CONSOLIDATED BANK VS CA

GR NO. 114286, 19 APRIL 2001

356 SCRA 671

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

Date of PN
Maturity Date
Amount Secured
8314-96-00083-3
29 April 1996
27 August 1996
P 700,000
8314-96-00085-0
2 May 1996
30 August 1996
P 500,000
Continental Cement Corp obtained from Consolidated Bank letter of credit used to
8314-96-000292-2
20 November 1996
20 March 1997
P 800,000
purchased 500,000 liters of bunker fuel oil. Respondent Corporation made a marginal
deposit to petitioner. A trust receipt was executed by respondent corporation, with
respondent Gregory Lim as signatory. Claiming that respondents failed to turn over the
The three promissory notes were renewed several times. On 30 April 1997, the
goods or proceeds, petitioner filed a complaint for sum of money before the RTC of Manila.
payment of the principal and interest of the latter two promissory notes were debited from
In their answer, respondents aver that the transaction was a simple loan and not a trust
the spouses Belusos account with UCPB; yet, a consolidated loan for P1.3 Million was
receipt one, and tht the amount claimed by petitioner did not take into account payments
again released to the spouses Beluso under one promissory note with a due date of 28
already made by them. The court dismissed the complaint, CA affirmed the same.
February 1998.
FACTS

ISSUE
Whether or not the marginal deposit should not be deducted outright from the
amount of the letter of credit.

To completely avail themselves of the P2.35 Million credit line extended to them
by UCPB, the spouses Beluso executed two more promissory notes for a total
ofP350,000.00:

HELD
No. petitioner argues that the marginal deposit should be considered only after
computing the principal plus accrued interest and other charges. It could be onerous97-00363-1
to
98-00002-4
compute interest and other charges on the face value of the letter of credit which a bank
issued, without first crediting or setting off the marginal deposit which the borrower paid to itcompensation is proper and should take effect by operation of law because the requisited in
Art. 1279 are present and should extinguish both debts to the concurrent amount. Unjust
enrichment.
UNITED COCONUT PLANTERS BANK vs. SPOUSES SAMUEL and ODETTE BELUSO

Date of PN
11 December 1997
2 January 1998

Maturity Date
28 February 1998
28 February 1998

Amount Secured
P 200,000
P 150,000

However, the spouses Beluso alleged that the amounts covered by these last two
promissory notes were never released or credited to their account and, thus, claimed that
the principal indebtedness was only P2 Million.
In any case, UCPB applied interest rates on the different promissory notes
ranging from 18% to 34%. From 1996 to February 1998 the spouses Beluso were able to
pay the total sum of P763,692.03.

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
which seeks to annul the Court of Appeals Decision [1] dated 21 January 2003 and its
[2]
Resolution dated 9 September 2003 in CA-G.R. CV No. 67318. The assailed Court of
Appeals Decision and Resolution affirmed in turn the Decision [3] dated 23 March 2000 and
Order[4] dated 8 May 2000 of the Regional Trial Court (RTC), Branch 65 of Makati City, in
Civil Case No. 99-314, declaring void the interest rate provided in the promissory notes
97-00363-1
executed by the respondents Spouses Samuel and Odette Beluso (spouses Beluso)97-00366-6
in
favor of petitioner United Coconut Planters Bank (UCPB).

From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and
penalty on the obligations of the spouses Beluso, as follows:
Amount Secured
P 200,000
P 700,000

97-00368-2

P 1,300,000

98-00002-4
On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line
under a Credit Agreement whereby the latter could avail from the former credit of up to a
maximum amount of P1.2 Million pesos for a term ending on 30 April 1997. The spouses
Beluso constituted, other than their promissory notes, a real estate mortgage over parcels of
land in Roxas City, covered by Transfer Certificates of Title No. T-31539 and T-27828, as
additional security for the obligation. The Credit Agreement was subsequently amended to
increase the amount of the Promissory Notes Line to a maximum of P2.35 Million pesos and
to extend the term thereof to 28 February 1998.

P 150,000

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

Interest
31%
30.17%
(7 days)
28%
(2 days)
33%
(102 days)

Penalty
36%
32.786% (102
days)
30.41% (102
days)
36%

Total
P 225,313.24
P 795,294.72
P 1,462,124.54

The spouses Beluso, however, failed to make any payment of the foregoing
amounts.
On 2 September 1998, UCPB demanded that the spouses Beluso pay their total
obligation of P2,932,543.00 plus 25% attorneys fees, but the spouses Beluso failed to
comply therewith. On 28 December 1998, UCPB foreclosed the properties mortgaged by

P 170,034.71

the spouses Beluso to secure their credit line, which, by that time, already ballooned
toP3,784,603.00.
On 9 February 1999, the spouses Beluso filed a Petition for Annulment,
Accounting and Damages against UCPB with the RTC of Makati City.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

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

On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of
the case as follows:
PREMISES CONSIDERED, judgment is hereby rendered
declaring the interest rate used by [UCPB] void and the foreclosure
and Sheriffs Certificate of Sale void. [UCPB] is hereby ordered to
return to [the spouses Beluso] the properties subject of the
foreclosure; to pay [the spouses Beluso] the amount of P50,000.00 by
way of attorneys fees; and to pay the costs of suit.[The spouses
Beluso] are hereby ordered to pay [UCPB] the sum of P1,560,308.00.

IV
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT
AFFIRMED THE DECISION OF THE TRIAL COURT WHICH FOUND
PETITIONER LIABLE FOR VIOLATION OF THE TRUTH IN LENDING
ACT
V

[5]

On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration, [6] prompting
UCPB to appeal the RTC Decision with the Court of Appeals. The Court of Appeals affirmed
the RTC Decision, to wit:
WHEREFORE, premises considered, the decision
dated March 23, 2000 of the Regional Trial Court, Branch
65, Makati City in Civil Case No. 99-314 is hereby AFFIRMED subject
to the modification that defendant-appellant UCPB is not liable for
attorneys fees or the costs of suit.[7]
On 9 September 2003, the Court of Appeals denied UCPBs Motion for
Reconsideration for lack of merit. UCPB thus filed the present petition, submitting the
following issues for our resolution:
I
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT
AFFIRMED THE DECISION OF THE TRIAL COURT WHICH
DECLARED VOID THE PROVISION ON INTEREST RATE AGREED
UPON BETWEEN PETITIONER AND RESPONDENTS
II
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT
AFFIRMED THE COMPUTATION BY THE TRIAL COURT OF
RESPONDENTS INDEBTEDNESS AND ORDERED RESPONDENTS
TO PAY PETITIONER THE AMOUNT OF ONLY ONE MILLION FIVE
HUNDRED SIXTY THOUSAND THREE HUNDRED EIGHT PESOS
(P1,560,308.00)
III

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT
FAILED TO ORDER THE DISMISSAL OF THE CASE BECAUSE THE
RESPONDENTS ARE GUILTY OF FORUM SHOPPING[8]
Validity of the Interest Rates
The Court of Appeals held that the imposition of interest in the following provision
found in the promissory notes of the spouses Beluso is void, as the interest rates and the
bases therefor were determined solely by petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on or before due
date, SPS. SAMUEL AND ODETTE BELUSO (BORROWER), jointly
and severally promise to pay to UNITED COCONUT PLANTERS
BANK (LENDER) or order at UCPB Bldg., Makati Avenue, Makati City,
Philippines, the sum of ______________ PESOS, (P_____),
Philippine Currency, with interest thereon at the rate indicative of DBD
retail rate or as determined by the Branch Head. [9]
UCPB asserts that this is a reversible error, and claims that while the interest rate
was not numerically quantified in the face of the promissory notes, it was nonetheless
categorically fixed, at the time of execution thereof, at the rate indicative of the DBD retail
rate. UCPB contends that said provision must be read with another stipulation in the
promissory notes subjecting to review the interest rate as fixed:
The interest rate shall be subject to review and may be
increased or decreased by the LENDER considering among others
the prevailing financial and monetary conditions; or the rate of interest
and charges which other banks or financial institutions charge or offer
to charge for similar accommodations; and/or the resulting profitability
to the LENDER after due consideration of all dealings with the
BORROWER.[10]
In this regard, UCPB avers that these are valid reference rates akin to a
prevailing rate or prime rate allowed by this Court in Polotan v. Court of Appeals.
[11]
Furthermore, UCPB argues that even if the proviso as determined by the branch head is

considered void, such a declaration would not ipso facto render the connecting clause
indicative of DBD retail rate void in view of the separability clause of the Credit Agreement,
which reads:

determinable in both choices. If either of these two choices presents an opportunity for
UCPB to fix the rate at will, the bank can easily choose such an option, thus making the
entire interest rate provision violative of the principle of mutuality of contracts.

Section 9.08 Separability Clause. If any one or more of the

provisions contained in this AGREEMENT, or documents executed in
connection herewith shall be declared invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining
provisions hereof shall not in any way be affected or impaired. [12]

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

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

The Cardholder agrees to pay interest per annum at 3% plus the

prime rate of Security Bank and Trust Company. x x x.[16]
In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the
parties can easily determine the interest rate by applying simple arithmetic. On the other
hand, the provision in the case at bar does not specify any margin above or below the DBD
retail rate. UCPB can peg the interest at any percentage above or below the DBD retail rate,
again giving it unfettered discretion in determining the interest rate.

We agree with the Court of Appeals, and find no merit in the contentions of
UCPB.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both contracting parties;
its validity or compliance cannot be left to the will of one of them.
[15]

We applied this provision in Philippine National Bank v. Court of Appeals,

where we held:
In order that obligations arising from contracts may have the
force of law between the parties, there must be mutuality between the
parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void (Garcia vs.
Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8
million loan agreement between the PNB and the private respondent
gave the PNB a license (although in fact there was none) to increase
the interest rate at will during the term of the loan, that license would
have been null and void for being violative of the principle of mutuality
essential in contracts. It would have invested the loan agreement with
the character of a contract of adhesion, where the parties do not
bargain on equal footing, the weaker party's (the debtor) participation
being reduced to the alternative "to take it or leave it" (Qua vs. Law
Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable
trap for the weaker party whom the courts of justice must protect
against abuse and imposition.

The stipulation in the promissory notes subjecting the interest rate to review does not render
the imposition by UCPB of interest rates on the obligations of the spouses Beluso
valid. According to said stipulation:
The interest rate shall be subject to review and may be
increased or decreased by the LENDER considering among others
the prevailing financial and monetary conditions; or the rate of interest
and charges which other banks or financial institutions charge or offer
to charge for similar accommodations; and/or the resulting profitability
to the LENDER after due consideration of all dealings with the
BORROWER.[17]
It should be pointed out that the authority to review the interest rate was given UCPB alone
as the lender. Moreover, UCPB may apply the considerations enumerated in this provision
as it wishes. As worded in the above provision, UCPB may give as much weight as it
desires to each of the following considerations: (1) the prevailing financial and monetary
condition; (2) the rate of interest and charges which other banks or financial institutions
charge or offer to charge for similar accommodations; and/or (3) the resulting profitability to
the LENDER (UCPB) after due consideration of all dealings with the BORROWER (the
spouses Beluso). Again, as in the case of the interest rate provision, there is no fixed
margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two
options of UCPB as to the interest to be imposed, as both options violate the principle of
mutuality of contracts.
UCPB likewise failed to convince us that the spouses Beluso were in estoppel.

The provision stating that the interest shall be at the rate indicative of DBD retail
rate or as determined by the Branch Head is indeed dependent solely on the will of
petitioner UCPB. Under such provision, petitioner UCPB has two choices on what the
interest rate shall be: (1) a rate indicative of the DBD retail rate; or (2) a rate as determined
by the Branch Head. As UCPB is given this choice, the rate should be categorically

Estoppel cannot be predicated on an illegal act. As between the parties to a

contract, validity cannot be given to it by estoppel if it is prohibited by law or is against public
policy.[18]

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

If the BANK shall require the services of counsel for the

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

Sec. 2. Declaration of Policy. It is hereby declared to be the

policy of the State to protect its citizens from a lack of awareness of
the true cost of credit to the user by assuring a full disclosure of such
cost with a view of preventing the uninformed use of credit to the
detriment of the national economy.[19]

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

Moreover, while the spouses Beluso indeed agreed to renew the credit line, the
offending provisions are found in the promissory notes themselves, not in the credit line. In
fixing the interest rates in the promissory notes to cover the renewed credit line, UCPB still
reserved to itself the same two options (1) a rate indicative of the DBD retail rate; or (2) a
rate as determined by the Branch Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the
interest rates imposed by UCPB, both failed to include in their computation of the
outstanding obligation of the spouses Beluso the legal rate of interest of 12% per
annum. Furthermore, the penalty charges were also deleted in the decisions of the RTC and
the Court of Appeals. Section 2.04, Article II on Interest and other Bank Charges of the
subject Credit Agreement, provides:
Section 2.04 Penalty Charges. In addition to the interest
provided for in Section 2.01 of this ARTICLE, any principal obligation
of the CLIENT hereunder which is not paid when due shall be subject
to a penalty charge of one percent (1%) of the amount of such
obligation per month computed from due date until the obligation is
paid in full. If the bank accelerates teh (sic) payment of availments
hereunder pursuant to ARTICLE VIII hereof, the penalty charge shall
be used on the total principal amount outstanding and unpaid
computed from the date of acceleration until the obligation is paid in
full.[20]
Paragraph 4 of the promissory notes also states:
In case of non-payment of this Promissory Note (Note) at
maturity, I/We, jointly and severally, agree to pay an additional sum
equivalent to twenty-five percent (25%) of the total due on the Note as
attorneys fee, aside from the expenses and costs of collection
whether actually incurred or not, and a penalty charge of one percent
(1%) per month on the total amount due and unpaid from date of
default until fully paid.[21]
Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to
Section 9.06 of the Credit Agreement, thus:

Section 2.02 Compounding Interest. Interest not paid when due shall
form part of the principal and shall be subject to the same interest rate
as herein stipulated.[23]
and paragraph 3 of the subject promissory notes:
Interest not paid when due shall be added to, and become part of the
principal and shall likewise bear interest at the same rate. [24]
UCPB lastly avers that the application of the spouses Belusos payments in the
disputed computation does not reflect the parties agreement. The RTC deducted the
payment made by the spouses Beluso amounting to P763,693.00 from the principal
of P2,350,000.00. This was allegedly inconsistent with the Credit Agreement, as well as with
the agreement of the parties as to the facts of the case. In paragraph 7 of the spouses
Belusos Manifestation and Motion on Proposed Stipulation of Facts and Issues vis-vis UCPBs Manifestation, the parties agreed that the amount of P763,693.00 was applied to
the interest and not to the principal, in accord with Section 3.03, Article II of the Credit
Agreement on Order of the Application of Payments, which provides:
Section 3.03 Application of Payment. Payments made by
the CLIENT shall be applied in accordance with the following order of
preference:
1.
2.
3.
4.
5.
6.
7.
8.

Accounts receivable and other out-of-pocket expenses

Front-end Fee, Origination Fee, Attorneys Fee and
other expenses of collection;
Penalty charges;
Past due interest;
Principal amortization/Payment in arrears;
Advance interest;
Outstanding balance; and
All other obligations of CLIENT to the BANK, if any.[25]

Thus, according to UCPB, the interest charges, penalty charges, and attorneys
fees had been erroneously excluded by the RTC and the Court of Appeals from the
computation of the total amount due and demandable from spouses Beluso.
The spouses Belusos defense as to all these issues is that the demand made by
UCPB is for a considerably bigger amount and, therefore, the demand should be considered
void. There being no valid demand, according to the spouses Beluso, there would be no

default, and therefore the interests and penalties would not commence to run. As it was
likewise improper to foreclose the mortgaged properties or file a case against the spouses
Beluso, attorneys fees were not warranted.
We agree with UCPB on this score. Default commences upon judicial or
extrajudicial demand.[26] The excess amount in such a demand does not nullify the demand
itself, which is valid with respect to the proper amount. A contrary ruling would put
commercial transactions in disarray, as validity of demands would be dependent on the
exactness of the computations thereof, which are too often contested.
There being a valid demand on the part of UCPB, albeit excessive, the spouses
Beluso are considered in default with respect to the proper amount and, therefore, the
interests and the penalties began to run at that point.
As regards the award of 12% legal interest in favor of petitioner, the RTC actually
recognized that said legal interest should be imposed, thus: There being no valid stipulation
as to interest, the legal rate of interest shall be charged. [27] It seems that the RTC
inadvertently overlooked its non-inclusion in its computation.
The spouses Beluso had even originally asked for the RTC to impose this legal
rate of interest in both the body and the prayer of its petition with the RTC:
12. Since the provision on the fixing of the rate of interest by
the sole will of the respondent Bank is null and void, only the legal rate
of interest which is 12% per annum can be legally charged and
imposed by the bank, which would amount to only about P599,000.00
since 1996 up to August 31, 1998.
xxxx
WHEREFORE, in view of the foregoing, petiitoners pray for
judgment or order:
xxxx
2. By way of example for the public good against the Banks
taking unfair advantage of the weaker party to their contract, declaring
the legal rate of 12% per annum, as the imposable rate of interest up
to February 28, 1999 on the loan of 2.350 million.[28]
All these show that the spouses Beluso had acknowledged before the RTC their obligation
to pay a 12% legal interest on their loans. When the RTC failed to include the 12% legal
interest in its computation, however, the spouses Beluso merely defended in the appellate
courts this non-inclusion, as the same was beneficial to them. We see, however, sufficient
basis to impose a 12% legal interest in favor of petitioner in the case at bar, as what we
have voided is merely the stipulated rate of interest and not the stipulation that the loan shall
earn interest.
We must likewise uphold the contract stipulation providing the compounding of
interest. The provisions in the Credit Agreement and in the promissory notes providing for
the compounding of interest were neither nullified by the RTC or the Court of Appeals, nor
assailed by the spouses Beluso in their petition with the RTC. The compounding of interests
has furthermore been declared by this Court to be legal. We have held in Tan v. Court of
Appeals,[29] that:

Without prejudice to the provisions of Article 2212, interest

due and unpaid shall not earn interest. However, the contracting
parties may by stipulation capitalize the interest due and unpaid,
which as added principal, shall earn new interest.
As regards the imposition of penalties, however, although we are likewise
upholding the imposition thereof in the contract, we find the rate iniquitous. Like in the case
of grossly excessive interests, the penalty stipulated in the contract may also be reduced by
the courts if it is iniquitous or unconscionable. [30]
We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be
iniquitous considering the fact that this penalty is already over and above the compounded
interest likewise imposed in the contract. If a 36% interest in itself has been declared
unconscionable by this Court,[31] what more a 30.41% to 36% penalty, over and above the
payment of compounded interest? UCPB itself must have realized this, as it gave us a
sample computation of the spouses Belusos obligation if both the interest and the penalty
charge are reduced to 12%.
As regards the attorneys fees, the spouses Beluso can actually be liable therefor
even if there had been no demand. Filing a case in court is the judicial demand referred to
in Article 1169[32] of the Civil Code, which would put the obligor in delay.
The RTC, however, also held UCPB liable for attorneys fees in this case, as the
spouses Beluso were forced to litigate the issue on the illegality of the interest rate provision
of the promissory notes. The award of attorneys fees, it must be recalled, falls under the
sound discretion of the court. [33] Since both parties were forced to litigate to protect their
respective rights, and both are entitled to the award of attorneys fees from the other,
practical reasons dictate that we set off or compensate both parties liabilities for attorneys
fees. Therefore, instead of awarding attorneys fees in favor of petitioner, we shall merely
affirm the deletion of the award of attorneys fees to the spouses Beluso.
In sum, we hold that spouses Beluso should still be held liable for a compounded
legal interest of 12% per annum and a penalty charge of 12% per annum. We also hold that,
instead of awarding attorneys fees in favor of petitioner, we shall merely affirm the deletion
of the award of attorneys fees to the spouses Beluso.
Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed, titles to which had already
been consolidated on 19 February 2001 and 20 March 2001 in the name of UCPB, as the
spouses Beluso failed to exercise their right of redemption which expired on 25 March
2000. The RTC, however, annulled the foreclosure of mortgage based on an alleged
incorrect computation of the spouses Belusos indebtedness.
UCPB alleges that none of the grounds for the annulment of a foreclosure sale are
present in the case at bar. Furthermore, the annulment of the foreclosure proceedings and
the certificates of sale were mooted by the subsequent issuance of new certificates of title in
the name of said bank. UCPB claims that the spouses Belusos action for annulment of
foreclosure constitutes a collateral attack on its certificates of title, an act proscribed by
Section 48 of Presidential Decree No. 1529, otherwise known as the Property Registration
Decree, which provides:

Section 48. Certificate not subject to collateral attack. A

certificate of title shall not be subject to collateral attack. It cannot be
altered, modified or cancelled except in a direct proceeding in
accordance with law.
The spouses Beluso retort that since they had the right to refuse payment of an
excessive demand on their account, they cannot be said to be in default for refusing to pay
the same. Consequently, according to the spouses Beluso, the enforcement of such illegal
and overcharged demand through foreclosure of mortgage should be voided.
We agree with UCPB and affirm the validity of the foreclosure
proceedings. Since we already found that a valid demand was made by UCPB upon the
spouses Beluso, despite being excessive, the spouses Beluso are considered in default
with respect to the proper amount of their obligation to UCPB and, thus, the property they
mortgaged to secure such amounts may be foreclosed. Consequently, proceeds of the
foreclosure sale should be applied to the extent of the amounts to which UCPB is rightfully
entitled.
As argued by UCPB, none of the grounds for the annulment of a foreclosure sale
are present in this case. The grounds for the proper annulment of the foreclosure sale are
the following: (1) that there was fraud, collusion, accident, mutual mistake, breach of trust or
misconduct by the purchaser; (2) that the sale had not been fairly and regularly conducted;
or (3) that the price was inadequate and the inadequacy was so great as to shock the
conscience of the court.[34]

Liability for Violation of Truth in Lending Act

The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for
UCPBs alleged violation of Republic Act No. 3765, otherwise known as the Truth in Lending
Act.
UCPB challenges this imposition, on the argument that Section 6(a) of the Truth
in Lending Act which mandates the filing of an action to recover such penalty must be made
under the following circumstances:
Section 6. (a) Any creditor who in connection with any
credit transaction fails to disclose to any person any information in
violation of this Act or any regulation issued thereunder shall be liable
to such person in the amount of P100 or in an amount equal to twice
the finance charge required by such creditor in connection with such
transaction, whichever is greater, except that such liability shall not
exceed P2,000 on any credit transaction. Action to recover such
penalty may be brought by such person within one year from the
date of the occurrence of the violation, in any court of competent
jurisdiction. x x x (Emphasis ours.)
According to UCPB, the Court of Appeals even stated that [a]dmittedly the
original complaint did not explicitly allege a violation of the Truth in Lending Act and no
action to formally admit the amended petition [which expressly alleges violation of the Truth
in Lending Act] was made either by [respondents] spouses Beluso and the lower court. x x
x.[35]

UCPB further claims that the action to recover the penalty for the violation of the
Truth in Lending Act had been barred by the one-year prescriptive period provided for in the
Act. UCPB asserts that per the records of the case, the latest of the subject promissory
notes had been executed on 2 January 1998, but the original petition of the spouses Beluso
was filed before the RTC on 9 February 1999, which was after the expiration of the period to
file the same on 2 January 1999.
On the matter of allegation of the violation of the Truth in Lending Act, the Court
of Appeals ruled:
Admittedly the original complaint did not explicitly allege a violation of
the Truth in Lending Act and no action to formally admit the amended
petition was made either by [respondents] spouses Beluso and the
lower court. In such transactions, the debtor and the lending
institutions do not deal on an equal footing and this law was intended
to protect the public from hidden or undisclosed charges on their loan
obligations, requiring a full disclosure thereof by the lender. We find
that its infringement may be inferred or implied from allegations that
when [respondents] spouses Beluso executed the promissory notes,
the interest rate chargeable thereon were left blank. Thus, [petitioner]
UCPB failed to discharge its duty to disclose in full to [respondents]
Spouses Beluso the charges applicable on their loans. [36]
We agree with the Court of Appeals. The allegations in the complaint, much
more than the title thereof, are controlling. Other than that stated by the Court of Appeals,
we find that the allegation of violation of the Truth in Lending Act can also be inferred from
the same allegation in the complaint we discussed earlier:
b.) In unilaterally imposing an increased interest rates (sic)
respondent bank has relied on the provision of their promissory note
granting respondent bank the power to unilaterally fix the interest
rates, which rate was not determined in the promissory note but was
left solely to the will of the Branch Head of the respondent Bank, x x x.
[37]

The allegation that the promissory notes grant UCPB the power to unilaterally fix
the interest rates certainly also means that the promissory notes do not contain a clear
statement in writing of (6) the finance charge expressed in terms of pesos and centavos;
and (7) the percentage that the finance charge bears to the amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the obligation.
[38]
Furthermore, the spouses Belusos prayer for such other reliefs just and equitable in the
premises should be deemed to include the civil penalty provided for in Section 6(a) of the
Truth in Lending Act.
UCPBs contention that this action to recover the penalty for the violation of the
Truth in Lending Act has already prescribed is likewise without merit. The penalty for the
violation of the act is P100 or an amount equal to twice the finance charge required by such
creditor in connection with such transaction, whichever is greater, except that such liability
shall not exceed P2,000.00 on any credit transaction.[39] As this penalty depends on
the finance charge required of the borrower, the borrowers cause of action would only
accrue when such finance charge is required. In the case at bar, the date of the demand for

payment of the finance charge is 2 September 1998, while the foreclosure was made on 28
December 1998. The filing of the case on 9 February 1999 is therefore within the one-year
prescriptive period.
UCPB argues that a violation of the Truth in Lending Act, being a criminal
offense, cannot be inferred nor implied from the allegations made in the complaint.
[40]
Pertinent provisions of the Act read:
Sec. 6. (a) Any creditor who in connection with any credit
transaction fails to disclose to any person any information in violation
of this Act or any regulation issued thereunder shall be liable to such
person in the amount of P100 or in an amount equal to twice the
finance charge required by such creditor in connection with such
transaction, whichever is the greater, except that such liability shall not
exceed P2,000 on any credit transaction. Action to recover such
penalty may be brought by such person within one year from the date
of the occurrence of the violation, in any court of competent
jurisdiction. In any action under this subsection in which any person is
entitled to a recovery, the creditor shall be liable for reasonable
attorneys fees and court costs as determined by the court.
xxxx
(c)
Any person who willfully violates any provision
of this Act or any regulation issued thereunder shall be fined by not less
than P1,000 or more than P5,000 or imprisonment for not less than 6
months, nor more than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the
said Act gives rise to both criminal and civil liabilities. Section 6(c) considers a criminal
offense the willful violation of the Act, imposing the penalty therefor of fine, imprisonment or
both. Section 6(a), on the other hand, clearly provides for a civil cause of action for failure
to disclose any information of the required information to any person in violation of the
Act. The penalty therefor is an amount of P100 or in an amount equal to twice the finance
charge required by the creditor in connection with such transaction, whichever is greater,
except that the liability shall not exceed P2,000.00 on any credit transaction. The action to
recover such penalty may be instituted by the aggrieved private person separately and
independently from the criminal case for the same offense.
In the case at bar, therefore, the civil action to recover the penalty under Section
6(a) of the Truth in Lending Act had been jointly instituted with (1) the action to declare the
interests in the promissory notes void, and (2) the action to declare the foreclosure
void. This joinder is allowed under Rule 2, Section 5 of the Rules of Court, which provides:
SEC. 5. Joinder of causes of action.A party may in one
pleading assert, in the alternative or otherwise, as many causes of
action as he may have against an opposing party, subject to the
following conditions:
(a) The party joining the causes of action shall comply with
the rules on joinder of parties;

(b) The joinder shall not include special civil actions or

actions governed by special rules;
(c) Where the causes of action are between the same
parties but pertain to different venues or jurisdictions, the joinder may
be allowed in the Regional Trial Court provided one of the causes of
action falls within the jurisdiction of said court and the venue lies
therein; and
(d) Where the claims in all the causes of action are
principally for recovery of money, the aggregate amount claimed shall
be the test of jurisdiction.
In attacking the RTCs disposition on the violation of the Truth in Lending Act
since the same was not alleged in the complaint, UCPB is actually asserting a violation of
due process. Indeed, due process mandates that a defendant should be sufficiently
apprised of the matters he or she would be defending himself or herself against. However,
in the1 July 1999 pre-trial brief filed by the spouses Beluso before the RTC, the claim for
civil sanctions for violation of the Truth in Lending Act was expressly alleged, thus:
Moreover, since from the start, respondent bank violated the Truth in
Lending Act in not informing the borrower in writing before the
execution of the Promissory Notes of the interest rate expressed as a
percentage of the total loan, the respondent bank instead is liable to
pay petitioners double the amount the bank is charging petitioners by
way of sanction for its violation.[41]
In the same pre-trial brief, the spouses Beluso also expressly raised the
following issue:
b.) Does the expression indicative rate of DBD retail (sic)
comply with the Truth in Lending Act provision to express the interest
rate as a simple annual percentage of the loan? [42]
These assertions are so clear and unequivocal that any attempt of UCPB to
feign ignorance of the assertion of this issue in this case as to prevent it from putting up a
defense thereto is plainly hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which has
jurisdiction to try and adjudicate the alleged violation of the Truth in Lending Act, considering
that the present action allegedly involved a single credit transaction as there was only one
Promissory Note Line.
We disagree. We have already ruled that the action to recover the penalty under
Section 6(a) of the Truth in Lending Act had been jointly instituted with (1) the action to
declare the interests in the promissory notes void, and (2) the action to declare the
foreclosure void. There had been no question that the above actions belong to the
jurisdiction of the RTC. Subsection (c) of the above-quoted Section 5 of the Rules of Court
on Joinder of Causes of Action provides:
(c) Where the causes of action are between the same
parties but pertain to different venues or jurisdictions, the joinder may

be allowed in the Regional Trial Court provided one of the causes of

action falls within the jurisdiction of said court and the venue lies
therein.
Furthermore, opening a credit line does not create a credit transaction of loan
or mutuum, since the former is merely a preparatory contract to the contract of loan
ormutuum. Under such credit line, the bank is merely obliged, for the considerations
specified therefor, to lend to the other party amounts not exceeding the limit provided. The
credit transaction thus occurred not when the credit line was opened, but rather when the
credit line was availed of. In the case at bar, the violation of the Truth in Lending Act
allegedly occurred not when the parties executed the Credit Agreement, where no interest
rate was mentioned, but when the parties executed the promissory notes, where the
allegedly offending interest rate was stipulated.
UCPB further argues that since the spouses Beluso were duly given copies of
the subject promissory notes after their execution, then they were duly notified of the terms
thereof, in substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides
that the disclosure statement must be furnished prior to the consummation of the
transaction:
SEC. 4. Any creditor shall furnish to each person to whom
credit is extended, prior to the consummation of the transaction, a
clear statement in writing setting forth, to the extent applicable and in
accordance with rules and regulations prescribed by the Board, the
following information:

The rationale of this provision is to protect users of credit from a lack of

awareness of the true cost thereof, proceeding from the experience that banks are able to
conceal such true cost by hidden charges, uncertainty of interest rates, deduction of
interests from the loaned amount, and the like. The law thereby seeks to protect debtors by
permitting them to fully appreciate the true cost of their loan, to enable them to give full
consent to the contract, and to properly evaluate their options in arriving at business
decisions.Upholding UCPBs claim of substantial compliance would defeat these purposes
of the Truth in Lending Act. The belated discovery of the true cost of credit will too often not
be able to reverse the ill effects of an already consummated business decision.
In addition, the promissory notes, the copies of which were presented to the
spouses Beluso after execution, are not sufficient notification from UCPB. As earlier
discussed, the interest rate provision therein does not sufficiently indicate with particularity
the interest rate to be applied to the loan covered by said promissory notes.
Forum Shopping
UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in
RTC, Makati City) on the ground that the spouses Beluso instituted another case (Civil Case
No. V-7227) before the RTC of Roxas City, involving the same parties and issues. UCPB
claims that while Civil Case No. V-7227 initially appears to be a different action, as it prayed
for the issuance of a temporary restraining order and/or injunction to stop foreclosure of
spouses Belusos properties, it poses issues which are similar to those of the present case.
[43]
To prove its point, UCPB cited the spouses Belusos Amended Petition in Civil Case No.
V-7227, which contains similar allegations as those in the present case.The RTC of Makati
denied UCPBs Motion to Dismiss Case No. 99-314 for lack of merit. Petitioner UCPB raised
the same issue with the Court of Appeals, and is raising the same issue with us now.

