An examination of the
document reveals several clauses that make it clear that the agreement was brought forth by the desire
of Ortigas, Inductivo and the Scholeys to be released from their liability under the loan agreement
which release was, in turn, part of the consideration for the assignment of their shares in Falcon to
petitioners and Matti. The whereas clauses manifest that Ortigas had bound himself with Falcon for the
payment of the loan with PDCP, and that amongst the consideration for OBLIGORS and/or their
principals aforesaid selling is SURETIES relieving OBLIGORS of any and all liability arising from
their said joint and several undertakings with FALCON. [23] Most crucial is the clause in Paragraph 3 of
the Undertaking wherein petitioners irrevocably agree and undertake to assume all of OBLIGORs said
guarantees [sic] to PDCP x x x under the following terms and conditions. [24]

At the same time, it is clear that the assumption by petitioners of Ortigass guarantees [sic] to
PDCP is governed by stipulated terms and conditions as set forth in sub-paragraphs (a) to (c) of
Paragraph 3. First, upon receipt by any of OBLIGORS of any demand from PDCP for the payment of
Falcons obligations with it, any of OBLIGORS was to immediately inform SURETIES thereof so that
the latter can timely take appropriate measures. Second, should any and/or all of OBLIGORS be
impleaded by PDCP in a suit for collection of its loan, SURETIES agree[d] to defend OBLIGORS at
their own expense, without prejudice to any and/or all of OBLIGORS impleading SURETIES therein
for contribution, indemnity, subrogation or other relief [25] in respect to any of the claims of PDCP.
Third, if any of the OBLIGORS is for any reason made to pay any amount to [PDCP], SURETIES
[were to] reimburse OBLIGORS for said amount/s within seven (7) calendar days from such
payment.[26]

Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas was not made to pay
PDCP the amount now sought to be reimbursed, as Ortigas voluntarily paid PDCP the amount of P1.3
Million as an amicable settlement of the claims posed by the bank against him. However, the subject
clause in paragraph 3(c) actually reads [i]n the event that any of OBLIGORS is for any reason made to
pay any amount to PDCP x x x[27] As pointed out by Ortigas, the phrase for any reason reasonably
includes any extra-judicial settlement of obligation such as what Ortigas had undertaken to pay to
PDCP, as it is indeed obvious that the phrase was incorporated in the clause to render the eventual
payment adverted to therein unlimited and unqualified.

The interpretation posed by petitioners would have held water had the Undertaking made clear
that the right of Ortigas to seek reimbursement accrued only after he had delivered payment to PDCP as
a consequence of a final and executory judgment. On the contrary, the clear intent of the Undertaking
was for petitioners and Matti to relieve the burden on Ortigas and his fellow OBLIGORS as soon as
possible, and not only after Ortigas had been subjected to a final and executory adverse judgment.

Paragraph 1 of the Undertaking enjoins petitioners to exert all efforts to cause PDCP x x x to
within a reasonable time release all the OBLIGORS x x x from their guarantees [sic] to PDCP x x
x[28] In the event that Ortigas and his fellow OBLIGORS could not be released from their guaranties,
paragraph 2 commits petitioners and Matti to cause the Board of Directors of Falcon to make a call on
its stockholders for the payment of their unpaid subscriptions and to pledge or assign such payments to
Ortigas, et al., as security for whatever amounts the latter may be held liable under their guaranties. In
addition, paragraph 1 also makes clear that nothing in the Undertaking shall prevent OBLIGORS, or
any one of them, from themselves negotiating with PDCP x x x for the release of their said guarantees
[sic].[29]

There is no argument to support petitioners position on the import of the phrase made to pay in
the Undertaking, other than an unduly literalist reading that is clearly inconsistent with the thrust of the
document. Under the Civil Code, the various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them taken jointly. [30] Likewise
applicable is the provision that if some stipulation of any contract should admit of several meanings, it
shall be understood as bearing

that import which is most adequate to render it effectual. [31] As a means to effect the general intent of
the document to relieve Ortigas from liability to PDCP, it is his interpretation, not that of petitioners,
that holds sway with this Court.

Neither do petitioners impress us of the non-fulfillment of any of the other conditions set in
paragraph 3, as they claim. Following the general assertion in the petition that Ortigas violated the terms
of the Undertaking, petitioners add that Ortigas paid PDCP BANK the amount of P1.3 million without
petitioners ESCANO and SILOSs knowledge and consent. [32] Paragraph 3(a) of the Undertaking does
impose a requirement that any of the OBLIGORS shall immediately inform SURETIES if they received
any demand for payment of FALCONs obligations to PDCP, but that requirement is reasoned so that
the [SURETIES] can timely take appropriate measures[33] presumably to settle the obligation without
having to burden the OBLIGORS. This notice requirement in paragraph 3(a) is markedly way off from
the suggestion of petitioners that Ortigas, after already having been impleaded as a defendant in the
collection suit, was obliged under the 1982 Undertaking to notify them before settling with PDCP.

The other arguments petitioners have offered to escape liability to Ortigas are similarly weak.

Petitioners impugn Ortigas for having settled with PDCP in the first place. They note that Ortigas
had, in his answer, denied any liability to PDCP and had alleged that he signed the Assumption of
Solidary Liability not in his personal capacity, but as an officer of Falcon. However, such position,
according to petitioners, could not be justified since Ortigas later voluntarily paid PDCP the amount
of P1.3 Million. Such circumstances, according to petitioners, amounted to estoppel on the part of
Ortigas.

Even as we entertain this argument at depth, its premises are still erroneous. The Partial
Compromise Agreement between PDCP and Ortigas expressly stipulated that Ortigass offer to pay
PDCP was conditioned without [Ortigass] admitting liability to plaintiff PDCP Banks complaint, and to
terminate and dismiss the said case as against Ortigas solely. [34] Petitioners profess it is unthinkable for
Ortigas to have voluntarily paid PDCP without admitting his liability, [35] yet such contention based on
assumption cannot supersede the literal terms of the Partial Compromise Agreement.

Petitioners further observe that Ortigas made the payment to PDCP after he had already assigned
his obligation to petitioners through the 1982 Undertaking. Yet the fact is PDCP did pursue a judicial
claim against Ortigas notwithstanding the Undertaking he executed with petitioners. Not being a party
to such Undertaking, PDCP was not precluded by a contract from pursuing its claim against Ortigas
based on the original Assumption of Solidary Liability.

At the same time, the Undertaking did not preclude Ortigas from relieving his distress through a
settlement with the creditor bank. Indeed, paragraph 1 of the Undertaking expressly states that nothing
herein shall prevent OBLIGORS, or any one of them, from themselves negotiating with PDCP x x x for
the release of their said guarantees [sic].[36]Simply put, the Undertaking did not bar Ortigas from
pursuing his own settlement with PDCP. Neither did the Undertaking bar Ortigas from recovering from
petitioners whatever amount he may have paid PDCP through his own settlement. The stipulation that if
Ortigas was for any reason made to pay any amount to PDCP[,] x x x SURETIES shall reimburse
OBLIGORS for said amount/s within seven (7) calendar days from such payment [37] makes it clear that
petitioners remain liable to reimburse Ortigas for the sums he paid PDCP.

We now turn to the set of arguments posed by petitioners, in the alternative, that is, on the
assumption that they are indeed liable.

Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas, claiming
that the Undertaking did not provide for express solidarity. They cite Article 1207 of the New Civil
Code, which states in part that [t]here is a solidary liability only when the obligation expressly so states,
or when the law or the nature of the obligation requires solidarity.
 Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable for the
Undertaking, as the language used in the agreement clearly shows that it is a surety
agreement[38] between the obligors (Ortigas group) and the sureties (Escao group). Ortigas points out
that the Undertaking uses the word SURETIES although the document, in describing the parties. It is
further contended that the principal objective of the parties in executing the Undertaking cannot be
attained unless petitioners are solidarily liable because the total loan obligation can not be paid or
settled to free or release the OBLIGORS if one or any of the SURETIES default from their obligation in
the Undertaking.[39]

In case, there is a concurrence of two or more creditors or of two or more debtors in one and the same
obligation, Article 1207 of the Civil Code states that among them, [t]here is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the obligation requires
solidarity. Article 1210 supplies further caution against the broad interpretation of solidarity by
providing: The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does
solidarity of itself imply indivisibility.

These Civil Code provisions establish that in case of concurrence of two or more creditors or of two or
more debtors in one and the same obligation, and in the absence of express and indubitable terms
characterizing the obligation as solidary, the presumption is that the obligation is only joint. It thus
becomes incumbent upon the party alleging that the obligation is indeed solidary in character to prove
such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the petitioners agreed to bind
themselves jointly and severally in their obligations to the Ortigas group, or any such terms to that
effect. Hence, such obligation established in the Undertaking is presumed only to be joint. Ortigas, as
the party alleging that the obligation is in fact solidary, bears the burden to overcome the presumption
of jointness of obligations. We rule and so hold that he failed to discharge such burden.

Ortigas places primary reliance on the fact that the petitioners and Matti identified themselves in
the Undertaking as SURETIES, a term repeated no less than thirteen (13) times in the document.
Ortigas claims that such manner of identification sufficiently establishes that the obligation of
petitioners to him was joint and solidary in nature.

The term surety has a specific meaning under our Civil Code. Article 2047 provides the statutory
definition of a surety agreement, thus:

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship. [Emphasis supplied][40]

As provided in Article 2047 in a surety agreement the surety undertakes to be bound solidarily
with the principal debtor. Thus, a surety agreement is an ancillary contract as it presupposes the
existence of a principal contract. It appears that Ortigass argument rests solely on the solidary nature of
the obligation of the surety under Article 2047. In tandem with the nomenclature SURETIES accorded
to petitioners and Matti in the Undertaking, however, this
argument can only be viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as defined under Article 2047 in the first place.
That clearly is not the case here, notwithstanding the use of the nomenclature SURETIES in the
Undertaking.

Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is
solidarily bound by way of an ancillary obligation of segregate identity from the obligation between the
principal debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch as the
latter is vested with the right to proceed against the former to collect the credit in lieu of proceeding
against the principal debtor for the same obligation. [41] At the same time, there is also a legal tie created
between the surety and the principal debtor to which the creditor is not privy or party to. The moment
the surety fully answers to the creditor for the obligation created by the principal debtor, such obligation
is extinguished.[42] At the same time, the surety may seek reimbursement from the principal debtor for
the amount paid, for the surety does in fact become subrogated to all the rights and remedies of the
creditor.[43]

Note that Article 2047 itself specifically calls for the application of the provisions on joint and
solidary obligations to suretyship contracts.[44] Article 1217 of the Civil Code thus comes into play,
recognizing the right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in
favor of the one who paid (i.e., the surety).[45]However, a significant distinction still lies between a joint
and several debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor can
compel any one of the joint and several debtors or the surety alone to answer for the entirety of the
principal debt. The difference lies in the respective faculties of the joint and several debtor and the
surety to seek reimbursement for the sums they paid out to the creditor.

Dr. Tolentino explains the differences between a solidary co-debtor and a surety:

A guarantor who binds himself in solidum with the principal debtor under the provisions of the
second paragraph does not become a solidary co-debtor to all intents and purposes. There is a
difference between a solidary co-debtor and a fiador in solidum (surety). The latter,
outside of the liability he assumes to pay the debt before the property of the principal
debtor has been exhausted, retains all the other rights, actions and benefits which
pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights
than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.

The second paragraph of [Article 2047] is practically equivalent to the contract of

suretyship. The civil law suretyship is, accordingly, nearly synonymous with the common law
guaranty; and the civil law relationship existing between the co-debtors liable in solidum is
similar to the common law suretyship.[46]

In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who
effected the payment to the creditor may claim from his co-debtors only the share which corresponds
to each, with the interest for the payment already made. Such solidary debtor will not be able to recover
from the co-debtors the full amount already paid to the creditor, because the right to recovery extends
only to the proportional share of the other co-debtors, and not as to the particular proportional share of
the solidary debtor who already paid. In contrast, even as the surety is solidarily bound with the
principal debtor to the creditor, the surety who does pay the creditor has the right to recover the full
amount paid, and not just any proportional share, from the principal debtor or debtors. Such right to full
reimbursement falls within the other rights, actions and benefits which pertain to the surety by reason of
the subsidiary obligation assumed by the surety.
 What is the source of this right to full reimbursement by the surety? We find the right under
Article 2066 of the Civil Code, which assures that [t]he guarantor who pays for a debtor must be
indemnified by the latter, such indemnity comprising of, among others, the total amount of the
debt.[47] Further, Article 2067 of the Civil Code likewise establishes that [t]he guarantor who pays is
subrogated by virtue thereof to all the rights which the creditor had against the debtor.[48]

Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions should
not extend to sureties, especially in light of the qualifier in Article 2047 that the provisions on joint and
several obligations should apply to sureties. We reject that argument, and instead adopt Dr. Tolentinos
observation that [t]he reference in the second paragraph of [Article 2047] to the provisions of Section 4,
Chapter 3, Title I, Book IV, on solidary or several obligations, however, does not mean that suretyship
is withdrawn from the applicable provisions governing guaranty. [49] For if that were not the implication,
there would be no material difference between the surety as defined under Article 2047 and the joint
and several debtors, for both classes of obligors would be governed by exactly the same rules and
limitations.

Accordingly, the rights to indemnification and subrogation as established and granted to the
guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. These
rights granted to the surety who pays materially differ from those granted under Article 1217 to the
solidary debtor who pays, since the indemnification that pertains to the latter extends only [to] the share
which corresponds to each [co-debtor]. It is for this reason that the Court cannot accord the conclusion
that because petitioners are identified in the Undertaking as SURETIES, they are consequently joint and
severally liable to Ortigas.

In order for the conclusion espoused by Ortigas to hold, in light of the general presumption
favoring joint liability, the Court would have to be satisfied that among the petitioners and Matti, there
is one or some of them who stand as the principal debtor to Ortigas and another as surety who has the
right to full reimbursement from the principal debtor or debtors. No suggestion is made by the parties
that such is the case, and certainly the Undertaking is not revelatory of such intention. If the Court were
to give full fruition to the use of the term SURETIES as conclusive indication of the existence of a
surety agreement that in turn gives rise to a solidary obligation to pay Ortigas, the necessary implication
would be to lay down a corresponding set of rights and obligations as between the SURETIES which
petitioners and Matti did not clearly intend.

It is not impossible that as between Escao, Silos and Matti, there was an agreement whereby in
the event that Ortigas were to seek reimbursement from them per the terms of the Undertaking, one of
them was to act as surety and to pay Ortigas in full, subject to his right to full reimbursement from the
other two obligors. In such case, there would have been, in fact, a surety agreement which evinces a
solidary obligation in favor of Ortigas. Yet if there was indeed such an agreement, it does not appear on
the record. More consequentially, no such intention is reflected in the Undertaking itself, the very
document that creates the conditional obligation that petitioners and Matti reimburse Ortigas should he
be made to pay PDCP. The mere utilization of the term SURETIES could not work to such effect,
especially as it does not appear who exactly is the principal debtor whose obligation is assured or
guaranteed by the surety.

Ortigas further argues that the nature of the Undertaking requires solidary obligation of the
Sureties, since the Undertaking expressly seeks to reliev[e] obligors of any and all liability arising from
their said joint and several undertaking with [F]alcon, and for the sureties to irrevocably agree and
undertake to assume all of obligors said guarantees to PDCP.[50] We do not doubt that a finding of
solidary liability among the petitioners works to the benefit of Ortigas in the facilitation of these goals,
yet the Undertaking itself contains no stipulation or clause that establishes petitioners obligation to
Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not by themselves establish that the
nature of the obligation requires solidarity. Even if the liability of petitioners and Matti were adjudged
as merely joint, the full relief and reimbursement of Ortigas arising from his payment to PDCP would
still be accomplished through the complete execution of such a judgment.
 Petitioners further claim that they are not liable for attorneys fees since the Undertaking
contained no such stipulation for attorneys fees, and that the situation did not fall under the instances
under Article 2208 of the Civil Code where attorneys fees are recoverable in the absence of stipulation.

We disagree. As Ortigas points out, the acts or omissions of the petitioners led to his being
impleaded in the suit filed by PDCP. The Undertaking was precisely executed as a means to obtain the
release of Ortigas and the Scholeys from their previous obligations as sureties of Falcon, especially
considering that they were already divesting their shares in the corporation. Specific provisions in the
Undertaking obligate petitioners to work for the release of Ortigas from his surety agreements with
Falcon. Specific provisions likewise mandate the immediate repayment of Ortigas should he still be
made to pay PDCP by reason of the guaranty agreements from which he was ostensibly to be released
through the efforts of petitioners. None of these provisions were complied with by petitioners, and
Article 2208(2) precisely allows for the recovery of attorneys fees [w]hen the defendants act or
omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his
interest.

Finally, petitioners claim that they should not be liable for interest since the Undertaking does not
contain any stipulation for interest, and assuming that they are liable, that the rate of interest should not
be 12% per annum, as adjudged by the RTC.

The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals [51] set forth the rules with
respect to the manner of computing legal interest:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,

delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on Damages of the Civil Code govern in determining the
measure of recoverable damages.

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

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

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

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

breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally
adjudged.
 3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1
or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.[52]

Since what was the constituted in the Undertaking consisted of a payment in a sum of money, the
rate of interest thereon shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand. The interest rate imposed by the RTC is thus proper. However, the computation
should be reckoned from judicial or extrajudicial demand. Per records, there is no indication that
Ortigas made any extrajudicial demand to petitioners and Matti after he paid PDCP, but on 14 March
1994, Ortigas made a judicial demand when he filed a Third-Party Complaint praying that petitioners
and Matti be made to reimburse him for the payments made to PDCP. It is the filing of this Third Party
Complaint on 14 March 1994 that should be considered as the date of judicial demand from which the
computation of interest should be reckoned.[53] Since the RTC held that interest should be computed
from 28 February 1994, the appropriate redefinition should be made.

WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial Court
dated 5 October 1995 is MODIFIED by declaring that petitioners and Joseph M. Matti are only jointly
liable, not jointly and severally, to respondent Rafael Ortigas, Jr. in the amount of P1,300,000.00. The
Order of the Regional Trial Court dated 7 March 1996 is MODIFIED in that the legal interest of 12%
per annum on the amount of P1,300,000.00 is to be computed from 14 March 1994, the date of judicial
demand, and not from 28 February 1994 as directed in the Order of the lower court. The assailed rulings
are affirmed in all other respects. Costs against petitioners.

SO ORDERED.
FIRST DIVISION

JOSE C. TUPAZ IV and G.R. No. 145578

PETRONILA C. TUPAZ,

Petitioners,

Present:

Davide, Jr., C.J.,

Chairman,

- versus - Quisumbing,

Ynares-Santiago,

Carpio, and

Azcuna, JJ.
THE COURT OF APPEALS and

BANK OF THE PHILIPPINE Promulgated:

ISLANDS,

Respondents. November 18, 2005

x-------------------------------------------------x

DECISION

CARPIO, J.:

The Case

This is a petition for review[1] of the Decision[2] of the Court of Appeals dated 7 September 2000 and its
Resolution dated 18 October 2000. The 7 September 2000 Decision affirmed the ruling of the Regional
Trial Court, Makati, Branch 144 in a case for estafa under Section 13, Presidential Decree No. 115. The
Court of Appeals Resolution of 18 October 2000 denied petitioners motion for reconsideration.

The Facts

Petitioners Jose C. Tupaz IV and Petronila C. Tupaz (petitioners) were Vice-President for Operations
and Vice-President/Treasurer, respectively, of El Oro Engraver Corporation (El Oro Corporation). El Oro
Corporation had a contract with the Philippine Army to supply the latter with survival bolos.

To finance the purchase of the raw materials for the survival bolos, petitioners, on behalf of El Oro
Corporation, applied with respondent Bank of the Philippine Islands (respondent bank) for two
commercial letters of credit. The letters of credit were in favor of El Oro Corporations suppliers,
Tanchaoco Manufacturing Incorporated[3] (Tanchaoco Incorporated) and Maresco Rubber and
Retreading Corporation[4] (Maresco Corporation). Respondent bank granted petitioners application
and issued Letter of Credit No. 2-00896-3 for P564,871.05 to Tanchaoco Incorporated and Letter of
Credit No. 2-00914-5 for P294,000 to Maresco Corporation.
 Simultaneous with the issuance of the letters of credit, petitioners signed trust receipts in favor
of respondent bank. On 30 September 1981, petitioner Jose C. Tupaz IV (petitioner Jose Tupaz) signed,
in his personal capacity, a trust receipt corresponding to Letter of Credit No. 2-00896-3
(for P564,871.05). Petitioner Jose Tupaz bound himself to sell the goods covered by the letter of credit
and to remit the proceeds to respondent bank, if sold, or to return the goods, if not sold, on or before
29 December 1981.

On 9 October 1981, petitioners signed, in their capacities as officers of El Oro Corporation, a

trust receipt corresponding to Letter of Credit No. 2-00914-5 (for P294,000). Petitioners bound
themselves to sell the goods covered by that letter of credit and to remit the proceeds to respondent
bank, if sold, or to return the goods, if not sold, on or before 8 December 1981.

After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to El Oro
Corporation, respondent bank paid the former P564,871.05 and P294,000, respectively.

Petitioners did not comply with their undertaking under the trust receipts. Respondent bank made
several demands for payments but El Oro Corporation made partial payments only. On 27 June 1983
and 28 June 1983, respondent banks counsel[5] and its representative[6] respectively sent final demand
letters to El Oro Corporation. El Oro Corporation replied that it could not fully pay its debt because the
Armed Forces of the Philippines had delayed paying for the survival bolos.

Respondent bank charged petitioners with estafa under Section 13, Presidential Decree No. 115
(Section 13)[7] or Trust Receipts Law (PD 115). After preliminary investigation, the then Makati Fiscals
Office found probable cause to indict petitioners. The Makati Fiscals Office filed the corresponding
Informations (docketed as Criminal Case Nos. 8848 and 8849) with the Regional Trial Court, Makati, on
17 January 1984 and the cases were raffled to Branch 144 (trial court) on 20 January 1984. Petitioners
pleaded not guilty to the charges and trial ensued. During the trial, respondent bank presented
evidence on the civil aspect of the cases.

The Ruling of the Trial Court

On 16 July 1992, the trial court rendered judgment acquitting petitioners of estafa on reasonable
doubt. However, the trial court found petitioners solidarily liable with El Oro Corporation for the
balance of El Oro Corporations principal debt under the trust receipts. The dispositive portion of the
trial courts Decision provides:
 WHEREFORE, judgment is hereby rendered ACQUITTING both accused Jose C. Tupaz,
IV and Petronila Tupaz based upon reasonable doubt.

However, El Oro Engraver Corporation, Jose C. Tupaz, IV and Petronila Tupaz, are hereby
ordered, jointly and solidarily, to pay the Bank of the Philippine Islands the outstanding
principal obligation of P624,129.19 (as of January 23, 1992) with the stipulated interest at the
rate of 18% per annum; plus 10% of the total amount due as attorneys fees; P5,000.00 as
expenses of litigation; and costs of the suit.[8]

In holding petitioners civilly liable with El Oro Corporation, the trial court held:

[S]ince the civil action for the recovery of the civil liability is deemed impliedly
instituted with the criminal action, as in fact the prosecution thereof was actively handled by
the private prosecutor, the Court believes that the El Oro Engraver Corporation and both
accused Jose C. Tupaz and Petronila Tupaz, jointly and solidarily should be held civilly liable
to the Bank of the Philippine Islands. The mere fact that they were unable to collect in full
from the AFP and/or the Department of National Defense the proceeds of the sale of the
delivered survival bolos manufactured from the raw materials covered by the trust receipt
agreements is no valid defense to the civil claim of the said complainant and surely could not
wipe out their civil obligation. After all, they are free to institute an action to collect the
same.[9]

Petitioners appealed to the Court of Appeals. Petitioners contended that: (1) their acquittal
operates to extinguish [their] civil liability and (2) at any rate, they are not personally liable for El Oro
Corporations debts.

The Ruling of the Court of Appeals

In its Decision of 7 September 2000, the Court of Appeals affirmed the trial courts ruling. The appellate
court held:

It is clear from [Section 13, PD 115] that civil liability arising from the violation of the trust
receipt agreement is distinct from the criminal liability imposed therein. In the case of Vintola
vs. Insular Bank of Asia and America, our Supreme Court held that acquittal in the estafa case
(P.D. 115) is no bar to the institution of a civil action for collection. This is because in such
cases, the civil liability of the accused does not arise ex delicto but rather based ex
contractu and as such is distinct and independent from any criminal proceedings and may
proceed regardless of the result of the latter. Thus, an independent civil action to enforce the
civil liability may be filed against the corporation aside from the criminal action against the
responsible officers or employees.

xxx

[W]e hereby hold that the acquittal of the accused-appellants from the criminal charge
of estafa did not operate to extinguish their civil liability under the letter of credit-trust
receipt arrangement with plaintiff-appellee, with which they dealt both in their personal
capacity and as officers of El Oro Engraver Corporation, the letter of credit applicant and
principal debtor.

Appellants argued that they cannot be held solidarily liable with their corporation, El Oro
Engraver Corporation, alleging that they executed the subject documents including the trust
receipt agreements only in their capacity as such corporate officers. They said that these
instruments are mere pro-forma and that they executed these instruments on the strength
of a board resolution of said corporation authorizing them to apply for the opening of a letter
of credit in favor of their suppliers as well as to execute the other documents necessary to
accomplish the same.

