BANKING CASES

G.R. No. 108555 December 20, 1994 RAMON TAN, petitioner, vs. THE HONORABLE COURT OF APPEALS and RIZAL COMMERCIAL BANKING CORPORATION, respondents. Yulo, Quisumbing, Torres, Ali & Bello Law Offices for petitioner. Siguion Reyna, Montecillo & Ongsiako for private respondent.

KAPUNAN, J.: This petition seeks to set aside the decision of the Court of Appeals dated January 12, 1993 in CA-G.R. CV No. 31083, entitled Ramon Tan, plaintiff-appellee, vs. Rizal Commercial Banking Corporation, defendant-appellant, reversing the decision of the Regional Trial Court dated December 28, 1990 ordering respondent bank Rizal Commercial Banking Corporation (RCBC), Binondo Branch, to pay petitioner damages and attorney's fees in the amount of ONE MILLION THIRTY FIVE THOUSAND (P1,035,000.00) PESOS. The following are the uncontroverted facts: Petitioner Ramon Tan, a trader-businessman and community leader in Puerto Princesa, had maintained since 1976 Current Account No. 109058068 with respondent bank's Binondo branch. On March 11, 1988, to avoid carrying cash while enroute to Manila, he secured a Cashier's Check No. L 406000126 from the Philippine Commercial Industrial Bank (PCIB), Puerto Princesa branch, in the amount of Thirty Thousand (P30,000.00) Pesos, payable to his order. He deposited the check in his account with RCBC Binondo on March 15. On the same day, RCBC erroneously sent the same cashier's check for clearing to the Central Bank which was returned for having been "missent" or "misrouted." 1 The next day, March 16, RCBC debited the amount covered by the same cashier's check from the account of the petitioner. Respondent bank at this time had not informed the petitioner of its action which the latter claims he learned of only 42 days after, specifically on March 16, when he received the bank's debit memo. 2 Relying on the common knowledge that a cashier's check was as good as cash, that the usual banking practice that local checks are cleared within three (3) working days and regional checks within seven (7) working days, and the fact that the cashier's check was accepted, petitioner issued two (2) personal checks both dated March 18. Check No. 040719

in the name of Go Lac for Five Thousand Five Hundred (P5,5000.00) Pesos was presented on April 25, 3 more than 30 days from petitioner's deposit date of the cashier's check. Check No. 040718 in the name of MS Development Trading Corporation for Six Thousand Fifty-Three Pesos and Seventy Centavos (P6,053.70) was returned twice on March 24, nine (9) days from his deposit date and again on April 26, twenty-two days after the day the cashier's check was deposited for insufficiency of funds. 4 Petitioner, alleging to have suffered humiliation and loss of face in the business sector due to the bounced checks, filed a complaint against RCBC for damages in the Regional Trial Court of Palawan and Puerto Princesa, Branch 47, docketed as Civil Case No. 2101. 5 During the trial, petitioner sought to prove: First, that it was RCBC's responsibility to call his attention there and then that he had erroneously filled the wrong deposit slip at the time he deposited the cashier's check with the respondent bank's teller and it was negligence on RCBC's part not to have done so; 6 Second, that RCBC had been remiss in the performance of its obligation to the petitioner when it "missent" the cashier's check to the Central Bank knowing, as it should, that the source of the check, PCIB, Puerto Princesa Branch, is not included in the areas required to be cleared by the Central Bank, a fact known to the banking world and surely to the respondent bank; 7 Third, that RCBC upon knowing of its error in "missending" the cashier's check to the Central Bank did not attempt to rectify its "misclearing" error by clearing it seasonably with PCIB, Puerto Princesa, thru its own RCBC Puerto Princesa Branch with whom it had direct radio contact; 8 Fourth, that as an old client, with twelve (12) years of good standing then, RCBC should have given him more consideration by exerting greater diligence in clearing the check with PCIB, Puerto Princesa, to protect its client's interest; 9 Fifth, that RCBC failed to inform petitioner promptly that the check had not been cleared, despite its debiting without delay the amount covered by the check from the account of the petitioner and hastily charging the latter service fees immediately after the return of the "missent checks"; 10 and Finally, that the bounced checks resulting from RCBC's "misclearing" had put in doubt his credibility among his business peers and sullied his reputation as a community leader which he had painstakingly cultivated for years. His community standing as a business-socio-civic leader was a source of pride for him in his old

age of 70. He cited being Chairman of Palawan Boy Scout Council, 2-term President of the Rotary Club of Puerto Princesa, member of Palawan Chamber of Commerce and Industry, member of the Monitoring Team of the Palawan Integrated Area Development Project, member of Lion's Club, Philippine Rifle Pistol Association and the Saturday Health Club to justify his claim for moral damages. 11 In its defense, RCBC disowning any negligence, put the blame for the "misrouting" on the petitioner for using the wrong check deposit slip. It insisted that the misuse of a local check deposit slip, instead of a regional check deposit slip, triggered the "misrouting" by RCBC of the cashier's check to the Central Bank and it was petitioner's negligent "misuse" of a local deposit slip which was the proximate cause of the "misrouting," thus he should bear the consequence. 12 RCBC alleged that it complied strictly with accepted banking practice when it debited the amount of P30,000.00 against petitioner's account since under Resolution No. 2202 dated December 21, 1979 of the Monetary Board, it is a matter of policy to prohibit the drawing against uncollected deposits (DAUDS) except when the drawings are made against uncollected deposits representing bank manager's/cashier's/treasurer's checks, treasury warrants, postal money orders and duly funded "on us" checks which may be permitted at the discretion of each bank. 13Without crediting the P30,000.00 deposit, petitioner's balance before and after was Two Thousand Seven Hundred Ninety-Two Pesos and the (P2,792.88) Eighty-Eight Centavos. 14 Thus, it dishonored the two (2) checks amounting to P11,553.70 since they were drawn against insufficient funds. RCBC added that petitioner had no bills purchase (BP) line which allows a depositor to receive or draw from proceeds of a check without waiting it to be cleared. Besides, RCBC maintained, had it forwarded the Cashier's Check to PCIB Puerto Princesa, Palawan, it would take at least twenty (20) working days for the cashier's check to be cleared and it would take the same length of time to clear the two (2) personal checks of Tan. 15 RCBC further asseverated it was merely acting as petitioner's collecting agent and it assumed no responsibilitybeyond care in selecting correspondents under the theory that where a check is deposited with a collecting bank the relationship created is that of agency and not creditor-debtor, thus it cannot be liable. 16 Finally, respondent claimed that serious attempts were made to contact petitioner through the telephone numbers in the signature specimen card of petitioner but to no avail. 17 The Assistant Branch Accountant of RCBC Binondo Branch testified that the first telephone number in the card had been deleted from the phone company's list and that when RCBC tried to contact petitioner's daughter Evelyn Tan-Banzon thru a certain telephone number and when they asked for Evelyn Tan, they were told there was no such person. 18

The trial court rendered a decision on December 28, 1990 in petitioner's favor, the dispositive portion 19 of which reads: WHEREFORE, premises considered, plaintiff having proven the allegations of his verified complaint by preponderance of evidence, the court hereby renders judgment ordering defendant bank, Binondo Branch, Manila, to pay him damages and attorney's fees in the total amount of P1,035,000.00 Philippine Currency, broken down as follows: P700,000.00 as moral damages, P200,000.00 as exemplary damages; P135,000.00 which is 15% of the sum herein awarded to plaintiff, as attorney's fees and to pay costs of suit. For having failed to prove by any receipt or writing to underpin it, plaintiff's claim for actual damage is denied for lack of merit. IT IS SO ORDERED. RCBC appealed to the Court of Appeals contending that the trial court erred in holding RCBC liable to petitioner on account of its alleged negligence and in awarding petitioner moral and exemplary damages and attorney's fees. The Court of Appeals on January 12, 1993 rendered a decision 20 with the following decretal portion: WHEREFORE, and upon all the foregoing, the decision of the court below is REVERSED and this complaint is DISMISSED without pronouncement as to cost. The Court of Appeals' decision is based on the following findings: 21 What appeared to have caused the unfortunate incident was that the plaintiff filled up the wrong deposit slip which led to the sending of the check to the Central Bank when the clearing should have been made elsewhere. But the claim of the plaintiff that he was not advised that the Cashier's check was missent does not seem to be correct. The evidence indicated that the defendant bank thru its personnel had called him up thru telephone in the number (No. 60-45-23) which he gave in his specimen signature card. But it came out, that said telephone number was no longer active or was already deleted from the list of telephone numbers. There was an instruction on the part of the plaintiff for the bank to contact his daughter, Mrs. Evelyn Tan Banzon and according to the

plaintiff, she too, was not contacted as per his instruction. The evidence, however, indicated that Ms. Evelyn Tan also could not be contacted at the number supposed to pertain to her as appeared in the specimen signature card. In other words while there was compliance with the instructions given by the plaintiff but said instructions were faulty. The plaintiff as a customer of the bank is under obligation to inform the defendant of any changes in the telephone numbers to be contacted in the event of any exigency. All in all, the facts indicate that the refusal of RCBC to credit the amount of P30,000.00 to the plaintiff's current account is consistent with the accepted banking practice. As the defendant bank had claimed, under Resolution No. 2202 dated December 21, 1979 of the Monetary Board, it had been emphatically declared as a matter of policy that no drawings should be made against uncollected deposits except when the drawings are made against uncollected deposits representing bank manager's/cashier's/treasurer's checks, treasury warrants, postal money orders, and duly funded "on-us" checks as may be permitted at the discretion of each bank. It is clear that immediate payment without awaiting clearance of a cashier's check is discretionary with the bank to whom the check is presented and such being the case, the refusal to allow it as in this case is not to be equated with negligence in the basic perception that discretion is not demandable as a right. In the instant case, prior to the deposit of P30,000.00, the plaintiff's account appeared to be only in the amount of P2,792.98. So the two (2) checks issued by the plaintiff amounting to P11,553.70 had to be dishonored since they were drawn against insufficient funds. What the plaintiff should have done, before issuing the two (2) checks, was to await the clearance of the Cashier's check and his failure to do so is a fault not ascribable to the defendant who appeared under the circumstance merely to have followed the usual banking practice. Petitioner now seeks to reverse the decision of the Court of Appeals and affirm that of the lower court. He raises the following errors: 1. THE HONORABLE COURT OF APPEALS COMMITTED GROSS AND MANIFEST ERROR IN CONCLUDING THAT THE NEGLIGENCE WAS ASCRIBABLE TO HEREIN PETITIONER. 2. THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION IN FINDING THAT THE RESPONDENT BANK HAD NOT

BEEN REMISS IN THE PERFORMANCE OF ITS OBLIGATIONS TO HEREIN PETITIONER. 3. THE HONORABLE COURT OF APPEALS COMMITTED GROSS AND MANIFEST ERROR AND GRAVE ABUSE OF DISCRETION IN REVERSING THE AWARD OF MORAL AND EXEMPLARY DAMAGES TO THE PETITIONER. 4. THE HONORABLE COURT OF APPEALS COMMITTED GROSS AND MANIFEST ERROR AND GRAVE ABUSE OF DISCRETION IN NOT AWARDING ATTORNEY'S FEES TO PETITIONER. In a most recent case decided by this Court, City Trust Corporation v. The Intermediate Appellate Court, 22involving damages against City Trust Banking Corporation, the depositor, instead of stating her correct account number 29000823 inaccurately wrote 2900823. Because of this error, six postdated checks amounting to P20,209.00 she issued were dishonored for insufficiency of funds. The Regional Trial Court dismissed the complaint for lack of merit. The Court of Appeals, however, found the appeal meritorious and ordered the bank to pay nominal damages of P2,000.00, temperate and moderate damages of P5,000.00 and attorney's fees of P4,000.00. Upon review, this Court quoted with favor the disquisition of the appellate court: We cannot uphold the position of defendant. For, even if it be true that there was error on the part of the plaintiff in omitting a zero in her account number, yet, it is a fact that her name, Emma E. Herrero, is clearly written on said deposit slip (Exh. B). This is controlling in determining in whose account the deposit is made or should be posted. This is so because it is not likely to commit an error in one's name that merely relying on numbers which are difficult to remember, especially a number with eight (8) digits as the account numbers of defendant's depositors. We view the use of numbers as simply for the convenience of the bank but was never intended to disregard the real name of its depositors. The bank is engaged in business impressed with public interests, and it is its duty to protect in return its many clients and depositors who transact business with it. It should not be a matter of the bank alone receiving deposits, lending out money and collecting interests. It is also its obligation to see to it that all funds invested with it are properly accounted for and duly posted in its ledgers. In the case before Us, we are not persuaded that defendant bank was not free from blame for the fiasco. In the first place, the teller should not have accepted plaintiff's deposit without correcting the account number