(1)

the cash price or delivered price of the property or

service to be acquired;

(2)

the amounts, if any, to be credited as down payment

and/or trade-in;

(3)

the difference between the amounts set forth under

clauses (1) and (2)

(4)

the charges, individually itemized, which are paid or to

be paid by such person in connection with the
transaction but which are not incident to the extension
of credit;

(5)

the total amount to be financed;

The spouses Beluso claim that the issue in Civil Case No. V-7227 before the
RTC of Roxas City, a Petition for Injunction Against Foreclosure, is the propriety of the
foreclosure before the true account of spouses Beluso is determined. On the other hand,
the issue in Case No. 99-314 before the RTC of Makati City is the validity of the interest rate
provision. The spouses Beluso claim that Civil Case No. V-7227 has become moot
because, before the RTC of Roxas City could act on the restraining order, UCPB proceeded
with the foreclosure and auction sale. As the act sought to be restrained by Civil Case No.
V-7227 has already been accomplished, the spouses Beluso had to file a different action,
that of Annulment of the Foreclosure Sale, Case No. 99-314 with the RTC, Makati City.
Even if we assume for the sake of argument, however, that only one cause of
action is involved in the two civil actions, namely, the violation of the right of the spouses
Beluso not to have their property foreclosed for an amount they do not owe, the Rules of
Court nevertheless allows the filing of the second action. Civil Case No. V-7227 was
dismissed by the RTC of Roxas City before the filing of Case No. 99-314 with the RTC of
Makati City, since the venue of litigation as provided for in the Credit Agreement is
inMakati City.

(6)

the finance charge expressed in terms of pesos and

centavos; and

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

(7)

the percentage that the finance bears to the total

amount to be financed expressed as a simple annual
rate on the outstanding unpaid balance of the
obligation.

SEC. 5. Effect of dismissal.Subject to the right of appeal,

an order granting a motion to dismiss based on paragraphs (f), (h)
and (i) of section 1 hereof shall bar the refiling of the same action or
claim. (n)

Improper venue as a ground for the dismissal of an action is found in paragraph

(c) of Section 1, not in paragraphs (f), (h) and (i):
SECTION 1. Grounds.Within the time for but before filing
the answer to the complaint or pleading asserting a claim, a motion
to dismiss may be made on any of the following grounds:
(a) That the court has no jurisdiction over the person of the
defending party;

dismissed. However, this rule is not absolute. According to this Court in Allied Banking
Corporation v. Court of Appeals[45]:
In these cases, it is evident that the first action was filed in
anticipation of the filing of the later action and the purpose is to
preempt the later suit or provide a basis for seeking the dismissal of
the second action.
Even if this is not the purpose for the filing of the first
action, it may nevertheless be dismissed if the later action is the
more appropriate vehicle for the ventilation of the issues
between the parties. Thus, in Ramos v. Peralta, it was held:

(b) That the court has no jurisdiction over the subject

matter of the claim;

[T]he rule on litis pendentia does not

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

(c) That venue is improperly laid;

(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same
parties for the same cause;
(f) That the cause of action is barred by a prior
judgment or by the statute of limitations;
(g) That the pleading asserting the claim states no cause
of action;
(h) That the claim or demand set forth in the plaintiffs
pleading has been paid, waived, abandoned, or otherwise
extinguished;
(i) That the claim on which the action is founded is
unenforceable under the provisions of the statute of frauds; and
(j) That a condition precedent for filing the claim has not
been complied with.[44] (Emphases supplied.)
When an action is dismissed on the motion of the other party, it is only when the
ground for the dismissal of an action is found in paragraphs (f), (h) and (i) that the action
cannot be refiled. As regards all the other grounds, the complainant is allowed to file same
action, but should take care that, this time, it is filed with the proper court or after the
accomplishment of the erstwhile absent condition precedent, as the case may be.
UCPB, however, brings to the attention of this Court a Motion for
Reconsideration filed by the spouses Beluso on 15 January 1999 with the RTC of Roxas
City, which Motion had not yet been ruled upon when the spouses Beluso filed Civil Case
No. 99-314 with the RTC of Makati. Hence, there were allegedly two pending actions
between the same parties on the same issue at the time of the filing of Civil Case No. 99314 on 9 February 1999 with the RTC of Makati. This will still not change our findings. It is
indeed the general rule that in cases where there are two pending actions between the
same parties on the same issue, it should be the later case that should be

Given, therefore, the pendency of two actions, the following

are the relevant considerations in determining which action should be
dismissed: (1) the date of filing, with preference generally given to the
first action filed to be retained; (2) whether the action sought to be
dismissed was filed merely to preempt the later action or to anticipate
its filing and lay the basis for its dismissal; and (3) whether the action
is the appropriate vehicle for litigating the issues between the parties.
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an
action for injunction against a foreclosure sale that has already been held, while Civil Case
No. 99-314 before the RTC of Makati City includes an action for the annulment of said
foreclosure, an action certainly more proper in view of the execution of the foreclosure
sale. The former case was improperly filed in Roxas City, while the latter was filed
in Makati City, the proper venue of the action as mandated by the Credit Agreement. It is
evident, therefore, that Civil Case No. 99-314 is the more appropriate vehicle for litigating
the issues between the parties, as compared to Civil Case No. V-7227. Thus, we rule that
the RTC of Makati City was not in error in not dismissing Civil Case No. 99-314.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with
the following MODIFICATIONS:
1.

2.

In addition to the sum of P2,350,000.00 as determined by the

courts a quo, respondent spouses Samuel and Odette Beluso are also
liable for the following amounts:
a. Penalty of 12% per annum on the amount due [46] from the date of
demand; and
b. Compounded legal interest of 12% per annum on the amount
due[47] from date of demand;
The following amounts shall be deducted from the liability of the
spouses Samuel and Odette Beluso:

a.

3.

Payments made by the spouses in the amount

of P763,692.00. These payments shall be applied to the date of
actual payment of the following in the order that they are listed,
to wit:
i.
penalty charges due and demandable
as of the time of payment;
ii.
interest due and demandable as of the
time of payment;
iii.
principal amortization/payment in arrears
as of the time of payment;
iv.
outstanding balance.
b. Penalty under Republic Act No. 3765 in the amount
of P26,000.00. This amount shall be deducted from the liability
of the spouses Samuel and Odette Beluso on9 February
1999 to the following in the order that they are listed, to wit:
i.
penalty charges due and demandable
as of time of payment;
ii.
interest due and demandable as of the
time of payment;
iii.
principal amortization/payment in arrears
as of the time of payment;
iv.
outstanding balance.
The
foreclosure
of
mortgage
is
hereby
declared
VALID. Consequently, the amounts which the Regional Trial Court and
the Court of Appeals ordered respondents to pay, as modified in this
Decision, shall be deducted from the proceeds of the foreclosure sale.

SO ORDERED.

PILIPINAS BANK, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, and LILIA R.
ECHAUS, respondents.
FACTS:
Private respondent filed a complaint against petitioner and
its president, Constantino Bautista, for collection of a sum of
money. The complaint alleged: (1) that petitioner and
Greatland executed a "Dacion en Pago," wherein Greatland
conveyed to petitioner several parcels of land in
consideration of the sum of P7,776,335.69; (2) that
Greatland assigned P2,300,000.00 out of the total
consideration in favor of private respondent; and (3) that
notwithstanding her demand for payment, petitioner refused
and failed to pay the said amount assigned to her.

Petitioner claimed: (1) that its former president had no

authority (2) that it never ratified the same; and (3) that
assuming arguendo that the agreement was binding, the
conditions stipulated therein were never fulfilled.
The trial court ruled in favor of private respondent. Court of
Appeals modified the Order dated April 3, 1985, by limiting
the execution pending appeal against petitioner to
P5,517.707.00 Trial court granted the new motion for
execution pending appeal. Petitioner complied with the writ
of execution pending appeal by issuing two manager's
checks in the total amount of P5,517,707.00 The Court of
Appeals rendered a decision in CA-G.R. No. CV-06017,which
modified the judgment of the trial court. Petitioner filed a
motion in the trial court praying that private respondent to
refund to her the excess payment of P1,898,623.67 with
interests at 6%. It must be recalled that while private
respondent was able to collect P5,517,707.00 from
petitioner pursuant to the writ of advance execution, the
final judgment in the main case awarded to private
respondent damages in the total amount of P3,619,083.33
ISSUE:
What interest rate applicable?
HELD:
Note that Circular No. 416, fixing the rate of interest at 12%
per annum, deals with (1) loans; (2) forbearance of any
money, goods or credit; and
(3) judgments.
(1) the amount of P2,300,000.00 adjudged to be paid by
petitioner to private respondent shall earn interest of 6%
per annum - The said obligation arose from a contract of
purchase and sale and not from a contract of loan or
mutuum. Hence, what is applicable is the rate of 6% per
annum as provided in Article 2209 of the Civil Code of the
Philippines and not the rate of 12% per annum as provided
in Circular No. 416.

(2) the amount of P1,898,623.67 to be refunded by private

respondent to petitioner shall earn interest of 12% per
annum. - where money is transferred from one person to
another and the obligation to return the same or a portion
thereof is subsequently adjudged.
FRIAS VS SAN DIEGO-SISON
G.R. NO. 155223 APRIL 4, 2007
FACTS
Petitioner is the owner of a house and lot in Ayala Alabang.
Petitioner and Dra. Flora San Diego-Sison (Respondent)
entered into a Memorandum of Agreement (MOA) over
the cited property with the following terms:
1. The land is to be sold for P 6.4 million.
2. Petitioner will receive P3 million from respondent
as downpayment.
3. In light of the downpayment, respondent had 6
months (1st) to notify the Petitioner of her
intention to purchase the land. However, the
balance is to be paid within another 6 months.
4. Prior to the first six months, the Petitioner may still
offer the cited land to other persons provided that
the P3 million downpayment shall be returned to
the Respondent including interest based on
prevailing compounded bank interest.
5. Nevertheless, in case there are no other buyers
within the first 6 months, no interest shall be
charged on the P3 million.
6. However, in the event that on the 6th month the
Respondent does not purchase the land, the
Petitioner has a period of another 6 months (2 nd)
within which to pay the sum of P3 million with
interest for the last six months only. The
downpayment shall be treated as loan granted by
the Respondent.

Petitioner received from Respondent P2 million in cash and

P1 million in a post-dated check which was subsequently
considered as stale. Therefore, only P2 million was
received as downpayment.
Before the check became stale, Petitioner gave
Respondent the TCT and the Deed of Absolute Sale of
the land.
Subsequently, Respondent decided not to purchase the
property and notified Petitioner of this reminding the
latter that the amount of P2 million should be considered
as a loan payable within six months as stipulated in the
MOA with interest computed from such notification.
Petitioner subsequently failed to return the P2 million
pesos.
CA ruled that the P2 million downpayment shall include
interest computed at the time the disputed amount was
considered a loan. Thus, this petition.
ISSUE:
Whether or not the interest should be limited to the 1st six
months as contained in the MOA?
RULING:
No. SC ruled in favour of Respondent.
The SC opined that if the terms of an agreement are clear
and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulations shall
prevail.
It is further required that the various stipulations of a
contract shall be interpreted together.
In this case, the phrase "for the last six months only"
should be taken in the context of the entire agreement.
The MOA speaks of 2 periods of six months each.

o The 1st six-months was given to Respondent to

make up her mind whether or not to purchase
Petitioner's property.

FACTS:

o The 2nd six-months was given to Petitioner to pay

the P2 million loan (downpayment) in the event
that Respondent decided not to buy the property
in which case interest will be charged "for the last
six months only", referring to the 2nd six-month
period.

On June 7, 1972, judgment was rendered by the Court of First instance of Cebu in
Civil Case No. R-11279, 2 the dispositive portion of which reads

o This means that no interest will be charged for the

1st six-months while Respondent contemplating
on whether to buy the property, but only for the
2nd six-months after Respondent had decided not
to buy the property. This is the meaning of the
phrase "for the last six months only".
o Certainly, there is nothing in their agreement that
suggests that interest will be charged for 6
months only even if it takes defendant-appellant
an eternity to pay the loan
This does NOT mean that interest will no longer be charged
after the 2nd six-month period since such stipulation was
made on the logical and reasonable expectation that
such amount would be paid within the date stipulated.
Therefore, the monetary interest for the last 6 months
continued to accrue until actual payment of the loaned
amount.
It has been held that for a debtor to continue in possession
of the principal of the loan and to continue to use the
same after maturity of the loan without payment of the
monetary interest, would constitute unjust enrichment
on the part of the debtor at the expense of the creditor.

This is a a Petition for Review on certiorari of the Resolution of CFI-Cebu Judge Tomol for
an action for Recovery of Damages for injury to Person and Loss of Property.

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
defendants and against the defendants and third party plaintiffs as follows: Ordering
defendants and third party plaintiffs Shelland Michael, Incorporated to pay jointly and
severally the following persons:
(g) Plaintiffs Pacita and Francisco Reformina the sum of P131,084.00 which is the
value of the boat F B Pacita Ill together with its accessories, fishing gear and equipment
minus P80,000.00 which is the value of the insurance recovered and the amount of
P10,000.00 a month as the estimated monthly loss suffered by them as a result of the fire
of May 6, 1969 up to the time they are actually paid or already the total sum of
P370,000.00 as of June 4, 1972 with legal interest from the filing of the complaint until
paid and to pay attorney's fees of P5,000.00 with costs against defendants and third party
plaintiffs.
On appeal to the then Court of Appeals, the trial court's judgment was modified to
reads as follows
WHEREFORE. the judgment appealed from is modified such that defendantsappellants Shell Refining Co. (Phils.), Inc. and Michael, Incorporated are hereby ordered to
pay ... The two (2) defendants- appellants are also directed to pay P100,000.00 with legal
interests from the filing of the complaint until paid as compensatory and moral
damages and P41,000.00 compensation for the value of the lost boat
with legal interest from the filing of the complaint until fully paid to Pacita F.Reformina and
the heirs of Francisco Reformina. The liability of the two defendants for an the awards
is solidary. Petitioners' motion for the reconsideration of the questioned Resolution
having been denied, they now come before Us through the instant petition praying for the
setting aside of the said Resolution and for a declaration that the judgment in their favor
should bear legal interest at the rate of twelve (12%) percent per annum pursuant to Central
Bank Circular No. 416 dated July 29, 1974.
ISSUE
How much, by way of legal interest, should ajudgment debtor pay the judgment
creditor?
WON legal interest meant 6% as provided for underArticle 2209 of the Civil Code .
What kind of judgment is covered under USURYLaw?
RULING

G.R. No. L-59096 October 11, 1985

PACITA F. REFORMINA and HEIRS OF FRANCISCO REFORMINA, petitioners,
vs. THE HONORABLE VALERIANO P. TOMOL, JR., as Judge of the Court of
First Instance,

Article 2209 of the Civil Code is applicable in case at bar. It must be noted that the decision
herein sought to be executed is one rendered in an Action for Damages for injury to persons
and loss of property and does not involve any loan, much less forbearances of any
money, goods or credits. As correctly argued by the private respondents, the law applicable
to the said case is Article 2209 of the New Civil Code which reads Art. 2209. If the

obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of
interest agreed upon, and in the absence of stipulation, the legal interest which is
six percent per annum. The above provision remains untouched despite the grant of
authority to the Central Bank by Act No.2655, as amended. To make Central Bank Circular
No. 416 applicable to any case other than those specifically provided for by the
Usury Law will make the same of doubtful constitutionality since the Monetary
Board will be exercising legislative functions which was beyond the intendment of P.D.
No. 116. Central Bank Circular No. 416 which provides By virtue of the authority granted
to it under Section 1 of Act 2655, as amended, otherwise known as the "Usury Law" the
Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the
rate of interest for the loan or forbearance of any money, goods, or credits and the
rate allowed in judgments, in the absence of express contract as to such rate of
interest, shall be twelve (12%) per cent per annum. This Circular shall take effect
immediately. (Italics supplied

petitioner, The Overseas Bank of Manila (TOBM), to enforce collection

of the proceeds of a time deposit for which TOBM had issued a
certificate for P100,000.00, with an interest rate of 4-1/2 % per annum
(Exh. "A").
After trial, the trial court rendered judgment for TAPIA the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered in
favor of the plaintiff against the herein defendant
ordering the latter (1) to pay plaintiff the sum of
P100,000.00 representing the value of its time
deposit together with interest thereon at 41/2%
per annum from November 9, 1964 until the
whole amount shall have been fully paid:

G.R. No. L-49353 June 11, 1981

THE OVERSEAS BANK OF MANILA, petitioners,
vs.
COURT OF APPEALS and TONY D. TAPIA, in his capacity as Attorney-in-Fact of
ENRIQUETA MICHEL DE CHAMPOURCIN respondents.
Petition for review of the decision of the Court of Appeals in CA-G.R. No. 44766-R, Tony D.
Tapia, etc. vs. The Overseas Bank of Manila and the denial of the motion for reconsideration
thereof. That judgment affirmed in toto the decision of the Court of First Instance of Manila,
Branch IV, in Civil Case No. 69876, for collection of money, reading thus:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff
against the herein defendant ordering the latter (1) to pay plaintiff the
sum of P100,000.00 representing the value of its time deposit together
with interest thereon at 4-1/2 % per annum from November 9, 1964
until the whole amount shall have been fully paid; (2) to pay attomey's
fees in the amount of P1,000.00 it appearing that defendant's unjust
and malicious refusal to pay has compelled plaintiff to litigate and
secure services of counsel; and to pay costs. (Page 22, Record.)
Actually, this case is simple enough but of undoubtedly great interest and grave importance
to the banking community. It was for this reason that after denying originally the herein
petition, We found it proper to give the same due course after petitioner filed a forceful and
well-reasoned second motion for reconsideration.
In petitioner's counsel's "Statement of the Case and of Matters Involved", it is stated that:
Private respondent TONY D. TAPIA, in his capacity as attorney-in-fact
of ENRIQUETA MICHEL DE CHAMPOURCIN (TAPIA), instituted the
present action in the Court of First Instance of Manila against

Not satisfied, TOBM interposed an appeal.

In the meantime, during the pendency of this case, certain
developments took place with respect to TOBM which were taken note
of by the Court of Appeals in its resolution dated November 3, 1978,
thus:
This Court took note of the fact that on July 31,
1968, TOBM was excluded by the Central Bank
under Monetary Board Resolution No. 1263 from
inter-bank clearing, that on August 1, 1968, its
operations were suspended under Central Bank
Resolution No. 1290; and that on August 13,
1968, it was completely forbidden by the Central
Bank in its Resolution No. 1333 to do business
preparatory to its forcible liquidation. These
Resolutions were, however, annulled and set
aside by the Supreme Court in its decision in
Ramos vs. Central Bank, L-29350, promulgated
October 4, 1971. To assure maximum protection
to its depositors, creditors and the public
interest, the rehabilitation, normalization and
stabilization thereof was also ordered by the
Supreme Court in its resolution dated February
24, 1972. Pursuant thereto, both TOBM and the
Central Bank submitted a Program of
Rehabilitation of TOBM which was approved by
the Supreme Court in its Resolution in L-29353,
October 23, 1974 (60 SCRA 278). (C.A.

Resolution dated Nov. 3, 1978, Appendix 'B', p.

XVII.)
It must be noted that the said resolutions of the Central Bank were
held by this Honorable Supreme Court to have been "adopted in
abuse of discretion equivalent to excess of jurisdiction" (Ramos vs.
Central Bank, 41 SCRA 565). Equally noteworthy, however, is that the
CB resolution suspending TOBM's business operations had actually
been implemented starting 2 August 1968, (id.) before it was annulled,
and that as of this writing TOBM has yet to resume operations in
accordance with the aforesaid program of rehabilitation approved by
this Honorable Supreme Court.
In the decision it rendered in the instant case, (C.A. Decision,
Appendix "A", p. V) the Court of Appeals affirmed in toto the trial
court's judgment, which, as aforeseen, orders TOBM, among other
things, to pay plaintiff the sum of P100,000.00 representing the value
of its time deposit together with interest thereon at 4-1/2% per annum
until the whole amount shall have been fully paid.
TOBM moved respondent Court of Appeals to reconsider its judgment
on two grounds, namely, (a) the suspension of operations of TOBM by
the Central Bank likewise suspends payment of accrued interest, and
(b) respondent Court's judgment must conform to the program of
rehabilitation of TOBM approved by this Supreme Court. The Court of
Appeals, acting on the motion for reconsideration, issued its resolution
(Appendix 'B' hereto dated November 3, 1978, declaring
In as much as a Program of Rehabilitation of the
TOBM has been approved by the Supreme
Court as above-mentioned, the execution of the
decision in question should be made in
accordance with the provision thereof, especially
paragraph 3, sub-paragraph 4, Phase 1Rehabilitation.
WHEREFORE, the motion for reconsideration is
granted, and the dispositive portion of the
decision, dated September 19, 1978, is hereby
amended, so as to read as follows:
WHEREFORE, the
judgment appealed from is
hereby affirmed in toto but

the execution thereof

should be in accordance
with the provision of the
Program of Rehabilitation
of TOBM as approved by
the Supreme Court in its
resolution in G.R. No. L29352 dated October 23,
1974 (60 SCRA 278)
especially paragraph 3,
Subparagraph 4, Phase 1,
Rehabilitation, to quote:
34 Petitioners shall effect
an agreement with OBM's
depositors and creditors,
singly or collectively, for
the conversion of their
deposits and claims into
bills payable under plans
mutually acceptable to the
parties concerned, with the
end in view that payments
of all deposits and claims
against OBM may be
made after a period three
(3) years from date of
suspension of normal
banking operations.
However, in the event that said program of
rehabilitation is revoked or failed to materialize,
the execution of the judgment is further subject
to any subsequent development or charge that
will be taken and considered by the Supreme
Court and/or Central Bank in the premises,
regarding the payments of deposits and claims
against the Overseas Bank of Manila. (pp. XX,
Court of Appeals' Resolution dated Nov. 3, 1978,
Appendix "B" hereof).
Thus, while the resolution purports to grant TOBM's motion for
reconsideration, actually it reiterates its affirmance of the trial court's
judgment in toto and rejects TOBM's prayer to be declared exempt
from liability for interest on the deposit during the suspension of its
business operations by the Central Bank, declaring:

Appellant TOBM has not been declared

insolvent. The suspension of its operations in
1968 was merely temporary. Its assets and
properties were intact including its various
investments, the management of which was
taken over by the Central Bank to protect its
depositors and creditors. Hence, there could be
no justifiable reason to suspend the payment of
the accrued interests on the appellee's time
deposit of P100,000.00 which has been long
overdue. The payment of interest thereon at 41/2% per annum from November 9, 1964
ordered by the lower court as wen as this Court
upon the appellant is in accordance with the
agreement embodied in the certificate of
deposit, Exhibit "A", issued by the bank in favor
of the appellee. Such agreement is the law
between the parties and it should be complied
with (Art. 1159, NCC). The mere suspension of
its operation which was temporary could not
excuse the appellant from complying with its
obligation. The effect of the suspension and
declared insolvency of a bank is to make its
deposits due and actionable and a depositor
then is entitled to interest on his deposits from
the date of such suspension (10 Am. Jr. 2d. p.
389).
The cases cited by the appellant in its motion
has no application in this case for these refer to
instances where the bank has been declared
insolvent. This is not the situation prevailing in
the case at bar.'
Moreover, while the resolution also purports to declare that the
execution of the judgment of the trial court should be in accordance
with the Program of Rehabilitation of TOBM as approved by the
Supreme Court, this is negated by its aforesaid reaffirmance in toto of
the trial court's judgment, which holds TOBM totally liable to TAPIA.
On the other hand, private respondent's brief begins thus:
Herein respondents respectfully beg leave of Court to adopt as their
own the Statement of the Case and of Matters Involved in the

petitioner's Brief, the same being in consonance with the records of

the case.
To begin with, we wish to call the attention of this Honorable Tribunal
that the only ground upon which the present petition is predicated
reads as follows:
The suspension of operations of the Overseas
Bank of Manila on August 1, 1968 by the
Monetary Board likewise suspends payment of
accrued interest contrary to the decision of this
Honorable Court affirming in toto the decision of
the Court of First Instance ordering defendantappellant to pay plaintiff-appellee the sum of
P100,000.00 representing the value of its time
deposit together with interest thereon at 4-1/2%
per annum from November 9, 1964 until the
whole amount shall have been fully paid despite
the suspension of operations and closing of the
Bank by the Monetary Board on August 1, 1968
and August 13, 1968, respectively (Petition, p.
10).
Apparently, the only issue in this case is whether or not the Petitioner
is exempt from the payment of interest on the private respondent's
time deposit of P100,000.00 for the period that its business operations
were suspended by the Central Bank. We respectfully submit that
under the facts of the case, the petitioner should be required to pay
the accrued interest. And since the payment of the principal time
deposit of P100,000.00 by the petitioner to the private respondent is
no longer at issue, we shall focus our discussion on the subject of
accrued interests as raised by the petitioner in its Assignment of
Errors. (Pages 1-2)
Briefly then" the general and main issue submitted for Our resolution is: When a bank is
excluded by the Central Bank from inter-bank clearing, and a day later further suspended
from operation, and thirteen days afterwards completely forbidden by the same (Central
Bank) to do business preparatory to its forcible liquidation, but subsequently, the Supreme
Court temporarily restrains the mentioned Central Bank's orders and ultimately renders a
decision nullifying the same, (41 SCRA 565) with subsequent directives for the
rehabilitation, normalization and stabilization thereof, under a formula approved by the
Court, (60 SCRA 276) and the process of such rehabilitation, normalization and stabilization
is considerably delayed, thru no fault of the bank, but due to usually difficult and lengthy
procedures and transactions directed towards such end, is a person who has deposited
money in said bank before the Central Bank's orders were issued, entitled to the payment of

interest on his deposit that accrues during all the period from the bank's factual closure to its
actual reopening for normal business? To make this statement of the issue more complete,
it may be added that although private respondent does not dispute that there was complete
paralization of the bank from August 13, 1968, he insists that since technically the bank was
not placed under liquidation because of the decision of the Supreme Court, its obligation,
contractual in nature, to pay him interest may not be deemed excused and should be
enforced. Private respondent admits though that in cases of actual liquidation of a bank, it is
justifiable for it not to pay interest of the nature here in dispute.
Thus, Our task is narrowed down to the resolution of the legal problem of whether or not, for
purposes of the payment of the interest here in question, stoppage of the operations of a
bank by a legal order of liquidation may be equated with actual cessation of the bank's
operation, not different, factually speaking, in its effects, from legal liquidation, the factual
cessation having been ordered by the Central Bank.
In the case of Chinese Grocer's Association, et al, vs. American Apothecaries, 65 Phil. 395,
this Court held:
As to the second assignment of error, this court, in G.R. No. 43682, In
re Liquidation of the Mercantile Bank of China, Tan Tiong Tick,
claimant and appellant, vs. American Apothecaries, C., et al, claimants
and appellees, through Justice Imperial, held the following:
4. The court held that the appellant is not
entitled to charge interest on the amounts of his
claims, and this is the object of the second
assignment of error. Upon this point a distinction
must be made between the interest which the
deposits should earn from their existence until
the bank ceased to operate, and that which they
may earn from the, time the bank's operations
were stopped until the date, of payment of the
deposits. As to the first class, we hold that it
should be paid because such interest has been
earned in the ordinary course of the bank's
business and before the latter has been
declared in a state of liquidation. Moreover, the
bank being authorized by law to make use of the
deposits, with the station stated, to invest the
same in its business and other operations, it
may be presumed that it bound itself to pay
interest to the depositors as in fact it paid
interest prior to the dates of the said claims. As
to the interest which may be charged from the
date the bank ceased to do business because it

was declared in a state of liquidation, we hold

that the said interest should not be paid.
The Court of Appeals considered this ruling inapplicable to the instant
case, precisely because, as contended by private respondent, the
said Apothecaries case had in fact in contemplation a valid order of
liquidation of the bank concerned, whereas here, the order of the
Central Bank of August 13, 1968 completely forbidding herein
petitioner to do business preparatory to its liquidation was first
restrained and then nullified by this Supreme Court. In other words, as
far as private respondent is concerned, it is the legal reason for
cessation of operations, not the actual cessation thereof, that matters
and is decisive insofar as his right to the continued payment of the
interest on his deposit during the period of cessation is concerned.
In the light of the peculiar circumstances of this particular case, We disagree. It is Our
considered view, after mature deliberation, that it is utterly unfair to award private
respondent his prayer for payment of interest on his deposit during the period that petitioner
bank was not allowed by the Central Bank to operate.
It is a matter of common knowledge, which We take judicial notice of, that what enables a
bank to pay stipulated interest on money deposited with it is that thru the other aspects of its
operation it is able to generate funds to cover the payment of such interest. Unless a bank
can lend money, engage in international transactions, acquire foreclosed mortgaged
properties or their proceeds and generally engage in other banking and financing activities
from which it can derive income, it is inconceivable how it can carry on as a depository
obligated to pay stipulated interest. Conventional wisdom dictates this inexorable fair and
just conclusion. And it can be said that all who deposit money in banks are aware of such a
simple economic proposition. Consequently, it should be deemed read into every contract of
deposit with a bank that the obligation to pay interest on the deposit ceases the moment the
operation of the bank is completely suspended by the duly constituted authority, the Central
Bank.
We consider it of trivial consequence that the stoppage of the bank's operation by the
Central Bank has been subsequently declared illegal by the Supreme Court, for before the
Court's order, the bank had no alternative under the law than to obey the orders of the
Central Bank. Whatever be the juridical significance of the subsequent action of the
Supreme Court, the stubborn fact remained that the petitioner was totally crippled from then
on from earning the income needed to meet its obligations to its depositors. If such a
situation cannot, strictly speaking, be legally denominated as "force majeure", as maintained
by private respondent, We hold it is a matter of simple equity that it be treated as such.
What is more, private respondent overlooks the fact that as noted in the very resolution of
the Court of Appeals of November 3, 1978 granting petitioner's motion for reconsideration,
said Court could not but take into account that petitioner's manner or mode of rehabilitation,

normalization and stabilization was placed by the resolution of the Supreme Court of
February 24, 1972 in the hands of the Central Bank, for it "to seek practical solutions in all
good faith for such rehabilitation." Pursuant to said resolution, a "Program of Rehabilitation
of TOBM (herein petitioner)" was submitted to this Court and We approved said program
only on October 23, 1974. But that approval did not yet put petitioner back on its feet. The
Central Bank, evidently in accordance with law, continued to refuse to allow it to operate
until the program approved by the Court could materialize. Thus, after October 23, 1976,
steps were continuously taken along that direction, and, as it is now of public knowledge, it
was only this year 1981, that petitioner, with another name and another management has
been allowed to reopen.
In the aforementioned resolution of the Court of Appeals of November 3, 1978, it revised the
dispositive portion of its original decision in the following manner:
WHEREFORE, the motion for reconsideration is granted, and the
dispositive portion of the decision dated September 19, 1978, is
hereby amended, so as to read as follows:
WHEREFORE, the judgment appealed from is
hereby affirmed in toto, but the execution thereof
should be in accordance with the provision of
the Program of Rehabilitation of TOBM as
approved by the Supreme Court in its resolution
in G. R. No. L-29352 dated October 23, 1974
(60 SCRA 278) especially paragraph 3, subparagraph 4, Phase 1, Rehabilitation to quote:
34 Petitioners shall effect
an agreement with OBM's
depositors and creditors,
singly or collectively, for
the conversion of their
deposits and claims into
bills payable under plans
mutually acceptable to the
parties concerned, with the
end in view that payments
of all deposits and claims
against OBM may be
made after a period of
three (3) years from date
of resumption of normal
banking operations.'

