[G.R. No. 146364.

June 3, 2004]

COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:

The Case
Before us is a petition for review[1] of the 21 June 2000 Decision[2] and 14 December 2000 Resolution of
the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the 11 November 1996
decision[3] of the Regional Trial Court of Quezon City, Branch 81, [4] affirming the 15 December 1995
decision[5] of the Metropolitan Trial Court of Quezon City, Branch 31.[6]

The Antecedents
In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a certain Pedro Perez for the rights over a
250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a house made of light materials
on the lot. Pajuyo and his family lived in the house from 1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra (Guevarra) executed
a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house for free
provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra promised that he
would voluntarily vacate the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that Guevarra
vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon City, Branch
31 (MTC).
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot where the
house stands because the lot is within the 150 hectares set aside by Proclamation No. 137 for socialized
housing. Guevarra pointed out that from December 1985 to September 1994, Pajuyo did not show up or
communicate with him. Guevarra insisted that neither he nor Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive portion of the
MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against defendant, ordering the
latter to:
A) vacate the house and lot occupied by the defendant or any other person or persons claiming any
right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00) monthly as reasonable
compensation for the use of the premises starting from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and

D) pay the cost of suit.

SO ORDERED.[7]
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 (RTC).
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC decision
reads:
WHEREFORE, premises considered, the Court finds no reversible error in the decision appealed from, being in accord
with the law and evidence presented, and the same is hereby affirmed en toto.
SO ORDERED.[8]
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14 December 1996 to
file his appeal with the Court of Appeals. Instead of filing his appeal with the Court of Appeals, Guevarra filed
with the Supreme Court a Motion for Extension of Time to File Appeal by Certiorari Based on Rule 42 (motion
for extension). Guevarra theorized that his appeal raised pure questions of law. The Receiving Clerk of the
Supreme Court received the motion for extension on 13 December 1996 or one day before the right to appeal
expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution[9] referring the motion for
extension to the Court of Appeals which has concurrent jurisdiction over the case. The case presented no
special and important matter for the Supreme Court to take cognizance of at the first instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a Resolution [10] granting the
motion for extension conditioned on the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevaras petition for
review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The dispositive
portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case No. Q-96-26943
is REVERSED and SET ASIDE; and it is hereby declared that the ejectment case filed against defendant-appellant is
without factual and legal basis.
SO ORDERED.[11]
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of Appeals
should have dismissed outright Guevarras petition for review because it was filed out of time. Moreover, it was
Guevarras counsel and not Guevarra who signed the certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos motion for
reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.
SO ORDERED.[12]

The Ruling of the MTC

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

The Ruling of the RTC

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

The Ruling of the Court of Appeals

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

The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND DISCRETION
TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondents Motion for an Extension of thirty
days to file petition for review at the time when there was no more period to extend as the
decision of the Regional Trial Court had already become final and executory.
2) in giving due course, instead of dismissing, private respondents Petition for Review even
though the certification against forum-shopping was signed only by counsel instead of by
petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact a
commodatum, instead of a Contract of Lease as found by the Metropolitan Trial Court and
in holding that the ejectment case filed against defendant-appellant is without legal and
factual basis.
4) in reversing and setting aside the Decision of the Regional Trial Court in Civil Case No. Q96-26943 and in holding that the parties are in pari delicto being both squatters, therefore,
illegal occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code of Policies of the
National Government Center Housing Project instead of deciding the same under the
Kasunduan voluntarily executed by the parties, the terms and conditions of which are the
laws between themselves.[13]

The Ruling of the Court

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

Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarras petition for review
because the RTC decision had already become final and executory when the appellate court acted on
Guevarras motion for extension to file the petition. Pajuyo points out that Guevarra had only one day before the
expiry of his period to appeal the RTC decision.Instead of filing the petition for review with the Court of
Appeals, Guevarra filed with this Court an undated motion for extension of 30 days to file a petition for
review. This Court merely referred the motion to the Court of Appeals. Pajuyo believes that the filing of the
motion for extension with this Court did not toll the running of the period to perfect the appeal. Hence, when the
Court of Appeals received the motion, the period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable to the
Court of Appeals by petition for review in cases involving questions of fact or mixed questions of fact and law.
[14]
Decisions of the regional trial courts involving pure questions of law are appealable directly to this Court by
petition for review.[15] These modes of appeal are now embodied in Section 2, Rule 41 of the 1997 Rules of
Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra thus filed
his motion for extension to file petition for review before this Court on 14 December 1996. On 3 January 1997,

Guevarra then filed his petition for review with this Court. A perusal of Guevarras petition for review gives the
impression that the issues he raised were pure questions of law. There is a question of law when the doubt or
difference is on what the law is on a certain state of facts. [16] There is a question of fact when the doubt or
difference is on the truth or falsity of the facts alleged.[17]
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarras petition for
review raised these questions: (1) Do ejectment cases pertain only to possession of a structure, and not the lot
on which the structure stands? (2) Does a suit by a squatter against a fellow squatter constitute a valid case for
ejectment? (3) Should a Presidential Proclamation governing the lot on which a squatters structure stands be
considered in an ejectment suit filed by the owner of the structure?
These questions call for the evaluation of the rights of the parties under the law on ejectment and the
Presidential Proclamation. At first glance, the questions Guevarra raised appeared purely legal. However,
some factual questions still have to be resolved because they have a bearing on the legal questions raised in
the petition for review. These factual matters refer to the metes and bounds of the disputed property and the
application of Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for
review. In Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court,[18] we
declared that the Court of Appeals could grant extension of time in appeals by petition for review. In Liboro v.
Court of Appeals,[19] we clarified that the prohibition against granting an extension of time applies only in a
case where ordinary appeal is perfected by a mere notice of appeal. The prohibition does not apply in a
petition for review where the pleading needs verification. A petition for review, unlike an ordinary appeal,
requires preparation and research to present a persuasive position. [20] The drafting of the petition for review
entails more time and effort than filing a notice of appeal. [21] Hence, the Court of Appeals may allow an
extension of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,[22] we held
that Liboros clarification of Lacsamana is consistent with the Revised Internal Rules of the Court of Appeals
and Supreme Court Circular No. 1-91. They all allow an extension of time for filing petitions for review with the
Court of Appeals. The extension, however, should be limited to only fifteen days save in exceptionally
meritorious cases where the Court of Appeals may grant a longer period.
A judgment becomes final and executory by operation of law. Finality of judgment becomes a fact on the
lapse of the reglementary period to appeal if no appeal is perfected. [23] The RTC decision could not have
gained finality because the Court of Appeals granted the 30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarras motion for
extension. The Court of Appeals gave due course to the motion for extension because it complied with the
condition set by the appellate court in its resolution dated 28 January 1997. The resolution stated that the
Court of Appeals would only give due course to the motion for extension if filed on time. The motion for
extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for extension are (1)
the date of receipt of the judgment or final order or resolution subject of the petition, and (2) the date of filing of
the motion for extension.[24] It is the date of the filing of the motion or pleading, and not the date of execution,
that determines the timeliness of the filing of that motion or pleading. Thus, even if the motion for extension
bears no date, the date of filing stamped on it is the reckoning point for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed his motion
for extension before this Court on 13 December 1996, the date stamped by this Courts Receiving Clerk on the
motion for extension. Clearly, Guevarra filed the motion for extension exactly one day before the lapse of the
reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarras appeal on technical grounds,
Pajuyo did not ask the appellate court to deny the motion for extension and dismiss the petition for review at
the earliest opportunity. Instead, Pajuyo vigorously discussed the merits of the case. It was only when the
Court of Appeals ruled in Guevarras favor that Pajuyo raised the procedural issues against Guevarras petition
for review.

A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision on the
merits, is estopped from attacking the jurisdiction of the court. [25] Estoppel sets in not because the judgment of
the court is a valid and conclusive adjudication, but because the practice of attacking the courts jurisdiction
after voluntarily submitting to it is against public policy.[26]
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarras failure to sign the
certification against forum shopping. Instead, Pajuyo harped on Guevarras counsel signing the verification,
claiming that the counsels verification is insufficient since it is based only on mere information.
A partys failure to sign the certification against forum shopping is different from the partys failure to sign
personally the verification. The certificate of non-forum shopping must be signed by the party, and not by
counsel.[27] The certification of counsel renders the petition defective.[28]
On the other hand, the requirement on verification of a pleading is a formal and not a jurisdictional
requisite.[29] It is intended simply to secure an assurance that what are alleged in the pleading are true and
correct and not the product of the imagination or a matter of speculation, and that the pleading is filed in good
faith.[30] The party need not sign the verification. A partys representative, lawyer or any person who personally
knows the truth of the facts alleged in the pleading may sign the verification.[31]
We agree with the Court of Appeals that the issue on the certificate against forum shopping was merely an
afterthought. Pajuyo did not call the Court of Appeals attention to this defect at the early stage of the
proceedings. Pajuyo raised this procedural issue too late in the proceedings.

Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to Resolve the
Issue of Possession
Settled is the rule that the defendants claim of ownership of the disputed property will not divest the
inferior court of its jurisdiction over the ejectment case. [32] Even if the pleadings raise the issue of ownership,
the court may pass on such issue to determine only the question of possession, especially if the ownership is
inseparably linked with the possession.[33] The adjudication on the issue of ownership is only provisional and
will not bar an action between the same parties involving title to the land. [34] This doctrine is a necessary
consequence of the nature of the two summary actions of ejectment, forcible entry and unlawful detainer,
where the only issue for adjudication is the physical or material possession over the real property.[35]
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners of the
contested property and that they are mere squatters. Will the defense that the parties to the ejectment case are
not the owners of the disputed lot allow the courts to renounce their jurisdiction over the case? The Court of
Appeals believed so and held that it would just leave the parties where they are since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for recovery of
possession. The parties cannot present evidence to prove ownership or right to legal possession except to
prove the nature of the possession when necessary to resolve the issue of physical possession. [36] The same is
true when the defendant asserts the absence of title over the property. The absence of title over the contested
lot is not a ground for the courts to withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is entitled to the physical
possession of the premises, that is, to the possession de facto and not to the possession de jure.[37] It does not
even matter if a partys title to the property is questionable,[38] or when both parties intruded into public land and
their applications to own the land have yet to be approved by the proper government agency.[39] Regardless of
the actual condition of the title to the property, the party in peaceable quiet possession shall not be thrown out
by a strong hand, violence or terror.[40] Neither is the unlawful withholding of property allowed. Courts will
always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against the owner
himself.[41] Whatever may be the character of his possession, if he has in his favor prior possession in time, he

has the security that entitles him to remain on the property until a person with a better right lawfully ejects him.
[42]
To repeat, the only issue that the court has to settle in an ejectment suit is the right to physical possession.
In Pitargue v. Sorilla,[43] the government owned the land in dispute. The government did not authorize
either the plaintiff or the defendant in the case of forcible entry case to occupy the land. The plaintiff had prior
possession and had already introduced improvements on the public land. The plaintiff had a pending
application for the land with the Bureau of Lands when the defendant ousted him from possession. The plaintiff
filed the action of forcible entry against the defendant. The government was not a party in the case of forcible
entry.
The defendant questioned the jurisdiction of the courts to settle the issue of possession because while the
application of the plaintiff was still pending, title remained with the government, and the Bureau of Public Lands
had jurisdiction over the case. We disagreed with the defendant. We ruled that courts have jurisdiction to
entertain ejectment suits even before the resolution of the application. The plaintiff, by priority of his application
and of his entry, acquired prior physical possession over the public land applied for as against other private
claimants. That prior physical possession enjoys legal protection against other private claimants because only
a court can take away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue[44] as squatters, strictly speaking,
their entry into the disputed land was illegal. Both the plaintiff and defendant entered the public land without the
owners permission. Title to the land remained with the government because it had not awarded to anyone
ownership of the contested public land. Both the plaintiff and the defendant were in effect squatting on
government property. Yet, we upheld the courts jurisdiction to resolve the issue of possession even if the
plaintiff and the defendant in the ejectment case did not have any title over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession because of the
public need to preserve the basic policy behind the summary actions of forcible entry and unlawful
detainer. The underlying philosophy behind ejectment suits is to prevent breach of the peace and criminal
disorder and to compel the party out of possession to respect and resort to the law alone to obtain what he
claims is his.[45] The party deprived of possession must not take the law into his own hands. [46] Ejectment
proceedings are summary in nature so the authorities can settle speedily actions to recover possession
because of the overriding need to quell social disturbances.[47]
We further explained in Pitargue the greater interest that is at stake in actions for recovery of possession.
We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take cognizance of possessory actions
involving these public lands before final award is made by the Lands Department, and before title is given any of the
conflicting claimants? It is one of utmost importance, as there are public lands everywhere and there are thousands of
settlers, especially in newly opened regions. It also involves a matter of policy, as it requires the determination of the
respective authorities and functions of two coordinate branches of the Government in connection with public land
conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old, which was in force in this country
before the American occupation, or in the new, we have a possessory action, the aim and purpose of which is the recovery
of the physical possession of real property, irrespective of the question as to who has the title thereto. Under the Spanish
Civil Code we had the accion interdictal, a summary proceeding which could be brought within one year from
dispossession (Roman Catholic Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291); and as early as October 1, 1901, upon
the enactment of the Code of Civil Procedure (Act No. 190 of the Philippine Commission) we implanted the common law
action of forcible entry (section 80 of Act No. 190), the object of which has been stated by this Court to be to prevent
breaches of the peace and criminal disorder which would ensue from the withdrawal of the remedy, and the
reasonable hope such withdrawal would create that some advantage must accrue to those persons who, believing
themselves entitled to the possession of property, resort to force to gain possession rather than to some appropriate
action in the court to assert their claims. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So before the
enactment of the first Public Land Act (Act No. 926) the action of forcible entry was already available in the courts of the
country. So the question to be resolved is, Did the Legislature intend, when it vested the power and authority to alienate
and dispose of the public lands in the Lands Department, to exclude the courts from entertaining the possessory action of
forcible entry between rival claimants or occupants of any land before award thereof to any of the parties? Did Congress

intend that the lands applied for, or all public lands for that matter, be removed from the jurisdiction of the judicial Branch
of the Government, so that any troubles arising therefrom, or any breaches of the peace or disorders caused by rival
claimants, could be inquired into only by the Lands Department to the exclusion of the courts? The answer to this question
seems to us evident. The Lands Department does not have the means to police public lands; neither does it have the means
to prevent disorders arising therefrom, or contain breaches of the peace among settlers; or to pass promptly upon conflicts
of possession. Then its power is clearly limited to disposition and alienation, and while it may decide conflicts of
possession in order to make proper award, the settlement of conflicts of possession which is recognized in the court
herein has another ultimate purpose, i.e., the protection of actual possessors and occupants with a view to the
prevention of breaches of the peace. The power to dispose and alienate could not have been intended to include the
power to prevent or settle disorders or breaches of the peace among rival settlers or claimants prior to the final
award. As to this, therefore, the corresponding branches of the Government must continue to exercise power and
jurisdiction within the limits of their respective functions. The vesting of the Lands Department with authority to
administer, dispose, and alienate public lands, therefore, must not be understood as depriving the other branches of the
Government of the exercise of the respective functions or powers thereon, such as the authority to stop disorders and
quell breaches of the peace by the police, the authority on the part of the courts to take jurisdiction over possessory
actions arising therefrom not involving, directly or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in American courts to the effect that courts have no jurisdiction to
determine the rights of claimants to public lands, and that until the disposition of the land has passed from the control of
the Federal Government, the courts will not interfere with the administration of matters concerning the same. (50 C. J.
1093-1094.) We have no quarrel with this principle. The determination of the respective rights of rival claimants to public
lands is different from the determination of who has the actual physical possession or occupation with a view to protecting
the same and preventing disorder and breaches of the peace. A judgment of the court ordering restitution of the possession
of a parcel of land to the actual occupant, who has been deprived thereof by another through the use of force or in any
other illegal manner, can never be prejudicial interference with the disposition or alienation of public lands. On the other
hand, if courts were deprived of jurisdiction of cases involving conflicts of possession, that threat of judicial action
against breaches of the peace committed on public lands would be eliminated, and a state of lawlessness would
probably be produced between applicants, occupants or squatters, where force or might, not right or justice, would
rule.
It must be borne in mind that the action that would be used to solve conflicts of possession between rivals or conflicting
applicants or claimants would be no other than that of forcible entry. This action, both in England and the United States
and in our jurisdiction, is a summary and expeditious remedy whereby one in peaceful and quiet possession may recover
the possession of which he has been deprived by a stronger hand, by violence or terror; its ultimate object being to prevent
breach of the peace and criminal disorder. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of the
remedy is mere possession as a fact, of physical possession, not a legal possession. (Mediran vs. Villanueva, 37 Phil. 752.)
The title or right to possession is never in issue in an action of forcible entry; as a matter of fact, evidence thereof is
expressly banned, except to prove the nature of the possession. (Second 4, Rule 72, Rules of Court.) With this nature of
the action in mind, by no stretch of the imagination can conclusion be arrived at that the use of the remedy in the courts of
justice would constitute an interference with the alienation, disposition, and control of public lands. To limit ourselves to
the case at bar can it be pretended at all that its result would in any way interfere with the manner of the alienation or
disposition of the land contested? On the contrary, it would facilitate adjudication, for the question of priority of
possession having been decided in a final manner by the courts, said question need no longer waste the time of the land
officers making the adjudication or award. (Emphasis ours)

The Principle of Pari Delicto is not Applicable to Ejectment Cases

The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code [48] embody the principle of pari delicto. We explained the principle
of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio and in pari delicto potior est conditio
defedentis. The law will not aid either party to an illegal agreement. It leaves the parties where it finds them. [49]

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

In Drilon v. Gaurana,[51] we reiterated the basic policy behind the summary actions of forcible entry and
unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that, regardless of the actual condition of
the title to the property, the party in peaceable quiet possession shall not be turned out by strong hand, violence or terror.
In affording this remedy of restitution the object of the statute is to prevent breaches of the peace and criminal disorder
which would ensue from the withdrawal of the remedy, and the reasonable hope such withdrawal would create that some
advantage must accrue to those persons who, believing themselves entitled to the possession of property, resort to force to
gain possession rather than to some appropriate action in the courts to assert their claims. This is the philosophy at the
foundation of all these actions of forcible entry and detainer which are designed to compel the party out of possession to
respect and resort to the law alone to obtain what he claims is his. [52]
Clearly, the application of the principle of pari delicto to a case of ejectment between squatters is fraught
with danger. To shut out relief to squatters on the ground of pari delicto would openly invite mayhem and
lawlessness. A squatter would oust another squatter from possession of the lot that the latter had illegally
occupied, emboldened by the knowledge that the courts would leave them where they are. Nothing would then
stand in the way of the ousted squatter from re-claiming his prior possession at all cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for recovery of
possession seek to prevent.[53] Even the owner who has title over the disputed property cannot take the law
into his own hands to regain possession of his property. The owner must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are squatters. The
determination of priority and superiority of possession is a serious and urgent matter that cannot be left to the
squatters to decide. To do so would make squatters receive better treatment under the law. The law restrains
property owners from taking the law into their own hands. However, the principle of pari delicto as applied by
the Court of Appeals would give squatters free rein to dispossess fellow squatters or violently retake
possession of properties usurped from them. Courts should not leave squatters to their own devices in cases
involving recovery of possession.

Possession is the only Issue for Resolution in an Ejectment Case

The case for review before the Court of Appeals was a simple case of ejectment. The Court of Appeals
refused to rule on the issue of physical possession. Nevertheless, the appellate court held that the pivotal issue
in this case is who between Pajuyo and Guevarra has the priority right as beneficiary of the contested land
under Proclamation No. 137.[54] According to the Court of Appeals, Guevarra enjoys preferential right under
Proclamation No. 137 because Article VI of the Code declares that the actual occupant or caretaker is the one
qualified to apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a relocation site under
Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the land that it declared open
for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation No. 137.
Guevarra had the burden to prove that the disputed lot is within the coverage of Proclamation No. 137. He
failed to do so.
Second. The Court of Appeals should not have given credence to Guevarras unsubstantiated claim that
he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the survey the project
administrator conducted, he and not Pajuyo appeared as the actual occupant of the lot.

There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo allowed
Guevarra to occupy the disputed property in 1985. President Aquino signed Proclamation No. 137 into law on
11 March 1986. Pajuyo made his earliest demand for Guevarra to vacate the property in September 1994.
During the time that Guevarra temporarily held the property up to the time that Proclamation No. 137
allegedly segregated the disputed lot, Guevarra never applied as beneficiary of Proclamation No. 137. Even
when Guevarra already knew that Pajuyo was reclaiming possession of the property, Guevarra did not take
any step to comply with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and Guevarra
has a pending application over the lot, courts should still assume jurisdiction and resolve the issue of
possession. However, the jurisdiction of the courts would be limited to the issue of physical possession only.
In Pitargue,[55] we ruled that courts have jurisdiction over possessory actions involving public land to
determine the issue of physical possession. The determination of the respective rights of rival claimants to
public land is, however, distinct from the determination of who has the actual physical possession or who has a
better right of physical possession.[56] The administrative disposition and alienation of public lands should be
threshed out in the proper government agency.[57]
The Court of Appeals determination of Pajuyo and Guevarras rights under Proclamation No. 137 was
premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law. Courts should not
preempt the decision of the administrative agency mandated by law to determine the qualifications of
applicants for the acquisition of public lands. Instead, courts should expeditiously resolve the issue of physical
possession in ejectment cases to prevent disorder and breaches of peace.[58]

Pajuyo is Entitled to Physical Possession of the Disputed Property

Guevarra does not dispute Pajuyos prior possession of the lot and ownership of the house built on
it. Guevarra expressly admitted the existence and due execution of the Kasunduan.The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay pahintulot kay G.
Eddie Guevarra, na pansamantalang manirahan sa nasabing bahay at lote ng walang bayad. Kaugnay nito, kailangang
panatilihin nila ang kalinisan at kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of rent, but
Guevarra was under obligation to maintain the premises in good condition. Guevarra promised to vacate the
premises on Pajuyos demand but Guevarra broke his promise and refused to heed Pajuyos demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding by a person
from another of the possession of real property to which the latter is entitled after the expiration or termination
of the formers right to hold possession under a contract, express or implied.[59]
Where the plaintiff allows the defendant to use his property by tolerance without any contract, the
defendant is necessarily bound by an implied promise that he will vacate on demand, failing which, an action
for unlawful detainer will lie.[60] The defendants refusal to comply with the demand makes his continued
possession of the property unlawful.[61] The status of the defendant in such a case is similar to that of a lessee
or tenant whose term of lease has expired but whose occupancy continues by tolerance of the owner.[62]
This principle should apply with greater force in cases where a contract embodies the permission or
tolerance to use the property. The Kasunduan expressly articulated Pajuyos forbearance. Pajuyo did not
require Guevarra to pay any rent but only to maintain the house and lot in good condition. Guevarra expressly
vowed in the Kasunduan that he would vacate the property on demand. Guevarras refusal to comply with
Pajuyos demand to vacate made Guevarras continued possession of the property unlawful.
We do not subscribe to the Court of Appeals theory that the Kasunduan is one of commodatum.

In a contract of commodatum, one of the parties delivers to another something not consumable so that the
latter may use the same for a certain time and return it. [63] An essential feature of commodatum is that it is
gratuitous. Another feature of commodatum is that the use of the thing belonging to another is for a certain
period.[64] Thus, the bailor cannot demand the return of the thing loaned until after expiration of the period
stipulated, or after accomplishment of the use for which the commodatum is constituted.[65] If the bailor should
have urgent need of the thing, he may demand its return for temporary use. [66] If the use of the thing is merely
tolerated by the bailor, he can demand the return of the thing at will, in which case the contractual relation is
called a precarium.[67] Under the Civil Code, precarium is a kind of commodatum.[68]
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially
gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the property
in good condition. The imposition of this obligation makes the Kasunduan a contract different from
a commodatum. The effects of the Kasunduan are also different from that of a commodatum. Case law on
ejectment has treated relationship based on tolerance as one that is akin to a landlord-tenant relationship
where the withdrawal of permission would result in the termination of the lease. [69] The tenants withholding of
the property would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra as
bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor. The obligation to
deliver or to return the thing received attaches to contracts for safekeeping, or contracts of commission,
administration and commodatum.[70] These contracts certainly involve the obligation to deliver or return the
thing received.[71]
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a squatter.
Squatters, Guevarra pointed out, cannot enter into a contract involving the land they illegally occupy. Guevarra
insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely entered into
the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from
it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a right to
physical possession of the contested property. The Kasunduan is the undeniable evidence of Guevarras
recognition of Pajuyos better right of physical possession. Guevarra is clearly a possessor in bad faith. The
absence of a contract would not yield a different result, as there would still be an implied promise to vacate.
Guevarra contends that there is a pernicious evil that is sought to be avoided, and that is allowing an
absentee squatter who (sic) makes (sic) a profit out of his illegal act. [72] Guevarra bases his argument on the
preferential right given to the actual occupant or caretaker under Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the property without
paying any rent. There is also no proof that Pajuyo is a professional squatter who rents out usurped properties
to other squatters. Moreover, it is for the proper government agency to decide who between Pajuyo and
Guevarra qualifies for socialized housing. The only issue that we are addressing is physical possession.
Prior possession is not always a condition sine qua non in ejectment.[73] This is one of the distinctions
between forcible entry and unlawful detainer.[74] In forcible entry, the plaintiff is deprived of physical possession
of his land or building by means of force, intimidation, threat, strategy or stealth. Thus, he must allege and
prove prior possession.[75] But in unlawful detainer, the defendant unlawfully withholds possession after the
expiration or termination of his right to possess under any contract, express or implied. In such a case, prior
physical possession is not required.[76]
Pajuyos withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarras transient right to
possess the property ended as well. Moreover, it was Pajuyo who was in actual possession of the property
because Guevarra had to seek Pajuyos permission to temporarily hold the property and Guevarra had to follow
the conditions set by Pajuyo in theKasunduan. Control over the property still rested with Pajuyo and this is
evidence of actual possession.

Pajuyos absence did not affect his actual possession of the disputed property. Possession in the eyes of
the law does not mean that a man has to have his feet on every square meter of the ground before he is
deemed in possession.[77] One may acquire possession not only by physical occupation, but also by the fact
that a thing is subject to the action of ones will.[78]Actual or physical occupation is not always necessary.[79]

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

We are aware of our pronouncement in cases where we declared that squatters and intruders who
clandestinely enter into titled government property cannot, by such act, acquire any legal right to said property.
[80]
We made this declaration because the person who had title or who had the right to legal possession over
the disputed property was a party in the ejectment suit and that party instituted the case against squatters or
usurpers.
In this case, the owner of the land, which is the government, is not a party to the ejectment case. This
case is between squatters. Had the government participated in this case, the courts could have evicted the
contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in this case, we cannot
evict on our own the parties. Such a ruling would discourage squatters from seeking the aid of the courts in
settling the issue of physical possession. Stripping both the plaintiff and the defendant of possession just
because they are squatters would have the same dangerous implications as the application of the principle
of pari delicto. Squatters would then rather settle the issue of physical possession among themselves than
seek relief from the courts if the plaintiff and defendant in the ejectment case would both stand to lose
possession of the disputed property. This would subvert the policy underlying actions for recovery of
possession.
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on the property
until a person who has title or a better right lawfully ejects him. Guevarra is certainly not that person. The ruling
in this case, however, does not preclude Pajuyo and Guevarra from introducing evidence and presenting
arguments before the proper administrative agency to establish any right to which they may be entitled under
the law.[81]
In no way should our ruling in this case be interpreted to condone squatting. The ruling on the issue of
physical possession does not affect title to the property nor constitute a binding and conclusive adjudication on
the merits on the issue of ownership. [82] The owner can still go to court to recover lawfully the property from the
person who holds the property without legal title. Our ruling here does not diminish the power of government
agencies, including local governments, to condemn, abate, remove or demolish illegal or unauthorized
structures in accordance with existing laws.

Attorneys Fees and Rentals

The MTC and RTC failed to justify the award of P3,000 attorneys fees to Pajuyo. Attorneys fees as part of
damages are awarded only in the instances enumerated in Article 2208 of the Civil Code. [83] Thus, the award of
attorneys fees is the exception rather than the rule. [84] Attorneys fees are not awarded every time a party
prevails in a suit because of the policy that no premium should be placed on the right to litigate. [85] We therefore
delete the attorneys fees awarded to Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra did not
dispute this factual finding of the two courts. We find the amount reasonable compensation to
Pajuyo. The P300 monthly rental is counted from the last demand to vacate, which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated 14
December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE.The Decision dated 11
November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil Case No. Q-96-26943, affirming

the Decision dated 15 December 1995 of the Metropolitan Trial Court of Quezon City, Branch 31 in Civil Case
No. 12432, is REINSTATED with MODIFICATION. The award of attorneys fees is deleted. No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, Ynares-Santiago, and Azcuna, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17474

October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V. Bagtas, petitionerappellant.
D. T. Reyes, Liaison and Associates for petitioner-appellant.
Office of the Solicitor General for plaintiff-appellee.
PADILLA, J.:
The Court of Appeals certified this case to this Court because only questions of law are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal
Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of
P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a
government charge of breeding fee of 10% of the book value of the bulls. Upon the expiration on 7 May 1949
of the contract, the borrower asked for a renewal for another period of one year. However, the Secretary of
Agriculture and Natural Resources approved a renewal thereof of only one bull for another year from 8 May
1949 to 7 May 1950 and requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the
Director of Animal Industry that he would pay the value of the three bulls. On 17 October 1950 he reiterated his
desire to buy them at a value with a deduction of yearly depreciation to be approved by the Auditor General.
On 19 October 1950 the Director of Animal Industry advised him that the book value of the three bulls could not
be reduced and that they either be returned or their book value paid not later than 31 October 1950. Jose V.
Bagtas failed to pay the book value of the three bulls or to return them. So, on 20 December 1950 in the Court
of First Instance of Manila the Republic of the Philippines commenced an action against him praying that he be
ordered to return the three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the
unpaid breeding fee in the sum of P199.62, both with interests, and costs; and that other just and equitable
relief be granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the
bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the pending
appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of the Philippines
from the refusal by the Director of Animal Industry to deduct from the book value of the bulls corresponding
yearly depreciation of 8% from the date of acquisition, to which depreciation the Auditor General did not object,
he could not return the animals nor pay their value and prayed for the dismissal of the complaint.
After hearing, on 30 July 1956 the trial court render judgment
. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus
the breeding fees in the amount of P626.17 with interest on both sums of (at) the legal rate from the
filing of this complaint and costs.