on the deposit slip which, obviously, was erroneous because, as pointed out by defendant, it contained only seven (7) digits instead of eight (8). Second, the complete name of plaintiff depositor appears in bold letters on the deposit slip (Exh. B). There could be no mistaking in her name, and that the deposit was made in her name, Emma E. Herrero. In fact, defendant's teller should not have fed her deposit slip to the computer knowing that her account number written thereon was wrong as it contained only seven (7) digits. As it happened, according to defendant, plaintiff's deposit had to be consigned to the suspense accounts pending verification. This, indeed, could have been avoided at the first instance had the teller of defendant bank performed her duties efficiently and well. For then she could have readily detected that the account number in the name of Emma E. Herrero was erroneous and would be rejected by the computer. That is, or should be, part of the training and standard operating procedure of the bank's employees. On the other hand, the depositors are not concerned with banking procedure. That is the responsibility of the bank and its employees. Depositors are only concerned with the facility of depositing their money, earning interest thereon, if any, and withdrawing therefrom, particularly businessmen, like plaintiff, who are supposed to be always on-the-go. Plaintiff's account is a current account which should immediately be posted. After all, it does not earn interest. At least, the forbearance should be commensurated with prompt, efficient and satisfactory service. Bank clients are supposed to rely on the services extended by the bank, including the assurance that their deposits will be duly credited them as soon as they are made. For, any delay in crediting their account can be embarrassing to them as in the case of plaintiff. 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. (Emphasis supplied). In the light of the above-cited case, the respondent bank cannot exculpate itself from liability by claiming that its depositor "impliedly instructed" the bank to clear his check with the Central Bank by filling a local check deposit slip. Such posture is disingenuous, to say the least. First, why would RCBC follow a patently erroneous act born of ignorance or inattention or both. Second, bank transactions pass through a succession of bank personnel whose duty is to check and countercheck transactions for possible errors. In the instant case, the teller should not have accepted the local deposit slip with the cashier's check that on its face was clearly a regional check without calling the depositor's attention to the mistake at the very

moment this was presented to her. Neither should everyone else down the line who processed the same check for clearing have allowed the check to be sent to Central Bank. Depositors do not pretend to be past master of banking technicalities, much more of clearing procedures. As soon as their deposits are accepted by the bank teller, they wholly repose trust in the bank personnel's mastery of banking, their and the bank's sworn profession of diligence and meticulousness in giving irreproachable service. We do not subscribe to RCBC's assertion that petitioner's use of the wrong deposit slip was the proximate cause of the clearing fiasco and so, petitioner must bear the consequence. In Pilipinas Bank, v. CA, 23 this Court said: The bank is not expected to be infallible but, as correctly observed by respondent Appellate Court, in this instance, it must bear the blame for not discovering the mistake of its teller despite the established procedure requiring the papers and bank books to pass through a battery of bank personnel whose duty it is to check and countercheck them for possible errors. Apparently, the officials and employees tasked to do that did not perform their duties with due care, . . . So it is in the instance case, where the conclusion is inevitable that respondent RCBC had been remiss in the performance of its duty and obligation to its client, as well as to itself. We draw attention to the fact that the two dishonored checks issued by petitioner, Check No. 040719 and Check No. 040718 were presented for payment 24 more than 45 days from the day the cashier's check was deposited. This gave RCBC more than ample time to have cleared the cashier's check had it corrected its "missending" the same upon return from Central Bank using the correct slip this time so it can be cleared properly. Instead, RCBC promptly debited the amount of P30,000.00 against petitioner's account and left it at that. We observe, likewise, that RCBC inquired about an Evelyn Tan but no Evelyn TanBanzon as specifically instructed in the same signature card. (Emphasis supplied) 25 RCBC insists that immediate payment without awaiting clearance of a cashier's check is discretionary with the bank to whom the check is presented and such being the case, its refusal to immediately pay the cashier's check in this case is not to be equated with negligence on its part. We find this disturbing and unfortunate. An ordinary check is not a mere undertaking to pay an amount of money. There is an element of certainty or assurance that it will be paid upon presentation that is why it is perceived as a convenient substitute for currency in commercial and financial transactions. The basis of the perception being confidence. Any practice

that destroys that confidence will impair the usefulness of the check as a currency substitute and create havoc in trade circles and the banking community. 26 Now, what was presented for deposit in the instant cases was not just an ordinary check but a cashier's check payable to the account of the depositor himself. A cashier's check is a primary obligation of the issuing bank andaccepted in advance by its mere issuance. 27 By its very nature, a cashier's check is the bank's order to pay drawn upon itself, committing in effect its total resources, integrity and honor behind the check. A cashier's check by its peculiar character and general use in the commercial world is regarded substantially to be as good as the money which it represents. 28 In this case, therefore, PCIB by issuing the check created an unconditional credit in favor of any collecting bank. All these considered, petitioner's reliance on the layman's perception that a cashier's check is as good as cash is not entirely misplaced, as it is rooted in practice, tradition, and principle. We see no reason thus why this so-called discretion was not exercised in favor of petitioner, specially since PCIB and RCBC are members of the same clearing house group relying on each other's solvency. RCBC could surely rely on the solvency of PCIB when the latter issued its cashier's check. On the third and fourth issue, RCBC contends that moral damages cannot be recovered in an action for breach of contract since under Article 2219 of the New Civil Code, the instant case is not among those enumerated. For an award of moral damages in a breach of contract, it is imperative that the party acted in bad faith or fraudulently as provided for in Art. 2220 of the Civil Code, to wit: Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. In the absence of moral damages, RCBC argues, exemplary damages cannot be awarded under Art. 2225 of the same Code which states: Exemplary damages or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages. We hold that petitioner has the right to recover moral damages even if the bank's negligence may not have been attended with malice and bad faith. In American Express International, Inc. v. IAC, 29 we held:

While petitioner was not in bad faith, its negligence caused the private respondent to suffer mental anguish, serious anxiety, embarrassment and humiliation, for which he is entitled to recover, reasonable moral damages (Art. 2217, Civil Code). In Zenith Insurance Corporation v. CA, 30 we also said that moral damages are not meant to enrich a complainant at the expense of defendant. It is only intended to alleviate the moral suffering he has undergone. In the instant case, we find the award of P700,000.00 as moral damages excessive and, accordingly, reduce it to one hundred thousand (P100,000.00) pesos. We find the award of exemplary damages of P200,000.00 unjustified in the absence of malice, bad faith or gross negligence. 31 The award of reasonable attorney's fees is proper for the petitioner was compelled to litigate to protect his interest. 32 IN VIEW WHEREOF, we REVERSE the decision of respondent Court of Appeals and hereby order private respondent RCBC, Binondo Branch, to pay petitioner the amount of one hundred thousand (P100,000.00) pesos as moral damages and the sum of fifty thousand (P50,000.00) pesos as attorney's fees, plus costs. SO ORDERED. Padilla, Davide, Jr., Bellosillo and Quiason, JJ., concur.

G.R. No. 112576 October 26, 1994 (CA-GR CV No. 26571) METROPOLITAN BANK AND TRUST COMPANY, petitioner, vs. THE HON. COURT OF APPEALS, RURAL BANK OF PADRE GARCIA, INC. and ISABEL R. KATIGBAK,respondents. Makalintal, Barot, Torres & Ibarra for petitioner. Fornier, Lava & Fornier for private respondents.

ROMERO, J.: This petition for certiorari seeks to annul the decision of respondent Court of Appeals dated October 29, 1992 in CA GR CV No. 26571 affirming the decision of the Regional Trial Court of Lipa, Batangas Branch XIII for damages, and the Resolution dated November 11, 1993 denying petitioner's motion for reconsideration of the aforesaid decision. The case emanated from a dispute between the Rural Bank of Padre Garcia, Inc. (RBPG) and Metropolitan Bank and Trust Company (MBTC) relative to a credit memorandum dated April 5, 1982 from the Central Bank in the amount of P304,000.00 in favor of RBPG. The records show that Isabel Katigbak is the president and director of RBPG, owning 65% of the shares thereof. Metropolitan Bank and Trust Company (MBTC) is the rural bank's depository bank, where Katigbak maintains current accounts with MBTC's main office in Makati as well as its Lipa City branch. On April 6, 1982, MBTC received from the Central Bank a credit memo dated April 5, 1982 that its demand deposit account was credited with P304,000.00 for the account of RBPG, representing loans granted by the Central Bank to RBPG. On the basis of said credit memo, Isabel Katigbak issued several checks against its account with MBTC in the total amount of P300,000.00, two (2) of which (Metrobank Check Nos. 0069 and 0070) were payable to Dr. Felipe C. Roque and Mrs. Eliza Roque for P25,000.00 each. Said checks issued to Dr. and Mrs. Roque were deposited by the Roques with the Philippine Banking Corporation, Novaliches Branch in Quezon City. When these checks were forwarded to MBTC on April 12, 1982 for payment (six (6) days from receipt of the Credit Memo), the checks were returned by MBTC with the annotations "DAIF TNC" (Drawn Against Insufficient

Funds Try Next Clearing) so they were redeposited on April 14, 1982. These were however again dishonored and returned unpaid for the following reason: "DAIF TNC NO ADVICE FROM CB." After the second dishonor of the two (2) checks, Dr. Felipe Roque, a member of the Board of Directors of Philippine Banking Corporation, allegedly went to the Office of Antonio Katigbak, an officer of RBPG, chiding him for the bouncing checks. In order to appease the doctor, RBPG paid Dr. Roque P50,000.00 in cash to replace the aforesaid checks. On April 13, 1982, Isabel Katigbak who was in Hongkong on a business-vacation trip together with her sons Alfredo and Antonio, both of whom were also officers of RBPG, received overseas phone calls from Mrs. Maris Katigbak-San Juan at her residence in San Lorenzo Village, Makati, informing Isabel Katigbak that a certain Mr. Rizal Dungo, Assistant Cashier of MBTC insisted on talking to her (Mrs. San Juan), berating her about the checks which bounced, saying "Nag-issue kayo ng tseke, wala namang pondo," even if it was explained to Mr. Dungo that Mrs. San Juan was not in any way connected with RBPG. Mrs. Katigbak testified that she informed Mrs. San Juan to request defendant MBTC to check and verify the records regarding the aforementioned Central Bank credit memo for P304,000.00 in favor of RBPG as she was certain that the checks were sufficiently covered by the CB credit memo as early as April 6, 1994, but the following day, Mrs. San Juan received another insulting call from Mr. Dungo ("Bakit kayo nag-issue ng tseke na wala namang pondo, Three Hundred Thousand na.") 1 When Mrs. San Juan explained to him the need to verify the records regarding the Central Bank memo, he merely brushed it aside, telling her sarcastically that he was very sure that no such credit memo existed. Mrs. San Juan was constrained to place another long distance call to Mrs. Katigbak in Hongkong that evening. Tense and angered, the Katigbaks had to cut short their Hongkong stay with their respective families and flew back to Manila, catching the first available flight on April 15, 1982. Immediately upon arrival, Mrs. Katigbak called up MBTC, through a Mr. Cochico, for a re-examination of the records of MBTC regarding the Central Bank credit memo dated April 5, 1982 for P304,000.00. Mr. Dungo, to whom Cochico handed over the phone, allegedly arrogantly said: "Bakit kayo magagalit, wala naman kayong pondo?" These remarks allegedly so shocked Mrs. Katigbak that her blood pressure rose to a dangerous level and she had to undergo medical treatment at the Makati Medical Center for two (2) days.