However, in the event that said program of rehabilitation is revoked or

failed to materialize, the execution of the judgment is further subject to
any subsequent development or change that will be taken and
considered by the Supreme Court and/or Central Bank in the
premises, regarding the payments of deposits and claims against the
Ovarseas Bank of Manila. (Pp. 33-34, Record.)
Peculiarly, however, while the Appellate Court resolved to "grant" petitioner's motion for
reconsideration, it still maintained its judgment affirming in toto the decision of the trial court,
albeit it made the execution thereof subject to the conditions aforequoted. Naturally,
petitioner could not be contented with such modification, hence the present petition before
Us asking, in effect, for the reversal of the foregoing resolution of the Court of Appeals
which left it with the obligation to pal the interest private respondent is demanding, as if it
were legally possible for the Court of Appeals to ignore or modify the "Program of
Rehabilitation" approved by this Court, which providesinter alia that:
3.4. Petitioners shall effect an agreement with OBM's depositors and
creditors, singly or collectively, for the conversion of their deposits and
claims into bills payable under plans mutually acceptable to the
parties concerned, with the end in view that payments of all deposits
and claims against OBM may be made after a period of three (3)
years from date of resumption of normal banking operation.(1)
xxx xxx xxx
PHASE II
NORMALIZATION AND STABILIZATION
This phase shall be undertaken only when all the conditions for
rehabilitation of OBM as speciffied in Phase I have been fulfilled
and/or complied with by petitioners. Banking operations and
transactions which OBM may be allowed to perform shall be in
accordance with such authority as the Monetary Board, upon
recommendation of the Director, Department of Commercial &
Savings Banks, may deem proper to extend OBM.
OBM may be allowed to resume normal banking operations only
when, in addition to standard conditions prevailing in normal banking
institutions:
1. It has reduced its loans/accounts receivable by at least 75% of the
aggregate amount outstanding as of the start of the rehabilitation
phase;

2. A program of paying depositors and creditors has been accepted

singly or collectively by all such depositors and creditors, including
Government instrumentalities and the Philippine National Bank;
3. The issues relative to penalties and interests mentioned in
paragraph 3.8 hereof have been resolved either judicially or
extrajudicially.
The Comptroller-designate and the committee-of-three mentioned in
paragraph 2.7 herein shall continue to function for as long as OBM
has not been allowed to resume normal banking operations. (Pp. 283285, 60 SCRA.)
Nowhere in the above program is there anything indicating that depositors are entitled to
interest. Paragraph 3.4 of the same refers to deposits exclusively. If the Central Bank
authorities or the Supreme Court had in mind the payment also of interest on such deposits,
either of those authorities would have required clear language to such effect be included in
the program. It is understandable why nothing of that sort was required. As We have
explained earlier, the complete factual suspension of petitioner's operation as a bank
disabled it to commit itself to the payment of such interest. Hopefully, petitioner may be able
to resume operations and recover its standing as a normal bank. But it is almost vain to
expect that within the forseeable future, it would be in a position to pay in full even at least
the deposits themselves, not to mention the interest thereon. In justice and equity, having
been subjected to what the Supreme Court has found to be an unfortunate express or
abuse by the Central Bank of the exercise of its authority under the law, it would be, to put it
tritely "squeezing blood out of turnip" for Us to grant private respondent's demand.
Parenthetically, We may add for the guidance of those who might be concerned, and so that
unnecessary litigations may be avoided from further clogging the dockets of the courts, that
in the light of the considerations expounded in the above opinion, the same formula that
exempts petitioner from the payment of interest to its depositors during the whole period of
factual stoppage of its operations by orders of the Central Bank, modified in effect by the
decision as well as the approval of a formula of rehabilitation by this Court, should be, as
a .Matter of consistency, applicable or followed in respect to all other obligations of
petitioner which could not be paid during the period of its actual complete closure.
PREMISES CONSIDERED, judgment is hereby rendered modifying the decision of the
Court of Appeals under review in the sense that the judgment of the trial court requiring
petitioner to pay interest on private respondent's deposit from August 13, 1968 up to the
reopening for normal operations of petitioner is reversed, and petitioner is declared free
from any liability therefor, and that with regard to his deposit of P100,000.00, it is Our
judgment that he secure payment thereof by negotiating with petitioner in accordance with
the terms of the Rehabilitation Program of TOBM approved by this Court on October 23,
1974.

No costs.
G.R. No. L-33582 March 30, 1982
THE OVERSEAS BANK OF MANILA, petitioner,
vs.
VICENTE CORDERO and COURT OF APPEALS, respondents.
Again, We are confronted with another case involving the Overseas Bank of Manila, filed by
one of its depositors.
This is a petition for review on certiorari of the decision of the Court of Appeals which
affirmed the judgment of the Court of First Instance of Manila, holding petitioner bank liable
to respondent Vicente Cordero in the amount of P80,000.00 representing the latter's time
deposit with petitioner, plus interest thereon at 6% per annum until fully paid, and costs.
On July 20, 1967, private respondent opened a one-year time deposit with petitioner bank in
the amount of P80,000.00 to mature on July 20, 1968 with interest at the rate of 6% per
annum. However, due to its distressed financial condition, petitioner was unable to pay
Cordero his said time deposit together with the interest. To enforce payment, Cordero
instituted an action in the Court of First Instance of Manila.
Petitioner, in its answer, raised as special defense the finding by the Monetary Board of its
state of insolvency. It cited the Resolution of August 1, 1968 of the Monetary Board which
authorized petitioner's board of directors to suspend all its operations, and the Resolution of
August 13, 1968 of the same Board, ordering the Superintendent of Banks to take over the
assets of petitioner for purposes of liquidation.
Petitioner contended that although the Resolution of August 13, 1968 was then pending
review before the Supreme Court, 1 it effectively barred or abated the action of respondent
for even if judgment be ultimately rendered in favor of Cordero, satisfaction thereof would
not be possible in view of the restriction imposed by the Monetary Board, prohibiting
petitioner from issuing manager's and cashier's checks and the provisions of Section 85 of
Rep. Act 337, otherwise known as the General Banking Act, forbidding its directors and
officers from making any payment out of its funds after the bank had become insolvent. It
was further claimed that a judgment in favor of respondent would create a preference in
favor of a particular creditor to the prejudice of other creditors and/or depositors of petitioner
bank.
After pre-trial, petitioner filed on November 29, 1968, a motion to dismiss, reiterating the
same defenses raised in its answer. Finding the same unmeritorious, the lower court denied
the motion and proceeded with the trial on the merits. In due time, the lower court rendered
the aforesaid decision. Dissatisfied, petitioner appealed to the Court of Appeals, which
affirmed the decision of the lower court.

Hence, this petition for review on certiorari.

The issues raised in this petition are quite novel. Petitioner stands firm on its contentions
that the suit filed by respondent Cordero for recovery of his time deposit is barred or abated
by the state of insolvency of petitioner as found by the Monetary Board of the Central Bank
of the Philippines; and that the judgment rendered in favor of respondent would in effect
create a preference in his favor to the prejudice of other creditors of the bank.
Certain supervening events, however, have rendered these issues moot and academic. The
first of these supervening events is the letter of Julian Cordero, brother and attorney-in-fact
of respondent Vicente Cordero, addressed to the Commercial Bank of Manila (Combank),
successor of petitioner Overseas Bank of Manila. In this letter dated February 13, 1981,
copy of which was furnished this Court, it appears that respondent Cordero had received
from the Philippine Deposit Insurance Company the amount of P10,000.00.
The second is a Manifestation by the same Julian Cordero dated July 3, 1981,
acknowledging receipt of the sum of P73,840.00. Said Manifestation is in the nature of a
quitclaim, pertinent portions of which We quote:
I, the undersigned acting for and in behalf of my brother Vicente R.
Cordero who resides in Canada and by virtue of a Special Power of
Attorney issued by Vicente Romero, our Consul General in Vancouver,
Canada, xerox copy attached, do hereby manifest to this honorable
court that we have decided to waive all and any damages that may be
awarded to the above-mentioned case and we hereby also agree to
accept the amount of Seventy Three Thousand Eight Hundred Forty
Pesos (P73,840.00) representing the principal and interest as
computed by the Commercial Bank of Manila. We also agree to hold
free and harmless the Commercial Bank of Manila against any claim
by any third party or any suit that may arise against this agreement of
payment.
... We also confirm receipt of Seventy Three Thousand Eight Hundred
Forty Pesos (P73,840.00) with our full satisfaction. ...
When asked to comment on this Manifestation, counsel for Combank filed on August 12,
1981 a Comment confirming and ratifying the same, particularly the portions which state:
We also agree to hold free and harmless the Commercial Bank any
third party or any suit that may arise against this agreement of
payment, and
We also confirm receipt of Seventy Three Thousand Eight Hundred
Forty Pesos (P73,840.00) with our full satisfaction.

However, upon further examination, this Court noted the absence of the alleged special
power of attorney executed by private respondent in favor of Julian Cordero. When directed
to produce the same, Julian Cordero submitted the following explanatory Comment, to
which was attached the special power of attorney executed by respondent Vicente Cordero:
3. This manifestation (referring to the Manifestation of July 3, 1981)
applies only to third party claims, suit and other damages. It does not
mean waiving the interest it should earn while the bank is closed and
also the attorney's fees as decided by the lower court. It is very clear. I
did not waive the attorney's fees because it belongs to our attorney
and interest because it belongs to us and we are entitled to it.
Thus, with the principal claim of respondent having been satisfied, the only remaining issue
to be determined is whether respondent is entitled to (1) interest on his time deposit during
the period that petitioner was closed and (2) to attorney's fees.
We find the answer to be in the negative.
The pronouncement made by this Court, per Justice Barredo, in the recent case
of Overseas Bank of Manila vs. Court of Appeals 2 is explicit and categorical. We quote:
It is a matter of common knowledge which we take judicial notice of,
that what enables a bank to pay stipulated interest on money
deposited with it is that thru the other aspects of its operation, it is able
to generate funds to cover the payment of such interest. Unless a
bank can lend money, engage in international transactions, acquire
foreclosed mortgaged properties or their proceeds and generally
engage in other banking and financing activities, from which it can
derive income, it is inconceivable how it can carry on as a depository
obligated to pay stipulated interest. ... Consequently, it should be
deemed read into every contract of deposit with a bank that the
obligation to pay interest on the deposit ceases the moment the
operation of the bank is completely suspended by the duly constituted
authority, the Central Bank.
We consider it of trivial consequence that the stoppage of the bank's
operations by the Central Bank has been subsequently declared
illegal by the Supreme Court, for before the Court's order, the bank
had no alternative under the law than to obey the orders of the Central
Bank. Whatever be the juridical significance of the subsequent action
of the Supreme Court, the stubborn fact remained that the petitioner
was totally crippled from then on from earning the income needed to
meet its obligations to its depositors. If such a situation cannot, strictly
speaking be legally denominated as "force majeure" as maintained by

private respondent, We hold it is a matter of simple equity that it be

treated as such.
And concluding, this Court stated:
Parenthetically, We may add for the guidance of those who might be
concerned and so that unnecessary litigations may be avoided from
further clogging the dockets of the courts that in the light of the
consideration expounded in the above opinion, the same formula that
exempts petitioner from the payment of interest to its depositors
during the whole period of factual stoppage of its operations by orders
of the Central Bank, modified in effect by the decision as well as the
approval of a formula of rehabilitation by this Court, should be, as a
matter of consistency, applicable or followed in respect to all other
obligations of petitioner which could not be paid during the period of
its actual complete closure.
Neither can respondent Cordero recover attorney's fees. The trial court found that herein
petitioner's refusal to pay was not due to a wilful and dishonest refusal to comply with its
obligation but to restrictions imposed by the Central Bank. 3 Since respondent did not
appeal from this decision, he is now barred from contesting the same.
WHEREFORE, that portion of the lower court's decision ordering petitioner to pay interest
on Cordero's time deposit is set aside. It appearing that the amount of the latter's time
deposit had been fully paid, this case is hereby dismissed. No costs.
SO ORDERED.
G.R. No. 138703

June 30, 2006

DEVELOPMENT BANK OF THE PHILIPPINES1 and PRIVATIZATION AND

MANAGEMENT OFFICE (formerly ASSET PRIVATIZATION TRUST), Petitioners,
vs.
HON. COURT OF APPEALS, PHILIPPINE UNITED FOUNDRY AND MACHINERY CORP.
and PHILIPPINE IRON
This is a petition for review on certiorari under Rule 45 of the Rules of Court of the decision
of the Court of Appeals (CA) dated May 7, 1999 in CA-G.R. CV No. 49239 entitled
"Philippine United Foundry and Machinery Corp. and Philippine Iron Manufacturing Co., Inc.
v. Development Bank of the Philippines and Asset Privatization Trust" which upheld the
decision of the Regional Trial Court (RTC), Branch 98 of Quezon City in Civil Case No. Q49650.
Sometime in March 1968, the Development Bank of the Philippines (DBP) granted to
respondents Philippine United Foundry and Machineries Corporation and Philippine Iron

Manufacturing Company, Inc. an industrial loan in the amount of P2,500,000 consisting

of P500,000 in cash and P2,000,000 in DBP Progress Bonds. The loan was evidenced by a
promissory note2 dated June 26, 1968 and secured by a mortgage 3 executed by
respondents over their present and future properties such as buildings, permanent
improvements, various machineries and equipment for manufacture.
Subsequently, DBP granted to respondents another loan in the form of a five-year revolving
guarantee amounting to P1,700,000 which was reflected in the amended mortgage
contract4 dated November 20, 1968. According to respondents, the loan guarantee was
extended to them when they encountered difficulty in negotiating the DBP Progress Bonds.
Respondents were only able to sell the bonds in 1972 or about five years from its issuance
for an amount that was 25% less than its face value. 5
On September 10, 1975, the outstanding accounts of respondents with DBP were
restructured in view of their failure to pay. Thus, the outstanding principal balance of the
loans and advances amounting to P4,655,992.35 were consolidated into a single account.
The restructured loan was evidenced by a new promissory note 6 dated November 12, 1975
payable within seven years, with partial payments on the principal to be made beginning on
the third year plus a 12% interest per annum payable every month. The following paragraph
appears at the bottom portion of the note:
This promissory note represents the consolidation into one account of the outstanding
principal balance of PHILIMCO and PHUMACOs account, and is prepared pursuant to Res.
No. 228, dated September 10, 1975, approved by the Executive Committee pursuant to Bd.
Res. No. 3577, s. of 1975. This note is secured by mortgages on the existing assets of the
firms.7
On the other hand, all accrued interest and charges due amounting to P3,074,672.21 were
denominated as "Notes Taken for Interests" and evidenced by a separate promissory
note8 dated November 12, 1975. The following annotation appears at the bottom portion of
the note:
This promissory note represents all accrued interests and charges which are taken up as
"NOTES TAKEN FOR INTEREST" due on the accounts of PHILIMCO and PHUMACO
approved under Bd. Res. No. 3577, s. of 1975. This note is secured by (a) mortgage on the
existing assets of the firm.9
Both notes provided for the following additional charges and penalties:
(1) 12% interest per annum on unpaid amortizations 10 ;
(2) 10% penalty charge per annum on the total amortizations past due effective
30 days from the date respondents failed to comply with any of the terms
stipulated in the notes11 ; and,
(3) Bank advances for insurance premiums, taxes, rentals, litigation and acquired
assets expenses, collection and other out-of-pocket expenses not covered by
inspection and processing fees subject to the following charges 12 :

(a) One time service charge of % on the amount advanced to be

included in the receivable account;

ii. Penalty charge of 16% per annum computed on amortizations or

portions thereof in arrears for more than thirty (30) days counted from
the date the amount in arrears becomes liable to this charge. 20

(b) Penalty charge of 8% per annum on past due advances; and

Under these two notes, respondents also bound themselves to pay bank advances for
insurance premiums, taxes, litigation and acquired assets expenses and other out-of-pocket
expenses not covered by inspection and processing fees as follows:

(c) Interest at 12% per annum.

Notwithstanding the restructuring, respondents were still unable to comply with the terms
and conditions of the new promissory notes. As a result, respondents requested DBP to
refinance the matured obligation. The request was granted by DBP, pursuant to which three
foreign currency denominated loans sourced from DBPs own foreign borrowings were
extended to respondents on various dates between 1980 and 1981. 13 These loans were
secured by mortgages14 on the properties of respondents and were evidenced by the
following promissory notes:
Face Value

Maturity Date

Interest Rate Per

Annum

(1)

Promissory Note15
dated December 11,
1980

$661,330

December 15,
1990

3% over DBPs
borrowing rate16

(2)

Promissory Note17
dated June 5, 1981

$666,666

June 23, 1991

3% over DBPs
borrowing rate18

(3)

Promissory Note19
dated December 16,
1981

$486,472.37

December 31,
1982

4% over DBPs
borrowing cost

Apart from the interest, the promissory notes imposed additional charges and penalties if
respondents defaulted on their payments. The notes dated December 11, 1980 and June 5,
1981 specifically provided for a 2% annual service fee computed on the outstanding
principal balance of the loans as well as the following additional interest and penalty
charges on the loan amortizations or portions in arrears:
(a) If in arrears for thirty (30) days or less:
i. Additional interest at the basic loan interest rate per annum
computed on total amortizations past due, irrespective of age.
ii. No penalty charge
(b) If in arrears for more than thirty (30) days:
i. Additional interest at the basic loan interest rate per annum
computed on total amortizations past due, irrespective of age, plus,

(a) One-time service charge of 2% of the amount advanced, same to be included

in the receivable account.
(b) Interest at 16% per annum.
(c) Penalty charge from date of advance at 16% per annum.
The note dated December 16, 1981, on the other hand, provided for the interest and penalty
charges on loan amortizations or portions of it in arrears as follows:
(a) Additional interest at the basic loan interest per annum computed on total
amortizations past due irrespective of age; plus
(b) Penalty charges of 8% per annum computed on total amortizations in arrears,
irrespective of age.21
Respondents were likewise bound to pay bank advances for insurance premiums, taxes,
litigation and acquired assets expenses and other out-of-pocket expenses not covered by
inspection and processing fees as follows:
(a) One-time service charge of 2% of (the) amount advanced, same to be
included and debited to the advances account;
(b) Interest at the basic loan interest rate; and
(c) Penalty charge from date of advance at 8% per annum. 22
Sometime in October 1985, DBP initiated foreclosure proceedings upon its computation that
respondents loans were in arrears by P62,954,473.68.23 According to DBP, this figure
already took into account the intermittent payments made by respondents between 1968
and 1981 in the aggregate amount of P5,150,827.71.24
However, the foreclosure proceedings were suspended on twelve separate occasions from
October 1985 to December 1986 upon the representations of respondents that a financial
rehabilitation fund arising from a contract with the military was forthcoming. On December
23, 1986, before DBP could proceed with the foreclosure proceedings, respondents
instituted the present suit for injunction.

On January 6, 1987, the complaint was amended to include the annulment of mortgage. On
December 15, 1987, the complaint was amended a second time to implead the Asset
Privatization Trust (APT) (now the Privatization and Management Office [PMO]) 25 as a party
defendant.
Respondents cause of action arose from their claim that DBP was collecting from them an
unconscionable if not unlawful or usurious obligation of P62,954,473.68 as of September
30, 1985, out of a mere P6,200,000 loan. Primarily, respondents contended that the amount
claimed by DBP is erroneous since they have remitted to DBP approximately P5,300,000 to
repay their original debt. Additionally, respondents assert that since the loans were procured
for the Self-Reliant Defense Posture Program of the Armed Forces of the Philippines (AFP),
the latters breach of its commitment to purchase military armaments and equipment from
respondents amounts to a failure of consideration that would justify the annulment of the
mortgage on respondents properties.26
On December 24, 1986, the RTC issued a temporary restraining order. A Writ of Preliminary
Injunction was subsequently issued on May 4, 1987. After trial on the merits, the court
rendered a decision in favor of respondents,27 the dispositive portion of which reads:
WHEREFORE, in view of the foregoing consideration, judgment is hereby rendered in favor
of the [respondents] and against the defendants [DBP and APT], ordering that:
(1) The Writ of Preliminary Injunction already issued be made permanent;
(2) The [respondents] be made to pay the original loans in the aggregate amount
of Six Million Two Hundred Thousand (P6,200,000) Pesos;
(3) The [respondents] payment in the amount of Five Million Three Hundred
Thirty-Five Thousand, Eight Hundred Twenty-seven Pesos and Seventy-one
Centavos (P5,335,827.71) be applied to payment for interest and penalties; and
(4) No further interest and/or penalties on the aforementioned principal obligation
of P6.2 million shall be imposed/charged upon the [respondents] for failure of the
military establishment to honor their commitment to a valid and consummated
contract with the former. Costs against the defendants.
SO ORDERED.
Both DBP and PMO appealed the decision to the CA. The CA, however, affirmed the
decision of the RTC. Aggrieved, DBP filed with the CA a motion for a reconsideration 28 dated
May 26, 1999, which motion has not been resolved by the CA to date. PMO, on the other
hand, sought relief directly with the Court by filing this present petition upon the following
grounds:
I. THE CA DISREGARDED THE BINDING AND OBLIGATORY FORCE OF
CONTRACTS WHICH IS THE LAW BETWEEN THE PARTIES.

xxx
II. THE CA VIOLATED THE PRINCIPLE OF LAW THAT CONTRACTS TAKE
EFFECT ONLY BETWEEN THE PARTIES AS IT LINKED RESPONDENTS
CONTRACTS WITH THE AFP WITH RESPONDENTS LOANS WITH DBP.
xxx
III. THE CA ERRED IN PERMANENTLY ENJOINING THE DBP AND APT FROM
FORECLOSING THE MORTGAGES ON RESPONDENTS PROPERTIES
THEREBY VIOLATING THE PROVISIONS OF P[RESIDENTIAL] D[ECREE NO.]
385 AND PROCLAMATION NO. 50.29
On the first issue, PMO asserts that the CA erred in declaring that the interest rate on the
loans had been unilaterally increased by DBP despite the evidence on record (consisting of
promissory notes and testimonies of witnesses for DBP) showing otherwise. PMO also
claims that the CA failed to take into account the effect of the restructuring and refinancing
of the loans granted by DBP upon the request of respondents.
Anent the second issue, PMO argues that the failure of the AFP to honor its commitment to
respondents should have had no bearing on respondents loan obligations to DBP as DBP
was not a party to their contract. Hence, PMO contends that the CA ran afoul of the principle
of relativity of contracts when it ruled that no further interest could be imposed on the loans.
Finally, PMO claims that DBP, being a government financial institution, could not be
enjoined by any restraining order or injunction, whether permanent or temporary, from
proceeding with the foreclosure proceedings mandated under Section 1 of Presidential
Decree No. 385.
For their part, respondents moved for the denial of the petition in their comment dated
October 27, 1999,30stating that (1) the petition merely raises questions of fact and not of
law; (2) PMO is engaged in forum shopping considering that the motion for reconsideration
filed by its co-defendant, DBP, against the CA decision was still pending before the
appellate court; and, (3) the petition is fatally defective because the attached certification
against non-forum shopping does not conform to the requirements set by law. After PMO
filed its reply denying the foregoing allegations, the parties submitted their respective
memoranda.
The petition is partly meritorious.
Prefatorily, it bears stressing that only questions of law may be raised in a petition for review
on certiorari under Rule 45 of the Rules of Court. This Court is not a trier of facts, its
jurisdiction in such a proceeding being limited to reviewing only errors of law that may have
been committed by the lower courts. Consequently, findings of fact of the trial court and the
CA are final and conclusive, and cannot be reviewed on appeal. 31 It is not the function of the
Court to reexamine or reevaluate evidence, whether testimonial or documentary, adduced
by the parties in the proceedings below.32 Nevertheless, the rule admits of certain
exceptions and has, in the past, been relaxed when the lower courts findings were not

supported by the evidence on record or were based on a misapprehension of facts, 33 or

when certain relevant and undisputed facts were manifestly overlooked that, if properly
considered, would justify a different conclusion.34
The resolution of the present controversy turns on the issue regarding the precise amount of
respondents principal obligation under the series of mortgages which DBP, as mortgageecreditor, attempted to foreclose. In this case, the total amount of respondents indebtedness
is not simply a question of fact but is a question of law, one requiring the application of legal
principles for the computation of the amount owed, and is thus a matter that can be properly
brought up for the Courts determination.35
PMO claims that the total outstanding obligation of respondents reached P62.9 Million on
September 30, 1985. This amount was purportedly the peso equivalent of the foreigncurrency denominated loans granted to respondents to refinance the original loans they
procured, and is inclusive of interest, penalties and other surcharges incurred from that date
as a result of respondents past defaults. Respondents contend, on the other hand, that
DBP grossly misstated the extent of their obligation, and insist that they should be made
liable only for the amount of P6.2 Million which they actually received from DBP.
As mentioned, the RTC ultimately sustained respondents and made permanent the writ of
preliminary injunction it issued to enjoin the foreclosure proceedings. Respondents were
directed to pay only the amount of the original loans, that is, P6.2 Million, with the P5.3
Million which they previously paid to be applied as interest and penalties. The RTC did not
find respondents culpable for defaulting on their loan obligations and passed the blame to
the AFP for not fulfilling its contractual obligations to respondents.
The CA affirmed the RTC decision and agreed that DBP cannot be allowed to foreclose on
the mortgage securing respondents loan. The CA surmised that since DBP failed to
adequately explain how it arrived at P62.9 Million, the original loan amount of P6.2 Million
could only have been "blatantly enlarged or erroneously computed" by DBP through the
imposition of an "unconscionable rate of interest and charges." The CA also agreed with the
trial court that there was no consideration for the mortgage contracts executed by
respondents considering the proceeds from the alleged foreign currency loans were never
actually received by the latter. This view is untenable and lacks foundation.
As correctly pointed out by PMO, the original loans alluded to by respondents had been
refinanced and restructured in order to extend their maturity dates. Refinancing is an
exchange of an old debt for a new debt, as by negotiating a different interest rate or term or
by repaying the existing loan with money acquired from a new loan. 36 On the other hand,
restructuring, as applied to a debt, implies not only a postponement of the maturity 37but also
a modification of the essential terms of the debt (e.g., conversion of debt into bonds or into
equity,38 or a change in or amendment of collateral security) in order to make the account of
the debtor current.39
In this instance, it is important to note that DBP accommodated respondents request to
restructure and refinance their account twice in view of the financial difficulties the latter
were experiencing. The first restructuring/refinancing was granted in 1975 while the second
one was undertaken sometime in the early 1980s. Pursuant to the restructuring schemes,
respondents executed promissory notes and mortgage contracts in favor of DBP,40 the
second restructuring being evidenced by three promissory notes dated December 11, 1980,

June 5, 1981 and December 16, 1981 in the total amount of $1.8 Million. The reason
respondents seek to be excused from fulfilling their obligation under the second batch of
promissory notes is that first, they allegedly had "no choice" but to sign the documents in
order to have the loan restructured41 and thus avert the foreclosure of their properties, and
second, they never received any proceeds from the same. This reasoning cannot be
sustained.
Respondents allegation that they had no "choice" but to sign is tantamount to saying that
DBP exerted undue influence upon them. The Court is mindful that the law grants an
aggrieved party the right to obtain the annulment of a contract on account of factors such as
mistake, violence, intimidation, undue influence and fraud which vitiate consent. 42 However,
the fact that the representatives were "forced" to sign the promissory notes and mortgage
contracts in order to have respondents original loans restructured and to prevent the
foreclosure of their properties does not amount to vitiated consent.
The financial condition of respondents may have motivated them to contract with DBP, but
undue influence cannot be attributed to DBP simply because the latter had lent money. The
concept of undue influence is defined as follows:
There is undue influence when a person takes improper advantage of his power over the
will of another, depriving the latter of a reasonable freedom of choice. The following
circumstances shall be considered: the confidential, family, spiritual and other relations
between the parties or the fact that the person alleged to have been unduly influenced was
suffering from mental weakness, or was ignorant or in financial distress. 43
While respondents were purportedly financially distressed, there is no clear showing that
those acting on their behalf had been deprived of their free agency when they executed the
promissory notes representing respondents refinanced obligations to DBP. For undue
influence to be present, the influence exerted must have so overpowered or subjugated the
mind of a contracting party as to destroy the latters free agency, making such party express
the will of another rather than its own. The alleged lingering financial woes of a
debtor per secannot be equated with the presence of undue influence. 44
Corollarily, the threat to foreclose the mortgage would not in itself vitiate consent as it is a
threat to enforce a just or legal claim through competent authority.45 It bears emphasis that
the foreclosure of mortgaged properties in case of default in payment of a debtor is a legal
remedy given by law to a creditor.46 In the event of default by the mortgage debtor in the
performance of the principal obligation, the mortgagee undeniably has the right to cause the
sale at public auction of the mortgaged property for payment of the proceeds to the
mortgagee.47
It is likewise of no moment that respondents never physically received the proceeds of the
foreign currency loans. When the loan was refinanced and restructured, the proceeds were
understandably not actually given by DBP to respondents since the transaction was but a
renewal of the first or original loan and the supposed proceeds were applied as payment for
the latter.
It also bears emphasis that the second set of promissory notes executed by respondents
must govern the contractual relation of the parties for they unequivocally express the terms

and conditions of the parties loan agreement, which are binding and conclusive between
them. Parties are free to enter into stipulations, clauses, terms and conditions they may
deem convenient; that is, as long as these are not contrary to law, morals, good customs,
public order or public policy.48 With the signatures of their duly authorized representatives on
the subject notes and mortgage contracts, the genuineness and due execution of which
having been admitted,49respondents in effect freely and voluntarily affirmed all the
concurrent rights and obligations flowing therefrom. Accordingly, respondents are barred
from claiming the contrary without transgressing the principle of estoppel and mutuality of
contracts. Contracts must bind both contracting parties; their validity or compliance cannot
be left to the will of one of them.50

cannot now protest against the fact that the loans were denominated in foreign currency and
were to be paid in its peso equivalent after they had already given their consent to such
terms.57 There is no legal impediment to having obligations or transactions paid in a foreign
currency as long as the parties agree to such an arrangement. In fact, obligations in foreign
currency may be discharged in Philippine currency based on the prevailing rate at the time
of payment.58 For this reason, it was improper for the CA to reject outright DBPs claim that
the conversion of the remaining balance of the foreign currency loans into peso accounted
for the considerable differential in the total indebtedness of respondents mainly because the
exchange rates at the time of demand had been volatile and led to the depreciation of the
peso.59

The significance of the promissory notes should not have been overlooked by the trial court
and the CA. By completely disregarding the promissory notes, the lower courts unilaterally
modified the contractual obligations of respondents after the latter already benefited from
the extension of the maturity date on their original loans, to the damage and prejudice of
PMO which steps into the shoes of DBP as mortgagee-creditor.