On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18 October
and issued on 11 November 1958. On 2 December 1958 granted an ex-parte motion filed by the plaintiff on
November 1958 for the appointment of a special sheriff to serve the writ outside Manila. Of this order
appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas, the surviving spouse of the defendant
Jose Bagtas who died on 23 October 1951 and as administratrix of his estate, was notified. On 7 January 1959
she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were returned to the Bureau
Animal of Industry and that sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wound
inflicted during a Huk raid on Hacienda Felicidad Intal, and praying that the writ of execution be quashed and
that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her motion. On 6
February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied her motion. Hence,
this appeal certified by the Court of Appeals to this Court as stated at the beginning of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned the
Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal Industry,
Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter (Exhibit 2). That is
why in its objection of 31 January 1959 to the appellant's motion to quash the writ of execution the appellee
prays "that another writ of execution in the sum of P859.53 be issued against the estate of defendant
deceased Jose V. Bagtas." She cannot be held liable for the two bulls which already had been returned to and
received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in November
1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept,
and that as such death was due to force majeure she is relieved from the duty of returning the bull or paying its
value to the appellee. The contention is without merit. The loan by the appellee to the late defendant Jose V.
Bagtas of the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May 1949, later
on renewed for another year as regards one bull, was subject to the payment by the borrower of breeding fee
of 10% of the book value of the bulls. The appellant contends that the contract was commodatum and that, for
that reason, as the appellee retained ownership or title to the bull it should suffer its loss due to force majeure.
A contract of commodatum is essentially gratuitous.1 If the breeding fee be considered a compensation, then
the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to
the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the
expiry of the contract. And even if the contract becommodatum, still the appellant is liable, because article
1942 of the Civil Code provides that a bailee in a contract of commodatum
. . . is liable for loss of the things, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event;
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for
another period of one year to end on 8 May 1950. But the appellant kept and used the bull until November
1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the
deceased husband of the appellant the bulls had each an appraised book value, to with: the Sindhi, at
P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of
the bull due to fortuitous event the late husband of the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the return of the bull or the payment
of its value being a money claim should be presented or filed in the intestate proceedings of the defendant who
died on 23 October 1951, is not altogether without merit. However, the claim that his civil personality having

ceased to exist the trial court lost jurisdiction over the case against him, is untenable, because section 17 of
Rule 3 of the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice,
the legal representative of the deceased to appear and to be substituted for the deceased, within a
period of thirty (30) days, or within such time as may be granted. . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule 3
which provides that
Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court
promptly of such death . . . and to give the name and residence of the executory administrator,
guardian, or other legal representative of the deceased . . . .
The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had been
issue letters of administration of the estate of the late Jose Bagtas and that "all persons having claims for
monopoly against the deceased Jose V. Bagtas, arising from contract express or implied, whether the same be
due, not due, or contingent, for funeral expenses and expenses of the last sickness of the said decedent, and
judgment for monopoly against him, to file said claims with the Clerk of this Court at the City Hall Bldg.,
Highway 54, Quezon City, within six (6) months from the date of the first publication of this order, serving a
copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the
said deceased," is not a notice to the court and the appellee who were to be notified of the defendant's death in
accordance with the above-quoted rule, and there was no reason for such failure to notify, because the
attorney who appeared for the defendant was the same who represented the administratrix in the special
proceedings instituted for the administration and settlement of his estate. The appellee or its attorney or
representative could not be expected to know of the death of the defendant or of the administration
proceedings of his estate instituted in another court that if the attorney for the deceased defendant did not
notify the plaintiff or its attorney of such death as required by the rule.
As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is only
liable for the sum of P859.63, the value of the bull which has not been returned to the appellee, because it was
killed while in the custody of the administratrix of his estate. This is the amount prayed for by the appellee in its
objection on 31 January 1959 to the motion filed on 7 January 1959 by the appellant for the quashing of the
writ of execution.
Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having
been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the
appellee cannot be enforced by means of a writ of execution but must be presented to the probate court for
payment by the appellant, the administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and Makalintal,
JJ.,concur.
Barrera, J., concurs in the result.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 115324

February 19, 2003

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

vs.
HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals dated June 25, 1991 in CA-G.R. CV
No. 11791 and of its Resolution2 dated May 5, 1994, denying the motion for reconsideration of said decision filed by
petitioner Producers Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles Sanchez to
help her friend and townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela Marketing and
Services ("Sterela" for brevity). Specifically, Sanchez asked private respondent to deposit in a bank a certain
amount of money in the bank account of Sterela for purposes of its incorporation. She assured private respondent
that he could withdraw his money from said account within a months time. Private respondent asked Sanchez to
bring Doronilla to their house so that they could discuss Sanchezs request. 3
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronillas private
secretary, met and discussed the matter. Thereafter, relying on the assurances and representations of Sanchez and
Doronilla, private respondent issued a check in the amount of Two Hundred Thousand Pesos (P200,000.00) in favor
of Sterela. Private respondent instructed his wife, Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in
opening a savings account in the name of Sterela in the Buendia, Makati branch of Producers Bank of the
Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went to the bank to deposit the check. They had with
them an authorization letter from Doronilla authorizing Sanchez and her companions, "in coordination with Mr. Rufo
Atienza," to open an account for Sterela Marketing Services in the amount of P200,000.00. In opening the account,
the authorized signatories were Inocencia Vives and/or Angeles Sanchez. A passbook for Savings Account No. 101567 was thereafter issued to Mrs. Vives.4
Subsequently, private respondent learned that Sterela was no longer holding office in the address previously given
to him. Alarmed, he and his wife went to the Bank to verify if their money was still intact. The bank manager referred
them to Mr. Rufo Atienza, the assistant manager, who informed them that part of the money in Savings Account No.
10-1567 had been withdrawn by Doronilla, and that only P90,000.00 remained therein. He likewise told them that
Mrs. Vives could not withdraw said remaining amount because it had to answer for some postdated checks issued
by Doronilla. According to Atienza, after Mrs. Vives and Sanchez opened Savings Account No. 10-1567, Doronilla
opened Current Account No. 10-0320 for Sterela and authorized the Bank to debit Savings Account No. 10-1567 for
the amounts necessary to cover overdrawings in Current Account No. 10-0320. In opening said current account,

Sterela, through Doronilla, obtained a loan of P175,000.00 from the Bank. To cover payment thereof, Doronilla
issued three postdated checks, all of which were dishonored. Atienza also said that Doronilla could assign or
withdraw the money in Savings Account No. 10-1567 because he was the sole proprietor of Sterela. 5
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he received a letter from
Doronilla, assuring him that his money was intact and would be returned to him. On August 13, 1979, Doronilla
issued a postdated check for Two Hundred Twelve Thousand Pesos (P212,000.00) in favor of private respondent.
However, upon presentment thereof by private respondent to the drawee bank, the check was dishonored. Doronilla
requested private respondent to present the same check on September 15, 1979 but when the latter presented the
check, it was again dishonored.6
Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the return of his
clients money. Doronilla issued another check for P212,000.00 in private respondents favor but the check was
again dishonored for insufficiency of funds.7
Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC) in Pasig,
Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was docketed as Civil Case No. 44485.
He also filed criminal actions against Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez passed away
on March 16, 1985 while the case was pending before the trial court. On October 3, 1995, the RTC of Pasig, Branch
157, promulgated its Decision in Civil Case No. 44485, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J. Doronila, Estrella
Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin Vives jointly and severally
(a) the amount of P200,000.00, representing the money deposited, with interest at the legal rate from the
filing of the complaint until the same is fully paid;
(b) the sum of P50,000.00 for moral damages and a similar amount for exemplary damages;
(c) the amount of P40,000.00 for attorneys fees; and
(d) the costs of the suit.
SO ORDERED.8
Petitioner appealed the trial courts decision to the Court of Appeals. In its Decision dated June 25, 1991, the
appellate court affirmed in toto the decision of the RTC.9 It likewise denied with finality petitioners motion for
reconsideration in its Resolution dated May 5, 1994.10
On June 30, 1994, petitioner filed the present petition, arguing that
I.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION BETWEEN THE
DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN AND NOT
ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONERS BANK MANAGER, MR.
RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should be
PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER SHOULD BE HELD LIABLE UNDER
THE PRINCIPLE OF NATURAL JUSTICE;

III.
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF THE REGIONAL
TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS THE FINDINGS OF THE REGIONAL
TRIAL COURT WERE BASED ON A MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION IN SALUDARES
VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR ACTS COMMITTED BY AN
EMPLOYEE IS APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE LOWER COURT
THAT HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER DEFENDANTS
FOR THE AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS ACCOUNT DEPOSIT, P50,000.00 FOR
MORAL DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00 FOR ATTORNEYS FEES AND THE
COSTS OF SUIT.11
Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto on September 25,
1995. The Court then required private respondent to submit a rejoinder to the reply. However, said rejoinder was
filed only on April 21, 1997, due to petitioners delay in furnishing private respondent with copy of the reply 12 and
several substitutions of counsel on the part of private respondent.13 On January 17, 2001, the Court resolved to give
due course to the petition and required the parties to submit their respective memoranda. 14 Petitioner filed its
memorandum on April 16, 2001 while private respondent submitted his memorandum on March 22, 2001.
Petitioner contends that the transaction between private respondent and Doronilla is a simple loan (mutuum) since
all the elements of a mutuum are present: first, what was delivered by private respondent to Doronilla was money, a
consumable thing; and second, the transaction was onerous as Doronilla was obliged to pay interest, as evidenced
by the check issued by Doronilla in the amount of P212,000.00, or P12,000 more than what private respondent
deposited in Sterelas bank account.15 Moreover, the fact that private respondent sued his good friend Sanchez for
his failure to recover his money from Doronilla shows that the transaction was not merely gratuitous but "had a
business angle" to it. Hence, petitioner argues that it cannot be held liable for the return of private
respondentsP200,000.00 because it is not privy to the transaction between the latter and Doronilla. 16
It argues further that petitioners Assistant Manager, Mr. Rufo Atienza, could not be faulted for allowing Doronilla to
withdraw from the savings account of Sterela since the latter was the sole proprietor of said company. Petitioner
asserts that Doronillas May 8, 1979 letter addressed to the bank, authorizing Mrs. Vives and Sanchez to open a
savings account for Sterela, did not contain any authorization for these two to withdraw from said account. Hence,
the authority to withdraw therefrom remained exclusively with Doronilla, who was the sole proprietor of Sterela, and
who alone had legal title to the savings account. 17 Petitioner points out that no evidence other than the testimonies
of private respondent and Mrs. Vives was presented during trial to prove that private respondent deposited
hisP200,000.00 in Sterelas account for purposes of its incorporation. 18 Hence, petitioner should not be held liable for
allowing Doronilla to withdraw from Sterelas savings account.
1a\^/phi1.net

Petitioner also asserts that the Court of Appeals erred in affirming the trial courts decision since the findings of fact
therein were not accord with the evidence presented by petitioner during trial to prove that the transaction between
private respondent and Doronilla was a mutuum, and that it committed no wrong in allowing Doronilla to withdraw
from Sterelas savings account.19
Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable for the actual
damages suffered by private respondent, and neither may it be held liable for moral and exemplary damages as well
as attorneys fees.20

Private respondent, on the other hand, argues that the transaction between him and Doronilla is not a mutuum but
an accommodation,21 since he did not actually part with the ownership of his P200,000.00 and in fact asked his wife
to deposit said amount in the account of Sterela so that a certification can be issued to the effect that Sterela had
sufficient funds for purposes of its incorporation but at the same time, he retained some degree of control over his
money through his wife who was made a signatory to the savings account and in whose possession the savings
account passbook was given.22
He likewise asserts that the trial court did not err in finding that petitioner, Atienzas employer, is liable for the return
of his money. He insists that Atienza, petitioners assistant manager, connived with Doronilla in defrauding private
respondent since it was Atienza who facilitated the opening of Sterelas current account three days after Mrs. Vives
and Sanchez opened a savings account with petitioner for said company, as well as the approval of the authority to
debit Sterelas savings account to cover any overdrawings in its current account. 23
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law may be raised in a petition for review filed with this
Court. The Court has repeatedly held that it is not its function to analyze and weigh all over again the evidence
presented by the parties during trial.24 The Courts jurisdiction is in principle limited to reviewing errors of law that
might have been committed by the Court of Appeals.25 Moreover, factual findings of courts, when adopted and
confirmed by the Court of Appeals, are final and conclusive on this Court unless these findings are not supported by
the evidence on record.26 There is no showing of any misapprehension of facts on the part of the Court of Appeals in
the case at bar that would require this Court to review and overturn the factual findings of that court, especially since
the conclusions of fact of the Court of Appeals and the trial court are not only consistent but are also amply
supported by the evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction between private respondent and
Doronilla was a commodatum and not a mutuum. A circumspect examination of the records reveals that the
transaction between them was a commodatum. Article 1933 of the Civil Code distinguishes between the two kinds
of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter
may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or
other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in
which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the
borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as money, the
contract would be a mutuum. However, there are some instances where a commodatum may have for its object a
consumable thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the
object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend
consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is a
commodatum and not a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the
actual character of a contract.27 In case of doubt, the contemporaneous and subsequent acts of the parties shall be
considered in such determination.28
As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private respondent
agreed to deposit his money in the savings account of Sterela specifically for the purpose of making it appear "that
said firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned within
thirty (30) days."29 Private respondent merely "accommodated" Doronilla by lending his money without
consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the transaction that the
money would not be removed from Sterelas savings account and would be returned to private respondent after
thirty (30) days.
Doronillas attempts to return to private respondent the amount of P200,000.00 which the latter deposited in
Sterelas account together with an additional P12,000.00, allegedly representing interest on the mutuum, did not
convert the transaction from a commodatum into a mutuum because such was not the intent of the parties and
because the additional P12,000.00 corresponds to the fruits of the lending of the P200,000.00. Article 1935 of the
Civil Code expressly states that "[t]he bailee in commodatum acquires the use of the thing loaned but not its fruits."
Hence, it was only proper for Doronilla to remit to private respondent the interest accruing to the latters money
deposited with petitioner.
Neither does the Court agree with petitioners contention that it is not solidarily liable for the return of private
respondents money because it was not privy to the transaction between Doronilla and private respondent. The
nature of said transaction, that is, whether it is a mutuum or a commodatum, has no bearing on the question of
petitioners liability for the return of private respondents money because the factual circumstances of the case
clearly show that petitioner, through its employee Mr. Atienza, was partly responsible for the loss of private
respondents money and is liable for its restitution.
Petitioners rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of Sterela for Savings
Account No. 10-1567 expressly states that
"2. Deposits and withdrawals must be made by the depositor personally or upon his written authority duly
authenticated, and neither a deposit nor a withdrawal will be permitted except upon the production of the depositor
savings bank book in which will be entered by the Bank the amount deposited or withdrawn." 30
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant Branch Manager for
the Buendia Branch of petitioner, to withdraw therefrom even without presenting the passbook (which Atienza very
well knew was in the possession of Mrs. Vives), not just once, but several times. Both the Court of Appeals and the
trial court found that Atienza allowed said withdrawals because he was party to Doronillas "scheme" of defrauding
private respondent:
XXX
But the scheme could not have been executed successfully without the knowledge, help and cooperation of Rufo
Atienza, assistant manager and cashier of the Makati (Buendia) branch of the defendant bank. Indeed, the evidence
indicates that Atienza had not only facilitated the commission of the fraud but he likewise helped in devising the
means by which it can be done in such manner as to make it appear that the transaction was in accordance with
banking procedure.
To begin with, the deposit was made in defendants Buendia branch precisely because Atienza was a key officer
therein. The records show that plaintiff had suggested that the P200,000.00 be deposited in his bank, the Manila
Banking Corporation, but Doronilla and Dumagpi insisted that it must be in defendants branch in Makati for "it will
be easier for them to get a certification". In fact before he was introduced to plaintiff, Doronilla had already prepared
a letter addressed to the Buendia branch manager authorizing Angeles B. Sanchez and company to open a savings
account for Sterela in the amount of P200,000.00, as "per coordination with Mr. Rufo Atienza, Assistant Manager of

the Bank x x x" (Exh. 1). This is a clear manifestation that the other defendants had been in consultation with
Atienza from the inception of the scheme. Significantly, there were testimonies and admission that Atienza is the
brother-in-law of a certain Romeo Mirasol, a friend and business associate of Doronilla.
1awphi1.nt

Then there is the matter of the ownership of the fund. Because of the "coordination" between Doronilla and Atienza,
the latter knew before hand that the money deposited did not belong to Doronilla nor to Sterela. Aside from such
foreknowledge, he was explicitly told by Inocencia Vives that the money belonged to her and her husband and the
deposit was merely to accommodate Doronilla. Atienza even declared that the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank records disclose that the only ones empowered
to withdraw the same were Inocencia Vives and Angeles B. Sanchez. In the signature card pertaining to this account
(Exh. J), the authorized signatories were Inocencia Vives &/or Angeles B. Sanchez. Atienza stated that it is the usual
banking procedure that withdrawals of savings deposits could only be made by persons whose authorized
signatures are in the signature cards on file with the bank. He, however, said that this procedure was not followed
here because Sterela was owned by Doronilla. He explained that Doronilla had the full authority to withdraw by
virtue of such ownership. The Court is not inclined to agree with Atienza. In the first place, he was all the time aware
that the money came from Vives and did not belong to Sterela. He was also told by Mrs. Vives that they were only
accommodating Doronilla so that a certification can be issued to the effect that Sterela had a deposit of so much
amount to be sued in the incorporation of the firm. In the second place, the signature of Doronilla was not authorized
in so far as that account is concerned inasmuch as he had not signed the signature card provided by the bank
whenever a deposit is opened. In the third place, neither Mrs. Vives nor Sanchez had given Doronilla the authority to
withdraw.
Moreover, the transfer of fund was done without the passbook having been presented. It is an accepted practice that
whenever a withdrawal is made in a savings deposit, the bank requires the presentation of the passbook. In this
case, such recognized practice was dispensed with. The transfer from the savings account to the current account
was without the submission of the passbook which Atienza had given to Mrs. Vives. Instead, it was made to appear
in a certification signed by Estrella Dumagpi that a duplicate passbook was issued to Sterela because the original
passbook had been surrendered to the Makati branch in view of a loan accommodation assigning the savings
account (Exh. C). Atienza, who undoubtedly had a hand in the execution of this certification, was aware that the
contents of the same are not true. He knew that the passbook was in the hands of Mrs. Vives for he was the one
who gave it to her. Besides, as assistant manager of the branch and the bank official servicing the savings and
current accounts in question, he also was aware that the original passbook was never surrendered. He was also
cognizant that Estrella Dumagpi was not among those authorized to withdraw so her certification had no effect
whatsoever.
The circumstance surrounding the opening of the current account also demonstrate that Atienzas active
participation in the perpetration of the fraud and deception that caused the loss. The records indicate that this
account was opened three days later after the P200,000.00 was deposited. In spite of his disclaimer, the Court
believes that Atienza was mindful and posted regarding the opening of the current account considering that
Doronilla was all the while in "coordination" with him. That it was he who facilitated the approval of the authority to
debit the savings account to cover any overdrawings in the current account (Exh. 2) is not hard to comprehend.
Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case. x x x. 31
Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for damages caused by
their employees acting within the scope of their assigned tasks. To hold the employer liable under this provision, it
must be shown that an employer-employee relationship exists, and that the employee was acting within the scope of
his assigned task when the act complained of was committed. 32 Case law in the United States of America has it that
a corporation that entrusts a general duty to its employee is responsible to the injured party for damages flowing
from the employees wrongful act done in the course of his general authority, even though in doing such act, the
employee may have failed in its duty to the employer and disobeyed the latters instructions. 33

There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not deny that Atienza
was acting within the scope of his authority as Assistant Branch Manager when he assisted Doronilla in withdrawing
funds from Sterelas Savings Account No. 10-1567, in which account private respondents money was deposited,
and in transferring the money withdrawn to Sterelas Current Account with petitioner. Atienzas acts of helping
Doronilla, a customer of the petitioner, were obviously done in furtherance of petitioners interests 34 even though in
the process, Atienza violated some of petitioners rules such as those stipulated in its savings account passbook. 35It
was established that the transfer of funds from Sterelas savings account to its current account could not have been
accomplished by Doronilla without the invaluable assistance of Atienza, and that it was their connivance which was
the cause of private respondents loss.
The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil Code, petitioner is
liable for private respondents loss and is solidarily liable with Doronilla and Dumagpi for the return of
theP200,000.00 since it is clear that petitioner failed to prove that it exercised due diligence to prevent the
unauthorized withdrawals from Sterelas savings account, and that it was not negligent in the selection and
supervision of Atienza. Accordingly, no error was committed by the appellate court in the award of actual, moral and
exemplary damages, attorneys fees and costs of suit to private respondent.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of Appeals are
AFFIRMED.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing and Austria-Martinez, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-8321

October 14, 1913

ALEJANDRA MINA, ET AL., plaintiffs-appellants,

vs.
RUPERTA PASCUAL, ET AL., defendants-appellees.
N. Segundo for appellants.
Iigo Bitanga for appellees.

ARELLANO, C.J.:
Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired during his lifetime, on
March 12, 1874, a lot in the center of the town of Laoag, the capital of the Province of Ilocos Norte, the property
having been awarded to him through its purchase at a public auction held by the alcalde mayor of that province. The
lot has a frontage of 120 meters and a depth of 15.
Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of the said lot,
embracing 14 meters of its frontage by 11 meters of its depth.

Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandro Mina, et al., were
recognized without discussion as his heirs.
Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta Pascual were
recognized likes without discussion, though it is not said how, and consequently are entitled to the said building, or
rather, as Ruperta Pascual herself stated, to only six-sevenths of one-half of it, the other half belonging, as it
appears, to the plaintiffs themselves, and the remaining one-seventh of the first one-half to the children of one of the
plaintiffs, Elena de Villanueva. The fact is that the plaintiffs and the defendants are virtually, to all appearance, the
owners of the warehouse; while the plaintiffs are undoubtedly, the owners of the part of the lot occupied by that
building, as well as of the remainder thereof.
This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the guardian of her minor children, the
herein defendants, petitioned the Curt of First Instance of Ilocos Norte for authorization to sell "the six-sevenths of
the one-half of the warehouse, of 14 by 11 meters, together with its lot." The plaintiffs that is Alejandra Mina, et al.
opposed the petition of Ruperta Pascual for the reason that the latter had included therein the lot occupied by the
warehouse, which they claimed was their exclusive property. All this action was taken in a special proceeding in
re guardianship.
The plaintiffs did more than oppose Pascual's petition; they requested the court, through motion, to decide the
question of the ownership of the lot before it pass upon the petition for the sale of the warehouse. But the court
before determining the matter of the ownership of the lot occupied by the warehouse, ordered the sale of this
building, saying:
While the trial continues with respect to the ownership of the lot, the court orders the sale at public auction of
the said warehouse and of the lot on which it is built, with the present boundaries of the land and condition of
the building, at a price of not less than P2,890 Philippine currency . . . .
So, the warehouse, together with the lot on which it stands, was sold to Cu Joco, the other defendant in this case,
for the price mentioned.
The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the court decided it by holding
that this land belonged to the owner of the warehouse which had been built thereon thirty years before.
The plaintiffs appealed and this court reversed the judgment of the lower court and held that the appellants were the
owners of the lot in question. 1
When the judgment became final and executory, a writ of execution issued and the plaintiffs were given possession
of the lot; but soon thereafter the trial court annulled this possession for the reason that it affected Cu Joco, who had
not been a party to the suit in which that writ was served.
It was then that the plaintiffs commenced the present action for the purpose of having the sale of the said lot
declared null and void and of no force and effect.
An agreement was had ad to the facts, the ninth paragraph of which is as follows:
9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the Supreme Court which
found for them by holding that they are the owners of the lot in question, although there existed and still
exists a commodatum by virtue of which the guardianship (meaning the defendants) had and has the use,
and the plaintiffs the ownership, of the property, with no finding concerning the decree of the lower court that
ordered the sale.
The obvious purport of the cause "although there existed and still exists a commodatum," etc., appears to be that it
is a part of the decision of the Supreme Court and that, while finding the plaintiffs to be the owners of the lot, we
recognized in principle the existence of a commodatum under which the defendants held the lot. Nothing could be

more inexact. Possibly, also, the meaning of that clause is that, notwithstanding the finding made by the Supreme
Court that the plaintiffs were the owners, these former and the defendants agree that there existed, and still exists, a
commodatum, etc. But such an agreement would not affect the truth of the contents of the decision of this court, and
the opinions held by the litigants in regard to this point could have no bearing whatever on the present decision.
Nor did the decree of the lower court that ordered the sale have the least influence in our previous decision to
require our making any finding in regard thereto, for, with or without that decree, the Supreme Court had to decide
the ownership of the lot consistently with its titles and not in accordance with the judicial acts or proceedings had
prior to the setting up of the issue in respect to the ownership of the property that was the subject of the judicial
decree.
What is essentially pertinent to the case is the fact that the defendant agree that the plaintiffs have the ownership,
and they themselves only the use, of the said lot.
On this premise, the nullity of the sale of the lot is in all respects quite evident, whatsoever be the manner in which
the sale was effected, whether judicially or extrajudicially.
He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale being a transfer of the
ownership of the thing, it is evident that he who has only the mere use of the thing cannot transfer its ownership.
The sale of a thing effected by one who is not its owner is null and void. The defendants never were the owners of
the lot sold. The sale of it by them is necessarily null and void. On cannot convey to another what he has never had
himself.
The returns of the auction contain the following statements:
I, Ruperta Pascual, the guardian of the minors, etc., by virtue of the authorization conferred upon me on the
31st of July, 1909, by the Court of First Instance of Ilocos Norte, proceeded with the sale at public auction of
the six-sevenths part of the one-half of the warehouse constructed of rubble stone, etc.
Whereas I, Ruperta Pascual, the guardian of the minors, etc., sold at public auction all the land and all the
rights title, interest, and ownership in the said property to Cu Joco, who was the highest bidder, etc.
Therefore, . . . I cede and deliver forever to the said purchaser, Cu Joco, his heirs and assigns, all the
interest, ownership and inheritance rights and others that, as the guardian of the said minors, I have and
may have in the said property, etc.
The purchaser could not acquire anything more than the interest that might be held by a person to whom realty in
possession of the vendor might be sold, for at a judicial auction nothing else is disposed of. What the minor children
of Ruperta Pascual had in their possession was the ownership of the six-sevenths part of one-half of the warehouse
and the use of the lot occupied by his building. This, and nothing more, could the Chinaman Cu Joco acquire at that
sale: not the ownership of the lot; neither the other half, nor the remaining one-seventh of the said first half, of the
warehouse. Consequently, the sale made to him of this one-seventh of one-half and the entire other half of the
building was null and void, and likewise with still more reason the sale of the lot the building occupies.
The purchaser could and should have known what it was that was offered for sale and what it was that he
purchased. There is nothing that can justify the acquisition by the purchaser of the warehouse of the ownership of
the lot that this building occupies, since the minors represented by Ruperta Pascual never were the owners of the
said lot, nor were they ever considered to be such.
The trial court, in the judgment rendered, held that there were no grounds for the requested annulment of the sale,
and that the plaintiffs were entitled to the P600 deposited with the clerk of the court as the value of the lot in
question. The defendants, Ruperta Pascual and the Chinaman Cu Joco, were absolved from the complaint, without
express finding as to costs.

The plaintiffs cannot be obliged to acquiesce in or allow the sale made and be compelled to accept the price set on
the lot by expert appraisers, not even though the plaintiffs be considered as coowner of the warehouse. It would be
much indeed that, on the ground of coownership, they should have to abide by and tolerate the sale of the said
building, which point this court does not decide as it is not a question submitted to us for decision, but, as regards
the sale of the lot, it is in all respects impossible to hold that the plaintiffs must abide by it and tolerate, it, and this
conclusion is based on the fact that they did not give their consent (art. 1261, Civil Code), and only the contracting
parties who have given it are obliged to comply (art. 1091, idem).
The sole purpose of the action in the beginning was to obtain an annulment of the sale of the lot; but subsequently
the plaintiffs, through motion, asked for an amendment by their complaint in the sense that the action should be
deemed to be one for the recovery of possession of a lot and for the annulment of its sale. The plaintiff's petition was
opposed by the defendant's attorney, but was allowed by the court; therefore the complaint seeks, after the judicial
annulment of the sale of the lot, to have the defendants sentenced immediately to deliver the same to the plaintiffs.
Such a finding appears to be in harmony with the decision rendered by the Supreme Court in previous suit, wherein
it was held that the ownership of the lot lay in the plaintiffs, and for this reason steps were taken to give possession
thereof to the defendants; but, as the purchaser Cu Joco was not a party to that suit, the present action is strictly
one for recover against Cu Joco to compel him, once the sale has been annulled, to deliver the lot to its lawful
owners, the plaintiffs.
As respects this action for recovery, this Supreme Court finds:
1. That it is a fact admitted by the litigating parties, both in this and in the previous suit, that Andres
Fontanilla, the defendants' predecessor in interest, erected the warehouse on the lot, some thirty years ago,
with the explicit consent of his brother Francisco Fontanilla, the plaintiff's predecessor in interest.
2. That it also appears to be an admitted fact that the plaintiffs and the defendants are the coowners of the
warehouse.
3. That it is a fact explicitly admitted in the agreement, that neither Andres Fontanilla nor his successors paid
any consideration or price whatever for the use of the lot occupied by the said building; whence it is,
perhaps, that both parties have denominated that use a commodatum.
Upon the premise of these facts, or even merely upon that of the first of them, the sentencing of the defendants to
deliver the lot to the plaintiffs does not follow as a necessary corollary of the judicial declaration of ownership made
in the previous suit, nor of that of the nullity of the sale of the lot, made in the present case.
The defendants do not hold lawful possession of the lot in question.

1awphil.net

But, although both litigating parties may have agreed in their idea of the commodatum, on account of its not being,
as indeed it is not, a question of fact but of law, yet that denomination given by them to the use of the lot granted by
Francisco Fontanilla to his brother, Andres Fontanilla, is not acceptable. Contracts are not to be interpreted in
conformity with the name that the parties thereto agree to give them, but must be construed, duly considering their
constitutive elements, as they are defined and denominated by law.
By the contract of loan, one of the parties delivers to the other, either anything not perishable, in order that
the latter may use it during the certain period and return it to the former, in which case it is
called commodatum . . . (art. 1740, Civil Code).
It is, therefore, an essential feature of the commodatum that the use of the thing belonging to another shall for a
certain period. Francisco Fontanilla did not fix any definite period or time during which Andres Fontanilla could have
the use of the lot whereon the latter was to erect a stone warehouse of considerable value, and so it is that for the
past thirty years of the lot has been used by both Andres and his successors in interest. The present contention of
the plaintiffs that Cu Joco, now in possession of the lot, should pay rent for it at the rate of P5 a month, would

destroy the theory of the commodatum sustained by them, since, according to the second paragraph of the
aforecited article 1740, "commodatum is essentially gratuitous," and, if what the plaintiffs themselves aver on page 7
of their brief is to be believed, it never entered Francisco's mind to limit the period during which his brother Andres
was to have the use of the lot, because he expected that the warehouse would eventually fall into the hands of his
son, Fructuoso Fontanilla, called the adopted son of Andres, which did not come to pass for the reason that
Fructuoso died before his uncle Andres. With that expectation in view, it appears more likely that Francisco intended
to allow his brother Andres a surface right; but this right supposes the payment of an annual rent, and Andres had
the gratuitous use of the lot.
Hence, as the facts aforestated only show that a building was erected on another's ground, the question should be
decided in accordance with the statutes that, thirty years ago, governed accessions to real estate, and which were
Laws 41 and 42, title 28, of the third Partida, nearly identical with the provisions of articles 361 and 362 of the Civil
Code. So, then, pursuant to article 361, the owner of the land on which a building is erected in good faith has a right
to appropriate such edifice to himself, after payment of the indemnity prescribed in articles 453 and 454, or to oblige
the builder to pay him the value of the land. Such, and no other, is the right to which the plaintiff are entitled.
For the foregoing reasons, it is only necessary to annul the sale of the said lot which was made by Ruperta Pascual,
in representation of her minor children, to Cu Joco, and to maintain the latter in the use of the lot until the plaintiffs
shall choose one or the other of the two rights granted them by article 361 of the Civil Code.
1awphil.net

The judgment appealed from is reversed and the sale of the lot in question is held to be null and void and of no
force or effect. No special finding is made as to the costs of both instances.
Torres, Johnson, Carson, Moreland and Trent, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-4150

February 10, 1910

FELIX DE LOS SANTOS, plaintiff-appelle,

vs.
AGUSTINA JARRA, administratrix of the estate of Magdaleno Jimenea, deceased, defendant-appellant.
Matias Hilado, for appellant.
Jose Felix Martinez, for appellee.
TORRES, J.:
On the 1st of September, 1906, Felix de los Santos brought suit against Agustina Jarra, the administratrix of the
estate of Magdaleno Jimenea, alleging that in the latter part of 1901 Jimenea borrowed and obtained from the

plaintiff ten first-class carabaos, to be used at the animal-power mill of his hacienda during the season of 1901-2,
without recompense or remuneration whatever for the use thereof, under the sole condition that they should be
returned to the owner as soon as the work at the mill was terminated; that Magdaleno Jimenea, however, did not
return the carabaos, notwithstanding the fact that the plaintiff claimed their return after the work at the mill was
finished; that Magdaleno Jimenea died on the 28th of October, 1904, and the defendant herein was appointed by
the Court of First Instance of Occidental Negros administratrix of his estate and she took over the administration of
the same and is still performing her duties as such administratrix; that the plaintiff presented his claim to the
commissioners of the estate of Jimenea, within the legal term, for the return of the said ten carabaos, but the said
commissioners rejected his claim as appears in their report; therefore, the plaintiff prayed that judgment be entered
against the defendant as administratrix of the estate of the deceased, ordering her to return the ten first-class
carabaos loaned to the late Jimenea, or their present value, and to pay the costs.
The defendant was duly summoned, and on the 25th of September, 1906, she demurred in writing to the complaint
on the ground that it was vague; but on the 2d of October of the same year, in answer to the complaint, she said that
it was true that the late Magdaleno Jimenea asked the plaintiff to loan him ten carabaos, but that he only obtained
three second-class animals, which were afterwards transferred by sale by the plaintiff to the said Jimenea; that she
denied the allegations contained in paragraph 3 of the complaint; for all of which she asked the court to absolve her
of the complaint with the cost against the plaintiff.
By a writing dated the 11th of December, 1906, Attorney Jose Felix Martinez notified the defendant and her counsel,
Matias Hilado, that he had made an agreement with the plaintiff to the effect that the latter would not compromise
the controversy without his consent, and that as fees for his professional services he was to receive one half of the
amount allowed in the judgment if the same were entered in favor of the plaintiff.
The case came up for trial, evidence was adduced by both parties, and either exhibits were made of record. On the
10th of January, 1907, the court below entered judgment sentencing Agustina Jarra, as administratrix of the estate
of Magdaleno Jimenea, to return to the plaintiff, Felix de los Santos, the remaining six second and third class
carabaos, or the value thereof at the rate of P120 each, or a total of P720 with the costs.
Counsel for the defendant excepted to the foregoing judgment, and, by a writing dated January 19, moved for anew
trial on the ground that the findings of fact were openly and manifestly contrary to the weight of the evidence. The
motion was overruled, the defendant duly excepted, and in due course submitted the corresponding bill of
exceptions, which was approved and submitted to this court.
The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan of ten carabaos which are now
claimed by the latter, as shown by two letters addressed by the said Jimenea to Felix de los Santos; but in her
answer the said defendant alleged that the late Jimenea only obtained three second-class carabaos, which were
subsequently sold to him by the owner, Santos; therefore, in order to decide this litigation it is indispensable that
proof be forthcoming that Jimenea only received three carabaos from his son-in-law Santos, and that they were sold
by the latter to him.
The record discloses that it has been fully proven from the testimony of a sufficient number of witnesses that the
plaintiff, Santos, sent in charge of various persons the ten carabaos requested by his father-in-law, Magdaleno
Jimenea, in the two letters produced at the trial by the plaintiff, and that Jimenea received them in the presence of
some of said persons, one being a brother of said Jimenea, who saw the animals arrive at the hacienda where it
was proposed to employ them. Four died of rinderpest, and it is for this reason that the judgment appealed from only
deals with six surviving carabaos.
The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not evidenced by any trustworthy
documents such as those of transfer, nor were the declarations of the witnesses presented by the defendant
affirming it satisfactory; for said reason it can not be considered that Jimenea only received three carabaos on loan
from his son-in-law, and that he afterwards kept them definitely by virtue of the purchase.