Such contention, however, is contradicted by the evidence on record. The trust receipt
agreement indicated in clear and unmistakable terms that the accused signed the same
as surety for the corporation and that they bound themselves directly and immediately liable
in the event of default with respect to the obligation under the letters of credit which were
made part of the said agreement, without need of demand. Even in the application for the
letter of credit, it is likewise clear that the undertaking of the accused is that of a surety as
indicated [in] the following words: In consideration of your establishing the commercial letter
of credit herein applied for substantially in accordance with the foregoing, the undersigned
Applicant and Surety hereby agree, jointly and severally, to each and all stipulations,
provisions and conditions on the reverse side hereof.

xxx

Having contractually agreed to hold themselves solidarily liable with El Oro Engraver
Corporation under the subject trust receipt agreements with appellee Bank of the Philippine
Islands, herein accused-appellants may not, therefore, invoke the separate legal personality
of the said corporation to evade their civil liability under the letter of credit-trust receipt
arrangement with said appellee, notwithstanding their acquittal in the criminal cases filed
against them. The trial court thus did not err in holding the appellants solidarily liable with El
Oro Engraver Corporation for the outstanding principal obligation of P624,129.19 (as of
January 23, 1992) with the stipulated interest at the rate of 18% per annum, plus 10% of the
total amount due as attorneys fees, P5,000.00 as expenses of litigation and costs of suit.[10]
Hence, this petition. Petitioners contend that:

1. A JUDGMENT OF ACQUITTAL OPERATE[S] TO EXTINGUISH THE CIVIL LIABILITY OF

PETITIONERS[;]

2. GRANTING WITHOUT ADMITTING THAT THE QUESTIONED OBLIGATION WAS INCURRED

BY THE CORPORATION, THE SAME IS NOT YET DUE AND PAYABLE;

3. GRANTING THAT THE QUESTIONED OBLIGATION WAS ALREADY DUE AND PAYABLE, xxx
PETITIONERS ARE NOT PERSONALLY LIABLE TO xxx RESPONDENT BANK, SINCE THEY
SIGNED THE LETTER[S] OF CREDIT AS SURETY AS OFFICERS OF EL ORO, AND THEREFORE,
AN EXCLUSIVE LIABILITY OF EL ORO; [AND]

4. IN THE ALTERNATIVE, THE QUESTIONED TRANSACTIONS ARE SIMULATED AND VOID.[11]

The Issues

The petition raises these issues:

(1) Whether petitioners bound themselves personally liable for El Oro Corporations debts under
the trust receipts;

(2) If so

(a) whether petitioners liability is solidary with El Oro Corporation; and

(b) whether petitioners acquittal of estafa under Section 13, PD 115 extinguished their civil
liability.
 The Ruling of the Court

The petition is partly meritorious. We affirm the Court of Appeals ruling with the modification that
petitioner Jose Tupaz is liable as guarantor of El Oro Corporations debt under the trust receipt dated
30 September 1981.

On Petitioners Undertaking Under

the Trust Receipts

A corporation, being a juridical entity, may act only through its directors, officers, and employees.
Debts incurred by these individuals, acting as such corporate agents, are not theirs but the direct
liability of the corporation they represent.[12] As an exception, directors or officers are personally liable
for the corporations debts only if they so contractually agree or stipulate. [13]

Here, the dorsal side of the trust receipts contains the following stipulation:

To the Bank of the Philippine Islands

In consideration of your releasing to under the terms of this Trust Receipt the goods described
herein, I/We, jointly and severally, agree and promise to pay to you, on demand, whatever sum
or sums of money which you may call upon me/us to pay to you, arising out of, pertaining to,
and/or in any way connected with, this Trust Receipt, in the event of default and/or non-
fulfillment in any respect of this undertaking on the part of the said . I/we further agree that
my/our liability in this guarantee shall be DIRECT AND IMMEDIATE, without any need
whatsoever on your part to take any steps or exhaust any legal remedies that you may have
against the said . before making demand upon me/us.[14] (Capitalization in the original)

In the trust receipt dated 9 October 1981, petitioners signed below this clause as officers of El Oro

Corporation. Thus, under petitioner Petronila Tupazs signature are the words Vice-PresTreasurer and

under petitioner Jose Tupazs signature are the words Vice-PresOperations. By so signing that trust

receipt, petitioners did not bind themselves personally liable for El Oro Corporations obligation. In Ong
v. Court of Appeals,[15] a corporate representative signed a solidary guarantee clause in two trust

receipts in his capacity as corporate representative. There, the Court held that the corporate

representative did not undertake to guarantee personally the payment of the corporations debts,

thus:

[P]etitioner did not sign in his personal capacity the solidary guarantee clause found
on the dorsal portion of the trust receipts. Petitioner placed his signature after the
typewritten words ARMCO INDUSTRIAL CORPORATION found at the end of the solidary
guarantee clause. Evidently, petitioner did not undertake to guaranty personally the payment
of the principal and interest of ARMAGRIs debt under the two trust receipts.

Hence, for the trust receipt dated 9 October 1981, we sustain petitioners claim that they are not

personally liable for El Oro Corporations obligation.

For the trust receipt dated 30 September 1981, the dorsal portion of which petitioner Jose

Tupaz signed alone, we find that he did so in his personal capacity. Petitioner Jose Tupaz did not

indicate that he was signing as El Oro Corporations Vice-President for Operations. Hence, petitioner

Jose Tupaz bound himself personally liable for El Oro Corporations debts. Not being a party to the trust

receipt dated 30 September 1981, petitioner Petronila Tupaz is not liable under such trust receipt.

The Nature of Petitioner Jose Tupazs Liability

Under the Trust Receipt Dated 30 September 1981

As stated, the dorsal side of the trust receipt dated 30 September 1981 provides:

To the Bank of the Philippine Islands

In consideration of your releasing to under the terms of this Trust Receipt the goods described
herein, I/We, jointly and severally, agree and promise to pay to you, on demand, whatever sum
or sums of money which you may call upon me/us to pay to you, arising out of, pertaining to,
and/or in any way connected with, this Trust Receipt, in the event of default and/or non-
fulfillment in any respect of this undertaking on the part of the said . I/we further agree that
my/our liability in this guarantee shall be DIRECT AND IMMEDIATE, without any need
whatsoever on your part to take any steps or exhaust any legal remedies that you may have
against the said . Before making demand upon me/us. (Underlining supplied; capitalization in
the original)
The lower courts interpreted this to mean that petitioner Jose Tupaz bound himself solidarily liable
with El Oro Corporation for the latters debt under that trust receipt.

This is error.

In Prudential Bank v. Intermediate Appellate Court,[16] the Court interpreted a substantially

identical clause[17] in a trust receipt signed by a corporate officer who bound himself personally liable
for the corporations obligation. The petitioner in that case contended that the stipulation we jointly
and severally agree and undertake rendered the corporate officer solidarily liable with the
corporation. We dismissed this claim and held the corporate officer liable as guarantor only. The Court
further ruled that had there been more than one signatories to the trust receipt, the solidary liability
would exist between the guarantors. We held:

Petitioner [Prudential Bank] insists that by virtue of the clear wording of the xxx clause
x x x we jointly and severally agree and undertake x x x, and the concluding sentence on
exhaustion, [respondent] Chis liability therein is solidary.

xxx

Our xxx reading of the questioned solidary guaranty clause yields no other conclusion
than that the obligation of Chi is only that of a guarantor. This is further bolstered by the last
sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this
case because the space therein for the party whose property may not be exhausted was not
filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be
raised by a guarantor before he may be held liable for the obligation. Petitioner likewise
admits that the questioned provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety. It, however, described the guaranty as solidary
between the guarantors; this would have been correct if two (2) guarantors had signed
it. The clause we jointly and severally agree and undertake refers to the undertaking of the
two (2) parties who are to sign it or to the liability existing between themselves. It does not
refer to the undertaking between either one or both of them on the one hand and the
petitioner on the other with respect to the liability described under the trust receipt. xxx

Furthermore, any doubt as to the import or true intent of the solidary guaranty clause should be resolved
against the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form
drafted and prepared solely by the petitioner; Chis participation therein is limited to the affixing of his signature
thereon. It is, therefore, a contract of adhesion; as such, it must be strictly construed against the party responsible
for its preparation.[18] (Underlining supplied; italicization in the original)

However, respondent banks suit against petitioner Jose Tupaz stands despite the Courts finding

that he is liable as guarantor only. First, excussion is not a pre-requisite to secure judgment against a

guarantor. The guarantor can still demand deferment of the execution of the judgment against him
until after the assets of the principal debtor shall have been exhausted. [19] Second, the benefit of

excussion may be waived.[20] Under the trust receipt dated 30 September 1981, petitioner Jose Tupaz

waived excussion when he agreed that his liability in [the] guaranty shall be DIRECT AND IMMEDIATE,

without any need whatsoever on xxx [the] part [of respondent bank] to take any steps or exhaust any

legal remedies xxx. The clear import of this stipulation is that petitioner Jose Tupaz waived the benefit

of excussion under his guarantee.

As guarantor, petitioner Jose Tupaz is liable for El Oro Corporations principal debt and other

accessory liabilities (as stipulated in the trust receipt and as provided by law) under the trust receipt

dated 30 September 1981. That trust receipt (and the trust receipt dated 9 October 1981) provided for

payment of attorneys fees equivalent to 10% of the total amount due and an interest at the rate of

7% per annum, or at such other rate as the bank may fix, from the date due until paid xxx.[21] In the

applications for the letters of credit, the parties stipulated that drafts drawn under the letters of credit

are subject to interest at the rate of 18% per annum.[22]

The lower courts correctly applied the 18% interest rate per annum considering that the face

value of each of the trust receipts is based on the drafts drawn under the letters of credit. Based on

the guidelines laid down in

Eastern Shipping Lines, Inc. v. Court of Appeals,[23] the accrued stipulated interest earns 12%

interest per annum from the time of the filing of the Informations in the Makati Regional Trial Court on

17 January 1984. Further, the total amount due as of the date of the finality of this Decision will earn

interest at 18% per annum until fully paid since this was the stipulated rate in the applications for the

letters of credit.[24]

The accounting of El Oro Corporations debts as of 23 January 1992, which the trial court used, is
no longer useful as it does not specify the amounts owing under each of the trust receipts. Hence, in
the execution of this Decision, the trial court shall compute El Oro Corporations total liability under
each of the trust receipts dated 30 September 1981 and 9 October 1981 based on the following
formula:[25]

TOTAL AMOUNT DUE = [principal + interest + interest on interest] partial payments

made[26]

Interest = principal x 18 % per annum x no. of years from due date[27] until finality of
judgment

Interest on interest = interest computed as of the filing of the complaint (17 January
1984) x 12% x no. of years until finality of judgment
 Attorneys fees is 10% of the total amount computed as of finality of judgment

Total amount due as of the date of finality of judgment will earn an interest of 18% per
annum until fully paid.

In so delegating this task, we reiterate what we said in Rizal Commercial Banking Corporation v. Alfa

RTW Manufacturing Corporation[28] where we also ordered the trial court to compute the amount of

obligation due based on a formula substantially similar to that indicated above:

The total amount due xxx [under] the xxx contract[] xxx may be easily determined by
the trial court through a simple mathematical computation based on the formula specified
above. Mathematics is an exact science, the application of which needs no further proof from
the parties.

Petitioner Jose Tupazs Acquittal did not

Extinguish his Civil Liability

The rule is that where the civil action is impliedly instituted with the criminal action, the civil
liability is not extinguished by acquittal

[w]here the acquittal is based on reasonable doubt xxx as only preponderance of evidence is
required in civil cases; where the court expressly declares that the liability of the accused is
not criminal but only civil in nature xxx as, for instance, in the felonies of estafa, theft, and
malicious mischief committed by certain relatives who thereby incur only civil liability (See
Art. 332, Revised Penal Code); and, where the civil liability does not arise from or is not based
upon the criminal act of which the accused was acquitted xxx.[29] (Emphasis supplied)

Here, respondent bank chose not to file a separate civil action [30] to recover payment under the
trust receipts. Instead, respondent bank sought to recover payment in Criminal Case Nos. 8848 and

8849. Although the trial court acquitted petitioner Jose Tupaz, his acquittal did not extinguish his civil

liability. As the Court of Appeals correctly held, his liability arose not from the criminal act of which he
was acquitted (ex delito) but from the trust receipt contract (ex contractu) of 30 September 1981.

Petitioner Jose Tupaz signed the trust receipt of 30 September 1981 in his personal capacity.

On the other Matters Petitioners Raise

Petitioners raise for the first time in this appeal the contention that El Oro Corporations debts under
the trust receipts are not yet due and demandable. Alternatively, petitioners assail the trust receipts
as simulated. These assertions have no merit. Under the terms of the trust receipts dated 30
September 1981 and 9 October 1981, El Oro Corporations debts fell due on 29 December 1981 and 8
December 1981, respectively.

Neither is there merit to petitioners claim that the trust receipts were simulated. During the trial,
petitioners did not deny applying for the letters of credit and subsequently executing the trust receipts
to secure payment of the drafts drawn under the letters of credit.

WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the Court of Appeals dated 7

September 2000 and its Resolution dated 18 October 2000 with the following MODIFICATIONS:

1) El Oro Engraver Corporation is principally liable for the total amount due under the trust

receipts dated 30 September 1981 and 9 October 1981, as computed by the Regional Trial

Court, Makati, Branch 144, upon finality of this Decision, based on the formula provided

above;

2) Petitioner Jose C. Tupaz IV is liable for El Oro Engraver Corporations total debt under the

trust receipt dated 30 September 1981 as thus computed by the Regional Trial Court, Makati,

Branch 144; and

3) Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable under the trust receipt

dated 9 October 1981.

SO ORDERED.
SECOND DIVISION

G.R. No. 126490 March 31, 1998

ESTRELLA PALMARES, petitioner,

vs.
COURT OF APPEALS and M.B. LENDING CORPORATION, respondents.
REGALADO, J.:

Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the principal
debtor in case the latter defaults in the payment of the loan, is such undertaking of the former deemed to be that of a surety
as an insurer of the debt, or of a guarantor who warrants the solvency of the debtor?

Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation extended a loan to the
spouses Osmeña and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or
before May 12, 1990, with compounded interest at the rate of 6% per annum to be computed every 30 days from the date
thereof.1 On four occasions after the execution of the promissory note and even after the loan matured, petitioner and the
Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made
after the last payment on September 26, 1991. 2

Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent corporation filed a
complaint3 against petitioner Palmares as the lone party-defendant, to the exclusion of the principal debtors, allegedly by
reason of the insolvency of the latter.

In her Amended Answer with Counterclaim, 4 petitioner alleged that sometime in August 1990, immediately after the loan
matured, she offered to settle the obligation with respondent corporation but the latter informed her that they would try to
collect from the spouses Azarraga and that she need not worry about it; that there has already been a partial payment in the
amount of P17,010.00; that the interest of 6% per month compounded at the same rate per month, as well as the penalty
charges of 3% per month, are usurious and unconscionable; and that while she agrees to be liable on the note but only upon
default of the principal debtor, respondent corporation acted in bad faith in suing her alone without including the Azarragas
when they were the only ones who benefited from the proceeds of the loan.

During the pre-trial conference, the parties submitted the following issues for the resolution of the trial court: (1) what the rate
of interest, penalty and damages should be; (2) whether the liability of the defendant (herein petitioner) is primary or
subsidiary; and (3) whether the defendant Estrella Palmares is only a guarantor with a subsidiary liability and not a co-maker
with primary liability.5

Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the memoranda to be
submitted by them. On November 26, 1992, the Regional Trial Court of Iloilo City, Branch 23, rendered judgment dismissing
the complaint without prejudice to the filing of a separate action for a sum of money against the spouses Osmeña and Merlyn
Azarraga who are primarily liable on the instrument. 6 This was based on the findings of the court a quo that the filing of the
complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga spouses, amounted to a discharge of a
prior party; that the offer made by petitioner to pay the obligation is considered a valid tender of payment sufficient to
discharge a person's secondary liability on the instrument; as co-maker, is only secondarily liable on the instrument; and that
the promissory note is a contract of adhesion.

Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment declaring herein
petitioner Palmares liable to pay respondent corporation:

1. The sum of P13,700.00 representing the outstanding balance still due and owing with interest at six percent (6%)
per month computed from the date the loan was contracted until fully paid;

2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding balance;

3. Attorney's fees at 25% of the total amount due per stipulations;

4. Plus costs of suit.7

Contrary to the findings of the trial court, respondent appellate court declared that petitioner Palmares is a surety since she
bound herself to be jointly and severally or solidarily liable with the principal debtors, the Azarraga spouses, when she signed
as a co-maker. As such, petitioner is primarily liable on the note and hence may be sued by the creditor corporation for the
entire obligation. It also adverted to the fact that petitioner admitted her liability in her Answer although she claims that the
Azarraga spouses should have been impleaded. Respondent court ordered the imposition of the stipulated 6% interest and
3% penalty charges on the ground that the Usury Law is no longer enforceable pursuant to Central Bank Circular No. 905.
Finally, it rationalized that even if the promissory note were to be considered as a contract of adhesion, the same is not
entirely prohibited because the one who adheres to the contract is free to reject it entirely; if he adheres, he gives his consent.

Hence this petition for review on certiorari wherein it is asserted that:

A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable to pay the
promissory note.

1. The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares' solidary liability.

2. The promissory note contains provisions which establish the co-maker's liability as that of a guarantor.

3. There is no sufficient basis for concluding that Palmares' liability is solidary.

4. The promissory note is a contract of adhesion and should be construed against M. B. Lending Corporation.

5. Palmares cannot be compelled to pay the loan at this point.

B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly imposing the interests and penalty
charges on the outstanding balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted in their material points by respondent corporation. They
are further refuted by accepted doctrines in the American jurisdiction after which we patterned our statutory law on surety and
guaranty. This case then affords us the opportunity to make an extended exposition on the ramifications of these two
specialized contracts, for such guidance as may be taken therefrom in similar local controversies in the future.

The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:

ATTENTION TO CO-MAKERS: PLEASE READ WELL

I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of this
Promissory Note for Short-Term Loan:

That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above principal
maker of this note;

That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan from me in
case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject to the same conditions
above-contained.8

Petitioner contends that the provisions of the second and third paragraph are conflicting in that while the second paragraph
seems to define her liability as that of a surety which is joint and solidary with the principal maker, on the other hand, under
the third paragraph her liability is actually that of a mere guarantor because she bound herself to fulfill the obligation only in
case the principal debtor should fail to do so, which is the essence of a contract of guaranty. More simply stated, although the
second paragraph says that she is liable as a surety, the third paragraph defines the nature of her liability as that of a
guarantor. According to petitioner, these are two conflicting provisions in the promissory note and the rule is that clauses in
the contract should be interpreted in relation to one another and not by parts. In other words, the second paragraph should
not be taken in isolation, but should be read in relation to the third paragraph.

In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that she could be held liable only
as a guarantor for several reasons. First, the words "jointly and severally or solidarily liable" used in the second paragraph are
technical and legal terms which are not fully appreciated by an ordinary layman like herein petitioner, a 65-year old housewife
who is likely to enter into such transactions without fully realizing the nature and extent of her liability. On the contrary, the
wordings used in the third paragraph are easier to comprehend. Second, the law looks upon the contract of suretyship with a
jealous eye and the rule is that the obligation of the surety cannot be extended by implication beyond specified limits, taking
into consideration the peculiar nature of a surety agreement which holds the surety liable despite the absence of any direct
consideration received from either the principal obligor or the creditor. Third, the promissory note is a contract of adhesion
since it was prepared by respondent M.B. Lending Corporation. The note was brought to petitioner partially filled up, the
contents thereof were never explained to her, and her only participation was to sign thereon. Thus, any apparent ambiguity in
the contract should be strictly construed against private respondent pursuant to Art. 1377 of the Civil Code. 9

Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the third paragraph of the
promissory note to be that of a guarantor.

Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the principal debtors cannot be
considered in default in the absence of a judicial or extrajudicial demand. It is true that the complaint alleges the fact of
demand, but the purported demand letters were never attached to the pleadings filed by private respondent before the trial
court. And, while petitioner may have admitted in her Amended Answer that she received a demand letter from respondent
corporation sometime in 1990, the same did not effectively put her or the principal debtors in default for the simple reason that
the latter subsequently made a partial payment on the loan in September, 1991, a fact which was never controverted by
herein private respondent.

Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of P2,745,483.39 in favor of private
respondent when, in truth and in fact, the outstanding balance of the loan is only P13,700.00. Where the interest charged on
the loan is exorbitant, iniquitous or unconscionable, and the obligation has been partially complied with, the court may
equitably reduce the penalty10 on grounds of substantial justice. More importantly, respondent corporation never refuted
petitioner's allegation that immediately after the loan matured, she informed said respondent of her desire to settle the
obligation. The court should, therefore, mitigate the damages to be paid since petitioner has shown a sincere desire for a
compromise.11

After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the petition for lack of merit, but to
except therefrom the issue anent the propriety of the monetary award adjudged to herein respondent corporation.

At the outset, let it here be stressed that even assuming arguendo that the promissory note executed between the parties is a
contract of adhesion, it has been the consistent holding of the Court that contracts of adhesion are not invalid per se and that
on numerous occasions the binding effects thereof have been upheld. The peculiar nature of such contracts necessitate a
close scrutiny of the factual milieu to which the provisions are intended to apply. Hence, just as consistently and
unhesitatingly, but without categorically invalidating such contracts, the Court has construed obscurities and ambiguities in the
restrictive provisions of contracts of adhesion strictly albeit not unreasonably against the drafter thereof when justified in light
of the operative facts and surrounding circumstances. 12 The factual scenario obtaining in the case before us warrants a liberal
application of the rule in favor of respondent corporation.

The Civil Code pertinently provides:

Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book
shall be observed. In such case the contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulation shall control. 13 In the case at bar, petitioner expressly
bound herself to be jointly and severally or solidarily liable with the principal maker of the note. The terms of the contract are
clear, explicit and unequivocal that petitioner's liability is that of a surety.

Her pretension that the terms "jointly and severally or solidarily liable" contained in the second paragraph of her contract are
technical and legal terms which could not be easily understood by an ordinary layman like her is diametrically opposed to her
manifestation in the contract that she "fully understood the contents" of the promissory note and that she is "fully aware" of her
solidary liability with the principal maker. Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot
now be heard to claim otherwise. Any reference to the existence of fraud is unavailing. Fraud must be established by clear
and convincing evidence, mere preponderance of evidence not even being adequate. Petitioner's attempt to prove fraud
must, therefore, fail as it was evidenced only by her own uncorroborated and, expectedly, self-serving allegations.14

Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped to assert that she did so
under a misapprehension or in ignorance of their legal effect, or as to the legal effect of the undertaking. 15 The rule that
ignorance of the contents of an instrument does not ordinarily affect the liability of one who signs it also applies to contracts of
suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving her of
liability.16

Petitioner would like to make capital of the fact that although she obligated herself to be jointly and severally liable with the
principal maker, her liability is deemed restricted by the provisions of the third paragraph of her contract wherein she agreed
"that M.B. Lending Corporation may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn
Azarraga defaults in the payment of the note," which makes her contract one of guaranty and not suretyship. The purported
discordance is more apparent than real.

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. 17 A suretyship is an
undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. 18 Stated differently, a surety
promises to pay the principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding
against the principal, may proceed against the guarantor if the principal is unable to pay. 19 A surety binds himself to perform if
the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the
principal will pay, but simply that he is able to do so.20 In other words, a surety undertakes directly for the payment and is so
responsible at once if the principal debtor makes default, while a guarantor contracts to pay if, by the use of due diligence, the
debt cannot be made out of the principal debtor.21

Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it from the ambit of
a contract of suretyship. The second and third paragraphs of the aforequoted portion of the promissory note do not contain
any other condition for the enforcement of respondent corporation's right against petitioner. It has not been shown, either in
the contract or the pleadings, that respondent corporation agreed to proceed against herein petitioner only if and when the
defaulting principal has become insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit by joining in
the principal debtor's obligation, so as to render himself directly and primarily responsible with him, and without reference to
the solvency of the principal.22

In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule on strictissimi juris, which holds
that when the meaning of a contract of indemnity or guaranty has once been judicially determined under the rule of
reasonable construction applicable to all written contracts, then the liability of the surety, under his contract, as thus
interpreted and construed, is not to be extended beyond its strict meaning. 23 The rule, however, will apply only after it has
been definitely ascertained that the contract is one of suretyship and not a contract of guaranty. It cannot be used as an aid in
determining whether a party's undertaking is that of a surety or a guarantor.

Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in the third paragraph
of the controverted suretyship contract merely elucidated on and made more specific the obligation of petitioner as generally
defined in the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor
because her liability attaches only upon default of the principal debtor, must necessarily fail for being incongruent with the
judicial pronouncements adverted to above.

It is a well-entrenched rule that in order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall also be principally considered. 24 Several attendant factors in that genre lend support to our finding that
petitioner is a surety. For one, when petitioner was informed about the failure of the principal debtor to pay the loan, she
immediately offered to settle the account with respondent corporation. Obviously, in her mind, she knew that she was directly
and primarily liable upon default of her principal. For another, and this is most revealing, petitioner presented the receipts of
the payments already made, from the time of initial payment up to the last, which were all issued in her name and of the
Azarraga spouses.25 This can only be construed to mean that the payments made by the principal debtors were considered by
respondent corporation as creditable directly upon the account and inuring to the benefit of petitioner. The concomitant and
simultaneous compliance of petitioner's obligation with that of her principals only goes to show that, from the very start,
petitioner considered herself equally bound by the contract of the principal makers.