PMO also denies that a unilateral increase in the interest rates on the loans caused the
substantial increase in the indebtedness of respondents and points out that the promissory
notes themselves specifically provided for the rates of interest as well as penalty and other
charges which were merely applied on respondents outstanding obligations. It should be
noted, however, that at the time of the transaction, Act No. 2655, as amended by
Presidential Decree No. 116 (Usury Law), was still in full force and effect. Basic is the rule
that the laws in force at the time the contract is made governs the effectivity of its
provisions.60 Section 2 of the Usury Law specifically provides as follows:

At this juncture, it must be emphasized that a party to a contract cannot deny its validity
after enjoying its benefits without outrage to ones sense of justice and fairness. Where
parties have entered into a well-defined contractual relationship, it is imperative that they
should honor and adhere to their rights and obligations as stated in their contracts because
obligations arising from it have the force of law between the contracting parties and should
be complied with in good faith.51
As a rule, a court in such a case has no alternative but to enforce the contractual
stipulations in the manner they have been agreed upon and written. Courts, whether trial or
appellate, generally have no power to relieve parties from obligations voluntarily assumed
simply because their contract turned out to be disastrous or unwise investments. 52
Thus, respondents cannot be absolved from their loan obligations on the basis of the failure
of the AFP to fulfill its commitment under the manufacturing agreement 53 entered by them
allegedly upon the prompting of certain AFP and DBP officials. While it is true that the DBP
representatives appear to have been aware that the proceeds from the sale to the AFP were
supposed to be applied to the loan, the records are bereft of any proof that would show that
DBP was a party to the contract itself or that DBP would condone respondents credit if the
contract did not materialize. Even assuming that the AFP defaulted in its obligations under
the manufacturing agreement, respondents cause of action lies with the AFP, and not with
DBP or PMO. The loan contract of respondents is separate and distinct from their
manufacturing agreement with the AFP.
Incidentally, the CA sustained the validity of a loan obligation but annulled the mortgage
securing it on the ground of failure of consideration. This is erroneous. A mortgage is a mere
accessory contract and its validity would depend on the validity of the loan secured by
it.54 Hence, the consideration of the mortgage contract is the same as that of the principal
contract from which it receives life, and without which it cannot exist as an independent
contract. 55 The debtor cannot escape the consequences of the mortgage contract once the
validity of the loan is upheld.
Again, as a rule, courts cannot intervene to save parties from disadvantageous provisions of
their contracts if they consented to the same freely and voluntarily.56 Thus, respondents

Sec. 2. No person or corporation shall directly or indirectly take or receive in money or other
property, real or personal, or choses in action, a higher rate of interest or a greater sum or
value, including commissions, premiums, fines and penalties, for the loan or renewal thereof
or forbearance of money, goods, or credits, where such loan or renewal or forbearance is
secured in whole or in part by a mortgage upon real estate the title to which is duly
registered, or by any document conveying such real estate or interest therein, than twelve
per centum per annum or the maximum rate prescribed by the Monetary Board and in force
at the time the loan or renewal thereof or forbearance is granted: Provided, that the rate of
interest under this section or the maximum rate of interest that may be prescribed by the
monetary board under this section may likewise apply to loans secured by other types of
security as may be specified by the Monetary Board.
A perusal of the promissory notes reveals that the interest charged upon the notes is
dependent upon the borrowing cost of DBP which, however, would be pegged at a fixed rate
assuming certain factors. The notes dated December 11, 1980 and June 5, 1981, for
example, had a per annum interest rate of 3% over DBPs borrowing rate that will become 1
% per annum in the event the loan is drawn under the Central Banks Jumbo Loan. These
were further subject to the condition that should the loan from where they were drawn be
fully repaid, the interest to be charged on respondents remaining dollar obligation would be
pegged at 16% per annum.61 The promissory note dated December 16, 1981, on the other
hand, had a per annum interest rate of 4% over DBPs borrowing rate. This rate would also
become 1 % per annum in the event the loan is drawn under the Central Banks Jumbo
Loan. However, should the loan from where respondents foreign currency loan was drawn
be fully repaid, the interest to be charged on their remaining dollar obligation would be
pegged at 18% per annum.62
Due to the variable factors mentioned above, it cannot be determined whether DBP did in
fact apply an interest rate higher than what is prescribed under the law. It appears on the
records, however, that DBP attempted to explain how it arrived at the amount stated in the
Statement of Account63 it submitted in support of its claim but was not allowed by the trial
court to do so citing the rule that the best evidence of the same is the document itself. 64 DBP

should have been given the opportunity to explain its entries in the Statement of Account in
order to place the figures that were cited in the proper context. Assuming the interest
applied to the principal obligation did, in fact, exceed 12%, in addition to the other penalties
stipulated in the note, this should be stricken out for being usurious.
In usurious loans, the entire obligation does not become void because of an agreement for
usurious interest; the unpaid principal debt still stands and remains valid but the stipulation
as to the interest is void. The debt is then considered to be without stipulation as to the
interest. In the absence of an express stipulation as to the rate of interest, the legal rate of
12% per annum shall be imposed.65

in light of the fact that PMO is the real party-in-interest in this case, being the successor-ininterest of DBP.
WHEREFORE, the petition is PARTLY GRANTED and the assailed Decision dated May 7,
1999 rendered by the Court of Appeals in CA-G.R. CV No. 49239 is REVERSED AND SET
ASIDE. The case is hereby remanded to the trial court for determination of the total amount
of the respondents obligation based on the promissory notes dated December 11, 1980,
June 5, 1981 and December 16, 1981 according to the interest rate agreed upon by the
parties or the interest rate of 12% per annum, whichever is lower.
No costs.

As to the issue raised by PMO that the injunction issued by the lower courts violated
Presidential Decree No. 385, the Court agrees with the ruling of the CA. Presidential Decree
No. 385 was issued primarily to see to it that government financial institutions are not
denied substantial cash inflows which are necessary to finance development projects all
over the country, by large borrowers who, when they become delinquent, resort to court
actions in order to prevent or delay the governments collection of their debts and loans. 66
The government, however, is bound by basic principles of fairness and decency under the
due process clause of the Bill of Rights. Presidential Decree No. 385 does not provide the
government blanket authority to unqualifiedly impose the mandatory provisions of the
decree without due regard to the constitutional rights of the borrowers. In fact, it is required
that a hearing first be conducted to determine whether or not 20% of the outstanding
arrearages has been paid, as a prerequisite for the issuance of a temporary restraining
order or a writ of preliminary injunction. Hence, the trial court can, on the basis of the
evidence then in its possession, make a provisional determination on the matter of the
actual existence of the arrearages and the amount on which the 20% requirement is to be
computed. Consequently, Presidential Decree No. 385 cannot be invoked where the extent
of the loan actually received by the borrower is still to be determined. 67
Finally, respondents allegation that PMO is engaged in forum shopping is untenable. Forum
shopping is the act of a party, against whom an adverse judgment has been rendered in one
forum, of seeking another and possibly favorable opinion in another forum by appeal or a
special civil action of certiorari.68 As correctly pointed out by PMO, the present petition is
merely an appeal from the adverse decision rendered in the same action where it was
impleaded as co-defendant with DBP. That DBP opted to file a motion for reconsideration
with the CA rather than a direct appeal to this Court does not bar PMO from seeking relief
from the judgment by taking the latter course of action.
It must be remembered that PMO was impleaded as party defendant through the amended
complaint69 dated November 25, 1987. Persons made parties-defendants via a
supplemental complaint possess locus standi or legal personality to seek a review by the
Court of the decision by the CA which they assail even if their co-defendants did not appeal
the said ruling of the appellate court.70 Even assuming that separate actions have been filed
by two different parties involving essentially the same subject matter, no forum shopping is
committed where the parties did not resort to multiple judicial remedies. 71
In any event, the Court deems it fit to put an end to this controversy and to finally adjudicate
the rights and obligations of the parties in the interest of a speedy dispensation of justice,
taking into account the length of time this action has been pending with the courts as well as

SO ORDERED.
G.R. No. L-8093

October 29, 1955

DOMINADOR NICOLAS and OLIMPIA MATIAS, plaintiffs-appellants,

vs.
VICENTA MATIAS, AMADO CORNEJO, JR., JOSE POLICARPIO, and MATILDE
MANUEL, defendants-appellees.
By an instrument dated June 29, 1944, Vicenta Matias Vda. de Cornejo, and her son,
Amado Cornejo, Jr., mortgaged to the spouses Dominador Nicolas and Olimpia Matias, four
(4) parcels of land, situated in San Roque, municipality of Gapan, Province of Nueva Ecija,
to guarantee the payment of the sum of P30,000then lent by the mortgagees to the
mortgagors and received by the latter, in Japanese military notesone (1) year after the
expiration of five (5) years from said date ("pagbabayaran isang [1] taon pagkatapos ng
limang [5] taon simula sa fecha ng kasulatang ito"), with interest thereon, at the rate of six
per cent (6%) per annum. On July 15, 1944, said mortgagors offered to pay the debt, with
interest for five (5) years, but the mortgagees rejected the offer. Whereupon, in August,
1944, the mortgagors deposited judicially the sum of P39,000representing the principal
(P30,000), plus interest for five (5) years, at the stipulated rateand instituted Civil Case
No. 156 of the Court of First Instance of Nueva Ecija, entitled "Vicenta Matias, et
al. vs. Dominador Nicolas, et al.," for the purpose of compelling the mortgagees to accept
said amount and to discharge the mortgage. Although holding that the mortgagees were not
justified in rejecting the tender of payment made by the mortgagors, said court rendered
judgment, on August 12, 1946, declaring the consignation invalid for failure of the
mortgagors to give previous notice thereof, and sentencing the mortgagors to pay the
mortgagees the sum of P2,000as the equivalent in Philippine currency, pursuant to the
Ballantyne schedule, of P30,000 in Japanese military noteswith interest, at the legal rate,
from June 29, 1944. On appeal from this judgment, the Court of Appeals, CAG. R. No.
554-R (L-1195), in a decision promulgated on September 16, 1947, held the consignation
valid and the obligation guaranteed by the mortgage fully discharged. The mortgagees,
however, brought the case, for review by writ ofcertiorari, to this Court, which, in a decision
promulgated on May 29, 1951 * (G. R. No. L-1743), held that the mortgagors could not,
without the mortgagees' consent, accelerate the date of maturity of the obligation in

question, which is payable after the fifth year from June 29, 1944; that the mortgagees
cannot be compelled to accept payment prior to the expiration of said fifth year; and that the
judicial consignation made by the mortgagors is, consequently, invalid, except as regards
the amount corresponding to the interest for one (1) year from June 29, 1944. The
dispositive part of our aforementioned decision reads:
Hence we must of necessity declare, that the offer and consignation were not
valid, except for the satisfaction of the interest for the year 1944 which was then
due. The appealed decision will thus be modified. Although the defendants have
asked for judgment against the plaintiffs "in the sixth year from 1944" for the
amount of the note plus interest, we must decline to render such judgment now,
firstly because at the time the case was instituted the mortgage was not yet
payable, and secondly because there is the moratorium law. Anyway they will be
at liberty to collect that mortgage plus interest when the moratorium is lifted, and
in that foreclosure proceedings the amount of recovery shall be determined. Let
judgment be entered accordingly.
Soon thereafter, or on August 22, 1951, the mortgagees instituted the present action for
foreclosure of said mortgage. The only issue raised in the lower court was whether the sum
of P30,000, lent by the mortgagees in Japanese war notes, should be paid by the
mortgagors in Philippine currency, peso for peso, or in accordance with the Ballantyne
schedule. The lower court chose the latter alternative and, accordingly, rendered judgment
"ordering defendants to pay plaintiffs the amount of P2,000, Philippine currency, with
interest at six per cent (6%) a year, from June 29, 1945, up to the date when it is actually
paid." The case is not before us on appeal taken by the mortgagees.

who had received P70,000 in Japanese military notes, shall pay the said sum of
P5,000 Philippine currency within a certain period after liberation. (Emphasis
supplied.)
This ruling was reiterated in Arevalo vs. Barreto (89 Phil., 633) decided on July 31, 1951, in
the following language:
After a consideration of the question raised in the second assignment of error of
the appellant, we are of the opinion, and so hold, that the lower court erred in
evaluating the repurchase price of the property sold and the value of the
promissory note, at P516.70 Philippine currency. The parties have stipulated or
agreed that the right to repurchase the property for P12,000 Philippine currency
"shall not commence from January 1, 1947, and shall end on January 10, 1948,"
and the promissory note for P4,000 Philippine currency "shall be paid on or after
October 31, 1946." As the said amounts were to become due after liberation,
they shall be paid in Philippine currency according to a long line of decision
rendered by this Court. Besides, in the present case, the agreement of the
parties was, not only that said amounts be paid after liberation, but they had
stipulated that of the 60,000 pesos in Japanese military notes, the vendee shall
pay P12,000 in Philippine currency for the repurchase of the property, and of the
20,000 in Japanese military notes received by the plaintiff from the defendant as
a loan, the former shall pay the latter P4,000 in Philippine currency, after
liberation. (Emphasis supplied.)
To the same effect was the conclusion reached in the case of Wilson vs. Berkenkotter (49
Off. Gaz., p. 1401), in which we said:

In Cruz vs. Del Rosario (G. R. No. L-4859) decided on July 24, 1951, it was held:
In passing upon the petitioner's first assignment of error, which was the only one
that deserved consideration, and dismissing the petition for certiorari, we have
cited in our minute resolution the cases already decided by this Court as
applicable to the present, not because they are similar in fact and law to this case
as the attorneys for the petitioner erroneously believe, but because the doctrine
laid down in those cases is squarely applicable to the present. That is, if
according to the stipulation of the parties, the money to be paid by the debtor to
the creditor, or by the vendor with pacto to the creditor to redeem the property
mortgaged, or sold, shall be due and payable after liberation as agreed upon by
the parties in the present case, it shall be paid in legal tender or Philippine
currency at par value or at the rate of one Philippine peso for each peso in
Japanese military notes; but if it shall be due and payable before liberation it shall
be paid after the liberation in Philippine currency in accordance with the
Ballantyne schedule. Besides, according to the facts found by the Court of
Appeals which we cannot disturb in the present case, in fixing the amount of
P5,000 to be paid by a vendor with pacto de retro to the vendee or by the debtor
to his creditor after liberation, the parties had stipulated that the debtor or vendor,

In several cases involving the application of the Ballantyne schedule, this Court
has held that said schedule is applicable to obligations contracted during the
Japanese occupation where said obligations, are made payable on demand or
during said Japanese occupation, but not after the war or at a specified date or
period which may indicate that the parties were speculating on the continuation
or cessation of the war at time of payment. If the obligation on the part of Wilson
to pay Berkenkotter the amount paid by the latter to wipe out their debt to the
Bank was created during the occupation, then created before the war, particularly
on date when plaintiff and defendant signed the promissory note in favor of the
Bank, then the Ballantyne schedule may not be applied.(Emphasis supplied.)
The foregoing view has been consistently applied by this Court in a number of other cases,
among which the following may be mentioned: Ilusorio vs. Busuego, 84 Phil., 630; Roo vs.
Gomez, 46 Off. Gaz., Supp. No. 11, 339; Gomez vs. Tabia, 47 Off. Gaz., 641, Ponce De
Leon vs. Syjuco, 90 Phil., 311; Garcia vs. De los Santos, 49 Off. Gaz., 4830. What is more,
the strong dissents written in some of the cases cited indicated that adherence to said view
was affected upon thorough consideration of the different aspects thereof, that said doctrine
is not in the nature of stare decisis and that the issue is now close as regards this Court.

It is thus settled that the contracting parties are free to stipulate on the currency in which
their respective obligations shall be settled, and that whenever, pursuant to the terms of an
agreement, an obligation assumed during the Japanese occupation is not payable until after
liberation of the Philippines, the parties to the agreement are deemed to have intended that
the amount stated in the contract be paid in such currency as may be legal tender at the
time when the obligation becomes due. This is, precisely, the situation obtaining in the case
at bar. The deed of mortgage in question provides that the obligation of the mortgagees
shall be paid one year after the expiration of five (5) years form June 29, 1944, which is the
date of said instrument. In other words, the obligation is not payable until June 29, 1949.
Indeed, in the decision of this Court in case G. R. No. L-1743, we reversed the decision of
the Court of Appeals sustaining the theory of the mortgagors, upon the ground that the latter
were not entitled to accelerate, without the consent of the mortgagees, the date of the
maturity of the obligation; that the mortgagees could not be compelled, and were under no
obligation, to accept the tender of payment made on July 15, 1944 (except as to the interest
for one [1] year) despite the fact that said tender included the interest for five (5) years from
June 29, 1944; and that, consequently, the consignation effected simultaneously with the
institution of civil case No. 156 of the Court of First Instance of Nueva Ecija in August, 1944,
was null and void, with the exception abovementioned.
In other words, said decision of this Court was implicitly held, and the doctrine laid down in
the cases above referred to, leave us no choice but to declare, as we do, that the obligation
involved in the present case must be satisfied, peso for peso, in Philippine currency.
Wherefore, the defendants-appellees are hereby sentenced to pay to the plaintiffsappellants, either directly or through the Clerk of the lower court, within ninety (90) days
from the date on which this decision shall become final, the sum of P30,000, in Philippine
currency, with interest thereon at the rate of six per centum (6%) of a year, from June 29,
1945. In default of such payment, let the mortgage in question be foreclosed in the manner
provided by law and the rules of court.
With costs against the defendants-appellees. So ordered.
G.R. No. L-46591

July 28, 1987

BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner,

vs.
HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch
XXXI and FLORANTE DEL VALLE, respondents.
This is a Petition to review on certiorari the Decision of respondent Court, the dispositive
portion of which decrees:
WHEREFORE, the Court finds that the enforcement of the escalation clause
retroactively before the lapse of the 15-year period stated in the promissory note

is contrary to Sec. 3 of Presidential Decree No. 116 and Sec. 109 of Republic Act
No. 265, and hereby declares null and void the said escalation clause. The
respondent Banco Filipino Savings and Mortgage Bank is hereby ordered to
desist from enforcing the increased rate of interest on petitioner's loan.
SO ORDERED.
The facts are not in dispute:
On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan secured
by a real estate mortgage (the LOAN, for short) from petitioner BANCO FILIPINO 1 in the
sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be
amortized within fifteen (15) years at twelve (12%) per cent interest annually. Hence, the
LOAN still had more than 730 days to run by January 2, 1976, the date when CIRCULAR
No. 494 was issued by the Central Bank.
Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as
follows:
I/We hereby authorize Banco Filipino to correspondingly increase the interest
rate stipulated in this contract without advance notice to me/us in the event law
should be enacted increasing the lawful rates of interest that may be charged on
this particular kind of loan.
The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January
2, 1976, the pertinent portion of which reads:
3. The maximum rate of interest, including commissions, premiums, fees and
other charges on loans with maturity of more than seven hundred thirty (730)
days, by banking institutions, including thrift banks and rural banks, or by
financial intermediaries authorized to engage in quasi-banking functions shall be
nineteen percent (19%) per annum.
xxx

xxx

xxx

7. Except as provided in this Circular and Circular No. 493, loans or renewals
thereof shall continue to be governed by the Usury Law, as amended."
CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by
Presidential Decree No. 116 (Amending Further Certain Sections of the Usury Law)
promulgated on January 29, 1973, the applicable section of which provides:

Sec. 2. The same Act is hereby amended by adding the following section
immediately after section one thereof, which reads as follows:
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum
rate or rates of interest for the loan or renewal thereof or the forbearance of any
money, goods or credits, and to change such rate or rates whenever warranted
by prevailing economic and social conditions: Provided, that such changes shall
not be made oftener than once every twelve months.
The same grant of authority appears in P.D. No. 858, promulgated on December 31, 1975,
except that the limitation on the frequency of changes was eliminated.
On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER
on June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum
effective on March 1, 1976.
On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a letter to the
BORROWER as follows:
September 24, 1976

In this connection, please be advised that the Monetary Board, in its Resolution No. 1155
dated June 11, 1976, adopted the following guidelines to govern interest rate adjustments
by banks and non-banks performing quasi-banking functions on loans already existing as of
January 3, 1976, in the light of Central Bank Circulars Nos. 492-498:
l. Only banks and non-bank financial intermediaries performing quasi-banking
functions may increase interest rates on loans already existings of January 2,
1976, provided that:
a. The pertinent loan contracts/documents contain escalation clauses
expressly authorizing lending bank or non-bank performing quasibanking functions to increase the rate of interest stipulated in the
contract, in the event that any law or Central Bank regulation is
promulgated increasing the maximum interest rate for loans; and
b. Said loans were directly granted by them and the remaining
maturities thereof were more than 730 days as of January 2, 1976;
and
2. The increase in the rate of interest can be effective only as of January 2, 1976
or on a later date.

Mr. Florante del Valle

14 Palanca Street
B.F. Homes, Paranaque
Rizal

The foregoing guidelines, however, shall not be understood as precluding affected parties
from questioning before a competent court of justice the legality or validity of such
escalation clauses.

Dear Mr. del Valle:

We trust the above guidelines would help you resolve your problems regarding additional
interest charges of Banco Filipino.

This refers to your letter dated August 28, 1976 addressed to the Governor, Central Bank of
the Philippines, seeking clarification and our official stand on Banco Filipino's recent
decision to raise interest rates on lots bought on installment from 12% to 17% per annum.
A verification made by our Examiner of the copy of your Promissory Note on file with Banco
Filipino showed that the following escalation clause with your signature is stamped on the
Promissory Note:
I /We hereby authorize Banco Filipino to correspondingly increase the interest
rate stipulated in this contract without advance notice to me/us in the event a law
should be enacted increasing the lawful rates of interest that may be charged on
this particular kind of loan.

Very truly yours,

(Sgd.) MERCEDES C. PAREDES
Director
Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of
the promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory
Relief" with respondent Court, praying that the Escalation Clause be declared null and void
and that BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest
on the BORROWER's real estate loan.
For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the
BORROWER authorized it to increase the interest rate once a law was passed increasing

the rate of interest and that its authority to increase was provided for by CIRCULAR No.
494.
In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO
FILIPINO to desist from enforcing the increased rate of interest on the BORROWER's loan.
It reasoned out that P.D. No. 116 does not expressly grant the Central Bank authority to
maximize interest rates with retroactive effect and that BANCO FILIPINO cannot legally
impose a higher rate of interest before the expiration of the 15-year period in which the loan
is to be paid other than the 12% per annum in force at the time of the execution of the loan.
It is from that Decision in favor of the BORROWER that BANCO FILIPINO has come to this
instance on review by Certiorari. We gave due course to the Petition, the question being
one of law.
On February 24, 1983, the parties represented by their respective counsel, not only moved
to withdraw the appeal on the ground that it had become moot and academic "because of
recent developments in the rules and regulations of the Central Bank," but also prayed that
"the decision rendered in the Court of First Instance be therefore vacated and declared of
no force and effect as if the case was never filed," since the parties would like to end this
matter once and for all."
However, "considering the subject matter of the controversy in which many persons similarly
situated are interested and because of the need for a definite ruling on the question," the
Court, in its Resolution of February 24, 1983, impleaded the Central Bank and required it to
submit its Comment, and encouraged homeowners similarly situated as the BORROWER to
intervene in the proceedings.
At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage homeowner at B.F.
Resort Subdivision, was present and manifested that he was in a similar situation as the
BORROWER. Since then, he has written several letters to the Court, pleading for early
resolution of the case. The Court allowed the intervention of Lolita Perono 2 and issued a
temporary restraining order enjoining the Regional Trial Court (Pasay City Branch) in the
case entitled "Banco Filipino Savings and Mortgage Bank vs. Lolita Perono" from issuing a
writ of possession over her mortgaged property. Also snowed to intervene were Enrique
Tabalon, Jose Llopis, et als., who had obtained loans with Identical escalation clauses from
Apex Mortgage and Loans Corporation, apparently an affiliate of BANCO FILIPINO, Upon
motion of Jose Llopis, a Temporary Restraining Order was likewise issued enjoining the
foreclosure of his real estate mortgage by BANCO FILIPINO.
The Court made it explicit, however, that intervention was allowed only for the purpose of
"joining in the discussion of the legal issue involved in this proceedings, to wit, the validity of
the so-called "escalation clause," or its applicability to existing contracts of loan."