Metrobank not only dishonored the checks issued by RBPG, the latter was issued four (4) debit memos representing service and penalty charges for the returned checks. RBPG and Isabel Katigbak filed Civil Case No. V-329 in the RTC of Lipa, Batangas Branch XIII against the Metropolitan Bank and Trust Company for damages on April 26, 1983. The ultimate facts as alleged by the defendant MBTC in its answer are as follows: that on April 6, 1982, its messenger, Elizer Gonzales, received from the Central Bank several credit advices on rural bank accounts, which included that of plaintiff RBPG in the amount of P304,000.00; that due to the inadvertence of said messenger, the credit advice issued in favor of plaintiff RBPG was not delivered to the department in charge of processing the same; consequently, when MBTC received from the clearing department the checks in question, the stated balance in RBPG's account was only P5,498.58 which excluded the unprocessed credit advice of P304,000.00 resulting in the dishonor of the aforementioned checks; that as regards the P304,000.00 which was a re-discounting loan from the Central Bank, the same was credited only on April 15, 1982 after the Central Bank finally confirmed that a credit advice was indeed issued in favor of RBPG; that after the confirmation, MBTC credited the amount of the credit advice to plaintiff RBPG's account and thru its officers, allegedly conveyed personally on two occasions its apologies to plaintiffs to show that the bank and its officers acted with no deliberate intent on their part to cause injury or damage to plaintiffs, explaining the circumstances that gave rise to the bouncing checks situation. Metrobank's negligence arising from their messenger's misrouting of the credit advice resulting in the return of the checks in question, despite daily reporting of credit memos and a corresponding daily radio message confirmation, (as shown by Exhibit "I," the Investigation Report of the bank's Mr. Valentino Elevado) and Mr. Dungo's improper handling of clients led to the messenger's dismissal from service and Mr. Dungo's transfer from Metro Manila to Mindoro. The threshold issue was whether or not, under the facts and circumstances of the case, plaintiff may be allowed to recover actual, moral and exemplary damages, including attorney's fees, litigation expenses and the costs of the suit. On August 25, 1989, the RTC of Lipa City rendered a decision 2 in favor of plaintiffs and against the defendant MBTC, ordering the latter to: 1. pay plaintiff Isabel Katigbak P50,000.00 as temperate damages; 2. pay P500,000.00 as moral damages, considering that RBPG's credit standing and business reputation were damaged by the wrongful acts of defendant's employees, coupled with the rude treatment received by

Isabel Katigbak at the hands of Mr. Dungo, all of which impelled her to seek medical treatment; 3. pay P100,000.00 as attorney's fees and litigation expenses; and. 4. pay the costs of suit. The lower court did not award actual damages in the amount of P50,000.00 representing the amount of the two (2) checks payable to Dr. Felipe C. Roque and Mrs. Elisa Roque for P25,000 each, as it found no showing that Mr. Antonio Katigbak who allegedly paid the amount was actually reimbursed by plaintiff RBPG. Moreover, the court held that no actual damages could have been suffered by plaintiff RBPG because on April 15, 1982, the Central Bank credit advice in the amount of P304,000 which included the two (2) checks issued to the Roque spouses in the sum of P50,000.00 were already credited to the account of RBPG and the service, as well as penalty charges, were all reversed. MBTC appealed from the decision to the Court of Appeals in CA GR CV No. 26571, alleging that the trial court erred in awarding temperate and moral damages, as well as attorney's fees, plus costs and expenses of litigation without factual or legal basis therefor. On October 29, 1992, the Court of Appeals rendered a decision 3 affirming that of the trial court, except for the deletion of the award of temperate damages, the reduction of moral damages from P500,000.00 to P50,000.00 in favor of RBPG and P100,000.00 for Isabel Katigbak and P50,000.00, as attorney's fees. Plaintiffsappellees filed a motion for reconsideration of the decision, questioning the deletion of the award of temperate damages and the reduction of the award of moral damages and attorney's fees. The motion was denied. MBTC filed this petition, presenting the following issues for resolution: 1. whether or not private respondents RBPG and Isabel Rodriguez are legally entitled to moral damages and attorney's fees, and 2. assuming that they are so entitled, whether or not the amounts awarded are excessive and unconscionable. The petition is devoid of merit. The case at bench was instituted to seek damages caused by the dishonor through negligence of respondent bank's checks which were actually sufficiently funded, and the insults from petitioner bank's officer directed against private respondent Isabel R. Katigbak. The presence of malice and the evidence of besmirched reputation or

loss of credit and business standing, as well as a reappraisal of its probative value, involves factual matters which, having been already thoroughly discussed and analyzed in the courts below, are no longer reviewable here. While this rule admits of exceptions, this case does not fall under any of these. There is no merit in petitioner's argument that it should not be considered negligent, much less be held liable for damages on account of the inadvertence of its bank employee as Article 1173 of the Civil Code only requires it to exercise the diligence of a good pater familias. As borne out by the records, the dishonoring of the respondent's checks committed through negligence by the petitioner bank on April 6, 1982 was rectified only on April 15, 1992 or nine (9) days after receipt of the credit memo. Clearly, petitioner bank was remiss in its duty and obligation to treat private respondent's account with the highest degree of care, considering the fiduciary nature of their relationship. The bank is under obligation to treat the accounts of its depositors with meticulous care, whether such account consists only of a few hundred pesos or of millions. It must bear the blame for failing to discover the mistake of its employee despite the established procedure requiring bank papers to pass through bank personnel whose duty it is to check and countercheck them for possible errors. 4 Responsibility arising from negligence in the performance of every kind of obligation is demandable. 5 While the bank's negligence may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation to private respondents for which they are entitled to recover reasonable moral damages. 6 As the records bear out, insult was added to injury by petitioner bank's issuance of debit memoranda representing service and penalty charges for the returned checks, not to mention the insulting remarks from its Assistant Cashier. In the case of Leopoldo Araneta v. Bank of America, 7 we held that: The financial credit of a businessman is a prized and valuable asset, it being a significant part of the foundation of his business. Any adverse reflection thereon constitutes some financial loss to him. As stated in the case of Atlanta National Bank vs. Davis, 96 Ga 334, 23 SE 190, citing 2 Morse Banks, Sec. 458, "it can hardly be possible that a customer's check can be wrongfully refused payment without some impeachment of his credit, which must in fact be an actual injury, though he cannot, from the nature of the case, furnish independent, distinct proof thereof". It was established that when Mrs. Katigbak learned that her checks were not being honored and Mr. Dungo repeatedly made the insulting phone calls, her wounded feelings and the mental anguish suffered by her caused her blood pressure to rise

beyond normal limits, necessitating medical attendance for two (2) days at a hospital. The damage to private respondents' reputation and social standing entitles them to moral damages. Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury. 8 Temperate or moderate damages which are more than nominal but less than compensatory damages, may be recovered when the court finds that some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be proved with certainty. 9 Temperate damages may be allowed in cases where from the nature of the case, definite proof of pecuniary loss cannot be adduced, although the court is convinced that there has been such loss. The appellate court, however, justified its deletion when MBTC reasoned out that the amount of P50,000.00 is not part of the relief prayed for in the complaint, aside from the fact that the amount allegedly suffered by Mrs. Katigbak is susceptible of proof. 10 Moral and temperate damages which are not susceptible of pecuniary estimation are not awarded to penalize the petitioner but to compensate the respondents for injuries suffered as a result of the former's fault and negligence, taking into account the latter's credit and social standing in the banking community, particularly since this is the very first time such humiliation has befallen private respondents. The amount of such losses need not be established with exactitude, precisely due to their nature. 11 The carelessness of petitioner bank, aggravated by the lack of promptness in repairing the error and the arrogant attitude of the bank officer handling the matter, justifies the grant of moral damages, which are clearly not excessive and unconscionable. Moreover, considering the nature and extent of the services rendered by private respondent's counsel, both in the trial and appellate courts, the Court deems it just and equitable that attorney's fees in the amount of P50,000.00 be awarded. WHEREFORE, the decision of respondent Court of Appeals is AFFIRMED in all respects. SO ORDERED. Bidin, Melo and Vitug, JJ., concur. Feliciano, J., is on leave.

G.R. No. 116181 January 6, 1997 PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS and CARMELO H. FLORES, respondents. RESOLUTION

KAPUNAN, J.: This refers to private respondent's motion for reconsideration dated 29 May 1996 of the Court's decision promulgated on 17 April 1996, the dispositive portion of which reads: WHEREFORE, premises considered, the assailed decision is hereby MODIFIED as follows: 1. The award of moral damages is reduced from P1,000,000.00 to P100,000.00; and 2. The award of exemplary damages is reduced from P1,000,000.00 to P25,000.00.
In all other respects, the assailed decision is hereby AFFIRMED.
1

Private respondent contends that the award of damages is too small considering that petitioner, to end the dispute, was willing to enter into a compromise agreement and offered the amount of P397,272.41 as settlement. In addition, private respondent assails petitioner's malicious act of attacking his character by alluding to his alleged reputation as a "gambler and big time casino player." Carmelo H. Flores' personality and character are irrelevant to the issues at hand. Petitioner's resort to character assassination is thus unfair and uncalled for. In its Brief dated 20 January 1993 filed with the Court of Appeals, petitioner audaciously stated that: . . . Significantly, there is uncontradicted evidence that Flores is a gambler and a big time casino player at that; consequently, his selfserving and uncorroborated evidence cannot be fully believed for as to quote a scholarly treatise

A common gambler is a common nuisance, insensible to honor, deaf to pity, bent upon plunder, he is human cormorant, more destructible than the bird of prey itself: (VII, part II, FRANCISCO, EVIDENCE 2 [1991] citing Smith v. Wilson, 31 How. Pr. [N.Y.] 272,22 Fed. Cas. No. 13,128 [at p. 721]).

Similarly, in its memorandum before this Court, petitioner asserted that "Flores used the proceeds of the manager's checks on the gaming table:" xxx xxx xxx The undeniable truth is that Flores was playing at the gaming table before he transacted with Angelita Sotero, Cashier of PNB Baguio Hyatt Casino Unit, for the encashment of the P1 Million checks; that after he was paid the first P500,000, in his way back to the gaming table, he took from Sotero a P100,000 advance; and that other three (3) P100,000 were separately paid to him by Sotero in the interval of one to two hours while Flores was playing at the gaming table (TSN, July 2, 1991, pp. 1926, 34).
Thus, the embarrassment claimed by Flores is but a figment of his imagination, as it is but natural to 3 conclude without fear of error that under the circumstances Flores used the money for gambling.

Petitioner's allegation that it is allowed by Sec. 11, Rule 132 of the Revised Rules on Evidence to impeach the adverse party's witness "by evidence that his general reputation for truth, honesty, or integrity is bad" is undeserving of merit. Petitioner has not presented adequate evidence to show that private respondent is indeed a big time gambler. Mere allegations are not equivalent to proof. Petitioner has besmirched private respondent's reputation and has considerably caused him undue humiliation. On this point, we reiterate with emphasis the findings of the trial court and the Court of Appeals, to wit: Since there is no doubt as to the fact that the plaintiff purchased from the defendant bank two (2) manager's check worth P500,000.00 each as this was evidenced by an official receipt (Exhibit "A"), then, following the above jurisprudential ruling, the existence of the manager's check (sic) created as (sic) fiduciary relationship between the defendant bank and the plaintiff and therefore any breach thereof must be borne by the negligent party. In this case, the money counter who, among her other duties, is in charge of counting the money received from a client purchasing a manager's check did not perform her duty with diligence and due care. This may be gathered from her testimony that she did not wait for the counting machine to finish counting the money for the plaintiff is a VIP client and he was in a hurry as he was tapping the window (p. 37, T.S.N., August 28, 1990). Equally negligent is Reynaldo Castor for not doing anything when he noticed that their money counters

who entertained the plaintiff were rattled. From these unfolded facts, the so-called honest mistake pleaded is therefore misplaced and perforced, defendant must suffer the consequences of its own negligent acts. The records further show that plaintiff is a prominent businessman, licensed and engaged in the real estate business, buying and selling houses and lots under the business name and style CMS Commercial. He is at the same time a consultant of Dizon-Esguerra Real Estate Company. Defendant treated him as a valued and VIP client. Because of the bank's refusal to encash the entire one million face amount of his manager's checks, he was so embarrassed for he was not able to purchase a house and lot in Montenoza Subdivision, Baguio City. Significantly, the foregoing undisputed facts made even more untenable defendant's implicit supposition that the subject manager's checks were not intended for the purchase of a house or for any business transaction but for gambling. Finally, since plaintiff was compelled to litigate to protect its interest due to the non-compliance of defendant's obligation, he is therefore entitled to attorney's fees (pars. 5, article 2208, Civil Code of the Philippines). xxx xxx xxx Appellee Flores narrated his woes to the lower court when appellant bank refused to honor his Manager's Checks worth P1 Million because of the alleged shortage in appellee's payment to the effect that he had to go back and forth the bank to encash said checks (pp. 16-18, t.s.n., July 2, 1990), and that he lost a deal of (sic) a house for sale in Baguio City worth P1 Million as he could not produce said amount withheld by the appellant bank (p. 22, Id.). Appellee Flores further testified as to the effect of the incident on his integrity as a businessman as follows: Yes, my integrity and dependability as a businessman is highly doubted in Baguio because of the PNB refusal to honor the two (2) manager's checks inspite of them issuing me the receipt. So, whenever I make a deal in house and they would now even doubt whether I have the money to buy the house that I am buying, it greatly affected my integrity as a businessman in Baguio. (p. 25, t.s.n.,. id.) In the case of Makabali v. C.A., 157 SCRA 253, the Supreme Court reiterated the doctrine on the grant of moral and exemplary damages, as follows:

To begin with, there is no hard and fast rule in the determination of what would be a fair amount of moral damages, since each case must be governed by its own peculiar circumstances. Article 2217 of the Civil Code recognizes that moral damages which include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury, are incapable of pecuniary estimation.
As to exemplary damages, Article 2229 of the Civil Code provides that such damages may be imposed by way of example or correction for the public good. While exemplary damages cannot be recovered as a matter of right, they need not be proved, although plaintiff must 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 4 be awarded.