By the laws in force the transfer of large cattle was and is still made by means of official documents issued by the
local authorities; these documents constitute the title of ownership of the carabao or horse so acquired.
Furthermore, not only should the purchaser be provided with a new certificate or credential, a document which has
not been produced in evidence by the defendant, nor has the loss of the same been shown in the case, but the old
documents ought to be on file in the municipality, or they should have been delivered to the new purchaser, and in
the case at bar neither did the defendant present the old credential on which should be stated the name of the
previous owner of each of the three carabaos said to have been sold by the plaintiff.
From the foregoing it may be logically inferred that the carabaos loaned or given on commodatum to the now
deceased Magdaleno Jimenea were ten in number; that they, or at any rate the six surviving ones, have not been
returned to the owner thereof, Felix de los Santos, and that it is not true that the latter sold to the former three
carabaos that the purchaser was already using; therefore, as the said six carabaos were not the property of the
deceased nor of any of his descendants, it is the duty of the administratrix of the estate to return them or indemnify
the owner for their value.
The Civil Code, in dealing with loans in general, from which generic denomination the specific one of commodatum
is derived, establishes prescriptions in relation to the last-mentioned contract by the following articles:
ART. 1740. By the contract of loan, one of the parties delivers to the other, either anything not perishable, in
order that the latter may use it during a certain period and return it to the former, in which case it is called
commodatum, or money or any other perishable thing, under the condition to return an equal amount of the
same kind and quality, in which case it is merely called a loan.
Commodatum is essentially gratuitous.
A simple loan may be gratuitous, or made under a stipulation to pay interest.
ART. 1741. The bailee acquires retains the ownership of the thing loaned. The bailee acquires the use
thereof, but not its fruits; if any compensation is involved, to be paid by the person requiring the use, the
agreement ceases to be a commodatum.
ART. 1742. The obligations and rights which arise from the commodatum pass to the heirs of both
contracting parties, unless the loan has been in consideration for the person of the bailee, in which case his
heirs shall not have the right to continue using the thing loaned.
The carabaos delivered to be used not being returned by the defendant upon demand, there is no doubt that she is
under obligation to indemnify the owner thereof by paying him their value.
Article 1101 of said code reads:
Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and those who in any manner
whatsoever act in contravention of the stipulations of the same, shall be subjected to indemnify for the
losses and damages caused thereby.
The obligation of the bailee or of his successors to return either the thing loaned or its value, is sustained by the
supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out with precision the legal doctrine touching
commodatum as follows:
Although it is true that in a contract of commodatum the bailor retains the ownership of the thing loaned, and
at the expiration of the period, or after the use for which it was loaned has been accomplished, it is the
imperative duty of the bailee to return the thing itself to its owner, or to pay him damages if through the fault
of the bailee the thing should have been lost or injured, it is clear that where public securities are involved,
the trial court, in deferring to the claim of the bailor that the amount loaned be returned him by the bailee in

bonds of the same class as those which constituted the contract, thereby properly applies law 9 of title 11
of partida5.
With regard to the third assignment of error, based on the fact that the plaintiff Santos had not appealed from the
decision of the commissioners rejecting his claim for the recovery of his carabaos, it is sufficient to estate that we
are not dealing with a claim for the payment of a certain sum, the collection of a debt from the estate, or payment for
losses and damages (sec. 119, Code of Civil Procedure), but with the exclusion from the inventory of the property of
the late Jimenea, or from his capital, of six carabaos which did not belong to him, and which formed no part of the
inheritance.
The demand for the exclusion of the said carabaos belonging to a third party and which did not form part of the
property of the deceased, must be the subject of a direct decision of the court in an ordinary action, wherein the
right of the third party to the property which he seeks to have excluded from the inheritance and the right of the
deceased has been discussed, and rendered in view of the result of the evidence adduced by the administrator of
the estate and of the claimant, since it is so provided by the second part of section 699 and by section 703 of the
Code of Civil Procedure; the refusal of the commissioners before whom the plaintiff unnecessarily appeared can not
affect nor reduce the unquestionable right of ownership of the latter, inasmuch as there is no law nor principle of
justice authorizing the successors of the late Jimenea to enrich themselves at the cost and to the prejudice of Felix
de los Santos.
For the reasons above set forth, by which the errors assigned to the judgment appealed from have been refuted,
and considering that the same is in accordance with the law and the merits of the case, it is our opinion that it
should be affirmed and we do hereby affirm it with the costs against the appellant. So ordered.
Arellano, C.J., Johnson, Moreland and Elliott, JJ., concur.
Carson, J., reserves his vote.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 80294-95 September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,

vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.
Valdez, Ereso, Polido & Associates for petitioner.
Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.
Jaime G. de Leon for the Heirs of Egmidio Octaviano.
Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:
The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long time ago can
properly be considered res judicata by respondent Court of Appeals in the present two cases between petitioner and
two private respondents.
Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth Division of Respondent
Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case No. 3655
(429)], both for Recovery of Possession, which affirmed the Decision of the Honorable Nicodemo T. Ferrer, Judge of the
Regional Trial Court of Baguio and Benguet in Civil Case No. 3607 (419) and Civil Case No. 3655 (429), with the
dispositive portion as follows:
WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar Apostolic of the
Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs. Heirs of Juan
Valdez, and Lot 3 of the same Plan to the other set of plaintiffs, the Heirs of Egmidio Octaviano
(Leonardo Valdez, et al.). For lack or insufficiency of evidence, the plaintiffs' claim or damages is
hereby denied. Said defendant is ordered to pay costs. (p. 36, Rollo)
Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's conclusions that the
Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases affirmed by the
Supreme Court, touched on the ownership of lots 2 and 3 in question; that the two lots were possessed by the
predecessors-in-interest of private respondents under claim of ownership in good faith from 1906 to 1951; that
petitioner had been in possession of the same lots as bailee in commodatum up to 1951, when petitioner repudiated
the trust and when it applied for registration in 1962; that petitioner had just been in possession as owner for eleven
years, hence there is no possibility of acquisitive prescription which requires 10 years possession with just title and
30 years of possession without; that the principle of res judicata on these findings by the Court of Appeals will bar a
reopening of these questions of facts; and that those facts may no longer be altered.
Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two aforementioned cases
(CA G.R. No. CV-05418 and 05419) was denied.
The facts and background of these cases as narrated by the trail court are as follows
... The documents and records presented reveal that the whole controversy started
when the defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for
brevity) filed with the Court of First Instance of Baguio Benguet on September 5,
1962 an application for registration of title over Lots 1, 2, 3, and 4 in Psu-194357,
situated at Poblacion Central, La Trinidad, Benguet, docketed as LRC N-91, said
Lots being the sites of the Catholic Church building, convents, high school building,
school gymnasium, school dormitories, social hall, stonewalls, etc. On March 22,

1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their
Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title
thereto. After trial on the merits, the land registration court promulgated its Decision,
dated November 17, 1965, confirming the registrable title of VICAR to Lots 1, 2, 3,
and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs
of Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607) appealed the
decision of the land registration court to the then Court of Appeals, docketed as CAG.R. No. 38830-R. The Court of Appeals rendered its decision, dated May 9, 1977,
reversing the decision of the land registration court and dismissing the VICAR's
application as to Lots 2 and 3, the lots claimed by the two sets of oppositors in the
land registration case (and two sets of plaintiffs in the two cases now at bar), the first
lot being presently occupied by the convent and the second by the women's
dormitory and the sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the
Court of Appeals to order the registration of Lot 3 in the names of the Heirs of
Egmidio Octaviano, and on May 17, 1977, the Heirs of Juan Valdez and Pacita
Valdez filed their motion for reconsideration praying that both Lots 2 and 3 be
ordered registered in the names of the Heirs of Juan Valdez and Pacita Valdez. On
August 12,1977, the Court of Appeals denied the motion for reconsideration filed by
the Heirs of Juan Valdez on the ground that there was "no sufficient merit to justify
reconsideration one way or the other ...," and likewise denied that of the Heirs of
Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari
of the decision of the Court of Appeals dismissing his (its) application for registration
of Lots 2 and 3, docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic of
the Mountain Province vs. Court of Appeals and Heirs of Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for reconsideration the Heirs
of Juan Valdez and Pacita Valdez, on September 8, 1977, filed with the Supreme
Court a petition for review, docketed as G.R. No. L-46872, entitled, Heirs of Juan
Valdez and Pacita Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio Octaviano
and Annable O. Valdez.
On January 13, 1978, the Supreme Court denied in a minute resolution both petitions
(of VICAR on the one hand and the Heirs of Juan Valdez and Pacita Valdez on the
other) for lack of merit. Upon the finality of both Supreme Court resolutions in G.R.
No. L-46832 and G.R. No. L- 46872, the Heirs of Octaviano filed with the then Court
of First Instance of Baguio, Branch II, a Motion For Execution of Judgment praying
that the Heirs of Octaviano be placed in possession of Lot 3. The Court, presided
over by Hon. Salvador J. Valdez, on December 7, 1978, denied the motion on the
ground that the Court of Appeals decision in CA-G.R. No. 38870 did not grant the
Heirs of Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a
petitioner for certiorari and mandamus, docketed as CA-G.R. No. 08890-R,
entitled Heirs of Egmidio Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its
decision dated May 16, 1979, the Court of Appeals dismissed the petition.
It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano
filed Civil Case No. 3607 (419) on July 24, 1979, for recovery of possession of Lot 3;

and the Heirs of Juan Valdez filed Civil Case No. 3655 (429) on September 24, 1979,
likewise for recovery of possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano presented one
(1) witness, Fructuoso Valdez, who testified on the alleged ownership of the land in question (Lot 3)
by their predecessor-in-interest, Egmidio Octaviano (Exh. C ); his written demand (Exh. BB-4 ) to
defendant Vicar for the return of the land to them; and the reasonable rentals for the use of the land
at P10,000.00 per month. On the other hand, defendant Vicar presented the Register of Deeds for
the Province of Benguet, Atty. Nicanor Sison, who testified that the land in question is not covered by
any title in the name of Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed
with the testimony of Mons.William Brasseur when the plaintiffs admitted that the witness if called to
the witness stand, would testify that defendant Vicar has been in possession of Lot 3, for seventyfive (75) years continuously and peacefully and has constructed permanent structures thereon.
In Civil Case No. 3655, the parties admitting that the material facts are not in dispute, submitted the
case on the sole issue of whether or not the decisions of the Court of Appeals and the Supreme
Court touching on the ownership of Lot 2, which in effect declared the plaintiffs the owners of the
land constitute res judicata.
In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up the
defense of ownership and/or long and continuous possession of the two lots in question since this is
barred by prior judgment of the Court of Appeals in CA-G.R. No. 038830-R under the principle of res
judicata. Plaintiffs contend that the question of possession and ownership have already been
determined by the Court of Appeals (Exh. C, Decision, CA-G.R. No. 038830-R) and affirmed by the
Supreme Court (Exh. 1, Minute Resolution of the Supreme Court). On his part, defendant Vicar
maintains that the principle ofres judicata would not prevent them from litigating the issues of long
possession and ownership because the dispositive portion of the prior judgment in CA-G.R. No.
038830-R merely dismissed their application for registration and titling of lots 2 and 3. Defendant
Vicar contends that only the dispositive portion of the decision, and not its body, is the controlling
pronouncement of the Court of Appeals. 2
The alleged errors committed by respondent Court of Appeals according to petitioner are as follows:
1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY
PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;
3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ AND
OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN
POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND THE
PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE IS A
PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY
ACQUISITIVE PRESCRIPTION OF 10 YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830 WAS
AFFIRMED BY THE SUPREME COURT;

8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF LOTS 2
AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2
AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE
BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH WITHOUT
RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND CONCLUSIVENESS
OF THE DECISION IN CA G.R. NO. 038830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149, when it clearly
held that it was in agreement with the findings of the trial court that the Decision of the Court of Appeals dated May
4,1977 in CA-G.R. No. 38830-R, on the question of ownership of Lots 2 and 3, declared that the said Court of
Appeals Decision CA-G.R. No. 38830-R) did not positively declare private respondents as owners of the land,
neither was it declared that they were not owners of the land, but it held that the predecessors of private
respondents were possessors of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner
was in possession as borrower in commodatum up to 1951, when it repudiated the trust by declaring the properties
in its name for taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 1962, it had been in
possession in concept of owner only for eleven years. Ordinary acquisitive prescription requires possession for ten
years, but always with just title. Extraordinary acquisitive prescription requires 30 years. 4
On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R. No. 38830R, affirmed by this Court, We see no error in respondent appellate court's ruling that said findings are res
judicatabetween the parties. They can no longer be altered by presentation of evidence because those issues were
resolved with finality a long time ago. To ignore the principle of res judicata would be to open the door to endless
litigations by continuous determination of issues without end.
An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R. No. 38830-R, shows
that it reversed the trial court's Decision 6 finding petitioner to be entitled to register the lands in question under its
ownership, on its evaluation of evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for acquisitive
prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for ordinary acquisitive
prescription because of the absence of just title. The appellate court did not believe the findings of the trial court that
Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired also by purchase from Egmidio
Octaviano by petitioner Vicar because there was absolutely no documentary evidence to support the same and the
alleged purchases were never mentioned in the application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both Valdez and
Octaviano had Free Patent Application for those lots since 1906. The predecessors of private respondents, not
petitioner Vicar, were in possession of the questioned lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not Lots 2 and 3,
because the buildings standing thereon were only constructed after liberation in 1945. Petitioner Vicar only declared
Lots 2 and 3 for taxation purposes in 1951. The improvements oil Lots 1, 2, 3, 4 were paid for by the Bishop but said
Bishop was appointed only in 1947, the church was constructed only in 1951 and the new convent only 2 years
before the trial in 1963.
When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot from Fructuoso
Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only in 1962.

Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the
church and the convent were destroyed. They never asked for the return of the house, but when they allowed its
free use, they became bailors in commodatum and the petitioner the bailee. The bailees' failure to return the subject
matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in
trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it
declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title
by way of ordinary acquisitive prescription because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents were possessors under claim
of ownership in good faith from 1906; that petitioner Vicar was only a bailee in commodatum; and that the adverse
claim and repudiation of trust came only in 1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-R. Its findings of
fact have become incontestible. This Court declined to review said decision, thereby in effect, affirming it. It has
become final and executory a long time ago.
Respondent appellate court did not commit any reversible error, much less grave abuse of discretion, when it held
that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is governing, under the principle of res judicata,
hence the rule, in the present cases CA-G.R. No. 05148 and CA-G.R. No. 05149. The facts as supported by
evidence established in that decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the Decision
dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals is AFFIRMED, with costs
against petitioner.
SO ORDERED.
Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-46240

November 3, 1939

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,

vs.
BECK, defendant-appellee.
Mauricio Carlos for appellants.
Felipe Buencamino, Jr. for appellee.

IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to return her certain furniture which she lent him for his use.
She appealed from the judgment of the Court of First Instance of Manila which ordered that the defendant return to
her the three has heaters and the four electric lamps found in the possession of the Sheriff of said city, that she call
for the other furniture from the said sheriff of Manila at her own expense, and that the fees which the Sheriff may
charge for the deposit of the furniture be paid pro rata by both parties, without pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar street, No.
1175. On January 14, 1936, upon the novation of the contract of lease between the plaintiff and the defendant, the
former gratuitously granted to the latter the use of the furniture described in the third paragraph of the stipulation of
facts, subject to the condition that the defendant would return them to the plaintiff upon the latter's demand. The
plaintiff sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified the
defendant of the conveyance, giving him sixty days to vacate the premises under one of the clauses of the contract
of lease. There after the plaintiff required the defendant to return all the furniture transferred to him for them in the
house where they were found. On
November 5, 1936, the defendant, through another person, wrote to the
plaintiff reiterating that she may call for the furniture in the ground floor of the house. On the 7th of the same month,
the defendant wrote another letter to the plaintiff informing her that he could not give up the three gas heaters and
the four electric lamps because he would use them until the 15th of the same month when the lease in due to
expire. The plaintiff refused to get the furniture in view of the fact that the defendant had declined to make delivery of
all of them. On
November 15th, before vacating the house, the defendant deposited with the Sheriff all the
furniture belonging to the plaintiff and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue,
in the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in holding that they
violated the contract by not calling for all the furniture on November 5, 1936, when the defendant placed them at
their disposal; in not ordering the defendant to pay them the value of the furniture in case they are not delivered; in
holding that they should get all the furniture from the Sheriff at their expenses; in ordering them to pay-half of the
expenses claimed by the Sheriff for the deposit of the furniture; in ruling that both parties should pay their respective
legal expenses or the costs; and in denying pay their respective legal expenses or the costs; and in denying the
motions for reconsideration and new trial. To dispose of the case, it is only necessary to decide whether the
defendant complied with his obligation to return the furniture upon the plaintiff's demand; whether the latter is bound
to bear the deposit fees thereof, and whether she is entitled to the costs of litigation.
lawphi1.net

The contract entered into between the parties is one of commadatum, because under it the plaintiff gratuitously
granted the use of the furniture to the defendant, reserving for herself the ownership thereof; by this contract the
defendant bound himself to return the furniture to the plaintiff, upon the latters demand (clause 7 of the contract,
Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation voluntarily assumed by the
defendant to return the furniture upon the plaintiff's demand, means that he should return all of them to the plaintiff
at the latter's residence or house. The defendant did not comply with this obligation when he merely placed them at
the disposal of the plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. The provisions
of article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial court, therefore,
erred when it came to the legal conclusion that the plaintiff failed to comply with her obligation to get the furniture
when they were offered to her.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's demand, the
Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at the
defendant's behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor was the plaintiff
under a duty to accept the offer to return the furniture, because the defendant wanted to retain the three gas heaters
and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof by the defendant
in case of his inability to return some of the furniture because under paragraph 6 of the stipulation of facts, the
defendant has neither agreed to nor admitted the correctness of the said value. Should the defendant fail to deliver
some of the furniture, the value thereof should be latter determined by the trial Court through evidence which the
parties may desire to present.
The costs in both instances should be borne by the defendant because the plaintiff is the prevailing party (section
487 of the Code of Civil Procedure). The defendant was the one who breached the contract of commodatum, and
without any reason he refused to return and deliver all the furniture upon the plaintiff's demand. In these
circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which the plaintiff
would not have otherwise defrayed.
The appealed judgment is modified and the defendant is ordered to return and deliver to the plaintiff, in the
residence to return and deliver to the plaintiff, in the residence or house of the latter, all the furniture described in
paragraph 3 of the stipulation of facts Exhibit A. The expenses which may be occasioned by the delivery to and
deposit of the furniture with the Sheriff shall be for the account of the defendant. the defendant shall pay the costs in
both instances. So ordered.
Avancea, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.

[G.R. No. 133632. February 15, 2002]

BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and ALS MANAGEMENT
& DEVELOPMENT CORPORATION,respondents.
DECISION
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals and its
resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the judgment of the
Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for foreclosure of mortgage by
petitioner BPI Investment Corporation (BPIIC for brevity) against private respondents ALS Management and
Development Corporation and Antonio K. Litonjua, [1] consolidated with (b) Civil Case No. 52093, for damages
with prayer for the issuance of a writ of preliminary injunction by the private respondents against said petitioner.
The trial court had held that private respondents were not in default in the payment of their monthly
amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in bad faith. It
awarded private respondents the amount of P300,000 for moral damages, P50,000 for exemplary damages,
and P50,000 for attorneys fees and expenses for litigation. It likewise dismissed the foreclosure suit for being
premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a house on his
lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to secure the
loan. Sometime in 1980, Roa sold the house and lot to private respondents ALS and Antonio Litonjua
for P850,000. They paid P350,000 in cash and assumed the P500,000 balance of Roas indebtedness with
AIDC. The latter, however, was not willing to extend the old interest rate to private respondents and proposed
to grant them a new loan of P500,000 to be applied to Roas debt and secured by the same property, at an
interest rate of 20% per annum and service fee of 1% per annum on the outstanding principal balance payable
within ten years in equal monthly amortization of P9,996.58 and penalty interest at the rate of 21% per annum
per day from the date the amortization became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed containing the above
stipulations with the provision that payment of the monthly amortization shall commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC the sum
of P190,601.35. This reduced Roas principal balance to P457,204.90 which, in turn, was liquidated when
BPIIC applied thereto the proceeds of private respondents loan of P500,000.
On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be what was left
of their loan after full payment of Roas loan.
In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that
they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to Four

Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100 Pesos (P475,585.31). A notice of
sheriffs sale was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged, among
others, that they were not in arrears in their payment, but in fact made an overpayment as of June 30,
1984. They maintained that they should not be made to pay amortization before the actual release of
the P500,000 loan in August and September 1982. Further, out of the P500,000 loan, only the total amount
of P464,351.77 was released to private respondents. Hence, applying the effects of legal compensation, the
balance of P35,648.23 should be applied to the initial monthly amortization for the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development Corporation and Antonio K.
Litonjua and against BPI Investment Corporation, holding that the amount of loan granted by BPI to ALS and Litonjua
was only in the principal sum of P464,351.77, with interest at 20% plus service charge of 1% per annum, payable on equal
monthly and successive amortizations at P9,283.83 for ten (10) years or one hundred twenty (120) months. The
amortization schedule attached as Annex A to the Deed of Mortgage is correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their publication in a
newspaper of general circulation as defaulting debtors, and therefore orders BPI to pay ALS and Litonjua the following
sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorneys fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.
Costs against BPI.
SO ORDERED.[2]
Both parties appealed to the Court of Appeals. However, private respondents appeal was dismissed for
non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion reads:
WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto.
SO ORDERED.[3]
In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery of the
object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only
on September 13, 1982, the date when BPIIC released the purported balance of the P500,000 loan after
deducting therefrom the value of Roas indebtedness. Thus, payment of the monthly amortization should
commence only a month after the said date, as can be inferred from the stipulations in the contract. This,
despite the express agreement of the parties that payment shall commence on May 1, 1981. From October
1982 to June 1984, the total amortization due was only P194,960.43. Evidence showed that private
respondents had an overpayment, because as of June 1984, they already paid a total amount
of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the mortgage and cause

the publication in newspapers concerning private respondents delinquency in the payment of their loan. This
fact constituted sufficient ground for moral damages in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition, where
BPIIC submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT OF
THE RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY DAMAGES
AND ATTORNEYS FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY ALS AND
OPPOSED TO THE RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF
APPEALS, 120 SCRA 707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a simple loan
is perfected upon the delivery of the object of the contract, the loan contract in this case was perfected only
on September 13, 1982. Petitioner claims that a contract of loan is a consensual contract, and a loan contract
is perfected at the time the contract of mortgage is executed conformably with our ruling in Bonnevie v. Court
of Appeals, 125 SCRA 122. In the present case, the loan contract was perfected on March 31, 1981, the date
when the mortgage deed was executed, hence, the amortization and interests on the loan should be computed
from said date.
Petitioner also argues that while the documents showed that the loan was released only on August 1982,
the loan was actually released on March 31, 1981, when BPIIC issued a cancellation of mortgage of Frank
Roas loan. This finds support in the registration on March 31, 1981 of the Deed of Absolute Sale executed by
Roa in favor of ALS, transferring the title of the property to ALS, and ALS executing the Mortgage Deed in favor
of BPIIC. Moreover, petitioner claims, the delay in the release of the loan should be attributed to private
respondents.As BPIIC only agreed to extend a P500,000 loan, private respondents were required to reduce
Frank Roas loan below said amount. According to petitioner, private respondents were only able to do so in
August 1982.
In their comment, private respondents assert that based on Article 1934 of the Civil Code, [4] a simple loan
is perfected upon the delivery of the object of the contract, hence a real contract. In this case, even though the
loan contract was signed on March 31, 1981, it was perfected only on September 13, 1982, when the full loan
was released to private respondents.They submit that petitioner misread Bonnevie. To give meaning to Article
1934, according to private respondents, Bonnevie must be construed to mean that the contract to extend the
loan was perfected on March 31, 1981 but the contract of loan itself was only perfected upon the delivery of the
full loan to private respondents on September 13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan contract was perfected
on March 31, 1981, and their payment did not start a month thereafter, still no default took place. According to
private respondents, a perfected loan agreement imposes reciprocal obligations, where the obligation or
promise of each party is the consideration of the other party. In this case, the consideration for BPIIC in
entering into the loan contract is the promise of private respondents to pay the monthly amortization. For the
latter, it is the promise of BPIIC to deliver the money. In reciprocal obligations, neither party incurs in delay if
the other does not comply or is not ready to comply in a proper manner with what is incumbent upon
him.Therefore, private respondents conclude, they did not incur in delay when they did not commence paying
the monthly amortization on May 1, 1981, as it was only on September 13, 1982when petitioner fully complied
with its obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but a real contract. It is
perfected only upon the delivery of the object of the contract. [5] Petitioner misapplied Bonnevie. The contract

in Bonnevie declared by this Court as a perfected consensual contract falls under the first clause of Article
1934, Civil Code. It is an accepted promise to deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445, petitioner
applied for a loan of P500,000 with respondent bank. The latter approved the application through a board
resolution. Thereafter, the corresponding mortgage was executed and registered. However, because of acts
attributable to petitioner, the loan was not released. Later, petitioner instituted an action for damages. We
recognized in this case, a perfected consensual contract which under normal circumstances could have made
the bank liable for not releasing the loan. However, since the fault was attributable to petitioner therein, the
court did not award it damages.
A perfected consensual contract, as shown above, can give rise to an action for damages. However, said
contract does not constitute the real contract of loan which requires the delivery of the object of the contract for
its perfection and which gives rise to obligations only on the part of the borrower.[6]
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other,
was perfected only on September 13, 1982, the date of the second release of the loan. Following the intentions
of the parties on the commencement of the monthly amortization, as found by the Court of Appeals, private
respondents obligation to pay commenced only on October 13, 1982, a month after the perfection of the
contract.[7]
We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein the
obligation or promise of each party is the consideration for that of the other. [8]As averred by private
respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and
Litonjua shall pay the monthly amortization commencing onMay 1, 1981, one month after the supposed
release of the loan. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the other
does not comply or is not ready to comply in a proper manner with what is incumbent upon him. [9] Only when a
party has performed his part of the contract can he demand that the other party also fulfills his own obligation
and if the latter fails, default sets in. Consequently, petitioner could only demand for the payment of the
monthly amortization after September 13, 1982 for it was only then when it complied with its obligation under
the loan contract. Therefore, in computing the amount due as of the date when BPIIC extrajudicially caused the
foreclosure of the mortgage, the starting date isOctober 13, 1982 and not May 1, 1981.
Other points raised by petitioner in connection with the first issue, such as the date of actual release of the
loan and whether private respondents were the cause of the delay in the release of the loan, are factual. Since
petitioner has not shown that the instant case is one of the exceptions to the basic rule that only questions of
law can be raised in a petition for review under Rule 45 of the Rules of Court, [10] factual matters need not tarry
us now. On these points we are bound by the findings of the appellate and trial courts.
On the second issue, petitioner claims that it should not be held liable for moral and exemplary damages
for it did not act maliciously when it initiated the foreclosure proceedings. It merely exercised its right under the
mortgage contract because private respondents were irregular in their monthly amortization. It invoked our
ruling in Social Security System vs. Court of Appeals, 120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of Appeals the negligence of
the appellant is not so gross as to warrant moral and temperate damages, except that, said Court reduced those damages by
only P5,000.00 instead of eliminating them. Neither can we agree with the findings of both the Trial Court and respondent
Court that the SSS had acted maliciously or in bad faith. The SSS was of the belief that it was acting in the legitimate
exercise of its right under the mortgage contract in the face of irregular payments made by private respondents and placed
reliance on the automatic acceleration clause in the contract. The filing alone of the foreclosure application should not be a
ground for an award of moral damages in the same way that a clearly unfounded civil action is not among the grounds for
moral damages.