The Central Bank has submitted its Comment and Supplemental Comment and like BANCO
FILIPINO, has taken the position that the issuance of its Circulars is a valid exercise of its
authority to scribe maximum rates of interest and that, based on general principles of
contract, the Escalation Clause is a valid provision in the loan agreement provided that "(1)
the increased rate imposed or charged by petitioner does not exceed the ceiling fixed by law
or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of
the law or regulation authorizing such an increase; and (3) the remaining maturities of the
loans are more than 730 days as of the effectivity of the law or regulation authorizing such
an increase. However, with respect to loan agreements entered into,on or after March 17,
1980, such agreement, in order to be valid, must also include a de-escalation clause as
required by Presidential Decree No. 1684." 3
The substantial question in this case is not really whether the Escalation Clause is a valid or
void stipulation. There should be no question that the clause is valid.
Some contracts contain what is known as an "escalator clause," which is defined
as one in which the contract fixes a base price but contains a provision that in the
event of specified cost increases, the seller or contractor may raise the price up
to a fixed percentage of the base. Attacks on such a clause have usually been
based on the claim that, because of the open price-provision, the contract was
too indefinite to be enforceable and did not evidence an actual meeting of the
minds of the parties, or that the arrangement left the price to be determined
arbitrarily by one party so that the contract lacked mutuality. In most instances,
however, these attacks have been unsuccessful. 4
The Court further finds as a matter of law that the cost of living index adjustment,
or escalator clause, is not substantively unconscionable.
Cost of living index adjustment clauses are widely used in commercial contracts
in an effort to maintain fiscal stability and to retain "real dollar" value to the price
terms of long term contracts. The provision is a common one, and has been
universally upheld and enforced. Indeed, the Federal government has recognized
the efficacy of escalator clauses in tying Social Security benefits to the cost of
living index, 42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated
by most of the major labor unions are other examples. That inflation, expected or
otherwise, will cause a particular bargain to be more costly in terms of total
dollars than originally contemplated can be of little solace to the plaintiffs. 5
What should be resolved is whether BANCO FILIPINO can increase the interest rate on the
LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered
opinion that it may not.
The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase

the interest rate stipulated in this contract without advance notice to me/us in the
event

Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money,

goods or credits may stipulate that the rate of interest agreed upon may be
increased in the event that the applicable maximum rate of interest
is increased by law or by the Monetary Board:

a law
increasing
the lawful rates of interest that may be charged
on this particular

Provided, That such stipulation shall be valid only if there is also a stipulation in
the agreement that the rate of interest agreed upon shall be reduced in the event
that the applicable maximum rate of interest is reduced by law or by the
Monetary Board;
Provided, further, That the adjustment in the rate of interest agreed upon shall
take effect on or after the effectivity of the increase or decrease in the maximum
rate of interest. (Paragraphing and emphasis supplied).

kind of loan. (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate may be increased "in
the event a lawshould be enacted increasing the lawful rate of interest that may be
charged on this particular kind of loan." " The Escalation Clause was dependent on an
increase of rate made by "law" alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly
issued is not strictly a statute or a law, it has, however, the force and effect of law." 6 (Italics
supplied). "An administrative regulation adopted pursuant to law has the force and effect of
law."7 "That administrative rules and regulations have the force of law can no longer be
questioned. "8
The distinction between a law and an administrative regulation is recognized in the
Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of
September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject
to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause
allowing the increase "in the event that any law or Central Bank regulation is promulgated
increasing the maximum interest rate for loans." The guidelines thus presuppose that a
Central Bank regulation is not within the term "any law."
The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980,
adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a
loan could stipulate that the rate of interest agreed upon may be increased in the event that
the applicable maximum rate of interest is increased "by law or by the Monetary Board." To
quote:

It is now clear that from March 17, 1980, escalation clauses to be valid should specifically
provide: (1) that there can be an increase in interest if increased by law or by the Monetary
Board; and (2) in order for such stipulation to be valid, it must include a provision for
reduction of the stipulated interest "in the event that the applicable maximum rate of interest
is reduced by law or by the Monetary Board."
While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation
clause in the Escalation Clause in question provides another reason why it should not be
given effect because of its one-sidedness in favor of the lender.
2. The Escalation Clause specifically stipulated that the increase in interest rate was to be
"on this particular kind of loan, " meaning one secured by registered real estate mortgage.
Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals continue to
be governed by the Usury Law, as amended." So do Circular No. 586 of the Central Bank,
which superseded Circular No. 494, and Circular No. 705, which superseded Circular No.
586. The Usury Law, as amended by Acts Nos. 3291, 3998 and 4070, became effective on
May 1, 1916. It provided for the maximum yearly interest of 12% for loans secured by a
mortgage upon registered real estate (Section 2), and a maximum annual interest of 14%
for loans covered by security other than mortgage upon registered real estate (Section 3).
Significant is the separate treatment of registered real estate loans and other loans not
secured by mortgage upon registered real estate. It appears clear in the Usury Law that the
policy is to make interest rates for loans guaranteed by registered real estate lower than
those for loans guaranteed by properties other than registered realty.
On June 15, 1948, Congress approved Republic Act No. 265, creating the Central Bank,
and establishing the Monetary Board. That law provides that "the Monetary Board may,
within the limits prescribed in the Usury law,9fix the maximum rates of interest which banks
may charge for different types of loans and for any other credit operations, ... " and that "any

modification in the maximum interest rates permitted for the borrowing or lending operations
of the banks shall apply only to future operations and not to those made prior to the date on
which the modification becomes effective" (Section 109).1avvphi1
On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The Decree
gave authority to the Monetary Board "to prescribe maximum rates of interest for the loan or
renewal thereof or the forbearance of any money goods or credits, and to change such rate
or rates whenever warranted by prevailing economic and social conditions. In one
section,10 the Monetary Board could prescribe the maximum rate of interest for loans
secured by mortgage upon registered real estate or by any document conveying such real
estate or an interest therein and, in another separate section, 11 the Monetary Board was
also granted authority to fix the maximum interest rate for loans secured by types of security
other than registered real property. The two sections read:
SEC. 3. Section two of the same Act is hereby amended to read as follows:
SEC. 2. No person or corporation shall directly or indirectly take or
receive in money or other property, real or personal, or choses in
action, a higher rate of interest or greater sum or value, including
commissions, premiums, fines and penalties, for the loan or renewal
thereof or forbearance of money, goods, or credits, where such loan or
renewal or forbearance is secured in whole or in part by a mortgage
upon real estate the title to which is duly registered or by any
document conveying such real estate or an interest therein, than
twelve per centum per annum or the maximum rate prescribed by the
Monetary Board and in force at the time the loan or renewal thereof or
forbearance is granted: Provided, That the rate of interest under this
section or the maximum rate of interest that may be prescribed by the
Monetary Board under this section may likewise apply to loans
secured by other types of security as may be specified by the
Monetary Board.
SEC. 4. Section three of the same Act is hereby amended to read as follows:
SEC. 3. No person or corporation shall directly or indirectly demand,
take, receive, or agree to charge in money or other property, real or
personal, a higher rate or greater sum or value for the loan or
forbearance of money, goods, or credits, where such loan or
forbearance is not secured as provided in Section two hereof, than
fourteen per centum per annum or the maximum rate or rates
prescribed by the Monetary Board and in force at the time the loan or
forbearance is granted.

Apparent then is that the separate treatment for the two classes of loans was maintained.
Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to
unlike Circular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1,
1979, which fix the effective rate of interest on loan transactions with maturities of more than
730 days to not exceeding 19% per annum (Circular No. 586) and not exceeding 21% per
annum (Circular No. 705) "on both secured and unsecured loans as defined by the Usury
Law, as amended."
In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan
was meant by the Monetary Board, the more equitable construction is to limit CIRCULAR
No. 494 to loans guaranteed by securities other than mortgage upon registered realty.
WHEREFORE, the Court rules that while an escalation clause like the one in question can
ordinarily be held valid, nevertheless, petitioner Banco Filipino cannot rely thereon to raise
the interest on the borrower's loan from 12% to 17% per annum because Circular No. 494 of
the Monetary Board was not the "law" contemplated by the parties, nor should said Circular
be held as applicable to loans secured by registered real estate in the absence of any such
specific indication and in contravention of the policy behind the Usury Law. The judgment
appealed from is, therefore, hereby affirmed in so far as it orders petitioner Banco Filipino to
desist from enforcing the increased rate of interest on petitioner's loan.
The Temporary Restraining Orders heretofore issued are hereby made permanent if the
escalation clauses are Identical to the one herein and the loans involved have applied the
increased rate of interest authorized by Central Bank Circular No. 494.
SO ORDERED.
PHILIPPINE NATIONAL BANK VS. COURT OF APPEALS, G.R. NO. 88880, 196 SCRA
536 , APRIL 30, 1991
PETITION for certiorari to review the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
The Chief Legal Counsel for petitioner.
Ambrosio Padilla, Mempin & Reyes Law Offices for private respondent.
GRIO-AQUINO, J.:
The Philippine National Bank (PNB) has appealed by certiorari from the decision
promulgated on June 27, 1989 by the Court of Appeals in CA-G.R. CV No. 09791 entitled,
AMBROSIO PADILLA, plaintiff-appellant versus PHILIPPINE NATIONAL BANK, defendantappellee, reversing the decision of the trial court which had dismissed the private
respondents complaint to annul interest increases. (p. 32, Rollo.) The Court of Appeals
rendered judgment:

x x x declaring the questioned increases of interest as unreasonable, excessive and

arbitrary and ordering the defendant-appellee [PNB] to refund to the plaintiff-appellant the
amount of interest collected from July, 1984 in excess of twenty-four percent (24%) per
annum. Costs against the defendant-appellee. (pp. 14-15, Rollo.)
In July 1982, the private respondent applied for, and was granted by petitioner PNB, a credit
line of P1.8 million, secured by a real estate mortgage, for a term of two (2) years, with 18%
interest per annum. Private respondent executed in favor of the PNB a Credit Agreement,
two (2) promissory notes in the amount of P900,000.00 each, and a Real Estate Mortgage
Contract.
The Credit Agreement provided that
9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and
regulations of the Central Bank and the current and general policies of the Bank and those
which the Bank may adopt in the future, which may have relation to or in any way affect the
Line, which rules, regulations and policies are incorporated herein by reference as if set
forth herein in full. Promptly upon receipt of a written request from the Bank, the Borrowers
shall execute and deliver such documents and instruments, in form and substance
satisfactory to the Bank, in order to effectuate or otherwise comply with such rules,
regulations and policies. (p. 85, Rollo.)
The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated 18%
interest per annum within the limits allowed by law at any time depending on whatever
policy it [PNB] may adopt in the future; Provided, that, the interest rate on this note shall be
correspondingly decreased in the event that the applicable maximum interest rate is
reduced by law or by the Monetary Board. (pp. 85-86, Rollo; italics ours.)
The Real Estate Mortgage Contract likewise provided that:
(k) INCREASE OF INTEREST RATE
The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in
accordance with the provisions hereof, shall be subject during the life of this contract to
such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors. (p. 86, Rollo; emphasis supplied.)
Four (4) months advance interest and incidental expenses/ charges were deducted from the
loan, the net proceeds of which were released to the private respondent by crediting or
transferring the amount to his current account with the bank.
On June 20, 1984, PNB informed the private respondent that (1) his credit line of P1.8
million will expire on July 4, 1984, (2) [i]f renewal of the line for another year is intended,
please submit soonest possible your request, and (3) the present policy of the Bank
requires at least 30% reduction of principal before your line can be renewed. (pp. 86-87,
Rollo.) Complying, private respondent on June 25, 1984, paid PNB P540,000.00 (30% of
P1.8 million) and requested that the balance of P1,260,000.00 be renewed for another
period of two (2) years under the same arrangement and that the increase of the interest
rate of my mortgage loan be from 18% to 21% (p. 87, Rollo.)
On July 4, 1984, private respondent paid PNB P360,000.00.

On July 18, 1984, private respondent reiterated in writing his request that the increase in
the rate of interest from 18% be fixed at 21% of 24%. (p. 87, Rollo.)
On July 26, 1984, private respondent made an additional payment of P100,000.
On August 10, 1984, PNB informed private respondent that we can not give due course to
your request for preferential interest rate in view of the following reasons: Existing Loan
Policies of the bank requires 32% for loan of more than one year; Our present cost of funds
has substantially increased. (pp. 87-88, Rollo.)
On August 17, 1984, private respondent further paid PNB P150,000.00.
In a letter dated August 24, 1984 to PNB, private respondent announced that he would
continue making further payments, and instead of a loan of more than one year, I shall pay
the said loan before the lapse of one year or before July 4, 1985. x x x I reiterate my request
that the increase of my rate of interest from 18% be fixed at 21% or 24%. (p. 88, Rollo.)
On September 12, 1984, private respondent paid PNB P160,000.00.
In letters dated September 12, 1984 and September 13, 1984, PNB informed private
respondent that the interest rate on your outstanding line/loan is hereby adjusted from 32%
p.a. to 41% p.a. (35% prime rate + 6%) effective September 6, 1984; and further explained
why we can not grant your request for a lower rate of 21% or 24%. (pp. 88-89, Rollo.)
In a letter dated September 24, 1984 to PNB, private respondent registered his protest
against the increase of interest rate from 18% to 32% on July 4, 1984 and from 32% to 41%
on September 6, 1984.
On October 15, 1984, private respondent reiterated his request that the interest rate should
not be increased from 18% to 32% and from 32% to 41%. He also attached (as payment) a
check for P140,000.00.
Like rubbing salt on the private respondents wound, the petitioner informed private
respondent on October 29, 1984, that the interest rate on your outstanding line/loan is
hereby adjusted from 41% p.a. to 48% p.a. (42% prime rate plus 6% spread) effective 25
October 1984. (p. 89, Rollo.)
In November 1984, private respondent paid PNB P50,000.00 thus reducing his principal
loan obligation to P300,000.00.
On December 18, 1984, private respondent filed in the Regional Trial Court of Manila a
complaint against PNB entitled, AMBROSIO PADILLA vs. PHILIPPINE NATIONAL BANK
(Civil Case No. 84-28391), praying that judgment be rendered:
a. Declaring that the unilateral increase of interest rates from 18% to 32%, then to 41%
and again to 48% are illegal, not valid nor binding on plaintiff, and that an adjustment of his
interest rate from 18% to 24% is reasonable, fair and just;
b. The interest rate on the P900,000.00 released on September 27, 1982 be counted
from said date and not from July 4, 1984;

c. The excess of interest payment collected by defendant bank by debiting plaintiffs

current account be refunded to plaintiff or credited to his current account;
d. Pending the determination of the merits of this case, a restraining order and/or a writ
of preliminary injunction be issued (1) to restrain and/or enjoin defendant bank for [sic]
collecting from plaintiff and/or debiting his current account with illegal and excessive
increases of interest rates; and (2) to prevent defendant bank from declaring plaintiff in
default for non-payment and from instituting any foreclosure proceeding, extrajudicial or
judicial, of the valuable commercial property of plaintiff. (pp. 89-90, Rollo.)
In its answer to the complaint, PNB denied that the increases in interest rates were illegal,
unilateral excessive and arbitrary and recited the reasons justifying said increases.
On March 31, 1985, the private respondent paid the P300,000-balance of his obligation to
PNBN (Exh. 5).
The trial court rendered judgment on April 14, 1986, dismissing the complaint because the
increases of interest were properly made.
The private respondent appealed to the Court of Appeals. On June 27, 1989, the Court of
Appeals reversed the trial court, hence, PNBs recourse to this Court by a petition for review
under Rule 45 of the Rules of Court.
The assignments of error raised in PNBs petition for review can be resolved into a single
legal issue of whether the bank, within the term of the loan which it granted to the private
respondent, may unilaterally change or increase the interest rate stipulated therein at will
and as often as it pleased.

x x x We focus Our attention first of all on the agreement between the parties as embodied
in the following instruments, to wit: (1) Exhibit 1Credit Agreement dated July 1, 1982; (2)
Exhibit 2Promissory Note dated July 5, 1982; (3) Exhibit 3Promissory Note dated
January 3, 1983; (4) Exhibit 4Promissory Note, dated December 13, 1983; and (5)
Exhibit 5Real Estate Mortgage contract dated July 1, 1982.
Exhibit 1 states in its portion marked Exhibit 1-g-1:
9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and
regulations of the Central Bank and the current and general policies of the Bank and those
which the Bank may adopt in the future, which may have relation to or in any way affect the
Line, which rules, regulations and policies are incorporated herein by reference as if set
forth herein in full. Promptly upon receipt of a written request from the Bank, the Borrowers
shall execute and deliver such documents and instruments, in form and substance
satisfactory to the Bank, in order to effectuate or otherwise comply with such rules,
regulations and policies.
Exhibits 2, 3, and 4 in their portions respectively marked Exhibits 2-B, 3-B, and 4-B
uniformly authorize the defendant bank to increase the stipualted interest rte of 18% per
annum within the limits allowed by law at any time depending on whatever policy it may
adopt in the future: Provided, that, the interest rate on this note shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced by law or by
the Monetary Board.
Exhibit 5 in its portion marked Exhibit 5-e-1 stipulates:

The answer to that question is no.

(k) INCREASE OF INTEREST RATE

In the first place, although Section 2, P.D. No. 116 of January 29, 1973, authorizes the
Monetary Board to prescribe the maximum rate or rates of interest for loans or renewal
thereof and to change such rate or rates whenever warranted by prevailing economic and
social conditions, it expressly provides that such changes shall not be made oftener than
once every twelve months.

The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in
accordance with the provisions hereof, shall be subject during the life of this contract to
such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.

In this case, PNB, over the objection of the private respondent, and without authority from
the Monetary Board, within a period of only four (4) months, increased the 18% interest rate
on the private respondents loan obligation three (3) times: (a) to 32% in July 1984; (b) to
41% in October 1984; and (c) to 48% in November 1984. Those increases were null and
void, for if the Monetary Board itself was not authorized to make such changes oftener than
once a year, even less so may a bank which is subordinate to the Board.

Clearly, then, the agreement between the parties authorized the defendant bank to
increase the interest rate beyond the original rate of 18% per annum but within the limits
allowed by law or within the rate allowed by law, it being declared the obligation of the
plaintiff as borrower to execute and deliver the corresponding documents and instruments to
effectuate the increase. (pp. 11-12, Rollo.)

Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor did
agree in the Deed of Real Estate Mortgage (Exh. 5) that the interest rate may be increased
during the life of the contract to such increase within the rate allowed by law, as the Board
of Directors of the MORTGAGEE may prescribe (Exh. 5-e-1) or within the limits allowed by
law (Promissory Notes, Exhs. 2, 3, and 4), no law was ever passed in July to November
1984 increasing the interest rates on loans or renewals thereof to 32%, 41% and 48% (per
annum), and no documents were executed and delivered by the debtor to effectuate the
increases. The Court of Appeals observed.

In Banco Filipino Savings and Mortgage Bank vs. Navarro, 15 SCRA 346 (1987), this Court
disauthorized the bank from raising the interest rate on the borrowers loan from 12% to
17% despite an escalation clause in the loan agreement signed by the debtors authorizing
Banco Filipino to correspondingly increase the interest rate stipulated in this contract
without advance notice to me/us in the event a law should be enacted increasing the lawful
rates of interest that may be charged on this particular kind of loan. (italics supplied.)

In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494 dated July 1,
1976 (72 O.G. No. 3, p. 676-J) which provided that the maximum rate of interest, including
commissions premiums, fees and other charges on loans with a maturity of more than 730
days by banking institution x x x shall be 19%.
This Court disallowed the increase for the simple reason that said Circular No. 494,
although it has the effect of law is not a law. Speaking through Mme. Justice Ameurfina M.
Herrera, this Court held:
It is now clear that from March 17, 1980, escalation clauses to be valid should specifically
provide: (1) that there can be an increase in interest if increased by law or by the Monetary
Board; and (2) in order for such stipulation to be valid, it must include a provision for
reduction of the stipulated interest in the event that the applicable maximum rate of interest
is reduced by law or by the Monetary Board. (p. 111, Rollo.)
In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB
Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those
resolution and circulars are neither laws nor resolutions of the Monetary Board.

PNBs successive increases of the interest rate on the private respondents loan, over the
latters protest, were arbitrary as they violated an express provision of the Credit Agreement
(Exh. 1) Section 9.01 that its terms may be amended only by an instrument in writing
signed by the party to be bound as burdened by such amendment. The increases imposed
by PNB also contravene Art. 1956 of the Civil Code which provides that no interest shall be
due unless it has been expressly stipulated in writing.
The debtor herein never agreed in writing to pay the interest increases fixed by the PNB
beyond 24% per annum, hence, he is not bound to pay a higher rate than that.
That an increase in the interest rate from 18% to 48% within a period of four (4) months is
excessive, as found by the Court of Appeals, is indisputable.
WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-G.R.
CV No. 09791, the Court resolved to deny the petition for review for lack of merit, with costs
against the petitioner.
SO ORDERED.

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest
rates

x x x increases in interest rates are not subject to any ceiling prescribed by the Usury Law.
but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively
increase the agreed interest rates from 18% to 48% within a span of four (4) months, in
violation of P.D. 116 which limits such changes to once every twelve months.
Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on
the private respondents loan, violated the mutuality of contracts ordained in Article 1308 of
the Civil Code:
ART. 1308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21
SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB
and the private respondent gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, that license would have been
null and void for being violative of the principle of mutuality essential in contracts. It would
have invested the loan agreement with the character of a contract of adhesion, where the
parties do not bargain on equal footing, the weaker partys (the debtor) participation being
reduced to the alternative to take it or leave it (Qua vs. Law Union & Rock Insurance Co.,
95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.

G.R. No. 187678

April 10, 2013

SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners,

vs.
CHINA BANKING CORPORATION, Respondent.
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, assailing the February 20, 2009 Decision 1 and April 27, 2009
Resolution2 of the Court of Appeals (CA) in CA G.R. CV No. 80338. The CA affirmed the
April 14, 2003 Decision3 of the Regional Trial Court (RTC) of Makati City, Branch 147.
The factual antecedents:
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China
Banking Corporation (respondent) as evidenced by two Promissory Notes both dated
October 6, 1998 and numbered 507-001051-34and 507-001052-0,5 for the sums of !!
6,216,000 and P4, 139,000, respectively. The loan was secured by a Real Estate Mortgage
(REM) over petitioners property located at 49 Greensville St., White Plains, Quezon City
covered by Transfer Certificate of Title (TCT) No. RT-103568 (167394) PR-41208 6 of the
Register of Deeds of Quezon City.
When petitioners failed to pay the monthly amortizations due, respondent demanded the full
payment of the outstanding balance with accrued monthly interests. On September 5, 2000,
petitioners received respondents last demand letter 7 dated August 29, 2000.
As of February 23, 2001, the amount due on the two promissory notes
totaled P19,201,776.63 representing the principal, interests, penalties and attorneys fees.
On the same day, the mortgaged property was sold at public auction, with respondent as
highest bidder for the amount of P10,300,000.

On May 8, 2001, petitioners received8 a demand letter9 dated May 2, 2001 from respondent
for the payment ofP8,901,776.63, the amount of deficiency after applying the proceeds of
the foreclosure sale to the mortgage debt. As its demand remained unheeded, respondent
filed a collection suit in the trial court. In its Complaint, 10respondent prayed that judgment be
rendered ordering the petitioners to pay jointly and severally: (1)P8,901,776.63 representing
the amount of deficiency, plus interests at the legal rate, from February 23, 2001 until fully
paid; (2) an additional amount equivalent to 1/10 of 1% per day of the total amount, until
fully paid, as penalty; (3) an amount equivalent to 10% of the foregoing amounts as
attorneys fees; and (4) expenses of litigation and costs of suit.
In their Answer,11 petitioners admitted the existence of the debt but interposed, by way of
special and affirmative defense, that the complaint states no cause of action considering
that the principal of the loan was already paid when the mortgaged property was
extrajudicially foreclosed and sold for P10,300,000. Petitioners contended that should they
be held liable for any deficiency, it should be only for P55,000 representing the difference
between the total outstanding obligation of P10,355,000 and the bid price of P10,300,000.
Petitioners also argued that even assuming there is a cause of action, such deficiency
cannot be enforced by respondent because it consists only of the penalty and/or
compounded interest on the accrued interest which is generally not favored under the Civil
Code. By way of counterclaim, petitioners prayed that respondent be ordered to
pay P100,000 in attorneys fees and costs of suit.
At the trial, respondent presented Ms. Annabelle Cokai Yu, its Senior Loans Assistant, as
witness. She testified that she handled the account of petitioners and assisted them in
processing their loan application. She called them monthly to inform them of the prevailing
rates to be used in computing interest due on their loan. As of the date of the public auction,
petitioners outstanding balance was P19,201,776.6312 based on the following statement of
account which she prepared:

PN# 507-0010520 due on 04-07-2004

1wphi1
4,139,000.00

Interest on P4,139,000.00 fr. 04-Nov-2000

04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . .

83,346.99

Interest on P4,139,000.00 fr. 04-Dec-2000

04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . .

23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . .

75,579.27

38,781.86

Penalty charge @ 1/10 of 1% of the total amount due

(P4,139,000.00 from 11-04-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . .

1,974,303.00

Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,002,110.73

PN# 507-0010513 due on 04-07-2004

Principal balance of PN# 5070010513. . . . . . . . . . . . . .

6,216,000.00

Interest on P6,216,000.00 fr. 06-Oct-99

04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . .

1,009,035.62

Interest on P6,216,000.00 fr. 04-Nov-2000

04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . .

125,171.51

Interest on P6,216,000.00 fr. 04-Dec-2000

04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . .

113,505.86

Interest on P6,216,000.00 fr. 04-Jan-2001

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . .

102,947.18

Interest on P6,216,000.00 fr. 04-Feb-2001

23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . .

58,243.07

3,145,296.00

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,770,199.23

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,772,309.96

Less: Accounts payable L & D (261,149.39)

Add: 10% Attorneys Fee

622,550.96

68,548.64

Interest on P4,139,000.00 fr. 04-Feb-2001

Less: A/P applied to balance of principal

Interest on P4,139,000.00 fr. 04-Nov-99

04-Nov-2000 366 days @ 15.00%. . . . . . . . . . . . . . . . .

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . .

Penalty charge @ 1/10 of 1% of the total amount due

(P6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . .

STATEMENT OF ACCOUNT
As of FEBRUARY 23, 2001
IGNACIO F. JUICO

Principal balance of PN# 5070010520. . . . . . . . . . . . . .

Interest on P4,139,000.00 fr. 04-Jan-2001

(55,000.00)
17,456,160.57
1,745,616.06

Total amount due

19,201,776.63

Less: Bid Price

10,300,000.00

TOTAL DEFICIENCY AMOUNT AS OF

FEB. 23, 2001

8,901,776.63

13

Petitioners thereafter received a demand letter 14 dated May 2, 2001 from respondents
counsel for the deficiency amount of P8,901,776.63. Ms. Yu further testified that based on

the Statement of Account15 dated March 15, 2002 which she prepared, the outstanding
balance of petitioners was P15,190,961.48.16
On cross-examination, Ms. Yu reiterated that the interest rate changes every month based
on the prevailing market rate and she notified petitioners of the prevailing rate by calling
them monthly before their account becomes past due. When asked if there was any written
authority from petitioners for respondent to increase the interest rate unilaterally, she
answered that petitioners signed a promissory note indicating that they agreed to pay
interest at the prevailing rate.17
Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to
sign a blank promissory note and was informed that the interest rate on the loan will be
based on prevailing market rates. Every month, respondent informs him by telephone of the
prevailing interest rate. At first, he was able to pay his monthly amortizations but when he
started to incur delay in his payments due to the financial crisis, respondent pressured him
to pay in full, including charges and interests for the delay. His property was eventually
foreclosed and was sold at public auction.18
On cross-examination, petitioner testified that he is a Doctor of Medicine and also engaged
in the business of distributing medical supplies. He admitted having read the promissory
notes and that he is aware of his obligation under them before he signed the same. 19
In its decision, the RTC ruled in favor of respondent. The fallo of the RTC decision reads:
WHEREFORE, premises considered, the Complaint is hereby sustained, and Judgment is
rendered ordering herein defendants to pay jointly and severally to plaintiff, the following:
1. P8,901,776.63 representing the amount of the deficiency owing to the plaintiff,
plus interest thereon at the legal rate after February 23, 2001;
2. An amount equivalent to 10% of the total amount due as and for attorneys
fees, there being stipulation therefor in the promissory notes;
3. Costs of suit.
SO ORDERED.20
The trial court agreed with respondent that when the mortgaged property was sold at public
auction on February 23, 2001 for P10,300,000 there remained a balance of P8,901,776.63
since before foreclosure, the total amount due on the two promissory notes aggregated
to P19,201,776.63 inclusive of principal, interests, penalties and attorneys fees. It ruled that
the amount realized at the auction sale was applied to the interest, conformably with Article
1253 of the Civil Code which provides that if the debt produces interest, payment of the
principal shall not be deemed to have been made until the interests have been covered.
This being the case, petitioners principal obligation subsists but at a reduced amount
of P8,901,776.63.

The trial court further held that Ignacios claim that he signed the promissory notes in blank
cannot negate or mitigate his liability since he admitted reading the promissory notes before
signing them. It also ruled that considering the substantial amount involved, it is
unbelievable that petitioners threw all caution to the wind and simply signed the documents
without reading and understanding the contents thereof. It noted that the promissory notes,
including the terms and conditions, are pro forma and what appears to have been left in
blank were the promissory note number, date of the instrument, due date, amount of loan,
and condition that interest will be at the prevailing rates. All of these details, the trial court
added, were within the knowledge of the petitioners.
When the case was elevated to the CA, the latter affirmed the trial courts decision. The CA
recognized respondents right to claim the deficiency from the debtor where the proceeds of
the sale in an extrajudicial foreclosure of mortgage are insufficient to cover the amount of
the debt. Also, it found as valid the stipulation in the promissory notes that interest will be
based on the prevailing rate. It noted that the parties agreed on the interest rate which was
not unilaterally imposed by the bank but was the rate offered daily by all commercial banks
as approved by the Monetary Board. Having signed the promissory notes, the CA ruled that
petitioners are bound by the stipulations contained therein.
Petitioners are now before this Court raising the sole issue of whether the interest rates
imposed upon them by respondent are valid. Petitioners contend that the interest rates
imposed by respondent are not valid as they were not by virtue of any law or Bangko
Sentral ng Pilipinas (BSP) regulation or any regulation that was passed by an appropriate
government entity. They insist that the interest rates were unilaterally imposed by the bank
and thus violate the principle of mutuality of contracts. They argue that the escalation clause
in the promissory notes does not give respondent the unbridled authority to increase the
interest rate unilaterally. Any change must be mutually agreed upon.
Respondent, for its part, points out that petitioners failed to show that their case falls under
any of the exceptions wherein findings of fact of the CA may be reviewed by this Court. It
contends that an inquiry as to whether the interest rates imposed on the loans of petitioners
were supported by appropriate regulations from a government agency or the Central Bank
requires a reevaluation of the evidence on records. Thus, the Court would in effect, be
confronted with a factual and not a legal issue.
The appeal is partly meritorious.
The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code, which
provides:
Article 1308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them. Article 1956 of the Civil Code likewise ordains that
"no interest shall be due unless it has been expressly stipulated in writing."
The binding effect of any agreement between parties to a contract is premised on two
settled principles: (1) that any obligation arising from contract has the force of law between
the parties; and (2) that there must be mutuality between the parties based on their
essential equality. Any contract which appears to be heavily weighed in favor of one of the
parties so as to lead to an unconscionable result is void. Any stipulation regarding the

validity or compliance of the contract which is left solely to the will of one of the parties, is
likewise, invalid.21
Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon
by the contracting parties. This Court has long recognized that there is nothing inherently
wrong with escalation clauses which are valid stipulations in commercial contracts to
maintain fiscal stability and to retain the value of money in long term contracts. 22 Hence,
such stipulations are not void per se.23
Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the
interest independently and upwardly, completely depriving the debtor of the right to assent
to an important modification in the agreement" is void. A stipulation of such nature violates
the principle of mutuality of contracts.24 Thus, this Court has previously nullified the
unilateral determination and imposition by creditor banks of increases in the rate of interest
provided in loan contracts.25
In Banco Filipino Savings & Mortgage Bank v. Navarro, 26 the escalation clause stated: "I/We
hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in
this contract without advance notice to me/us in the event a law should be enacted
increasing the lawful rates of interest that may be charged on this particular kind of loan."
While escalation clauses in general are considered valid, we ruled that Banco Filipino may
not increase the interest on respondent borrowers loan, pursuant to Circular No. 494 issued
by the Monetary Board on January 2, 1976, because said circular is not a law although it
has the force and effect of law and the escalation clause has no provision for reduction of
the stipulated interest "in the event that the applicable maximum rate of interest is reduced
by law or by the Monetary Board" (de-escalation clause).
Subsequently, in Insular Bank of Asia and America v. Spouses Salazar 27 we reiterated that
escalation clauses are valid stipulations but their enforceability are subject to certain
conditions. The increase of interest rate from 19% to 21% per annum made by petitioner
bank was disallowed because it did not comply with the guidelines adopted by the Monetary
Board to govern interest rate adjustments by banks and non-banks performing quasibanking functions.
In the 1991 case of Philippine National Bank v. Court of Appeals, 28 the promissory notes
authorized PNB to increase the stipulated interest per annum "within the limits allowed by
law at any time depending on whatever policy PNB may adopt in the future; Provided, that,
the interest rate on this note shall be correspondingly decreased in the event that the
applicable maximum interest rate is reduced by law or by the Monetary Board." This Court
declared the increases (from 18% to 32%, then to 41% and then to 48%) unilaterally
imposed by PNB to be in violation of the principle of mutuality essential in contracts. 29
A similar ruling was made in a 1994 case30 also involving PNB where the credit agreement
provided that "PNB reserves the right to increase the interest rate within the limits allowed
by law at any time depending on whatever policy it may adopt in the future: Provided, that
the interest rate on this accommodation shall be correspondingly decreased in the event
that the applicable maximum interest is reduced by law or by the Monetary Board x x x".