Accordingly, the moral and exemplary damages awarded to private respondent are increased by P100,000.00 and P25,000.00, respectively. WHEREFORE, the award of moral damages to private respondent is increased to P200,000.00 and the award of exemplary damages is increased to P50,000.00. SO ORDERED.

G.R. No. 112392

February 29, 2000

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. COURT OF APPEALS and BENJAMIN C. NAPIZA, respondents. YNARES-SANTIAGO, J.: This is a petition for review on certiorari of the Decision1 of the Court of Appeals in CA-G.R. CV No. 37392 affirming in toto that of the Regional Trial Court of Makati, Branch 139,2 which dismissed the complaint filed by petitioner Bank of the Philippine Islands against private respondent Benjamin C. Napiza for sum of money. On September 3, 1987, private respondent deposited in Foreign Currency Deposit Unit (FCDU) Savings Account No. 028-1873 which he maintained in petitioner bank's Buendia Avenue Extension Branch, Continental Bank Manager's Check No. 000147574 dated August 17, 1984, payable to "cash" in the amount of Two Thousand Five Hundred Dollars ($2,500.00) and duly endorsed by private respondent on its dorsal side.5 It appears that the check belonged to a certain Henry who went to the office of private respondent and requested him to deposit the check in his dollar account by way of accommodation and for the purpose of clearing the same. Private respondent acceded, and agreed to deliver to Chan a signed blank withdrawal slip, with the understanding that as soon as the check is cleared, both of them would go to the bank to withdraw the amount of the check upon private respondent's presentation to the bank of his passbook. Using the blank withdrawal slip given by private respondent to Chan, on October 23, 1984, one Ruben Gayon, Jr. was able to withdraw the amount of $2,541.67 from FCDU Savings Account No. 028-187. Notably, the withdrawal slip shows that the amount was payable to Ramon A. de Guzman and Agnes C. de Guzman and was duly initialed by the branch assistant manager, Teresita Lindo.6 On November 20, 1984, petitioner received communication from the Wells Fargo Bank International of New York that the said check deposited by private respondent was a counterfeit check7 because it was "not of the type or style of checks issued by Continental Bank International."8 Consequently, Mr. Ariel Reyes, the manager of petitioner's Buendia Avenue Extension Branch, instructed one of its employees, Benjamin D. Napiza IV, who is private respondent's son, to inform his father that the check bounced.9 Reyes himself sent a telegram to private respondent regarding the dishonor of the check. In turn, private respondent's son wrote to Reyes stating that the check been assigned "for encashment" to Ramon A. de Guzman and/or Agnes C. de Guzman after it shall have been cleared upon instruction of Chan. He also

said that upon learning of the dishonor of the check, his father immediately tried to contact Chan but the latter was out of town.10 Private respondent's son undertook to return the amount of $2,500.00 to petitioner bank. On December 18, 1984, Reyes reminded private respondent of his son's promise and warned that should he fail to return that amount within seven (7) days, the matter would be referred to the bank's lawyers for appropriate action to protect the bank's interest.11 This was followed by a letter of the bank's lawyer dated April 8, 1985 demanding the return of the $2,500.00.12 In reply, private respondent wrote petitioner's counsel on April 20, 198513 stating that he deposited the check "for clearing purposes" only to accommodate Chan. He added: Further, please take notice that said check was deposited on September 3, 1984 and withdrawn on October 23, 1984, or a total period of fifty (50) days had elapsed at the time of withdrawal. Also, it may not be amiss to mention here that I merely signed an authority to withdraw said deposit subject to its clearing, the reason why the transaction is not reflected in the passbook of the account. Besides, I did not receive its proceeds as may be gleaned from the withdrawal slip under the captioned signature of recipient.
1wphi1.nt

If at all, my obligation on the transaction is moral in nature, which (sic) I have been and is (sic) still exerting utmost and maximum efforts to collect from Mr. Henry Chan who is directly liable under the circumstances. xxx xxx xxx

On August 12, 1986, petitioner filed a complaint against private respondent, praying for the return of the amount of $2,500.00 or the prevailing peso equivalent plus legal interest from date of demand to date of full payment, a sum equivalent to 20% of the total amount due as attorney's fees, and litigation and/or costs of suit. Private respondent filed his answer, admitting that he indeed signed a "blank" withdrawal slip with the understanding that the amount deposited would be withdrawn only after the check in question has been cleared. He likewise alleged that he instructed the party to whom he issued the signed blank withdrawal slip to return it to him after the bank draft's clearance so that he could lend that party his passbook for the purpose of withdrawing the amount of $2,500.00. However, without his knowledge, said party was able to withdraw the amount of $2,541.67 from his dollar savings account through collusion with one of petitioner's employees. Private respondent added that he had "given the Plaintiff fifty one (51) days with which to clear the bank draft in question." Petitioner should have disallowed the withdrawal because his passbook was not presented. He claimed that petitioner had

no one to blame except itself "for being grossly negligent;" in fact, it had allegedly admitted having paid the amount in the check "by mistake" . . . "if not altogether due to collusion and/or bad faith on the part of (its) employees." Charging petitioner with "apparent ignorance of routine bank procedures," by way of counterclaim, private respondent prayed for moral damages of P100,000.00, exemplary damages of P50,000.00 and attorney's fees of 30% of whatever amount that would be awarded to him plus an honorarium of P500.00 per appearance in court. Private respondent also filed a motion for admission of a third party complaint against Chan. He alleged that "thru strategem and/or manipulation," Chan was able to withdraw the amount of $2,500.00 even without private respondent's passbook. Thus, private respondent prayed that third party defendant Chan be made to refund to him the amount withdrawn and to pay attorney's fees of P5,000.00 plus P300.00 honorarium per appearance. Petitioner filed a comment on the motion for leave of court to admit the third party complaint, whenever it asserted that per paragraph 2 of the Rules and Regulations governing BPI savings accounts, private respondent alone was liable "for the value of the credit given on account of the draft or check deposited." It contended that private respondent was estopped from disclaiming liability because he himself authorized the withdrawal of the amount by signing the withdrawal slip. Petitioner prayed for the denial of the said motion so as not to unduly delay the disposition of the main case asserting that private respondent's claim could be ventilated in another case. Private respondent replied that for the parties to obtain complete relief and to avoid multiplicity of suits, the motion to admit third party complaint should be granted. Meanwhile, the trial court issued orders on August 25, 1987 and October 28, 1987 directing private respondent to actively participate in locating Chan. After private respondent failed to comply, the trial court, on May 18, 1988, dismissed the third party complaint without prejudice. On November 4, 1991, a decision was rendered dismissing the complaint. The lower court held that petitioner could not hold private respondent liable based on the check's face value alone. To so hold him liable "would render inutile the requirement of "clearance" from the drawee bank before the value of a particular foreign check or draft can be credited to the account of a depositor making such deposit." The lower court further held that "it was incumbent upon the petitioner to credit the value of the check in question to the account of the private respondent only upon receipt of the notice of final payment and should not have authorized the withdrawal from the latter's account of the value or proceeds of the check." Having admitted that it committed a "mistake" in not waiting for the clearance of the check before

authorizing the withdrawal of its value or proceeds, petitioner should suffer the resultant loss. On appeal, the Court of Appeals affirmed the lower court's decision. The appellate court held that petitioner committed "clears gross negligence" in allowing Ruben Gayon, Jr. to withdraw the money without presenting private respondent's passbook and, before the check was cleared and in crediting the amount indicated therein in private respondent's account. It stressed that the mere deposit of a check in private respondent's account did not mean that the check was already private respondent's property. The check still had to be cleared and its proceeds can only be withdrawn upon presentation of a passbook in accordance with the bank's rules and regulations. Furthermore, petitioner's contention that private respondent warranted the check's genuineness by endorsing it is untenable for it would render useless the clearance requirement. Likewise, the requirement of presentation of a passbook to ascertain the propriety of the accounting reflected would be a meaningless exercise. After all, these requirements are designed to protect the bank from deception or fraud. The Court of Appeals cited the case of Roman Catholic Bishop of Malolos, Inc. v. IAC,14 where this Court stated that a personal check is not legal tender or money, and held that the check deposited in this case must be cleared before its value could be properly transferred to private respondent's account. Without filing a motion for the reconsideration of the Court of Appeals' Decision, petitioner filed this petition for review on certiorari, raising the following issues: 1. WHETHER OR NOT RESPONDENT NAPIZA IS LIABLE UNDER HIS WARRANTIES AS A GENERAL INDORSER. 2. WHETHER OR NOT A CONTRACT OF AGENCY WAS CREATED BETWEEN RESPONDENT NAPIZA AND RUBEN GAYON. 3. WHETHER OR NOT PETITIONER WAS GROSSLY NEGLIGENT IN ALLOWING THE WITHDRAWAL. Petitioner claims that private respondent, having affixed his signature at the dorsal side of the check, should be liable for the amount stated therein in accordance with the following provision of the Negotiable Instruments Law (Act No. 2031): Sec. 66. Liability of general indorser. Every indorser who indorses without qualification, warrants to all subsequent holders in due course (a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and

(b) That the instrument is at the time of his indorsement, valid and subsisting. And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. Sec. 65, on the other hand, provides for the following warranties of a person negotiating an instrument by delivery or by qualified indorsement: (a) that the instrument is genuine and in all respects what it purports to be; (b) that he has a good title to it, and (c) that all prior parties had capacity to contract.15 In People v. Maniego,16 this Court described the liabilities of an indorser as follows: Appellant's contention that as mere indorser, she may not be liable on account of the dishonor of the checks indorsed by her, is likewise untenable. Under the law, the holder or last indorsee of a negotiable instrument has the right "to enforce payment of the instrument for the full amount thereof against all parties liable thereon. Among the "parties liable thereon." Is an indorser of the instrument, i.e., "a person placing his signature upon an instrument otherwise than as a maker, drawer or acceptor * * unless he clearly indicated by appropriate words his intention to be bound in some other capacity." Such an indorser "who indorses without qualification," inter alia "engages that on due presentment, * * (the instrument) shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or any subsequent indorser who may be compelled to pay it." Maniego may also be deemed an "accommodation party" in the light of the facts, i.e., a person "who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value thereof, and for the purpose of lending his name to some other person." As such, she is under the law "liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew * * (her) to be only an accommodation party," although she has the right, after paying the holder, to obtain reimbursement from the party accommodated, "since the relation between them is in effect that of principal and surety, the accommodation party being the surety. It is thus clear that ordinarily private respondent may be held liable as an indorser of the check or even as an accommodation party.17 However, to hold private respondent liable for the amount of the check he deposited by the strict application of the law and without considering the attending circumstances in the case would result in an injustice and in the erosion of the public trust in the banking system. The