Private respondents counter that BPIIC was guilty of bad faith and should be liable for said damages
because it insisted on the payment of amortization on the loan even before it was released. Further, it did not
make the corresponding deduction in the monthly amortization to conform to the actual amount of loan
released, and it immediately initiated foreclosure proceedings when private respondents failed to make timely
payment.
But as admitted by private respondents themselves, they were irregular in their payment of monthly
amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in bad faith.
Consequently, we should rule out the award of moral and exemplary damages.[11]
However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of mortgage,
without checking and correspondingly adjusting its records on the amount actually released to private
respondents and the date when it was released. Such negligence resulted in damage to private respondents,
for which an award of nominal damages should be given in recognition of their rights which were violated by
BPIIC.[12] For this purpose, the amount of P25,000 is sufficient.
Lastly, as in SSS where we awarded attorneys fees because private respondents were compelled to
litigate, we sustain the award of P50,000 in favor of private respondents as attorneys fees.
WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution
dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral
and exemplary damages in favor of private respondents is DELETED, but the award to them of attorneys fees
in the amount of P50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private respondents P25,000
as nominal damages. Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 84719

January 25, 1991

YONG CHAN KIM, petitioner,

vs.
PEOPLE OF THE PHILIPPINES, HON. EDGAR D. GUSTILO, Presiding Judge, RTC, 6th Judicial Region,
Branch 28 Iloilo City and Court of Appeals (13th Division) respondents.
Remedios C. Balbin and Manuel C. Cases, Jr. for petitioner.
Hector P. Teodosio for private respondent.
PADILLA, J.:
This petition seeks the review on certiorari of the following:
1. The decision dated 3 September 1986 of the 15th Municipal Circuit Trial Court (Guimbal-IgbarasTigbauan-Tubungan) in Guimbal, Iloilo, in Criminal Case No. 628, and the affirming decision of the Regional
Trial Court, Branch XXVIII, Iloilo City, in Criminal Case No. 20958, promulgated on 30 July 1987;
1

2. The decision of the Court of Appeals, dated 29 April 1988,

dismissing petitioner's appeal/petition for review for having been filed out of time, and the resolution, dated 19
August 1988, denying petitioner's motion for reconsideration.
4

The antecedent facts are as follows:

Petitioner Yong Chan Kim was employed as a Researcher at the Aquaculture Department of the Southeast Asian
Fisheries Development Center (SEAFDEC) with head station at Tigbauan, Province of Iloilo. As Head of the
Economics Unit of the Research Division, he conducted prawn surveys which required him to travel to various
selected provinces in the country where there are potentials for prawn culture.
On 15 June 1982, petitioner was issued Travel Order No. 2222 which covered his travels to different places in Luzon
from 16 June to 21 July 1982, a period of thirty five (35) days. Under this travel order, he received P6,438.00 as
cash advance to defray his travel expenses.
Within the same period, petitioner was issued another travel order, T.O. 2268, requiring him to travel from the Head
Station at Tigbauan, Iloilo to Roxas City from 30 June to 4 July 1982, a period of five (5) days. For this travel order,
petitioner received a cash advance of P495.00.
On 14 January 1983, petitioner presented both travel orders for liquidation, submitting Travel Expense Reports to
the Accounting Section. When the Travel Expense Reports were audited, it was discovered that there was an
overlap of four (4) days (30 June to 3 July 1982) in the two (2) travel orders for which petitioner collected per
diemstwice. In sum, the total amount in the form of per diems and allowances charged and collected by petitioner
under Travel Order No. 2222, when he did not actually and physically travel as represented by his liquidation
papers, was P1,230.00.
Petitioner was required to comment on the internal auditor's report regarding the alleged anomalous claim for per
diems. In his reply, petitioner denied the alleged anomaly, claiming that he made make-up trips to compensate for
the trips he failed to undertake under T.O. 2222 because he was recalled to the head office and given another
assignment.
In September 1983, two (2) complaints for Estafa were filed against the petitioner before the Municipal Circuit Trial
Court at Guimbal, Iloilo, docketed as Criminal Case Nos. 628 and 631.
After trial in Criminal Case No. 628, the Municipal Circuit Trial Court rendered a decision, the dispositive part of
which reads as follows:
IN VIEW OF THE FOREGOING CONSIDERATIONS, the court finds the accused, Yong Chan Kim, guilty
beyond reasonable doubt for the crime of Estafa penalized under paragraph l(b) of Article 315, Revised
Penal Code. Records disclose there is no aggravating circumstance proven by the prosecution. Neither
there is any mitigating circumstance proven by the accused. Considering the amount subject of the present
complaint, the imposable penalty should be in the medium period of arresto mayor in its maximum period
to prision correccional in its minimum period in accordance with Article 315, No. 3, Revised Penal Code.
Consonantly, the Court hereby sentences the accused to suffer an imprisonment ranging from four (4)
months as the minimum to one (1) year and six (6) months as the maximum in accordance with the
Indeterminate Sentence Law and to reimburse the amount of P1,230.00 to SEAFDEC.
The surety bond of the accused shall remain valid until final judgment in accordance herewith.
Costs against the accused.

Criminal Case No. 631 was subsequently dismissed for failure to prosecute.
Petitioner appealed from the decision of the Municipal Circuit Trial Court in Criminal Case No. 628. On 30 July 1987,
the Regional Trial Court in Iloilo City in Criminal Case No. 20958 affirmed in toto the trial court's decision.
6

The decision of the Regional Trial Court was received by petitioner on 10 August 1987. On 11 August 1987,
petitioner, thru counsel, filed a notice of appeal with the Regional Trial Court which ordered the elevation of the
records of the case to the then Intermediate Appellate Court on the following day, 12 August 1987. The records of
the case were received by the Intermediate Appellate Court on 8 October 1987, and the appeal was docketed as
CA-G.R. No. 05035.
On 30 October 1987, petitioner filed with the appellate court a petition for review. As earlier stated, on 29 April 1988,
the Court of Appeals dismissed the petition for having been filed out of time. Petitioner's motion for reconsideration
was denied for lack of merit.
Hence, the present recourse.
On 19 October 1988, the Court resolved to require the respondents to comment on the petition for review. The
Solicitor General filed his Comment on 20 January 1989, after several grants of extensions of time to file the same.
In his Comment, the Solicitor General prayed for the dismissal of the instant petition on the ground that, as provided
for under Section 22, Batas Pambansa 129, Section 22 of the Interim Rules and Guidelines, and Section 3, Rule
123 of the 1985 Rules of Criminal Procedure, the petitioner should have filed a petition for review with the then
Intermediate Appellate Court instead of a notice of appeal with the Regional Trial Court, in perfecting his appeal
from the RTC to the Intermediate Appellate Court, since the RTC judge was rendered in the exercise of its appellate
jurisdiction over municipal trial courts. The failure of petitioner to file the proper petition rendered the decision of the
Regional Trial Court final and executory, according to the Solicitor General.
Petitioner's counsel submitted a Reply (erroneously termed Comment) wherein she contended that the peculiar
circumstances of a case, such as this, should be considered in order that the principle barring a petitioner's right of
review can be made flexible in the interest of justice and equity.
7

In our Resolution of 29 May 1989, we resolved to deny the petition for failure of petitioner to sufficiently show that
the Court of Appeals had committed any reversible error in its questioned judgment which had dismissed petitioner's
petition for review for having been filed out of time.
8

Petitioner filed a motion for reconsideration maintaining that his petition for review did not limit itself to the issue
upon which the appellate court's decision of 29 April 1988 was based, but rather it delved into the substance and
merits of the case.
9

On 10 August 1990, we resolved to set aside our resolution dismissing this case and gave due course to the
petition. In the said resolution, we stated:
In several cases decided by this Court, it had set aside technicalities in the Rules in order to give way to
justice and equity. In the present case, we note that the petitioner, in filing his Notice of Appeal the very next
day after receiving the decision of the court a quo lost no time in showing his intention to appeal, although
the procedure taken was not correct. The Court can overlook the wrong pleading filed, if strict compliance
with the rules would mean sacrificing justice to technicality. The imminence of a person being deprived
unjustly of his liberty due to procedural lapse of counsel is a strong and compelling reason to warrant
suspension of the Rules. Hence, we shall consider the petition for review filed in the Court of Appeals as a
Supplement to the Notice of Appeal. As the Court declared in a recent decision, '. . . there is nothing sacred
about the procedure of pleadings. This Court may go beyond the pleadings when the interest of justice so
warrants. It has the prerogative to suspend its rules for the same purpose. . . . Technicality, when it deserts
its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant
consideration from courts. [Alonzo v. Villamor, et al., 16 Phil. 315]
Conscience cannot rest in allowing a man to go straight to jail, closing the door to his every entreaty for a full
opportunity to be heard, even as he has made a prima facie showing of a meritorious cause, simply because
he had chosen an appeal route, to be sure, recognized by law but made inapplicable to his case, under
altered rules of procedure. While the Court of Appeals can not be faulted and, in fact, it has to be lauded for
correctly applying the rules of procedure in appeals to the Court of Appeals from decisions of the RTC

rendered in the exercise of its appellate jurisdiction, yet, this Court, as the ultimate bulwark of human rights
and individual liberty, will not allow substantial justice to be sacrified at the altar of procedural rigor.
10

In the same resolution, the parties were required to file their respective memoranda, and in compliance with said
resolution, petitioner filed his memorandum on 25 October 1989, while private respondent SEAFDEC filed its
required memorandum on 10 April 1990. On the other hand, the Solicitor General filed on 13 March 1990 a
Recommendation for Acquittal in lieu of the required memorandum.
Two (2) issues are raised by petitioner to wit:
I. WHETHER OR NOT THE DECISION (sic) OF THE MUNICIPAL CIRCUIT TRIAL COURT (GUIMBAL,
ILOILO) AND THE REGIONAL TRIAL COURT, BRANCH 28 (ILOILO CITY) ARE SUPPORTED BY THE
FACTS AND EVIDENCE OR CONTRARY TO LAW AND THAT THE TWO COURTS A QUO HAVE ACTED
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION OR HAVE ACTED
WITHOUT OR IN EXCESS OF JURISDICTION.
II. WHETHER OR NOT THE DECISION OF THE HONORABLE COURT OF APPEALS IS CONTRARY TO
LAW, ESTABLISHED JURISPRUDENCE, EQUITY AND DUE PROCESS.
The second issue has been resolved in our Resolution dated 10 August 1990, when we granted petitioner's second
motion for reconsideration. We shall now proceed to the first issue.
We find merit in the petition.
It is undisputed that petitioner received a cash advance from private respondent SEAFDEC to defray his travel
expenses under T.O. 2222. It is likewise admitted that within the period covered by T.O. 2222, petitioner was
recalled to the head station in Iloilo and given another assignment which was covered by T.O. 2268. The dispute
arose when petitioner allegedly failed to return P1,230.00 out of the cash advance which he received under T.O.
2222. For the alleged failure of petitioner to return the amount of P1,230.00, he was charged with the crime of
Estafa under Article 315, par. 1(b) of the Revised Penal Code, which reads as follows:
Art. 315. Swindling (Estafa). Any person who shall defraud another by any of the means mentioned herein
below shall be punished by:
xxx

xxx

xxx

1. With unfaithfulness or abuse of confidence, namely:

(a) x x x

xxx

xxx

(b) By misappropriating or converting, to the prejudice of another, money, goods, or any other
personal property received by the offender in trust or on commission, or for administration, or under
any other obligation involving the duty to make delivery of; or to return, the same, even though such
obligation be fatally or partially guaranteed by a bond; or by denying having received such money,
goods, or other property.
In order that a person can be convicted under the abovequoted provision, it must be proven that he had the
obligation to deliver or return the same money, good or personal property that he had received.
11

Was petitioner under obligation to return the same money (cash advance) which he had received? We belive not.
Executive Order No. 10, dated 12 February 1980 provides as follows:
B. Cash Advance for Travel
xxx

xxx

xxx

4. All cash advances must be liquidated within 30 days after date of projected return of the person.
Otherwise, corresponding salary deduction shall be made immediately following the expiration day.
Liquidation simply means the settling of an indebtedness. An employee, such as herein petitioner, who liquidates a
cash advance is in fact paying back his debt in the form of a loan of money advanced to him by his employer, as per
diems and allowances. Similarly, as stated in the assailed decision of the lower court, "if the amount of the cash
advance he received is less than the amount he spent for actual travel . . . he has the right to demand
reimbursement from his employer the amount he spent coming from his personal funds. In other words, the money
advanced by either party is actually a loan to the other. Hence, petitioner was under no legal obligation to return the
same cash or money, i.e., the bills or coins, which he received from the private respondent.
12

13

Article 1933 and Article 1953 of the Civil Code define the nature of a simple loan.
Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so
that the latter may use the same for a certain time and return it, in which case the contract is called
acommodatum; or money or other consumable thing, upon the condition that the same amount of the same
kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes
to the borrower.
Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.
The ruling of the trial judge that ownership of the cash advanced to the petitioner by private respondent was not
transferred to the latter is erroneous. Ownership of the money was transferred to the petitioner. Even the
prosecution witness, Virgilio Hierro, testified thus:
Q When you gave cash advance to the accused in this Travel Order No. 2222 subject to liquidation, who
owns the funds, accused or SEAFDEC? How do you consider the funds in the possession of the accused at
the time when there is an actual transfer of cash? . . .
A The one drawing cash advance already owns the money but subject to liquidation. If he will not liquidate,
be is obliged to return the amount.
Qxxx

xxx

xxx

So why do you treat the itinerary of travel temporary when in fact as of that time the accused owned already
the cash advance. You said the cash advance given to the accused is his own money. In other words, at the
time you departed with the money it belongs already to the accused?
A Yes, but subject for liquidation. He will be only entitled for that credence if he liquidates.
Q If other words, it is a transfer of ownership subject to a suspensive condition that he liquidates the amount
of cash advance upon return to station and completion of the travel?
A Yes, sir.
(pp. 26-28, tsn, May 8, 1985).

14

Since ownership of the money (cash advance) was transferred to petitioner, no fiduciary relationship was created.
Absent this fiduciary relationship between petitioner and private respondent, which is an essential element of the
crime of estafa by misappropriation or conversion, petitioner could not have committed estafa.
15

Additionally, it has been the policy of private respondent that all cash advances not liquidated are to be deducted
correspondingly from the salary of the employee concerned. The evidence shows that the corresponding salary
deduction was made in the case of petitioner vis-a-vis the cash advance in question.
WHEREFORE, the decision dated 3 September 1986 of the 15th Municipal Circuit Trial Court in Guimbal, Iloilo in
Criminal Case No. 628, finding petitioner guilty of estafa under Article 315, par. 1 (b) of the Revised Penal Code and
the affirming decision of the Regional Trial Court, Branch XXVIII, Iloilo City, in Criminal Case No. 20958,
promulgated on 30 July 1987 are both hereby SET ASIDE. Petitioner is ACQUITTED of criminal charge filed against
him.
SO ORDERED.
Melencio-Herrera, Paras, Sarmiento and Regalado JJ., concur.

Republic of the Philippines

SUPREME COURT
THIRD DIVISION
G.R. No. 160892 November 22, 2005
SPOUSES ANTONIO and LOLITA TAN, Petitioners,
vs.
CARMELITO VILLAPAZ, Respondent.
DECISION
CARPIO MORALES, J.:
From the January 25, 2001 decision1 of the Court of Appeals reversing that of the Regional Trial Court (RTC) of
Digos, Davao del Sur2 which dismissed the complaint filed by herein respondent Carmelito Villapaz against herein
petitioners-spouses Antonio "Tony" and Lolita Tan, the present Petition for Review on Certiorari 3 was lodged.
On February 6, 1992, respondent issued a Philippine Bank of Communications (PBCom) crossed check 4 in the
amount of P250,000.00, payable to the order of petitioner Tony Tan. On even date, the check was deposited at the

drawee bank, PBCom Davao City branch at Monteverde Avenue, to the account of petitioner Antonio Tan also at
said bank.
The Malita, Davao del Sur Police, by letter of June 22, 1994,5 issued an invitation-request to petitioner Antonio Tan
at his address at Malatibas Plaza, Lolitas Rendezvous, Bonifacio St., Davao City inviting him to appear before the
Deputy Chief of Police Office on June 27, 1994 at 9:00 oclock in the morning "in connection with the request of
[herein respondent] Carmelito Villapaz, for conference of vital importance."
The invitation-request was received by petitioner Antonio Tan on June 22, 1994 6 but on the advice of his lawyer,7he
did not show up at the Malita, Davao del Sur Police Office.
On November 7, 1994,8 respondent filed before the Digos, Davao del Sur RTC a Complaint for sum of money
against petitioners-spouses, alleging that, inter alia, on February 6, 1992, petitioners-spouses repaired to his place
of business at Malita, Davao and obtained a loan of P250,000.00, hence, his issuance of the February 6, 1992
PBCom crossed check which loan was to be settled interest-free in six (6) months; on the maturity date of the loan
or on August 6, 1992, petitioner Antonio Tan failed to settle the same, and despite repeated demands, petitioners
never did, drawing him to file the complaint thru his counsel to whom he agreed to pay 30% of the loan as attorneys
fees on a contingent basis and P1,000.00 per appearance fee; and on account of the willful refusal of petitioners to
honor their obligation, he suffered moral damages in the amount of P50,000.00, among other things.
By their Answer,9 petitioners, denying having gone to Malita and having obtained a loan from respondent, alleged
that the check was issued by respondent in Davao City on February 6, 1992 "in exchange for equivalent cash"; they
never received from respondent any demand for payment, be it verbal or written, respecting the alleged loan; since
the alleged loan was one with a period payable in six months, it should have been expressly stipulated upon in
writing by the parties but it was not, hence, the essential requisite for the validity and enforceability of a loan is
wanting; and the check is inadmissible to prove the existence of a loan for P250,000.00.
By way of Compulsory Counterclaim, petitioners prayed for the award of damages and litigation expenses and
attorneys fees.10
Crediting defendants-petitioners version, Branch 19 of the RTC, Digos, Davao del Sur, by Decision 11 of July 24,
1996, dismissed the Complaint and granted the Counterclaim, disposing as follows:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Ordering the dismissal of the complaint;
2. On the counterclaim ordering the plaintiff Carmelito Villapaz to pay to defendants spouses Antonio and Lolita Tan:
a. P100,000.00 as moral damages;
b. P50,000.00 as exemplary damages;
c. P30,000.00 as attorneys fees; and
3. Plaintiff Carmelito Villapaz to pay the costs.
SO ORDERED. (Underscoring in the original)12
Respondent appealed to the Court of Appeals which, by Decision 13 of January 25, 2001, credited his version and
accordingly reversed the trial courts decision in this wise:
Briefly stated, the lower Court gave four reasons for ruling out a loan, namely: (a) the defense of defendantsappellees that they did not go to plaintiff-appellants place on February 6, 1992, date the check was given to them;

(b) defendants-appellees could not have borrowed money on that date because from January to March, 1992, they
had an average daily deposit of P700,000 and on February 6, 1992, they had P1,211,400.64 in the bank, hence,
they had "surely no reason nor logic" to borrow money from plaintiff-appellant; (c) the alleged loan was not reduced
in writing and (d) the check could not be a competent evidence of loan.
The four-fold reasoning cannot be sustained. They are faulty and do not accord either with law or ordinary conduct
of men. For one thing, the first two given reasons partake more of alibi and speculation, hence, deserve scant
consideration. For another, the last two miss the applicable provisions of law.
The existence of a contract of loan cannot be denied merely because it is not reduced in writing. Surely,
there can be a verbal loan. Contracts are binding between the parties, whether oral or written. The law is explicit that
contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites
for their validity are present. A loan (simple loan or mutuum) exists when a person receives a loan of money or any
other fungible thing and acquires the ownership thereof. He is bound to pay to the creditor the equal amount of the
same kind and quality.
Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of
what has been expressly stipulated but also to all the consequences which, according to their nature, maybe in
keeping with good faith, usage and law.
The lower Court misplaced its reliance on Article 1358 of the Civil Code providing that to be enforceable,
contracts where the amount involved exceed five hundred pesos, must appear in writing. Such requirement,
it has been held, is only for convenience, not for validity. It bears emphasis that at the time plaintiff-appellant
delivered the crossed-check to defendants-appellees, plaintiff-appellant had no account whatsoever with
them.Defendants-appellees contention that they did not obtain any loan but merely exchanged the latters
check for cash is not borne by any evidence.
Notably, plaintiff-appellant and defendant-appellee Antonio Tan are compadres, one of them being a godfather to the
others son. There is no established enmity between them such that plaintiff-appellant would be motivated to
institute an unfounded action in court. Plaintiff-appellants sole purpose was to be paid back the loan he extended to
defendants-appellees. Thus, a pertinent portion of his testimony on cross-examination discloses:
ATTY. TAN (On Cross Examination):
Q: Now, aside from this check that you issued, did you let the defendant sign a cash voucher?
A: I did not require him any cash voucher or any written document because as I said we are close friends and
I trusted him so I issued a check in his name Tony Tan.
Q: You said that the spouses Tan were in need of money on February 6, 1992. Why did you have to issue a crosscheck?
A: I issued a cross-check in order to be sure that he received the money from me so that he could not deny that he
did not receive. (TSN of Villapaz dtd 7/25/95, p. 21)
Apart from their self-serving testimonies, there is no evidence or proof that defendants-appellees actually delivered
to plaintiff-appellant the cash amount of P250,000.00 in exchange for the check. Defendant-appellee Tan testified
that he records his transactions if it involves a huge cash amount. But surprisingly in this case, he did not follow his
usual practice.
ATTY. CARPENTERO (On Cross-Examination):
Q: x x x you have noticed Carmelito Villapaz to have trusted and have full confidence in you during your business
relationship, correct?

A: All people have trust and confidence but whenever there is a transaction, it should be covered a (sic) proof.
Q: You mean you are a fellow who adheres that every transaction should be recorded?
A: Yes, if the transaction involves a big amount,
Q: But in this case of Carmelito Villapaz you noticed personally that he has trust and confidence in your person,
correct?
A: The truth is, if ever we have a transaction which involves P1,000.00 or P2,000.00, we need no document at all as
proof, but because it is a big amount, it needs documents. (TSN of Tan dtd 5/9/96, pp. 12-13.
Plaintiff-appellant has a checking account with PBCom Bank. This is located within walking distance (300 meters)
from defendants-appellees store. If plaintiff-appellant was in dire need of money, he could have personally
withdrawn said money from his own account, since it was sufficiently funded. Defendant-appellee Antonio
Tan himself testified that plaintiff-appellants check was sufficiently funded.
It is well-nigh unlikely that the wife who was supposed to have delivered the money on such a short notice,
produced, prepared and counted the money at home from Obrero, Davao City, then delivered it to plaintiff-appellant
who was in the Golden Harvest Store at Sta Ana Avenue, Davao City. In contrast, PBCom Bank where plaintiffappellant has his account is in the same vicinity of the store of Golden Harvest.
Certainly, by way of exception to the general rule, the erroneous inferences in the factual finding of the trial
Court cannot bind the appellate courts.
The trial Court placed much emphasis on the daily and time deposit accounts of defendants-appellees. It is
immaterial whether or not one is financially capable. A pauper may borrow money for survival; a prince may incur a
loan for expansion.14 (Emphasis supplied; underscoring in the original)
Thus, the Court of Appeals disposed:
WHEREFORE, the appealed judgment is hereby REVERSED and SET ASIDE. Defendants-appellees are ordered
to pay plaintiff-appellant the sum of P250,000.00 with 12% interest per annum from judicial demand or filing of the
complaint in Court until fully paid.15
Hence, the present appeal by petitioners anchored on the following grounds:
I.
The Honorable Court of Appeals erred in concluding that the transaction in dispute was a contract of loan and not a
mere matter of check encashment as found by the trial court.
II.
The Honorable Court likewise erred in reasoning that the trial court placed much emphasis on the daily and time
deposits of herein petitioners to determine their financial capability.
III.
The Honorable Court failed to consider the wanton, reckless manner of respondent in attempting to enforce an
obligation that does not even exist, thus justifying the award for moral and exemplary damages, as well as attorneys
fees and costs of suit.16 (Underscoring supplied)

Petitioners maintain that they did not secure a loan from respondent, insisting that they encashed in Davao City
respondents February 6, 1992 crossed check; in the ordinary course of business, prudence dictates that a contract
of loan must be in writing as in fact the New Civil Code provides that to be enforceable "contracts where the amount
involved exceed[s] P500.00 must appear in writing even a private one," hence, respondents "self-serving" claim
does not suffice to prove the existence of a loan; respondents allegation that no memorandum in writing of the
transaction was executed because he and they are "kumpadres" does not inspire belief for respondent, being a
businessman himself, was with more reason expected to be more prudent; and the mere encashment of the check
is not a contractual transaction such as a sale or a loan which ordinarily requires a receipt and that explains why
they did not issue a receipt when they encashed the check of respondent.
Petitioners add that they could not have gone to Malita on February 6, 1992, as claimed by respondent, to obtain
the alleged loan represented by the check because February 6, 1992 was the opening for business in Davao City of
Golden Harvest of which petitioner Antonio Tan is treasurer and in-charge of the bodega, during which opening
guests and well-wishers including respondent were entertained.
Petitioners furthermore maintain that they were financially stable on February 6, 1992 as shown by the entries of
their bank passbook,17 hence, there was no reason for them to go to a distant place like Malita to borrow money.
The petition fails.
By petitioner Antonio Tans account, respondent arrived at the Golden Harvest place of business at Davao City on
February 6, 1992 at about 10:30 in the morning18 and left before noon of the same day; respondent, however,
returned to Golden Harvest shortly before 3:00 oclock in the afternoon of the same day upon which he informed him
(petitioner Antonio Tan) that he needed to bring cash to Malita in the amount of P250,000.00 but "time was running
out and . . . he was so busy that was why he requested [him] to accommodate (sic) the said amount at 3:00 p.m."19
Still by petitioner Antonio Tans account, he thereupon inquire by telephone from his wife who was at their house
whether she had P250,000.00 cash and as his wife replied she had, he asked her to bring the cash, as she did, to
the Golden Harvest where she gave the amount of P250,000.00 to him (petitioner Antonio Tan); in the meantime, as
respondent had left for a while but not before leaving the check, he (petitioner Antonio Tan) kept the P250,000.00
cash and gave the check to his wife who had it deposited on the same afternoon to his account at PBCom
Monteverde branch after he received clearance from the bank manager, who knows him (petitioner Antonio Tan)
very well, that respondents account at same branch of the bank was funded and the check could be deposited and
credited to his (petitioner Antonio Tans) account that same afternoon; and when later that same afternoon
respondent returned to the Golden Harvest, he turned over to him the P250,000.00 cash.
Petitioner Antonio Tans foregoing tale hardly inspires credence. For it is contrary to common experience. If indeed
respondent, who came all the way from Malita to Davao City, arriving at petitioner Antonio Tans workplace at
Golden Harvest at 10:30 in the morning, needed cash of P250,000.00, and the drawee bank PBCom Davao City,
Monteverde branch where respondent maintained a current account could even be reached by foot from the Golden
Harvest in just a few minutes (albeit by petitioner Antonio Tans own information respondent brought his truck with
him),20 it being about 300 meters away,21 respondent could just have gone there and drew cash from his current
account via over the counter transaction. After all, his account had sufficient funds. In other words, he did not have
to encash his check from petitioners.
Even assuming that, as claimed by petitioner Antonio Tan, at the time respondent needed to have his check
encashed, it was already close to 3:00 oclock in the afternoon, why could not have PBCom Monteverde branch also
accommodated him and allow him to encash his check that same time when he, like petitioners, was also a clientdepositor and the bank was still open for business?
Petitioners version was thus correctly denied credit by the appellate court.

That apart from the check no written proof of the grant of the loan was executed was credibly explained by
respondent when he declared that petitioners son being his godson, he, out of trust and respect, believed that the
crossed check sufficed to prove their transaction.
As for petitioners reliance on Art. 135822 of the Civil Code, the same is misplaced for the requirement that contracts
where the amount involved exceeds P500.00 must appear in writing is only for convenience. 23
At all events, a check, the entries of which are no doubt in writing, could prove a loan transaction. 24
That petitioner Antonio Tan had, on February 6, 1992, an outstanding balance of more than P950,000.00 in his
account at PBCom Monteverde branch where he was later to deposit respondents check did not rule out petitioners
securing a loan. It is pure naivete to believe that if a businessman has such an outstanding balance in his bank
account, he would have no need to borrow a lesser amount.
In fine, as petitioners side of the case is incredible as it is inconsistent with the principles by which men similarly
situated are governed, whereas respondents claim that the proceeds of the check, which were admittedly received
by petitioners, represented a loan25 extended to petitioner Antonio Tan is credible, the preponderance of evidence
inclines on respondent.
WHEREFORE, the present petition is DENIED.
Costs against petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 123643 October 30, 1996

PHILIPPINE NATIONAL BANK, petitioner,

vs.
COURT OF APPEALS and DR. ERLINDA G. IBARROLA, respondents.
RESOLUTION

FRANCISCO, J.:p
As payments for the purchase of medicines, the Province of Isabela issued several checks drawn against its
account with petitioner Philippine National Bank (PNB) in favor of the seller, Lyndon Pharmaceuticals
Laboratories, a business operated by private respondent Ibarrola. The checks were delivered to the seller's
agents 1 who turned them over to Ibarrola, except 23 checks amounting to P98,691.90, which the agents
appropriated after negotiating them with PNB. For her failure to receive the full payment for the medicines,
Ibarrola filed on November 6, 1974 before the Regional Trial Court (RTC) an "action for a sum of money and
damages," docketed as Civil Case 4226-p, 2 against the Province of Isabela, its Treasurer, the two agents and
PNB.
In its decision dated September 29, 1987, the trial court ordered all the defendants in said civil case, except
the treasurer who died in the meantime, to "jointly and solidarily" pay Ibarrola several amounts, among
which is:
(1) P98,691.90 with interest thereon at the legal rate from the date of the filing of the complaint until
the entire amount is fully paid; 3 (Emphasis supplied.)
PNB's appeal to the Court of Appeals (CA) 4 and later to the Supreme Court 5 were denied and dismissed,
respectively. All the three courts, however, did not specify whether the legal rate of interest referred to in the
judgment is 6% or 12%. The judgment in Civil Case 4226-P became final and executory on November 26, 1993.
At the execution stage, the sheriff computed the interest mentioned in the judgment at the rate of 12% which PNB
opposed insisting that the rate should only be 6%. Ibarrola sought clarification from the same RTC which
promulgated the decision. On August 4, 1994 said court issued an order clarifying that the rate is 12%. PNB's
direct appeal to this court from that order was referred to the CA which affirmed the RTC order. Hence, this
petition for review under Rule 45 where two legal issues are raised: (1) whether in an action for damages, the
legal rate of interest is 6% as provided by Article 2209 6 of the New Civil Code or 12% as provided by CB Circular
416 series of 1974, 7 and (2) whether such rate shall be computed from the filing of the complaint until fully paid?
The issues are not new. In the case of Estern Shipping Lines, Inc. v.
CA, 8 this Court had provided a rule "of thumb for future guidance," 9 to wit:
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. 10 (Emphasis ours.)
The case at bench does not involve a loan, forbearance of money or judgment involving a loan or
forbearance of money as it arose from a contract of sale whereby Ibarrola did not receive full payment for
her merchandise. When an obligation arises "from a contract of purchase and sale and not from a contract
of loan or mutuum," the applicable rate is "6% per annum as provided in Article 2209 of the NCC and not the

rate of 12% per annum as provided in (CB) Cir. No. 416." 11 Indeed, PNB's liability is based only on the RTC's
judgment where it was held solidarily liable with the other defendants due to its negligence when it "failed to
assure itself" if the Provincial Treasurer was "properly authorized" by Ibarrola to "make endorsements" of said
checks. 12
The rate of 12% interest referred to in Cir. 416 applies only to:
[L]oan or forbearance of money, or to cases where money is transferred from one person to another
and the obligation to return the same or a portion thereof is adjudged. Any other monetary judgment
which does not involve or which has nothing to do with loans or forbearance of any money, goods or
credit does not fall within its coverage for such imposition is not within the ambit of the authority
granted to the Central Bank. When an obligation not constituting a loan or forbearance of money is
breached then an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum in accordance with Art. 2209 of the Civil Code. Indeed, the
monetary judgment in favor of private respondent does not involve a loan or forbearance of money,
hence the proper imposable rate of interest is six (6%) per cent. 13 (Emphasis ours.)
Applying the aforequoted rule, therefore, the proper rate of interest referred to in the judgment under
execution is only 6%. This interest according to Eastern Shipping shall be computed from the time of the
filing of the complaint considering that the amount adjudged (P98,691.90) can be established with
reasonable certainty. Said amount being merely the uncollected balance of the purchase price covered by
the 23 checks encashed and appropriated by Ibarrola's agents. However, once the judgment becomes final
and executory, the "interim period from the finality of judgment awarding a monetary claim and until payment
thereof, is deemed to be equivalent to a forbearance of credit." 14 Thus, in accordance with the pronouncement
in Eastern Shipping the rate of 12% p.a. should be imposed, and to be computed from the time the judgment
became final and executory until fully satisfied. The actual base for the computation of this 12% interest after the
judgment in this damage suit became final shall be the amount adjudged (P98,691.90).
ACCORDINGLY, the appealed decision is REVERSED. The rate of interest shall be 6% p.a. computed from
the time of the filing of the complaint until its full payment before finality of judgment. Thereafter, if the
amount adjudged remains unpaid, the interest rate shall be 12% p.a. computed from the time the judgment
became final and executory on November 26, 1993 until fully satisfied.
SO ORDERED.
Narvasa, C.J., Davide, Jr., Melo and Panganiban, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 97873 August 12, 1993

PILIPINAS BANK, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, and LILIA R. ECHAUS, respondents.
Gella, Reyes, Danguilan and Associates for the petitioner.
Manuel L. Melotindos for the respondents.