Again, in 1996, the Court invalidated escalation clauses authorizing PNB to raise the
stipulated interest rate at any time without notice, within the limits allowed by law. The Court
observed that there was no attempt made by PNB to secure the conformity of respondent
borrower to the successive increases in the interest rate. The borrowers assent to the
increases cannot be implied from their lack of response to the letters sent by PNB, informing
them of the increases.31
In the more recent case of Philippine Savings Bank v. Castillo, 32 we sustained the CA in
declaring as unreasonable the following escalation clause: "The rate of interest and/or bank
charges herein stipulated, during the terms of this promissory note, its extensions, renewals
or other modifications, may be increased, decreased or otherwise changed from time to
time within the rate of interest and charges allowed under present or future law(s) and/or
government regulation(s) as the PSBank may prescribe for its debtors." Clearly, the
increase or decrease of interest rates under such clause hinges solely on the discretion of
petitioner as it does not require the conformity of the maker before a new interest rate could
be enforced. We also said that respondents assent to the modifications in the interest rates
cannot be implied from their lack of response to the memos sent by petitioner, informing
them of the amendments, nor from the letters requesting for reduction of the rates. Thus:
the validity of the escalation clause did not give petitioner the unbridled right to
unilaterally adjust interest rates. The adjustment should have still been subjected to the
mutual agreement of the contracting parties. In light of the absence of consent on the part of
respondents to the modifications in the interest rates, the adjusted rates cannot bind them
notwithstanding the inclusion of a de-escalation clause in the loan agreement. 33
It is now settled that an escalation clause is void where the creditor unilaterally determines
and imposes an increase in the stipulated rate of interest without the express conformity of
the debtor. Such unbridled right given to creditors to adjust the interest independently and
upwardly would completely take away from the debtors the right to assent to an important
modification in their agreement and would also negate the element of mutuality in their
contracts.34 While a ceiling on interest rates under the Usury Law was already lifted under
Central Bank Circular No. 905, nothing therein "grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets."35
The two promissory notes signed by petitioners provide:
I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as
the case may be, the interest rate/service charge presently stipulated in this note without
any advance notice to me/us in the event a law or Central Bank regulation is passed or
promulgated by the Central Bank of the Philippines or appropriate government entities,
increasing or decreasing such interest rate or service charge. 36
Such escalation clause is similar to that involved in the case of Floirendo, Jr. v. Metropolitan
Bank and Trust Company37 where this Court ruled:
The provision in the promissory note authorizing respondent bank to increase, decrease or
otherwise change from time to time the rate of interest and/or bank charges "without
advance notice" to petitioner, "in the event of change in the interest rate prescribed by law

or the Monetary Board of the Central Bank of the Philippines," does not give respondent
bank unrestrained freedom to charge any rate other than that which was agreed upon.
Here, the monthly upward/downward adjustment of interest rate is left to the will of
respondent bank alone. It violates the essence of mutuality of the contract. 38
More recently in Solidbank Corporation v. Permanent Homes, Incorporated, 39 we upheld as
valid an escalation clause which required a written notice to and conformity by the borrower
to the increased interest rate. Thus:
The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3
December 1982 of the Monetary Board of the Central Bank, and later by Central Bank
Circular No. 905 which took effect on 1 January 1983. These circulars removed the ceiling
on interest rates for secured and unsecured loans regardless of maturity. The effect of these
circulars is to allow the parties to agree on any interest that may be charged on a loan. The
virtual repeal of the Usury Law is within the range of judicial notice which courts are bound
to take into account. Although interest rates are no longer subject to a ceiling, the lender still
does not have an unbridled license to impose increased interest rates. The lender and the
borrower should agree on the imposed rate, and such imposed rate should be in writing.
The three promissory notes between Solidbank and Permanent all contain the following
provisions:
"5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest
rate agreed in this Note or Loan on the basis of, among others, prevailing rates in the local
or international capital markets. For this purpose, We/I authorize Solidbank to debit any
deposit or placement account with Solidbank belonging to any one of us. The adjustment of
the interest rate shall be effective from the date indicated in the written notice sent to us by
the bank, or if no date is indicated, from the time the notice was sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due
under this Note or Loan within thirty (30) days from the receipt by anyone of us of the written
notice. Otherwise, We/I shall be deemed to have given our consent to the interest rate
adjustment."
The stipulations on interest rate repricing are valid because (1) the parties mutually agreed
on said stipulations; (2) repricing takes effect only upon Solidbanks written notice to
Permanent of the new interest rate; and (3) Permanent has the option to prepay its loan if
Permanent and Solidbank do not agree on the new interest rate. The phrases "irrevocably
authorize," "at any time" and "adjustment of the interest rate shall be effective from the date
indicated in the written notice sent to us by the bank, or if no date is indicated, from the time
the notice was sent," emphasize that Permanent should receive a written notice from
Solidbank as a condition for the adjustment of the interest rates. (Emphasis supplied.)
In this case, the trial and appellate courts, in upholding the validity of the escalation clause,
underscored the fact that there was actually no fixed rate of interest stipulated in the
promissory notes as this was made dependent on prevailing rates in the market. The
subject promissory notes contained the following condition written after the first paragraph:

With one year grace period on principal and thereafter payable in 54 equal monthly
instalments to start on the second year. Interest at the prevailing rates payable quarterly in
arrears.40
In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner cardholder assailed the trial and appellate
courts in ruling for the validity of the escalation clause in the Cardholders Agreement. On
petitioners contention that the interest rate was unilaterally imposed and based on the
standards and rate formulated solely by respondent credit card company, we held:
The contractual provision in question states that "if there occurs any change in the
prevailing market rates, the new interest rate shall be the guiding rate in computing the
interest due on the outstanding obligation without need of serving notice to the Cardholder
other than the required posting on the monthly statement served to the Cardholder." This
could not be considered an escalation clause for the reason that it neither states an
increase nor a decrease in interest rate. Said clause simply states that the interest rate
should be based on the prevailing market rate.
Interpreting it differently, while said clause does not expressly stipulate a reduction in
interest rate, it nevertheless provides a leeway for the interest rate to be reduced in case the
prevailing market rates dictate its reduction.
Admittedly, the second paragraph of the questioned proviso which provides that "the
Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such
interest in the event of changes in prevailing market rates x x x" is an escalation clause.
However, it cannot be said to be dependent solely on the will of private respondent as it is
also dependent on the prevailing market rates.
Escalation clauses are not basically wrong or legally objectionable as long as they are not
solely potestative but based on reasonable and valid grounds. Obviously, the fluctuation in
the market rates is beyond the control of private respondent. 42 (Emphasis supplied.)
In interpreting a contract, its provisions should not be read in isolation but in relation to each
other and in their entirety so as to render them effective, having in mind the intention of the
parties and the purpose to be achieved. The various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense which may result from all of
them taken jointly.43
Here, the escalation clause in the promissory notes authorizing the respondent to adjust the
rate of interest on the basis of a law or regulation issued by the Central Bank of the
Philippines, should be read together with the statement after the first paragraph where no
rate of interest was fixed as it would be based on prevailing market rates. While the latter is
not strictly an escalation clause, its clear import was that interest rates would vary as
determined by prevailing market rates. Evidently, the parties intended the interest on
petitioners loan, including any upward or downward adjustment, to be determined by the
prevailing market rates and not dictated by respondents policy. It may also be mentioned
that since the deregulation of bank rates in 1983, the Central Bank has shifted to a marketoriented interest rate policy.44

There is no indication that petitioners were coerced into agreeing with the foregoing
provisions of the promissory notes. In fact, petitioner Ignacio, a physician engaged in the
medical supply business, admitted having understood his obligations before signing them.
At no time did petitioners protest the new rates imposed on their loan even when their
property was foreclosed by respondent.
This notwithstanding, we hold that the escalation clause is still void because it grants
respondent the power to impose an increased rate of interest without a written notice to
petitioners and their written consent. Respondents monthly telephone calls to petitioners
advising them of the prevailing interest rates would not suffice. A detailed billing statement
based on the new imposed interest with corresponding computation of the total debt should
have been provided by the respondent to enable petitioners to make an informed decision.
An appropriate form must also be signed by the petitioners to indicate their conformity to the
new rates. Compliance with these requisites is essential to preserve the mutuality of
contracts. For indeed, one-sided impositions do not have the force of law between the
parties, because such impositions are not based on the parties essential equality.45
Modifications in the rate of interest for loans pursuant to an escalation clause must be the
result of an agreement between the parties. Unless such important change in the contract
terms is mutually agreed upon, it has no binding effect. 46 In the absence of consent on the
part of the petitioners to the modifications in the interest rates, the adjusted rates cannot
bind them. Hence, we consider as invalid the interest rates in excess of 15%, the rate
charged for the first year.
Based on the August 29, 2000 demand letter of China Bank, petitioners total principal
obligation under the two promissory notes which they failed to settle is P10,355,000.
However, due to China Banks unilateral increases in the interest rates from 15% to as high
as 24.50% and penalty charge of 1/10 of 1% per day or 36.5% per annum for the period
November 4, 1999 to February 23, 2001, petitioners balance ballooned to P19,201,776.63.
Note that the original amount of principal loan almost doubled in only 16 months. The Court
also finds the penalty charges imposed excessive and arbitrary, hence the same is hereby
reduced to 1% per month or 12% per annum.1wphi1
Petitioners Statement of Account, as of February 23, 2001, the date of the foreclosure
proceedings, should thus be modified as follows:
Principal
Interest at 15% per annum
P10,355,000 x .15 x 477 days/365 days
Penalty at 12% per annum

P10,355,000.00
2,029,863.70
1,623 ,890. 96

P10,355,000 x .12 x 477days/365 days

Sub-Total
Less: A/P applied to balance of principal
Less: Accounts payable L & D

14,008,754.66
(55,000.00)
(261,149.39)

13,692,605.27
Add: Attorney's Fees

1,369,260.53

Total Amount Due

15,061,865.79

Less: Bid Price

10,300,000.00

TOTAL DEFICIENCY AMOUNT

4,761,865.79

WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The February 20,
2009 Decision and April 27, 2009 Resolution of the Court of Appeals in CA G.R. CV No.
80338 are hereby MODIFIED. Petitioners Spouses Ignacio F. Juico and Alice P. Juico are
hereby ORDERED to pay jointly and severally respondent China Banking Corporation P4, 7
61 ,865. 79 representing the amount of deficiency inclusive of interest, penalty charge and
attorney's fees. Said amount shall bear interest at 12% per annum, reckoned from the time
of the filing of the complaint until its full satisfaction.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 181045

July 2, 2014

SPOUSES EDUARDO and LYDIA SILOS, Petitioners,

vs.
PHILIPPINE NATIONAL BANK, Respondent.
In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not
the most important component. Thus, any modification thereof must be mutually agreed
upon; otherwise, it has no binding effect. Moreover, the Court cannot consider a stipulation
granting a party the option to prepay the loan if said party is not agreeable to the arbitrary
interest rates imposed. Premium may not be placed upon a stipulation in a contract which
grants one party the right to choose whether to continue with or withdraw from the
agreement if it discovers that what the other party has been doing all along is improper or
illegal.
This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2 of the Court of
Appeals (CA) in CA-G.R. CV No. 79650, which affirmed with modifications the February 28,
2003 Decision3 and the June 4, 2003 Order4 of the Regional Trial Court (RTC), Branch 6 of
Kalibo, Aklan in Civil Case No. 5975.
Factual Antecedents

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

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

To secure a one-year revolving credit line of P150,000.00 obtained from PNB, petitioners
constituted in August 1987 a Real Estate Mortgage 5 over a 370-square meter lot in Kalibo,
Aklan covered by Transfer Certificate of Title No. (TCT) T-14250. In July 1988,the credit line
was increased to P1.8 million and the mortgage was correspondingly increased to P1.8
million.6

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

And in July 1989, a Supplement to the Existing Real Estate Mortgage 7 was executed to
cover the same credit line, which was increased to P2.5 million, and additional security was
given in the form of a 134-square meter lot covered by TCT T-16208. In addition, petitioners
issued eight Promissory Notes8 and signed a Credit Agreement.9This July 1989 Credit
Agreement contained a stipulation on interest which provides as follows:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum.
Interest shall be payable in advance every one hundred twenty days at the rate prevailing at
the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending
on whatever policy the Bank may adopt in the future, including without limitation, the shifting
from the floating interest rate system to the fixed interest rate system, or vice versa. Where
the Bank has imposed on the Loan interest at a rate per annum, which is equal to the
Banks spread over the current floating interest rate, the Borrower hereby agrees that the
Bank may, without need of notice to the Borrower, increase or decrease its spread over the
floating interest rate at any time depending on whatever policy it may adopt in the
future.10 (Emphases supplied)
The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the
right to increase or reduce interest rates "within the limits allowed by law or by the Monetary
Board."11
The Real Estate Mortgage agreement provided the same right to increase or reduce interest
rates "at any time depending on whatever policy PNB may adopt in the future." 12

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

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

In August 1991, an Amendment to Credit Agreement 14 was executed by the parties, with the
following stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment
thereof at the rate per annum which is determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment. 15 (Emphases supplied)
Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following
18 Promissory Notes, which petitioners settled except the last (the note covering the
principal) at the following interest rates:
1. 9th Promissory Note dated November 8, 1991 26%;
2. 10th Promissory Note dated March 19, 1992 25%;
3. 11th Promissory Note dated July 11, 1992 23%;
4. 12th Promissory Note dated November 10, 1992 21%;
5. 13th Promissory Note dated March 15, 1993 21%;
6. 14th Promissory Note dated July 12, 1993 17.5%;
7. 15th Promissory Note dated November 17, 1993 21%;

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

8. 16th Promissory Note dated March 28, 1994 21%;
1. 1st Promissory Note dated July 24, 1989 19.5%;
9. 17th Promissory Note dated July 13, 1994 21%;
2. 2nd Promissory Note dated November 22, 1989 23%;
10. 18th Promissory Note dated November 16, 1994 16%;
3. 3rd Promissory Note dated March 21, 1990 22%;
11. 19th Promissory Note dated April 10, 1995 21%;
4. 4th Promissory Note dated July 19, 1990 24%;

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

13. 21st Promissory Note dated December 18, 1995 18.75%;
14. 22nd Promissory Note dated April 22, 1996 18.5%;
15. 23rd Promissory Note dated July 22, 1996 18.5%;

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

P 2,500,000.00

Interest

538,874.94

Penalties

581,666.66

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

17. 25th Promissory Note dated May 30, 1997 17.5%; and
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 25%. 16
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the
Bank may at any time without notice, raise within the limits allowed by law x x x." 17
On the other hand, the 18th up to the 26th promissory notes including PN 9707237, which
is the 26th promissory note carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be
increased or decreased for the subsequent Interest Periods, with prior notice to the
Borrower in the event of changes in interest rate prescribed by law or the Monetary Board of
the Central Bank of the Philippines, or in the Banks overall cost of funds. I/We hereby agree
that in the event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we
shall have the option top repay the loan or credit facility without penalty within ten (10)
calendar days from the Interest Setting Date. 18 (Emphasis supplied)
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on
the promissory notes, religiously paying the interests without objection or fail. But in 1997,
petitioners faltered when the interest rates soared due to the Asian financial crisis.
Petitioners sole outstanding promissory note for P2.5 million PN 9707237 executed in
July 1997 and due 120 days later or on October 28, 1997 became past due, and despite
repeated demands, petitioners failed to make good on the note.
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of
default, as follows:
Without need for notice or demand, failure to pay this note or any installment thereon, when
due, shall constitute default and in such cases or in case of garnishment, receivership or
bankruptcy or suit of any kind filed against me/us by the Bank, the outstanding principal of
this note, at the option of the Bank and without prior notice of demand, shall immediately
become due and payable and shall be subject to a penalty charge of twenty four percent
(24%) per annum based on the defaulted principal amount. x x x 19 (Emphasis supplied)

Total

P 3,620,541.60

Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on
the mortgage, and on January 14, 1999, TCTs T-14250 and T-16208 were sold to it at
auction for the amount of P4,324,172.96.21 The sheriffs certificate of sale was registered on
March 11, 1999.
More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975, seeking
annulment of the foreclosure sale and an accounting of the PNB credit. Petitioners theorized
that after the first promissory note where they agreed to pay 19.5% interest, the succeeding
stipulations for the payment of interest in their loan agreements with PNB which allegedly
left to the latter the sole will to determine the interest rate became null and void.
Petitioners added that because the interest rates were fixed by respondent without their
prior consent or agreement, these rates are void, and as a result, petitioners should only be
made liable for interest at the legal rate of 12%. They claimed further that they overpaid
interests on the credit, and concluded that due to this overpayment of steep interest
charges, their debt should now be deemed paid, and the foreclosure and sale of TCTs T14250 and T-16208 became unnecessary and wrongful. As for the imposed penalty
of P581,666.66, petitioners alleged that since the Real Estate Mortgage and the
Supplement thereto did not include penalties as part of the secured amount, the same
should be excluded from the foreclosure amount or bid price, even if such penalties are
provided for in the final Promissory Note, or PN 9707237. 22
In addition, petitioners sought to be reimbursed an alleged overpayment of P848,285.00
made during the period August 21, 1991 to March 5, 1998,resulting from respondents
imposition of the alleged illegal and steep interest rates. They also prayed to be
awarded P200,000.00 by way of attorneys fees.23
In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates; that petitioners
agreed that without prior notice, PNB may modify interest rates depending on future policy
adopted by it; and that the imposition of penalties was agreed upon in the Credit Agreement.
It added that the imposition of penalties is supported by the all-inclusive clause in the Real
Estate Mortgage agreement which provides that the mortgage shall stand as security for
any and all other obligations of whatever kind and nature owing to respondent, which thus
includes penalties imposed upon default or non-payment of the principal and interest on due
date.
On pre-trial, the parties mutually agreed to the following material facts, among others:

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

be applicable is valid,31 as was held in Consolidated Bank and Trust Corporation

(SOLIDBANK) v. Court of Appeals;32

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

2. Banks are allowed to stipulate that interest rates on loans need not be fixed
and instead be made dependent on prevailing rates upon which to peg such
variable interest rates;33

During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the
Amendment to Credit Agreement, Real Estate Mortgage and the Supplement thereto were
all prepared by respondent PNB and were presented to her and her husband Eduardo only
for signature; that she was told by PNB that the latter alone would determine the interest
rate; that as to the Amendment to Credit Agreement, she was told that PNB would fill up the
interest rate portion thereof; that at the time the parties executed the said Credit Agreement,
she was not informed about the applicable spread that PNB would impose on her account;
that the interest rate portion of all Promissory Notes she and Eduardo issued were always
left in blank when they executed them, with respondents mere assurance that it would be
the one to enter or indicate thereon the prevailing interest rate at the time of availment; and
that they agreed to such arrangement. She further testified that the two Real Estate
Mortgage agreements she signed did not stipulate the payment of penalties; that she and
Eduardo consulted with a lawyer, and were told that PNBs actions were improper, and so
on March 20, 2000, they wrote to the latter seeking a recomputation of their outstanding
obligation; and when PNB did not oblige, they instituted Civil Case No. 5975. 27
On cross-examination, Lydia testified that she has been in business for 20 years; that she
also borrowed from other individuals and another bank; that it was only with banks that she
was asked to sign loan documents with no indicated interest rate; that she did not bother to
read the terms of the loan documents which she signed; and that she received several PNB
statements of account detailing their outstanding obligations, but she did not complain; that
she assumed instead that what was written therein is correct. 28
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness for
respondent, stated on cross-examination that as a practice, the determination of the prime
rates of interest was the responsibility solely of PNBs Treasury Department which is based
in Manila; that these prime rates were simply communicated to all PNB branches for
implementation; that there are a multitude of considerations which determine the interest
rate, such as the cost of money, foreign currency values, PNBs spread, bank administrative
costs, profitability, and the practice in the banking industry; that in every repricing of each
loan availment, the borrower has the right to question the rates, but that this was not done
by the petitioners; and that anything that is not found in the Promissory Note may be
supplemented by the Credit Agreement.29
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment dismissing Civil Case No. 5975. 30
It ruled that:
1. While the Credit Agreement allows PNB to unilaterally increase its spread over
the floating interest rate at any time depending on whatever policy it may adopt in
the future, it likewise allows for the decrease at any time of the same. Thus, such
stipulation authorizing both the increase and decrease of interest rates as may

3. The Promissory Note, as the principal contract evidencing petitioners loan,

prevails over the Credit Agreement and the Real Estate Mortgage.
As such, the rate of interest, penalties and attorneys fees stipulated in the
Promissory Note prevail over those mentioned in the Credit Agreement and the
Real Estate Mortgage agreements;34
4. Roughly, PNBs computation of the total amount of petitioners obligation is
correct;35
5. Because the loan was admittedly due and demandable, the foreclosure was
regularly made;36
6. By the admission of petitioners during pre-trial, all payments made to PNB
were properly applied to the principal, interest and penalties. 37
The dispositive portion of the trial courts Decision reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the respondent
and against the petitioners by DISMISSING the latters petition.
Costs against the petitioners.
SO ORDERED.38
Petitioners moved for reconsideration. In an Order 39 dated June 4, 2003, the trial court
granted only a modification in the award of attorneys fees, reducing the same from 10% to
1%. Thus, PNB was ordered to refund to petitioner the excess in attorneys fees in the
amount of P356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate
charged by the respondent as well as the extra-judicial foreclosure proceedings and the
Certificate of Sale. However, respondent is directed to refund to the petitioner the amount
of P356,589.90 representing the excess interest charged against the latter.
No pronouncement as to costs.
SO ORDERED.40

Ruling of the Court of Appeals

Petitioners appealed to the CA, which issued the questioned Decision with the following
decretal portion:
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The
modified Decision of the Regional Trial Court per Order dated June 4, 2003 is hereby
AFFIRMED with MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the expiration of the first 30-day
interest period for PN. No. 9707237 should be 12% per annum;
2. [T]hat the attorneys fees of10% is valid and binding; and
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid
price of P377,505.99 which is the difference between the total amount due [PNB]
and the amount of its bid price.
SO ORDERED.41
On the other hand, respondent did not appeal the June 4,2003 Order of the trial court which
reduced its award of attorneys fees. It simply raised the issue in its appellees brief in the
CA, and included a prayer for the reversal of said Order.

On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage
agreements contemplated the inclusion of the PN 9707237-stipulated 24% penalty in the
amount to be secured by the mortgaged property, thus
For and in consideration of certain loans, overdrafts and other credit accommodations
obtained from the MORTGAGEE and to secure the payment of the same and those others
that the MORTGAGEE may extend to the MORTGAGOR, including interest and expenses,
and other obligations owing by the MORTGAGOR to the MORTGAGEE, whether direct or
indirect, principal or secondary, as appearing in the accounts, books and records of the
MORTGAGEE, the MORTGAGOR does hereby transfer and convey by way of mortgage
unto the MORTGAGEE x x x43 (Emphasis supplied)
The CA believes that the 24% penalty is covered by the phrase "and other obligations owing
by the mortgagor to the mortgagee" and should thus be added to the amount secured by the
mortgages.44
The CA then proceeded to declare valid the foreclosure and sale of properties covered by
TCTs T-14250 and T-16208, which came as a necessary result of petitioners failure to pay
the outstanding obligation upon demand.45The CA saw fit to increase the trial courts award
of 1% to 10%, finding the latter rate to be reasonable and citing the Real Estate Mortgage
agreement which authorized the collection of the higher rate. 46
Finally, the CA ruled that petitioners are entitled to P377,505.09 surplus, which is the
difference between PNBs bid price of P4,324,172.96 and petitioners total computed
obligation as of January 14, 1999, or the date of the auction sale, in the amount
of P3,946,667.87.47

In effect, the CA limited petitioners appeal to the following issues:

Hence, the present Petition.
1) Whether x x x the interest rates on petitioners outstanding obligation were
unilaterally and arbitrarily imposed by PNB;
2) Whether x x x the penalty charges were secured by the real estate mortgage;
and
3) Whether x x x the extrajudicial foreclosure and sale are valid. 42
The CA noted that, based on receipts presented by petitioners during trial, the latter dutifully
paid a total ofP3,027,324.60 in interest for the period August 7, 1991 to August 6, 1997,
over and above the P2.5 million principal obligation. And this is exclusive of payments for
insurance premiums, documentary stamp taxes, and penalty. All the while, petitioners did
not complain nor object to the imposition of interest; they in fact paid the same religiously
and without fail for seven years. The appellate court ruled that petitioners are thus estopped
from questioning the same.
The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB
wrongly applied an interest rate of 25.72% instead of the agreed 25%; thus it overcharged
petitioners, and the latter paid, an excess ofP736.56 in interest.

Issues
The following issues are raised in this Petition:
I
A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT
ERRED IN NOT NULLIFYING THE INTEREST RATE PROVISION IN
THE CREDIT AGREEMENT DATED JULY 24, 1989 X X X AND IN
THE AMENDMENT TO CREDIT AGREEMENT DATEDAUGUST 21,
1991 X X X WHICH LEFT TO THE SOLE UNILATERAL
DETERMINATION OF THE RESPONDENT PNB THE ORIGINAL
FIXING OF INTEREST RATE AND ITS INCREASE, WHICH
AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF THE [NEW
CIVIL CODE], AS ENUNCIATED IN PONCIANO ALMEIDA V. COURT
OF APPEALS,G.R. [NO.] 113412, APRIL 17, 1996, AND CONTRARY
TO PUBLIC POLICY AND PUBLIC INTEREST, AND IN APPLYING
THE PRINCIPLE OF ESTOPPEL ARISING FROM THE ALLEGED

DELAYED COMPLAINT OF PETITIONER[S], AND [THEIR]

PAYMENT OF THE INTEREST CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER
COURT ERRED IN NOT DECLARING THAT PNB IS NOT AT ALL
ENTITLED TO ANY INTEREST EXCEPT THE LEGAL RATE FROM
DATE OF DEMAND, AND IN NOT APPLYING THE EXCESS OVER
THE LEGAL RATE OF THE ADMITTED PAYMENTS MADE BY
PETITIONER[S] FROM 1991-1998 IN THE ADMITTED TOTAL
AMOUNT OF P3,484,287.00, TO PAYMENT OF THE PRINCIPAL
OFP2,500,000.[00] LEAVING AN OVERPAYMENT OFP984,287.00
REFUNDABLE BY RESPONDENT TO PETITIONER[S] WITH
INTEREST OF 12% PER ANNUM.
II
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT
PENALTIES ARE INCLUDEDIN THE SECURED AMOUNT, SUBJECT TO
FORECLOSURE, WHEN NO PENALTIES ARE MENTIONED [NOR] PROVIDED FOR IN
THE REAL ESTATE MORTGAGE AS A SECURED AMOUNT AND THEREFORE THE
AMOUNT OF PENALTIES SHOULDHAVE BEEN EXCLUDED FROM [THE]
FORECLOSURE AMOUNT.
III
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER
COURT, WHICH REDUCED THE ATTORNEYS FEES OF 10% OF THE TOTAL
INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL FORECLOSURE TOONLY
1%, AND [AWARDING] 10% ATTORNEYS FEES.48
Petitioners Arguments
Petitioners insist that the interest rate provision in the Credit Agreement and the Amendment
to Credit Agreement should be declared null and void, for they relegated to PNB the sole
power to fix interest rates based on arbitrary criteria or factors such as bank policy,
profitability, cost of money, foreign currency values, and bank administrative costs; spaces
for interest rates in the two Credit Agreements and the promissory notes were left blank for
PNB to unilaterally fill, and their consent or agreement to the interest rates imposed
thereafter was not obtained; the interest rate, which consists of the prime rate plus the bank
spread, is determined not by agreement of the parties but by PNBs Treasury Department in
Manila. Petitioners conclude that by this method of fixing the interest rates, the principle of
mutuality of contracts is violated, and public policy as well as Circular 905 49 of the then
Central Bank had been breached.
Petitioners question the CAs application of the principle of estoppel, saying that no estoppel
can proceed from an illegal act. Though they failed to timely question the imposition of the
alleged illegal interest rates and continued to pay the loan on the basis of these rates, they
cannot be deemed to have acquiesced, and hence could recover what they erroneously
paid.50

Petitioners argue that if the interest rates were nullified, then their obligation to PNB is
deemed extinguished as of July 1997; moreover, it would appear that they even made an
over payment to the bank in the amount ofP984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage agreements did not include
nor specify, as part of the secured amount, the penalty of 24% authorized in PN 9707237,
such amount of P581,666.66 could not be made answerable by or collected from the
mortgages covering TCTs T-14250 and T-16208. Claiming support from Philippine Bank of
Communications [PBCom] v. Court of Appeals,51 petitioners insist that the phrase "and other
obligations owing by the mortgagor to the mortgagee" 52 in the mortgage agreements cannot
embrace theP581,666.66 penalty, because, as held in the PBCom case, "[a] penalty charge
does not belong to the species of obligations enumerated in the mortgage, hence, the said
contract cannot be understood to secure the penalty"; 53while the mortgages are the
accessory contracts, what items are secured may only be determined from the provisions of
the mortgage contracts, and not from the Credit Agreement or the promissory notes.
Finally, petitioners submit that the trial courts award of 1% attorneys fees should be
maintained, given that in foreclosures, a lawyers work consists merely in the preparation
and filing of the petition, and involves minimal study.54 To allow the imposition of a
staggering P396,211.00 for such work would be contrary to equity. Petitioners state that the
purpose of attorneys fees in cases of this nature "is not to give respondent a larger
compensation for the loan than the law already allows, but to protect it against any future
loss or damage by being compelled to retain counsel x x x to institute judicial proceedings
for the collection of its credit."55 And because the instant case involves a simple extrajudicial
foreclosure, attorneys fees may be equitably tempered.
Respondents Arguments
For its part, respondent disputes petitioners claim that interest rates were unilaterally fixed
by it, taking relief in the CA pronouncement that petitioners are deemed estopped by their
failure to question the imposed rates and their continued payment thereof without
opposition. It adds that because the Credit Agreement and promissory notes contained both
an escalation clause and a de-escalation clause, it may not be said that the bank violated
the principle of mutuality. Besides, the increase or decrease in interest rates have been
mutually agreed upon by the parties, as shown by petitioners continuous payment without
protest. Respondent adds that the alleged unilateral imposition of interest rates is not a
proper subject for review by the Court because the issue was never raised in the lower
court.
As for petitioners claim that interest rates imposed by it are null and void for the reasons
that 1) the Credit Agreements and the promissory notes were signed in blank; 2) interest
rates were at short periods; 3) no interest rates could be charged where no agreement on
interest rates was made in writing; 4) PNB fixed interest rates on the basis of arbitrary
policies and standards left to its choosing; and 5) interest rates based on prime rate plus
applicable spread are indeterminate and arbitrary PNB counters:
a. That Credit Agreements and promissory notes were signed by petitioner[s] in
blank Respondent claims that this issue was never raised in the lower court.
Besides, documentary evidence prevails over testimonial evidence; Lydia Silos
testimony in this regard is self-serving, unsupported and uncorroborated, and for

being the lone evidence on this issue. The fact remains that these documents are
in proper form, presumed regular, and endure, against arbitrary claims by Silos
who is an experienced business person that she signed questionable loan
documents whose provisions for interest rates were left blank, and yet she
continued to pay the interests without protest for a number of years. 56
b. That interest rates were at short periods Respondent argues that the law
which governs and prohibits changes in interest rates made more than once
every twelve months has been removed57 with the issuance of Presidential
Decree No. 858.58
c. That no interest rates could be charged where no agreement on interest rates
was made in writing in violation of Article 1956 of the Civil Code, which provides
that no interest shall be due unless it has been expressly stipulated in writing
Respondent insists that the stipulated 25% per annum as embodied in PN
9707237 should be imposed during the interim, or the period after the loan
became due and while it remains unpaid, and not the legal interest of 12% as
claimed by petitioners.59
d. That PNB fixed interest rates on the basis of arbitrary policies and standards
left to its choosing According to respondent, interest rates were fixed taking into
consideration increases or decreases as provided by law or by the Monetary
Board, the banks overall costs of funds, and upon agreement of the parties. 60
e. That interest rates based on prime rate plus applicable spread are
indeterminate and arbitrary On this score, respondent submits there are
various factors that influence interest rates, from political events to economic
developments, etc.; the cost of money, profitability and foreign currency
transactions may not be discounted.61
On the issue of penalties, respondent reiterates the trial courts finding that during pre-trial,
petitioners admitted that the Statement of Account as of October 12, 1998 which detailed
and included penalty charges as part of the total outstanding obligation owing to the bank
was correct. Respondent justifies the imposition and collection of a penalty as a normal
banking practice, and the standard rate per annum for all commercial banks, at the time,
was 24%.
Respondent adds that the purpose of the penalty or a penal clause for that matter is to
ensure the performance of the obligation and substitute for damages and the payment of
interest in the event of non-compliance.62 And the promissory note being the principal
agreement as opposed to the mortgage, which is a mere accessory should prevail. This
being the case, its inclusion as part of the secured amount in the mortgage agreements is
valid and necessary.
Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-empting
consolidation of its ownership over TCTs T-14250 and T-16208; that petitioners filed Civil
Case No. 5975 ostensibly to question the foreclosure and sale of properties covered by
TCTs T-14250 and T-16208 in a desperate move to retain ownership over these properties,
because they failed to timely redeem them.