interest of justice thus demands looking into the events that led to the encashment of the check. Petitioner asserts that by signing the withdrawal slip, private respondent "presented the opportunity for the withdrawal of the amount in question." Petitioner relied "on the genuine signature on the withdrawal slip, the personality of private respondent's son and the lapse of more than fifty (50) days from date of deposit of the Continental Bank draft, without the same being returned yet."18 We hold, however, that the propriety of the withdrawal should be gauged by compliance with the rules thereon that both petitioner bank and its depositors are duty-bound to observe. In the passbook that petitioner issued to private respondent, the following rules on withdrawal of deposits appear: 4. Withdrawals must be made by the depositor personally but in some exceptional circumstances, the Bank may allow withdrawal by another upon the depositor's written authority duly authenticated; and neither a deposit nor a withdrawal will be permitted except upon the presentation of the depositor's savings passbook, in which the amount deposited withdrawn shall be entered only by the Bank. 5. Withdrawals may be made by draft, mail or telegraphic transfer in currency of the account at the request of the depositor in writing on the withdrawal slip or by authenticated cable. Such request must indicate the name of the payee/s, amount and the place where the funds are to be paid. Any stamp, transmission and other charges related to such withdrawals shall be for the account of the depositor and shall be paid by him/her upon demand. Withdrawals may also be made in the form of travellers checks and in pesos. Withdrawals in the form of notes/bills are allowed subject however, to their (availability). 6. Deposits shall not be subject to withdrawal by check, and may be withdrawal only in the manner above provided, upon presentation of the depositor's savings passbook and with the withdrawal form supplied by the Bank at the counter.19 Under these rules, to be able to withdraw from the savings account deposit under the Philippine foreign currency deposit system, two requisites must be presented to petitioner bank by the person withdrawing an amount: (a) a duly filled-up withdrawal slip, and (b) the depositor's passbook. Private respondent admits he signed a blank withdrawal slip ostensibly in violation of Rule No. 6 requiring that the request for withdrawal must name the payee, the amount to be withdrawn and the place where such withdrawal should be made. That the withdrawal slip was in fact a blank one with only private respondent's two signatures affixed on the proper spaces is

buttressed by petitioner's allegation in the instant petition that had private respondent indicated therein the person authorized to receive the money, then Ruben Gayon, Jr. could not have withdrawn any amount. Petitioner contends that "(I)n failing to do so (i.e., naming his authorized agent), he practically authorized any possessor thereof to write any amount and to collect the same."20 Such contention would have been valid if not for the fact that the withdrawal slip itself indicates a special instruction that the amount is payable to "Ramon A. de Guzman &/or Agnes C. de Guzman." Such being the case, petitioner's personnel should have been duly warned that Gayon, who was also employed in petitioner's Buendia Ave. Extension branch,21 was not the proper payee of the proceeds of the check. Otherwise, either Ramon or Agnes de Guzman should have issued another authority to Gayon for such withdrawal. Of course, at the dorsal side of the withdrawal slip is an "authority to withdraw" naming Gayon the person who can withdraw the amount indicated in the check. Private respondent does not deny having signed such authority. However, considering petitioner's clear admission that the withdrawal slip was a blank one except for private respondent's signature, the unavoidable conclusion is that the typewritten name of "Ruben C. Gayon, Jr." was intercalated and thereafter it was signed by Gayon or whoever was allowed by petitioner to withdraw the amount. Under these facts, there could not have been a principal-agent relationship between private respondent and Gayon so as to render the former liable for the amount withdrawn. Moreover, the withdrawal slip contains a boxed warning that states: "This receipt must be signed and presented with the corresponding foreign currency savings passbook by the depositor in person. For withdrawals thru a representative, depositor should accomplish the authority at the back." The requirement of presentation of the passbook when withdrawing an amount cannot be given mere lip service even though the person making the withdrawal is authorized by the depositor to do so. This is clear from Rule No. 6 set out by petitioner so that, for the protection of the bank's interest and as a reminder to the depositor, the withdrawal shall be entered in the depositor's passbook. The fact that private respondent's passbook was not presented during the withdrawal is evidenced by the entries therein showing that the last transaction that he made with the bank was on September 3, 1984, the date he deposited the controversial check in the amount of $2,500.00.22 In allowing the withdrawal, petitioner likewise overlooked another rule that is printed in the passbook. Thus: 2. All deposits will be received as current funds and will be repaid in the same manner; provided, however, that deposits of drafts, checks, money orders, etc. will be accented as subject to collection only and credited to the account

only upon receipt of the notice of final payment. Collection charges by the Bank's foreign correspondent in effecting such collection shall be for the account of the depositor. If the account has sufficient balance, the collection shall be debited by the Bank against the account. If, for any reason, the proceeds of the deposited checks, drafts, money orders, etc., cannot be collected or if the Bank is required to return such proceeds, the provisional entry therefor made by the Bank in the savings passbook and its records shall be deemed automatically cancelled regardless of the time that has elapsed, and whether or not the defective items can be returned to the depositor; and the Bank is hereby authorized to execute immediately the necessary corrections, amendments or changes in its record, as well as on the savings passbook at the first opportunity to reflect such cancellation. (Emphasis and underlining supplied.) As correctly held by the Court of Appeals, in depositing the check in his name, private respondent did not become the outright owner of the amount stated therein. Under the above rule, by depositing the check with petitioner, private respondent was, in a way, merely designating petitioner as the collecting bank. This is in consonance with the rule that a negotiable instrument, such as a check, whether a manager's check or ordinary check, is not legal tender.23 As such, after receiving the deposit, under its own rules, petitioner shall credit the amount in private respondent's account or infuse value thereon only after the drawee bank shall have paid the amount of the check or the check has been cleared for deposit. Again, this is in accordance with ordinary banking practices and with this Court's pronouncement that "the collecting bank or last endorser generally suffers the loss because has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements."24 The rule finds more meaning in this case where the check involved is drawn on a foreign bank and therefore collection is more difficult than when the drawee bank is a local one even though the check in question is a manager's check.25 In Banco Atlantico v. Auditor General,26 Banco Atlantico, a commercial bank in Madrid, Spain, paid the amounts represented in three (3) checks to Virginia Boncan, the finance officer of the Philippine Embassy in Madrid. The bank did so without previously clearing the checks with the drawee bank, the Philippine National Bank in New York, on account of the "special treatment" that Boncan received from the personnel of Banco Atlantico's foreign department. The Court held that the encashment of the checks without prior clearance is "contrary to normal or ordinary banking practice specially so where the drawee bank is a foreign bank and the amounts involved were large." Accordingly, the Court approved the Auditor

General's denial of Banco Atlantico's claim for payment of the value of the checks that was withdrawn by Boncan. Said ruling brings to light the fact that the banking business is affected with public interest. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors "with meticulous care, always having in mind the fiduciary nature of their relationship."27 As such, in dealing with its depositors, a bank should exercise its functions not only with the diligence of a good father of a family but it should do so with the highest degree of care.28 In the case at bar, petitioner, in allowing the withdrawal of private respondent's deposit, failed to exercise the diligence of a good father of a family. In total disregard of its own rules, petitioner's personnel negligently handled private respondent's account to petitioner's detriment. As this Court once said on this matter: Negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case of Picart v. Smith, provides that test by which to determine the existence of negligence in a particular case which may be stated as follows: Did the defendant in doing the alleged negligent act use that reasonable care and caution which an ordinarily prudent person would have used in the same situation? If not, then he is guilty of negligence. The law here in effect adopts the standard supposed to be supplied by the imaginary conduct of the discreet paterfamilias of the Roman law. The existence of negligence in a given case is not determined by reference to the personal judgment of the actor in the situation before him. The law considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence and determines liability by that.29 Petitioner violated its own rules by allowing the withdrawal of an amount that is definitely over and above the aggregate amount of private respondent's dollar deposits that had yet to be cleared. The bank's ledger on private respondent's account shows that before he deposited $2,500.00, private respondent had a balance of only $750.00.30 Upon private respondent's deposit of $2,500.00 on September 3, 1984, that amount was credited in his ledger as a deposit resulting in the corresponding total balance of $3,250.00.31 On September 10, 1984, the amount of $600.00 and the additional charges of $10.00 were indicated therein as withdrawn thereby leaving a balance $2,640.00. On September 30, 1984, an interest of $11.59 was reflected in the ledger and on October 23, 1984, the amount of $2,541.67 was entered as withdrawn with a balance of $109.92.32 On November

19, 1984 the word "hold" was written beside the balance of $109.92.33 That must have been the time when Reyes, petitioner's branch manager, was informed unofficially of the fact that the check deposited was a counterfeit, but petitioner's Buendia Ave. Extension Branch received a copy of the communication thereon from Wells Fargo Bank International in New York the following day, November 20, 1984.34 According to Reyes, Wells Fargo Bank International handled the clearing of checks drawn against U.S. banks that were deposited with petitioner. 35 From these facts on record, it is at once apparent that petitioner's personnel allowed the withdrawal of an amount bigger than the original deposit of $750.00 and the value of the check deposited in the amount of $2,500.00 although they had not yet received notice from the clearing bank in the United States on whether or not the check was funded. Reyes' contention that after the lapse of the 35-day period the amount of a deposited check could be withdrawn even in the absence of a clearance thereon, otherwise it could take a long time before a depositor could make a withdrawal,36 is untenable. Said practice amounts to a disregard of the clearance requirement of the banking system. While it is true that private respondent's having signed a blank withdrawal slip set in motion the events that resulted in the withdrawal and encashment of the counterfeit check, the negligence of petitioner's personnel was the proximate cause of the loss that petitioner sustained. Proximate cause, which is determined by a mixed consideration of logic, common sense, policy and precedent, is "that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred."37 The proximate cause of the withdrawal and eventual loss of the amount of $2,500.00 on petitioner's part was its personnel's negligence in allowing such withdrawal in disregard of its own rules and the clearing requirement in the banking system. In so doing, petitioner assumed the risk of incurring a loss on account of a forged or counterfeit foreign check and hence, it should suffer the resulting damage.
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WHEREFORE, the petition for review on certiorari is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 37392 is AFFIRMED. SO ORDERED.

G.R. No. 88435

January 16, 2002

DEVELOPMENT BANK OF THE PHILIPPINES, JESUS P. ESTANISLAO, DOLORES A. SANTIAGO, LYNN H. CATUNCAN, NORMA O. TERREL, MA. ANTONIA G. REBUENO, petitioners, vs. COMMISSION ON AUDIT, respondent. CARPIO, J.: The Case This is a petition for review on certiorari1 of the letter-decision of the Chairman of the Commission on Audit2("COA" for brevity) and the letter-decision of the COA en banc3, prohibiting the Development Bank of the Philippines ("DBP" for brevity) from hiring a private external auditor. This petition raises a question of first impression, whether or not the constitutional power of the COA to examine and audit the DBP is exclusive and precludes a concurrent audit of the DBP by a private external auditor. The Antecedent Facts In 1986, the Philippine government, under the administration of then President Corazon C. Aquino, obtained from the World Bank an Economic Recovery Loan ("ERL" for brevity) in the amount of US$310 million. The ERL was intended to support the recovery of the Philippine economy, at that time suffering severely from the financial crisis that hit the country during the latter part of the Marcos regime. As a condition for granting the loan, the World Bank required the Philippine government to rehabilitate the DBP which was then saddled with huge nonperforming loans. Accordingly, the government committed to rehabilitate the DBP to make it a viable and self-sustaining financial institution in recognition of its developmental role in the economy. The DBP was expected to continue "providing principally medium and long-term financing to projects with risks higher than the private sector may be willing to accept under reasonable terms."4 The government's commitment was embodied in the Policy Statement for the Development Bank of the Philippines which stated in part: "4. Furthermore, like all financial institutions under Central Bank supervision, DBP will now be required to have a private external audit, and its Board of Directors will now be opened to adequate private sector representation. It is hoped that with these commitments, DBP can avoid the difficulties of the past and can function as a competitive and viable financial institution within the Philippine financial system."5 (Emphasis supplied)