QUIASON, J.:
This is a petition for certiorari under Rule 45 of the Revised Rules of Court to review the Resolution of the Court of
Appeals in CA-G.R. CV No. 06017 promulgated on March 14, 1991. The Resolution was rendered in response to
private respondent's motion for clarification of the decision of the Court of Appeals in CA-G.R. No. 06017. The
matters sought to be clarified arose in the course of the execution of the decision of the Regional Trial Court, Branch
71, Antipolo, Rizal in Civil Case No. 239-A, as modified by the decision of the Court of Appeals in CA-G.R. CV No.
06017.
In Civil Case No. 239-A, 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 Realty
Corporation (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 of the Dacion en Pago, in favor of private respondent; and (3) that notwithstanding her demand for
payment, petitioner in bad faith, refused and failed to pay the said amount assigned to her.
Petitioner, while admitting the execution of the Dacion en Pago, claimed: (1) that its former president had no
authority to enter into such agreement; (2) that it never ratified the same; and (3) that assuming arguendo that the
agreement was binding, the conditions stipulated therein were never fulfilled.
Dismissing petitioner's defense as unmeritorious, the trial court ruled in favor of private respondent. The trial court
ordered petitioner and its co-defendant, jointly and severally, to pay private respondent as follows:
1) P2,300,000.00 the total amount assigned by Greatland in her favor out of the P2,300,000.00
liability of defendant Pilipinas to Greatland plus legal interest from the dates of assignments until fully
paid;
2) P3,217,707.00 representing the total actual damages suffered by the plaintiff plus legal interest
until fully paid;
3) P1,000,000.00 in moral damages to partially assuage the extreme moral sufferings of plaintiff
inflicted upon her person considering the bad faith on the part of the defendants and their failure to
act with justice, and to give what is lawfully due her and observe honesty and good faith;
4) P100,000.00 exemplary and nominal damages to vindicate plaintiff's violated rights;
5) Attorney's fees equivalent to 15% of the total award in favor of the plaintiff;

6) Costs of suit (Rollo, p. 78).

On March 22, 1985, petitioner appealed the decision of the trial court to the Court of Appeals, which docketed the
appeal as CA-G.R. No. 06017. On the same day, private respondent filed a motion for Immediate Execution
Pending Appeal. The trial court granted the motion for execution pending appeal in an Order dated April 3, 1985.
Petitioner challenged the Order dated April 3, 1985 before the Court of Appeals in CA-G.R. No. SP No. 05909.
On October 30, 1986, the Court of Appeals modified the Order dated April 3, 1985, by limiting the execution pending
appeal against petitioner to P5,517.707.00 and deferring the execution of the award for moral, exemplary and
nominal damages to await the final judgment of the main case in CA-G.R. No. 06017. On June 17, 1987, the
Supreme Court in G.R. No. L-76506 affirmed the Order dated October 30, 1986 of the Court of Appeals.
On July 1, 1988, the trial court granted the new motion for execution pending appeal filed by private respondent
pursuant to the Resolution of the Supreme Court dated June 17, 1987, upon the filing of the required bond.
Petitioner complied with the writ of execution pending appeal by issuing two manager's checks in the total amount of
P5,517,707.00 (one for P4,965,936.30 payable to private respondent and another for P551,770.70 payable to the
Clerk of Court, RTC, Antipolo, Rizal).
The check payable to private respondent was encashed on July 15, 1988.
On June 28, 1990, the Court of Appeals rendered a decision in CA-G.R. No. CV-06017, which modified the
judgment of the trial court as follows:
1. The defendant-appellant Pilipinas Bank, formerly known as Filipinas Manufacturers Bank is
ordered to pay the plaintiff-appellee the following:
(a) The sum of Two Million Three Hundred Thousand (2,300,000,00) Pesos,
representing the total amount assigned by Greatland to her, with interest at the legal
rate starting July 24, 1981, date when demand was first made (Exh. "F" and "G");
(b) The sum of One Hundred Thousand (P100,000.00) Pesos in moral damages, to
assuage moral sufferings and embarrassment of plaintiff-appellee as a consequence
of appellant-bank's unwarranted acts;
(c) The sum of Twenty Five Thousand (P25,000.00) Pesos, as exemplary damages
to serve as an example or correction for the public good;
(d) The sum equivalent to ten (10) percent of the principal claim awarded,
representing attorney's fees; and
2. Constantino Bautista is absolved of personal liability (Rollo, pp. 31-32).
Petitioner filed a motion for extension of time to file a Petition for Review on Certiorari with the Supreme Court,
which however was withdrawn on July 23,1990. Private respondent, on her part, filed a motion for reconsideration of
the decision of the Court of Appeals in CA-G.R. No. 06017, which likewise was withdrawn on August 13, 1990.
Hence, the decision of the Court of Appeals rendered in CA-G.R. No. 06017 became final and executory.
On September 4, 1990, petitioner filed a motion in the trial court praying that private respondent and Standard
Insurance Co. (which furnished the bond required in the advance execution of the decision of the trial court) to
refund to her the excess payment of P1,898,623.67 with interests at 6% (Rollo, pp. 83-84).
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 allowed in CA-G.R. No. SP No. 05909, the final judgment in the main case (CA-G.R. No.

06017) awarded to private respondent damages in the total amount of only P2,655,000.00 (P2,300,000.00
representing the amount assigned by Greatland to private respondent, P100,000.00 as moral damages; P25,000.00
as exemplary damages and attorney's fees equivalent to 10% of the P2,300,000.00), together "with interest on the
amount of P2,300,000.00 at the legal rate starting July 24, 1981, date when demand was first made (Exh. "F" and
"G")."
Private respondent opposed the motion of petitioner with respect to the rate of interest to be charged on the amount
of P2,300,000.00. According to private respondent, the legal interest on the principal amount of P2,300,000.00 due
her should be 12% per annum pursuant to CB Circular No. 416 and not 6% per annum as computed by petitioner.
On October 12, 1990, the trial court, while ordering the refund to petitioner of the excess payment, fixed the interest
rate due on the amount of P2,300.000.00 at 12% per annum as proposed by private respondent, instead of 6% per
annum as proposed by petitioner.
On October 16, 1990, petitioner moved to reconsider the Order dated October 12, 1990 of the trail court, which
however could not be acted upon because on October 23, 1990, private respondent filed a Motion for Clarification
with the Court of Appeals in CA-G.R. CV No. 06017, regarding the following matters:
a) The "legal rate" of interest on the principal award of P2,300,000.00 from July 24, 1981 (as per
decision) up to July 14, 1988 (date of actual payment made by defendant-appellant to plaintiffappellee per execution pending appeal);
b) The imposition of such "legal rate" of interest on the accrued interest' from July 24, 1981 up to
July 14, 1988;
c) The amount of the costs of suit will include premium on surety bond;
d) The discharged of the surety bond whether total or partial, depending on the computation of the
interest;
e) The award of attorney's fees equivalent to 10% of the principal award, whether this should totally
go to plaintiff-appellee's former counsel or to be shared on the basis of quantum meruit with the
undersigned counsel; and
f) Aside from this final award of 10% attorney's fees chargeable against defendant-appellant,
whether or not former counsel of plaintiff-appellee can still collect from her the balance of 15% out of
the 25% attorney's fees under Exh. "N" (Rollo, p.32).
In its Resolution promulgated on March 14, 1991, the Court of Appeals clarified that:
a) The legal rate of interest on the principal award of P2,300,000.00 should be 12% per annum in
accordance with Circular No. 416 dated July 29, 1974 of the Central Bank.
b) The computation of compounding interest annually has no basis, therefore, not allowed in the
instant case;
c) The payment of premium on the bond in the sum of P259,813.50 as cost, being without legal and
factual basis, is denied;
d) The surety bond posted by plaintiff-appellee may be released after satisfaction of the decision;
and
e) Payment/distribution of attorney's fees may/shall be litigated in a separate proceeding if the
parties cannot settle their differences amicably.

SO ORDERED (Rollo, p. 35-36).

In this appeal, petitioner claims that the Court of Appeals erred:
(1) In ruling that the legal rate of interest on the amount of P2,300,000.00 adjudged to be paid by petitioner to
private respondent is 12% per annum.
(2) In not holding that the refund to which petitioner is entitled should earn interest at the rate of 12% per annum.
(3) In not holding that the surety bond should only be released after actual refund (Rollo, p. 18).
The Court of Appeals was of the theory that the action in Civil Case No. 239-A filed by private respondent against
petitioner "involves forbearance of money, as the principal award to plaintiff-appellee (private respondent) in the
amount of P2,300.000.00 was the overdue debt of defendant-appellant to her since July 1981. The case is, in effect,
a simple collection of the money due to plaintiff-appellee, as the unpaid creditor from the defendant bank, the
debtor" (Resolution, p.3; Rollo, p. 33). Applying Central Bank Circular No. 416, the Court of Appeals held that the
applicable rate of interest is 12% per annum.
Petitioner argues that the applicable law is Article 2209 of the Civil Code, not the Central Bank Circular No. 416.
Said Article 2209 provides:
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 the
interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per
annum.
Presidential Decree No. 116 authorized the Monetary Board 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 amended the Usury Law (Act No.
2655) for that purpose.
As amended, the Usury Law now provides:
Sec. 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 six per
centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of
the Philippines for that purpose in accordance with the authority hereby granted.
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
charge such rate or rates whenever warranted by prevailing economic and social
conditions: Provided, That such changes shall not be made oftener that once every twelve months.
In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum
rates for consumer loans or renewals thereof as well as such loans made by pawnshops, finance
companies and other similar credit institutions although the rates prescribed for these institutions
need not necessarily be uniform.
Acting on the authority vested on it by the Usury Law, as amended by P.D. No. 116, the Monetary Board of Central
Bank issued 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)
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.
In Reformina v. Tomol, Jr., 139 SCRA 260 [1985], the Court held that the judgments spoken of and referred to in
Circular No. 416 are "judgments in litigation involving loans or forbearance of any money, goods or credits. Any
other kind of monetary judgment which has nothing to do with nor involving loans or forbearance of any money,
goods or credits does not fall within the coverage of the said law for it is not, within the ambit of the authority granted
to the Central Bank."
Reformina was affirmed in Philippines Virginia Tobacco Administration v. Tensuan, 188 SCRA 628 [1990], which
emphasized that the "judgments" contemplated in Circular No. 417 "are judgments involving said loans or
forbearance only and not in judgments in litigation that have nothing to do with loans . . . ."
We held that Circular No. 416 does not apply to judgments involving damages (Reformina v. Tomol, Jr., supra;
Philippine Virginia Tobacco Administration v. Tensuan, supra) and compensation in expropriation proceedings
(National Power Corporation v. Angas, 208 SCRA 542 [1992]). We also held that payment of unliquidated cash
advances to an employee by his employer (Villarica v. Court of Appeals, 123 SCRA 259 [1983]) and the return of
money paid by a buyer of a leasehold right but which contract was voided due to the fault of the seller (Buisier v.
Court of Appeals, 154 SCRA 438 [1987]).
What then is the nature of the judgment ordering petitioner to pay private respondent the amount of P2,300,000.00?
The said amount was a portion of the P7,776,335.69 which petitioner was obligated to pay Greatland as
consideration for the sale of several parcels of land by Greatland to petitioner. The amount of P2,300,000.00 was
assigned by Greatland in favor of private respondent. The said obligation therefore 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.
Petitioner next contends that, consistent with its thesis that Circular No. 416 applies only to judgments involving the
payment of loans or forbearance of money, goods and credit, the Court of Appeals should have ordered private
respondent to pay interest at the rate of 12% on the overpayment collected by her pursuant to the advance
execution of the judgment.
Again, we sustain petitioner's contention as correct.
Private respondent was paid in advance the amount of P5,517,707.00 by petitioner to the order for the execution
pending appeal of the judgment of the trial court. On appeal, the Court of Appeals reduced the total damages to
P3,619,083.33, leaving a balance of P1,898,623.67 to be refunded by private respondent to petitioner. In an
execution pending appeal, funds are advanced by the losing party to the prevailing party with the implied obligation
of the latter to repay former, in case the appellate court cancels or reduces the monetary award.
Under Section 5 of Rule 39 of the Revised Rules of Court where "the judgment executed is reversed totally or
partially on appeal, the trial court, on motion, after the case is remanded to it, may issue such orders of restitution,
as equity and justice may warrant under the circumstances." It was to guarantee the restitution contemplated by
Section 5 of Rule 39 of the Revised Rules of Court that private respondent was required by the trial court to post a
bond before the writ of advance execution was issued.

In the case before us, the excess amount ordered to refunded by private respondent falls within the ruling
in Viloriaand Buiser that Circular No. 416 applies to cases where money is transferred from one person to another
and the obligation to return the same or a portion thereof is subsequently adjudged.
Finally, petitioner questions as vague the ruling of the Court of Appeals that the surety bond given to secure the
advance execution may be discharged "upon the finality and satisfaction of the decision." We believe that this ruling
of the Court of Appeals is clear enough in ordering that the surety bond shall be released only after private
respondent has fully refunded the overpayment to petitioner.
WHEREFORE, the petition is GRANTED. The Resolution of the Court of Appeals appealed from is MODIFIED in
that (1) the amount of P2,300,000.00 adjudged to be paid by petitioner to private respondent shall earn interest of
6% per annum and (2) the amount of P1,898,623.67 to be refunded by private respondent to petitioner shall earn
interest of 12% per annum. Costs against private respondent.
SO ORDERED.

PAN PACIFIC SERVICE

CONTRACTORS, INC. and
RICARDO F. DEL ROSARIO,
Petitioners,

G.R. No. 169975

Present:
CARPIO, J., Chairperson,
BRION,
DEL CASTILLO,
ABAD, and
PEREZ, JJ.

- versus -

EQUITABLE PCI BANK (formerly THE

PHILIPPINE COMMERCIAL INTERNATIONAL
BANK),
Respondent.

Promulgated:
March 18, 2010

X - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X
DECISION
CARPIO, J.:
The Case
PAN PACIFIC SERVICE CONTRACTORS, INC. AND RICARDO F. DEL ROSARIO (PETITIONERS) FILED THIS
PETITION FOR REVIEW[1]ASSAILING THE COURT OF APPEALS (CA) DECISION [2]DATED 30 JUNE 2005 IN
CA-G.R. CV NO. 63966 AS WELL AS THE RESOLUTION [3]DATED 5 OCTOBER 2005 DENYING THE MOTION
FOR RECONSIDERATION. IN THE ASSAILED DECISION, THE CA MODIFIED THE 12 APRIL 1999
DECISION[4]OF THE REGIONAL TRIAL COURT OF MAKATI CITY, BRANCH 59 (RTC) BY ORDERING
EQUITABLE PCI BANK[5](RESPONDENT) TO PAY PETITIONERS P1,516,015.07 WITH INTEREST AT THE
LEGAL RATE OF 12% PER ANNUM STARTING 6 MAY 1994 UNTIL THE AMOUNT IS FULLY PAID.
The Facts
Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting mechanical works on airconditioning system.
On 24 November 1989, Pan Pacific, through its President, Ricardo F. Del Rosario (Del Rosario), entered into a contract of
mechanical works (Contract) with respondent for P20,688,800. Pan Pacific and respondent also agreed on nine change
orders for P2,622,610.30. Thus, the total consideration for the whole project was P23,311,410.30.[6]The Contract
stipulated, among others, that Pan Pacific shall be entitled to a price adjustment in case of increase in labor costs and
prices of materials under paragraphs 70.1 [7]and 70.2[8]of the General Conditions for the Construction of PCIB Tower II
Extension (the escalation clause).[9]

Pursuant to the contract, Pan Pacific commenced the mechanical works in the project site, the PCIB Tower II
extension building in Makati City. The project was completed in June 1992. Respondent accepted the project on 9 July
1992.[10]
In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance with the escalation clause, Pan
Pacific claimed a price adjustment of P5,165,945.52. Respondents appointed project engineer, TCGI Engineers, asked for
a reduction in the price adjustment. To show goodwill, Pan Pacific reduced the price adjustment toP4,858,548.67.[11]
On 28 April 1992, TCGI Engineers recommended to respondent that the price adjustment should be pegged
at P3,730,957.07. TCGI Engineers based their evaluation of the price adjustment on the following factors:
1. Labor Indices of the Department of Labor and Employment.
2.
PRICE INDEX OF THE NATIONAL STATISTICS OFFICE.
PD 1594 AND ITS IMPLEMENTING RULES AND REGULATIONS AS AMENDED, 15 MARCH 1991.
SHIPPING DOCUMENTS SUBMITTED BY PPSCI.
SUB-CLAUSE 70.1 OF THE GENERAL CONDITIONS OF THE CONTRACT DOCUMENTS.[12]

Pan Pacific contended that with this recommendation, respondent was already estopped from disclaiming liability
of at least P3,730,957.07 in accordance with the escalation clause. [13]
Due to the extraordinary increases in the costs of labor and materials, Pan Pacifics operational capital was becoming
inadequate for the project. However, respondent withheld the payment of the price adjustment under the escalation clause
despite Pan Pacifics repeated demands.[14]Instead, respondent offered Pan Pacific a loan of P1.8 million. Against its will
and on the strength of respondents promise that the price adjustment would be released soon, Pan Pacific, through Del
Rosario, was constrained to execute a promissory note in the amount of P1.8 million as a requirement for the loan. Pan
Pacific also posted a surety bond. The P1.8 million was released directly to laborers and suppliers and not a single centavo
was given to Pan Pacific.[15]
Pan Pacific made several demands for payment on the price adjustment but respondent merely kept on promising to
release the same. Meanwhile, the P1.8 million loan matured and respondent demanded payment plus interest and penalty.
Pan Pacific refused to pay the loan. Pan Pacific insisted that it would not have incurred the loan if respondent released the
price adjustment on time. Pan Pacific alleged that the promissory note did not express the true agreement of the parties.
Pan Pacific maintained that the P1.8 million was to be considered as an advance payment on the price adjustment.
Therefore, there was really no consideration for the promissory note; hence, it is null and void from the beginning. [16]
Respondent stood firm that it would not release any amount of the price adjustment to Pan Pacific but it would offset the
price adjustment with Pan Pacifics outstanding balance of P3,226,186.01, representing the loan, interests, penalties and
collection charges.[17]
Pan Pacific refused the offsetting but agreed to receive the reduced amount of P3,730,957.07 as recommended by the
TCGI Engineers for the purpose of extrajudicial settlement, less P1.8 million and P414,942 as advance payments.[18]

On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the promissory note, sum of money,
and damages against the respondent with the RTC ofMakati City, Branch 59. On 12 April 1999, the RTC rendered its
decision, the dispositive portion of which reads:
WHEREFORE, PREMISES CONSIDERED, JUDGMENT IS HEREBY RENDERED IN
FAVOR OF THE PLAINTIFFS AND AGAINST THE DEFENDANT AS FOLLOWS:
1.

DECLARING THE PROMISSORY NOTE (EXHIBIT B) NULL AND

VOID;

ORDERING THE DEFENDANT TO PAY THE PLAINTIFFS THE FOLLOWING AMOUNTS:

A. P1,389,111.10 REPRESENTING UNPAID BALANCE
OF THE ADJUSTMENT PRICE, WITH INTEREST
THEREON AT THE LEGAL RATE OF TWELVE

(12%) PERCENT PER ANNUM STARTING MAY 6,

1994, THE DATE WHEN THE COMPLAINT WAS
FILED, UNTIL THE AMOUNT IS FULLY PAID;
P100,000.00 REPRESENTING MORAL DAMAGES;
P50,000.00 REPRESENTING EXEMPLARY DAMAGES; AND
P50,000.00 AS AND FOR ATTORNEYS FEES.
2.
DISMISSING DEFENDANTS COUNTERCLAIM, FOR LACK OF
MERIT; AND
WITH COSTS AGAINST THE DEFENDANT.
SO ORDERED.[19]

On 23 May 1999, petitioners partially appealed the RTC Decision to the CA. On 26 May 1999, respondent
appealed the entire RTC Decision for being contrary to law and evidence. In sum, the appeals of the parties with the CA
are as follows:
1. WITH RESPECT TO THE PETITIONERS, WHETHER THE RTC ERRED IN DEDUCTING THE
AMOUNT OF P126,903.97 FROM THE BALANCE OF THE ADJUSTED PRICE AND IN
AWARDING ONLY 12% ANNUAL INTEREST ON THE AMOUNT DUE, INSTEAD OF THE
BANK LOAN RATE OF 18% COMPOUNDED ANNUALLY BEGINNING SEPTEMBER
1992.
2. With respect to respondent, whether the RTC erred in declaring the promissory note void and in awarding
moral and exemplary damages and attorneys fees in favor of petitioners and in dismissing its
counterclaim.
In its decision dated 30 June 2005, the CA modified the RTC decision, with respect to the principal amount due to
petitioners. The CA removed the deduction ofP126,903.97 because it represented the final payment on the basic contract
price. Hence, the CA ordered respondent to pay P1,516,015.07 to petitioners, with interest at the legal rate of 12% per
annum starting 6 May 1994.[20]
On 26 July 2005, petitioners filed a Motion for Partial Reconsideration seeking a reconsideration of the CAs
Decision imposing the legal rate of 12%. Petitioners claimed that the interest rate applicable should be the 18% bank
lending rate. Respondent likewise filed a Motion for Reconsideration of the CAs decision. In a Resolution dated 5
October 2005, the CA denied both motions.
AGGRIEVED BY THE CAS DECISION, PETITIONERS ELEVATED THE CASE BEFORE THIS COURT.
The Issue

Petitioners submit this sole issue for our consideration: Whether the CA, in awarding the unpaid balance of the price
adjustment, erred in fixing the interest rate at 12% instead of the 18% bank lending rate.

Ruling of the Court

We grant the petition.

This Court notes that respondent did not appeal the decision of the CA. Hence, there is no longer any issue as to
the principal amount of the unpaid balance on the price adjustment, which the CA correctly computed at P1,516,015.07.
The only remaining issue is the interest rate applicable for respondents delay in the payment of the balance of the price
adjustment.
The CA denied petitioners claim for the application of the bank lending rate of 18% compounded annually
reasoning, to wit:
Anent the 18% interest rate compounded annually, while it is true that the contract provides for an
interest at the current bank lending rate in case of delay in payment by the Owner, and the promissory
note charged an interest of 18%, the said proviso does not authorize plaintiffs to unilaterally raise the
interest rate without the other partys consent. Unlike their request for price adjustment on the basic
contract price, plaintiffs never informed nor sought the approval of defendant for the imposition of 18%
interest on the adjusted price. To unilaterally increase the interest rate of the adjusted price would
be violative of the principle of mutuality of contracts. Thus, the Court maintains the legal rate of twelve
percent per annum starting from the date of judicial demand. Although the contract provides for the
period when the recommendation of the TCGI Engineers as to the price adjustment would be binding on
the parties, it was established, however, that part of the adjusted price demanded by plaintiffs was already
disbursed as early as 28 February 1992 by defendant bank to their suppliers and laborers for their account.
[21]

In this appeal, petitioners allege that the contract between the parties consists of two parts, the Agreement [22]and
the General Conditions,[23]both of which provide for interest at the bank lending rate on any unpaid amount due under the
contract. Petitioners further claim that there is nothing in the contract which requires the consent of the respondent to be
given in order that petitioners can charge the bank lending rate. [24]Specifically, petitioners invoke Section 2.5 of the
Agreement and Section 60.10 of the General Conditions as follows:
Agreement
2.5

IF ANY PAYMENT IS DELAYED, THE CONTRACTOR MAY CHARGE

INTEREST THEREON AT THE CURRENT BANK LENDING RATES, WITHOUT
PREJUDICE TO OWNERS RECOURSE TO ANY OTHER REMEDY AVAILABLE
UNDER EXISTING LAW.[25]

GENERAL CONDITIONS
60.10 TIME FOR PAYMENT
THE AMOUNT DUE TO THE CONTRACTOR UNDER ANY INTERIM CERTIFICATE ISSUED BY THE
ENGINEER PURSUANT TO THIS CLAUSE, OR TO ANY TERM OF THE CONTRACT, SHALL, SUBJECT TO
CLAUSE 47, BE PAID BY THE OWNER TO THE CONTRACTOR WITHIN 28 DAYS AFTER SUCH INTERIM

CERTIFICATE HAS BEEN DELIVERED TO THE OWNER, OR, IN THE CASE OF THE FINAL CERTIFICATE
REFERRED TO IN SUB-CLAUSE 60.8, WITHIN 56 DAYS, AFTER SUCH FINAL CERTIFICATE HAS BEEN
DELIVERED TO THE OWNER. IN THE EVENT OF THE FAILURE OF THE OWNER TO MAKE PAYMENT
WITHIN THE TIMES STATED, THE OWNER SHALL PAY TO THE CONTRACTOR INTEREST AT THE RATE
BASED ON BANKING LOAN RATES PREVAILING AT THE TIME OF THE SIGNING OF THE CONTRACT UPON
ALL SUMS UNPAID FROM THE DATE BY WHICH THE SAME SHOULD HAVE BEEN PAID. THE PROVISIONS
OF THIS SUB-CLAUSE ARE WITHOUT PREJUDICE TO THE CONTRACTORS ENTITLEMENT UNDER CLAUSE
69.[26](EMPHASIS SUPPLIED)

Petitioners thus submit that it is automatically entitled to the bank lending rate of interest from the time an amount
is determined to be due thereto, which respondent should have paid. Therefore, as petitioners have already proven their
entitlement to the price adjustment, it necessarily follows that the bank lending interest rate of 18% shall be applied. [27]
On the other hand, respondent insists that under the provisions of 70.1 and 70.2 of the General Conditions, it is stipulated
that any additional cost shall be determined by the Engineer and shall be added to the contract price after due consultation
with the Owner, herein respondent. Hence, there being no prior consultation with the respondent regarding the additional
cost to the basic contract price, it naturally follows that respondent was never consulted or informed of the imposition of
18% interest rate compounded annually on the adjusted price. [28]
A perusal of the assailed decision shows that the CA made a distinction between the consent given by the owner of the
project for the liability for the price adjustments, and the consent for the imposition of the bank lending rate. Thus, while
the CA held that petitioners consulted respondent for price adjustment on the basic contract price, petitioners, nonetheless,
are not entitled to the imposition of 18% interest on the adjusted price, as petitioners never informed or sought the
approval of respondent for such imposition.[29]
We disagree.
It is settled that the agreement or the contract between the parties is the formal expression of the parties rights,
duties, and obligations. It is the best evidence of the intention of the parties. Thus, when the terms of an agreement have
been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between the parties and
their successors in interest, no evidence of such terms other than the contents of the written agreement. [30]
The escalation clause of the contract provides:
CHANGES IN COST AND LEGISLATION
70.1 Increase or Decrease of Cost
There shall be added to or deducted from the Contract Price such sums in respect of rise or fall in the cost of labor and/or
materials or any other matters affecting the cost of the execution of the Works as may be determined.
70.2 Subsequent Legislation
If, after the date 28 days prior to the latest date of submission of tenders for the Contract there occur in the country in
which the Works are being or are to be executed changes to any National or State Statute, Ordinance, Decree or other Law
or any regulation or bye-law (sic) of any local or other duly constituted authority, or the introduction of any such State
Statute, Ordinance, Decree, Law, regulation or bye-law (sic) which causes additional or reduced cost to the contractor,
other than under Sub-Clause 70.1, in the execution of the Contract, such additional or reduced cost shall, after due
consultation with the Owner and Contractor, be determined by the Engineer and shall be added to or deducted from the
Contract Price and the Engineer shall notify the Contractor accordingly, with a copy to the Owner. [31]

In this case, the CA already settled that petitioners consulted respondent on the imposition of the price adjustment,
and held respondent liable for the balance ofP1,516,015.07. Respondent did not appeal from the decision of the CA;
hence, respondent is estopped from contesting such fact.
However, the CA went beyond the intent of the parties by requiring respondent to give its consent to the
imposition of interest before petitioners can hold respondent liable for interest at the current bank lending rate. This is
erroneous. A review of Section 2.6 of the Agreement and Section 60.10 of the General Conditions shows that the consent
of the respondent is not needed for the imposition of interest at the current bank lending rate, which occurs upon any delay
in payment.
When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal
meaning of its stipulations governs. In these cases, courts have no authority to alter a contract by construction or to make a
new contract for the parties. The Courts duty is confined to the interpretation of the contract which the parties have made
for themselves without regard to its wisdom or folly as the court cannot supply material stipulations or read into the
contract words which it does not contain. It is only when the contract is vague and ambiguous that courts are permitted to
resort to construction of its terms and determine the intention of the parties. [32]
The escalation clause must be read in conjunction with Section 2.5 of the Agreement and Section 60.10 of the
General Conditions which pertain to the time of payment. Once the parties agree on the price adjustment after due
consultation in compliance with the provisions of the escalation clause, the agreement is in effect an amendment to the
original contract, and gives rise to the liability of respondent to pay the adjusted costs. Under Section 60.10 of the General
Conditions, the respondent shall pay such liability to the petitioner within 28 days from issuance of the interim certificate.
Upon respondents failure to pay within the time provided (28 days), then it shall be liable to pay the stipulated interest.
This is the logical interpretation of the agreement of the parties on the imposition of interest. To provide a contrary
interpretation, as one requiring a separate consent for the imposition of the stipulated interest, would render the intentions
of the parties nugatory.
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.Therefore, 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. [33]
We agree with petitioners interpretation that in case of default, the consent of the respondent is not needed in
order to impose interest at the current bank lending rate.