Respondent directs the attention of the Court to its petition in G.R. No. 181046, 63 where the
propriety of the CAs ruling on the following issues is squarely raised:
1. That the interest rate to be applied after the expiration of the first 30-day
interest period for PN 9707237 should be 12% per annum; and
2. That PNB should reimburse petitioners the excess in the bid price
of P377,505.99 which is the difference between the total amount due to PNB and
the amount of its bid price.
Our Ruling
The Court grants the Petition.
Before anything else, it must be said that it is not the function of the Court to re-examine or
re-evaluate evidence adduced by the parties in the proceedings below. The rule admits of
certain well-recognized exceptions, though, as when the lower courts findings are not
supported by the evidence on record or are based on a misapprehension of facts, or when
certain relevant and undisputed facts were manifestly overlooked that, if properly
considered, would justify a different conclusion. This case falls within such exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the Courts First
Division denying respondents petition in G.R. No. 181046, due to late filing, failure to attach
the required affidavit of service of the petition on the trial court and the petitioners, and
submission of a defective verification and certification of non-forum shopping. On June 25,
2008, the Court issued another Resolution denying with finality respondents motion for
reconsideration of the March 5, 2008 Resolution. And on August 15, 2008, entry of judgment
was made. This thus settles the issues, as above-stated, covering a) the interest rate or
12% per annum that applies upon expiration of the first 30 days interest period provided
under PN 9707237, and b)the CAs decree that PNB should reimburse petitioner the excess
in the bid price of P377,505.09.
It appears that respondents practice, more than once proscribed by the Court, has been
carried over once more to the petitioners. In a number of decided cases, the Court struck
down provisions in credit documents issued by PNB to, or required of, its borrowers which
allow the bank to increase or decrease interest rates "within the limits allowed by law at any
time depending on whatever policy it may adopt in the future." Thus, in Philippine National
Bank v. Court of Appeals,64 such stipulation and similar ones were declared in violation of
Article 130865 of the Civil Code. In a second case, Philippine National Bank v. Court of
Appeals,66 the very same stipulations found in the credit agreement and the promissory
notes prepared and issued by the respondent were again invalidated. The Court therein
said:
The Credit Agreement provided inter alia, that
(a) The BANK reserves the right to increase the interest rate within the limits allowed by law
at any time depending on whatever policy it may adopt in the future; Provided, that the
interest rate on this accommodation shall be correspondingly decreased in the event that

the applicable maximum interest is reduced by law or by the Monetary Board. In either case,
the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in the maximum interest rate.

Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges.

The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time
without notice, beyond the stipulated rate of 12% but only "within the limits allowed by law."
The Real Estate Mortgage contract likewise provided that
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured
by this mortgage as well as the interest on the amount which may have been advanced by
the MORTGAGEE, in accordance with the provision hereof, shall be subject during the life
of this contract to such an increase within the rate allowed by law, as the Board of Directors
of the MORTGAGEE may prescribe for its debtors.
xxxx
In making the unilateral increases in interest rates, petitioner bank relied on the escalation
clause contained in their credit agreement which provides, as follows:
The Bank reserves the right to increase the interest rate within the limits allowed by law at
any time depending on whatever policy it may adopt in the future and provided, that, the
interest rate on this accommodation shall be correspondingly decreased in the event that
the applicable maximum interest rate is reduced by law or by the Monetary Board. In either
case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date
of the increase or decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further
amended Act No. 2655 ("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after Section 7, to
read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or
credits may stipulate that the rate of interest agreed upon may be increased in the event
that the applicable maximum rate of interest is increased bylaw or by the Monetary Board;
Provided, That such stipulation shall be valid only if there is also a stipulation in the
agreement that the rate of interest agreed upon shall be reduced in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided
further, That the adjustment in the rate of interest agreed upon shall take effect on or after
the effectivity of the increase or decrease in the maximum rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central Banks Monetary Board to prescribe
the maximum rates of interest for loans and certain forbearances. Pursuant to such
authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982,
Section 5 of which provides:

The rate of interest, including commissions, premiums, fees and other charges, on any
loan, or forbearance of any money, goods or credits, regardless of maturity and whether
secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to
the Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate
freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan
or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or
downward, the interest previously stipulated. However, contrary to the stubborn insistence
of petitioner bank, the said law and circular did not authorize either party to unilaterally raise
the interest rate without the others consent.
It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one
who contracts, his act has no more efficacy than if it had been done under duress or by a
person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The
minds of all the parties must meet as to the proposed modification, especially when it affects
an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid
that the rate of interest is always a vital component, for it can make or break a capital
venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any
binding effect.
We cannot countenance petitioner banks posturing that the escalation clause at bench
gives it unbridled right to unilaterally upwardly adjust the interest on private respondents
loan. That would completely take away from private respondents the right to assent to an
important modification in their agreement, and would negate the element of mutuality in
contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545
(1991) we held
x x x The unilateral action of the PNB in increasing the interest rate on the private
respondents loan violated the mutuality of contracts ordained in Article 1308 of the Civil
Code:
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them.
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void . . . . Hence, even assuming that
the . . . loan agreement between the PNB and the private respondent gave the PNB a

license (although in fact there was none) to increase the interest rate at will during the term
of the loan, that license would have been null and void for being violative of the principle of
mutuality essential in contracts. It would have invested the loan agreement with the
character of a contract of adhesion, where the parties do not bargain on equal footing, the
weaker partys (the debtor) participation being reduced to the alternative "to take it or leave
it" . . . . Such a contract is a veritable trap for the weaker party whom the courts of justice
must protect against abuse and imposition.67 (Emphases supplied)
Then again, in a third case, Spouses Almeda v. Court of Appeals, 68 the Court invalidated the
very same provisions in the respondents prepared Credit Agreement, declaring thus:
The binding effect of any agreement between parties to a contract is premised on two
settled principles: (1) that any obligation arising from contract has the force of law between
the parties; and (2) that there must be mutuality between the parties based on their
essential equality. Any contract which appears to be heavily weighed in favor of one of the
parties so as to lead to an unconscionable result is void. Any stipulation regarding the
validity or compliance of the contract which is left solely to the will of one of the parties, is
likewise, invalid.

escalation clause patently unreasonable and unconscionable, but also there are no valid
and reasonable standards upon which the increases are anchored.
xxxx
In the face of the unequivocal interest rate provisions in the credit agreement and in the law
requiring the parties to agree to changes in the interest rate in writing, we hold that the
unilateral and progressive increases imposed by respondent PNB were null and void. Their
effect was to increase the total obligation on an eighteen million peso loan to an amount
way over three times that which was originally granted to the borrowers. That these
increases, occasioned by crafty manipulations in the interest rates is unconscionable and
neutralizes the salutary policies of extending loans to spur business cannot be
disputed.69 (Emphases supplied)
Still, in a fourth case, Philippine National Bank v. Court of Appeals, 70 the above doctrine was
reiterated:
The promissory note contained the following stipulation:

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank
unilaterally altered the terms of its contract with petitioners by increasing the interest rates
on the loan without the prior assent of the latter. In fact, the manner of agreement is itself
explicitly stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall
be due unless it has been expressly stipulated in writing." What has been "stipulated in
writing" from a perusal of interest rate provision of the credit agreement signed between the
parties is that petitioners were bound merely to pay 21% interest, subject to a possible
escalation or de-escalation, when 1) the circumstances warrant such escalation or deescalation; 2) within the limits allowed by law; and 3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the
contract in this case was the 21% rate stipulated in the interest provision. Any doubt about
this is in fact readily resolved by a careful reading of the credit agreement because the
same plainly uses the phrase "interest rate agreed upon," in reference to the original 21%
interest rate. x x x
xxxx
Petitioners never agreed in writing to pay the increased interest rates demanded by
respondent bank in contravention to the tenor of their credit agreement. That an increase in
interest rates from 18% to as much as 68% is excessive and unconscionable is
indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to virtually
half of the entire principal (P7,735,004.66) which was applied to interest alone. By the time
the spouses tendered the amount of P40,142,518.00 in settlement of their obligations;
respondent bank was demanding P58,377,487.00 over and above those amounts already
previously paid by the spouses.

For value received, I/we, [private respondents] jointly and severally promise to pay to the
ORDER of the PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines, the
sum of FIFTEEN THOUSAND ONLY (P15,000.00), Philippine Currency, together with
interest thereon at the rate of 12% per annum until paid, which interest rate the Bank may at
any time without notice, raise within the limits allowed by law, and I/we also agree to pay
jointly and severally ____% per annum penalty charge, by way of liquidated damages
should this note be unpaid or is not renewed on due dated.
Payment of this note shall be as follows:
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made subject to the
condition that any and/or all extensions hereof that will leave any portion of the amount still
unpaid after 730 days shall automatically convert the outstanding balance into a medium or
long-term obligation as the case may be and give the Bank the right to charge the interest
rates prescribed under its policies from the date the account was originally granted.
To secure payment of the loan the parties executed a real estate mortgage contract which
provided:
(k) INCREASE OF INTEREST RATE:

Escalation clauses are not basically wrong or legally objectionable so long as they are not
solely potestative but based on reasonable and valid grounds. Here, as clearly
demonstrated above, not only [are] the increases of the interest rates on the basis of the

The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in

accordance with the provision hereof, shall be subject during the life of this contract to such
an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE
may prescribe for its debtors.
xxxx
To begin with, PNBs argument rests on a misapprehension of the import of the appellate
courts ruling. The Court of Appeals nullified the interest rate increases not because the
promissory note did not comply with P.D. No. 1684 by providing for a de-escalation, but
because the absence of such provision made the clause so one-sided as to make it
unreasonable.
That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage
Bank v. Navarro that although P.D. No. 1684 is not to be retroactively applied to loans
granted before its effectivity, there must nevertheless be a de-escalation clause to mitigate
the one-sidedness of the escalation clause. Indeed because of concern for the unequal
status of borrowers vis--vis the banks, our cases after Banco Filipino have fashioned the
rule that any increase in the rate of interest made pursuant to an escalation clause must be
the result of agreement between the parties.
Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized PNB
to increase the stipulated interest per annum" within the limits allowed by law at any time
depending on whatever policy [PNB] may adopt in the future; Provided, that the interest rate
on this note shall be correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board." The real estate mortgage likewise
provided:
The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in
accordance with the provisions hereof, shall be subject during the life of this contract to
such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then
to 41% and then to 48%. This Court declared the increases unilaterally imposed by [PNB] to
be in violation of the principle of mutuality as embodied in Art.1308 of the Civil Code, which
provides that "[t]he contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them." As the Court explained:
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21
SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB
and the private respondent gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, that license would have been
null and void for being violative of the principle of mutuality essential in contracts. It would
have invested the loan agreement with the character of a contract of adhesion, where the
parties do not bargain on equal footing, the weaker partys (the debtor) participation being

reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co.,
95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.
A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit
agreement in that case provided:
The BANK reserves the right to increase the interest rate within the limits allowed by law at
any time depending on whatever policy it may adopt in the future: Provided, that the interest
rate on this accommodation shall be correspondingly decreased in the event that the
applicable maximum interest is reduced by law or by the Monetary Board. . . .
As in the first case, PNB successively increased the stipulated interest so that what was
originally 12% per annum became, after only two years, 42%. In declaring the increases
invalid, we held:
We cannot countenance petitioner banks posturing that the escalation clause at bench
gives it unbridled right to unilaterally upwardly adjust the interest on private respondents
loan. That would completely take away from private respondents the right to assent to an
important modification in their agreement, and would negate the element of mutuality in
contracts.
Only recently we invalidated another round of interest increases decreed by PNB pursuant
to a similar agreement it had with other borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the
said circular could possibly be read as granting respondent bank carte blanche authority to
raise interest rates to levels which would either enslave its borrowers or lead to a
hemorrhaging of their assets.
In this case no attempt was made by PNB to secure the conformity of private respondents
to the successive increases in the interest rate. Private respondents assent to the increases
can not be implied from their lack of response to the letters sent by PNB, informing them of
the increases. For as stated in one case, no one receiving a proposal to change a contract
is obliged to answer the proposal.71 (Emphasis supplied)
We made the same pronouncement in a fifth case, New Sampaguita Builders Construction,
Inc. v. Philippine National Bank,72 thus
Courts have the authority to strike down or to modify provisions in promissory notes that
grant the lenders unrestrained power to increase interest rates, penalties and other charges
at the latters sole discretion and without giving prior notice to and securing the consent of
the borrowers. This unilateral authority is anathema to the mutuality of contracts and enable
lenders to take undue advantage of borrowers. Although the Usury Law has been effectively
repealed, courts may still reduce iniquitous or unconscionable rates charged for the use of
money. Furthermore, excessive interests, penalties and other charges not revealed in
disclosure statements issued by banks, even if stipulated in the promissory notes, cannot be
given effect under the Truth in Lending Act.73 (Emphasis supplied)

Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora, 74 the above
pronouncements were reiterated to debunk PNBs repeated reliance on its invalidated
contract stipulations:
We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the 1996
case of PNB v. CA and Spouses Basco. Taking no heed of these rulings, the escalation
clause PNB used in the present case to justify the increased interest rates is no different
from the escalation clause assailed in the 1996 PNB case; in both, the interest rates were
increased from the agreed 12% per annum rate to 42%. x x x

On the basis of the Credit Agreement, petitioners issued promissory notes which they
signed in blank, and respondent later on entered their corresponding interest rates, as
follows:
1st Promissory Note dated July 24, 1989 19.5%;
2nd Promissory Note dated November 22, 1989 23%;
3rd Promissory Note dated March 21, 1990 22%;

xxxx
4th Promissory Note dated July 19, 1990 24%;
On the strength of this ruling, PNBs argument that the spouses Rocamoras failure to
contest the increased interest rates that were purportedly reflected in the statements of
account and the demand letters sent by the bank amounted to their implied acceptance of
the increase should likewise fail.
Evidently, PNBs failure to secure the spouses Rocamoras consent to the increased interest
rates prompted the lower courts to declare excessive and illegal the interest rates imposed.
Togo around this lower court finding, PNB alleges that the P206,297.47 deficiency claim
was computed using only the original 12% per annum interest rate. We find this unlikely.
Our examination of PNBs own ledgers, included in the records of the case, clearly indicates
that PNB imposed interest rates higher than the agreed 12% per annum rate. This
confirmatory finding, albeit based solely on ledgers found in the records, reinforces the
application in this case of the rule that findings of the RTC, when affirmed by the CA, are
binding upon this Court.75 (Emphases supplied)
Verily, all these cases, including the present one, involve identical or similar provisions
found in respondents credit agreements and promissory notes. Thus, the July 1989 Credit
Agreement executed by petitioners and respondent contained the following stipulation on
interest:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum].
Interest shall be payable in advance every one hundred twenty days at the rate prevailing at
the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending
on whatever policy the Bank may adopt in the future, including without limitation, the shifting
from the floating interest rate system to the fixed interest rate system, or vice versa. Where
the Bank has imposed on the Loan interest at a rate per annum which is equal to the Banks
spread over the current floating interest rate, the Borrower hereby agrees that the Bank
may, without need of notice to the Borrower, increase or decrease its spread over the
floating interest rate at any time depending on whatever policy it may adopt in the
future.76 (Emphases supplied)
while the eight promissory notes issued pursuant thereto granted PNB the right to increase
or reduce interest rates "within the limits allowed by law or the Monetary Board" 77 and the
Real Estate Mortgage agreement included the same right to increase or reduce interest
rates "at any time depending on whatever policy PNB may adopt in the future." 78

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

6th Promissory Note dated February 14, 1991 32%;
7th Promissory Note dated March 1, 1991 30%; and
8th Promissory Note dated July 11, 1991 24%. 79
On the other hand, the August 1991 Amendment to Credit Agreement contains the following
stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment
thereof at the rate per annum which is determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment. 80 (Emphases supplied)
and under this Amendment to Credit Agreement, petitioners again executed and signed the
following promissory notes in blank, for the respondent to later on enter the corresponding
interest rates, which it did, as follows:
9th Promissory Note dated November 8, 1991 26%;
10th Promissory Note dated March 19, 1992 25%;
11th Promissory Note dated July 11, 1992 23%;
12th Promissory Note dated November 10, 1992 21%;
13th Promissory Note dated March 15, 1993 21%;
14th Promissory Note dated July 12, 1993 17.5%;

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

had to sign the promissory notes in blank, since the imposable interest rates have yet to be
determined and fixed by respondents Treasury Department in Manila.

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

17th Promissory Note dated July 13, 1994 21%;
18th Promissory Note dated November 16, 1994 16%;
19th Promissory Note dated April 10, 1995 21%;
20th Promissory Note dated July 19, 1995 18.5%;
21st Promissory Note dated December 18, 1995 18.75%;

Moreover, in Aspas enumeration of the factors that determine the interest rates PNB fixes
such as cost of money, foreign currency values, bank administrative costs, profitability, and
considerations which affect the banking industry it can be seen that considerations which
affect PNBs borrowers are ignored. A borrowers current financial state, his feedback or
opinions, the nature and purpose of his borrowings, the effect of foreign currency values or
fluctuations on his business or borrowing, etc. these are not factors which influence the
fixing of interest rates to be imposed on him. Clearly, respondents method of fixing interest
rates based on one-sided, indeterminate, and subjective criteria such as profitability, cost of
money, bank costs, etc. is arbitrary for there is no fixed standard or margin above or below
these considerations.
The stipulation in the promissory notes subjecting the interest rate to review does not render
the imposition by UCPB of interest rates on the obligations of the spouses Beluso valid.
According to said stipulation:

22nd Promissory Note dated April 22, 1996 18.5%;

23rd Promissory Note dated July 22, 1996 18.5%;
24th Promissory Note dated November 25, 1996 18%;
25th Promissory Note dated May 30, 1997 17.5%; and
26th Promissory Note (PN 9707237) dated July 30, 1997 25%. 81
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the
Bank may at any time without notice, raise within the limits allowed by law x x x." 82 On the
other hand, the 18th up to the 26th promissory notes which includes PN 9707237
carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be
increased or decreased for the subsequent Interest Periods, with prior notice to the
Borrower in the event of changes in interest rate prescribed by law or the Monetary Board of
the Central Bank of the Philippines, or in the Banks overall cost of funds. I/We hereby agree
that in the event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we
shall have the option to prepay the loan or credit facility without penalty within ten (10)
calendar days from the Interest Setting Date. 83 (Emphasis supplied)
These stipulations must be once more invalidated, as was done in previous cases. The
common denominator in these cases is the lack of agreement of the parties to the imposed
interest rates. For this case, this lack of consent by the petitioners has been made obvious
by the fact that they signed the promissory notes in blank for the respondent to fill. We find
credible the testimony of Lydia in this respect. Respondent failed to discredit her; in fact, its
witness PNB Kalibo Branch Manager Aspa admitted that interest rates were fixed solely by
its Treasury Department in Manila, which were then simply communicated to all PNB
branches for implementation. If this were the case, then this would explain why petitioners

The interest rate shall be subject to review and may be increased or decreased by the
LENDER considering among others the prevailing financial and monetary conditions; or the
rate of interest and charges which other banks or financial institutions charge or offer to
charge for similar accommodations; and/or the resulting profitability to the LENDER after
due consideration of all dealings with the BORROWER.
It should be pointed out that the authority to review the interest rate was given [to] UCPB
alone as the lender. Moreover, UCPB may apply the considerations enumerated in this
provision as it wishes. As worded in the above provision, UCPB may give as much weight
as it desires to each of the following considerations: (1) the prevailing financial and
monetary condition;(2) the rate of interest and charges which other banks or financial
institutions charge or offer to charge for similar accommodations; and/or(3) the resulting
profitability to the LENDER (UCPB) after due consideration of all dealings with the
BORROWER (the spouses Beluso). Again, as in the case of the interest rate provision,
there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of
UCPB as to the interest to be imposed, as both options violate the principle of mutuality of
contracts.84 (Emphases supplied)
To repeat what has been said in the above-cited cases, any modification in the contract,
such as the interest rates, must be made with the consent of the contracting
parties.1wphi1 The minds of all the parties must meet as to the proposed modification,
especially when it affects an important aspect of the agreement. In the case of loan
agreements, the rate of interest is a principal condition, if not the most important
component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has
no binding effect.
What is even more glaring in the present case is that, the stipulations in question no longer
provide that the parties shall agree upon the interest rate to be fixed; -instead, they are

worded in such a way that the borrower shall agree to whatever interest rate respondent
fixes. In credit agreements covered by the above-cited cases, it is provided that:
The Bank reserves the right to increase the interest rate within the limits allowed by law at
any time depending on whatever policy it may adopt in the future: Provided, that, the
interest rate on this accommodation shall be correspondingly decreased in the event that
the applicable maximum interest rate is reduced by law or by the Monetary Board. In either
case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date
of the increase or decrease in maximum interest rate. 85 (Emphasis supplied)

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the
following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;

Whereas, in the present credit agreements under scrutiny, it is stated that:

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

IN THE JULY 1989 CREDIT AGREEMENT

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

(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending
on whatever policy the Bank may adopt in the future, including without limitation, the shifting
from the floating interest rate system to the fixed interest rate system, or vice versa. Where
the Bank has imposed on the Loan interest at a rate per annum, which is equal to the
Banks spread over the current floating interest rate, the Borrower hereby agrees that the
Bank may, without need of notice to the Borrower, increase or decrease its spread over the
floating interest rate at any time depending on whatever policy it may adopt in the
future.86 (Emphases supplied)
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment
thereof at the rate per annum which is determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment. 87 (Emphasis supplied)
Plainly, with the present credit agreement, the element of consent or agreement by the
borrower is now completely lacking, which makes respondents unlawful act all the more
reprehensible.
Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for
"[e]stoppel cannot be predicated on an illegal act. As between the parties to a contract,
validity cannot be given to it by estoppel if it is prohibited by law or is against public policy." 88
It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act No.
3765, which was enacted "to protect x x x citizens from a lack of awareness of the true cost
of credit to the user by using a full disclosure of such cost with a view of preventing the
uninformed use of credit to the detriment of the national economy." 89 The law "gives a
detailed enumeration of the specific information required to be disclosed, among which are
the interest and other charges incident to the extension of credit." 90 Section 4 thereof
provides that a disclosure statement must be furnished prior to the consummation of the
transaction, thus:

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
Under Section 4(6), "finance charge" represents the amount to be paid by the debtor
incident to the extension of credit such as interest or discounts, collection fees, credit
investigation fees, attorneys fees, and other service charges. The total finance charge
represents the difference between (1) the aggregate consideration (down payment plus
installments) on the part of the debtor, and (2) the sum of the cash price and non-finance
charges.91
By requiring the petitioners to sign the credit documents and the promissory notes in blank,
and then unilaterally filling them up later on, respondent violated the Truth in Lending Act,
and was remiss in its disclosure obligations. In one case, which the Court finds applicable
here, it was held:
UCPB further argues that since the spouses Beluso were duly given copies of the subject
promissory notes after their execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the
disclosure statement must be furnished prior to the consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the
following information:

(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
The rationale of this provision is to protect users of credit from a lack of awareness of the
true cost thereof, proceeding from the experience that banks are able to conceal such true
cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned
amount, and the like. The law thereby seeks to protect debtors by permitting them to fully
appreciate the true cost of their loan, to enable them to give full consent to the contract, and
to properly evaluate their options in arriving at business decisions. Upholding UCPBs claim
of substantial compliance would defeat these purposes of the Truth in Lending Act. The
belated discovery of the true cost of credit will too often not be able to reverse the ill effects
of an already consummated business decision.
In addition, the promissory notes, the copies of which were presented to the spouses
Beluso after execution, are not sufficient notification from UCPB. As earlier discussed, the
interest rate provision therein does not sufficiently indicate with particularity the interest rate
to be applied to the loan covered by said promissory notes. 92(Emphases supplied)
However, the one-year period within which an action for violation of the Truth in Lending Act
may be filed evidently prescribed long ago, or sometime in 2001, one year after petitioners
received the March 2000 demand letter which contained the illegal charges.
The fact that petitioners later received several statements of account detailing its
outstanding obligations does not cure respondents breach. To repeat, the belated discovery
of the true cost of credit does not reverse the ill effects of an already consummated
business decision.93
Neither may the statements be considered proposals sent to secure the petitioners
conformity; they were sent after the imposition and application of the interest rate, and not
before. And even if it were to be presumed that these are proposals or offers, there was no
acceptance by petitioners. "No one receiving a proposal to modify a loan contract,
especially regarding interest, is obliged to answer the proposal." 94

Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low
initial interest rates, but actually accompanied by provisions written in fine print that allow
lenders to later on increase or decrease interest rates unilaterally, without the consent of the
borrower, and depending on complex and subjective factors. Because they have been lured
into these contracts by initially low interest rates, borrowers get caught and stuck in the web
of subsequent steep rates and penalties, surcharges and the like. Being ordinary individuals
or entities, they naturally dread legal complications and cannot afford court litigation; they
succumb to whatever charges the lenders impose. At the very least, borrowers should be
charged rightly; but then again this is not possible in a one-sided credit system where the
temptation to abuse is strong and the willingness to rectify is made weak by the eternal
desire for profit.
Given the above supposition, the Court cannot subscribe to respondents argument that in
every repricing of petitioners loan availment, they are given the right to question the interest
rates imposed. The import of respondents line of reasoning cannot be other than that if one
out of every hundred borrowers questions respondents practice of unilaterally fixing interest
rates, then only the loan arrangement with that lone complaining borrower will enjoy the
benefit of review or re-negotiation; as to the 99 others, the questionable practice will
continue unchecked, and respondent will continue to reap the profits from such
unscrupulous practice. The Court can no more condone a view so perverse. This is exactly
what the Court meant in the immediately preceding cited case when it said that "the belated
discovery of the true cost of credit does not reverse the ill effects of an already
consummated business decision;"95 as to the 99 borrowers who did not or could not
complain, the illegal act shall have become a fait accompli to their detriment, they have
already suffered the oppressive rates.
Besides, that petitioners are given the right to question the interest rates imposed is, under
the circumstances, irrelevant; we have a situation where the petitioners do not stand on
equal footing with the respondent. It is doubtful that any borrower who finds himself in
petitioners position would dare question respondents power to arbitrarily modify interest
rates at any time. In the second place, on what basis could any borrower question such
power, when the criteria or standards which are really one-sided, arbitrary and subjective
for the exercise of such power are precisely lost on him?
For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to
the 26th promissory notes, petitioners are granted the option to prepay the loan or credit
facility without penalty within 10 calendar days from the Interest Setting Date if they are not
agreeable to the interest rate fixed. It has been shown that the promissory notes are
executed and signed in blank, meaning that by the time petitioners learn of the interest rate,
they are already bound to pay it because they have already pre-signed the note where the
rate is subsequently entered.
Besides, premium may not be placed upon a stipulation in a contract which grants one party
the right to choose whether to continue with or withdraw from the agreement if it discovers
that what the other party has been doing all along is improper or illegal.
Thus said, respondents arguments relative to the credit documents that documentary
evidence prevails over testimonial evidence; that the credit documents are in proper form,
presumed regular, and endure, against arbitrary claims by petitioners, experienced business
persons that they are, they signed questionable loan documents whose provisions for

interest rates were left blank, and yet they continued to pay the interests without protest for
a number of years deserve no consideration.
With regard to interest, the Court finds that since the escalation clause is annulled, the
principal amount of the loan is subject to the original or stipulated rate of interest, and upon
maturity, the amount due shall be subject to legal interest at the rate of 12% per annum.
This is the uniform ruling adopted in previous cases, including those cited here. 96 The
interests paid by petitioners should be applied first to the payment of the stipulated or legal
and unpaid interest, as the case may be, and later, to the capital or principal. 97 Respondent
should then refund the excess amount of interest that it has illegally imposed upon
petitioners; "[t]he amount to be refunded refers to that paid by petitioners when they had no
obligation to do so."98 Thus, the parties original agreement stipulated the payment of 19.5%
interest; however, this rate was intended to apply only to the first promissory note which
expired on November 21, 1989 and was paid by petitioners; it was not intended to apply to
the whole duration of the loan. Subsequent higher interest rates have been declared illegal;
but because only the rates are found to be improper, the obligation to pay interest subsists,
the same to be fixed at the legal rate of 12% per annum. However, the 12% interest shall
apply only until June 30, 2013. Starting July1, 2013, the prevailing rate of interest shall be
6% per annum pursuant to our ruling in Nacar v. Gallery Frames 99 and Bangko Sentral ng
Pilipinas-Monetary Board Circular No. 799.
Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment
thereon, when due, shall constitute default, and a penalty charge of 24% per annum based
on the defaulted principal amount shall be imposed. Petitioners claim that this penalty
should be excluded from the foreclosure amount or bid price because the Real Estate
Mortgage and the Supplement thereto did not specifically include it as part of the secured
amount. Respondent justifies its inclusion in the secured amount, saying that the purpose of
the penalty or a penal clause is to ensure the performance of the obligation and substitute
for damages and the payment of interest in the event of non-compliance. 100 Respondent
adds that the imposition and collection of a penalty is a normal banking practice, and the
standard rate per annum for all commercial banks, at the time, was 24%. Its inclusion as
part of the secured amount in the mortgage agreements is thus valid and necessary.
The Court sustains petitioners view that the penalty may not be included as part of the
secured amount. Having found the credit agreements and promissory notes to be tainted,
we must accord the same treatment to the mortgages. After all, "[a] mortgage and a note
secured by it are deemed parts of one transaction and are construed together." 101 Being so
tainted and having the attributes of a contract of adhesion as the principal credit documents,
we must construe the mortgage contracts strictly, and against the party who drafted it. An
examination of the mortgage agreements reveals that nowhere is it stated that penalties are
to be included in the secured amount. Construing this silence strictly against the
respondent, the Court can only conclude that the parties did not intend to include the
penalty allowed under PN 9707237 as part of the secured amount. Given its resources,
respondent could have if it truly wanted to conveniently prepared and executed an
amended mortgage agreement with the petitioners, thereby including penalties in the
amount to be secured by the encumbered properties. Yet it did not.
With regard to attorneys fees, it was plain error for the CA to have passed upon the issue
since it was not raised by the petitioners in their appeal; it was the respondent that
improperly brought it up in its appellees brief, when it should have interposed an appeal,
since the trial courts Decision on this issue is adverse to it. It is an elementary principle in

the subject of appeals that an appellee who does not himself appeal cannot obtain from the
appellate court any affirmative relief other than those granted in the decision of the court
below.
x x x [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to
make counter assignments of error in ordinary actions, when the purpose is merely to
defend himself against an appeal in which errors are alleged to have been committed by the
trial court both in the appreciation of facts and in the interpretation of the law, in order to
sustain the judgment in his favor but not when his purpose is to seek modification or
reversal of the judgment, in which case it is necessary for him to have excepted to and
appealed from the judgment.102
Since petitioners did not raise the issue of reduction of attorneys fees, the CA possessed
no authority to pass upon it at the instance of respondent. The ruling of the trial court in this
respect should remain undisturbed.
For the fixing of the proper amounts due and owing to the parties to the respondent as
creditor and to the petitioners who are entitled to a refund as a consequence of
overpayment considering that they paid more by way of interest charges than the 12% per
annum103 herein allowed the case should be remanded to the lower court for proper
accounting and computation, applying the following procedure:
1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and
paid;
2. All subsequent promissory notes (from the 2nd to the 26th promissory notes)
shall carry an interest rate of only 12% per annum. 104 Thus, interest payment
made in excess of 12% on the 2nd promissory note shall immediately be applied
to the principal, and the principal shall be accordingly reduced. The reduced
principal shall then be subjected to the 12% 105 interest on the 3rd promissory
note, and the excess over 12% interest payment on the 3rd promissory note shall
again be applied to the principal, which shall again be reduced accordingly. The
reduced principal shall then be subjected to the 12% interest on the 4th
promissory note, and the excess over12% interest payment on the 4th
promissory note shall again be applied to the principal, which shall again be
reduced accordingly. And so on and so forth;
3. After the above procedure is carried out, the trial court shall be able to
conclude if petitioners a) still have an OUTSTANDING BALANCE/OBLIGATION
or b) MADE PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION
(principal and interest);
4. Such outstanding balance/obligation, if there be any, shall then be subjected to
a 12% per annum interest from October 28, 1997 until January 14, 1999, which is
the date of the auction sale;
5. Such outstanding balance/obligation shall also be charged a 24% per annum
penalty from August 14, 1997 until January 14, 1999. But from this total penalty,

the petitioners previous payment of penalties in the amount of P202,000.00made

on January 27, 1998106 shall be DEDUCTED;
6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final
and executory award of 1% attorneys fees shall be ADDED;
7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorneys
fees (6.) shall be DEDUCTED from the bid price of P4,324,172.96. The penalties
(5.) are not included because they are not included in the secured amount;
8. The difference in (7.) [P4,324,172.96 LESS sum total of the outstanding
balance (3.), interest (4.), and 1% attorneys fees (6.)] shall be DELIVERED TO
THE PETITIONERS;
9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T16208;
10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out
that petitioners made an OVERPAYMENT, the interest (4.), penalties (5.), and the
award of 1% attorneys fees (6.) shall be DEDUCTED from the overpayment.
There is no outstanding balance/obligation precisely because petitioners have
paid beyond the amount of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.),
and award of 1% attorneys fees (6.), the excess shall be RETURNED to the
petitioners, with legal interest, under the principle of solutio indebiti; 107
12. Likewise, if the overpayment exceeds the total amount of interest (4.) and
award of 1% attorneys fees (6.), the trial court shall INVALIDATE THE
EXTRAJUDICIAL FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and award of 1% attorneys
fees (6.) exceed petitioners overpayment, then the excess shall be DEDUCTED
from the bid price of P4,324,172.96;
14. The difference in (13.) [P4,324,172.96 LESS sum total of the interest (4.) and
1% attorneys fees (6.)] shall be DELIVERED TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T16208. The outstanding penalties, if any, shall be collected by other means.
From the above, it will be seen that if, after proper accounting, it turns out that the
petitioners made payments exceeding what they actually owe by way of principal,
interest, and attorneys fees, then the mortgaged properties need not answer for
any outstanding secured amount, because there is not any; quite the contrary,
respondent must refund the excess to petitioners.1wphi1 In such case, the
extrajudicial foreclosure and sale of the properties shall be declared null and void

for obvious lack of basis, the case being one of solutio indebiti instead. If, on the
other hand, it turns out that petitioners overpayments in interests do not exceed
their total obligation, then the respondent may consolidate its ownership over the
properties, since the period for redemption has expired. Its only obligation will be
to return the difference between its bid price (P4,324,172.96) and petitioners
total obligation outstanding except penalties after applying the latters
overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision
of the Court of Appeals in CA-G.R. CV No. 79650 is ANNULLED and SET ASIDE. Judgment
is hereby rendered as follows:
1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory
Notes are DECLARED NULL AND VOID, and such notes shall instead be subject
to interest at the rate of twelve percent (12%) per annum up to June 30, 2013,
and starting July 1, 2013, six percent (6%) per annum until full satisfaction;
2. The penalty charge imposed in Promissory Note No. 9707237 shall be
EXCLUDED from the amounts secured by the real estate mortgages;
3. The trial courts award of one per cent (1%) attorneys fees is REINSTATED;
4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of
Kalibo, Aklan for the computation of overpayments made by petitioners spouses
Eduardo and Lydia Silos to respondent Philippine National Bank, taking into
consideration the foregoing dispositions, and applying the procedure
hereinabove set forth;
5. Thereafter, the trial court is ORDERED to make a determination as to the
validity of the extrajudicial foreclosure and sale, declaring the same null and void
in case of overpayment and ordering the release and return of Transfer
Certificates of Title Nos. T-14250 and TCT T-16208 to petitioners, or ordering the
delivery to the petitioners of the difference between the bid price and the total
remaining obligation of petitioners, if any;
6. In the meantime, the respondent Philippine National Bank is ENJOINED from
consolidating title to Transfer Certificates of Title Nos. T-14250 and T-16208 until
all the steps in the procedure above set forth have been taken and applied;
7. The reimbursement of the excess in the bid price of P377,505.99, which
respondent Philippine National Bank is ordered to reimburse petitioners, should
be HELD IN ABEYANCE until the true amount owing to or owed by the parties as
against each other is determined;
8. Considering that this case has been pending for such a long time and that
further proceedings, albeit uncomplicated, are required, the trial court is
ORDERED to proceed with dispatch.

SO ORDERED.
EASTERN SHIPPING LINES, INC. V CA (CREDIT TRANSACTIONS)
G.R. NO. 97412 JULY 12, 1994
FACTS:
This is an action against defendants shipping company, arrastre operator and brokerforwarder for damages sustained by a shipment while in defendants' custody, filed by the
insurer-subrogee who paid the consignee the value of such losses/damages.The
losses/damages were sustained while in the respective and/or successive custody and
possession of defendants carrier (Eastern), arrastre operator (Metro Port) and broker (Allied
Brokerage).
As a consequence of the losses sustained, plaintiff was compelled to pay the consignee
P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to
all the rights of action of said consignee against defendants.
DECISION OF LOWER COURTS: * trial court: ordered payment of damages, jointly and
severally * CA: affirmed trial court.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court
at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims
or damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably established at the time the demand
is made, the interest shall begin to run only from the date the judgment of the court is made
(at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.

ISSUES AND RULING:

(a) whether or not a claim for damage sustained on a shipment of goods can be a solidary,
or joint and several, liability of the common carrier, the arrastre operator and the customs
broker;
YES, it is solidary. Since it is the duty of the ARRASTRE to take good care of the goods that
are in its custody and to deliver them in good condition to the consignee, such responsibility
also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore
charged with the obligation to deliver the goods in good condition to the consignee.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts
from the time the articles are surrendered to or unconditionally placed in the possession of,
and received by, the carrier for transportation until delivered to, or until the lapse of a
reasonable time for their acceptance by, the person entitled to receive them (Arts. 17361738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar
Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in
damaged condition, a presumption arises against the carrier of its failure to observe that
diligence, and there need not be an express finding of negligence to hold it liable.
(b) whether the payment of legal interest on an award for loss or damage is to be computed
from the time the complaint is filed or from the date the decision appealed from is rendered;
and
FOLLOW THESE VERY IMPORTANT RULES (GUIDANCE BY THE SUPREME COURT)
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.

3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.
(c) whether the applicable rate of interest, referred to above, is twelve percent (12%) or six
percent (6%).
SIX PERCENT (6%) on the amount due computed from the decision, dated 03 February
1988, of the court a quo (Court of Appeals) AND A TWELVE PERCENT (12%) interest, in
lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of the Supreme
Court decision until the payment thereof.
RATIO: when the judgment awarding a sum of money becomes final and executory, the
monetary award shall earn interest at 12% per annum from the date of such finality until its
satisfaction, regardless of whether the case involves a loan or forbearance of money. The
reason is that this interim period is deemed to be by then equivalent to a forbearance of
credit.
NOTES: the Central Bank Circular imposing the 12% interest per annum applies only to
loans or forbearance of money, goods or credits, as well as to judgments involving such
loan or forbearance of money, goods or credits, and that the 6% interest under the Civil
Code governs when the transaction involves the payment of indemnities in the concept of
damage arising from the breach or a delay in the performance of obligations in general.
Observe, too, that in these cases, a common time frame in the computation of the 6%
interest per annum has been applied, i.e., from the time the complaint is filed until the
adjudged amount is fully paid.

LIGUTAN VS. COURT OF APPEALS

G.R. No. 147465, February 12, 2002
FACTS:
Ligutan and dela Llana obtained a loan from Security Bank and Trust Co. They executed a
promissory note binding themselves jointly and severally to pay the sum borrowed with an
interest of 15.89% per annum upon maturity and to pay a penalty of 5% every month on the
outstanding principal and interest in case of default. In addition, they agreed to pay 10% of
the total amount due by way of attorneys fees if the matter were indorsed to a lawyer for
collection or if a suit were instituted to enforce payment. Ligutan and dela Llana failed to
settle the debt. A complaint for recovery of the amount due was filed with the RTC. The
court held, among others, the borrowers were liable for a 3% per month penalty (instead of
5%) and 10% of the total amount of the indebtedness for attorneys fee, in addition to the
principal loan.

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

ISSUE:

(1) Whether or not interest was due to petitioner; and (2) whether the principle of solutio
indebiti
applies
to
the
case
at
bar.

Whether the court is correct in holding the borrowers liable for the penalty.

Ruling:

HELD:

1) No. Compensatory interest is not chargeable in the instant case because it was not duly
proven that respondent defaulted in paying the loan and no interest was due on the loan
because there was no written agreement as regards payment of interest. Article 1956 of the
Civil Code, which refers to monetary interest, specifically mandates that no interest shall be
due unless it has been expressly stipulated in writing. As can be gleaned from the foregoing
provision, payment of monetary interest is allowed only if: (1) there was an express
stipulation for the payment of interest; and (2) the agreement for the payment of interest
was reduced in writing. The concurrence of the two conditions is required for the payment
of monetary interest. Thus, we have held that collection of interest without any stipulation
therefor
in
writing
is
prohibited
by
law.

A penalty clause, expressly recognized by law, is an accessory undertaking to assume

greater liability on the part of an obligor in case of breach of an obligation. It functions to
strengthen the coercive force of the obligation and to provide for what could be the
stipulated indemnity without the necessity of proof on the existence and on the measure of
damages caused by the breach. Although the court may not at liberty ignore the freedom of
the parties to agree on such terms and conditions as they see fit, a stipulated penalty,
nevertheless may be equitably reduced by the courts if iniquitous or unconscionable or if the
principal obligation has been partly or irregularly complied with. The reduction is justified by
the facts that the borrowers were able to partly comply with their obligations.
CASE DIGEST: G.R. NO. 173227. JANUARY 20, 2009
SEBASTIAN SIGA-AN, PETITIONER, VS. ALICIA VILLANUEVA, RESPONDENT.

FACTS:
Respondent filed a complaint for sum of money against petitioner. Respondent claimed that
petitioner approached her inside the PNO and offered to loan her the amount
of P540,000.00 of which the loan agreement was not reduced in writing and there was no
stipulation as to the payment of interest for the loan. Respondent issued a check
worth P500,000.00 to petitioner as partial payment of the loan. She then issued another
check in the amount of P200,000.00 to petitioner as payment of the remaining balance of
the loan of which the excess amount of P160,000.00 would be applied as interest for the
loan. Not satisfied with the amount applied as interest, petitioner pestered her to pay
additional interest and threatened to block or disapprove her transactions with the PNO if
she would not comply with his demand. Thus, she paid additional amounts in cash and
checks as interests for the loan. She asked petitioner for receipt for the payments but was
told that it was not necessary as there was mutual trust and confidence between them.
According to her computation, the total amount she paid to petitioner for the loan and
interest
accumulated
to P1,200,000.00.

(2) Petitioner cannot be compelled to return the alleged excess amount paid by respondent
as interest. Under Article 1960 of the Civil Code, if the borrower of loan pays interest when
there has been no stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied. Article 2154 of the Civil Code explains the
principle of solutio indebiti. Said provision provides that if something is received when there
is no right to demand it, and it was unduly delivered through mistake, the obligation to return
it arises. In such a case, a creditor-debtor relationship is created under a quasi-contract
whereby the payor becomes the creditor who then has the right to demand the return of
payment made by mistake, and the person who has no right to receive such payment
becomes obligated to return the same. The quasi-contract of solutio indebiti harks back to
the ancient principle that no one shall enrich himself unjustly at the expense of another. The
principle of solutio indebiti applies where (1) a payment is made when there exists no
binding relation between the payor, who has no duty to pay, and the person who received
the payment; and (2) the payment is made through mistake, and not through liberality or
some other cause. We have held that the principle of solutio indebiti applies in case of
erroneous
payment
of
undue
interest.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti,
exemplary damages may be imposed if the defendant acted in an oppressive manner.
Petitioner acted oppressively when he pestered respondent to pay interest and threatened
to block her transactions with the PNO if she would not pay interest. This forced respondent
to pay interest despite lack of agreement thereto. Thus, the award of exemplary damages

is appropriate so as to deter petitioner and other lenders from committing similar and other
serious wrongdoings.
EN BANC
G.R. No. 189871

August 13, 2013

DARIO NACAR, Petitioner,

BACKWAGES
Date Dismissed

January 24, 1997

Rate per day

P196.00

Date of Decisions

Aug. 18, 1998

vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., Respondents.

This is a petition for review on certiorari assailing the Decision 1 dated September 23, 2008
of the Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution 2 dated October
9, 2009 denying petitioners motion for reconsideration.

a) 1/24/97 to 2/5/98 = 12.36 mos.

P196.00/day x 12.36 mos.

= P62,986.56

The factual antecedents are undisputed.

Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration
Branch of the National Labor Relations Commission (NLRC) against respondents Gallery
Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision 3 in favor of petitioner and found
that he was dismissed from employment without a valid or just cause. Thus, petitioner was
awarded backwages and separation pay in lieu of reinstatement in the amount
of P158,919.92. The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of
showing that complainant was dismissed from employment for a just or valid cause. All the
more, it is clear from the records that complainant was never afforded due process before
he was terminated. As such, we are perforce constrained to grant complainants prayer for
the payments of separation pay in lieu of reinstatement to his former position, considering
the strained relationship between the parties, and his apparent reluctance to be reinstated,
computed only up to promulgation of this decision as follows:
SEPARATION PAY

b) 2/6/98 to 8/18/98 = 6.4 months

Prevailing Rate per day

= P62,986.00

P198.00 x 26 days x 6.4 mos.

= P32,947.20

TO TAL

= P95.933.76
xxxx

WHEREFORE, premises considered, judgment is hereby rendered finding respondents

guilty of constructive dismissal and are therefore, ordered:
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred
eighty-six pesos and 56/100 (P62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine
hundred thirty-three and 36/100 (P95,933.36) representing his backwages; and

Date Hired

August 1990

Rate

P198/day

Date of Decision

Aug. 18, 1998

Length of Service

8 yrs. & 1 month

P198.00 x 26 days x 8 months = P41,184.00

All other claims are hereby dismissed for lack of merit.

SO ORDERED.4
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the
Resolution5 dated February 29, 2000. Accordingly, the NLRC sustained the decision of the
Labor Arbiter. Respondents filed a motion for reconsideration, but it was denied. 6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August
24, 2000, the CA issued a Resolution dismissing the petition. Respondents filed a Motion for
Reconsideration, but it was likewise denied in a Resolution dated May 8, 2001. 7
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332.
Finding no reversible error on the part of the CA, this Court denied the petition in the
Resolution dated April 17, 2002.8

An Entry of Judgment was later issued certifying that the resolution became final and
executory on May 27, 2002. 9 The case was, thereafter, referred back to the Labor Arbiter. A
pre-execution conference was consequently scheduled, but respondents failed to appear.10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his
backwages be computed from the date of his dismissal on January 24, 1997 up to the
finality of the Resolution of the Supreme Court on May 27, 2002. 11 Upon recomputation,
the Computation and Examination Unit of the NLRC arrived at an updated amount in the
sum of P471,320.31.12
On December 2, 2002, a Writ of Execution 13 was issued by the Labor Arbiter ordering the
Sheriff to collect from respondents the total amount of P471,320.31. Respondents filed a
Motion to Quash Writ of Execution, arguing, among other things, that since the Labor Arbiter
awarded separation pay of P62,986.56 and limited backwages of P95,933.36, no more
recomputation is required to be made of the said awards. They claimed that after the
decision becomes final and executory, the same cannot be altered or amended
anymore.14 On January 13, 2003, the Labor Arbiter issued an Order 15 denying the motion.
Thus, an Alias Writ of Execution16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a
Resolution17 granting the appeal in favor of the respondents and ordered the recomputation
of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the
NLRC to be final and executory. Consequently, another pre-execution conference was held,
but respondents failed to appear on time. Meanwhile, petitioner moved that an Alias Writ of
Execution be issued to enforce the earlier recomputed judgment award in the sum
of P471,320.31.18
The records of the case were again forwarded to the Computation and Examination Unit for
recomputation, where the judgment award of petitioner was reassessed to be in the total
amount of only P147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him
the original amount as determined by the Labor Arbiter in his Decision dated October 15,
1998, pending the final computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the
judgment award that was due to petitioner in the amount of P147,560.19, which petitioner
eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the
monetary award to include the appropriate interests. 19
On May 10, 2005, the Labor Arbiter issued an Order 20 granting the motion, but only up to the
amount ofP11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision
that should be enforced considering that it was the one that became final and executory.
However, the Labor Arbiter reasoned that since the decision states that the separation pay
and backwages are computed only up to the promulgation of the said decision, it is the
amount of P158,919.92 that should be executed. Thus, since petitioner already
receivedP147,560.19, he is only entitled to the balance of P11,459.73.
21

Petitioner then appealed before the NLRC, which appeal was denied by the NLRC in its
Resolution22 dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it
was likewise denied in the Resolution23dated January 31, 2007.

Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No.
98591.
On September 23, 2008, the CA rendered a Decision 24 denying the petition. The CA opined
that since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter,
which already became final and executory, a belated correction thereof is no longer allowed.
The CA stated that there is nothing left to be done except to enforce the said judgment.
Consequently, it can no longer be modified in any respect, except to correct clerical errors or
mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated
October 9, 2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED,
COMMITTED GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN
UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN,
SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE
DISPOSITIVE PORTION OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER
LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE BODY OF THE SAME
DECISION.26
Petitioner argues that notwithstanding the fact that there was a computation of backwages
in the Labor Arbiters decision, the same is not final until reinstatement is made or until
finality of the decision, in case of an award of separation pay. Petitioner maintains that
considering that the October 15, 1998 decision of the Labor Arbiter did not become final and
executory until the April 17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was
entered in the Book of Entries on May 27, 2002, the reckoning point for the computation of
the backwages and separation pay should be on May 27, 2002 and not when the decision
of the Labor Arbiter was rendered on October 15, 1998. Further, petitioner posits that he is
also entitled to the payment of interest from the finality of the decision until full payment by
the respondents.
On their part, respondents assert that since only separation pay and limited backwages
were awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more
recomputation is required to be made of said awards. Respondents insist that since the
decision clearly stated that the separation pay and backwages are computed only up to
[the] promulgation of this decision, and considering that petitioner no longer appealed the
decision, petitioner is only entitled to the award as computed by the Labor Arbiter in the total
amount ofP158,919.92. Respondents added that it was only during the execution
proceedings that the petitioner questioned the award, long after the decision had become
final and executory. Respondents contend that to allow the further recomputation of the
backwages to be awarded to petitioner at this point of the proceedings would substantially
vary the decision of the Labor Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v.
Court of Appeals (Sixth Division),27 wherein the issue submitted to the Court for resolution
was the propriety of the computation of the awards made, and whether this violated the
principle of immutability of judgment. Like in the present case, it was a distinct feature of the
judgment of the Labor Arbiter in the above-cited case that the decision already provided for
the computation of the payable separation pay and backwages due and did not further order

the computation of the monetary awards up to the time of the finality of the judgment. Also in
Session Delights, the dismissed employee failed to appeal the decision of the labor arbiter.
The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of
the labor arbiters original computation of the awards made, pegged as of the time the
decision was rendered and confirmed with modification by a final CA decision, is legally
proper. The question is posed, given that the petitioner did not immediately pay the awards
stated in the original labor arbiters decision; it delayed payment because it continued with
the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from
the way the original labor arbiter framed his decision. The decision consists essentially of
two parts.
The first is that part of the decision that cannot now be disputed because it has been
confirmed with finality. This is the finding of the illegality of the dismissal and the awards of
separation pay in lieu of reinstatement, backwages, attorneys fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the
labor arbiter made shows that it was time-bound as can be seen from the figures used in the
computation. This part, being merely a computation of what the first part of the decision
established and declared, can, by its nature, be re-computed. This is the part, too, that the
petitioner now posits should no longer be re-computed because the computation is already
in the labor arbiters decision that the CA had affirmed. The public and private respondents,
on the other hand, posit that a re-computation is necessary because the relief in an illegal
dismissal decision goes all the way up to reinstatement if reinstatement is to be made, or up
to the finality of the decision, if separation pay is to be given in lieu reinstatement.
That the labor arbiters decision, at the same time that it found that an illegal dismissal had
taken place, also made a computation of the award, is understandable in light of Section 3,
Rule VIII of the then NLRC Rules of Procedure which requires that a computation be made.
This Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as
practicable, shall embody in any such decision or order the detailed and full amount
awarded.
Clearly implied from this original computation is its currency up to the finality of the labor
arbiters decision. As we noted above, this implication is apparent from the terms of the
computation itself, and no question would have arisen had the parties terminated the case
and implemented the decision at that point.
However, the petitioner disagreed with the labor arbiters findings on all counts i.e., on the
finding of illegality as well as on all the consequent awards made. Hence, the petitioner
appealed the case to the NLRC which, in turn, affirmed the labor arbiters decision. By law,
the NLRC decision is final, reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds
through a timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC
exceeded its authority in affirming the payment of 13th month pay and indemnity, lapsed to
finality and was subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal
portion of the original labor arbiters decision, the implementing labor arbiter ordered the
award re-computed; he apparently read the figures originally ordered to be paid to be the
computation due had the case been terminated and implemented at the labor arbiters level.

Thus, the labor arbiter re-computed the award to include the separation pay and the
backwages due up to the finality of the CA decision that fully terminated the case on the
merits. Unfortunately, the labor arbiters approved computation went beyond the finality of
the CA decision (July 29, 2003) and included as well the payment for awards the final CA
decision had deleted specifically, the proportionate 13th month pay and the indemnity
awards. Hence, the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it
essentially considered the labor arbiters original decision in accordance with its basic
component parts as we discussed above. To reiterate, the first part contains the finding of
illegality and its monetary consequences; the second part is the computation of the awards
or monetary consequences of the illegal dismissal, computed as of the time of the labor
arbiters original decision.28
Consequently, from the above disquisitions, under the terms of the decision which is sought
to be executed by the petitioner, no essential change is made by a recomputation as this
step is a necessary consequence that flows from the nature of the illegality of dismissal
declared by the Labor Arbiter in that decision. 29 A recomputation (or an original computation,
if no previous computation has been made) is a part of the law specifically, Article 279 of
the Labor Code and the established jurisprudence on this provision that is read into the
decision. By the nature of an illegal dismissal case, the reliefs continue to add up until full
satisfaction, as expressed under Article 279 of the Labor Code. The recomputation of the
consequences of illegal dismissal upon execution of the decision does not constitute an
alteration or amendment of the final decision being implemented. The illegal dismissal ruling
stands; only the computation of monetary consequences of this dismissal is affected, and
this is not a violation of the principle of immutability of final judgments. 30
That the amount respondents shall now pay has greatly increased is a consequence that it
cannot avoid as it is the risk that it ran when it continued to seek recourses against the
Labor Arbiters decision. Article 279 provides for the consequences of illegal dismissal in no
uncertain terms, qualified only by jurisprudence in its interpretation of when separation pay
in lieu of reinstatement is allowed. When that happens, the finality of the illegal dismissal
decision becomes the reckoning point instead of the reinstatement that the law decrees. In
allowing separation pay, the final decision effectively declares that the employment
relationship ended so that separation pay and backwages are to be computed up to that
point.31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines,
Inc. v. Court of Appeals,32 the Court laid down the guidelines regarding the manner of
computing legal interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court
at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims
or damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall

begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably established at the time the demand
is made, the interest shall begin to run only from the date the judgment of the court is made
(at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.

To recapitulate and for future guidance, the guidelines laid down in the case of
Eastern Shipping Lines 42 are accordingly modified to embody BSP-MB Circular No.
799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions
under Title XVIII on Damages of the Civil Code govern in determining the measure of
recoverable damages.

3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit. 33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its
Resolution No. 796 dated May 16, 2013, approved the amendment of Section 2 34 of Circular
No. 905, Series of 1982 and, accordingly, issued Circular No. 799, 35 Series of 2013,
effective July 1, 2013, the pertinent portion of which reads:

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1.

When the obligation is breached, and it consists in the

payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2.

When an obligation, not constituting a loan or forbearance

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

3.

When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance
of credit.

The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following
revisions governing the rate of interest in the absence of stipulation in loan contracts,
thereby amending Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of an express contract as to such rate of
interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 36 of the Manual of Regulations for
Banks and Sections 4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for
Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest
that would govern the parties, the rate of legal interest for loans or forbearance of any
money, goods or credits and the rate allowed in judgments shall no longer be twelve percent
(12%) per annum as reflected in the case of Eastern Shipping Lines 40 and Subsection
X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and
4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its
amendment by BSP-MB Circular No. 799 but will now be six percent (6%) per annum
effective July 1, 2013. It should be noted, nonetheless, that the new rate could only be
applied prospectively and not retroactively. Consequently, the twelve percent (12%) per
annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of
six percent (6%) per annum shall be the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B.
Olaguer v. Bangko Sentral Monetary Board, 41 this Court affirmed the authority of the BSPMB to set interest rates and to issue and enforce Circulars when it ruled that the BSP-MB
may prescribe the maximum rate or rates of interest for all loans or renewals thereof or the
forbearance of any money, goods or credits, including those for loans of low priority such as
consumer loans, as well as such loans made by pawnshops, finance companies and similar
credit institutions. It even authorizes the BSP-MB to prescribe different maximum rate or
rates for different types of borrowings, including deposits and deposit substitutes, or loans of
financial intermediaries.
Nonetheless, with regard to those judgments that have become final and executory prior to
July 1, 2013, said judgments shall not be disturbed and shall continue to be implemented
applying the rate of interest fixed therein.

And, in addition to the above, judgments that have become final and executory prior to July
1, 2013, shall not be disturbed and shall continue to be implemented applying the rate of
interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court
of Appeals in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009
are REVERSED and SET ASIDE. Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24,
1997 up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became
final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month
pay per year of service; and

(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from
May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their
full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total
monetary benefits awarded and due to petitioner in accordance with this Decision.
SO ORDERED.