In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the principal, 26and as such
is deemed an original promisor and debtor from the beginning. 27 This is because in suretyship there is but one contract, and
the surety is bound by the same agreement which binds the principal. 28 In essence, the contract of a surety starts with the
agreement,29 which is precisely the situation obtaining in this case before the Court.

It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and conditions stipulated
between respondent corporation, as creditor, and the principal obligors. A surety is usually bound with his principal by the
same instrument, executed at the same time and upon the same consideration; he is an original debtor, and his liability is
immediate and direct.30 Thus, it has been held that where a written agreement on the same sheet of paper with and
immediately following the principal contract between the buyer and seller is executed simultaneously therewith, providing that
the signers of the agreement agreed to the terms of the principal contract, the signers were "sureties" jointly liable with the
buyer.31 A surety usually enters into the same obligation as that of his principal, and the signatures of both usually appear
upon the same instrument, and the same consideration usually supports the obligation for both the principal and the surety. 32
There is no merit in petitioner's contention that the complaint was prematurely filed because the principal debtors cannot as
yet be considered in default, there having been no judicial or extrajudicial demand made by respondent corporation. Petitioner
has agreed that respondent corporation may demand payment of the loan from her in case the principal maker defaults,
subject to the same conditions expressed in the promissory note. Significantly, paragraph (G) of the note states that "should I
fail to pay in accordance with the above schedule of payment, I hereby waive my right to notice and demand." Hence,
demand by the creditor is no longer necessary in order that delay may exist since the contract itself already expressly so
declares.33 As a surety, petitioner is equally bound by such waiver.

Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the
commencement of the suit is a sufficient demand. 34 On this point, it may be worth mentioning that a surety is not even entitled,
as a matter of right, to be given notice of the principal's default. Inasmuch as the creditor owes no duty of active diligence to
take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal
cannot have the effect of discharging the surety. The surety is bound to take notice of the principal's default and to perform
the obligation. He cannot complain that the creditor has not notified
him in the absence of a special agreement to that effect in the contract of suretyship.35

The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not attaching copies
thereof to its pleadings, is likewise immaterial. In the absence of a statutory or contractual requirement, it is not necessary that
payment or performance of his obligation be first demanded of the principal, especially where demand would have been
useless; nor is it a requisite, before proceeding against the sureties, that the principal be called on to account. 36 The
underlying principle therefor is that a suretyship is a direct contract to pay the debt of another. A surety is liable as much as
his principal is liable, and absolutely liable as soon as default is made, without any demand upon the principal whatsoever or
any notice of default.37 As an original promisor and debtor from the beginning, he is held ordinarily to know every default of his
principal.38

Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the principal debtors who
allegedly were the only ones who benefited from the proceeds of the loan. What petitioner is trying to imply is that the creditor,
herein respondent corporation, should have proceeded first against the principal before suing on her obligation as surety. We
disagree.

A creditor's right to proceed against the surety exists independently of his right to proceed against the principal.39Under Article
1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even
against the surety alone.40 Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold
the surety liable, where, by the terms of the contract, the obligation of the surety is the same that of the principal, then soon as
the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had
against the principal.41 Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is
primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the
surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security,
require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the
principal, particularly where both principal and surety are equally bound.42

We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release
her from liability. Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In other words,
mere want of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety requires him
by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety
whether given at the principal's request or without it, and whether it is yielded by the creditor through sympathy or from an
inclination to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue the principal at the time
the debt falls due does not discharge the surety, even if such delay continues until the principal becomes insolvent. 43 And, in
the absence of proof of resultant injury, a surety is not discharged by the creditor's mere statement that the creditor will not
look to the surety,44 or that he need not trouble himself.45 The consequences of the delay, such as the subsequent insolvency
of the principal,46 or the fact that the remedies against the principal may be lost by lapse of time, are immaterial. 47

The raison d'être for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any
time.48 At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal,
he may pay the debt himself and become subrogated to all the rights and remedies of the creditor.49

It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the
time when the debt might be demanded, does not constitute an extension of the time of payment, which would release the
surety.50 In order to constitute an extension discharging the surety, it should appear that the extension was for a definite
period, pursuant to an enforceable agreement between the principal and the creditor, and that it was made without the
consent of the surety or with a reservation of rights with respect to him. The contract must be one which precludes the creditor
from, or at least hinders him in, enforcing the principal contract within the period during which he could otherwise have
enforced it, and which precludes the surety from paying the debt.51

None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave the principal
debtors an extended period of time within which to comply with their obligation did not effectively absolve here in petitioner
from the consequences of her undertaking. Besides, the burden is on the surety, herein petitioner, to show that she has been
discharged by some act of the creditor,52 herein respondent corporation, failing in which we cannot grant the relief prayed for.

As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty charges on the
outstanding balance of the loan cannot be imposed for being illegal and unconscionable. Petitioner additionally theorizes that
respondent corporation intentionally delayed the collection of the loan in order that the interests and penalty charges would
accumulate. The statement, likewise traversed by said respondent, is misleading.

In an affidavit53 executed by petitioner, which was attached to her petition, she stated, among others, that:

8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan has been released and that she
has not paid the same upon its maturity. I received a telephone call from Mr. Augusto Banusing of MB Lending
informing me of this fact and of my liability arising from the promissory note which I signed.
 9. I requested Mr. Banusing to try to collect first from Merlyn and Osmeña Azarraga. At the same time, I offered to pay
MB Lending the outstanding balance of the principal obligation should he fail to collect from Merlyn and Osmeña
Azarraga. Mr. Banusing advised me not to worry because he will try to collect first from Merlyn and Osmeña Azarraga.

10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that the loan of
Merlyn and Osmeña Azarraga, together with interest and penalties thereon, has not been paid. Since I had no
available funds at that time, I offered to pay MB Lending by delivering to them a parcel of land which I own. Mr.
Banusing's secretary, however, refused my offer for the reason that they are not interested in real estate.

11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB Lending before the
RTC-Iloilo. After learning that a complaint was filed against me, I instructed Sheila Gatia to go to MB Lending and
reiterate my first offer to pay the outstanding balance of the principal obligation of Merlyn Azarraga in the amount of
P30,000.00.

12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB Lending.

13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding balance of the
principal obligation loan (sic) of Merlyn and Osmeña Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia
that my offer is not acceptable to Mr. Banusing.

The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to effectively discharge
her from liability. There are a number of circumstances which conjointly inveigh against her aforesaid theory.

1. Respondent corporation cannot be faulted for not immediately demanding payment from petitioner. It was petitioner who
initially requested that the creditor try to collect from her principal first, and she offered to pay only in case the creditor fails to
collect. The delay, if any, was occasioned by the fact that respondent corporation merely acquiesced to the request of
petitioner. At any rate, there was here no actual offer of payment to speak of but only a commitment to pay if the principal
does not pay.

2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she owned. Respondent
corporation was acting well within its rights when it refused to accept the offer. The debtor of a thing cannot compel the
creditor to receive a different one, although the latter may be of the same value, or more valuable than that which is due.54 The
obligee is entitled to demand fulfillment of the obligation or performance as stipulated. A change of the object of the obligation
would constitute novation requiring the express consent of the parties. 55

3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance of the obligation in
the amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation cannot be blamed for refusing
the amount being offered because it fell way below the amount it had computed, based on the stipulated interests and penalty
charges, as owing and due from herein petitioner. A debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or rendered, as the case may be.56 In other words, the
prestation must be fulfilled completely. A person entering into a contract has a right to insist on its performance in all
particulars.57

Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the moment the latter
accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, then the
obligation shall be deemed fully complied with. 58 Precisely, this is what respondent corporation wanted to avoid when it
continually refused to settle with petitioner at less than what was actually due under their contract.

This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorney's fees equivalent to
25% of the total amount due are highly inequitable and unreasonable.

It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already been paid even
before the filing of the present case. Article 1229 of the Civil Code provides that the court shall equitably reduce the penalty
when the principal obligation has been partly or irregularly complied with by the debtor. And, even if there has been no
performance, the penalty may also be reduced if it is iniquitous or leonine.

In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation, and which is
substantially on all fours with the one at bar, we decided to eliminate altogether the penalty interest for being excessive and
unwarranted under the following rationalization:

Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty
interest of three percent (3 %) per month on total amount due but unpaid should be equitably reduced. The purpose
for which the penalty interest is intended — that is, to punish the obligor — will have been sufficiently served by the
effects of compounded interest. Under the exceptional circumstances in the case at bar, e.g., the original amount
loaned was only P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy (albeit still lawful)
regular compensatory interest, the penalty interest stipulated in the parties' promissory note is iniquitous and
unconscionable and may be equitably reduced further by eliminating such penalty interest altogether. 59

Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated.

Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with an agreement thereon
between the parties, the court may nevertheless reduce such attorney's fees fixed in the contract when the amount thereof
appears to be unconscionable or unreasonable. 60 To that end, it is not even necessary to show, as in other contracts, that it is
contrary to morals or public policy.61 The grant of attorney's fees equivalent to 25% of the total amount due is, in our opinion,
unreasonable and immoderate, considering the minimal unpaid amount involved and the extent of the work involved in this
simple action for collection of a sum of money. We, therefore, hold that the amount of P10,000.00 as and for attorney's fee
would be sufficient in this case.62
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the penalty interest of
3% per month is hereby deleted and the award of attorney's fees is reduced to P10,000.00.

SO ORDERED.

FIRST DIVISION

G.R. No. 142381 October 15, 2003

PHILIPPINE BLOOMING MILLS, INC., and ALFREDO CHING, petitioners,

vs.
COURT OF APPEALS and TRADERS ROYAL BANK, respondents.

DECISION

CARPIO, J.:

The Case

This is a petition for review on certiorari1 to annul the Decision2 dated 16 July 1999 of the Court of Appeals in CA-G.R. CV No.
39690, as well as its Resolution dated 17 February 2000 denying the motion for reconsideration. The Court of Appeals
affirmed with modification the Decision3 dated 31 August 1992 rendered by Branch 113 of the Regional Trial Court of Pasay
City ("trial court"). The trial court’s Decision declared petitioner Alfredo Ching ("Ching") liable to respondent Traders Royal
Bank ("TRB") for the payment of the credit accommodations extended to Philippine Blooming Mills, Inc. ("PBM").

Antecedent Facts

This case stems from an action to compel Ching to pay TRB the following amounts:

1. P959,611.96 under Letter of Credit No. 479 AD covered by Trust Receipt No. 106; 4

2. P1,191,137.13 under Letter of Credit No. 563 AD covered by Trust Receipt No. 113; 5 and

3. P3,500,000 under the trust loan covered by a notarized Promissory Note. 6

Ching was the Senior Vice President of PBM. In his personal capacity and not as a corporate officer, Ching signed a
Deed of Suretyship dated 21 July 1977 binding himself as follows:

xxx as primary obligor(s) and not as mere guarantor(s), hereby warrant to the TRADERS ROYAL BANK, its
successors and assigns, the due and punctual payment by the following individuals and/or companies/firms,
hereinafter called the DEBTOR(S), of such amounts whether due or not, as indicated opposite their respective names,
to wit:

NAME OF DEBTOR(S) AMOUNT OF OBLIGATION

PHIL. BLOOMING MILLS CORP. TEN MILLION PESOS
(P 10,000,000.00)

owing to said TRADERS ROYAL BANK, hereafter called the CREDITOR, as evidenced by all notes, drafts, overdrafts
and other credit obligations of every kind and nature contracted/incurred by said DEBTOR(S) in favor of said
CREDITOR.

In case of default by any and/or all of the DEBTOR(S) to pay the whole or part of said indebtedness herein secured at
maturity, I/We, jointly and severally, agree and engage to the CREDITOR, its successors and assigns, the prompt
payment, without demand or notice from said CREDITOR, of such notes, drafts, overdrafts and other credit
obligations on which the DEBTOR(S) may now be indebted or may hereafter become indebted to the CREDITOR,
together with all interests, penalty and other bank charges as may accrue thereon and all expenses which may be
incurred by the latter in collecting any or all such instruments.

I/WE further warrant the due and faithful performance by the DEBTOR(S) of all the obligations to be performed under
any contracts, evidencing indebtedness/obligations and any supplements, amendments, charges or modifications
made thereto, including but not limited to, the due and punctual payment by the said DEBTOR(S).

I/WE hereby expressly waive notice of acceptance of this suretyship, and also presentment, demand, protest and
notice of dishonor of any and all such instruments, loans, advances, credits, or other indebtedness or obligations
hereinbefore referred to.

MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and not contingent upon the
pursuit by the CREDITOR, its successors or assigns, of whatever remedies it or they may have against the
DEBTOR(S) or the securities or liens it or they may possess; and I/WE hereby agree to be and remain bound upon
this suretyship, irrespective of the existence, value or condition of any collateral, and notwithstanding also that all
obligations of the DEBTOR(S) to you outstanding and unpaid at any time may exceed the aggregate principal sum
herein above stated.

In the event of judicial proceedings, I/WE hereby expressly agree to pay the creditor for and as attorney’s fees a sum
equivalent to TEN PER CENTUM (10%) of the total indebtedness (principal and interest) then unpaid, exclusive of all
costs or expenses for collection allowed by law. 7 (Emphasis supplied)
 On 24 March and 6 August 1980, TRB granted PBM letters of credit on application of Ching in his capacity as Senior
Vice President of PBM. Ching later accomplished and delivered to TRB trust receipts, which acknowledged receipt in
trust for TRB of the merchandise subject of the letters of credit. Under the trust receipts, PBM had the right to sell the
merchandise for cash with the obligation to turn over the entire proceeds of the sale to TRB as payment of PBM’s
indebtedness. Letter of Credit No. 479 AD, covered by Trust Receipt No. 106, has a face value of US$591,043, while
Letter of Credit No. 563 AD, covered by Trust Receipt No. 113, has a face value of US$155,460.34.

Ching further executed an Undertaking for each trust receipt, which uniformly provided that:

xxx

6. All obligations of the undersigned under the agreement of trusts shall bear interest at the rate of __ per centum (
__%) per annum from the date due until paid.

7. [I]n consideration of the Trust Receipt, the undersigned hereby jointly and severally undertake and agree to pay on
demand on the said BANK, all sums and amounts of money which said BANK may call upon them to pay arising out
of, pertaining to, and/or in any manner connected with this receipt. In case it is necessary to collect the draft covered
by the Trust Receipt by or through an attorney-at-law, the undersigned hereby further agree(s) to pay an additional of
10% of the total amount due on the draft as attorney’s fees, exclusive of all costs, fees and other expenses of
collection but shall in no case be less than P200.00"8(Emphasis supplied)

On 27 April 1981, PBM obtained a P3,500,000 trust loan from TRB. Ching signed as co-maker in the notarized Promissory
Note evidencing this trust loan. The Promissory Note reads:

FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We, jointly and severally, promise to pay the TRADERS ROYAL
BANK or order, at its Office in 4th Floor, Kanlaon Towers Bldg., Roxas Blvd., Pasay City, the sum of Pesos: THREE MILLION
FIVE HUNDRED THOUSAND ONLY (P3,500,000.00), Philippine Currency, with the interest rate of Eighteen Percent (18%)
per annum until fully paid.

In case of non-payment of this note at maturity, I/We, jointly and severally, agree to pay an additional amount
equivalent to two per cent (2%) of the principal sum per annum, as penalty and collection charges in the form of
liquidated damages until fully paid, and the further sum of ten percent (10%) thereof in full, without any deduction, as and
for attorney’s fees whether actually incurred or not, exclusive of costs and other judicial/extrajudicial expenses; moreover,
I/We jointly and severally, further empower and authorize the TRADERS ROYAL BANK at its option, and without notice to set
off or to apply to the payment of this note any and all funds, which may be in its hands on deposit or otherwise belonging to
anyone or all of us, and to hold as security therefor any real or personal property which may be in its possession or control by
virtue of any other contract.9 (Emphasis supplied)

PBM defaulted in its payment of Trust Receipt No. 106 (Letter of Credit No. 479 AD) for P959,611.96, and of Trust Receipt
No. 113 (Letter of Credit No. 563 AD) for P1,191,137.13. PBM also defaulted on its P3,500,000 trust loan.

On 1 April 1982, PBM and Ching filed a petition for suspension of payments with the Securities and Exchange Commission
("SEC"), docketed as SEC Case No. 2250. 10 The petition sought to suspend payment of PBM’s obligations and prayed that
the SEC allow PBM to continue its normal business operations free from the interference of its creditors. One of the listed
creditors of PBM was TRB.11

On 9 July 1982, the SEC placed all of PBM’s assets, liabilities, and obligations under the rehabilitation receivership of Kalaw,
Escaler and Associates.12

On 13 May 1983, ten months after the SEC placed PBM under rehabilitation receivership, TRB filed with the trial court a
complaint for collection against PBM and Ching. TRB asked the trial court to order defendants to pay solidarily the following
amounts:

(1) P6,612,132.74 exclusive of interests, penalties, and bank charges [representing its indebtedness arising from the
letters of credit issued to its various suppliers];

(2) P4,831,361.11, exclusive of interests, penalties, and other bank charges [due and owing from the trust loan of 27
April 1981 evidenced by a promissory note];

(3) P783,300.00 exclusive of interests, penalties, and other bank charges [due and owing from the money market loan
of 1 April 1981 evidenced by a promissory note];

(4) To order defendant Ching to pay P10,000,000.00 under the Deed of Suretyship in the event plaintiff can not
recover the full amount of PBM’s indebtedness from the latter;

(5) The sum equivalent to 10% of the total sum due as and for attorney’s fees;

(6) Such other amounts that may be proven by the plaintiff during the trial, by way of damages and expenses for
litigation.13

On 25 May 1983, TRB moved to withdraw the complaint against PBM on the ground that the SEC had already placed PBM
under receivership.14 The trial court thus dismissed the complaint against PBM. 15

On 23 June 1983, PBM and Ching also moved to dismiss the complaint on the ground that the trial court had no jurisdiction
over the subject matter of the case. PBM and Ching invoked the assumption of jurisdiction by the SEC over all of PBM’s
assets and liabilities.16
TRB filed an opposition to the Motion to Dismiss. TRB argued that (1) Ching is being sued in his personal capacity as a surety
for PBM; (2) the SEC decision declaring PBM in suspension of payments is not binding on TRB; and (3) Presidential Decree
No. 1758 ("PD No. 1758"),17 which Ching relied on to support his assertion that all claims against PBM are suspended, does
not apply to Ching as the decree regulates corporate activities only. 18

In its order dated 15 August 1983,19 the trial court denied the motion to dismiss with respect to Ching and affirmed its
dismissal of the case with respect to PBM. The trial court stressed that TRB was holding Ching liable under the Deed of
Suretyship. As Ching’s obligation was solidary, the trial court ruled that TRB could proceed against Ching as surety upon
default of the principal debtor PBM. The trial court also held that PD No. 1758 applied only to corporations, partnerships and
associations and not to individuals.

Upon the trial court’s denial of his Motion for Reconsideration, Ching filed a Petition for Certiorari and Prohibition20 before the
Court of Appeals. The appellate court granted Ching’s petition and ordered the dismissal of the case. The appellate court
ruled that the SEC assumed jurisdiction over Ching and PBM to the exclusion of courts or tribunals of coordinate rank.

TRB assailed the Court of Appeals’ Decision21 before this Court. In Traders Royal Bank v. Court of Appeals,22this Court
upheld TRB and ruled that Ching was merely a nominal party in SEC Case No. 2250. Creditors may sue individual sureties of
debtor corporations, like Ching, in a separate proceeding before regular courts despite the pendency of a case before the
SEC involving the debtor corporation.

In his Answer dated 6 November 1989, Ching denied liability as surety and accommodation co-maker of PBM. He claimed
that the SEC had already issued a decision23 approving a revised rehabilitation plan for PBM’s creditors, and that PBM
obtained the credit accommodations for corporate purposes that did not redound to his personal benefit. He further claimed
that even as a surety, he has the right to the defenses personal to PBM. Thus, his liability as surety would attach only if, after
the implementation of payments scheduled under the rehabilitation plan, there would remain a balance of PBM’s debt to
TRB.24 Although Ching admitted PBM’s availment of the credit accommodations, he did not show any proof of payment by
PBM or by him.

TRB admitted certain partial payments on the PBM account made by PBM itself and by the SEC-appointed receiver.25 Thus,
the trial court had to resolve the following remaining issues:

1. How much exactly is the corporate defendant’s outstanding obligation to the plaintiff?

2. Is defendant Alfredo Ching personally answerable, and for exactly how much? 26

TRB presented Mr. Lauro Francisco, loan officer of the Remedial Management Department of TRB, and Ms. Carla Pecson,
manager of the International Department of TRB, as witnesses. Both witnesses testified to the following:

1. The existence of a Deed of Suretyship dated 21 July 1977 executed by Ching for PBM’s liabilities to TRB up
to P10,000,000;27

2. The application of PBM and grant by TRB on 13 March 1980 of Letter of Credit No. 479 AD for US$591,043, and
the actual availment by PBM of the full proceeds of the credit accommodation;28

3. The application of PBM and grant by TRB on 6 August 1980 of Letter of Credit No. 563 AD for US$156,000, and
the actual availment by PBM of the full proceeds of the credit accommodation; 29 and

4. The existence of a trust loan of P3,500,000 evidenced by a notarized Promissory Note dated 27 April 1981 wherein
Ching bound himself solidarily with PBM;30 and

5. Per TRB’s computation, Ching is liable for P19,333,558.16 as of 31 October 1991.31

Ching presented Atty. Vicente Aranda, corporate secretary and First Vice President of the Human Resources Department of
TRB, as witness. Ching sought to establish that TRB’s Board of Directors adopted a resolution fixing the PBM account at an
amount lower than what TRB wanted to collect from Ching. The trial court allowed Atty. Aranda to testify over TRB’s
manifestation that the Answer failed to plead the subject matter of his testimony. Atty. Aranda produced TRB Board
Resolution No. 5935, series of 1990, which contained the minutes of the special meeting of TRB’s Board of Directors held on
8 June 1990.32 In the resolution, the Board of Directors advised TRB’s Management "not to release Alfredo Ching from his
JSS liability to the bank."33 The resolution also stated the following:

a) Accept the P1.373 million deposits remitted over a period of 17 years or until 2006 which shall be applied directly to the
account (as remitted per hereto attached schedule). The amount of P1.373 million shall be considered as full payment of
PBM’s account. (The receiver is amenable to this alternative)

The initial deposit/remittance which amounts to P150,000.00 shall be remitted upon approval of the above and conforme to
PISCOR and PBM. Subsequent deposits shall start on the 3rd year and annually thereafter (every June 30th of the year) until
June 30, 2006.

Failure to pay one annual installment shall make the whole obligation due and demandable.

b) Write-off immediately P4.278 million. The balance [of] P1.373 million to remain outstanding in the books of the Bank. Said
balance will equal the deposits to be remitted to the Bank for a period of 17 years. 34

However, Atty. Aranda himself testified that both items (a) and (b) quoted above were never complied with or implemented.
Not only was there no initial deposit of P150,000 as required in the resolution, TRB also disapproved the document prepared
by the receiver, which would have released Ching from his suretyship. 35

The Ruling of the Trial Court

The trial court found Ching liable to TRB for P19,333,558.16 under the Deed of Suretyship. The trial court explained:

[T]he liability of Ching as a surety attaches independently from his capacity as a stockholder of the Philippine Blooming Mills.
Indisputably, under the Deed of Suretyship defendant Ching unconditionally agreed to assume PBM’s liability to the plaintiff in
the event PBM defaulted in the payment of the said obligation in addition to whatever penalties, expenses and bank charges
that may occur by reason of default. Clear enough, under the Deed of Suretyship (Exh. J), defendant Ching bound himself
jointly and severally with PBM in the payment of the latter’s obligation to the plaintiff. The obligation being solidary, the plaintiff
Bank can hold Ching liable upon default of the principal debtor. This is explicitly provided in Article 1216 of the New Civil Code
already quoted above.36

The dispositive portion of the trial court’s Decision reads:

WHEREFORE, judgment is hereby rendered declaring defendant Alfredo Ching liable to plaintiff bank in the amount
of P19,333,558.16 (NINETEEN MILLION THREE HUNDRED THIRTY THREE THOUSAND FIVE HUNDRED FIFTY EIGHT &
16/100) as of October 31, 1991, and to pay the legal interest thereon from such date until it is fully paid. To pay plaintiff 5% of
the entire amount by way of attorney’s fees.

SO ORDERED.37

The Ruling of the Court of Appeals

On appeal, Ching stated that as surety and solidary debtor, he should benefit from the changed nature of the obligation as
provided in Article 1222 of the Civil Code, which reads:

Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the
nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which
personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are
responsible.

Ching claimed that his liability should likewise be reduced since the equitable apportionment of PBM’s remaining assets
among its creditors under the rehabilitation proceedings would have the effect of reducing PBM’s liability. He also claimed that
the amount for which he was being held liable was excessive. He contended that the outstanding principal balance, as stated
in TRB Board Resolution No. 5893-1990, was only P5,650,749.09.38Ching also contended that he was not liable for interest,
as the loan documents did not stipulate the interest rate, pursuant to Article 1956 of the Civil Code. 39 Finally, Ching asserted
that the Deed of Suretyship executed on 21 July 1977 could not guarantee obligations incurred after its execution. 40

TRB did not file its appellee’s brief. Thus, the Court of Appeals resolved to submit the case for decision. 41

The Court of Appeals considered the following issues for its determination:

1. Whether the Answer of Ching amounted to an admission of liability.

2. Whether Ching can still be sued as a surety after the SEC placed PBM under rehabilitation receivership, and if in
the affirmative, for how much.42

The Court of Appeals resolved the first two questions in favor of TRB. The appellate court stated:

Ching did not deny under oath the genuineness and due execution of the L/Cs, Trust Receipts, Undertaking, Deed of Surety,
and the 3.5 Million Peso Promissory Note upon which TRB’s action rested. He is, therefore, presumed to be liable unless he
presents evidence showing payment, partially or in full, of these obligations (Investment and Underwriting Corporation of the
Philippines v. Comptronics Philippines, Inc. and Gene v. Tamesis, 192 SCRA 725 [1990]).