On November 28, 1986, the Monetary Board adopted Resolution No. 1079 amending the Central Bank's Manual of Regulations for Banks and other Financial Intermediaries, in line with the government's commitment to the World Bank to require a private external auditor for DBP. Thus, on December 5, 1986, the Central Bank Governor issued Central Bank Circular No. 1124, providing that: "SECTION 1. Subsection 1165.5 (Book I) is amended to read as follows: 1165.5 Financial Audit. - Each Bank, whether Government-owned or controlled or private, shall cause an annual financial audit to be conducted by an external independent auditor not later than thirty (30) days after the close of the calendar year or the fiscal year adopted by the bank. x x x. x x x The Audit of a Government-owned or controlled bank by an external independent auditor shall be in addition to and without prejudice to that conducted by the Commission on Audit in the discharge of its mandate under existing law. x x x. xxx "SECTION 3. The requirement for an annual financial audit by an external independent auditor shall extend to specialized and unique government banks such as the Land Bank of the Philippines and the Development Bank of the Philippines."6 On December 12, 1986, pursuant to Central Bank Circular No. 1124 and the government's commitment to the World Bank, DBP Chairman Jesus Estanislao wrote the COA seeking approval of the DBP's engagement of a private external auditor in addition to the COA.7 On January 2, 1987, to formalize its request for the ERL, the Philippine government sent the World Bank a letter assuring the World Bank that pursuant to Central Bank Circular No. 1124, "all Banks, including government banks, shall be fully audited by external independent auditors x x x in addition to that provided by the Commission on Audit." The letter was signed by the Central Bank Governor and the Ministers of Finance, Trade and Industry, and Economic Planning of the Philippine government.8 On January 8, 1987, the Philippine government and World Bank negotiating panels reached final agreement on the private audit of the DBP, as follows: "13. With respect to the draft Policy Statement, it was agreed that Sections 4, 7 and 11 would be amended as follows:

x x x (iii) Section 11 should in line with the letter of Development Policy, confirm that the external independent audits would commence with a balance sheet audit as of December 31, 1986 and a full financial audit, including income statements, starting with the period July 1 to December 31, 1986. A copy of COA's letter (referred to in par. 1, a draft of which is attached as Annex VIII) regarding DBP's appointment of a private external auditor will be sent to the Bank before the distribution of the loan documents to the Bank's Board, along with a copy of the scope of audit as approved by COA and satisfactory to the Bank. With regard to the scope of the audit to be undertaken by the private external auditors, the terms of reference which will be issued to the selected auditors should be generally consistent with the attached model terms of reference for financial audits (Annex IX). These general terms of reference were discussed during negotiations and form a part of the World Bank's guidelines for financial information on financial institutions."9 On January 20, 1987, then COA Chairman Teofisto Guingona, Jr. replied to the December 12, 1986 letter of the DBP Chairman. The COA Chairman's reply stated that: "x x x the Commission on Audit (COA) will interpose no objection to your engagement of a private external auditor as required by the Economic Recovery Program Loan Agreements of 1987 provided that the terms for said audit are first reviewed and approved by the Commission."10 The following day, the COA Chairman also informed the Consultant of the Central Bank that the COA interposed no objection to the proposed scope of audit services to be undertaken by the private external auditors to be engaged by the DBP.11 On February 18, 1987, the Board of Directors of the DBP approved the hiring of Joaquin Cunanan & Co. as the DBP's private external auditor for calendar year 1986 as required by Central Bank Circular No. 1124 and the World Bank. The DBP Board of Directors placed a ceiling on the amount of reimbursable out-of-pocket expenses that could be charged by the private auditor.12 On February 23, 1987, the World Bank President, in his Report to the Bank's Executive Directors on the Philippine government's application for the ERL, certified that the Philippine government was complying with the requirement of a private external auditor. The World Bank President's certification stated that: "74. Accounting and Auditing. All banks both government and private are now subject to accounting and auditing standards as established by the Central

Bank. To ensure full public accountability, the Monetary Board now requires that all government banks be subject to annual audits by independent private auditing firms, in addition to those normally undertaken by the Government's Commission on Audit. DBP and PNB have already selected private auditors, and audited accounts for 1986 and 1987 will be a requirement for the releases of the second and third tranches, respectively, of the ERL."13 However, a change in the leadership of the COA suddenly reversed the course of events. On April 27, 1987, the new COA Chairman, Eufemio Domingo, wrote the Central Bank Governor protesting the Central Bank's issuance of Circular No. 1124 which allegedly encroached upon the COA's constitutional and statutory power to audit government agencies. The COA Chairman's letter informed the Governor that: "This Commission hereby registers its strong objection to that portion of the CBP Circular No. 1124 which requires government banks to engage private auditors in addition to that conducted by the Commission on Audit, and urges the immediate amendment thereof. It is the position of this Commission that the said requirement: (a) infringes on Article IX-D of the Philippine Constitution; (b) violates Section 26 and 32 of the Government Auditing Code of the Philippines; (c) exposes the financial programs and strategies of the Philippine Government to high security risks; (d) allows the unnecessary and unconscionable expenditure of government funds; and (e) encourages unethical encroachment among professionals."14 On May 13, 1987, after learning that the DBP had signed a contract with a private auditing firm for calendar year 1986, the new COA Chairman wrote the DBP Chairman that the COA resident auditors were under instructions to disallow any payment to the private auditor whose services were unconstitutional, illegal and unnecessary.15 On July 1, 1987, the DBP Chairman sent to the COA Chairman a copy of the DBP's contract with Joaquin Cunanan & Co., signed four months earlier on March 5, 1987. The DBP Chairman's covering handwritten note sought the COA's concurrence to the contract.16 During the pendency of the DBP Chairman's note-request for concurrence, the DBP paid the billings of the private auditor in the total amount of P487,321.1417 despite the objection of the COA. On October 30, 1987, the COA Chairman issued a Memorandum disallowing the payments, and holding the following persons personally liable for such payment: "SVP Fajardo who approved the voucher for payment; VP Santiago who certified that the expenditure was authorized, necessary and lawful; SM Terrel, Catuncan and Rebueno who signed the checks; and the head of office who

signed the contract and who is immediately and primarily responsible for the funds of the Bank."18 On January 19, 1988, the DBP Chairman wrote the COA Chairman seeking reconsideration of the COA Chairman's Memorandum.19 However, the DBP received no response until August 29, 1988 when the COA Chairman issued a letter-decision denying petitioner's July 1, 1987 note-request for concurrence. The letter-decision, one of the two COA decisions assailed in this petition, declared in part as follows: "(a) In the letter to the Central Bank Governor x x x, this Commission clearly stated its non-negotiable stand on the issue in the following terms: ' x x x the very essence of the Commission on Audit as an independent constitutional commission in the total scheme of Government, is its singular function to '[E]xamine, audit, and settle x x x all accounts pertaining to x x x the Government, or any of its subdivisions, x x x including government-owned or controlled corporations.' To allow private firms to interfere in this governmental audit domain would be to derogate the Constitutional supremacy of State audit as the Government's guardian of the people's treasury, and as the prime advocate of economy in the use of government resources.' xxx "(c) In the letter to the Secretary of Finance dated January 28, 1988 x x x, this Commission maintains: 1. 'COA is in no way prepared to permit 'use of private auditors' except insofar as the law allows, which is 'to deputize and retain in the name of the Commission such certified public accountants and other licensed professionals not in the public service as it may deem necessary to assist government auditors in undertaking specialized audit engagements' (Sec. 31, PD No 1445). Outside of this, the Commission does not consider the matter of hiring private auditing firms a negotiable matter, and this we want to emphasize to avoid future embarrassment to the Government. The Commission on Audit is a constitutionally-created independent and separate body, and neither Congress nor the Executive Department has the power to detract from its mandated duties, functions, and powers. 2. 'Since the proceeds of the proposed loan accrue to the Republic of the Philippines as borrower, it follows that its accounting and audit must comply with the laws of this country. To specify in the Loan Agreement

that the loan account, once released to the Government, shall be 'audited by independent auditors acceptable to the Bank' is not only to entirely by-pass this Commission but to ignore as well the Constitution and the laws of this country which vests in this Commission the 'power, authority, and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property x x x pertaining to the Government.' (Sec. 2, Art. IX-D, Phil. Const.).
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'Such brazen disregard of the fundamental law of this country cannot be countenanced by this Commission.' "In view of all the foregoing, you are hereby advised: "1. To desist from proceeding with the audit of Joaquin Cunanan & Co. of the Bank's financial statements for the year ending December 31, 1987. "2. To refrain from making any payments out of the funds of the Development Bank of the Philippines, in the event that such audit services have already been rendered, attention being invited to the following provisions of the Government Auditing Code of the Philippines: 'Sec. 108. General liability for unlawful expenditures Expenditures of government funds or uses of government property in violation of law or regulations shall be a personal liability of the official or employee found to be directly responsible therefore.' "3. To restitute, within thirty (30) days from receipt hereof, the total amount of P513,549.24 under CV Nos. 9136, 5014, 6201 and 4082 for professional services rendered in the audit of the 1986 financial operations of the Bank. Pursuant to the aforequoted provisions of law, such unlawful expenditure is the personal liability of the official directly responsible therefore. "Please be guided accordingly."20 On September 26, 1988, the DBP Chairman appealed the letter-decision to the COA en banc. On May 20, 1989, the COA en banc, in a letter-decision, denied the DBP's appeal. This letter-decision, now also assailed by the DBP, held that: "Upon a circumspect evaluation of the grounds upon which your instant request is predicated, this Commission finds the same to be devoid of merit. As hereunder demonstrated, the justifications offered do not inspire rational belief in the mind of this Commission.

"First, it bears stress that CB Circular No. 1124, series of 1986, which has earlier been shown to be constitutionally and legally infirm, cannot by any means possess any binding and conclusive effect upon this Commission and, hence, may not be properly invoked in support of the instant appeal. "Secondly, it was not the International Bank for Reconstruction and Development which required the audit of government banks by private auditing firm, but the Central Bank itself. "Thirdly, insofar as this Commission is concerned, PD 2029 is an anachronism of sorts if viewed in the light of the present Constitution recognizing this Commission as the supreme and exclusive audit institution of the government. This is necessarily implicit from the bare language of Section 2(1), Article IX-D thereof which, despite the absence of the qualifying adjective "exclusive" that anyway would be a surplusage, ought to be reasonably construed as vesting in this Commission the "power, authority, and duty" to audit all government accounts to the exclusion of any other person or entity, whether in the public or the private sector. Expressio unius est exclusio alterius. A contrary interpretation, such as that being pressed upon this Commission, would reduce this constitutional ordinance to an absurdity (reductio ad absurdum) as it thereby would give rise to the rather confusing spectacle, as it were, of a government agency or corporation being audited not only by this Commission but also and in addition thereto by one or two or several private accounting firms certainly a situation never intended by the framers of the Constitution. "Lastly, while this Commission has not lost sight of the letter of then COA Chairman Guingona, Jr. to the DBP Chairman, dated January 20, 1987, it has opted to be guided and influenced by the more persuasive and controlling COA Circular No. 860254 dated March 24, 1986, which in categorical and precise terms ordained that: 'Accordingly, by way of reassertion and reaffirmation of its primary audit jurisdiction, as herein above defined, the Commission on Audit hereby issues the following directives: 1. Any ongoing audit of a government-owned and/or controlled corporation or any of its subsidiaries or corporate offsprings being conducted by a private auditor or accounting firm shall cease and terminate on April 15, 1986. Henceforth, from and after said date, the audit of said corporate entity shall be undertaken solely and exclusively by the Commission on Audit. x x x.' "Premises considered, it is regretted that your instant request for reconsideration has to be, as it is hereby, denied."21

Hence, on June 14, 1989 the DBP filed this petition for review with prayer for a temporary restraining order, assailing the two COA letter-decisions for being contrary to the Constitution and existing laws. On June 15, 1989 this Court issued a temporary restraining order directing the COA to cease and desist from enforcing its challenged letter-decisions. The Office of the Solicitor General, in a Manifestation dated October 18, 1989, declined to appear on behalf of the COA on the ground that the Solicitor General was "taking a position adverse to that of the COA." Consequently, a private counsel on pro bono basis represented the COA. The Issues The DBP's petition raises the following issues: 1. Does the Constitution vest in the COA the sole and exclusive power to examine and audit government banks so as to prohibit concurrent audit by private external auditors under any circumstance? 2. Is there an existing statute that prohibits government banks from hiring private auditors in addition to the COA? If there is none, is there an existing statute that authorizes government banks to hire private auditors in addition to the COA? 3. If there is no legal impediment to the hiring by government banks of a private auditor, was the hiring by the DBP of a private auditor in the case at bar necessary, and were the fees paid by DBP to the private auditor reasonable, under the circumstances? The Court's Ruling The DBP's petition is meritorious. First Issue: Power of COA to Audit under the Constitution The resolution of the primordial issue of whether or not the COA has the sole and exclusive power to examine and audit government banks involves an interpretation of Section 2, Article IX-D of the 1987 Constitution. This Section provides as follows: "Sec. 2. (1) The Commission on Audit shall have the power, authority, and duty to examine, audit, and settleall accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned and held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned or controlled corporations with original charters, x x x.