Applicable Interest Rate

Under Article 2209 of the Civil Code, the appropriate measure for damages in case of delay in discharging an
obligation consisting of the payment of a sum of money is the payment of penalty interest at the rate agreed upon in the
contract of the parties. In the absence of a stipulation of a particular rate of penalty interest, payment of additional interest

at a rate equal to the regular monetary interest becomes due and payable. Finally, if no regular interest had been agreed
upon by the contracting parties, then the damages payable will consist of payment of legal interest which is 6%, or in the
case of loans or forbearances of money, 12% per annum. [34]It is only when the parties to a contract have failed to fix the
rate of interest or when such amount is unwarranted that the Court will apply the 12% interest per annum on a loan or
forbearance of money.[35]
The written agreement entered into between petitioners and respondent provides for an interest at the current bank lending
rate in case of delay in payment and the promissory note charged an interest of 18%.
To prove petitioners entitlement to the 18% bank lending rate of interest, petitioners presented the promissory
[36]

note prepared by respondent bank itself. This promissory note, although declared void by the lower courts because it did
not express the real intention of the parties, is substantial proof that the bank lending rate at the time of default was 18%
per annum. Absent any evidence of fraud, undue influence or any vice of consent exercised by petitioners against the
respondent, the interest rate agreed upon is binding on them. [37]
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision and Resolution of the Court of Appeals
in CA-G.R. CV No. 63966. We ORDER respondent to pay petitioners P1,516,015.07 with interest at the bank lending
rate of 18% per annum starting 6 May 1994 until the amount is fully paid.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 116285

October 19, 2001

ANTONIO TAN, petitioner,

vs.
COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES, respondents.
DE LEON, JR., J.:
Before us is a petition for review of the Decision1 dated August 31, 1993 and Resolution2 dated July 13, 1994 of the
Court of Appeals affirming the Decision3 dated May 8, 1991 of the Regional Trial Court (RTC) of Manila, Branch 27.
The facts are as follows:
On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount of
Two Million Pesos (P2,000,000.00), or in the total principal amount of Four Million Pesos (P4,000,000.00) from
respondent Cultural Center of the Philippines (CCP, for brevity) evidenced by two (2) promissory notes with maturity
dates on May 14, 1979 and July 6, 1979, respectively. Petitioner defaulted but after a few partial payments he had
the loans restructured by respondent CCP, and petitioner accordingly executed a promissory note (Exhibit "A") on
August 31, 1979 in the amount of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One Pesos
and Thirty-Two Centavos (P3,411,421.32) payable in five (5) installments. Petitioner Tan failed to pay any
installment on the said restructured loan of Three Million Four Hundred Eleven Thousand Four Hundred TwentyOne Pesos and Thirty-Two Centavos (P3,411,421.32), the last installment falling due on December 31, 1980. In a
letter dated January 26, 1982, petitioner requested and proposed to respondent CCP a mode of paying the
restructured loan, i.e., (a) twenty percent (20%) of the principal amount of the loan upon the respondent giving its
conformity to his proposal; and (b) the balance on the principal obligation payable in thirty-six (36) equal monthly
installments until fully paid. On October 20, 1983, petitioner again sent a letter to respondent CCP requesting for a
moratorium on his loan obligation until the following year allegedly due to a substantial deduction in the volume of
his business and on account of the peso devaluation. No favorable response was made to said letters. Instead,
respondent CCP, through counsel, wrote a letter dated May 30, 1984 to the petitioner demanding full payment,
within ten (10) days from receipt of said letter, of the petitioners restructured loan which as of April 30, 1984
amounted to Six Million Eighty-Eight Thousand Seven Hundred Thirty-Five Pesos and Three Centavos
(P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money,
docketed as Civil Case No. 84-26363, against the petitioner after the latter failed to settle his said restructured loan
obligation. The petitioner interposed the defense that he merely accommodated a friend, Wilson Lucmen, who
allegedly asked for his help to obtain a loan from respondent CCP. Petitioner claimed that he has not been able to
locate Wilson Lucmen. While the case was pending in the trial court, the petitioner filed a Manifestation wherein he
proposed to settle his indebtedness to respondent CCP by proposing to make a down payment of One Hundred
Forty Thousand Pesos (P140,000.00) and to issue twelve (12) checks every beginning of the year to cover
installment payments for one year, and every year thereafter until the balance is fully paid. However, respondent
CCP did not agree to the petitioners proposals and so the trial of the case ensued.
On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, ordering defendant
to pay plaintiff, the amount of P7,996,314.67, representing defendants outstanding account as of August 28,
1986, with the corresponding stipulated interest and charges thereof, until fully paid, plus attorneys fees in
an amount equivalent to 25% of said outstanding account, plus P50,000.00, as exemplary damages, plus
costs.

Defendants counterclaims are ordered dismissed, for lack of merit.

SO ORDERED.4
The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to the petitioners
contention that the loan was merely for the accommodation of Wilson Lucmen for the reason that the defense
propounded was not credible in itself. Second, assuming, arguendo, that the petitioner did not personally benefit
from the said loan, he should have filed a third party complaint against Wilson Lucmen, the alleged accommodated
party but he did not. Third, for three (3) times the petitioner offered to settle his loan obligation with respondent CCP.
Fourth, petitioner may not avoid his liability to pay his obligation under the promissory note (Exh. "A") which he must
comply with in good faith pursuant to Article 1159 of the New Civil Code. Fifth, petitioner is estopped from denying
his liability or loan obligation to the private respondent.
The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged interest,
surcharges, attorneys fees and exemplary damages against the petitioner. In his appeal, the petitioner asked for the
reduction of the penalties and charges on his loan obligation. He abandoned his alleged defense in the trial court
that he merely accommodated his friend, Wilson Lucmen, in obtaining the loan, and instead admitted the validity of
the same. On August 31, 1993, the appellate court rendered a decision, the dispositive portion of which reads:
WHEREFORE, with the foregoing modification, the judgment appealed from is hereby AFFIRMED.
SO ORDERED.5
In affirming the decision of the trial court imposing surcharges and interest, the appellate court held that:
We are unable to accept appellants (petitioners) claim for modification on the basis of alleged partial or
irregular performance, there being none. Appellants offer or tender of payment cannot be deemed as a
partial or irregular performance of the contract, not a single centavo appears to have been paid by the
defendant.
However, the appellate court modified the decision of the trial court by deleting the award for exemplary damages
and reducing the amount of awarded attorneys fees to five percent (5%), by ratiocinating as follows:
Given the circumstances of the case, plus the fact that plaintiff was represented by a government lawyer, We
believe the award of 25% as attorneys fees and P500,000.00 as exemplary damages is out of proportion to
the actual damage caused by the non-performance of the contract and is excessive, unconscionable and
iniquitous.
In a Resolution dated July 13, 1994, the appellate court denied the petitioners motion for reconsideration of the said
decision.
Hence, this petition anchored on the following assigned errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR TO THE
DECISION OF THE TRIAL COURT WHICH COMPOUNDED INTEREST ON SURCHARGES.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF INTEREST FOR THE
PERIOD OF TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST PETITIONER IN APPLYING FOR
RELIEF OF LIABILITY THROUGH THE COMMISSION ON AUDIT AND THE OFFICE OF THE PRESIDENT.
III

THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEYS FEES AND IN
REDUCING PENALTIES.
Significantly, the petitioner does not question his liability for his restructured loan under the promissory note marked
Exhibit "A". The first question to be resolved in the case at bar is whether there are contractual and legal bases for
the imposition of the penalty, interest on the penalty and attorneys fees.
The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorneys fees
and in not reducing the penalties considering that the petitioner, contrary to the appellate courts findings, has
allegedly made partial payments on the loan. And if penalty is to be awarded, the petitioner is asking for the nonimposition of interest on the surcharges inasmuch as the compounding of interest on surcharges is not provided in
the promissory note marked Exhibit "A". The petitioner takes exception to the computation of the private respondent
whereby the interest, surcharge and the principal were added together and that on the total sum interest was
imposed. Petitioner also claims that there is no basis in law for the charging of interest on the surcharges for the
reason that the New Civil Code is devoid of any provision allowing the imposition of interest on surcharges.
We find no merit in the petitioners contention. Article 1226 of the New Civil Code provides that:
In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of
interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be
paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
In the case at bar, the promissory note (Exhibit "A") expressly provides for the imposition of both interest and
penalties in case of default on the part of the petitioner in the payment of the subject restructured loan. The
pertinent6 portion of the promissory note (Exhibit "A") imposing interest and penalties provides that:
For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE PHILIPPINES at
its office in Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED +
PESOS (P3,411,421.32) Philippine Currency, xxx.
xxx

xxx

xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid. PLUS
THREE PERCENT (3%) SERVICE CHARGE.
In case of non-payment of this note at maturity/on demand or upon default of payment of any portion of it
when due, I/We jointly and severally agree to pay additional penalty charges at the rate of TWO per cent
(2%) per month on the total amount due until paid, payable and computed monthly. Default of payment of
this note or any portion thereof when due shall render all other installments and all existing promissory notes
made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES immediately due and demandable.
(Underscoring supplied)
xxx

xxx

xxx

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

interest rate partakes of the nature of a penalty clause which is sanctioned by law, more particularly under Article
2209 of the New Civil Code which provides that:
If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in
the absence of stipulation, the legal interest, which is six per cent per annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the
petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated
penalty charge. The penalty charge is also called penalty or compensatory interest. Having clarified the same, the
next issue to be resolved is whether interest may accrue on the penalty or compensatory interest without violating
the provisions of Article 1959 of the New Civil Code, which provides that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However,
the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal,
shall earn new interest.
According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the reason
that the law only allows imposition of interest on monetary interest but not the charging of interest on penalty. He
claims that since there is no law that allows imposition of interest on penalties, the penalties should not earn
interest. But as we have already explained, penalty clauses can be in the form of penalty or compensatory interest.
Thus, the compounding of the penalty or compensatory interest is sanctioned by and allowed pursuant to the abovequoted provision of Article 1959 of the New Civil Code considering that:
First, there is an express stipulation in the promissory note (Exhibit "A") permitting the compounding of interest. The
fifth paragraph of the said promissory note provides that: "Any interest which may be due if not paid shall be added
to the total amount when due and shall become part thereof, the whole amount to bear interest at the maximum rate
allowed by law."10 Therefore, any penalty interest not paid, when due, shall earn the legal interest of twelve percent
(12%) per annum,11 in the absence of express stipulation on the specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this point." In the instant case, interest likewise
began to run on the penalty interest upon the filing of the complaint in court by respondent CCP on August 29, 1984.
Hence, the courts a quo did not err in ruling that the petitioner is bound to pay the interest on the total amount of the
principal, the monetary interest and the penalty interest.
The petitioner seeks the elimination of the compounded interest imposed on the total amount based allegedly on the
case of National Power Corporation v. National Merchandising Corporation,12 wherein we ruled that the imposition of
interest on the damages from the filing of the complaint is unjust where the litigation was prolonged for twenty-five
(25) years through no fault of the defendant. However, the ruling in the said National Power Corporation (NPC) case
is not applicable to the case at bar inasmuch as our ruling on the issue of interest in that NPC case was based on
equitable considerations and on the fact that the said case lasted for twenty-five (25) years "through no fault of the
defendant." In the case at bar, however, equity cannot be considered inasmuch as there is a contractual stipulation
in the promissory note whereby the petitioner expressly agreed to the compounding of interest in case of failure on
his part to pay the loan at maturity. Inasmuch as the said stipulation on the compounding of interest has the force of
law between the parties and does not appear to be inequitable or unjust, the said written stipulation should be
respected.
The private respondents Statement of Account (marked Exhibits "C" to "C-2") 13 shows the following breakdown of
the petitioners indebtedness as of August 28, 1986:

Principal

P2,838,454.68

Interest

P 576,167.89

Surcharge P4,581,692.10

P7,996,314.67

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

xxx

xxx

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

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

xxx

xxx

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

SEBASTIAN SIGA-AN,
Petitioner,

G.R. No. 173227

Present:

-versus

YNARES-SANTIAGO,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
LEONARDO-DE CASTRO,* JJ.

Promulgated:
ALICIA VILLANUEVA,
Respondent.
January 20, 2009
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition[1] for Review on Certiorari under Rule 45 of the Rules of Court seeking to set aside the
Decision,[2] dated 16 December 2005, and Resolution, [3]dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No.
71814, which affirmed in toto the Decision,[4] dated 26 January 2001, of the Las Pinas City Regional Trial Court, Branch
255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint [5] for sum of money against petitioner
Sebastian Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-980068. Respondent alleged that she was a businesswoman engaged in supplying office materials and equipments to the
Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig City, while petitioner was a military officer and
comptroller of the PNO from 1991 to 1996.

Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered to loan her the
amount of P540,000.00. Since she needed capital for her business transactions with the PNO, she accepted petitioners
proposal. The loan agreement was not reduced in writing. Also, there was no stipulation as to the payment of interest for
the loan.[6]
On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial payment of the loan. On
31 October 1993, she issued another check in the amount of P200,000.00 to petitioner as payment of the remaining
balance of the loan. Petitioner told her that since she paid a total amount of P700,000.00 for the P540,000.00 worth of
loan, the excess amount of P160,000.00 would be applied as interest for the loan. Not satisfied with the amount applied as
interest, petitioner pestered her to pay additional interest. Petitioner threatened to block or disapprove her transactions
with the PNO if she would not comply with his demand. As all her transactions with the PNO were subject to the approval
of petitioner as comptroller of the PNO, and fearing that petitioner might block or unduly influence the payment of her
vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash and checks as interests for the loan. She
asked petitioner for receipt for the payments but petitioner told her that it was not necessary as there was mutual trust and
confidence between them. According to her computation, the total amount she paid to petitioner for the loan and interest
accumulated to P1,200,000.00.[7]
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan despite absence of
agreement to that effect. Her lawyer told her that petitioner could not validly collect interest on the loan because there was
no agreement between her and petitioner regarding payment of interest. Since she paid petitioner a total amount
of P1,200,000.00 for the P540,000.00 worth of loan, and upon being advised by her lawyer that she made overpayment to
petitioner, she sent a demand letter to petitioner asking for the return of the excess amount of P660,000.00. Petitioner,
despite receipt of the demand letter, ignored her claim for reimbursement. [8]
Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1) P660,000.00 plus legal
interest from the time of demand; (2) P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4) an
amount equivalent to 25% of P660,000.00 as attorneys fees.[9]
In his answer[10] to the complaint, petitioner denied that he offered a loan to respondent. He averred that in 1992,
respondent approached and asked him if he could grant her a loan, as she needed money to finance her business venture
with the PNO. At first, he was reluctant to deal with respondent, because the latter had a spotty record as a supplier of the
PNO. However, since respondent was an acquaintance of his officemate, he agreed to grant her a loan. Respondent paid
the loan in full.[11]

Subsequently, respondent again asked him to give her a loan. As respondent had been able to pay the previous
loan in full, he agreed to grant her another loan. Later, respondent requested him to restructure the payment of the loan
because she could not give full payment on the due date. He acceded to her request. Thereafter, respondent pleaded for
another restructuring of the payment of the loan. This time he rejected her plea. Thus, respondent proposed to execute a
promissory note wherein she would acknowledge her obligation to him, inclusive of interest, and that she would issue
several postdated checks to guarantee the payment of her obligation. Upon his approval of respondents request for
restructuring of the loan, respondent executed a promissory note dated 12 September 1994 wherein she admitted having
borrowed an amount ofP1,240,000.00, inclusive of interest, from petitioner and that she would pay said amount in March
1995. Respondent also issued to him six postdated checks amounting toP1,240,000.00 as guarantee of compliance with
her obligation. Subsequently, he presented the six checks for encashment but only one check was honored. He demanded
that respondent settle her obligation, but the latter failed to do so. Hence, he filed criminal cases for Violation of the
Bouncing Checks Law (Batas Pambansa Blg. 22) against respondent. The cases were assigned to the Metropolitan Trial
Court of Makati City, Branch 65 (MeTC).[12]
Petitioner insisted that there was no overpayment because respondent admitted in the latters promissory note that
her monetary obligation as of 12 September 1994 amounted to P1,240,000.00 inclusive of interests. He argued that
respondent was already estopped from complaining that she should not have paid any interest, because she was given
several times to settle her obligation but failed to do so. He maintained that to rule in favor of respondent is tantamount to
concluding that the loan was given interest-free.Based on the foregoing averments, he asked the RTC to dismiss
respondents complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an overpayment of her
loan obligation to petitioner and that the latter should refund the excess amount to the former. It ratiocinated that
respondents obligation was only to pay the loaned amount of P540,000.00, and that the alleged interests due should not be
included in the computation of respondents total monetary debt because there was no agreement between them regarding
payment of interest. It concluded that since respondent made an excess payment to petitioner in the amount
of P660,000.00 through mistake, petitioner should return the said amount to respondent pursuant to the principle
of solutio indebiti.[13]
The RTC also ruled that petitioner should pay moral damages for the sleepless nights and wounded feelings
experienced by respondent. Further, petitioner should pay exemplary damages by way of example or correction for the
public good, plus attorneys fees and costs of suit.
The dispositive portion of the RTC Decision reads:

WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and
jurisprudence on the matter, judgment is hereby rendered in favor of the plaintiff and against the
defendant as follows:
(1)
Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal interest of
12% per annum computed from 3 March 1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral damages;
(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of P660,000.00 as attorneys
fees; and
(5) Ordering defendant to pay the costs of suit.[14]

Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court promulgated its Decision
affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed
decision [is] AFFIRMED in toto.[15]

Petitioner filed a motion for reconsideration of the appellate courts decision but this was denied. [16] Hence,
petitioner lodged the instant petition before us assigning the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE
TO PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO
INDEBITI.[17]

Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as monetary
interest. Interest may also be imposed by law or by courts as penalty or indemnity for damages. This is called
compensatory interest.[18] The right to interest arises only by virtue of a contract or by virtue of damages for delay or
failure to pay the principal loan on which interest is demanded. [19]
Article 1956 of the Civil Code, which refers to monetary interest, [20] specifically mandates that no interest shall be
due unless it has been expressly stipulated in writing.As can be gleaned from the foregoing provision, payment of
monetary interest is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement
for the payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of
monetary interest. Thus, we have held that collection of interest without any stipulation therefor in writing is prohibited by
law.[21]

It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither was there
convincing proof of written agreement between the two regarding the payment of interest. Respondent testified that
although she accepted petitioners offer of loan amounting to P540,000.00, there was, nonetheless, no verbal or written
agreement for her to pay interest on the loan.[22]
Petitioner presented a handwritten promissory note dated 12 September 1994 [23] wherein respondent purportedly
admitted owing petitioner capital and interest.Respondent, however, explained that it was petitioner who made a
promissory note and she was told to copy it in her own handwriting; that all her transactions with the PNO were subject to
the approval of petitioner as comptroller of the PNO; that petitioner threatened to disapprove her transactions with the
PNO if she would not pay interest; that being unaware of the law on interest and fearing that petitioner would make good
of his threats if she would not obey his instruction to copy the promissory note, she copied the promissory note in her own
handwriting; and that such was the same promissory note presented by petitioner as alleged proof of their written
agreement on interest.[24] Petitioner did not rebut the foregoing testimony. It is evident that respondent did not really
consent to the payment of interest for the loan and that she was merely tricked and coerced by petitioner to pay
interest. Hence, it cannot be gainfully said that such promissory note pertains to an express stipulation of interest or
written agreement of interest on the loan between petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and respondent agreed
on the payment of 7% rate of interest on the loan; that the agreed 7% rate of interest was duly admitted by respondent in
her testimony in the Batas Pambansa Blg. 22 cases he filed against respondent; that despite such judicial admission by
respondent, the RTC and the Court of Appeals, citing Article 1956 of the Civil Code, still held that no interest was due
him since the agreement on interest was not reduced in writing; that the application of Article 1956 of the Civil Code
should not be absolute, and an exception to the application of such provision should be made when the borrower admits
that a specific rate of interest was agreed upon as in the present case; and that it would be unfair to allow respondent to
pay only the loan when the latter very well knew and even admitted in the Batas Pambansa Blg. 22 cases that there was an
agreed 7% rate of interest on the loan.[25]
We have carefully examined the RTC Decision and found that the RTC did not make a ruling therein that
petitioner and respondent agreed on the payment of interest at the rate of 7% for the loan. The RTC clearly stated that
although petitioner and respondent entered into a valid oral contract of loan amounting to P540,000.00, they, nonetheless,
never intended the payment of interest thereon. [26] While the Court of Appeals mentioned in its Decision that it concurred
in the RTCs ruling that petitioner and respondent agreed on a certain rate of interest as regards the loan, we consider this
as merely an inadvertence because, as earlier elucidated, both the RTC and the Court of Appeals ruled that petitioner is not
entitled to the payment of interest on the loan. The rule is that factual findings of the trial court deserve great weight and

respect especially when affirmed by the appellate court. [27] We found no compelling reason to disturb the ruling of both
courts.
Petitioners reliance on respondents alleged admission in the Batas Pambansa Blg. 22 cases that they had agreed
on the payment of interest at the rate of 7% deserves scant consideration. In the said case, respondent merely testified that
after paying the total amount of loan, petitioner ordered her to pay interest. [28] Respondent did not categorically declare in
the same case that she and respondent made an express stipulation in writing as regards payment of interest at the rate of
7%. As earlier discussed, monetary interest is due only if there was an express stipulation in writing for the payment of
interest.
There are instances in which an interest may be imposed even in the absence of express stipulation, verbal or
written, regarding payment of interest. Article 2209 of the Civil Code states that if the obligation consists in the payment
of a sum of money, and the debtor incurs delay, a legal interest of 12% per annum may be imposed as indemnity for
damages if no stipulation on the payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides
that interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent on
this point.
All the same, the interest under these two instances may be imposed only as a penalty or damages for breach of
contractual obligations. It cannot be charged as a compensation for the use or forbearance of money. In other words, the
two instances apply only to compensatory interest and not to monetary interest. [29] The case at bar involves petitioners
claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because it was not duly proven that
respondent defaulted in paying the loan. Also, as earlier found, no interest was due on the loan because there was no
written agreement as regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not apply to the
instant case. Thus, he cannot be compelled to return the alleged excess amount paid by respondent as interest. [30]
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no stipulation
therefor, the provisions of the Civil Code concerning solutioindebiti shall be applied. Article 2154 of the Civil Code
explains the principle of solutio indebiti. Said provision provides that if something is received when there is no right to
demand it, and it was unduly delivered through mistake, the obligation to return it arises. In such a case, a creditor-debtor
relationship is created under a quasi-contract whereby the payor becomes the creditor who then has the right to demand
the return of payment made by mistake, and the person who has no right to receive such payment becomes obligated to
return the same. The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself

unjustly at the expense of another.[31] The principle of solutio indebiti applies where (1) a payment is made when there
exists no binding relation between the payor, who has no duty to pay, and the person who received the payment; and (2)
the payment is made through mistake, and not through liberality or some other cause. [32] We have held that the principle
of solutio indebiti applies in case of erroneous payment of undue interest. [33]
It was duly established that respondent paid interest to petitioner. Respondent was under no duty to make such
payment because there was no express stipulation in writing to that effect. There was no binding relation between
petitioner and respondent as regards the payment of interest. The payment was clearly a mistake. Since petitioner received
something when there was no right to demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award and damages imposed by the RTC and the Court of
Appeals.
Records show that respondent received a loan amounting to P540,000.00 from petitioner.[34] Respondent issued
two checks with a total worth of P700,000.00 in favor of petitioner as payment of the loan. [35] These checks were
subsequently encashed by petitioner.[36] Obviously, there was an excess of P160,000.00 in the payment for the
loan.Petitioner claims that the excess of P160,000.00 serves as interest on the loan to which he was entitled. Aside from
issuing the said two checks, respondent also paid cash in the total amount of P175,000.00 to petitioner as interest.
[37]

Although no receipts reflecting the same were presented because petitioner refused to issue such to respondent,

petitioner, nonetheless, admitted in his Reply-Affidavit [38] in the Batas Pambansa Blg. 22 cases that respondent paid him a
total amount of P175,000.00 cash in addition to the two checks. Section 26 Rule 130 of the Rules of Evidence provides
that the declaration of a party as to a relevant fact may be given in evidence against him. Aside from the amounts
of P160,000.00 and P175,000.00 paid as interest, no other proof of additional payment as interest was presented by
respondent. Since we have previously found that petitioner is not entitled to payment of interest and that the principle
of solutio indebiti applies to the instant case, petitioner should return to respondent the excess amount ofP160,000.00
and P175,000.00 or the total amount of P335,000.00. Accordingly, the reimbursable amount to respondent fixed by the
RTC and the Court of Appeals should be reduced from P660,000.00 to P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22 against
respondent. In the said cases, the MeTC found respondent guilty of violating Batas Pambansa Blg. 22 for issuing five
dishonored checks to petitioner. Nonetheless, respondents conviction therein does not affect our ruling in the instant
case. The two checks, subject matter of this case, totaling P700,000.00 which respondent claimed as payment of
the P540,000.00 worth of loan, were not among the five checks found to be dishonored or bounced in the five criminal
cases. Further, the MeTC found that respondent made an overpayment of the loan by reason of the interest which the latter
paid to petitioner.[39]

Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent physical
suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation and similar injury. Respondent testified that she experienced sleepless nights and wounded feelings when
petitioner refused to return the amount paid as interest despite her repeated demands. Hence, the award of moral damages
is justified. However, its corresponding amount of P300,000.00, as fixed by the RTC and the Court of Appeals, is
exorbitant and should be equitably reduced. Article 2216 of the Civil Code instructs that assessment of damages is left to
the discretion of the court according to the circumstances of each case. This discretion is limited by the principle that the
amount awarded should not be palpably excessive as to indicate that it was the result of prejudice or corruption on the part
of the trial court.[40] To our mind, the amount of P150,000.00 as moral damages is fair, reasonable, and proportionate to the
injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary damages may be
imposed if the defendant acted in an oppressive manner.Petitioner acted oppressively when he pestered respondent to pay
interest and threatened to block her transactions with the PNO if she would not pay interest. This forced respondent to pay
interest despite lack of agreement thereto. Thus, the award of exemplary damages is appropriate. The amount
of P50,000.00 imposed as exemplary damages by the RTC and the Court is fitting so as to deter petitioner and other
lenders from committing similar and other serious wrongdoings. [41]
Jurisprudence instructs that in awarding attorneys fees, the trial court must state the factual, legal or equitable
justification for awarding the same. [42] In the case under consideration, the RTC stated in its Decision that the award of
attorneys fees equivalent to 25% of the amount paid as interest by respondent to petitioner is reasonable and moderate
considering the extent of work rendered by respondents lawyer in the instant case and the fact that it dragged on for
several years.[43] Further, respondent testified that she agreed to compensate her lawyer handling the instant case such
amount.[44] The award, therefore, of attorneys fees and its amount equivalent to 25% of the amount paid as interest by
respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount refundable to
respondent computed from 3 March 1998 until its full payment. This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals, [45] that when an obligation, not constituting a loan or
forbearance of money is breached, an interest on the amount of damages awarded may be imposed at the rate of 6% per
annum. We further declared that when the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether it is a loan/forbearance of money or not, shall be 12% per annum from such finality until
its satisfaction, this interim period being deemed equivalent to a forbearance of credit.

In the present case, petitioners obligation arose from a quasi-contract of solutio indebiti and not from a loan or
forbearance of money. Thus, an interest of 6% per annum should be imposed on the amount to be refunded as well as on
the damages awarded and on the attorneys fees, to be computed from the time of the extra-judicial demand on 3 March
1998,[46] up to the finality of this Decision. In addition, the interest shall become 12% per annum from the finality of this
Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16 December 2005, is
hereby AFFIRMED with the followingMODIFICATIONS: (1) the amount of P660,000.00 as refundable amount of
interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND PESOS (P335,000.00); (2) the amount
of P300,000.00 imposed as moral damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00);
(3) an interest of 6% per annum is imposed on the P335,000.00, on the damages awarded and on the attorneys fees to be
computed from the time of the extra-judicial demand on 3 March 1998 up to the finality of this Decision; and (4) an
interest of 12% per annum is also imposed from the finality of this Decision up to its satisfaction. Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.

VITUG, J.:
The issues, albeit not completely novel, are: (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; (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 (c) whether the applicable rate of
interest, referred to above, is twelve percent (12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts that have
led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and broker-forwarder 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.
On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery
vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No.
81/01177 for P36,382,466.38.

Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of
defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which
damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant
Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey."
Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the
shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages,
while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).
Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered
losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented
against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).
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 (per "Form of Subrogation", "Release" and Philbanking check,
Exhs. M, N, and O). (pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:
Defendants filed their respective answers, traversing the material allegations of the complaint
contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged in
good order from the vessel unto the custody of Metro Port Service so that any damage/losses
incurred after the shipment was incurred after the shipment was turned over to the latter, is no longer
its liability (p. 17, Record); Metroport averred that although subject shipment was discharged unto its
custody, portion of the same was already in bad order (p. 11, Record); Allied Brokerage alleged that
plaintiff has no cause of action against it, not having negligent or at fault for the shipment was
already in damage and bad order condition when received by it, but nonetheless, it still exercised
extra ordinary care and diligence in the handling/delivery of the cargo to consignee in the same
condition shipment was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in the custody of
defendants (in whose respective custody, if determinable);
3. Whether or not defendant(s) should be held liable for the losses/damages (see
plaintiff's pre-Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's
Records, p. 38).
As to the first issue, there can be no doubt that the shipment sustained
losses/damages. The two drums were shipped in good order and condition, as
clearly shown by the Bill of Lading and Commercial Invoice which do not indicate any
damages drum that was shipped (Exhs. B and C). But when on December 12, 1981
the shipment was delivered to defendant Metro Port Service, Inc., it excepted to one
drum in bad order.