As surety of a corporation placed under rehabilitation receivership, Ching can answer separately for the obligations of debtor
PBM (Rizal Banking Corporation v. Court of Appeals, Philippine Blooming Mills, Inc., and Alfredo Ching, 178 SCRA 738
[1990], and Traders Royal Bank v. Philippine Blooming Mills and Alfredo Ching, 177 SCRA 788 [1989]).

Even a[n] SEC injunctive order cannot suspend payment of the surety’s obligation since the rehabilitation receivers are limited
to the existing assets of the corporation. 43

The dispositive portion of the Decision of the Court of Appeals reads:

WHEREFORE, the judgment of the lower court is hereby AFFIRMED but modified with respect to the amount of liability of
defendant Alfredo Ching which is lowered from P19,333,558.16 to P15,773,708.78 with legal interest of 12% per annum until
it is fully paid.

SO ORDERED.44

The Court of Appeals denied Ching’s Motion for Reconsideration for lack of merit.

Hence, this petition.

Issues

Ching assigns the following as errors of the Court of Appeals:

1. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT PETITIONER ALFREDO CHING
WAS LIABLE FOR OBLIGATIONS CONTRACTED BY PBM LONG AFTER THE EXECUTION OF THE DEED OF
SURETYSHIP.
 2. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT THE PETITIONERS WERE
LIABLE FOR THE TRUST RECEIPTS DESPITE THE FACT THAT PRIVATE RESPONDENT HAD PREVENTED
THEIR FULFILLMENT.

3. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT FOUND PETITIONER ALFREDO CHING LIABLE
FOR P15,773,708.78 WITH LEGAL INTEREST AT 12% PER ANNUM UNTIL FULLY PAID DESPITE THE FACT
THAT UNDER THE REHABILITATION PLAN OF PETITIONER PBM, WHICH WAS APPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, PRIVATE RESPONDENT IS ONLY ENTITLED TO P1,373,415.00.45

Ching asserted that the Deed of Suretyship dated 21 July 1977 could not answer for obligations not yet in existence at the
time of its execution. Specifically, Ching maintained that the Deed of Suretyship could not answer for debts contracted by
PBM in 1980 and 1981. Ching contended that no accessory contract of suretyship could arise without an existing principal
contract of loan. Ching likewise argued that TRB could no longer claim on the trust receipts because TRB had already taken
the properties subject of the trust receipts. Ching likewise maintained that his obligation as surety could not exceed
the P1,373,415 apportioned to PBM under the SEC-approved rehabilitation plan.

In its Comment, TRB asserted that the first two assigned errors raised factual issues not brought before the trial court.
Furthermore, TRB pointed out that Ching never presented PBM’s rehabilitation plan before the trial court. TRB also stated that
the Supreme Court ruling in Traders Royal Bank v. Court of Appeals46 constitutes res judicata between the parties.
Therefore, TRB could proceed against Ching separately from PBM to enforce in full Ching’s liability as surety. 47

The Ruling of the Court

The petition has no merit.

The case before us is an offshoot of the trial court’s denial of Ching’s motion to have the case dismissed against him. The
petition is a thinly veiled attempt to make this Court reconsider its decision in the prior case of Traders Royal Bank v. Court of
Appeals.48 This Court has already resolved the issue of Ching’s separate liability as a surety despite the rehabilitation
proceedings before the SEC. We held in Traders Royal Bank that:

Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of PBM, the SEC could not assume jurisdiction over
his person and properties. The Securities and Exchange Commission was empowered, as rehabilitation receiver, to take
custody and control of the assets and properties of PBM only, for the SEC has jurisdiction over corporations only [and] not
over private individuals, except stockholders in an intra-corporate dispute (Sec. 5, P.D. 902-A and Sec. 2 of P.D. 1758). Being
a nominal party in SEC Case No. 2250, Ching’s properties were not included in the rehabilitation receivership that the SEC
constituted to take custody of PBM’s assets. Therefore, the petitioner bank was not barred from filing a suit against Ching, as
a surety for PBM. An anomalous situation would arise if individual sureties for debtor corporations may escape liability by
simply co-filing with the corporation a petition for suspension of payments in the SEC whose jurisdiction is limited only to
corporations and their corporate assets.

xxx

Ching can be sued separately to enforce his liability as surety for PBM, as expressly provided by Article 1216 of the
New Civil Code.

xxx

It is elementary that a corporation has a personality distinct and separate from its individual stockholders and members. Being
an officer or stockholder of a corporation does not make one’s property the property also of the corporation, for they are
separate entities (Adelio Cruz vs. Quiterio Dalisay, 152 SCRA 482).

Ching’s act of joining as a co-petitioner with PBM in SEC Case No. 2250 did not vest in the SEC jurisdiction over his person
or property, for jurisdiction does not depend on the consent or acts of the parties but upon express provision of law (Tolentino
vs. Social Security System, 138 SCRA 428; Lee vs. Municipal Trial Court of Legaspi City, Br. I, 145 SCRA 408). (Emphasis
supplied)

Traders Royal Bank has fully resolved the issue regarding Ching’s liability as a surety of the credit accommodations TRB
extended to PBM. The decision amounts to res judicata49 which bars Ching from raising the same issue again. Hence, the
only question that remains is the amount of Ching’s liability. Nevertheless, we shall resolve the issues Ching has raised in his
attempt to escape liability under his surety.

Whether Ching is liable for obligations PBM contracted after execution of the Deed of Suretyship

Ching is liable for credit obligations contracted by PBM against TRB before and after the execution of the 21 July 1977 Deed
of Suretyship. This is evident from the tenor of the deed itself, referring to amounts PBM "may now be indebted or may
hereafter become indebted" to TRB.

The law expressly allows a suretyship for "future debts". Article 2053 of the Civil Code provides:

A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim
against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (Emphasis supplied)

Furthermore, this Court has ruled in Diño v. Court of Appeals50 that:

Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not be known at the
time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing
guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a
series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally
intended to provide security with respect to future transactions within certain limits, and contemplates a succession of
liabilities, for which, as they accrue, the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which
covers all transactions, including those arising in the future, which are within the description or contemplation of the contract
of guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing when by the terms thereof
it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or
until a certain period; especially if the right to recall the guaranty is expressly reserved. Hence, where the contract states that
the guaranty is to secure advances to be made "from time to time," it will be construed to be a continuing one.

In other jurisdictions, it has been held that the use of particular words and expressions such as payment of "any debt," "any
indebtedness," or "any sum," or the guaranty of "any transaction," or money to be furnished the principal debtor "at any time,"
or "on such time" that the principal debtor may require, have been construed to indicate a continuing guaranty.

Whether Ching’s liability is limited to the amount stated in PBM’s rehabilitation plan

Ching would like this Court to rule that his liability is limited, at most, to the amount stated in PBM’s rehabilitation plan. In
claiming this reduced liability, Ching invokes Article 1222 of the Civil Code which reads:

Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the
nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which
personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are
responsible.

In granting the loan to PBM, TRB required Ching’s surety precisely to insure full recovery of the loan in case PBM becomes
insolvent or fails to pay in full. This was the very purpose of the surety. Thus, Ching cannot use PBM’s failure to pay in full as
justification for his own reduced liability to TRB. As surety, Ching agreed to pay in full PBM’s loan in case PBM fails to pay in
full for any reason, including its insolvency.

TRB, as creditor, has the right under the surety to proceed against Ching for the entire amount of PBM’s loan. This is clear
from Article 1216 of the Civil Code:

ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others,
so long as the debt has not been fully collected. (Emphasis supplied)

Ching further claims a reduced liability under TRB Board Resolution No. 5935. This resolution states that PBM’s outstanding
loans may be reduced to P1.373 million subject to certain conditions like the payment of P150,000 initial payment.51 The
resolution also states that TRB should not release Ching’s solidary liability under his surety. The resolution even directs TRB’s
management to study Ching’s criminal liability under the trust documents. 52

Ching’s own witness testified that Resolution No. 5935 was never implemented. For one, PBM or its receiver never paid
the P150,000 initial payment to TRB. TRB also rejected the document that PBM’s receiver presented which would have
released Ching from his suretyship. Clearly, Ching cannot rely on Resolution No. 5935 to escape liability under his suretyship.

Ching’s attempts to have this Court review the factual issues of the case are improper. It is not a function of the Supreme
Court to assess and evaluate again the evidence, testimonial and evidentiary, adduced by the parties particularly where the
findings of both the trial court and the appellate court coincide on the matter. 53

Whether Ching is liable for the trust receipts

Ching is still liable for the amounts stated in the letters of credit covered by the trust receipts. Other than his bare allegations,
Ching has not shown proof of payment or settlement with TRB. Atty. Vicente Aranda, TRB’s corporate secretary and First
Vice President of its Human Resource Management Department, testified that the conditions in the TRB board resolution
presented by Ching were not met or implemented, thus:

ATTY. AZURA

Q Going into the resolution itself. A certain stipulation ha[s] been outlined, and may I refer you to condition or step No.
1, which reads: "a) Accept the P1.373 million deposits remitted over a period of 17 years or until 2006 which shall be
applied directly to the account (as remitted per hereto attached schedule). The amount of P1.373 million shall be
considered as full payment of PBM’s account. (The receiver is amenable to this alternative.) The initial
deposit/remittance which amounts to P150,000.00 shall be remitted upon approval of the above and conforme of
PISCOR [xxx] and PBM. Subsequent deposits shall start on the 3rd year and annually thereafter (every June 30th of
the year) until June 30, 2006.

Failure to pay one annual installment shall make the whole obligation due and demandable. Now Mr. Witness, would
you be in a position to inform [the court] if these conditions listed in item (a) in Resolution No. 5935, series of 1990,
were implemented or met?

A Yes. I know for a fact that the conditions, more particularly the initial deposit/remittance in the amount
of P150,000.00 which have to be done with approval was not remitted or met.

Q Will you clarify your answer. Would you be in a position to inform the court if those conditions were met? Because
your initial answer was yes.

A Yes sir, I am in a position to state that these conditions were not met.

Q Let me refer you to the condition listed as item (b) of the same resolution which I read and quote: "Write off
immediately P4.278 million. The balance of P1.373 million to remain outstanding in the books of the bank. Said
 balance will be remitted to the Bank for a period of 17 years." Mr. Witness, would you be in a position to inform the
court if the bank implemented that particular condition?

A In the implementation of this settlement the receiver prepared a document for approval and conformity of the bank.
The said document would in effect release the suretyship of Alfredo Ching and for that reason the bank refused or
denied fixing its conformity and approval with the court.

xxx

ATTY. ATIENZA ON REDIRECT EXAMINATION

Q Mr. Witness you stated that the reason why the plaintiff bank did not implement these conditionalities [sic] was
because the former defendant corporation requested that the suretyship of Alfredo Ching be released, is that correct?

A I did not say that. I said that in effect the document prepared by the lawyer of the receiver xxx the bank would
release the suretyship of Alfredo Ching, that is why the bank is not amenable to such a document.

Q Despite this approved resolution the bank, because of said requirement or conformity did not seek to implement
these conditionalities [sic]?

A Yes sir because the conditions imposed by the board is not being followed in that document because it was the
condition of the board that the suretyship should not be released but the document being presented to the bank for
signature and conformity in effect if signed would release the suretyship. So it would be a violation with the approval of
the board so the bank did not sign the conformity.54

Ching also claims that TRB prevented PBM from fulfilling its obligations under the trust receipts when TRB, together with
other creditor banks, took hold of PBM’s inventories, including the goods covered by the trust receipts. Ching asserts that this
act of TRB released him from liability under the suretyship. Ching forgets that he executed, on behalf of PBM, separate
Undertakings for each trust receipt expressly granting to TRB the right to take possession of the goods at any time to protect
TRB’s interests. TRB may exercise such right without waiving its right to collect the full amount of the loan to PBM. The
Undertakings also provide that any suspension of payment or any assignment by PBM for the benefit of creditors renders the
loan due and demandable. Thus, the separate Undertakings uniformly provide:

2. That the said BANK may at any time cancel the foregoing trust and take possession of said merchandise with the
right to sell and dispose of the same under such terms and conditions it may deem best, or of the proceeds of such
of the same as may then have been sold, wherever the said merchandise or proceeds may then be found and all the
provisions of the Trust Receipt shall apply to and be deemed to include said above-mentioned merchandise if the same shall
have been made up or used in the manufacture of any other goods, or merchandise, and the said BANK shall have the same
rights and remedies against the said merchandise in its manufactured state, or the product of said manufacture as it would
have had in the event that such merchandise had remained [in] its original state and irrespective of the fact that other and
different merchandise is used in completing such manufacture. In the event of any suspension, or failure or assignment
for the benefit of creditors on the part of the undersigned or of the non-fulfillment of any obligation, or of the non-
payment at maturity of any acceptance made under said credit, or any other credit issued by the said BANK on account of
the undersigned or of the non-payment of any indebtedness on the part of the undersigned to the said BANK, all
obligations, acceptances, indebtedness and liabilities whatsoever shall thereupon without notice mature and
become due and payable and the BANK may avail of the remedies provided herein.55 (Emphasis supplied)

Presidential Decree No. 115 ("PD No. 115"), otherwise known as the Trust Receipts Law, expressly allows TRB to take
possession of the goods covered by the trust receipts. Thus, Section of 7 of PD No. 115 states:

SECTION 7. Rights of the entruster. — The entruster shall be entitled to the proceeds from the sale of the goods, documents
or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears
in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all
other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this Decree.

The entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust
or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the
terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee, and the
entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the
intention to sell, and may, not less than five days after serving or sending of such notice, sell the goods, documents or
instruments at public or private sale, and the entruster may, at a public sale, become a purchaser. The proceeds of any
such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment
of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the
entrustee’s indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster
for any deficiency. Notice of sale shall be deemed sufficiently given if in writing, and either personally served on the
entrustee or sent by post-paid ordinary mail to the entrustee’s last known business address. (Emphasis supplied)

Thus, even though TRB took possession of the goods covered by the trust receipts, PBM and Ching remained liable for the
entire amount of the loans covered by the trust receipts.

Absent proof of payment or settlement of PBM and Ching’s credit obligations with TRB, Ching’s liability is what the Deed of
Suretyship stipulates, plus the applicable interest and penalties. The trust receipts, as well as the Letter of Undertaking dated
16 April 198056 executed by PBM, stipulate in writing the payment of interest without specifying the rate. In such a case, the
applicable interest rate shall be the legal rate, which is now 12% per annum. 57 This is in accordance with Central Bank
Circular No. 416, which states:

By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise known as the "Usury Law," the
Monetary Board, in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan or
forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of express contract as to such
rate of interest, shall be twelve per cent (12%) per annum. (Emphasis supplied)

On the other hand, the Promissory Note evidencing the P3,500,000 trust loan provides for 18% interest per annum plus 2%
penalty interest per annum in case of default. This stipulated interest should continue to run until full payment of
the P3,500,000 trust loan. In addition, the accrued interest on all the credit accommodations should earn legal interest from
the date of filing of the complaint pursuant to Article 2212 of the Civil Code.

Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent
upon this point.

The trial court found and the appellate court affirmed that the outstanding principal amounts as of the filing of the complaint
with the trial court on 13 May 1983 were P959,611.96 under Trust Receipt No. 106, P1,191,137.13 under Trust Receipt No.
113, and P3,500,000 for the trust loan. As extracted from TRB’s Statement of Account as of 31 October 1991, 58 the accrued
interest on the trust receipts and the trust loan as of the filing of the complaint on 13 May 1983 were P311,387.5159 under
Trust Receipt No. 106, P338,739.8160 under Trust Receipt No. 113, and P1,287,616.4461 under the trust loan. The penalty
interest on the trust loan amounted to P137,315.07.62Ching did not rebut this Statement of Account which TRB presented
during trial.

Thus, the following is the summary of Ching’s liability under the suretyship as of 13 May 1983, the date of filing of TRB’s
complaint with the trial court:

1. On Trust Receipt No. 106 (Letter of Credit No. 479 AD)

Outstanding Principal P 959,611.96

Accrued Interest (12% per annum) 311,387.51

2. On Trust Receipt No. 113 (Letter of Credit No. 563 AD)

Outstanding Principal P 1,191,137.13

Accrued Interest (12% per annum) 338,739.82

3. On the Trust Loan (Promissory Note)

Outstanding Principal P 3,500,000.00

Accrued Interest (18% per annum) 1,287,616.44

Accrued Penalty Interest (2% per annum) 137,315.07

WHEREFORE, we AFFIRM the decision of the Court of Appeals with MODIFICATION. Petitioner Alfredo Ching shall pay
respondent Traders Royal Bank the following (1) on the credit accommodations under the trust receipts, the total principal
amount of P2,150,749.09 with legal interest at 12% per annum from 14 May 1983 until full payment; (2) on the trust loan
evidenced by the Promissory Note, the principal sum of P3,500,000 with 20% interest per annum from 14 May 1983 until full
payment; (3) on the total accrued interest as of 13 May 1983, P2,075,058.84 with 12% interest per annum from 14 May 1983
until full payment. Petitioner Alfredo Ching shall also pay attorney’s fees to respondent Traders Royal Bank equivalent to 5%
of the total principal and interest.

SO ORDERED.

THIRD DIVISION

BENJAMIN BITANGA, G.R. No. 173526

Petitioner,
Present:

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,

CHICO-NAZARIO,

- versus - NACHURA, and

REYES, JJ.
 Promulgated:

PYRAMID CONSTRUCTION
ENGINEERING CORPORATION,
August 28, 2008
Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

Assailed in this Petition for Review under Rule 45[1] of the Revised Rules of Court are: (1) the
Decision[2] dated 11 April 2006 of the Court of Appeals in CA-G.R. CV No. 78007 which affirmed with
modification the partial Decision[3] dated 29 November 2002 of the Regional Trial Court (RTC), Branch
96, of Quezon City, in Civil Case No. Q-01-45041, granting the motion for summary judgment filed by
respondent Pyramid Construction and Engineering Corporation and declaring petitioner
Benjamin Bitanga and his wife, Marilyn Bitanga (Marilyn), solidarily liable to pay P6,000,000.000 to
respondent; and (2) the Resolution[4] dated 5 July 2006 of the appellate court in the same case denying
petitioners Motion for Reconsideration.

The generative facts are:

On 6 September 2001, respondent filed with the RTC a Complaint for specific performance and
damages with application for the issuance of a writ of preliminary attachment against the petitioner
and Marilyn. The Complaint was docketed as Civil Case No. Q-01-45041.

Respondent alleged in its Complaint that on 26 March 1997, it entered into an agreement
with Macrogen Realty, of which petitioner is the President, to construct for the latter theShoppers
Gold Building, located at Dr. A. Santos Avenue corner Palayag Road, Sucat, Paraaque City. Respondent
commenced civil, structural, and architectural works on the construction project by May
1997. However, Macrogen Realty failed to settle respondents progress billings. Petitioner, through his
representatives and agents, assured respondent that the outstanding account of Macrogen Realty
would be paid, and requested respondent to continue working on the construction project. Relying on
the assurances made by petitioner, who was no less than the President of Macrogen Realty,
respondent continued the construction project.

In August 1998, respondent suspended work on the construction project since the conditions
that it imposed for the continuation thereof, including payment of unsettled accounts, had not
been complied with by Macrogen Realty. On 1 September 1999, respondent instituted with the
Construction Industry Arbitration Commission (CIAC) a case for arbitration
against Macrogen Realty seeking payment by the latter of its unpaid billings and project
costs. Petitioner, through counsel, then conveyed to respondent his purported willingness to amicably
settle the arbitration case. On 17 April 2000, before the arbitration case could be set for trial,
respondent and Macrogen Realty entered into a Compromise Agreement,[5] with petitioner acting as
signatory for and in behalf of Macrogen Realty. Under the Compromise Agreement, Macrogen Realty
agreed to pay respondent the total amount of P6,000,000.00 in six equal monthly installments, with
each installment to be delivered on the 15th day of the month, beginning 15 June
2000.Macrogen Realty also agreed that if it would default in the payment of two successive monthly
installments, immediate execution could issue against it for the unpaid balance, without need of
judgment or decree from any court or tribunal. Petitioner guaranteed the obligations
of Macrogen Realty under the Compromise Agreement by executing a Contract of Guaranty [6] in favor
of respondent, by virtue of which he irrevocably and unconditionally guaranteed the full and complete
payment of the principal amount of liability of Macrogen Realty in the sum of P6,000,000.00. Upon
joint motion of respondent and Macrogen Realty, the CIAC approved the Compromise Agreement
on 25 April 2000.[7]

However, contrary to petitioners assurances, Macrogen Realty failed and refused to pay all the
monthly installments agreed upon in the Compromise Agreement. Hence, on 7 September 2000,
respondent moved for the issuance of a writ of execution [8] against Macrogen Realty, which CIAC
granted.

On 29 November 2000, the sheriff[9] filed a return stating that he was unable to locate any
property of Macrogen Realty, except its bank deposit of P20,242.33, with the Planters
Bank, Buendia Branch.

Respondent then made, on 3 January 2001, a written demand[10] on petitioner, as guarantor

of Macrogen Realty, to pay the P6,000,000.00, or to point out available properties of
the Macrogen Realty within the Philippines sufficient to cover the obligation guaranteed. It also made
verbal demands on petitioner. Yet, respondents demands were left unheeded.

Thus, according to respondent, petitioners obligation as guarantor was already due and
demandable. As to Marilyns liability, respondent contended that Macrogen Realty was owned and
controlled by petitioner and Marilyn and/or by corporations owned and controlled by
them. Macrogen Realty is 99% owned by the Asian Appraisal Holdings, Inc. (AAHI), which in turn is 99%
owned by Marilyn. Since the completion of the construction project would have redounded to the
benefit of both petitioner and Marilyn and/or their corporations; and considering, moreover, Marilyns
enormous interest in AAHI, the corporation which controls Macrogen Realty, Marilyn cannot be
unaware of the obligations incurred by Macrogen Realty and/or petitioner in the course of the
business operations of the said corporation.

Respondent prayed in its Complaint that the RTC, after hearing, render a judgment ordering
petitioner and Marilyn to comply with their obligation under the Contract of Guaranty by paying
respondent the amount of P6,000,000.000 (less the bank deposit of Macrogen Realty with Planters
Bank in the amount of P20,242.23) and P400,000.000 for attorneys fees and expenses of
litigation. Respondent also sought the issuance of a writ of preliminary attachment as security for the
satisfaction of any judgment that may be recovered in the case in its favor.
Marilyn filed a Motion to Dismiss,[11] asserting that respondent had no cause of action against her,
since she did not co-sign the Contract of Guaranty with her husband; nor was she a party to the
Compromise Agreement between respondent and Macrogen Realty. She had no part at all in the
execution of the said contracts. Mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of another corporation is not by itself a sufficient ground for
disregarding the separate personality of the latter corporation. Respondent misread Section 4, Rule 3
of the Revised Rules of Court.

The RTC denied Marilyns Motion to Dismiss for lack of merit, and in its Order dated 24 January
2002 decreed that:

The Motion To Dismiss Complaint Against Defendant Marilyn Andal Bitanga filed
on November 12, 2001 is denied for lack of merit considering that Sec. 4, Rule 3, of the Rules
of Court (1997) specifically provides, as follows:

SEC. 4. Spouses as parties. Husband and wife shall sue or be sued jointly, except
as provided by law.

and that this case does not come within the exception.[12]

Petitioner filed with the RTC on 12 November 2001, his Answer[13] to respondents Complaint averring
therein that he never made representations to respondent that MacrogenRealty would
faithfully comply with its obligations under the Compromise Agreement. He did not offer to guarantee
the obligations of Macrogen Realty to entice respondent to enter into the Compromise Agreement but
that, on the contrary, it was respondent that required Macrogen Realty to offer some form of security
for its obligations before agreeing to the compromise. Petitioner further alleged that his wife Marilyn
was not aware of the obligations that he assumed under both the Compromise Agreement and the
Contract of Guaranty as he did not inform her about said contracts, nor did he secure her consent
thereto at the time of their execution.

As a special and affirmative defense, petitioner argued that the benefit of excussion was still available
to him as a guarantor since he had set it up prior to any judgment against him. According to petitioner,
respondent failed to exhaust all legal remedies to collect from Macrogen Realty the amount due under
the Compromise Agreement, considering that Macrogen Realty still had uncollected credits which
were more than enough to pay for the same. Given these premise, petitioner could not be held liable
as guarantor.Consequently, petitioner presented his counterclaim for damages.