"(2) The Commission shall have the exclusive authority, subject to the limitations in this Article, to define the scope of its audit and examination, establish the techniques and methods required therefore, and promulgate accounting and auditing rules and regulations, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or uses of government funds and properties." (Emphasis supplied) The COA vigorously asserts that under the first paragraph of Section 2, the COA enjoys the sole and exclusivepower to examine and audit all government agencies, including the DBP. The COA contends this is similar to its sole and exclusive authority, under the second paragraph of the same Section, to define the scope of its audit, promulgate auditing rules and regulations, including rules on the disallowance of unnecessary expenditures of government agencies. The bare language of Section 2, however, shows that the COA's power under the first paragraph is not declared exclusive, while its authority under the second paragraph is expressly declared "exclusive." There is a significant reason for this marked difference in language. During the deliberations of the Constitutional Commission, Commissioner Serafin Guingona proposed the addition of the word "exclusive" in the first paragraph of Section 2, thereby granting the COA the sole and exclusive power to examine and audit all government agencies. However, the Constitutional Commission rejected the addition of the word "exclusive" in the first paragraph of Section 2 and Guingona was forced to withdraw his proposal. Commissioner Christian Monsod explained the rejection in this manner: "MR. MONSOD. Earlier Commissioner Guingona, in withdrawing his amendment to add "EXCLUSIVE" made a statement about the preponderant right of COA. "For the record, we would like to clarify the reason for not including the word. First, we do not want an Article that would constitute a disincentive or an obstacle to private investment. There are government institutions with private investments in them, and some of these investors - Filipinos, as well as in some cases, foreigners - require the presence of private auditing firms, not exclusively, but concurrently. So this does not take away the power of the Commission on Audit. Second, there are certain instances where private auditing may be required, like the listing in the stock exchange. In other words, we do not want this provision to be an unnecessary obstacle to privatization of these companies or attraction of investments."22(Emphasis supplied)

Shortly thereafter, Commissioner Guingona attempted to resurrect his amendment by proposing the following provision: "Private auditing firms may not examine or audit accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property owned or held in trust by or pertaining to the Government or any of its subdivisions, agencies or instrumentalities."23 Guingona argued that a private audit in addition to the COA audit would be a useless duplication and an unnecessary expense on the part of government. The Constitutional Commission also rejected this proposed provision, after Commissioner Monsod made the following explanation: "MR. MONSOD. x x x But it is also a fact that even government agencies, instrumentalities and subdivisions sometimes borrow money from abroad. And if we are at all going to preclude the possibility of anyconcurrent auditing, if that is required, and insist that it is only exclusively the government which can audit, we may be unnecessarily tying their hands without really accomplishing much more than what we want. As long as the COA is there, and the COA's power cannot be eliminated by law, by decree or anything of that sort, then the government funds are protected. As far as the question of fees is concerned, this is always negotiable. Besides, if one talks about auditing fees, these are governed by certain regulations within the auditing profession, beyond which auditing firms cannot go. Furthermore, the government can always refuse to pay unconscionable fees. So, that matter really is not that relevant. But I think what we want to insist on is that there should be some flexibility so that a procedural requirement does not impede a substantive transaction as long as COA is there."24 (Emphasis supplied) The rejection of Guingona's second proposal put an end to all efforts to grant the COA the sole and exclusive power to examine and audit government agencies. In sharp contrast, the Constitutional Commission placed the word "exclusive" to qualify the authority of the COA under the second paragraph of the same Section 2. The word "exclusive" did not appear in the counterpart provisions of Section 2 in the 1935 and 1973 Constitutions.25 There is no dispute that the COA's authority under the second paragraph of Section 2 is exclusive as the language of the Constitution admits of no other meaning. Thus, the COA has the exclusive authority to decide on disallowances of unnecessary government expenditures. Other government agencies and their officials, as well as private auditors engaged by them, cannot in any way intrude into this exclusive function of the COA.

The qualifying word "exclusive" in the second paragraph of Section 2 cannot be applied to the first paragraph which is another sub-section of Section 2. A qualifying word is intended to refer only to the phrase to which it is immediately associated, and not to a phrase distantly located in another paragraph or sub-section.26 Thus, the first paragraph of Section 2 must be read the way it appears, without the word "exclusive", signifying that non-COA auditors can also examine and audit government agencies. Besides, the framers of the Constitution intentionallyomitted the word "exclusive" in the first paragraph of Section 2 precisely to allow concurrent audit by private external auditors. The clear and unmistakable conclusion from a reading of the entire Section 2 is that the COA's power to examine and audit is non-exclusive. On the other hand, the COA's authority to define the scope of its audit, promulgate auditing rules and regulations, and disallow unnecessary expenditures is exclusive. Moreover, as the constitutionally mandated auditor of all government agencies, the COA's findings and conclusions necessarily prevail over those of private auditors, at least insofar as government agencies and officials are concerned. The superiority or preponderance of the COA audit over private audit can be gleaned from the records of the Constitutional Commission, as follows: "MR. GUINGONA. Madam President, after consultation with the honorable members of the Committee, I have amended my proposed amendment by deleting the word EXCLUSIVE because I was made to understand that the Commission on Audit will still have the preponderant power and authority to examine, audit and settle."27 (Emphasis supplied) The findings and conclusions of the private auditor may guide private investors or creditors who require such private audit. Government agencies and officials, however, remain bound by the findings and conclusions of the COA, whether the matter falls under the first or second paragraph of Section 2, unless of course such findings and conclusions are modified or reversed by the courts. The power of the COA to examine and audit government agencies, while nonexclusive, cannot be taken away from the COA. Section 3, Article IX-D of the Constitution mandates that: "Sec. 3. No law shall be passed exempting any entity of the Government or its subsidiary in any guise whatsoever, or any investment of public funds, from the jurisdiction of the Commission on Audit." The mere fact that private auditors may audit government agencies does not divest the COA of its power to examine and audit the same government agencies. The COA is neither by-passed nor ignored since even with a private audit the COA will

still conduct its usual examination and audit, and its findings and conclusions will still bind government agencies and their officials. A concurrent private audit poses no danger whatsoever of public funds or assets escaping the usual scrutiny of a COA audit. Manifestly, the express language of the Constitution, and the clear intent of its framers, point to only one indubitable conclusion - the COA does not have the exclusive power to examine and audit government agencies. The framers of the Constitution were fully aware of the need to allow independent private audit of certain government agencies in addition to the COA audit, as when there is a private investment in a government-controlled corporation, or when a government corporation is privatized or publicly listed, or as in the case at bar when the government borrows money from abroad. In these instances the government enters the marketplace and competes with the rest of the world in attracting investments or loans. To succeed, the government must abide with the reasonable business practices of the marketplace. Otherwise no investor or creditor will do business with the government, frustrating government efforts to attract investments or secure loans that may be critical to stimulate moribund industries or resuscitate a badly shattered national economy as in the case at bar. By design the Constitution is flexible enough to meet these exigencies. Any attempt to nullify this flexibility in the instances mentioned, or in similar instances, will be ultra vires, in the absence of a statute limiting or removing such flexibility. The deliberations of the Constitutional Commission reveal eloquently the intent of Section 2, Article IX-D of the Constitution. As this Court has ruled repeatedly, the intent of the law is the controlling factor in the interpretation of the law.28 If a law needs interpretation, the most dominant influence is the intent of the law.29 The intent of the law is that which is expressed in the words of the law, which should be discovered within its four corners aided, if necessary, by its legislative history.30 In the case of Section 2, Article IX-D of the Constitution, the intent of the framers of the Constitution is evident from the bare language of Section 2 itself. The deliberations of the Constitutional Commission confirm expressly and even elucidate further this intent beyond any doubt whatsoever. There is another constitutional barrier to the COA's insistence of exclusive power to examine and audit all government agencies. The COA's claim clashes directly with the Central Bank's constitutional power of "supervision" over banks under Section 20, Article XII of the Constitution. This provision states as follows: "Sec. 20. The Congress shall establish an independent central monetary authority, the members of whose governing board must be natural-born

Filipino citizens, of known probity, integrity, and patriotism, the majority of whom shall come from the private sector. They shall also be subject to such other qualifications and disabilities as may be prescribed by law. The authority shall provide policy direction in the areas of money, banking, and credit. It shall have supervision over the operations of banks and exercise such regulatory powers as may be provided by law over the operations of finance companies and other institutions performing similar functions." (Emphasis supplied) Historically, the Central Bank has been conducting periodic and special examination and audit of banks to determine the soundness of their operations and the safety of the deposits of the public. Undeniably, the Central Bank's power of "supervision" includes the power to examine and audit banks, as the banking laws have always recognized this power of the Central Bank.31 Hence, the COA's power to examine and audit government banks must be reconciled with the Central Bank's power to supervise the same banks. The inevitable conclusion is that the COA and the Central Bank have concurrent jurisdiction, under the Constitution, to examine and audit government banks. However, despite the Central Bank's concurrent jurisdiction over government banks, the COA's audit still prevails over that of the Central Bank since the COA is the constitutionally mandated auditor of government banks. And in matters falling under the second paragraph of Section 2, Article IX-D of the Constitution, the COA's jurisdiction is exclusive. Thus, the Central Bank is devoid of authority to allow or disallow expenditures of government banks since this function belongs exclusively to the COA. Second Issue: Statutes Prohibiting or Authorizing Private Auditors The COA argues that Sections 26, 31 and 32 of PD No. 1445, otherwise known as the Government Auditing Code of the Philippines, prohibit the hiring of private auditors by government agencies. Section 26 of PD No. 1445 provides that: "Section 26. General Jurisdiction. The authority and powers of the Commission shall extend to and comprehend all matters relating to auditing procedures, systems and controls, the keeping of the general accounts of the Government, the preservation of vouchers pertaining thereto for a period of ten years, the examination and inspection of the books, records, and papers relating to those accounts; and the audit and settlement of the accounts of all persons respecting funds or property received or held by them in an accountable capacity, as well as the examination, audit, and settlement of all debts and claims of any sort due or owing to the Government or any of its subdivisions, agencies or instrumentalities. The said jurisdiction extends to all

government-owned or controlled corporations, including their subsidiaries, and other self-governing boards, commissions, or agencies of the Government, and as herein prescribed, including non-governmental entities subsidized by the government, those funded by donations through the government, those required to pay levies or government share, and those for which the government has put up a counterpart fund or those partly funded by the government." Section 26 defines the extent and scope of the powers of the COA. Considering the comprehensive definition in Section 26, the COA's jurisdiction covers all government agencies, offices, bureaus and units, including government-owned or controlled corporations, and even non-government entities enjoying subsidy from the government. However, there is nothing in Section 26 that states, expressly or impliedly, that the COA's power to examine and audit government banks is exclusive, thereby preventing private audit of government agencies concurrently with the COA audit. Section 26 is a definition of the COA's "general jurisdiction." Jurisdiction may be exclusive or concurrent. Section 26 of PD No. 1445 does not state that the COA's jurisdiction is exclusive, and there are other laws providing for concurrent jurisdiction. Thus, Section 26 must be applied in harmony with Section 5832 of the General Banking Law of 2000 (RA No. 8791) which authorizes unequivocally the Monetary Board to require banks to hire independent auditors. Section 58 of the General Banking Law of 2000 states as follows: "Section 58. Independent Auditor. - The Monetary Board may require a bank, quasi-bank or trust entity to engage the services of an independent auditor to be chosen by the bank, quasi-bank or trust entity concerned from a list of certified public accountants acceptable to the Monetary Board. The term of the engagement shall be as prescribed by the Monetary Board which may either be on a continuing basis where the auditor shall act as resident examiner, or on the basis of special engagements; but in any case, the independent auditor shall be responsible to the bank's, quasi-bank's or trust entity's board of directors. A copy of the report shall be furnished to the Monetary Board. x x x." (Emphasis supplied) Moreover, Section 26 must also be applied in conformity with Sections 25 and 2833 of the New Central Bank Act (RA No. 7653) which authorize expressly the Monetary Board to conduct periodic or special examination of all banks. Sections 25 and 28 of the New Central Bank Act state as follows:

"Sec. 25. Supervision and Examination. The Bangko Sentral shall have supervision over, and conduct periodic or special examinations of, banking institutions x x x. (Emphasis supplied) xxx "Sec. 28. Examination and Fees. The supervising and examining department head, personally or by deputy, shall examine the books of every banking institution once in every twelve (12) months, and at such other time as the Monetary Board by an affirmative vote of five (5) members may deem expedient and to make a report on the same to the Monetary Board: x x x." (Emphasis supplied) The power vested in the Monetary Board under Section 58 of the General Banking Law of 2000, and Sections 25 and 28 of the New Central Bank Act, emanates from the Central Bank's explicit constitutional mandate to exercise "supervision over the operations of banks." Under Section 4 of the General Banking Law of 2000, the term "supervision"34 is defined as follows: "Section 4. Supervisory Powers. The operations and activities of banks shall be subject to supervision of the Bangko Sentral. "Supervision" shall include the following: xxx 4.2. The conduct of examination to determine compliance with laws and regulations if the circumstances so warrant as determined by the Monetary Board; xxx 4.4. Regular investigation which shall not be oftener than once a year from the last date ofexamination to determine whether an institution is conducting its business on a safe or sound basis: Provided, That the deficiencies/irregularities found by or discovered by an audit shall immediately be addressed; x x x." (Emphasis supplied) Clearly, under existing laws, the COA does not have the sole and exclusive power to examine and audit government banks. The Central Bank has concurrent jurisdiction to examine and audit, or cause the examination and audit, of government banks.