Correspondingly, as to the second issue, it follows that 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). This becomes evident when the Marine Cargo Survey Report (Exh. G),
with its "Additional Survey Notes", are considered. In the latter notes, it is stated that
when the shipment was "landed on vessel" to dock of Pier # 15, South Harbor,
Manila on December 12, 1981, it was observed that "one (1) fiber drum (was) in
damaged condition, covered by the vessel's Agent's Bad Order Tally Sheet
No. 86427." The report further states that when defendant Allied Brokerage withdrew
the shipment from defendant arrastre operator's custody on January 7, 1982, one
drum was found opened without seal, cello bag partly torn but contents intact. Net
unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the consignee, one
drum was found with adulterated/faked contents. It is obvious, therefore, that these
losses/damages occurred before the shipment reached the consignee while under
the successive custodies of defendants. Under Art. 1737 of the New Civil Code, the
common carrier's duty to observe extraordinary diligence in the vigilance of goods
remains in full force and effect even if the goods are temporarily unloaded and stored
in transit in the warehouse of the carrier at the place of destination, until the
consignee has been advised and has had reasonable opportunity to remove or
dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own exhibit,
the "Turn-Over Survey of Bad Order Cargoes" (Exhs. 3-Eastern) states that on
December 12, 1981 one drum was found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of 12% per annum from
October 1, 1982, the date of filing of this complaints, until fully paid (the liability of
defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value
of the loss, whichever is lesser, while the liability of defendant Metro Port Service,
Inc. shall be to the extent of the actual invoice value of each package, crate box or
container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the
Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim of defendant/crossclaimant Allied Brokerage Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is
correct. As there is sufficient evidence that the shipment sustained damage while in the successive

possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount it
paid to the consignee. (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of discretion on
the part of the appellate court when
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE
OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS
GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT
SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF
TWELVE PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE
TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE
RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that novel.
Indeed, we do have a fairly good number of previous decisions this Court can merely tack to.
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. 1736-1738, 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 (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139
SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when
such presumption of fault is not observed but these cases, enumerated in Article 1734 1 of the Civil Code, are
exclusive, not one of which can be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the
goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port
Services (182 SCRA 455), we have explained, in holding the carrier and the arrastre operator liable in solidum, thus:
The legal relationship between the consignee and the arrastre operator is akin to that of a depositor
and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between
the consignee and the common carrier is similar to that of the consignee and the arrastre operator
(Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). 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.
We do not, of course, imply by the above pronouncement that the arrastre operator and the customs broker are
themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that attendant facts in a given
case may not vary the rule. The instant petition has been brought solely by Eastern Shipping Lines, which, being the
carrier and not having been able to rebut the presumption of fault, is, in any event, to be held liable in this particular
case. A factual finding of both the court a quo and the appellate court, we take note, is that "there is sufficient
evidence that the shipment sustained damage while in the successive possession of appellants" (the herein

petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this
case, is inevitable regardless of whether there are others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more than just a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries and pilferage of
goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint that the total
amount of its claim for the value of the undelivered goods amounted to P3,947.20. This demand, however, was neither
established in its totality nor definitely ascertained. In the stipulation of facts later entered into by the parties, in lieu of
proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment ordering the appellants (defendants)
Manila Port Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with legal
interest thereon from the date the complaint was filed on 28 December 1962 until full payment thereof. The appellants
then assailed, inter alia, the award of legal interest. In sustaining the appellants, this Court ruled:
Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal
rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial. The trial
court opted for judicial demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon
unliquidated claims or damages, except when the demand can be established with reasonable
certainty." And as was held by this Court in Rivera vs. Perez, 4 L-6998, February 29, 1956, if the suit
were for damages, "unliquidated and not known until definitely ascertained, assessed and determined by
the courts after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)
The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of Damages for Injury to Person
and Loss of Property." After trial, the lower court decreed:
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 Shell and Michael, Incorporated to pay jointly and
severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the
value of the boat F B Pacita III 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. (Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained the
trial court in adjudging legal interest from the filing of the complaint until fully paid. When the appellate
court's decision became final, the case was remanded to the lower court for execution, and this was when
the trial court issued its assailed resolution which applied the 6% interest per annum prescribed in Article
2209 of the Civil Code. In their petition for review on certiorari, the petitioners contended that Central Bank
Circular
No. 416, providing thus

By virtue of the authority granted to it under Section 1 of Act 2655, as amended, 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%) percent per annum. This Circular
shall take effect immediately. (Emphasis found in the text)
should have, instead, been applied. This Court 6 ruled:
The judgments spoken of and referred to are judgments in litigations involving loans or forbearance
of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with,
nor involving loans or forbearance of any money, goods or credits does not fall within the coverage
of the said law for it is not within the ambit of the authority granted to the Central Bank.
xxx xxx xxx
Coming to the case at bar, 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 rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July 1986. The case
was for damages occasioned by an injury to person and loss of property. The trial court awarded private respondent
Pedro Manabat actual and compensatory damages in the amount of P72,500.00 with legal interest thereon from the filing
of the complaint until fully paid. Relying on the Reformina v. Tomol case, this Court 8 modified the interest award from 12%
to 6% interest per annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages arising from the
collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date of
the filing of the complaint until full payment . . . ." Save from the modification of the amount granted by the lower court, the
Court of Appeals sustained the trial court's decision. When taken to this Court for review, the case, on 03 October 1986,
was decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and
environmental circumstances of this case, we deem it reasonable to render a decision imposing, as
We do hereby impose, upon the defendant and the third-party defendants (with the exception of
Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos
to cover all damages (with the exception to attorney's fees) occasioned by the loss of the building
(including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this
decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum shall be
imposed upon aforementioned amounts from finality until paid. Solidary costs against the defendant
and third-party defendants (Except Roman Ozaeta). (Emphasis supplied)
A motion for reconsideration was filed by United Construction, contending that "the interest of twelve (12%)
per cent per annum imposed on the total amount of the monetary award was in contravention of law." The
Court 10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of
15 April 1988, it explained:

There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No.
416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit;
and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or
forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA
160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case,
there is neither a loan or a forbearance, but then no interest is actually imposed provided the sums
referred to in the judgment are paid upon the finality of the judgment. It is delay in the payment of
such final judgment, that will cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum,
from the filing of the complaint until paid; in other words, as part of the judgment for damages.
Clearly, they are not applicable to the instant case. (Emphasis supplied.)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court 11 was a petition for
review on certiorari from the decision, dated 27 February 1985, of the then Intermediate Appellate Court reducing the
amount of moral and exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and
its resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as
moral damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum from notice of
judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the right of the private
respondent to recover damages, held the award, however, for moral damages by the trial court, later sustained by the
IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court and rendered a new one,
"ordering the petitioner to pay private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral
damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from a breach of
employment contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral and
exemplary damages without, however, providing any legal interest thereon. When the decision was appealed to the Court
of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated
October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except
defendant-appellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in
the dispositive portion of the decision, including the sum of P1,400.00 in concept of compensatory
damages, with interest at the legal rate from the date of the filing of the complaint until fully
paid(Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted to the trial court,
and an entry of judgment was made. The writ of execution issued by the trial court directed that only
compensatory damages should earn interest at 6% per annum from the date of the filing of the complaint.
Ascribing grave abuse of discretion on the part of the trial judge, a petition for certiorari assailed the said
order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal
rate" from the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416] does
not apply to actions based on a breach of employment contract like the case at bar. (Emphasis
supplied)
The Court reiterated that the 6% interest per annum on the damages should be computed from the time the
complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power Corporation
vs. Angas, 14decided on 08 May 1992, involved the expropriation of certain parcels of land. After conducting a hearing on
the complaints for eminent domain, the trial court ordered the petitioner to pay the private respondents certain sums of

money as just compensation for their lands so expropriated "with legal interest thereon . . . until fully paid." Again, in
applying the 6% legal interest per annum under the Civil Code, the Court 15 declared:

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but
expropriation of certain parcels of land for a public purpose, the payment of which is without
stipulation regarding interest, and the interest adjudged by the trial court is in the nature of indemnity
for damages. The legal interest required to be paid on the amount of just compensation for the
properties expropriated is manifestly in the form of indemnity for damages for the delay in the
payment thereof. Therefore, since the kind of interest involved in the joint judgment of the lower
court sought to be enforced in this case is interest by way of damages, and not by way of earnings
from loans, etc. Art. 2209 of the Civil Code shall apply.
Concededly, there have been seeming variances in the above holdings. The cases can perhaps be classified into
two groups according to the similarity of the issues involved and the corresponding rulings rendered by the court.
The "first group" would consist of the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines
v. Cruz(1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan Insurance Company
v.Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American Express International
v.Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or 12% (under
the Central Bank Circular) interest per annum. It is easily discernible in these cases that there has been a consistent
holding that the Central Bank Circular imposing the 12% interest per annum applies only to loans or forbearance 16of
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.
The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per
annum, 17depending on whether or not the amount involved is a loan or forbearance, on the one hand, or one of indemnity
for damage, on the other hand. Unlike, however, the "first group" which remained consistent in holding that the running of
the legal interest should be from the time of the filing of the complaint until fully paid, the "second group" varied on the
commencement of the running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision of the court a
quo,explaining that "if the suit were for damages, 'unliquidated and not known until definitely ascertained, assessed
and determined by the courts after proof,' then, interest 'should be from the date of the decision.'" American Express
International v. IAC, introduced a different time frame for reckoning the 6% interest by ordering it to be "computed
from the finality of (the) decision until paid." The Nakpil and Sons case ruled that 12% interest per annum should be
imposed from the finality of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for different applications,
guided by the rule that the courts are vested with discretion, depending on the equities of each case, on the award
of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest the following
rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts 18 is
breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII on "Damages" of the Civil
Code govern in determining the measure of recoverable damages. 20
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. 21 Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. 22 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 23 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 24 at the rate of 6% per annum. 25 No interest, however,
shall be adjudged on unliquidated claims or damages except when or until the demand can be established with
reasonable certainty. 26 Accordingly, where the demand is established with reasonable certainty, the interest shall begin to
run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of
the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that
the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be
imposed on such amount upon finality of this decision until the payment thereof.
SO ORDERED.

Republic of the Philippines

Supreme Court
Baguio City
FIRST DIVISION
HERMOJINA ESTORES,
Petitioner,

G.R. No. 175139

Present:

- versus -

CORONA, C.J., Chairperson,

LEONARDO-DE CASTRO,
BERSAMIN,
DEL CASTILLO, and

VILLARAMA, JR., JJ.

SPOUSES ARTURO and
LAURA SUPANGAN,
Promulgated:
Respondents.
April 18, 2012
x-------------------------------------------------------------------x
DECISION
DEL CASTILLO, J.:
The only issue posed before us is the propriety of the imposition of interest and attorneys fees.
Assailed in this Petition for Review[1] filed under Rule 45 of the Rules of Court is the May 12, 2006 Decision [2] of the Court of
Appeals (CA) in CA-G.R. CV No. 83123, the dispositive portion of which reads:
WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six percent (6%) per
annum, computed from September 27, 2000 until its full payment before finality of the judgment.If the adjudged
principal and the interest (or any part thereof) remain unpaid thereafter, the interest rate shall be adjusted to twelve
percent (12%) per annum, computed from the time the judgment becomes final and executory until it is fully
satisfied. The award of attorneys fees is hereby reduced to P100,000.00. Costs against the defendants-appellants.
SO ORDERED.[3]
Also assailed is the August 31, 2006 Resolution[4] denying the motion for reconsideration.
Factual Antecedents
On October 3, 1993, petitioner Hermojina Estores and respondent-spouses Arturo and Laura Supangan entered into a Conditional
Deed of Sale[5] whereby petitioner offered to sell, and respondent-spouses offered to buy, a parcel of land covered by Transfer
Certificate of Title No. TCT No. 98720 located at Naic, Cavite for the sum of P4.7 million. The parties likewise stipulated, among
others, to wit:
xxxx
1. Vendor will secure approved clearance from DAR requirements of which are (sic):
a) Letter request
b) Title
c) Tax Declaration
d) Affidavit of Aggregate Landholding Vendor/Vendee
e) Certification from the Provl. Assessors as to Landholdings of Vendor/Vendee
f) Affidavit of Non-Tenancy
g) Deed of Absolute Sale
xxxx
4. Vendee shall be informed as to the status of DAR clearance within 10 days upon signing of the documents.
xxxx

6. Regarding the house located within the perimeter of the subject [lot] owned by spouses [Magbago], said house
shall be moved outside the perimeter of this subject property to the 300 sq. m. area allocated for [it]. Vendor
hereby accepts the responsibility of seeing to it that such agreement is carried out before full payment of the sale
is made by vendee.
7. If and after the vendor has completed all necessary documents for registration of the title and the vendee fails to
complete payment as per agreement, a forfeiture fee of 25% or downpayment, shall be applied.However, if the
vendor fails to complete necessary documents within thirty days without any sufficient reason, or without
informing the vendee of its status, vendee has the right to demand return of full amount of down payment.
xxxx
9. As to the boundaries and partition of the lots (15,018 sq. m. and 300 sq. m.) Vendee shall be informed
immediately of its approval by the LRC.
10. The vendor assures the vendee of a peaceful transfer of ownership.
x x x x [6]

After almost seven years from the time of the execution of the contract and notwithstanding payment of P3.5 million on the
part of respondent-spouses, petitioner still failed to comply with her obligation as expressly provided in paragraphs 4, 6, 7, 9 and 10 of
the contract. Hence, in a letter[7] dated September 27, 2000, respondent-spouses demanded the return of the amount of P3.5 million
within 15 days from receipt of the letter. In reply,[8] petitioner acknowledged receipt of the P3.5 million and promised to return the
same within 120 days. Respondent-spouses were amenable to the proposal provided an interest of 12% compounded annually shall
be imposed on the P3.5 million.[9] When petitioner still failed to return the amount despite demand, respondent-spouses were
constrained to file a Complaint[10] for sum of money before the Regional Trial Court (RTC) of Malabon against herein petitioner as
well as Roberto U. Arias (Arias) who allegedly acted as petitioners agent. The case was docketed as Civil Case No. 3201-MN and
raffled off to Branch 170. In their complaint, respondent-spouses prayed that petitioner and Arias be ordered to:
1.

Pay the principal amount of P3,500,000.00 plus interest of 12% compounded annually starting
October 1, 1993 or an estimated amount of P8,558,591.65;

2.

Pay the following items of damages:

a)

Moral damages in the amount of P100,000.00;

b)

Actual damages in the amount of P100,000.00;

c)

Exemplary damages in the amount of P100,000.00;

d)
e)

[Attorneys] fee in the amount of P50,000.00 plus 20% of recoverable amount from the
[petitioner].
[C]ost of suit.[11]

In their Answer with Counterclaim,[12] petitioner and Arias averred that they are willing to return the principal amount of P3.5
million but without any interest as the same was not agreed upon. In their Pre-Trial Brief,[13] they reiterated that the only remaining
issue between the parties is the imposition of interest. They argued that since the Conditional Deed of Sale provided only for the return
of the downpayment in case of breach, they cannot be held liable to pay legal interest as well.[14]

In its Pre-Trial Order[15] dated June 29, 2001, the RTC noted that the parties agreed that the principal amount of 3.5 million
pesos should be returned to the [respondent-spouses] by the [petitioner] and the issue remaining [is] whether x x x [respondentspouses] are entitled to legal interest thereon, damages and attorneys fees.[16]
Trial ensued thereafter. After the presentation of the respondent-spouses evidence, the trial court set the presentation of Arias
and petitioners evidence on September 3, 2003.[17]However, despite several postponements, petitioner and Arias failed to appear hence
they were deemed to have waived the presentation of their evidence. Consequently, the case was deemed submitted for decision.[18]
Ruling of the Regional Trial Court
On May 7, 2004, the RTC rendered its Decision[19] finding respondent-spouses entitled to interest but only at the rate of 6% per annum
and not 12% as prayed by them. [20] It also found respondent-spouses entitled to attorneys fees as they were compelled to litigate to
protect their interest.[21]
The dispositive portion of the RTC Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the [respondent-spouses]
and ordering the [petitioner and Roberto Arias] to jointly and severally:
1.
Pay [respondent-spouses] the principal amount of Three Million Five Hundred Thousand pesos
(P3,500,000.00) with an interest of 6% compounded annually starting October 1, 1993 and attorneys fee in the
amount of Fifty Thousand pesos (P50,000.00) plus 20% of the recoverable amount from the defendants and cost of
the suit.
The Compulsory Counter Claim is hereby dismissed for lack of factual evidence.
SO ORDERED.[22]

Ruling of the Court of Appeals

Aggrieved, petitioner and Arias filed their notice of appeal.[23] The CA noted that the only issue submitted for its resolution is whether
it is proper to impose interest for an obligation that does not involve a loan or forbearance of money in the absence of stipulation of the
parties.[24]
On May 12, 2006, the CA rendered the assailed Decision affirming the ruling of the RTC finding the imposition of 6%
interest proper.[25] However, the same shall start to run only from September 27, 2000 when respondent-spouses formally demanded
the return of their money and not from October 1993 when the contract was executed as held by the RTC. The CA also modified the
RTCs ruling as regards the liability of Arias. It held that Arias could not be held solidarily liable with petitioner because he merely
acted as agent of the latter. Moreover, there was no showing that he expressly bound himself to be personally liable or that he
exceeded the limits of his authority. More importantly, there was even no showing that Arias was authorized to act as agent of
petitioner.[26] Anent the award of attorneys fees, the CA found the award by the trial court (P50,000.00 plus 20% of the recoverable
amount) excessive[27] and thus reduced the same to P100,000.00.[28]

The dispositive portion of the CA Decision reads:

WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six percent (6%) per annum,
computed from September 27, 2000 until its full payment before finality of the judgment. If the adjudged principal
and the interest (or any part thereof) remain[s] unpaid thereafter, the interest rate shall be adjusted to twelve percent
(12%) per annum, computed from the time the judgment becomes final and executory until it is fully satisfied. The
award of attorneys fees is hereby reduced to P100,000.00. Costs against the [petitioner].
SO ORDERED.[29]

Petitioner moved for reconsideration which was denied in the August 31, 2006 Resolution of the CA.
Hence, this petition raising the sole issue of whether the imposition of interest and attorneys fees is proper.
Petitioners Arguments
Petitioner insists that she is not bound to pay interest on the P3.5 million because the Conditional Deed of Sale only provided for the
return of the downpayment in case of failure to comply with her obligations. Petitioner also argues that the award of attorneys fees in
favor of the respondent-spouses is unwarranted because it cannot be said that the latter won over the former since the CA even
sustained her contention that the imposition of 12% interest compounded annually is totally uncalled for.
Respondent-spouses Arguments
Respondent-spouses aver that it is only fair that interest be imposed on the amount they paid considering that petitioner failed to return
the amount upon demand and had been using the P3.5 million for her benefit. Moreover, it is undisputed that petitioner failed to
perform her obligations to relocate the house outside the perimeter of the subject property and to complete the necessary
documents. As regards the attorneys fees, they claim that they are entitled to the same because they were forced to litigate when
petitioner unjustly withheld the amount. Besides, the amount awarded by the CA is even smaller compared to the filing fees they paid.
Our Ruling
The petition lacks merit.
Interest may be imposed even in the absence of stipulation in the
contract.

We sustain the ruling of both the RTC and the CA that it is proper to impose interest notwithstanding the absence of
stipulation in the contract. Article 2210 of the Civil Code expressly provides that [i]nterest may, in the discretion of the court, be
allowed upon damages awarded for breach of contract. In this case, there is no question that petitioner is legally obligated to return
the P3.5 million because of her failure to fulfill the obligation under the Conditional Deed of Sale, despite demand. She has in fact
admitted that the conditions were not fulfilled and that she was willing to return the full amount of P3.5 million but has not actually

done so. Petitioner enjoyed the use of the money from the time it was given to her[30] until now. Thus, she is already in default of her
obligation from the date of demand, i.e., on September 27, 2000.
The interest at the rate of 12% is applicable in the instant case.

Anent the interest rate, the general rule is that the applicable rate of interest shall be computed in accordance with the
stipulation of the parties.[31] Absent any stipulation, the applicable rate of interest shall be 12% per annum when the obligation arises
out of a loan or a forbearance of money, goods or credits. In other cases, it shall be six percent (6%).[32] In this case, the parties did not
stipulate as to the applicable rate of interest. The only question remaining therefore is whether the 6% as provided under Article 2209
of the Civil Code, or 12% under Central Bank Circular No. 416, is due.
The contract involved in this case is admittedly not a loan but a Conditional Deed of Sale. However, the contract provides
that the seller (petitioner) must return the payment made by the buyer (respondent-spouses) if the conditions are not fulfilled. There is
no question that they have in fact, not been fulfilled as the seller (petitioner) has admitted this. Notwithstanding demand by the buyer
(respondent-spouses), the seller (petitioner) has failed to return the money and
should be considered in default from the time that demand was made on September 27, 2000.
Even if the transaction involved a Conditional Deed of Sale, can the stipulation governing the return of the money be
considered as a forbearance of money which required payment of interest at the rate of 12%? We believe so.
In Crismina Garments, Inc. v. Court of Appeals,[33] forbearance was defined as a contractual obligation of lender or creditor
to refrain during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable. This
definition describes a loan where a debtor is given a period within which to pay a loan or debt. In such case, forbearance of money,
goods or credits will have no distinct definition from a loan. We believe however, that the phrase forbearance of money, goods or
credits is meant to have a separate meaning from a loan, otherwise there would have been no need to add that phrase as a loan is
already sufficiently defined in the Civil Code.[34] Forbearance of money, goods or credits should therefore refer to arrangements other
than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending happening of certain
events or fulfillment of certain conditions. In this case, the respondent-spouses parted with their money even before the conditions
were fulfilled. They have therefore allowed or granted forbearance to the seller (petitioner) to use their money pending fulfillment of
the conditions. They were deprived of the use of their money for the period pending fulfillment of the conditions and when those
conditions were breached, they are entitled not only to the return of the principal amount paid, but also to compensation for the use of
their money. And the compensation for the use of their money, absent any stipulation, should be the same rate of legal interest
applicable to a loan since the use or deprivation of funds is similar to a loan.
Petitioners unwarranted withholding of the money which rightfully pertains to respondent-spouses amounts to forbearance of
money which can be considered as an involuntary loan.Thus, the applicable rate of interest is 12% per annum. In Eastern Shipping
Lines, Inc. v. Court of Appeals,[35]cited in Crismina Garments, Inc. v. Court of Appeals,[36] the Court suggested the following
guidelines:

I.

When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title
XVIII on Damages of the Civil Code govern in determining the measure of recoverable damages.

II.

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

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

2.

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

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

3.

When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.[37]

Eastern Shipping Lines, Inc. v. Court of Appeals[38]and its predecessor case, Reformina v. Tongol[39] both involved torts cases
and hence, there was no forbearance of money, goods, or credits. Further, the amount claimed (i.e., damages) could not be established
with reasonable certainty at the time the claim was made. Hence, we arrived at a different ruling in those cases.
Since the date of demand which is September 27, 2000 was satisfactorily established during trial, then the interest rate of
12% should be reckoned from said date of demand until the principal amount and the interest thereon is fully satisfied.
The award of attorneys fees is warranted.
Under Article 2208 of the Civil Code, attorneys fees may be recovered:
xxxx
(2) When the defendants act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest;
xxxx
(11)

In any other case where the court deems it just and equitable that attorneys fees and expenses of litigation
should be recovered.

In all cases, the attorneys fees and expenses of litigation must be reasonable.
Considering the circumstances of the instant case, we find respondent-spouses entitled to recover attorneys fees. There is no
doubt that they were forced to litigate to protect their interest, i.e., to recover their money. However, we find the amount
of P50,000.00 more appropriate in line with the policy enunciated in Article 2208 of the Civil Code that the award of attorneys fees
must always be reasonable.

WHEREFORE, the Petition for Review is DENIED. The May 12, 2006 Decision of the Court of Appeals in CA-G.R. CV
No. 83123 is AFFIRMED with MODIFICATIONS that the rate of interest shall be twelve percent (12%) per annum, computed
from September 27, 2000 until fully satisfied. The award of attorneys fees is further reduced to P50,000.00.
SO ORDERED.
PRISMA CONSTRUCTION &
DEVELOPMENT CORPORATION and
ROGELIO S. PANTALEON,
Petitioners,

G.R. No. 160545

Present:

versus -

NACHURA, J.,

BRION, Acting Chairperson,

DEL CASTILLO,
ABAD, and
PEREZ, JJ.

ARTHUR F. MENCHAVEZ ,
Respondent.
Promulgated:

March 9, 2010

x------------------------------------------------------------------------------------------x
DECISION
BRION, J.:

We resolve in this Decision the petition for review on certiorari[1] filed by petitioners Prisma
Construction & Development Corporation (PRISMA) and Rogelio S. Pantaleon (Pantaleon)
(collectively, petitioners) who seek to reverse and set aside the Decision [2] dated May 5, 2003

and the Resolution[3] dated October 22, 2003 of the Former Ninth Division of the Court of Appeals
(CA) in CA-G.R. CV No. 69627. The assailed CA Decision affirmed the Decision of the Regional
Trial Court (RTC), Branch 73, Antipolo City in Civil Case No. 97-4552 that held the petitioners
liable for payment of P3,526,117.00 to respondent Arthur F. Menchavez (respondent), but
modified the interest rate from 4% per month to 12% per annum, computed from the filing of the
complaint to full payment. The assailed CA Resolution denied the petitioners Motion for
Reconsideration.

FACTUAL BACKGROUND

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

On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA,
obtained

a P1,000,000.00[4] loan

from

the

respondent,

with

monthly

interest

of P40,000.00 payable for six months, or a total obligation of P1,240,000.00 to be paid

within six (6) months,[5] under the following schedule of payments:
January 8, 1994 . P40,000.00
February 8, 1994 ... P40,000.00
March 8, 1994 ... P40,000.00
April 8, 1994 . P40,000.00
May 8, 1994 .. P40,000.00
June 8, 1994 P1,040,000.00[6]
Total P1,240,000.00
To secure the payment of the loan, Pantaleon issued a promissory note [7] that states:
I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO
HUNDRED FORTY THOUSAND PESOS (P1,240,000), Philippine Currency, from Mr.
Arthur F. Menchavez, representing a six-month loan payable according to the
following schedule:

January 8, 1994 . P40,000.00

February 8, 1994 ... P40,000.00

March 8, 1994 ... P40,000.00
April 8, 1994 . P40,000.00
May 8, 1994 .. P40,000.00
June 8, 1994 P1,040,000.00

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

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

From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to
the respondent:
September 8, 1994 P320,000.00
October 8, 1995.P600,000.00
November 8, 1995.....P158,772.00
January 4, 1997 P30,000.00[11]

As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00. However, the
respondent found that the petitioners still had an outstanding balance ofP1,364,151.00 as of
January 4, 1997, to which it applied a 4% monthly interest.[12] Thus, on August 28, 1997, the
respondent filed a complaint for sum of money with the RTC to enforce the unpaid balance, plus
4% monthly interest, P30,000.00 in attorneys fees, P1,000.00 per court appearance and costs
of suit.[13]

In their Answer dated October 6, 1998, the petitioners admitted the loan of P1,240,000.00, but
denied the stipulation on the 4% monthly interest, arguing that the interest was not provided in

the promissory note. Pantaleon also denied that he made himself personally liable and that he
made representations that the loan would be repaid within six (6) months. [14]

THE RTC RULING

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

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

THE CA RULING

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

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

THE PETITION

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

48%

per

annum

to

12%

per

annum,

but

failed

to

consider

that

the

amount

of P3,526,117.00 that the RTC ordered them to pay includes the compounded 4% monthly
interest.

THE CASE FOR THE RESPONDENT

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

THE ISSUE

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

OUR RULING

We find the petition meritorious.

Interest due should be stipulated in writing;
otherwise, 12% per annum

Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.[20] When the terms of a contract are clear and leave no
doubt as to the intention of the contracting parties, the literal meaning of its stipulations governs.
[21]

In such cases, courts have no authority to alter the contract by construction or to make a new

contract for the parties; a court's duty is confined to the interpretation of the contract the parties
made for themselves without regard to its wisdom or folly, as the court cannot supply material
stipulations or read into the contract words the contract does not contain. [22] It is only when the
contract is vague and ambiguous that courts are permitted to resort to the interpretation of its
terms to determine the parties intent.

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

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

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

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

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

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

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

Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon v.
Salazar[35] of 6% per month or 72% per annum interest on a P60,000.00 loan; in Ruiz v. Court of
Appeals,[36] of 3% per month or 36% per annum interest on a P3,000,000.00 loan; in Imperial v.

Jaucian,[37] of 16% per month or 192% per annum interest on a P320,000.00 loan; in Arrofo v.
Quio,[38] of 7% interest per month or 84% per annum interest on a P15,000.00 loan; in Bulos, Jr. v.
Yasuma,[39] of 4% per month or 48% per annum interest on a P2,500,000.00 loan; and in Chua v.
Timan,[40] of 7% and 5% per month for loans totalling P964,000.00. We note that in all these
cases, the terms of the loans were open-ended; the stipulated interest rates were applied for an
indefinite period.

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

It is a familiar doctrine in obligations and contracts that the parties are bound by the
stipulations, clauses, terms and conditions they have agreed to, which is the law between them,
the only limitation being that these stipulations, clauses, terms and conditions are not contrary to
law,

morals,

public

order

or

public

policy. [42] The

payment

of

thespecific

sum

of

money of P40,000.00 per month was voluntarily agreed upon by the petitioners and the
respondent. There is nothing from the records and, in fact, there is no allegation showing that
petitioners were victims of fraud when they entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00 per
month for a period of six (6) months, or from December 8, 1993 to June 8, 1994, for a total
principal and interest amount of P1,240,000.00. Thereafter, interest at the rate of 12% per
annum shall apply. The amounts already paid by the petitioners during the pendency of the suit,
amounting to P1,228,772.00 as of February 12, 1999,[43] should be deducted from the total
amount due, computed as indicated above. We remand the case to the trial court for the actual
computation of the total amount due.
Doctrine of Estoppel not applicable

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

We disagree with the respondents contention.

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

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

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

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

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

[G.R. No. 154129. July 8, 2005]

TERESITA
DIO, petitioner,
vs. SPOUSES
[1]
MARTA JAPOR, respondents.

VIRGILIO

and

LUZ

ROCES

JAPOR

and

DECISION
QUISUMBING, J.:
For review on certiorari is the Decision,[2] dated February 22, 2002, of the Court of Appeals, in the
consolidated cases CA-G.R. CV No. 51521 and CA-G.R. SP No. 40457. The decretal portion read:
WHEREFORE, premises considered, in CA-G.R. CV No. 51521, the decision of the trial court is AFFIRMED with
MODIFICATION. Judgment is rendered as follows:
1. Declaring the Real Estate Mortgage to be valid;
2. Fixing the interest at 12% per annum and an additional 1% penalty charge per month such that
plaintiffs-appellants contractual obligation under the deed of real estate mortgage would amount
toP1,252,674.00;
3. Directing defendant-appellee Dio to give the surplus of P2,247,326.00 to plaintiffs-appellants; and
4. Affirming the dissolution of the writ of preliminary injunction previously issued by the trial court.
No pronouncement as to costs.
The Petition in CA-G.R. SP No. 40457 is DENIED for being moot and academic.
SO ORDERED.[3]
Equally assailed in this petition is the Resolution,[4] dated July 2, 2002, of the appellate court, denying
Teresita Dios Motion for Partial Reconsideration of March 19, 2002 and the Spouses Japor and Marta
Japors Motion for Reconsideration dated March 20, 2002.
The antecedent facts are as follows:
Herein respondents Spouses Virgilio Japor and Luz Roces Japor were the owners of an 845.5 squaremeter residential lot including its improvements, situated in Barangay Ibabang Mayao, Lucena City, as shown
by Transfer Certificate of Title (TCT) No. T-39514. Adjacent to the Japors lot is another lot owned by
respondent Marta Japor, which consisted of 325.5 square meters and titled under TCT No. T-15018.