At the pre-trial held on 5 September 2002, the parties submitted the following issues for the
resolution of the RTC:

(1) whether the defendants were liable under the contract of guarantee dated April 17,
2000 entered into between Benjamin Bitanga and the plaintiff;
 (2) whether defendant wife Marilyn Bitanga is liable in this action;

(3) whether the defendants are entitled to the benefit of excussion, the plaintiff on the one
hand claiming that it gave due notice to the guarantor, Benjamin Bitanga, and the
defendants contending that no proper notice was received by Benjamin Bitanga;

(4) if damages are due, which party is liable; and

(5) whether the benefit of excussion can still be invoked by the defendant guarantor even
after the notice has been allegedly sent by the plaintiff although proper receipt is
denied.[14]

On 20 September 2002, prior to the trial proper, respondent filed a Motion for Summary
Judgment.[15] Respondent alleged therein that it was entitled to a summary judgment on account of
petitioners admission during the pre-trial of the genuineness and due execution of the Contract of
Guaranty. The contention of petitioner and Marilyn that they were entitled to the benefit
of excussion was not a genuine issue. Respondent had already exhausted all legal remedies to collect
from Macrogen Realty, but its efforts proved unsuccessful. Given that the inability of Macrogen Realty
as debtor to pay the amount of its debt was already proven by the return of the writ of execution to
CIAC unsatisfied, the liability of petitioner as guarantor already arose. [16] In any event, petitioner and
Marilyn were deemed to have forfeited their right to avail themselves of the benefit
of excussion because they failed to comply with Article 2060[17] of the Civil Code when petitioner
ignored respondents demand letter dated 3 January 2001 for payment of the amount he
guaranteed.[18] The duty to collect the supposed receivables of Macrogen Realty from its creditors
could not be imposed on respondent, since petitioner and Marilyn never informed respondent about
such uncollected credits even after receipt of the demand letter for payment. The allegation of
petitioner and Marilyn that they could not respond to respondents demand letter since they did not
receive the same was unsubstantiated and insufficient to raise a genuine issue of fact which could
defeat respondents Motion for Summary Judgment. The claim that Marilyn never participated in the
transactions that culminated in petitioners execution of the Contract of Guaranty was nothing more
than a sham.

In opposing respondents foregoing Motion for Summary Judgment, petitioner and Marilyn countered
that there were genuinely disputed facts that would require trial on the merits. They appended
thereto an affidavit executed by petitioner, in which he declared that his spouse Marilyn could not be
held personally liable under the Contract of Guaranty or the Compromise Agreement, nor should her
share in the conjugal partnership be made answerable for the guaranty petitioner assumed, because
his undertaking of the guaranty did not in any way redound to the benefit of their family. As
guarantor, petitioner was entitled to the benefit of excussion, and he did not waive his right
thereto. He never received the respondents demand letter dated 3 January 2001, as Ms. Dette Ramos,
the person who received it, was not an employee of Macrogen Realty nor was she authorized to
receive the letter on his behalf. As a guarantor, petitioner could resort to the benefit of excussion at
any time before judgment was rendered against him.[19] Petitioner reiterated that Macrogen Realty
had uncollected credits which were more than sufficient to satisfy the claim of respondent.

On 29 November 2002, the RTC rendered a partial Decision, the dispositive portion of which provides:
 WHEREFORE, summary judgment is rendered ordering defendants SPOUSES BENJAMIN
BITANGA and MARILYN ANDAL BITANGA to pay the [herein respondent], jointly and
severally, the amount of P6,000,000.00, less P20,242.23 (representing the amount garnished
bank deposit of MACROGEN in the Planters Bank, Buendia Branch); and the costs of suit.

Within 10 days from receipt of this partial decision, the [respondent] shall inform the Court
whether it shall still pursue the rest of the claims against the defendants. Otherwise, such
claims shall be considered waived.[20]

Petitioner and Marilyn filed a Motion for Reconsideration of the afore-quoted Decision, which the RTC
denied in an Order dated 26 January 2003.[21]

In time, petitioner and Marilyn filed an appeal with the Court of Appeals, docketed as CA-G.R. CV
78007. In its Decision dated 11 April 2006, the appellate court held:

UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from must be, as it
hereby is, MODIFIED to the effect that defendant-appellant Marilyn Bitanga is adjudged not
liable, whether solidarily or otherwise, with her husband the defendant-appellant
Benjamin Bitanga, under the compromise agreement or the contract of guaranty. No costs in
this instance.[22]

In holding that Marilyn Bitanga was not liable, the Court of Appeals cited Ramos v. Court of
Appeals,[23] in which it was declared that a contract cannot be enforced against one who is not a party
to it. The Court of Appeals stated further that the substantial ownership of shares in Macrogen Realty
by Marilyn Bitanga was not enough basis to hold her liable.

The Court of Appeals, in its Resolution dated 5 July 2006, denied petitioners Motion for
Reconsideration[24] of its earlier Decision.

Petitioner is now before us via the present Petition with the following assignment of errors:

THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE VALIDITY OF THE PARTIAL
SUMMARY JUDGMENT BY THE REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH 96,
DESPITE THE CLEAR EXISTENCE OF DISPUTED GENUINE AND MATERIAL FACTS OF THE CASE
THAT SHOULD HAVE REQUIRED A TRIAL ON THE MERITS.

II
 THE COURT OF APPEALS GRAVELY ERRED IN NOT UPHOLDING THE RIGHT OF PETITIONER
BENJAMIN M. BITANGA AS A MERE GUARANTOR TO THE BENEFIT OF EXCUSSION UNDER
ARTICLES 2058, 2059, 2060, 2061, AND 2062 OF THE CIVIL CODE OF THE PHILIPPINES.[25]

As in the two courts below, it is petitioners position that summary judgment is improper in Civil
Case No. Q-01-45041 because there are genuine issues of fact which have to be threshed out during
trial, to wit:

(A) Whether or not there was proper service of notice to petitioner considering the said
letter of demand was allegedly received by one Dette Ramos at Macrogen office and not by
him at his residence.

(B) Whether or not petitioner is entitled to the benefit of excussion?[26]

We are not persuaded by petitioners arguments.

Rule 35 of the Revised Rules of Civil Procedure provides:

Section 1. Summary judgment for claimant. A party seeking to recover upon a claim, counterclaim, or
cross-claim or to obtain a declaratory relief may, at any time after the pleading in answer thereto has been served,
move with supporting affidavits, depositions or admissions for a summary judgment in his favor upon all or any
part thereof.

For a summary judgment to be proper, the movant must establish two requisites: (a) there must be
no genuine issue as to any material fact, except for the amount of damages; and (b) the party presenting
the motion for summary judgment must be entitled to a judgment as a matter of law. Where, on the
basis of the pleadings of a moving party, including documents appended thereto, no genuine issue as to
a material fact exists, the burden to produce a genuine issue shifts to the opposing party. If the
opposing party fails, the moving party is entitled to a summary judgment. [27]

In a summary judgment, the crucial question is: are the issues raised by the opposing party not
genuine so as to justify a summary judgment?[28]

First off, we rule that the issue regarding the propriety of the service of a copy of the demand
letter on the petitioner in his office is a sham issue. It is not a bar to the issuance of a summary
judgment in respondents favor.

A genuine issue is an issue of fact which requires the presentation of evidence as distinguished
from an issue which is a sham, fictitious, contrived or false claim. To forestall summary judgment, it is
essential for the non-moving party to confirm the existence of genuine issues, as to which he has
substantial, plausible and fairly arguable defense, i.e.,[29] issues of fact calling for the presentation of
evidence upon which reasonable findings of fact could return a verdict for the non-moving party,
although a mere scintilla of evidence in support of the party opposing summary judgment will be
insufficient to preclude entry thereof.

Significantly, petitioner does not deny the receipt of the demand letter from the respondent. He
merely raises a howl on the impropriety of service thereof, stating that the address to which the said
letter was sent was not his residence but the office of Macrogen Realty, thus it cannot be considered
as the correct manner of conveying a letter of demand upon him in his personal capacity. [30]

Section 6, Rule 13 of the Rules of Court states:

SEC. 6. Personal service. Service of the papers may be made by delivering personally a copy
to the party or his counsel, or by leaving it in his office with his clerk or with a person having
charge thereof. If no person is found in his office, or his office is not known, or he has no
office, then by leaving the copy, between the hours of eight in the morning and six in the
evening, at the partys or counsels residence, if known, with a person of sufficient age and
discretion then residing therein.

The affidavit of Mr. Robert O. Pagdilao, messenger of respondents counsel states in part:

2. On 4 January 2001, Atty. Jose Vicente B. Salazar, then one of the Associates of the ACCRA
Law Offices, instructed me to deliver to the office of Mr. Benjamin Bitanga a letter
dated 3 January 2001, pertaining to Construction Industry Arbitration Commission
(hereafter, CIAC) Case No. 99-56, entitled Pyramid Construction Engineering
Corporation vs. Macrogen Realty Corporation.

3. As instructed, I immediately proceeded to the office of Mr. Bitanga located at the

12th Floor, Planters Development Bank Building, 314 Senator
Gil Puyat Avenue, Makati City. I delivered the said letter to Ms. Dette Ramos, a person
of sufficient age and discretion, who introduced herself as one of the employees of
Mr. Bitanga and/or of the latters companies.[31](Emphasis supplied.)

We emphasize that when petitioner signed the Contract of Guaranty and assumed obligation as
guarantor, his address in the said contract was the same address where the demand letter was
served.[32] He does not deny that the said place of service, which is the office of Macrogen, was also
the address that he used when he signed as guarantor in the Contract of Guaranty. Nor does he deny
that this is his office address; instead, he merely insists that the person who received the letter and
signed the receiving copy is not an employee of his company. Petitioner could have easily
substantiated his allegation by a submission of an affidavit of the personnel manager of his office that
no such person is indeed employed by petitioner in his office, but that evidence was not
submitted.[33] All things are presumed to have been done correctly and with due formality until the
contrary is proved. This juris tantum presumption stands even against the most well-reasoned
allegation pointing to some possible irregularity or anomaly. [34] It is petitioners burden to overcome
the presumption by sufficient evidence, and so far we have not seen anything in the record to support
petitioners charges of anomaly beyond his bare allegation. Petitioner cannot now be heard to
complain that there was an irregular service of the demand letter, as it does not escape our attention
that petitioner himself indicated 314 Sen. Gil Puyat Avenue, Makati City as his office address in the
Contract of Guaranty.

Moreover, under Section 6, Rule 13 of the Rules of Court, there is sufficiency of service when
the papers, or in this case, when the demand letter is personally delivered to the party or his
counsel, or by leaving it in his office with his clerk or with a person having charge thereof, such as
what was done in this case.

We have consistently expostulated that in summary judgments, the trial court can determine a
genuine issue on the basis of the pleadings, admissions, documents, affidavits or counter affidavits
submitted by the parties. When the facts as pleaded appear uncontested or undisputed, then there is
no real or genuine issue or question as to any fact, and summary judgment is called for. [35]

The Court of Appeals was correct in holding that:

Here, the issue of non-receipt of the letter of demand is a sham or pretended issue, not a genuine and substantial
issue. Indeed, against the positive assertion of Mr. Roberto O. Pagdilao (the private courier) in his affidavit that he
delivered the subject letter to a certain Ms. Dette Ramos who introduced herself as one of the employees of
[herein petitioner] Mr. Benjamin Bitangaand/or of the latters companies, said [petitioner] merely offered a bare
denial. But bare denials, unsubstantiated by facts, which would be admissible in evidence at a hearing, are not
sufficient to raise a genuine issue of fact sufficient to defeat a motion for summary judgment. [36]

We further affirm the findings of both the RTC and the Court of Appeals that, given the settled
facts of this case, petitioner cannot avail himself of the benefit of excussion.

Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to do so. The guarantor who pays for a debtor, in
turn, must be indemnified by the latter. However, the guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of the debtor and resorted to all the legal
remedies against the debtor. This is what is otherwise known as the benefit of excussion.[37]

Article 2060 of the Civil Code reads:

Art. 2060. In order that the guarantor may make use of the benefit of excussion, he must set
it up against the creditor upon the latters demand for payment from him, and point out to
the creditor available property of the debtor within Philippine territory, sufficient to cover
the amount of the debt.[38]

The afore-quoted provision imposes a condition for the invocation of the defense
of excussion. Article 2060 of the Civil Code clearly requires that in order for the guarantor to make use
of the benefit of excussion, he must set it up against the creditor upon the latters demand for
payment and point out to the creditor available property of the debtor within the Philippines sufficient
to cover the amount of the debt.[39]

It must be stressed that despite having been served a demand letter at his office, petitioner still failed
to point out to the respondent properties of Macrogen Realty sufficient to cover its debt as required
under Article 2060 of the Civil Code. Such failure on petitioners part forecloses his right to set up the
defense of excussion.
Worthy of note as well is the Sheriffs return stating that the only property of Macrogen Realty which
he found was its deposit of P20,242.23 with the Planters Bank.

Article 2059(5) of the Civil Code thus finds application and precludes petitioner from interposing the
defense of excussion. We quote:

Art. 2059. This excussion shall not take place:

xxxx

(5) If it may be presumed that an execution on the property of the principal debtor would not result in the
satisfaction of the obligation.

As the Court of Appeals correctly ruled:

We find untenable the claim that the [herein petitioner] Benjamin Bitanga cannot be compelled to pay Pyramid
because the Macrogen Realty has allegedly sufficient assets. Reason: The said [petitioner] had not
genuinely controverted the return made by Sheriff Joseph F. Bisnar, who affirmed that, after exerting diligent
efforts, he was not able to locate any property belonging to the Macrogen Realty, except for a bank deposit with
the Planters Bank at Buendia, in the amount of P20,242.23. It is axiomatic that the liability of the guarantor arises
when the insolvency or inability of the debtor to pay the amount of debt is proven by the return of the writ of
execution that had not been unsatisfied.[40]

IN ALL, we fail to point out any impropriety in the rendition of a summary judgment in favor of
the respondent.

WHEREFORE, premises considered, the instant petition is DENIED for lack of merit. The Decision
of the Court of Appeals dated 11 April 2006 and its Resolution dated 5 July 2006 are AFFIRMED. Costs
against petitioner.

SO ORDERED.

SECOND DIVISION

[G.R. No. 151060. August 31, 2005]

JN DEVELOPMENT CORPORATION, and SPS. RODRIGO and LEONOR STA.

ANA, petitioners, vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE
CORPORATION, respondent.

[G.R. No. 151311. August 31, 2005]

NARCISO V. CRUZ, petitioner, vs. PHILIPPINE EXPORT and FOREIGN LOAN
GUARANTEE CORPORATION, respondent.

DECISION
TINGA, J.:

Before us are consolidated petitions questioning the Decision[1] of the Court of Appeals (CA) in
CA-G.R. CV No. 61318, entitled Philippine Export and Foreign Loan Guarantee Corporation v. JN
Development Corporation, et al., which reversed the Decision of the Regional Trial Court (RTC) of
Makati, Branch 60.
On 13 December 1979, petitioner JN Development Corporation (JN) and Traders Royal Bank
(TRB) entered into an agreement whereby TRB would extend to JN an Export Packing Credit Line
for Two Million Pesos (P2,000,000.00). The loan was covered by several securities, including a
real estate mortgage[2] and a letter of guarantee from respondent Philippine Export and Foreign
Loan Guarantee Corporation (PhilGuarantee), now Trade and Investment Development
Corporation of the Philippines, covering seventy percent (70%) of the credit line. [3] With
PhilGuarantee issuing a guarantee in favor of TRB,[4] JN, petitioner spouses Rodrigo and Leonor
Sta. Ana[5] and petitioner Narciso Cruz[6] executed a Deed of Undertaking[7](Undertaking) to assure
repayment to PhilGuarantee.
It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8 October 1980
TRB requested PhilGuarantee to make good its guarantee.[8] PhilGuarantee informed JN about
the call made by TRB, and inquired about the action of JN to settle the loan. [9] Having received no
response from JN, on 10 March 1981 PhilGuarantee paid TRB Nine Hundred Thirty Four
Thousand Eight Hundred Twenty Four Pesos and Thirty Four Centavos
(P934,824.34).[10] Subsequently, PhilGuarantee made several demands on JN, but the latter failed
to pay. On 30 May 1983, JN, through Rodrigo Sta. Ana, proposed to settle the obligation by way
of development and sale of the mortgaged property.[11] PhilGuarantee, however, rejected the
proposal.
PhilGuarantee thus filed a Complaint[12] for collection of money and damages against herein
petitioners.
In its Decision dated 20 August 1998, the RTC dismissed PhilGuarantees Complaint as well
as the counterclaim of petitioners. It ruled that petitioners are not liable to reimburse
PhilGuarantee what it had paid to TRB. Crucial to this holding was the courts finding that TRB
was able to foreclose the real estate mortgage executed by JN, thus extinguishing petitioners
obligation.[13] Moreover, there was no showing that after the said foreclosure, TRB had demanded
from JN any deficiency or the payment of the difference between the proceeds of the foreclosure
sale and the actual loan.[14] In addition, the RTC held that since PhilGuarantees guarantee was
good for only one year from 17 December 1979, or until 17 December 1980, and since it was not
renewed after the expiry of said period, PhilGuarantee had no more legal duty to pay TRB on 10
March 1981.[15] The RTC likewise ruled that Cruz cannot be held liable under the Undertaking
since he was not the one who signed the document, in line with its finding that his signature found
in the records is totally different from the signature on the Undertaking.[16]
According to the RTC, the failure of TRB to sue JN for the recovery of the loan precludes
PhilGuarantee from seeking recoupment from the spouses Sta. Ana and Cruz what it paid to
TRB. Thus, PhilGuarantees payment to TRB amounts to a waiver of its right under Art. 2058 of
the Civil Code.[17]
Aggrieved by the RTC Decision, PhilGuarantee appealed to the CA. The appellate court
reversed the RTC and ordered petitioners to pay PhilGuarantee Nine Hundred Thirty Four
Thousand Six Hundred Twenty Four Pesos and Thirty Four Centavos (P934,624.34), plus service
charge and interest.[18]
In reaching its denouement, the CA held that the RTCs finding that the loan was extinguished
by virtue of the foreclosure sale of the mortgaged property had no factual support,[19] and that
such finding is negated by Rodrigo Sta. Anas testimony that JN did not receive any notice of
foreclosure from PhilGuarantee or from TRB. [20] Moreover, Sta. Ana even offered the same
mortgaged property to PhilGuarantee to settle its obligations with the latter.[21]
The CA also ruled that JNs obligation had become due and demandable within the one-year
period of effectivity of the guarantee; thus, PhilGuarantees payment to TRB conformed with its
guarantee, although the payment itself was effected one year after the maturity date of the
loan.[22] Contrary to the trial courts finding, the CA ruled that the contract of guarantee was not
extinguished by the alleged lack of evidence on PhilGuarantees consent to the extensions
granted by TRB to JN.[23] Interpreting Art. 2058 of the Civil Code,[24] the appellate court explained
that while the provision states that the guarantor cannot be compelled to pay unless the
properties of the debtor are exhausted, the guarantor is not precluded from waiving the benefit of
excussion and paying the obligation altogether.[25]
Finally, the CA found that Narciso Cruz was unable to prove the alleged forgery of his
signature in the Undertaking, the evidence presented not being sufficient to overcome the
presumption of regularity of the Undertaking which is a notarized document. [26]
Petitioners sought reconsideration of the Decision and prayed for the admission of documents
evidencing the foreclosure of the real estate mortgage, but the motion for reconsideration was
denied by the CA for lack of merit. The CA ruled that the documentary evidence presented by
petitioners cannot be considered as newly discovered evidence, it being already in existence
while the case was pending before the trial court, the very forum before which it should have been
presented. Besides, a foreclosure sale per se is not proof of petitioners payment of the loan to
PhilGuarantee, the CA added.[27]
So now before the Court are the separate petitions for review of the CA Decision. JN and the
spouses Sta. Ana, petitioners in G.R. No. 151060, posit that the CA erred in interpreting Articles
2079, 2058, and 2059 of the Civil Code in its Decision.[28] Meanwhile, petitioner Narciso Cruz in
G.R. No. 151311 claims that the CA erred when it held that petitioners are liable to PhilGuarantee
despite its payment after the expiration of its contract of guarantee and the lack of PhilGuarantees
consent to the extensions granted by TRB to JN. Moreover, Cruz questions the reversal of the
ruling of the trial court anent his liability as a signatory to the Undertaking.[29]
On the other hand, PhilGuarantee maintains that the date of default, not the actual date of
payment, determines the liability of the guarantor and that having paid TRB when the loan
became due, it should be indemnified by petitioners.[30] It argues that, contrary to petitioners claim,
there could be no waiver of its right to excussion more explicit than its act of payment to TRB very
directly.[31] Besides, the right to excussion is for the benefit of the guarantor and is not a defense
for the debtor to raise and use to evade liability.[32] Finally, PhilGuarantee maintains that there is
no sufficient evidence proving the alleged forgery of Cruzs signature on the Undertaking, which is
a notarized document and as such must be accorded the presumption of regularity. [33]
The Court finds for PhilGuarantee.
Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so. [34] The guarantor who pays
for a debtor, in turn, must be indemnified by the latter. [35] However, the guarantor cannot be
compelled to pay the creditor unless the latter has exhausted all the property of the debtor and
resorted to all the legal remedies against the debtor.[36] This is what is otherwise known as the
benefit of excussion.
It is clear that excussion may only be invoked after legal remedies against the principal debtor
have been expanded. Thus, it was held that the creditor must first obtain a judgment against the
principal debtor before assuming to run after the alleged guarantor, for obviously the exhaustion
of the principals property cannot even begin to take place before judgment has been
obtained.[37] The law imposes conditions precedent for the invocation of the defense. Thus, in
order that the guarantor may make use of the benefit of excussion, he must set it up against the
creditor upon the latters demand for payment and point out to the creditor available property of
the debtor within the Philippines sufficient to cover the amount of the debt.[38]
While a guarantor enjoys the benefit of excussion, nothing prevents him from paying the
obligation once demand is made on him. Excussion, after all, is a right granted to him by law and
as such he may opt to make use of it or waive it. PhilGuarantees waiver of the right of excussion
cannot prevent it from demanding reimbursement from petitioners. The law clearly requires the
debtor to indemnify the guarantor what the latter has paid.[39]
Petitioners claim that PhilGuarantee had no more obligation to pay TRB because of the
alleged expiration of the contract of guarantee is untenable. The guarantee, dated17 December
1979, states:

In the event of default by JNDC and as a consequence thereof, PHILGUARANTEE is made to pay its
obligation arising under the aforesaid guarantee PHILGUARANTEE shall pay the BANK the amount
of P1.4 million or 70% of the total obligation unpaid

....
This guarantee shall be valid for a period of one (1) year from date hereof but may be renewed upon
payment by JNDC of the guarantee fee at the same rate of 1.5% per annum.[40]

The guarantee was only up to 17 December 1980. JNs obligation with TRB fell due on 30
June 1980, and demand on PhilGuarantee was made by TRB on 08 October 1980. That payment
was actually made only on 10 March 1981 does not take it out of the terms of the guarantee.
What is controlling is that default and demand on PhilGuarantee had taken place while the
guarantee was still in force.
There is likewise no merit in petitioners claim that PhilGuarantees failure to give its express
consent to the alleged extensions granted by TRB to JN had extinguished the guarantee. The
requirement that the guarantor should consent to any extension granted by the creditor to the
debtor under Art. 2079 is for the benefit of the guarantor. As such, it is likewise waivable by the
guarantor. Thus, even assuming that extensions were indeed granted by TRB to JN,
PhilGuarantee could have opted to waive the need for consent to such extensions. Indeed, a
guarantor is not precluded from waiving his right to be notified of or to give his consent to
extensions obtained by the debtor. Such waiver is not contrary to public policy as it is purely
personal and does not affect public interest.[41] In the instant case, PhilGuarantees waiver can be
inferred from its actual payment to TRB after the latters demand, despite JNs failure to pay the
renewal/guarantee fee as indicated in the guarantee.[42]
For the above reasons, there is no basis for petitioners claim that PhilGuarantee was a mere
volunteer payor and had no legal obligation to pay TRB. The law does not prohibit the payment by
a guarantor on his own volition, heedless of the benefit of excussion. In fact, it recognizes the
right of a guarantor to recover what it has paid, even if payment was made before the debt
becomes due,[43] or if made without notice to the debtor,[44] subject of course to some conditions.
Petitioners invocation of our ruling in Willex Plastic Industries, Corp. v. Court of Appeals[45] is
misplaced, if not irrelevant. In the said case, the guarantor claimed that it could not be proceeded
against without first exhausting all of the properties of the debtor. The Court, finding that there
was an express renunciation of the benefit of excussion in the contract of guarantee, ruled against
the guarantor.
The cited case finds no application in the case a quo. PhilGuarantee is not invoking the
benefit of excussion. It cannot be overemphasized that excussion is a right granted to the
guarantor and, therefore, only he may invoke it at his discretion.
The benefit of excussion, as well as the requirement of consent to extensions of payment, is a
protective device pertaining to and conferred on the guarantor. These may be invoked by the
guarantor against the creditor as defenses to bar the unwarranted enforcement of the guarantee.
However, PhilGuarantee did not avail of these defenses when it paid its obligation according to
the tenor of the guarantee once demand was made on it. What is peculiar in the instant case is
that petitioners, the principal debtors themselves, are muddling the issues and raising the same
defenses against the guarantor, which only the guarantor may invoke against the creditor, to
avoid payment of their own obligation to the guarantor. The Court cannot countenance their self-
seeking desire to be exonerated from the duty to reimburse PhilGuarantee after it had paid TRB
on their behalf and to unjustly enrich themselves at the expense of PhilGuarantee.
Petitioners assert that TRBs alleged foreclosure of the real estate mortgage over the land
executed as security for the loan agreement had extinguished PhilGuarantees obligation; thus,
PhilGuarantees recourse should be directed against TRB, as per the pari-passu provision[46] in the
contract of guarantee.[47] We disagree.
The foreclosure was made on 27 August 1993, after the case was submitted for decision in
1992 and before the issuance of the decision of the court a quo in 1998.[48] Thus, foreclosure was
resorted to by TRB against JN when they both had become aware that PhilGuarantee had
already paid TRB and that there was a pending case filed by PhilGuarantee against petitioners.
This matter was not raised and proved in the trial court, nor in the appeal before the CA, but
raised for the first time in petitioners motion for reconsideration in the CA. In their appellants Brief,
petitioners claimed that there was no need for the defendant-appellee JNDC to present any
evidence before the lower court to show that indeed foreclosure of the REM took place. [49] As
properly held by the CA,