Section 31 of PD No. 1445, another provision of law claimed by the COA to prohibit the hiring of private auditors by government agencies, provides as follows: "Section 31. Deputization of private licensed professionals to assist government auditors. - (1) The Commission may, when the exigencies of the service so require, deputize and retain in the name of the Commission such certified public accountants and other licensed professionals not in the public service as it may deem necessary to assist government auditors in undertaking specialized audit engagements. "(2) The deputized professionals shall be entitled to such compensation and allowances as may be stipulated, subject to pertinent rules and regulations on compensation and fees." According to the COA, Section 31 is the maximum extent that private auditors can participate in auditing government agencies and anything beyond this is without legal basis. Hence, the COA maintains that the hiring of private auditors who act in their own name and operate independently of the COA is unlawful. Section 31 is bereft of any language that prohibits, expressly or impliedly, the hiring of private auditors by government agencies. This provision of law merely grants authority to the COA to hire and deputize private auditors to assist the COA in the auditing of government agencies. Such private auditors operate under the authority of the COA. By no stretch of statutory construction can this provision be interpreted as an absolute statutory ban on the hiring of private auditors by government agencies. Evidently, the language of the law does not support the COA's claim. Moreover, the COA further contends that Section 32 of PD No. 1445 is another provision of law that prohibits the hiring of private auditors by government agencies. Section 32 provides as follows: "Section 32. Government contracts for auditing, accounting, and related services. (1) No government agency shall enter into any contract with any private person or firm for services to undertake studies and services relating to government auditing, including services to conduct, for a fee, seminars or workshops for government personnel on these topics, unless the proposed contract is first submitted to the Commission to enable it to determine if it has the resources to undertake such studies or services. The Commission may engage the services of experts from the public or private sector in the conduct of these studies. "(2) Should the Commission decide not to undertake the study or service, it shall nonetheless have the power to review the contract in order to determine the reasonableness of its costs." (Emphasis supplied)

Section 32 refers to contracts for studies and services "relating to government auditing" which the COA may or may not want to undertake itself for a government agency. Stated another way, Section 32 speaks of studies and services that the COA may choose not to render to a government agency. Obviously, the subject of these contracts is not the audit itself of a government agency because the COA is compelled to undertake such audit and cannot choose not to conduct such audit. The Constitution and existing law mandate the COA to audit all government agencies. Section 2, Article IX-D of the Constitution commands that the COA "shall have the x x x dutyto examine, audit, and settle all accounts" of government agencies (Emphasis supplied). Similarly, the Revised Administrative Code of 1987 directs that the "Commission on Audit shall have the x x x duty to examine, audit, and settle all accounts"35 of government agencies (Emphasis supplied). Hence, the COA cannot refuse to audit government agencies under any circumstance. The subject of the contracts referred to in Section 32 is necessarily limited to studies, seminars, workshops, researches and other services on government auditing which the COA may or may not undertake at its discretion, thereby excluding the audit itself of government agencies. Since the COA personnel have the experience on government auditing and are in fact the experts on this subject, it is only proper for the COA to be granted the right of first refusal to undertake such services if required by government agencies. This is what Section 32 is all about and nothing more. Plainly, there is nothing in Section 32 which prohibits the hiring of private auditors to audit government agencies concurrently with the COA audit.
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On the other hand, the DBP cites Central Bank Circular No. 112436 as legal basis for hiring a private auditor. This Circular amended Subsection 1165.5 (Book I) of the Manual of Regulations for Banks and other Financial Intermediaries to require "[E]ach bank, whether government-owned or controlled or private, x x x (to) cause an annual financial audit to be conducted by an external auditor x x x." Moreover, the Circular states that the "audit of a government-owned or controlled bank by an external independent auditor shall be in addition to and without prejudice to that conducted by the Commission on Audit in the discharge of its mandate under existing law." Furthermore, the Circular provides that the "requirement for an annual audit by an external independent auditor shall extend to specialized and unique government banks such as the Land Bank of the Philippines and the Development Bank of the Philippines." The Central Bank promulgated Circular No. 1124 on December 5, 1986 pursuant to its power under the Freedom Constitution, the fundamental law then in force, as well as pursuant to its general rule making authority under the General Banking Act (RA No. 337), the banking law in effect at that time. Under the Freedom Constitution, the Central Bank exercised supervisory authority over the banking

system. Section 14, Article XV of the 1973 Constitution, which was re-adopted in the Freedom Constitution, provided as follows: "SEC. 14. The Batasang Pambansa shall establish a central monetary authority which shall provide policy direction in the areas of money, banking and credit. It shall have supervisory authority over the operations of banks and exercise such regulatory authority as may be provided by law over the operations of finance companies and other institutions performing similar functions. Until the Batasang Pambansa shall otherwise provide, the Central Bank of the Philippines, operating under existing laws, shall function as the central monetary authority." (Emphasis supplied) Section 6-D of the General Banking Act (RA No. 337) vested the Monetary Board with the specific power to "require a bank to engage the services of an independent auditor to be chosen by the bank concerned from a list of certified public accountants acceptable to the Monetary Board." The 1987 Constitution created an independent central monetary authority with substantially the same powers as the Central Bank under the 1973 Constitution and the Freedom Constitution. Section 20, Article XII of the 1987 Constitution provides that the Monetary Board "shall have supervision over the operations of banks". The specific power of the Central Bank under the General Banking Act (RA No. 337) to require an independent audit of banks was re-enacted in Section 58 of the General Banking Law of 2000 (RA No. 8791). Indubitably, the Central Bank had the express constitutional and statutory power to promulgate Circular No. 1124 on December 5, 1986. The power granted to the Central Bank to issue Circular No. 1124 with respect to the independent audit of banks is direct, unambiguous, and beyond dispute. The Bangko Sentral ng Pilipinas, which succeeded the Central Bank, retained under the 1987 Constitution and the General Banking Law of 2000 (RA No. 8791) the same constitutional and statutory power the Central Bank had under the Freedom Constitution and the General Banking Act (RA No. 337) with respect to the independent audit of banks. Circular No. 1124 has the force and effect of law. In a long line of decisions,37 this Court has held consistently that the rules and regulations issued by the Central Bank pursuant to its supervisory and regulatory powers have the force and effect of law. The DBP, being a bank under the constitutional and statutory supervision of the Central Bank, was under a clear legal obligation to comply with the requirement of Circular No. 1124 on the private audit of banks. Refusal by the DBP to comply with the Circular would have rendered the DBP and its officers liable to the penal provisions of the General Banking Act,38 as well as the administrative and penal sanctions under the Central Bank Act.39

The DBP also relies on Section 8 of PD No. 2029 as its statutory basis for hiring a private auditor. This Section states in part as follows: "The audit of government corporations by the Commission on Audit shall not preclude government corporations from engaging the services of private auditing firms: Provided, however, that even if the services of the latter are availed of, the audit report of the Commission on Audit shall serve as the report for purposes of compliance with audit requirements as required of government corporations under applicable law." Section 8 of PD No. 2029, however, also provides that the "policy of withdrawal of resident auditors shall be fully implemented x x x." Section 2 of the same decree also excludes from the term "government-owned or controlled corporation" two classes of corporations. The first are originally private corporations the majority of the shares of stock of which are acquired by government financial institutions through foreclosure or dacion en pago. The second are subsidiary corporations of government corporations, which subsidiaries are organized exclusively to own, manage or lease physical assets acquired by government financial institutions through foreclosure or dacion en pago. Claiming that PD No. 2029 operates to exempt certain government-owned corporations from the COA's jurisdiction in violation of Section 3, Article IX-D of the Constitution, the COA is questioning the constitutionality of PD No. 2029. There is, however, no compelling need to pass upon the constitutionality of PD No. 2029 because the Constitution and existing banking laws allow such hiring. The issues raised in this case can be resolved adequately without resolving the constitutionality of PD No. 2029. This Court will leave the issue of the constitutionality of PD No. 2029 to be settled in another case where its resolution is an absolute necessity.40 Third Issue: Necessity of Private Auditor and Reasonableness of the Fees The remaining issue to be resolved is whether or not the DBP's hiring of a private auditor was necessary and the fees it paid reasonable under the circumstances. The hiring by the DBP of a private auditor was a condition imposed by the World Bank for the grant to the Philippine government in early 1987 of a US$310 million Economic Recovery Loan, at a time when the government desperately needed funds to revive a badly battered economy. One of the salient objectives of the US$310 million loan was the rehabilitation of the DBP which was then burdened with enormous bad loans. The rehabilitation of the DBP was important in the overall recovery of the national economy. On February 23, 1986, the World Bank President reported to the Bank's Executive Directors that the privately audited accounts of the DBP for 1986 and 1987 "will be

a requirement for the releases of the second and third tranches, respectively, of the ERL" (Emphasis supplied). Moreover, the Agreed Minutes of Negotiations on the Philippine Economic Recovery Program41 signed by the Philippine government and World Bank negotiating panels on January 8, 1987, required that "a copy of COA's letter x x x regarding DBP's appointment of a private external auditor will be sent to the (World) Bank before the distribution of the loan documents to the Bank's Board, along with a copy of the scope of audit as approved by COA and satisfactory to the Bank" (Emphasis supplied). As a creditor, the World Bank needed the private audit for its own information to monitor the progress of the DBP's rehabilitation. This is apparent from the said Agreed Minutes which provided that the "general terms of reference (for the hiring of private external audit) were discussed during the negotiations and form part of the World Bank'sguidelines for financial information on financial institutions"42 (Emphasis supplied). The hiring of a private auditor being an express condition for the grant of the US$310 million Economic Recovery Loan, a major objective of which was the DBP's rehabilitation, the same was a necessary corporate act on the part of the DBP. The national government, represented by the Central Bank Governor, as well as the Ministers of Finance, Trade, and Economic Planning, had already committed to the hiring by all government banks of private auditors in addition to the COA. For the DBP to refuse to hire a private auditor would have aborted the vital loan and derailed the national economic recovery, resulting in grave consequences to the entire nation. The hiring of a private auditor was not only necessary based on the government's loan covenant with the World Bank, it was also necessary because it was mandated by Central Bank Circular No. 1124 under pain of administrative and penal sanctions. The last matter to determine is the reasonableness of the fees charged by Joaquin C. Cunanan & Co., the private auditor hired by the DBP. The COA describes the private auditor's fees as an "excessive, extravagant or unconscionable expenditure" of government funds. For the audit of the DBP's financial statements in 1986, the private auditor billed the DBP the amount of P487,321.14.43 In 1987, the private auditor billed the DBP the amount of P529,947.00.44 In comparison, the COA billed the DBP an audit fee of P27,015,963.0045 in 1988, andP15,421,662.0046 in 1989. Even granting that the COA's scope of audit services was broader,47 still it could not be said that the private auditor's fees are excessive, extravagant or unconscionable compared to the COA's billings. The hiring of a private auditor by the DBP being a condition of the US$310 million World Bank loan to the Philippine government, the fees of such private auditor are in reality part of the government's cost of borrowing from the World Bank. The audit

report of the private auditor is primarily intended for the World Bank's information48 on the financial status of the DBP whose rehabilitation was one of the objectives of the loan. An annual private audit fee of about half a million pesos added to the interest on a US$310 million loan would hardly make the cost of borrowing excessive, extravagant or unconscionable. Besides, the condition imposed by a lender, whose money is at risk, requiring the borrower or its majorityowned subsidiaries to submit to audit by an independent public accountant, is a reasonable and normal business practice.
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WHEREFORE, the petition is hereby GRANTED. The letter-decision of the Chairman of the Commission on Audit dated August 29, 1988, and the letterdecision promulgated by the Commission on Audit en banc dated May 20, 1989, are hereby SET ASIDE, and the temporary restraining order issued by the court enjoining respondent Commission on Audit from enforcing the said decisions is hereby made PERMANENT. SO ORDERED. Davide, Jr., C.J., Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Panganiban, Quisumbing, Pardo, Buena, Ynares-Santiago, De Leon, Jr., and SandovalGutierrez, JJ., concur.