Firstly, the documents evidencing foreclosure of mortgage cannot be considered as newly discovered
evidence. The said documents were already subsisting and should have been presented during the trial of
the case. The alleged foreclosure sale was made on August 23, 1993 while the decision was rendered by the
trial court on August 20, 1998 about five (5) years thereafter. These documents were likewise not submitted
by the defendants-appellees when they submitted their appellees Brief to this Court. Thus, these cannot be
considered as newly discovered evidence but are more correctly ascribed as suppressed forgotten evidence
Secondly, the alleged foreclosure sale is not proof of payment of the loan by defendant-appellees to the
plaintiffs-appellants.[50]

Besides, the complaint a quo was filed by PhilGuarantee as guarantor for JN, and its cause of
action was premised on its payment of JNs obligation after the latters default. PhilGuarantee was
well within its rights to demand reimbursement for such payment made, regardless of whether the
creditor, TRB, was subsequently able to obtain payment from JN. If double payment was indeed
made, then it is JN which should go after TRB, and not PhilGuarantee. Petitioners have no one to
blame but themselves, having allowed the foreclosure of the property for the full value of the loan
despite knowledge of PhilGuarantees payment to TRB. Having been aware of such payment, they
should have opposed the foreclosure, or at the very least, filed a supplemental pleading with the
trial court informing the same of the foreclosure sale.
Likewise, petitioners cannot invoke the pari-passu clause in the guarantee, not being parties
to the said agreement. The clause is clearly for the benefit of the guarantor and no other.
The Court notes the letter[51] of Rodrigo Sta. Ana offering, by way of settlement of JNs
obligations to PhilGuarantee, the very same parcel of land mortgaged as security for the loan
agreement. This further weakens the position of petitioners, since it becomes obvious that they
acknowledged the payment made by PhilGuarantee on their behalf and that they were in fact
willing to negotiate with PhilGuarantee for the settlement of the said obligation before the filing of
the complaint a quo.
Anent the issue of forgery, the CA is correct in reversing the decision of the trial court. Save
for the denial of Narciso Cruz that it was not his signature in the Undertaking and the perfunctory
comparison of the signatures, nothing in the records would support the claim of forgery. Forgery
cannot be presumed and must be proved by clear, positive and convincing evidence and the
burden of proof lies on the party alleging forgery.[52] Mere denial will not suffice to overcome the
positive value of the Undertaking, which is a notarized document, has in its favor the presumption
of regularity, and carries the evidentiary weight conferred upon it with respect to its due
execution.[53] Even in cases where the alleged forged signature was compared to samples of
genuine signatures to show its variance therefrom, this Court still found such evidence
insufficient.[54] Mere variance of the signatures cannot be considered as conclusive proof that the
same were forged.[55]
WHEREFORE, the consolidated petitions are DENIED. The Decision of the Court of Appeals
in CA-G.R. CV No. 61318 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
THIRD DIVISION

STRONGHOLD INSURANCE COMPANY, G.R. Nos. 158820-21

INCORPORATED,

Petitioner, Present:

YNARES-SANTIAGO, J.,

Chairperson,

- versus - CARPIO,*

CORONA,**

NACHURA, and

PERALTA, JJ.
TOKYU CONSTRUCTION COMPANY, LTD., Promulgated:

Respondent.

June 5, 2009

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court is the Court of
Appeals (CA) Decision[1] dated January 21, 2003 and its Resolution[2]dated June 25, 2003.

The factual and procedural antecedents follow:

Respondent Tokyu Construction Company, Ltd., a member of a consortium of four (4) companies, was
awarded by the Manila International Airport Authority a contract for the construction of the Ninoy
Aquino International Airport (NAIA) Terminal 2 (also referred to as the project). On July 2, 1996,
respondent entered into a Subcontract Agreement[3]with G.A. Gabriel Enterprises, owned and
managed by Remedios P. Gabriel (Gabriel), for the construction of the projects Storm Drainage System
(SDS) for P33,007,752.00 and Sewage Treatment Plant (STP) for P23,500,000.00, or a total contract
price of P56,507,752.00. The parties agreed that the construction of the SDS and STP would be
completed on August 10, 1997 and May 31, 1997, respectively.[4]

In accordance with the terms of the agreement, respondent paid Gabriel 15% of the contract price, as
advance payment, for which the latter obtained from petitioner Stronghold Insurance Company, Inc.
Surety Bonds[5] dated February 26, 1996[6] and April 15, 1996,[7] to guarantee its repayment to
respondent. Gabriel also obtained from petitioner Performance Bonds[8] to guarantee to respondent
due and timely performance of the work.[9] Both bonds were valid for a period of one year from date
of issue.

In utter defiance of the parties agreements, Gabriel defaulted in the performance of her
obligations. On February 10, 1997, in a letter[10] sent to Gabriel, respondent manifested its intention to
terminate the subcontract agreement. Respondent also demanded that petitioner comply with its
undertaking under its bonds.
On February 26, 1997, both parties (respondent and Gabriel) agreed to revise the scope of work,
reducing the contract price for the SDS phase from P33,007,752.00 to P1,175,175.00[11] and the STP
from P23,500,000.00 to P11,095,930.50,[12] fixing the completion time on May 31, 1997.

Gabriel thereafter obtained from Tico Insurance Company, Inc. (Tico) Surety [13] and
Performance[14] Bonds to guarantee the repayment of the advance payment given by respondent to
Gabriel and the completion of the work for the SDS, respectively.

Still, Gabriel failed to accomplish the works within the agreed completion period. Eventually, on April
26, 1997, Gabriel abandoned the project. On August 8, 1997, respondent served a letter [15] upon
Gabriel terminating their agreement since the latter had only completed 63.48% of the SDS project,
valued at P744,965.00; and 46.60% of the STP, valued at P5,171,032.48. Respondent thereafter
demanded from Gabriel the return of the balance of the advance payment. Respondent, likewise,
demanded the payment of the additional amount that it incurred in completing the project. [16] Finally,
respondent made formal demands against petitioner and Tico to make good their obligations under
their respective performance and surety bonds. However, all of them failed to heed respondents
demand. Hence, respondent filed a complaint[17] against petitioner, Tico, and Gabriel, before the
Construction Industry Arbitration Commission (CIAC).

In the complaint, respondent prayed that Gabriel, Tico, and petitioner be held jointly and
severally liable for the payment of the additional costs it incurred in completing the project covered by
the subcontract agreement; for liquidated damages; for the excess downpayment paid to Gabriel; for
exemplary damages; and for attorneys fees.[18]

Gabriel denied liability and argued that the delay in the completion of the project was caused by
respondent. She also contended that the original subcontract agreement was novated by the revised
scope of work and completion schedule. To counter respondents monetary demands, she claimed that
it was, in fact, respondent who had an unpaid balance.

For its part, Tico averred that it actually treated respondents demand as a claim on the
performance and surety bonds it issued; but it could not make payment since the claim was still
subject to determination, findings, and recommendation of its assigned independent adjuster. [19]

On the other hand, petitioner interposed the following special and affirmative defenses: 1) the
surety and performance bonds had expired; 2) the premium on the bonds had not been paid by
Gabriel; 3) the contract for which the bonds were issued was set aside/novated; 4) the requisite
notices were not made which thus barred respondents claims against it; and 5) the damages claimed
were not arbitrable.[20]

On February 5, 1999, the parties signed the Terms of Reference [21] (TOR) wherein their
admission of facts, their respective positions and claims, the issues to be determined, and the amount
of arbitration fees were summarized and set forth.

On August 24, 1999, the CIAC rendered a decision,[22] the dispositive portion of which reads:
 WHEREFORE, award is hereby made as follows:

1. On Tokyus claims for cost overrun and cost of materials, equipment, manpower
contributed prior to alleged takeover, Gabriel is found liable to pay Tokyu the amount
of P1,588,527.00.

2. On Tokyus claim of liquidated damages, Gabriel is found liable to pay Tokyu the
amount of P662,666.44.

3. On Tokyus claim against Tico, we find Tico to be jointly and severally liable with
Gabriel on its Performance Bond for the payment of the amounts stated in numbers [1] and
[2] above but its liability to Tokyu shall not exceed the amount of P238,401.39 on its
performance bond. The claim against Tico on its Surety Bond is hereby dismissed.

4. With regard to the claim for the return of the unrecouped down payment, we find
that Gabriel is liable to pay Tokyu the amount [of] P7,588,613.18.

5. With regard to Tokyus claim against Stronghold on its Surety Bonds, we find
Stronghold liable jointly and severally with Gabriel for the payment of the unrecouped down
payment but only up to the amount of P6,701,063.60. The claim against Stronghold on its
Performance Bonds is hereby dismissed.

6. The counterclaim of Gabriel against Tokyu is not contested. Tokyu is held liable to
pay Gabriel on her counterclaim of P1,007,515.78.

7. The net amount due Gabriel for its unpaid progress billing is P1,190,108.41. Tokyu is
held liable to pay this amount to Gabriel.

The amount adjudged in favor of Tokyu against Gabriel is P9,642,182.43 The amount
adjudged in favor of Gabriel against Tokyu is P2,197,624.19. Offsetting these two amounts,
there is a net award in favor of Tokyu of P7,642,182.43. Payment of this amount or any
portion thereof shall inure to the benefit of and reduce pro tanto the liability of the
respondents sureties. (Art. 1217, Civil Code)

All other claims or counterclaims not included in the foregoing disposition are hereby
denied. The costs of arbitration shall be shared by the parties pro rata on the basis of their
claims and counterclaims as reflected in the TOR.

SO ORDERED.[23]
 The CIAC refused to resolve the issue of novation since respondent had already terminated the
agreement by sending a letter to Gabriel. It further held that petitioners liabilities under the surety
and performance bonds were not affected by the revision of the scope of work, contract price, and
completion time.

Petitioner and respondent separately appealed the CIAC decision to the CA via a petition for
review under Rule 43 of the Rules of Court. The appeals were docketed as CA-G.R. SP Nos. 54920
(petitioner) and 55167 (respondent) which were later consolidated. On January 21, 2003, the CA
rendered a decision[24] modifying the awards made by the Arbitral Tribunal, thus:

WHEREFORE, the appealed decision/award of the Arbitral Tribunal is hereby

MODIFIED in that:

1. On TOKYUs claim for liquidated damages, GABRIEL is found liable to pay TOKYU the
amount of P1,699,843.95.

2. STRONGHOLD and TICO are ordered to pay TOKYU from their respective
performance bonds, jointly and severally with GABRIEL the cost of overrun and liquidated
damages in the amount of P1,588,570.00 and P1,699,843.95 or the total amount
of P3,288,370.95 but TICOs liability for liquidated damages shall be limited only to those
accruing from the SDS phase of the Project and only in the amount of P70,992.77.

3. STRONGHOLD is further ordered to pay TOKYU from its surety bonds, jointly and
severally with GABRIEL, the total unrecouped downpayments in the amount
of P7,588,613.18.

4. The aggregate amount adjudged in favor of TOKYU against GABRIEL

is P10,876,984.13 while the total amount adjudged in favor of Gabriel
is P2,197,624.19. Offsetting these two (2) amounts against each other, there is a net award in
favor of TOKYU in the amount of P8,679,359.94. Payment of this net amount or any portion
thereof by GABRIEL shall in (sic) inure to the benefit and reduce pro tanto the liability of the
sureties STRONGHOLD and TICO.

In all other respects, the same appealed decision/award is AFFIRMED.

No pronouncement as to costs.

SO ORDERED.[25]
Hence, the instant petition, anchored on the following grounds:

5.1. THE COURT OF APPEALS ERRED IN HOLDING STRONGHOLD LIABLE ON ITS BONDS
AFTER THE BONDS HAVE BEEN INVALIDATED, LAPSED AND EXPIRED.

5.2. THE COURT OF APPEALS ERRED IN HOLDING STRONGHOLD LIABLE ON ITS BONDS WHICH
WERE ISSUED WITHOUT THE EXISTENCE OF ANY PRINCIPAL CONTRACT.

5.3. THE COURT OF APPEALS ERRED IN HOLDING STRONGHOLD LIABLE ON ITS BONDS AND
CONFUSED THE LEGAL EFFECTS, IMPORT AND SIGNIFICANCE BETWEEN A GUARANTY (UNDER
THE CIVIL CODE) AND SURETY UNDER THE INSURANCE CODE.

5.4. THE COURT OF APPEALS ERRED IN HOLDING STRONGHOLD LIABLE ON ITS BONDS
WHERE THE PRINCIPAL CONTRACT UNDER WHICH THE BONDS WERE ISSUED HAD BEEN
NOVATED.[26]

Apart from the errors specifically assigned in its petition and memorandum, petitioner asks this Court
to address the issue of whether the CIAC had jurisdiction to take cognizance of insurance
claims. Petitioner insists that respondents claim against it is not related to the construction dispute,
hence, it should have been lodged with the regular courts.

The argument is misplaced.

Section 4 of Executive Order (E.O.) No. 1008, or the Construction Industry Arbitration Law, provides:

SEC. 4. Jurisdiction. The CIAC shall have original and exclusive jurisdiction over disputes
arising from, or connected with, contracts entered into by parties involved in construction in
the Philippines, whether the dispute arises before or after the completion of the contract, or
after the abandonment or breach thereof. These disputes may involve government or private
contracts.For the Board to acquire jurisdiction, the parties to a dispute must agree to submit
the same to voluntary arbitration.

The jurisdiction of the CIAC may include but is not limited to violation of specifications for
materials and workmanship, violation of the terms of agreement, interpretation and/or
application of contractual time and delays, maintenance and defects, payment, default of
employer or contractor, and changes in contract cost.

Excluded from the coverage of the law are disputes arising from employer-employee
relationships which shall continue to be covered by the Labor Code of the Philippines.
Clearly, E.O. 1008 expressly vests in the CIAC original and exclusive jurisdiction over disputes arising
from or connected with construction contracts entered into by parties that have agreed to submit
their dispute to voluntary arbitration.[27]

In this case, the CIAC validly acquired jurisdiction over the dispute. Petitioner submitted itself to the
jurisdiction of the Arbitral Tribunal when it signed the TOR.[28] The TOR states:

II. STIPULATION/ADMISSION OF FACTS

xxxx

11. The Construction Industry Arbitration Commission has jurisdiction over the instant case
by virtue of Section 12.10 (Arbitration Clause) of the Subcontract Agreement.[29]

After recognizing the CIACs jurisdiction, petitioner cannot be permitted to now question that same
authority it earlier accepted, only because it failed to obtain a favorable decision. This is especially true
in the instant case since petitioner is challenging the tribunals jurisdiction for the first time before this
Court.

With the issue of jurisdiction resolved, we proceed to the merits of the case.

It is well to note that Gabriel did not appeal the CIAC decision and Ticos petition before this Court has
been denied with finality.[30] Hence, the CIAC and CA decisions have become final and executory as to
Gabriel and Tico, and in that respect, they shall not be disturbed by this Court.

Thus, the sole issue that confronts us is whether or not petitioner is liable under its bonds. To resolve
the same, we need to inquire into the following corollary issues:

1) whether the bonds (surety and performance) are null and void having been secured
without a valid and existing principal contract;

2) whether the bonds were invalidated by the modification of the subcontract

agreement without notice to the surety; and

3) whether the bonds for which petitioner was being made liable already expired.
Initially, petitioner argued that the surety and performance bonds (which were accessory contracts)
were of no force and effect since they were issued ahead of the execution of the principal contract. To
support this contention, it now adds that the bonds were actually secured through misrepresentation,
as petitioner was made to believe that the principal contract was already in existence when the bonds
were issued, but it was, in fact, yet to be executed.[31]

We are not persuaded.

In the first place, as correctly observed by respondent, the claim of misrepresentation was never
raised by petitioner as a defense in its Answer. Settled is the rule that points of law, theories, issues,
and arguments not adequately brought to the attention of the trial court need not be, and ordinarily
will not be, considered by a reviewing court. They cannot be raised for the first time on appeal. To
allow this would be offensive to the basic rules of fair play, justice, and due process. [32]

Besides, even if we look into the merit of such contention, the CA is correct in holding that there
was no evidentiary support of petitioners claim of misrepresentation. [33]This being a factual issue, we
respect the finding made in the assailed decision. We have repeatedly held that we are not a trier of
facts. We generally rely upon, and are bound by, the conclusions on factual matters made by the lower
courts, which are better equipped and have better opportunity to assess the evidence first-hand,
including the testimony of the witnesses.[34]

Petitioner also contends that the principal contract (original subcontract agreement) was novated by
the revised scope of work and contract schedule, without notice to the surety, thereby rendering the
bonds invalid and ineffective. Finally, it avers that no liability could attach because the subject bonds
expired and were replaced by the Tico bonds.

Again, we do not agree.

Petitioners liability was not affected by the revision of the contract price, scope of work, and
contract schedule. Neither was it extinguished because of the issuance of new bonds procured from
Tico.

As early as February 10, 1997, respondent already sent a letter[35] to Gabriel informing the latter of the
delay incurred in the performance of the work, and of the formers intention to terminate the
subcontract agreement to prevent further losses. Apparently, Gabriel had already been in default even
prior to the aforesaid letter; and demands had been previously made but to no avail. By reason of said
default, Gabriels liability had arisen; as a consequence, so also did the liability of petitioner as a surety
arise.

A contract of suretyship is an agreement whereby a party, called the surety, guarantees the
performance by another party, called the principal or obligor, of an obligation or undertaking in favor
of another party, called the obligee.[36] By its very nature, under the laws regulating suretyship, the
liability of the surety is joint and several but is limited to the amount of the bond, and its terms are
determined strictly by the terms of the contract of suretyship in relation to the principal contract
between the obligor and the obligee.[37]

By the language of the bonds issued by petitioner, it guaranteed the full and faithful compliance
by Gabriel of its obligations in the construction of the SDS and STP specifically set forth in the
subcontract agreement, and the repayment of the 15% advance payment given by respondent. These
guarantees made by petitioner gave respondent the right to proceed against the former following
Gabriels non-compliance with her obligation.

Confusion, however, transpired when Gabriel and respondent agreed, on February 26, 1997, to
reduce the scope of work and, consequently, the contract price. Petitioner viewed such revision as
novation of the original subcontract agreement; and since no notice was given to it as a surety, it
resulted in the extinguishment of its obligation.

We wish to stress herein the nature of suretyship, which actually involves two types of relationship ---
the underlying principal relationship between the creditor (respondent) and the debtor (Gabriel), and
the accessory surety relationship between the principal (Gabriel) and the surety (petitioner).The
creditor accepts the suretys solidary undertaking to pay if the debtor does not pay. Such acceptance,
however, does not change in any material way the creditors relationship with the principal debtor nor
does it make the surety an active party to the principal creditor-debtor relationship. In other words,
the acceptance does not give the surety the right to intervene in the principal contract. The suretys
role arises only upon the debtors default, at which time, it can be directly held liable by the creditor
for payment as a solidary obligor.[38]

The surety is considered in law as possessed of the identity of the debtor in relation to whatever
is adjudged touching upon the obligation of the latter. Their liabilities are so interwoven as to be
inseparable. Although the contract of a surety is, in essence, secondary only to a valid principal
obligation, the suretys liability to the creditor is direct, primary, and absolute; he becomes liable for
the debt and duty of another although he possesses no direct or personal interest over the obligations
nor does he receive any benefit therefrom.[39]

Indeed, a surety is released from its obligation when there is a material alteration of the
principal contract in connection with which the bond is given, such as a change which imposes a new
obligation on the promising party, or which takes away some obligation already imposed, or one
which changes the legal effect of the original contract and not merely its form. However, a surety is
not released by a change in the contract, which does not have the effect of making its obligation more
onerous.[40]

In the instant case, the revision of the subcontract agreement did not in any way make the
obligations of both the principal and the surety more onerous. To be sure, petitioner never assumed
added obligations, nor were there any additional obligations imposed, due to the modification of the
terms of the contract. Failure to receive any notice of such change did not, therefore, exonerate
petitioner from its liabilities as surety.

Neither can petitioner be exonerated from liability simply because the bonds it issued were
replaced by those issued by Tico.
 The Court notes that petitioner issued four bonds, namely: 1) Performance Bond No. 43601
which guaranteed the full and faithful compliance of Gabriels obligations for the construction of the
SDS; 2) Performance Bond No. 13608 for the construction of the STP; 3) Surety Bond No. 065493
which guaranteed the repayment of the 15% advance payment for the SDS project; and 4) Surety Bond
No. 068189 for the STP project. Under the surety agreements, the first and third bonds were to expire
on February 25, 1997 or one year from date of issue of the bonds, while the second and fourth bonds
were to expire one year from April 15, 1996.

The impending expiration of the first and third bonds prompted respondent to require Gabriel
to arrange for their (the bonds) immediate revalidation. Thus, in a letter dated February 21, 1997,
respondent asked that the performance bond for the SDS phase be extended until May 31, 1998; and
for the surety bond, until June 30, 1997.[41] Contrary to petitioners contention, this should not be
construed as a recognition on the part of respondent that the bonds were no longer valid by reason of
the modification of the subcontract agreement. There was indeed a need for the renewal of
petitioners bonds because they were about to expire, pursuant to the terms of the surety
agreements. Since petitioner refused to revalidate the aforesaid bonds, Gabriel was constrained to
secure the required bonds from Tico which issued, on February 25, 1997, the new performance and
surety bonds (for the SDS phase) replacing those of petitioners. The performance bond was
coterminous with the final acceptance of the project, while the surety bond was to expire on February
26, 1998.

Notwithstanding the issuance of the new bonds, the fact remains that the event insured against,
which is the default in the performance of Gabriels obligations set forth in the subcontract agreement,
already took place. By such default, petitioners liability set in. Thus, petitioner remains solidarily liable
with Gabriel, subject only to the limitations on the amount of its liability as provided for in the Bonds
themselves.

Considering that the performance bonds issued by petitioner were valid only for a period of one
year, its liabilities should further be limited to the period prior to the expiration date of said bonds. As
to Performance Bond No. 43601 for the SDS project, the same was valid only for one year
from February 26, 1996; while Performance Bond No. 13608 was valid only for one year from April 15,
1996. Logically, petitioner can be held solidarily liable with Gabriel only for the cost overrun and
liquidated damages accruing during the above periods. The assailed CA decision is, therefore, modified
in this respect.

WHEREFORE, premises considered, the petition is DENIED. The Decision of the Court of Appeals
dated January 21, 2003 and its Resolution dated June 25, 2003 are AFFIRMED with
the MODIFICATION that petitioner Stronghold Insurance, Company, Inc. is jointly and severally liable
with Remedios P. Gabriel only for the cost overrun and liquidated damages accruing during the
effectivity of its bonds.

All other aspects of the assailed decision STAND.

SO ORDERED.
SECOND DIVISION

[G.R. No. 160466. January 17, 2005]

SPOUSES ALFREDO and SUSANA ONG, petitioners, vs. PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, respondent.

DECISION
PUNO, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside the
Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated February 17, 2003, affirming
the decision of the trial court denying petitioners motion to dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the
manufacture and export of finished wood products. Petitioners-spouses Alfredo and Susana Ong
are its President and Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial International Bank (now Equitable-
Philippine Commercial International Bank or E-PCIB) filed a case for collection of a sum of
money against petitioners-spouses. Respondent bank sought to hold petitioners-spouses liable
[1]

as sureties on the three (3) promissory notes they issued to secure some of BMCs loans, totalling
five million pesos (P5,000,000.00).
The complaint alleged that in 1991, BMC needed additional capital for its business and
applied for various loans, amounting to a total of five million pesos, with the respondent bank.
Petitioners-spouses acted as sureties for these loans and issued three (3) promissory notes for
the purpose. Under the terms of the notes, it was stipulated that respondent bank may consider
debtor BMC in default and demand payment of the remaining balance of the loan upon the levy,
attachment or garnishment of any of its properties, or upon BMCs insolvency, or if it is declared to
be in a state of suspension of payments. Respondent bank granted BMCs loan applications.
On November 22, 1991, BMC filed a petition for rehabilitation and suspension of payments
with the Securities and Exchange Commission (SEC) after its properties were attached by
creditors. Respondent bank considered debtor BMC in default of its obligations and sought to
collect payment thereof from petitioners-spouses as sureties. In due time, petitioners-spouses
filed their Answer.
On October 13, 1992, a Memorandum of Agreement (MOA) was executed by debtor BMC,
[2]

the petitioners-spouses as President and Treasurer of BMC, and the consortium of creditor banks
of BMC (of which respondent bank is included). The MOA took effect upon its approval by the
SEC on November 27, 1992. [3]

Thereafter, petitioners-spouses moved to dismiss the complaint. They argued that as the
[4]

SEC declared the principal debtor BMC in a state of suspension of payments and, under the
MOA, the creditor banks, including respondent bank, agreed to temporarily suspend any pending
civil action against the debtor BMC, the benefits of the MOA should be extended to petitioners-
spouses who acted as BMCs sureties in their contracts of loan with respondent bank. Petitioners-
spouses averred that respondent bank is barred from pursuing its collection case filed against
them.
The trial court denied the motion to dismiss. Petitioners-spouses appealed to the Court of
Appeals which affirmed the trial courts ruling that a creditor can proceed against petitioners-
spouses as surety independently of its right to proceed against the principal debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case filed against them by respondent bank
should be dismissed for three (3) reasons: First, the MOA provided that during its effectivity, there
shall be a suspension of filing or pursuing of collection cases against the BMC and this provision
should benefit petitioners as sureties. Second, principal debtor BMC has been placed under
suspension of payment of debts by the SEC; petitioners contend that it would prejudice them if
the principal debtor BMC would enjoy the suspension of payment of its debts while petitioners,
who acted only as sureties for some of BMCs debts, would be compelled to make the payment;
petitioners add that compelling them to pay is contrary to Article 2063 of the Civil Code which
provides that a compromise between the creditor and principal debtor benefits the guarantor and
should not prejudice the latter. Lastly, petitioners rely on Article 2081 of the Civil Code which
provides that: the guarantor may set up against the creditor all the defenses which pertain to the
principal debtor and are inherent in the debt; but not those which are purely personal to the
debtor. Petitioners aver that if the principal debtor BMC can set up the defense of suspension of
payment of debts and filing of collection suits against respondent bank, petitioners as sureties
should likewise be allowed to avail of these defenses.
 We find no merit in petitioners contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is
misplaced as these provisions refer to contracts of guaranty. They do not apply to
suretyship contracts. Petitioners-spouses are not guarantors but sureties of BMCs debts. There
is a sea of difference in the rights and liabilities of a guarantor and a surety. A guarantor insures
the solvency of the debtor while a surety is an insurer of the debt itself. A contract of
guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is only after the
creditor has proceeded against the properties of the principal debtor and the debt remains
unsatisfied that a guarantor can be held liable to answer for any unpaid amount. This is the
principle of excussion. In a suretyship contract, however, the benefit of excussion is not
available to the surety as he is principally liable for the payment of the debt. As the surety
insures the debt itself, he obligates himself to pay the debt if the principal debtor will not pay,
regardless of whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor
can go directly against the surety although the principal debtor is solvent and is able to pay or no
prior demand is made on the principal debtor. A surety is directly, equally and absolutely
bound with the principal debtor for the payment of the debt and is deemed as an original
promissor and debtor from the beginning. [5]

Under the suretyship contract entered into by petitioners-spouses with respondent bank, the
former obligated themselves to be solidarily bound with the principal debtor BMC for the payment
of its debts to respondent bank amounting to five million pesos (P5,000,000.00). Under Article
1216 of the Civil Code, respondent bank as creditor may proceed against petitioners-spouses
[6]

as sureties despite the execution of the MOA which provided for the suspension of payment and
filing of collection suits against BMC. Respondent banks right to collect payment from the surety
exists independently of its right to proceed directly against the principal debtor. In fact, the creditor
bank may go against the surety alone without prior demand for payment on the principal debtor. [7]

The provisions of the MOA regarding the suspension of payments by BMC and the non-
filing of collection suits by the creditor banks pertain only to the property of the principal
debtor BMC. Firstly, in the rehabilitation receivership filed by BMC, only the properties of BMC
were mentioned in the petition with the SEC. Secondly, there is nothing in the MOA that involves
[8]

the liabilities of the sureties whose properties are separate and distinct from that of the debtor
BMC. Lastly, it bears to stress that the MOA executed by BMC and signed by the creditor-banks
was approved by the SEC whose jurisdiction is limited only to corporations and corporate assets.
It has no jurisdiction over the properties of BMCs officers or sureties.
Clearly, the collection suit filed by respondent bank against petitioners-spouses as sureties
can prosper. The trial courts denial of petitioners motion to dismiss was proper.
IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as to
costs.
SO ORDERED.
SECOND DIVISION

[G.R. No. 113931. May 6, 1998]

E. ZOBEL, INC., petitioner, vs. THE COURT OF APPEALS, CONSOLIDATED BANK AND
TRUST CORPORATION, and SPOUSES RAUL and ELEA R.
CLAVERIA, respondents.

DECISION
MARTINEZ, J.:

This petition for review on certiorari seeks the reversal of the decision[1] of the Court of Appeals dated July
13, 1993 which affirmed the Order of the Regional Trial Court of Manila, Branch 51, denying petitioner's
Motion to Dismiss the complaint, as well as the Resolution[2] dated February 15, 1994 denying the motion for
reconsideration thereto.
The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for
a loan with respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) in the amount of Two
Million Eight Hundred Seventy Five Thousand Pesos (P2, 875,000.00) to finance the purchase of two (2)
maritime barges and one tugboat[3] which would be used in their molasses business. The loan was granted
subject to the condition that respondent spouses execute a chattel mortgage over the three (3) vessels to be
acquired and that a continuing guarantee be executed by Ayala International Philippines, Inc., now herein
petitioner E. Zobel, Inc. in favor of SOLIDBANK. The respondent spouses agreed to the arrangement.
Consequently, a chattel mortgage and a Continuing Guaranty[4] were executed.
Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence, on January
31,1991, SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary attachment,
against respondents spouses and petitioner. The case was docketed as Civil Case No. 91-55909 in the
Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its right to
be subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the chattel mortgage
with the appropriate government agency.
SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is not a
guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of which reads:

"After a careful consideration of the matter on hand, the Court finds the ground of the motion to
dismiss without merit. The document referred to as 'Continuing Guaranty' dated August 21,1985
(Exh. 7) states as follows:

'For and in consideration of any existing indebtedness to you of Agro Brokers, a single
proprietorship owned by Mr. Raul Claveria for the payment of which the undersigned is now
obligated to you as surety and in order to induce you, in your discretion, at any other manner, to,
or at the request or for the account of the borrower, x x x '

"The provisions of the document are clear, plain and explicit.

"Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the title of the
document is 'Continuing Guaranty', the Court's interpretation is not limited to the title alone but to
the contents and intention of the parties more specifically if the language is clear and positive.
The obligation of the defendant Zobel being that of a surety, Art. 2080 New Civil Code will not
apply as it is only for those acting as guarantor. In fact, in the letter of January 31, 1986 of the
defendants (spouses and Zobel) to the plaintiff it is requesting that the chattel mortgage on the
vessels and tugboat be waived and/or rescinded by the bank inasmuch as the said loan is
covered by the Continuing Guaranty by Zobel in favor of the plaintiff thus thwarting the claim of
the defendant now that the chattel mortgage is an essential condition of the guaranty. In its letter,
it said that because of the Continuing Guaranty in favor of the plaintiff the chattel mortgage is
rendered unnecessary and redundant.

"With regard to the claim that the failure of the plaintiff to register the chattel mortgage with the
proper government agency, i.e. with the Office of the Collector of Customs or with the Register of
Deeds makes the obligation a guaranty, the same merits a scant consideration and could not be
taken by this Court as the basis of the extinguishment of the obligation of the defendant
corporation to the plaintiff as surety. The chattel mortgage is an additional security and should not
be considered as payment of the debt in case of failure of payment. The same is true with the
failure to register, extinction of the liability would not lie.

"WHEREFORE, the Motion to Dismiss is hereby denied and defendant E. Zobel, Inc., is ordered to file its
answer to the complaint within ten (10) days from receipt of a copy of this Order."[5]

Petitioner moved for reconsideration but was denied on April 26,1993. [6]
Thereafter, petitioner questioned said Orders before the respondent Court of Appeals, through a petition
for certiorari, alleging that the trial court committed grave abuse of discretion in denying the motion to dismiss.
On July 13,1993, the Court of Appeals rendered the assailed decision the dispositive portion of which
reads:

"WHEREFORE, finding that respondent Judge has not committed any grave abuse of discretion
in issuing the herein assailed orders, We hereby DISMISS the petition."

A motion for reconsideration filed by petitioner was denied for lack of merit on February 15,1994.
Petitioner now comes to us via this petition arguing that the respondent Court of Appeals erred in its
finding: (1) that Article 2080 of the New Civil Code which provides: "The guarantors, even though they be
solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to
the rights, mortgages, and preferences of the latter," is not applicable to petitioner; (2) that petitioner's
obligation to respondent SOLIDBANK under the continuing guaranty is that of a surety; and (3) that the failure
of respondent SOLIDBANK to register the chattel mortgage did not extinguish petitioner's liability to
respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under the "Continuing Guaranty" obligated
itself to SOLIDBANK as a guarantor or a surety.
A contract of surety is an accessory promise by which a person binds himself for another already bound,
and agrees with the creditor to satisfy the obligation if the debtor does not. [7] A contract of guaranty, on the
other hand, is a collateral undertaking to pay the debt of another in case the latter does not pay the debt. [8]
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both.
However, under our civil law, they may be distinguished thus: A surety is usually bound with his principal by
the same instrument, executed at the same time, and on the same consideration. He is an original promissor
and debtor from the beginning, and is held, ordinarily, to know every default of his principal. Usually, he will
not be discharged, either by the mere indulgence of the creditor to the principal, or by want of notice of the
default of the principal, no matter how much he may be injured thereby. On the other hand, the contract of
guaranty is the guarantor's own separate undertaking, in which the principal does not join. It is usually entered
into before or after that of the principal, and is often supported on a separate consideration from that
supporting the contract of the principal. The original contract of his principal is not his contract, and he is not
bound to take notice of its non-performance. He is often discharged by the mere indulgence of the creditor to
the principal, and is usually not liable unless notified of the default of the principal. [9]
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of
the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer of the
debt, and he obligates himself to pay if the principal does not pay.[10]
Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of
SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of the
contract categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to respondent
spouses. This can be seen in the following stipulations.

"For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single
proprietorship owned by MR. RAUL P. CLAVERIA, of legal age, married and with business
address x x x (hereinafter called the Borrower), for the payment of which the undersigned is now
obligated to you as surety and in order to induce you, in your discretion, at any time or from
time to time hereafter, to make loans or advances or to extend credit in any other manner to, or at
the request or for the account of the Borrower, either with or without purchase or discount, or to
make any loans or advances evidenced or secured by any notes, bills receivable, drafts,
acceptances, checks or other instruments or evidences of indebtedness x x upon which the
Borrower is or may become liable as maker, endorser, acceptor, or otherwise, the undersigned
agrees to guarantee, and does hereby guarantee, the punctual payment, at maturity or
upon demand, to you of any and all such instruments, loans, advances, credits and/or
other obligations herein before referred to, and also any and all other indebtedness of
every kind which is now or may hereafter become due or owing to you by the
Borrower, together with any and all expenses which may be incurred by you in collecting all or
any such instruments or other indebtedness or obligations hereinbefore referred to, and or in
enforcing any rights hereunder, and also to make or cause any and all such payments to be made
strictly in accordance with the terms and provisions of any agreement (g), express or implied,
which has (have) been or may hereafter be made or entered into by the Borrower in reference
thereto, regardless of any law, regulation or decree, now or hereafter in effect which might in any
manner affect any of the terms or provisions of any such agreements(s) or your right with respect
thereto as against the Borrower, or cause or permit to be invoked any alteration in the time,
amount or manner of payment by the Borrower of any such instruments, obligations or
indebtedness; x x x " (Italics Ours)

One need not look too deeply at the contract to determine the nature of the undertaking and the intention
of the parties. The contract clearly disclose that petitioner assumed liability to SOLIDBANK, as a regular party
to the undertaking and obligated itself as an original promissor. It bound itself jointly and severally to the
obligation with the respondent spouses. In fact, SOLIDBANK need not resort to all other legal remedies or
exhaust respondent spouses' properties before it can hold petitioner liable for the obligation. This can be
gleaned from a reading of the stipulations in the contract, to wit:

'x x x If default be made in the payment of any of the instruments, indebtedness or other
obligation hereby guaranteed by the undersigned, or if the Borrower, or the undersigned
should die, dissolve, fail in business, or become insolvent, x x x , or if any funds or other
property of the Borrower, or of the undersigned which may be or come into your
possession or control or that of any third party acting in your behalf as aforesaid should
be attached of distrained, or should be or become subject to any mandatory order of court
or other legal process, then, or any time after the happening of any such event any or all of
the instruments of indebtedness or other obligations hereby guaranteed shall, at your
option become (for the purpose of this guaranty) due and payable by the undersigned
forthwith without demand of notice, and full power and authority are hereby given you, in your
discretion, to sell, assign and deliver all or any part of the property upon which you may then have
a lien hereunder at any broker's board, or at public or private sale at your option, either for cash or
for credit or for future delivery without assumption by you of credit risk, and without either the
demand, advertisement or notice of any kind, all of which are hereby expressly waived. At any
sale hereunder, you may, at your option, purchase the whole or any part of the property so sold,
free from any right of redemption on the part of the undersigned, all such rights being also hereby
waived and released. In case of any sale and other disposition of any of the property
aforesaid, after deducting all costs and expenses of every kind for care, safekeeping,
collection, sale, delivery or otherwise, you may apply the residue of the proceeds of the
sale and other disposition thereof, to the payment or reduction, either in whole or in part,
of any one or more of the obligations or liabilities hereunder of the undersigned whether or
not except for disagreement such liabilities or obligations would then be due, making
proper allowance or interest on the obligations and liabilities not otherwise then due, and
returning the overplus, if any, to the undersigned; all without prejudice to your rights as
against the undersigned with respect to any and all amounts which may be or remain
unpaid on any of the obligations or liabilities aforesaid at any time (s)"

xxx xxx xxx

'Should the Borrower at this or at any future time furnish, or should be heretofore have
furnished, another surety or sureties to guarantee the payment of his obligations to you,
the undersigned hereby expressly waives all benefits to which the undersigned might be
entitled under the provisions of Article 1837 of the Civil Code (beneficio division), the
liability of the undersigned under any and all circumstances being joint and several;"
(Italics Ours)

The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty. Authorities
recognize that the word "guarantee" is frequently employed in business transactions to describe not the
security of the debt but an intention to be bound by a primary or independent obligation. [11] As aptly observed
by the trial court, the interpretation of a contract is not limited to the title alone but to the contents and intention
of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner,
finds no application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa,[12] we have ruled
that Article 2080 of the New Civil Code does not apply where the liability is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel mortgage
did not release petitioner from the obligation. In the Continuing Guaranty executed in favor of SOLIDBANK,
petitioner bound itself to the contract irrespective of the existence of any collateral. It even released
SOLIDBANK from any fault or negligence that may impair the contract. The pertinent portions of the contract
so provides:

"x x x the undersigned (petitioner) who hereby agrees to be and remain bound upon this
guaranty, irrespective of the existence, value or condition of any collateral, and
notwithstanding any such change, exchange, settlement, compromise, surrender, release, sale,
application, renewal or extension, and notwithstanding also that all obligations of the Borrower to
you outstanding and unpaid at any time (s) may exceed the aggregate principal sum herein above
prescribed.

'This is a Continuing Guaranty and shall remain in full force and effect until written notice shall
have been received by you that it has been revoked by the undersigned, but any such notice shall
not be released the undersigned from any liability as to any instruments, loans, advances or other
obligations hereby guaranteed, which may be held by you, or in which you may have any interest,
at the time of the receipt of such notice. No act or omission of any kind on your part in the
premises shall in any event affect or impair this guaranty, nor shall same be affected by any
change which may arise by reason of the death of the undersigned, of any partner (s) of the
undersigned, or of the Borrower, or of the accession to any such partnership of any one or more
new partners." (Italics supplied)

In fine, we find the petition to be without merit as no reversible error was committed by respondent Court
of Appeals in rendering the assailed decision.
 WHEREFORE, the decision of the respondent Court of Appeals is hereby AFFIRMED. Costs against the
petitioner.
SO ORDERED.

FIRST DIVISION

G.R. No. 163116 June 29, 2015

ALLIED BANKING CORPORATION, Petitioner,

vs.
JESUS S. YUJUICO (DECEASED), REPRESENTED BY BRENDON V. YUJUICO, Respondent.

DECISION

BERSAMIN, J.:

This appeal assails the decision promulgated on May 30, 2003, 1 whereby the Court of Appeals (CA) affirmed the decision
rendered on November 19, 1997 by the Regional Trial Court (RTC), Branch 13, in Manila dismissing its complaint for the
collection of a debt brought against respondent Jesus S. Yujuico and several others (docketed as Civil Case No. R-82-8211
entitled Allied Banking Corporation v. Yujuico Logging & Trading Corporation, Clarencio S. Yujuico, Jesus S. Yujuico and
Gregoria Y Paredes).2

Civil Case No. R-82-8211 was commenced in the Court of First Instance of Manila on November 7, 1978 3 to demand the
principal sum of 1!6,020,000.00 representing· the total obligations of Yujuico Logging & Trading Corporation (YLTC) under
five promissory notes. In their answer, 4 Jesus S. Yujuico and Gregoria Y. Paredes denied that they were parties to the loan
agreements of YLTC; and averred that any liability each could incur under the continuing guaranties had been extinguished or
revoked through payment, novation, and prescription. Each presented a counterclaim for damages against the plaintiff.

In time course of the proceedings, the RTC, which in the meantime replaced the defunct Court of First Instance, dismissed the
action against YLTC and Clarencio S. Yujuico because the summons could not be successfully served upon them despite the
lapse of 13 years, and there was no prospect of making a successful service thereafter. The R TC also dismissed the case
against Gregoria Y. Paredes because of her intervening demise, without prejudice to the bringing of the proper claim against
her estate. The trial continued only against Jesus S. Yujuico.

On September 22, 2003, Jesus died in San Mateo, California, United States of America.5 On February 28, 2005, the Court
noted the "confirmation of authority of Brendon V. Yujuico to represent all the legal heirs of Jesus S. Yujuico" in this case.6

Antecedents

The CA summed up the following factual antecedents, 7 viz.:

On January 10, 1966, the board of directors of General Bank & Trust Company (Genbank, for brevity) approved a resolution
granting YLTC an Omnibus Credit Line in the amount of P800,000.00 to be made available by overdrafts, loans and advances
upon condition that the principals of YLTC would personally bind themselves in a Continuing Guarantee to secure payment of
obligations drawn on said credit extended by Genbank. On February 6, 1968, in order to secure punctual payment at maturity
of YLTC's obligations, defendants-appellees Gregoria Y. Paredes, Clarencio S. Yujuico and defendant-appellee Jesus S.
Yujuico, principal stockholders of YLTC as sureties, executed a Continuing Guarantee for the amount of P800,000 binding
themselves in their personal capacities as required by Genbank.

Following the expiration of the first credit line, on January 9, 1967, Genbank passed a board resolution granting YLTC a credit
line of P1.5M which included the preceding P800,000-credit line. Pursuant to bank requirements, defendant-appellee Jesus S.
Yujuico, Gregoria S. Paredes and Clarencio S. Yujuico again executed a Continuing Guarantee for the entire amount
of P1.5M. This replaced the previous Continuing Guarantee.

After the second credit line expired, Genbank passed a board resolution on April 4, 1968 approving the renewal of YLTC's
credit line of Pl .S M for another year or "up to statutory limits" and "under existing terms and conditions" covered again by the
Continuing Guarantee of P1.5M. YLTC's credit line was renewed successively for the following years 1969, 1970, 1971, 1972
and 1973.

On January 7, 1974, Genbank's board of directors passed a resolution granting YLTC a credit line of PS M or "up to statutory
limits", whichever is higher. To cover that credit line, on February 6, 1974, Clarence S. Yujuico, as lone surety, executed a
Continuing Guarantee to secure payment of YLTC's loan obligations in an amount not exceeding PSM or up to statutory limits
allowed by law, whichever is higher. Said credit line included the previous Pl.SM credit accommodation. On January 7, 197S,
Genbank passed a board resolution which continued the effectivity of YLTC's !!SM-credit line for the year 197S. On
December 8, 197S, Genbank passed a board resolution renewing the time loan of PS.2M for another year or up to December
31, 1976.

Meanwhile, loans contracted by YLTC in 1975 and 1976 evidenced by the following promissory notes became due and
demandable:

Date Amount Maturity Date

April 30, 1975 P5.2 M December 31, 1975
June 4, 1976 P0.4 M December 1, 1976
July 8, 1976 P0.2 M October 6, 1976
October 5, 1976 P0.2 M January 4, 1977
 December 1, 1976 P20,184.90 March 1, 1977
Total P6,020,18[4].90

Genbank was placed under liquidation by the Monetary Board. Pursuant to a Memorandum of Agreement executed between
the duly appointed bank liquidator and here plaintiff-appellant Allied Banking Corporation, the latter acquired all assets and
liabilities of Genbank. Plaintiff-appellant, as successor-in-interest of Genbank, sought to collect the amount covered by the
promissory notes. YLTC failed to pay constraining plaintiff-appellant to file the instant collection suit in court. Judgment of the
RTC On November 19, 1997, the RTC rendered judgment dismissing the complaint against Jesus, as well as his
counterclaim.8 It considered Exhibit B, the second continuing guarantee executed by Jesus on February 22, 1967, as pivotal
inasmuch as the credit guaranteed by the first continuing guarantee executed on February 8, 1966 had become "part of the
credit under the second agreement," observing that Jesus had not been sued "for any availment by YLTC under Exhibit B, but
for those obtained by YLTC

after the third guaranty agreement, Exhibit CC, was executed," to which Jesus was not a signatory. It found:

There is on record a xerox copy of a letter dated November 27, 1973 signed by Teodoro Presa for defendant Yujuico and
addressed to the Board of Directors of Genbank and received by Atty. Rodolfo Santiago (Exh. 4, previously marked Exhibit 1,
appearing as page 393 of Vol. 1 of the records). The paper bore the title "notice of revocation of continuing guaranty" and
stated that defendant Yujuico was revoking the continuing guaranty of P800,000 (Exhibit A), and of the Pl.5 million (Exhibit B)
that was said to have absorbed and cancelled the former. Mr. Presa was a financial consultant of defendant Yujuico on the
date specified in the letter, being under him in a company known as General Textiles (Gentex). Presa testified that upon his
advice, defendant Yujuico decided to revoke all his outstanding guaranties as a means to improve his credit standing with the
banks and enable him to support Gentex's expansion program. Yujuico specifically instructed him to prepare the letter Exhibit
4 which revoked the latter's guaranty in favor of YLTC (tsn March 25, 1996, at 5). Atty. Santiago, Genbank's corporate
secretary, admitted receiving this letter and said that he had presented it to the board of directors which proceeded to renew
YLTC's loan without defendant Yujuico's signature (tsn July 9, 1996, at 10, 15). Atty. Rafael Durian, defendant's counsel,
stated that he had custody of the carbon original of Exhibit 4, but it was mistakenly included among the old records of their
office and destroyed. He affirmed that Exhibit 4 was the xerox copy of the carbon original (tsn April 16, 1996, at 3-4). On the
strength of these testimonies, the Court issatisfied of the existence of a letter of revocation sent by defendant Yujuico to
Genbank in 1973 and that the xerox copy (sic) Exhibit 4 was a faithful reproduction of that lost communication. Against this
evidence plaintiff merely raised the speculation that Atty. Santiago is biased in favor of defendant became (sic) the latter is the
uncle of his (Atty. Santiago's) wife. But relationship alone is not enough to discredit the testimony of a witness if it is otherwise
clear and convincing, and corroborated by other facts and circumstances, in this case by the testimonies of Mr. Presa and
Atty. Durian, People vs. Puesca 87 SCRA 130. 9

In view of the revocation letter executed by Teodoro Presa in the name and behalf of Jesus being considered existing and
valid, the R TC laid down the following consequences of the revocation letter:

In the continuing guaranty Exhibit B, the following is stated: "This is a continuing guaranty and shall remain in full force and
effect until written notice shall have been received by you that it has been revoked by the undersigned (referring to the
guarantors), but any such notice shall not release the undersigned from any liability as to any instruments, loans, advances or
other obligations hereby guaranteed, which may be held by you, or in which you may have any interest, at the time of the
receipt of such notice" (underscoring supplied.)

Pursuant to this provision, defendant Yujuico may continue to be held responsible only for loans and obligations of YLTC
already contacted (sic) as of the time the letter or revocation Exhibit 4 was sent. But the accounts sued upon by plaintiff, that
is, Exhibit D, E, F, G, H, came into existence in 1975 and 1976, after the revocations (sic) was made. It follows that defendant
Yujuico cannot be held liable for them. 10

The RTC also ruled that the increase in credit line had novated the continuing guaranty executed by Jesus, to wit:

It is clear, moreover, that as a result of the increase of the credit line of YLTC from Pl,500,000 to P.5,000,000, a novation of
the loan agreement of YLTC with Genbank had taken place. This because the old obligations had been merged into the new
one, the amount increased, and new date specified for its performance. There is, in effect, a new contract that substitutes and
replaces the old, and becomes the sole source of the rights and obligations of the parties. In such a juridical situation, the
accessory obligations under the old contracts, such as those of guarantors and sureties, are deemed released unless the
latter agree to the change. Tolentino, Civil Code of the Philippines Vol. IV, 1962, at 365. Since, in the case at bar, defendant
Yujuico as a guarantor did not consent to the novation of the credit agreement between Genbank and YLTC, but on the
contrary, revoked his guaranty under the old credit line, he should be released from his undertaking. 11

Decision of the CA

On appeal, the petitioner assigned the following errors, namely:

THE TRIAL COURT ERRED IN FINDING THAT APPELLEE HAD ALREADY REVOKED HIS CONTINUING GUARANTEES
AND NOTIFIED GENBANK OF SUCH REVOCATION, HENCE, COULD NO LONGER BE HELD LIABLE AS A SURETY OF
THE OBLIGATIONS SUED UPON.

II

THE TRIAL COURT ERRED IN FINDING THAT APPELLEE'S OBLIGATION AS A SURETY UNDER THE CONTINUING
GUARANTY DATED FEBRUARY 22, 1967 WAS EXTINGUISHED BY NOV A TION WHEN YLTC'S CREDIT LINE WAS
INCREASED FROM Pl,500,000.00 TO P.5,000,000.00 PURSUANT TO THE CONTINUING GUARANTY DATED
FEBRUARY 6, 1974.12

By its assailed decision, the CA affirmed the RTC, to wit: The appeal has no merit.
On the first error assigned by plaintiff-appellant, it is urged that the record is bereft of credible evidence that Genbank received
the letter of revocation. Furthermore, the letter of revocation was signed by Mr. Teodoro Presa, a financial consultant of
General Textiles, a company that had nothing to do with the debtor YLTC, and hence was ineffectual as a letter of revocation.

The contention deserves no consideration. We are convinced that Mr. Presa wrote the letter of revocation under the express
instructions of defendant-appellee for the latter would not have presented the letter of revocation in his defense had he not
actually authorized its preparation. Corroborative of this is Atty. Santiago's testimony that he received such a letter and t hat at
a meeting attended by him, Genbank's board of directors allowed the revocation of the Continuing Guarantee defendant-
appellee signed in 1967. Defendant-appellee was no longer required to execute a continuing guarantee thereafter. In civil
cases, it is a well settled rule that the appellate court will not reverse a finding of fact by the trial court depending largely upon
the credibility of witnesses who testified in the presence of the court, unless the court failed to take into consideration some
material fact or circumstance or to weigh accurately all of the material facts and circumstances presented to it for
consideration. In the instant case, We do not see any reason for the application of the exception to the just cited rule.

On the second assigned error, it is contended that defendant-appellee Jesus Yujuico should not have been discharged from
liability as a surety because there was no indication that the Continuing Guarantee. executed by Clarence Yujuico alone was
intended to replace the Continuing Guarantee defendant-appellee, Clarencio Yujuico and Gregoria Paredes had executed in
1967. The non-inclusion of defendant-appellee in suretyship agreements subsequent to the revocation made at his instance
and the absorption of the P1.5M credit line in the subsequent P5M-credit line, clearly evince the intent of superseding the
previous surety agreement under the .P1.5M-credit line. In 1974, it was Clarence Yujuico alone who executed a Continuing
Guarantee to secure payment of loans contracted under the .PSM-credit line. Notably, in the course of his testimony, Francis
Pasatiempo, a bank officer of plaintiff-appellant bank and formerly connected with Genbank, admitted that the .PSM-credit line
already absorbed the P1.5M credit line under which defendant-appellee was previously held bound. Thus, the lower court
seasonably held that defendant-appellee is not bound to answer as surety for loans contracted after the revocation such as
those sought to be collected by plaintiff-appellant in this case.

WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby AFFIRMED.

SO ORDERED.13

On March 31, 2004, the CA denied the petitioner's motion for reconsideration. 14

Issues

The petitioner charges the CA with grave error for declaring that: (a) the revocation letter had released Jesus from his
obligations as surety; and (b) there was competent evidence to show that the continuing guaranty was extinguished by
novation. It contends that the CA, in pointing out that Jesus "would not have presented the letter of revocation in his defense
had he not actually authorized its preparation," ignored that Jesus "never testified under oath to affirm that the letter of
revocation signed by Mr. Teodoro Presa had been executed pursuant to his instructions." It argues that the testimony of
Presa on the revocation letter was self-serving; hence, the CA erred in giving such testimony due weight and consideration. It
stresses that there was no competent showing that the revocation letter had ,emanated from Jesus. 15

The petitioner argues that the CA erred in holding that the revocation letter was executed upon the instruction of Jesus
because there was no evidence that he had executed a special power of attorney in favor of Presa; that Jesus did not present
the original copy of the revocation letter to show its receipt by the petitioner; that there was no proof showing that the original
copy of the revocation letter had been lost; that Atty. Santiago was a biased witness whose testimony should not be given full
faith and credit considering that Jesus was the uncle of his wife; that Atty. Santiago also had no personal knowledge of the
actual receipt of the revocation letter by the petitioner; and that Presa was not even certain on who had received the
revocation letter.

Ruling of the Court

The appeal lacks merit.

I
The undertaking of Jesus was that of a surety, not a guarantor

Written on Genbank letterhead, the continuing guaranty dated February 8, 1966 16 and the continuing guaranty dated February
22, 196717 contained identical principal provisions to the effect that: (a) he had guaranteed the "punctual payment at maturity"
of the loans secured by the continuing guaranty; (b) Gen bank, as the creditor bank of YLTC, could "make or cause"
payments under the terms and conditions of their loan agreement; (c) under paragraph II, Jesus had offered as security for
the loans of YLTC his own properties in the possession of Genbank or for which Genbank had attached a lien, which, upon
default by YLTC in paying the loan, Genbank, "without demand or notice" upon respondent, would have the full power and
authority to sell; (d) should YLTC incur in default in the payment of the loans, Genbank could "proceed directly" against Jesus

"without exhausting the property" of YLTC; and (e) paragraph XII expressly stated that the liability of the signatory or
signatories to the continuing guaranty would be "joint and several."

It is apparent that the courts below, as well as the petitioner, interchangeably used the terms guaranty and surety in
characterizing the undertakings of Jesus under the continuing guaranties. The terms are distinct from each other, however,
and the distinction is expressly delineated in the Civil Code, to wit:

Article 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
Thus, in guaranty, the guarantor "binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so." The liability of the guarantor is secondary to that of the principal debtor because he "cannot be
compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal
remedies against the debtor."18 In contrast, the surety is solidarily bound to the obligation of the principal debtor. 19

Although the first part of the continuing guaranties showed that Jesus as the signatory had agreed to be bound "either as
guarantor or otherwise,"20 the usage of term guaranty or guarantee in the caption of the documents, or of the word guarantor
in the contents of the documents did not conclusively characterize the nature of the obligations assumed therein. What
properly characterized and defined the undertakings were the contents of the documents and the intention of the parties. 21 In
holding that the continuing guaranty executed in E. Zobel, Inc. v. Court of Appeals was a surety instead of a guaranty, the
Court accented the distinctions between them, viz.:

A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees with the
creditor to satisfy the obligation if the debtor does not. A contract of guaranty, on the other hand, is a collateral undertaking to
pay the debt of another in case the latter does not pay the debt.

Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. However, under
1âwphi1

our civil law, they may be distinguished thus: A surety is usually bound with his principal by the same instrument, executed at
the same time, and on the same consideration. He is an original promissor and debtor from the beginning, and is held,
ordinarily, to know every default of his principal. Usually, he will not be discharged, either by the mere indulgence of the
creditor to the principal, or by want of notice of the default of the principal, no matter how much he may be injured thereby. On
the other hand, the contract of guaranty is the guarantor's own separate undertaking, in which the principal does not join. It is
usually entered into before or after that of the principal, and is often supported on a separate consideration from that
supporting the contract of the principal. The original contract of his principal is not his contract, and he is not bound to take
notice of its non-performance. He is often discharged by the mere indulgence of the creditor to the principal, and is usually not
liable unless notified of the default of the principal.

Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor and thus
binds himself to pay if the principal is unable to pay while a surety is the insurer of the debt, and he obligates himself to pay if
the principal does not pay. 22

(Italics in the original; emphasis and bold italics supplied.)

With the stipulations in the continuing guaranties indicating that he was the surety of the credit line extended to YLTC, Jesus
was solidarily liable to Genbank for the indebtedness of YLTC. In other words, he thereby rendered himself "directly and
primarily responsible" with YLTC, "without reference to the solvency of the principal. "23

II
Jesus was no longer liable as
a surety due to the non-renewal
of the continuing guaranties

Be that as it may, the continuing guaranties could not answer for the promissory notes amounting to P6,020, 184.90 that the
petitioner sought to judicially recover from Jesus as surety.

The courts below found and declared that the continuing guaranties of February 8, 1966 and February 22, 1967 were not
renewed after the expiration of the credit line. 24

The petitioner did not establish that another suretyship by Jesus ensured the payment of the credit line issued on April 4,
1968 upon the expiration of the credit line for 1967. What was shown instead is that on February 6, 1974, 25 or about seven
years after the expiration of the continuing guaranty of February 22, 1967, it was Clarencio who executed a continuing
guaranty for P5,000,000.00. Since Genbank accepted the promissory note of P5,200,000.00 on April 30, 1975,26 the
continuing guaranty that Clarencio executed about two months earlier covered that amount.

Based on the records, the practice was for the sureties to ensure credit lines issued by Genbank annually with the new
sureties absorbing the earlier surety agreements. Considering that no new sureties covered the credit lines from 1968 to 197
4, and in view of the fact that the suretyships were continuing, Jesus was solidarily liable for the credit lines Genbank issued
for seven years, or until February 6, 1974 when Clarencio assumed the suretyship. Hence, Clarencio, not Jesus, was the
party solidarily liable for the indebtedness incurred after February 6, 1974 starting with the promissory note dated April 30,
1975.

Obviously, the petitioner sued to recover the indebtedness of YLTC from Jesus because he was the only available surety after
one had died and the other had absconded. Yet, it could not recover from Jesus whose suretyship had been superseded by
Clarencio's continuing guaranty for the promissory notes executed subsequent to the new suretyship.

In view of the result reached, the Court will not dwell anymore on the other issues raised for our consideration.

WHEREFORE, the Court AFFIRMS the decision promulgated on May 30, 2003 absolving the estate of the late Jesus S.
Yujuico from liability under the continuing guaranties executed on February 8, 1966 and February 22, 1967; and ORDERS the
petitioner to pay the costs of suit.

SO ORDERED.

SECOND DIVISION

G.R. No. 187403 February 12, 2014

TRADE AND INVESTMENT DEVELOPMENT CORPORATION OF THE PHILIPPINES (Formerly PHILIPPINE EXPORT
AND FOREIGN LOAN GUARANTEE CORPORATION.), Petitioner,
vs.
ASIA PACES CORPORATION, PACES INDUSTRIAL CORPORATION, NICOLAS C. BALDERRAMA, SIDDCOR
INSURANCE CORPORATION (now MEGA PACIFIC INSURANCE CORPORATION), PHILIPPINE PHOENIX SURETY
AND INSURANCE, INC., PARAMOUNT INSURANCE CORPORATION,* AND FORTUNE LIFE AND GENERAL
INSURANCE COMPANY, Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated April 30, 2008 and Resolution3 dated March 27, 2009
of the Court of Appeals (CA) in CA-G.R. CV No. 86558 which affirmed the Decision4 dated April 29, 2005 of the Regional Trial
Court of Makati, Branch 132 (RTC) in Civil Case No. 95-1812. The CA upheld the RTC’s finding that the liabilities of
Paramount Insurance Corporation (Paramount), and respondents Philippine Phoenix Surety and Insurance, Inc. (Phoenix),
Mega Pacific Insurance Corporation5 (Mega Pacific), and Fortune Life and General Insurance Company (Fortune) on their
respective counter-surety bonds have been extinguished due to the extension of the principal obligations these bonds
covered, to which said respondents did not give their consent.

The Facts

On January 19, 1981, respondents Asia Paces Corporation (ASPAC) and Paces Industrial Corporation (PICO) entered into a
sub-contracting agreement, denominated as "200 KV Transmission Lines Contract No. 20-/80-II Civil Works & Electrical
Erection," with the Electrical Projects Company of Libya (ELPCO), as main contractor, for the construction and erection of a
double circuit bundle phase conductor transmission line in the country of Libya. To finance its working capital requirements,
ASPAC obtained loans from foreign banks Banque Indosuez and PCI Capital (Hong Kong) Limited (PCI Capital) which, upon
the latter’s request, were secured by several Letters of Guarantee issued by petitioner Trade and Investment Development
Corporation of the Philippines (TIDCORP),6then Philippine Export and Foreign Loan Guarantee Corp., a government owned
and controlled corporation created for the primary purpose of, among others, "guarantee[ing], with the prior concurrence of
the Monetary Board, subject to the rules and regulations that the Monetary Board may prescribe, approved foreign loans, in
whole or in part, granted to any entity, enterprise or corporation organized or licensed to engage in business in the
Philippines."7 Under the Letters of Guarantee, TIDCORP irrevocably and unconditionally guaranteed full payment of ASPAC’s
loan obligations to Banque Indosuez and PCI Capital in the event of default by the latter. 8The denominations of these letters,
including the loan agreements secured by each, are detailed as follows:9

LETTER OF GUARANTEE LOAN AGREEMENT SECURED CREDITOR

Letter of Guarantee No. 82-446 F Loan Agreement dated March 9, 1982 Banque
dated March 11, 1982 (with an extension dated March 25, Indosuez
(LG No. 82-446 F) 1983), in the amount of
US$250,000.00
Letter of Guarantee No. 82-498 F Loan Agreement dated June 10, 1982, PCI
dated June 10, 1982 in the amount of US$250,000.00 Capital
(LG No. 82-498 F)
Letter of Guarantee No. 82-548 F Loan Agreement dated October 5, PCI
dated October 5, 1982 1982, in the amount of Capital
(LG No. 82-548 F) US$2,000,000.00

As a condition precedent to the issuance by TIDCORP of the Letters of Guarantee, ASPAC, PICO, and ASPAC’s President,
respondent Nicolas C. Balderrama (Balderrama) had to execute several Deeds of Undertaking, 10binding themselves to jointly
and severally pay TIDCORP for whatever damages or liabilities it may incur under the aforementioned letters. In the same
light, ASPAC, as principal debtor, entered into surety agreements (Surety Bonds) with Paramount, Phoenix, Mega Pacific and
Fortune (bonding companies), as sureties, also holding themselves solidarily liable to TIDCORP, as creditor, for whatever
damages or liabilities the latter may incur under the Letters of Guarantee. 11 The details of said bonds, including their
respective coverage amounts and expiration dates, among others, are as follows:

SURETY BOND LETTER OF COVERAGE BONDING FINAL

GUARANTEE AMOUNT12 COMPANY/ EXPIRATION
COVERED SURETY DATE
Surety Bond No.
LG No. 82-446 F P2,752,000.00 Paramount March 5, 198614
G(16)0194313
Surety Bond No.
P1,845,000.00 Paramount June 4, 198616
G(16)0190615
LG No. 82-498 F
Surety Bond No. November 21,
P1,849,000.00 Fortune
G(16)1549517 198518
Surety Bond No. September 28,
P11,970,000.00 Phoenix
G(16)0190319 198520
LG No. 82-548 F
Surety Bond No. Mega September 28,
P5,030,000.00
G(16)0149721 Pacific 198522

ASPAC eventually defaulted on its loan obligations to Banque Indosuez and PCI Capital, prompting them to demand payment
from TIDCORP under the Letters of Guarantee. The demand letter of Banque Indosuez was sent to TIDCORP on March 5,
1984,23 while that of PCI Capital was sent on February 21, 1985. 24 In turn, TIDCORP demanded payment from
Paramount,25 Phoenix,26 Mega Pacific,27 and Fortune28 under the Surety Bonds. TIDCORP’s demand letters to the bonding
companies were sent on May 28, 1985, or before the final expiration dates of all the Surety Bonds, but to no avail.29

Taking into account the moratorium request 30 issued by the Minister of Finance of the Republic of the Philippines (whereby
members of the international banking community were requested to grant government financial institutions, 31 such as
TIDCORP, among others, a 90-day roll over from their foreign debts beginning October 17, 1983), TIDCORP and its various
creditor banks, such as Banque Indosuez and PCI Capital, forged a Restructuring Agreement 32 on April 16, 1986, extending
the maturity dates of the Letters of Guarantee. 33 The bonding companies were not privy to the Restructuring Agreement and,
hence, did not give their consent to the payment extensions granted by Banque Indosuez and PCI Capital, among others, in
favor of TIDCORP. Nevertheless, following new payment schedules,34 TIDCORP fully settled its obligations under the Letters
of Guarantee to both Banque Indosuez and PCI Capital on December 1, 1992, and April 19 and June 4, 1991,
respectively.35 Seeking payment for the damages and liabilities it had incurred under the Letters of Guarantee and with its
previous demands therefor left unheeded, TIIDCORP filed a collection case36 against: (a) ASPAC, PICO, and Balderrama on
account of their obligations under the deeds of undertaking; and (b) the bonding companies on account of their obligations
under the Surety Bonds.

The RTC Ruling

In a Decision37 dated April 29, 2005, the RTC partially granted TIDCORP’s complaint and thereby found ASPAC, PICO, and
Balderrama jointly and severally liable to TIDCORP in the sum of P277,891,359.66 pursuant to the terms of the Deeds of
Undertaking, but absolved the bonding companies from liability on the ground that the moratorium request and the
consequent payment extensions granted by Banque Indosuez and PCI Capital in TIDCORP’s favor without their consent
extinguished their obligations under the Surety Bonds. As basis, the RTC cited Article 2079 of the Civil Code which provides
that an extension granted to the debtor by the creditor without the consent of the guarantor/surety extinguishes the
guaranty/suretyship, and, in this relation, added that the bonding companies "should not be held liable as sureties for the
extended period."38

Dissatisfied, TIDCORP and Balderrama filed separate appeals before the CA. 39 For its part, TIDCORP averred, among others,
that Article 2079 of the Civil Code is only limited to contracts of guaranty, and, hence, should not apply to contracts of
suretyship. Meanwhile, Balderrama theorized that the main contractor’s (i.e., ELPCO) failure to pay ASPAC due to the
war/political upheaval in Libya which further resulted in the latter’s inability to pay Banque Indosuez and PCI Capital had the
effect of releasing him from his obligations under the Deeds of Undertaking.

The CA Ruling

In a Decision40 dated April 30, 2008, the CA upheld the RTC’s ruling that the moratorium request "had the effect of an
extension granted to a debtor, which extension was without the consent of the guarantor, and thus released the surety
companies from their respective liabilities under the issued surety bonds" pursuant to Article 2079 of the Civil Code. 41 To this
end, it noted that "the maturity of the foreign loans was extended to December 31, 1989 or up to December 31, 1994 as
provided under Section 4.01 of the Restructuring Agreement," and that "said extension is beyond the expiry date[s] of the
surety bonds x x x and the maturity date of the principal obligations it purportedly secured, which extension was without [the
bonding companies’] consent,"42 It further discredited TIDCORP’s contention that Article 2079 of the Civil Code is only limited
to contracts of guaranty by citing the Court’s pronouncement on the provision’s applicability to suretyships in the case of
Security Bank and Trust Co., Inc. v. Cuenca43 (Security Bank). As for Balderrama, the CA debunked his assignment of error,
ratiocinating that "[h]is undertaking to pay is not dependent upon the payment to be made by ELPCO to ASPAC." 44 The CA,
however, modified the RTC decision to the extent of holding ASPAC, PICO, and Balderrama liable to TIDCORP for attorney’s
fees in the reasonable amount of P2,000,000.00 since the payment of attorney’s fees was stipulated by the parties in the
Deed of Undertaking dated April 2, 1982.45

Aggrieved, TIDCORP and Balderrama filed separate motions for reconsideration, 46 which were, however, denied in a
Resolution47 dated March 27, 2009. Only TIDCORP elevated the matter to the Court on appeal. Pending resolution thereof, or
on October 6, 2010, TIDCORP filed a Motion for Partial Withdrawal48 of its claim against Paramount in view of their
Compromise Agreement49 dated June 24, 2010 which was approved50 by the CA in CA-G.R. CV No. 92818, entitled "Trade &
Investment Corporation of the Phils., et al. v. Roblet Industrial Construction Corp. and Paramount Insurance Corp., et al." 51

The Issue Before the Court

The essential issue raised for the Court’s resolution is whether or not the CA erred in holding that the bonding companies’
liabilities to TIDCORP under the Surety Bonds have been extinguished by the payment extensions granted by Banque
Indosuez and PCI Capital to TIDCORP under the Restructuring Agreement.

The Court’s Ruling

The petition is granted.

A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation
of the latter, and their liabilities are interwoven as to be inseparable. Although the contract of a surety is in essence secondary
only to a valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt and
duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit
therefrom.52 The fundamental reason therefor is that a contract of suretyship effectively binds the surety as a solidary debtor.
This is provided under Article 2047 of the Civil Code which states:

Article 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship. (Emphasis and underscoring supplied)
Thus, since the surety is a solidary debtor, it is not necessary that the original debtor first failed to pay before the surety could
be made liable; it is enough that a demand for payment is made by the creditor for the surety’s liability to attach.53

Article 1216 of the Civil Code provides that:

Article 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others,
so long as the debt has not been fully collected.

Comparing a surety’s obligations with that of a guarantor, the Court, in the case of Palmares v. CA,54 illumined that a surety is
responsible for the debt’s payment at once if the principal debtor makes default, whereas a guarantor pays only if the principal
debtor is unable to pay, viz.:55

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an
1âwphi1

undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. Stated differently, a surety
promises to pay the principal’s debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding
against the principal, may proceed against the guarantor if the principal is unable to pay. A surety binds himself to perform if
the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the
principal will pay, but simply that he is able to do so. In other words, a surety undertakes directly for the payment and is so
responsible at once if the principal debtor makes default, while a guarantor contracts to pay if, by the use of due diligence, the
debt cannot be made out of the principal debtor.

(Emphases and underscoring supplied; citations omitted)

Despite these distinctions, the Court in Cochingyan, Jr. v. R&B Surety & Insurance Co., Inc., 56 and later in the case of Security
Bank, held that Article 2079 of the Civil Code, which pertinently provides that "[a]n extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes the guaranty," equally applies to both contracts of guaranty and
suretyship. The rationale therefor was explained by the Court as follows: 57

The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety’s
consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor’s remedies
against the principal debtor upon the maturity date. The surety is said to be entitled to protect himself against the contingency
of the principal debtor or the indemnitors becoming insolvent during the extended period. (Emphasis and underscoring
supplied; citations omitted)

Applying these principles, the Court finds that the payment extensions granted by Banque Indosuez and PCI Capital to
TIDCORP under the Restructuring Agreement did not have the effect of extinguishing the bonding companies’ obligations to
TIDCORP under the Surety Bonds, notwithstanding the fact that said extensions were made without their consent. This is
because Article 2079 of the Civil Code refers to a payment extension granted by the creditor to the principal debtor without the
consent of the guarantor or surety. In this case, the Surety Bonds are suretyship contracts which secure the debt of ASPAC,
the principal debtor, under the Deeds of Undertaking to pay TIDCORP, the creditor, the damages and liabilities it may incur
under the Letters of Guarantee, within the bounds of the bonds’ respective coverage periods and amounts. No payment
extension was, however, granted by TIDCORP in favor of ASPAC in this regard; hence, Article 2079 of the Civil Code should
not be applied with respect to the bonding companies’ liabilities to TIDCORP under the Surety Bonds.

The payment extensions granted by Banque Indosuez and PCI Capital pertain to TIDCORP’s own debt under the Letters of
Guarantee wherein it (TIDCORP) irrevocably and unconditionally guaranteed full payment of ASPAC’s loan obligations to the
banks in the event of its (ASPAC) default. In other words, the Letters of Guarantee secured ASPAC’s loan agreements to the
banks. Under this arrangement, TIDCORP therefore acted58 as a guarantor,59with ASPAC as the principal debtor, and the
banks as creditors.

Proceeding from the foregoing discussion, it is quite clear that there are two sets of transactions that should be treated
separately and distinctly from one another following the civil law principle of relativity of contracts "which provides that
contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of
such contract and has acted with knowledge thereof." 60 Verily, as the Surety Bonds concern ASPAC’s debt to TIDCORP and
not TIDCORP’s debt to the banks, the payments extensions (which conversely concern TIDCORP’s debt to the banks and not
ASPAC’s debt to TIDCORP) would not deprive the bonding companies of their right to pay their creditor (TIDCORP) and to be
immediately subrogated to the latter’s remedies against the principal debtor (ASPAC) upon the maturity date. It must be
stressed that these payment extensions did not modify the terms of the Letters of Guarantee but only provided for a new
payment scheme covering TIDCORP’s liability to the banks. In fine, considering the inoperability of Article 2079 of the Civil
Code in this case, the bonding companies’ liabilities to TIDCORP under the Surety Bonds – except those issued by
Paramount and covered by its Compromise Agreement with TIDCORP – have not been extinguished. Since these obligations
arose and have been duly demanded within the coverage periods of all the Surety Bonds, 61TIDCORP’s claim is hereby
granted and the CA’s ruling on this score consequently reversed. Nevertheless, given that no appeal has been filed on
Balderrama’s adjudged liability or on the award of attorney's fees, the CA's dispositions on these matters are now deemed as
final and executory.

WHEREFORE, the petition is GRANTED. The Decision dated April 30, 2008 and Resolution dated March 27, 2009 of the
Court of Appeals in CA-G.R. CV No. 86558 are MODIFIED in that respondents Philippine Phoenix Surety and Insurance, Inc.,
Mega Pacific Insurance Corporation, Fortune Life and General Insurance Company are ORDERED to fulfill their respective
obligations to petitioner Trade and Investment Development Corporation of the Philippines (TIDCORP) under the Surety
Bonds subject of this case, discounting the obligations arising from the Surety Bonds issued by Paramount Insurance
Corporation and covered by its Compromise Agreement with TIDCORP.

SO ORDERED.