On August 23, 1982, the respondents obtained a loan of P90,000 from the Quezon Development Bank
(QDB), and as security therefor, they mortgaged the lots covered by TCT Nos. T-39514 and T-15018 to QDB,
as evidenced by a Deed of Real Estate Mortgage duly executed by and between the respondents and QDB.
On December 6, 1983, respondents and QDB amended the Deed of Real Estate Mortgage increasing
respondents loan to P128,000.
The respondents failed to pay their aforesaid loans. However, before the bank could foreclose on the
mortgage, respondents, thru their broker, one Lucia G. Orian, offered to mortgage their properties to petitioner
Teresita Dio. Petitioner prepared a Deed of Real Estate Mortgage, whereby respondents mortgaged anew the
two properties already mortgaged with QDB to secure the timely payment of a P350,000 loan that respondents
had from petitioner Dio. The Deed of Real Estate Mortgage, though dated January 1989, was actually
executed on February 13, 1989 and notarized on February 17, 1989.
Under the terms of the deed, respondents agreed to pay the petitioner interest at the rate of five percent
(5%) a month, within a period of two months or until April 14, 1989. In the event of default, an additional
interest equivalent to five percent (5%) of the amount then due, for every month of delay, would be charged on
them.
The respondents failed to settle their obligation to petitioner on April 14, 1989, the agreed deadline for
settlement.
On August 27, 1991, petitioner made written demands upon the respondents to pay their debt.
Despite repeated demands, respondents did not pay, hence petitioner applied for extrajudicial foreclosure
of the mortgage. The auction of the unredeemed properties was set for February 26, 1992.
Meanwhile, on February 24, 1992, respondents filed an action for Fixing of Contractual Obligation with
Prayer for Preliminary Mandatory Injunction/Restraining Order, docketed as Civil Case No. 92-26, with the
Regional Trial Court (RTC) of Lucena City. Respondents prayed that judgment be rendered fixing the
contractual obligations of plaintiffs with the defendant Dio plus legal or allowable interests thereon. [5]
The trial court issued an Order enjoining the auction sale of the aforementioned mortgaged properties.
On June 15, 1992, the Japors filed a Motion to Admit Amended Complaint with an attached copy of
their Amended Complaint praying that the Deed of Real Estate Mortgage dated February 13, 1989 be
declared null and void, but reiterating the plea that the trial court fix the contractual obligations of the Japors
with Dio. The trial court denied the motion.
On September 27, 1994, respondents filed with the appellate court, a petition for certiorari, docketed as
CA-G.R. SP No. 35315, praying that the Court of Appeals direct the trial court to admit their Amended
Complaint. The appellate court denied said petition.[6]
On December 11, 1995, the trial court handed down the following judgment:
WHEREFORE, in view of the foregoing considerations, judgment is rendered:
1. Dismissing the complaint for failure of the plaintiffs to substantiate their affirmative allegations;
2. Declaring the Real Estate Mortgage (Exhs. A to A-13/Exhs. 3 to 3-D) to be valid and binding as
between the parties, more particularly the plaintiffs Virgilio Japor, Luz Japor and Marta Japor or the
latters substituted heir or heirs, as the case may be;

3. Dissolving the writ of preliminary injunction previously issued by this Court; and
4. To pay the cost of this suit.
SO ORDERED.[7]
On January 17, 1996, respondents filed their notice of appeal. On April 26, 1996, they also filed a Petition
for Temporary Restraining Order And/Or Mandatory Injunction in Aid of Appellate Jurisdiction with the
Court of Appeals.
On May 8, 1996, petitioner Dio as the sole bidder in an auction purchased the properties for P3,500,000.
On May 9, 1996, the Court of Appeals denied respondents application for a temporary restraining order.[8]
On October 9, 1996, the appellate court consolidated CA-G.R. CV No. 51521 and CA-G.R. SP No. 40457.
As stated at the outset, the appellate court affirmed the decision of the trial court with respect to the validity
of the Deed of Real Estate Mortgage, but modified the interest and penalty rates for being unconscionable and
exorbitant.
Before us, petitioner assigns the following errors allegedly committed by the appellate court:
I
THE ALLEGED INIQUITY OF THE STIPULATED INTEREST AND PENALTY WAS NOT RAISED BEFORE THE
TRIAL COURT NOR ASSIGNED AS AN ERROR IN RESPONDENTS APPEAL.
II
THE STIPULATED INTEREST AND PENALTY ARE NOT EXCESSIVE, INIQUITOUS, UNCONSCIONABLE,
EXORBITANT AND CONTRARY TO MORAL[S].
III
PAYMENT OF THE SURPLUS OF P2,247,326.00 TO RESPONDENTS WOULD RESULT IN THEIR UNJUST
ENRICHMENT.
IV
RESPONDENTS APPEAL SHOULD HAVE BEEN DISMISSED DUE TO FORUM SHOPPING.[9]
Simply stated, the issue is: Did the Court of Appeals err when it held that the stipulations on interest and
penalty in the Deed of Real Estate Mortgage is contrary to morals, if not illegal? Corollarily, were respondents
entitled to any surplus on the auction sale price?
On the main issue, petitioner contends that The Usury Law [10] has been rendered ineffective by Central
Bank Circular No. 905, series of 1982 and accordingly, usury has become legally non-existent in this
jurisdiction, thus, interest rates may accordingly be pegged at such levels or rates as the lender and the
borrower may agree upon. Petitioner avers she has not violated any law considering she is not engaged in the
business of money-lending. Moreover, she claims she has suffered inconveniences and incurred expenses for
some 13 years now as a result of respondents failure to pay her. Petitioner further points out that the 5%
interest rate was proposed by the respondents and have only themselves to blame if the interests and

penalties ballooned to its present amount due to their willful delay and default in payment. The appellate court
thus erred, petitioner now insists, in applying Sps. Almeda v. Court of Appeals[11] andMedel v. Court of
Appeals[12] to reduce the interest rate to 12% per annum and the penalty to 1% per month.
Respondents admit they owe petitioner P350,000 and do not question any lawful interest on their loan but
they maintain that the Deed of Real Estate Mortgage is null and void since it did not state the true intent of the
parties, which limited the 5% interest rate to only two (2) months from the date of the loan and which did not
provide for penalties and other charges in the event of default or delay. Respondents vehemently contend that
they never consented to the said stipulations and hence, should not be bound by them.
On the first issue, we are constrained to rule against the petitioners contentions.
Central Bank Circular No. 905, which took effect on January 1, 1983, effectively removed the ceiling on
interest rates for both secured and unsecured loans, regardless of maturity. However, nothing in said Circular
grants lenders carte blanche authority to impose interest rates which would result in the enslavement of their
borrowers or to the hemorrhaging of their assets. [13] While a stipulated rate of interest may not technically and
necessarily be usurious under Circular No. 905, usury now being legally non-existent in our jurisdiction,
[14]
nonetheless, said rate may be equitably reduced should the same be found to be iniquitous,
unconscionable, and exorbitant, and hence, contrary to morals (contra bonos mores), if not against the law.
[15]
What is iniquitous, unconscionable, and exorbitant shall depend upon the factual circumstances of each
case.
In the instant case, the Court of Appeals found that the 5% interest rate per month and 5% penalty rate per
month for every month of default or delay is in reality interest rate at 120%per annum. This Court has held that
a stipulated interest rate of 5.5% per month or 66% per annum is void for being iniquitous or unconscionable.
[16]
We have likewise ruled that an interest rate of 6% per month or 72% per annum is outrageous and
inordinate.[17] Conformably to these precedent cases, a combined interest and penalty rate at 10% per month
or 120% per annum, should be deemed iniquitous, unconscionable, and inordinate. Hence, we sustain the
appellate court when it found the interest and penalty rates in the Deed of Real Estate Mortgage in the present
case excessive, hence legally impermissible. Reduction is legally called for now in rates of interest and penalty
stated in the mortgage contract.
What then should the interest and penalty rates be?
The evidence shows that it was indeed the respondents who proposed the 5% interest rate per month for
two (2) months. Having agreed to said rate, the parties are now estopped from claiming otherwise. For the
succeeding period after the two months, however, the Court of Appeals correctly reduced the interest rate to
12% per annum and the penalty rate to 1% per month, in accordance with Article 2227[18] of the Civil Code.
But were respondents entitled to the surplus of P2,247,326[19] as a result of the overpricing in the auction?
We note that the surplus was the result of the computation by the Court of Appeals of respondents
outstanding liability based on a reduced interest rate of 12% per annum and the reduced penalty rate of 1%
per month. The court a quo then proceeded to apply our ruling in Sulit v. Court of Appeals,[20] to the effect that
in case of surplus in the purchase price, the mortgagee is liable for such surplus as actually comes into his
hands, but where he sells on credit instead of cash, he must still account for the proceeds as if the price were
paid in cash, for such surplus stands in the place of the land itself with respect to liens thereon or vested rights
therein particularly those of the mortgagor or his assigns.
In the instant case, however, there is no surplus to speak of. In adjusting the interest and penalty rates to
equitable and conscionable levels, what the Court did was merely to reflect the true price of the land in the
foreclosure sale. The amount of the petitioners bid merely represented the true amount of the mortgage debt.

No surplus in the purchase price was thus created to which the respondents as the mortgagors have a vested
right.
WHEREFORE, the Decision dated February 22, 2002, of the Court of Appeals in the consolidated cases
CA-G.R. CV No. 51521 and CA-G.R. SP No. 40457 is hereby AFFIRMED with MODIFICATION. The interest
rate for the subject loan owing to QDB, or whoever is now the party mortgagee, is hereby fixed at five percent
(5%) for the first two (2) months following the date of execution of the Deed of Real Estate Mortgage, and
twelve percent (12%) for the succeeding period. The penalty rate thereafter shall be fixed at one percent (1%)
per month. Petitioner Teresita Dio is declared free of any obligation to return to the respondents, the Spouses
Virgilio Japor and Luz Roces Japor and Marta Japor, any surplus in the foreclosure sale price. There being no
surplus, after the court below had applied our ruling in Sulit,[21] respondents could not legally claim any
overprice from the petitioner, much less the amount ofP2,247,326.00.
SO ORDERED.

SALVADOR
CHUA,

CHUA

and

Petitioners,

VIOLETA G.R. No. 170452

Present:

QUISUMBING, J., Chairperson,

CORONA,
- versus -

CARPIO MORALES,

VELASCO, JR., and

BRION, JJ.

RODRIGO TIMAN, MA.

and LYDIA TIMAN,

LYNN

TIMAN Promulgated:

Respondents.

August 13, 2008

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

DECISION
QUISUMBING, J.:
Before

us

is

petition

for

review

on

certiorari

assailing

the

Decision [1] and

Resolution[2] dated March 9, 2005 and November 24, 2005, respectively, of the Court of Appeals
in CA-G.R. CV No. 82865, which had affirmed the Decision [3] dated May 14, 2004 of the Regional
Trial Court (RTC) of Quezon City, Branch 86, in Civil Case No. Q-00-41276. The Court of Appeals
reduced the stipulated original interest rates of 7% and 5% per month to only 1% per month or
12% per annum and ordered petitioners to refund the excess interest payments by respondents.
The pertinent facts are as follows:
In February and March 1999, petitioners Salvador and Violeta Chua granted respondents
Rodrigo, Ma. Lynn and Lydia Timan the following loans: a) P100,000; b)P200,000; c) P150,000;
d) P107,000; e) P200,000; and f) P107,000. These loans were evidenced by promissory notes
with interest of 7% per month, which was later reduced to 5% per month. Rodrigo and
Ma. Lynn issued five (5) postdated checks to secure the loans, except for the P150,000 loan
which was secured by a postdated check issued by Lydia.
Respondents paid the loans initially at 7% interest rate per month until September 1999
and then at 5% interest rate per month from October to December 1999. Sometime in March
2000, respondents offered to pay the principal amount of the loans through a Philippine National
Bank managers check worth P764,000, but petitioners refused to accept the same insisting that
the principal amount of the loans totalled P864,000.

On May 3, 2000, respondents deposited P864,000 with the Clerk of Court of the RTC of Quezon
City. Later, they filed a case for consignation and damages. Petitioners moved to dismiss the
case, but the RTC denied the motion, as well as the subsequent motion for reconsideration.
By virtue of an order of Partial Judgment [4] dated October 16, 2002, the Clerk of Court of the RTC
of Quezon City released the amount of P864,000 to petitioners.
Trial on the validity of the stipulated interests on the subject loans, as well as on the issue of
damages, then proceeded.
On May 14, 2004, the RTC rendered a decision in favor of respondents. It ruled that the original
stipulated interest rates of 7% and 5% per month were excessive. It further ordered petitioners
to refund to respondents all interest payments in excess of the legal rate of 1% per month or
12% per annum. However, the RTC denied petitioners claim for damages.
On appeal, the Court of Appeals affirmed the trial courts decision. The Court of Appeals declared
illegal the stipulated interest rates of 7% and 5% per month for being excessive, iniquitous,
unconscionable and exorbitant. Accordingly, the Court of Appeals reduced the stipulated interest
rates of 7% and 5% per month (equivalent to 84% and 60% per annum, respectively) to a fair
and reasonable rate of 1% per month or 12% per annum. The Court of Appeals also ordered
petitioners

to

refund

to

respondents

all

interest

payments

in

excess

of

12%

per

annum. Petitioners sought reconsideration, but it was denied.

Hence, this petition raising the lone issue of:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE
ERROR OR ACTED NOT IN ACCORD WITH THE LAW AND JURISPRUDENCE WHEN IT
AFFIRMED THE JUDGMENT OF THE REGIONAL TRIAL COURT ORDERING THE RETURN
OF THE EXCESS INTEREST TO RESPONDENTS. [5]
Essentially, the main issue is: (1) Did the Court of Appeals err in ruling that the original
stipulated interest rates of 7% and 5%, equivalent to 84% and 60% per annum, are
unconscionable, and in ordering petitioners to refund to respondents all payments of interest in
excess of 12% per annum?
Petitioners aver that the stipulated interest of 5% monthly and higher cannot be considered
unconscionable because these rates are not usurious by virtue of Central Bank (C.B.) Circular No.

905-82[6] which

had

expressly removed

the

interest ceilings prescribed

by the

Usury

Law. Petitioners add that respondents were in pari delicto since they agreed on the stipulated
interest rates of 7% and 5% per month. They further aver they honestly believed that the
interest rates they imposed on respondents loans were not usurious.
Respondents, invoking Medel v. Court of Appeals,[7] counter that the stipulated interest rates of 7%
and 5% per month are iniquitous, unconscionable and exorbitant, thus, they are entitled to the
return of the excessive interest paid. They also contend that petitioners cannot raise the defense
of in pari delicto for the first time on appeal. They further contend that the defense of good faith is
a factual issue which cannot be raised by petitioners in a petition for review under Rule 45 of the
Rules of Civil Procedure.
The petition is patently devoid of merit.
The stipulated interest rates of 7% and 5% per month imposed on respondents loans must
be equitably reduced to 1% per month or 12% per annum.[8] We need not unsettle the principle we
had affirmed in a plethora of cases that stipulated interest rates of 3% [9] per month and
higher[10] are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for
being contrary to morals, if not against the law.[11] While C.B. Circular No. 905-82, which took effect
on January 1, 1983, effectively removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity,[12] nothing in the said circular could possibly be read as
granting carte blanche authority to lenders to raise interest rates to levels which would either
enslave their borrowers or lead to a hemorrhaging of their assets.[13]
Petitioners cannot also raise the defenses of in pari delicto and good faith. The defense
of in pari delicto was not raised in the RTC, hence, such an issue cannot be raised for the first
time on appeal. Petitioners must have seasonably raised it in the proceedings before the lower
court, because questions raised on appeal are confined only within the issues framed by the
parties.[14] The defense of good faith must also fail because such an issue is a question of
fact[15] which may not be properly raised in a petition for review under Rule 45 of the Rules of
Civil Procedure which allows only questions of law. [16]

As well set forth in Medel:[17]

We agree that the stipulated rate of interest at 5.5% per month on
the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant.

However, we can not consider the rate usurious because this Court has consistently
held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has
expressly removed the interest ceilings prescribed by the Usury Law and that the
Usury Law is now legally inexistent.
In Security Bank and Trust Company vs. Regional Trial Court of Makati,
Branch 61, the Court held that CB Circular No. 905 did not repeal nor in any way
amend the Usury Law but simply suspended the latters effectivity. Indeed, we have
held that a Central Bank Circular can not repeal a law. Only a law can repeal another
law. In the recent case of Florendo vs. Court of Appeals, the Court reiterated the
ruling that by virtue of CB Circular 905, the Usury Law has been rendered
ineffective. Usury has been legally non-existent in our jurisdiction. Interest can now
be charged as lender and borrower may agree upon.
Nevertheless, we find the interest at 5.5% per month, or 66% per annum,
stipulated upon by the parties in the promissory note iniquitous or unconscionable,
and, hence, contrary to morals (contra bonos mores), if not against the law. The
stipulation is void.

WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and Resolution
dated March 9, 2005 and November 24, 2005, respectively, of the Court of Appeals in CA-G.R. CV
No. 82865 are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 182963

June 3, 2013

SPOUSES DEO AGNER and MARICON AGNER, Petitioners,

vs.
BPI FAMILY SAVINGS BANK, INC., Respondent.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the April 30, 2007 Decision 1 and May 19, 2008 Resolution2of the
Court of Appeals in CAG.R. CV No. 86021, which affirmed the August 11, 2005 Decision 3 of the Regional Trial Court,
Branch 33, Manila City.
On February 15, 2001, petitioners spouses Deo Agner and Maricon Agner executed a Promissory Note with Chattel
Mortgage in favor of Citimotors, Inc. The contract provides, among others, that: for receiving the amount of Php834,
768.00, petitioners shall pay Php 17,391.00 every 15th day of each succeeding month until fully paid; the loan is
secured by a 2001 Mitsubishi Adventure Super Sport; and an interest of 6% per month shall be imposed for failure
to pay each installment on or before the stated due date. 4
On the same day, Citimotors, Inc. assigned all its rights, title and interests in the Promissory Note with Chattel
Mortgage to ABN AMRO Savings Bank, Inc. (ABN AMRO), which, on May 31, 2002, likewise assigned the same to
respondent BPI Family Savings Bank, Inc.5
For failure to pay four successive installments from May 15, 2002 to August 15, 2002, respondent, through counsel,
sent to petitioners a demand letter dated August 29, 2002, declaring the entire obligation as due and demandable
and requiring to pay Php576,664.04, or surrender the mortgaged vehicle immediately upon receiving the letter.6 As
the demand was left unheeded, respondent filed on October 4, 2002 an action for Replevin and Damages before
the Manila Regional Trial Court (RTC).
A writ of replevin was issued.7 Despite this, the subject vehicle was not seized.8 Trial on the merits ensued. On
August 11, 2005, the Manila RTC Br. 33 ruled for the respondent and ordered petitioners to jointly and severally pay
the amount of Php576,664.04 plus interest at the rate of 72% per annum from August 20, 2002 until fully paid, and
the costs of suit.
Petitioners appealed the decision to the Court of Appeals (CA), but the CA affirmed the lower courts decision and,
subsequently, denied the motion for reconsideration; hence, this petition.
Before this Court, petitioners argue that: (1) respondent has no cause of action, because the Deed of Assignment
executed in its favor did not specifically mention ABN AMROs account receivable from petitioners; (2) petitioners

cannot be considered to have defaulted in payment for lack of competent proof that they received the demand letter;
and (3) respondents remedy of resorting to both actions of replevin and collection of sum of money is contrary to
the provision of Article 14849 of the Civil Code and the Elisco Tool Manufacturing Corporation v. Court of
Appeals10ruling.
The contentions are untenable.
With respect to the first issue, it would be sufficient to state that the matter surrounding the Deed of Assignment had
already been considered by the trial court and the CA. Likewise, it is an issue of fact that is not a proper subject of a
petition for review under Rule 45. An issue is factual when the doubt or difference arises as to the truth or falsehood
of alleged facts, or when the query invites calibration of the whole evidence, considering mainly the credibility of
witnesses, existence and relevancy of specific surrounding circumstances, their relation to each other and to the
whole, and the probabilities of the situation.11 Time and again, We stress that this Court is not a trier of facts and
generally does not weigh anew evidence which lower courts have passed upon.
As to the second issue, records bear that both verbal and written demands were in fact made by respondent prior to
the institution of the case against petitioners.12 Even assuming, for arguments sake, that no demand letter was sent
by respondent, there is really no need for it because petitioners legally waived the necessity of notice or demand in
the Promissory Note with Chattel Mortgage, which they voluntarily and knowingly signed in favor of respondents
predecessor-in-interest. Said contract expressly stipulates:
In case of my/our failure to pay when due and payable, any sum which I/We are obliged to pay under this note
and/or any other obligation which I/We or any of us may now or in the future owe to the holder of this note or to any
other party whether as principal or guarantor x x x then the entire sum outstanding under this note shall, without
prior notice or demand, immediately become due and payable. (Emphasis and underscoring supplied)
A provision on waiver of notice or demand has been recognized as legal and valid in Bank of the Philippine Islands
v. Court of Appeals,13 wherein We held:
The Civil Code in Article 1169 provides that one incurs in delay or is in default from the time the obligor demands the
fulfillment of the obligation from the obligee. However, the law expressly provides that demand is not necessary
under certain circumstances, and one of these circumstances is when the parties expressly waive demand. Hence,
since the co-signors expressly waived demand in the promissory notes, demand was unnecessary for them to be in
default.14
Further, the Court even ruled in Navarro v. Escobido15 that prior demand is not a condition precedent to an action for
a writ of replevin, since there is nothing in Section 2, Rule 60 of the Rules of Court that requires the applicant to
make a demand on the possessor of the property before an action for a writ of replevin could be filed.
Also, petitioners representation that they have not received a demand letter is completely inconsequential as the
mere act of sending it would suffice. Again, We look into the Promissory Note with Chattel Mortgage, which
provides:
All correspondence relative to this mortgage, including demand letters, summonses, subpoenas, or notifications of
any judicial or extrajudicial action shall be sent to the MORTGAGOR at the address indicated on this promissory
note with chattel mortgage or at the address that may hereafter be given in writing by the MORTGAGOR to the
MORTGAGEE or his/its assignee. The mere act of sending any correspondence by mail or by personal delivery to
the said address shall be valid and effective notice to the mortgagor for all legal purposes and the fact that any
communication is not actually received by the MORTGAGOR or that it has been returned unclaimed to the
MORTGAGEE or that no person was found at the address given, or that the address is fictitious or cannot be
located shall not excuse or relieve the MORTGAGOR from the effects of such notice. 16 (Emphasis and underscoring
supplied)

The Court cannot yield to petitioners denial in receiving respondents demand letter. To note, their postal address
evidently remained unchanged from the time they executed the Promissory Note with Chattel Mortgage up to time
the case was filed against them. Thus, the presumption that "a letter duly directed and mailed was received in the
regular course of the mail"17 stands in the absence of satisfactory proof to the contrary.
Petitioners cannot find succour from Ting v. Court of Appeals18 simply because it pertained to violation of Batas
Pambansa Blg. 22 or the Bouncing Checks Law. As a higher quantum of proof that is, proof beyond reasonable
doubt is required in view of the criminal nature of the case, We found insufficient the mere presentation of a copy
of the demand letter allegedly sent through registered mail and its corresponding registry receipt as proof of
receiving the notice of dishonor.
Perusing over the records, what is clear is that petitioners did not take advantage of all the opportunities to present
their evidence in the proceedings before the courts below. They miserably failed to produce the original cash deposit
slips proving payment of the monthly amortizations in question. Not even a photocopy of the alleged proof of
payment was appended to their Answer or shown during the trial. Neither have they demonstrated any written
requests to respondent to furnish them with official receipts or a statement of account. Worse, petitioners were not
able to make a formal offer of evidence considering that they have not marked any documentary evidence during
the presentation of Deo Agners testimony.19
Jurisprudence abounds that, in civil cases, one who pleads payment has the burden of proving it; the burden rests
on the defendant to prove payment, rather than on the plaintiff to prove non-payment. 20 When the creditor is in
possession of the document of credit, proof of non-payment is not needed for it is presumed. 21 Respondent's
possession of the Promissory Note with Chattel Mortgage strongly buttresses its claim that the obligation has not
been extinguished. As held in Bank of the Philippine Islands v. Spouses Royeca: 22
x x x The creditor's possession of the evidence of debt is proof that the debt has not been discharged by payment. A
promissory note in the hands of the creditor is a proof of indebtedness rather than proof of payment. In an action for
replevin by a mortgagee, it is prima facie evidence that the promissory note has not been paid. Likewise, an
uncanceled mortgage in the possession of the mortgagee gives rise to the presumption that the mortgage debt is
unpaid.23
Indeed, when the existence of a debt is fully established by the evidence contained in the record, the burden of
proving that it has been extinguished by payment devolves upon the debtor who offers such defense to the claim of
the creditor.24 The debtor has the burden of showing with legal certainty that the obligation has been discharged by
payment.25
Lastly, there is no violation of Article 1484 of the Civil Code and the Courts decision in Elisco Tool Manufacturing
Corporation v. Court of Appeals.26
In Elisco, petitioner's complaint contained the following prayer:
WHEREFORE, plaintiffs pray that judgment be rendered as follows:
ON THE FIRST CAUSE OF ACTION
Ordering defendant Rolando Lantan to pay the plaintiff the sum of P39,054.86 plus legal interest from the date of
demand until the whole obligation is fully paid;
ON THE SECOND CAUSE OF ACTION
To forthwith issue a Writ of Replevin ordering the seizure of the motor vehicle more particularly described in
paragraph 3 of the Complaint, from defendant Rolando Lantan and/or defendants Rina Lantan, John Doe, Susan
Doe and other person or persons in whose possession the said motor vehicle may be found, complete with

accessories and equipment, and direct deliver thereof to plaintiff in accordance with law, and after due hearing to
confirm said seizure and plaintiff's possession over the same;
PRAYER COMMON TO ALL CAUSES OF ACTION
1. Ordering the defendant Rolando Lantan to pay the plaintiff an amount equivalent to twenty-five percent
(25%) of his outstanding obligation, for and as attorney's fees;
2. Ordering defendants to pay the cost or expenses of collection, repossession, bonding fees and other
incidental expenses to be proved during the trial; and
3. Ordering defendants to pay the costs of suit.
Plaintiff also prays for such further reliefs as this Honorable Court may deem just and equitable under the
premises.27
The Court therein ruled:
The remedies provided for in Art. 1484 are alternative, not cumulative. The exercise of one bars the exercise of the
others. This limitation applies to contracts purporting to be leases of personal property with option to buy by virtue of
Art. 1485. The condition that the lessor has deprived the lessee of possession or enjoyment of the thing for the
purpose of applying Art. 1485 was fulfilled in this case by the filing by petitioner of the complaint for replevin to
recover possession of movable property. By virtue of the writ of seizure issued by the trial court, the deputy sheriff
seized the vehicle on August 6, 1986 and thereby deprived private respondents of its use. The car was not returned
to private respondent until April 16, 1989, after two (2) years and eight (8) months, upon issuance by the Court of
Appeals of a writ of execution.
Petitioner prayed that private respondents be made to pay the sum of P39,054.86, the amount that they were
supposed to pay as of May 1986, plus interest at the legal rate. At the same time, it prayed for the issuance of a writ
of replevin or the delivery to it of the motor vehicle "complete
with accessories and equipment." In the event the car could not be delivered to petitioner, it was prayed that private
respondent Rolando Lantan be made to pay petitioner the amount of P60,000.00, the "estimated actual value" of the
car, "plus accrued monthly rentals thereof with interests at the rate of fourteen percent (14%) per annum until fully
paid." This prayer of course cannot be granted, even assuming that private respondents have defaulted in the
payment of their obligation. This led the trial court to say that petitioner wanted to eat its cake and have it too. 28
In contrast, respondent in this case prayed:
(a) Before trial, and upon filing and approval of the bond, to forthwith issue a Writ of Replevin ordering the
seizure of the motor vehicle above-described, complete with all its accessories and equipments, together
with the Registration Certificate thereof, and direct the delivery thereof to plaintiff in accordance with law and
after due hearing, to confirm the said seizure;
(b) Or, in the event that manual delivery of the said motor vehicle cannot be effected to render judgment in
favor of plaintiff and against defendant(s) ordering them to pay to plaintiff, jointly and severally, the sum
ofP576,664.04 plus interest and/or late payment charges thereon at the rate of 72% per annum from August
20, 2002 until fully paid;
(c) In either case, to order defendant(s) to pay jointly and severally:
(1) the sum of P297,857.54 as attorneys fees, liquidated damages, bonding fees and other
expenses incurred in the seizure of the said motor vehicle; and

(2) the costs of suit.

Plaintiff further prays for such other relief as this Honorable Court may deem just and equitable in the premises. 29
Compared with Elisco, the vehicle subject matter of this case was never recovered and delivered to respondent
despite the issuance of a writ of replevin. As there was no seizure that transpired, it cannot be said that petitioners
were deprived of the use and enjoyment of the mortgaged vehicle or that respondent pursued, commenced or
concluded its actual foreclosure. The trial court, therefore, rightfully granted the alternative prayer for sum of money,
which is equivalent to the remedy of "exacting fulfillment of the obligation." Certainly, there is no double recovery or
unjust enrichment30 to speak of.
1wphi1

All the foregoing notwithstanding, We are of the opinion that the interest of 6% per month should be equitably
reduced to one percent (1%) per month or twelve percent (12%) per annum, to be reckoned from May 16, 2002 until
full payment and with the remaining outstanding balance of their car loan as of May 15, 2002 as the base amount.
Settled is the principle which this Court has affirmed in a number of cases that stipulated interest rates of three
percent (3%) per month and higher are excessive, iniquitous, unconscionable, and exorbitant. 31 While Central Bank
Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both
secured and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as granting
carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead
to a hemorrhaging of their assets.32 Since the stipulation on the interest rate is void for being contrary to morals, if
not against the law, it is as if there was no express contract on said interest rate; thus, the interest rate may be
reduced as reason and equity demand.33
WHEREFORE, the petition is DENIED and the Court AFFIRMS WITH MODIFICATION the April 30, 2007 Decision
and May 19, 2008 Resolution of the Court of Appeals in CA-G.R. CV No. 86021. Petitioners spouses Deo Agner and
Maricon Agner are ORDERED to pay, jointly and severally, respondent BPI Family Savings Bank, Inc. ( 1) the
remaining outstanding balance of their auto loan obligation as of May 15, 2002 with interest at one percent ( 1 o/o)
per month from May 16, 2002 until fully paid; and (2) costs of suit.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 189871

August 13, 2013

DARIO NACAR, PETITIONER,

vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the Decision1 dated September 23, 2008 of the Court of Appeals
(CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October 9, 2009 denying petitioners motion for
reconsideration.
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 Decision3 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
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

BACKWAGES
Date Dismissed

January 24, 1997

Rate per day

P196.00

Date of Decisions

Aug. 18, 1998

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

P196.00/day x 12.36 mos.

= P62,986.56

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
T O 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
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 Resolution 5 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,
2002.9The 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 Execution13 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
ofP95,933.36, 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 Order15 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 Resolution 17 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 Order20 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.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its Resolution 22 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 Decision24 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 arbiter's 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 arbiter's 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,
attorney's 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 arbiter's 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 arbiter's 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 arbiter's 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 arbiter's 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 arbiter's 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
arbiter's 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
arbiter's 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 arbiter's
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 arbiter's 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 arbiter's 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 Arbiter's 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.
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 234 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:
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 X305.136 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
Lines40and 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 BSP-MB 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.

1awp++i1

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.
1wphi1

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:
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.
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.
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.
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.

SOLIDBANK CORPORATION, G.R. No. 171925

(now Metropolitan Bank and Trust Company),
Petitioner,
Present:
CARPIO, J., Chairperson,
NACHURA,
- versus - PERALTA,
DEL CASTILLO,* and
ABAD, JJ.
PERMANENT HOMES, Promulgated:
INCORPORATED,
Respondent. July 23, 2010
x-------------------------------------------------- x

DECISION
CARPIO, J.:
G.R. No. 171925 is a petition for review[1] assailing the Decision[2] promulgated on 29 June 2005 by the Court of Appeals
(appellate court) as well as the Resolution[3]promulgated on 14 March 2006 in CA-G.R. CV No. 75926. The appellate
court granted the petition filed by Permanent Homes, Incorporated (Permanent) and reversed the decision of the Regional
Trial Court of Makati City, Branch 58 (trial court) dated 5 July 2002 in Civil Case No. 98-654. The appellate court
ordered Solidbank Corporation (Solidbank) and Permanent to enter into an express agreement about the applicable interest
rates on Permanents loan. Solidbank was also ordered to render an accounting of Permanents payments, not to impose

interest on interest upon Permanents loans, and to release the remaining amount available under Permanents omnibus
credit line.

The Facts
The appellate court narrated the facts as follows:
The records disclose that PERMANENT HOMES is a real estate development company, and to finance
its housing project known as the Buena Vida Townhomes located within Merville Subdivision, Paraaque
City, it applied and was subsequently granted by SOLIDBANK with an Omnibus Line credit facility in
the total amount of SIXTY MILLION PESOS. Of the entire loan, FIFTY NINE MILLION as [sic] time
loan for a term of up to three hundred sixty (360) days, with interest thereon at prevailing market rates,
and subject to monthly repricing. The remaining ONE MILLION was available for domestic bills
purchase.
To secure the aforesaid loan, PERMANENT HOMES initially mortgaged three (3) townhouse units
within the Buena Vida project in Paraaque. At the time, however, the instant complaint was filed against
SOLIDBANK, a total of thirty six (36) townhouse units were mortgaged with said bank.
Of the 60 million available to PERMANENT HOMES, it availed of a total of 41.5 million pesos, covered
by three (3) promissory notes, which contain the following provisions, thus:
xxx
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.
Contrary, however, to the specific provisions as afore-quoted, there was a standing agreement by the
parties that any increase or decrease in interest rates shall be subject to the mutual agreement of the
parties.
For the first loan availment of PERMANENT HOMES on March 20, 1997, in the amount of 19.6
MILLION, from the initial interest rate of 14.25% per annum (p.a.), the same was increased15% p.a.
effective May 19, 1997; it was again increased to 26% p.a. effective July 18, 1997. It was thereafter
reduced to 20% p.a. effective August 18, 1997, and then increased to 24% p.a.effective September 17,
1997. The rate was increased further to 30% p.a. effective October 17, 1997, then decreased to 27%
p.a. on November 17, 1997, and again increased to 34% p.a.effective December 17, 1997. The rate then
decreased to 30% p.a. on January 16, 1998.
For the second loan availment in the amount of 18 million, the rate was initially pegged at 15.75% p.a.
on June 24, 1997. A month later, the rate increased to 23.5% p.a. It thereafter decreased to 20%
p.a. effective August 24, 1997, but again increased to 22.5% p.a. effective September 24, 1997. For the
next month, the rate surged to 30% p.a., and decreased to 27% p.a. for the month of November. The rate

again surged to 34% p.a. for the month of December, and was decreased to 30% p.a. from January 22,
1998 to February 20, 1998.
For the third loan availment on July 15, 1997, in the amount of 3.9 million, the interest rate was initially
pegged at 35% p.a., but this was decreased to 21% p.a. from August 14 until September 11, 1997. The
rate increased slightly to 23% p.a. on September 12, 1997, and surged to 27% p.a. on October 13,
1997. The rate went down slightly to 27% p.a. for the month of November, and to 26% p.a. for the
month of December. The rate, however, again surged to 30% p.a. on January 12, 1998 before settling
at 29% p.a. for the month of February.
It is [Permanents] stand that SOLIDBANK unilaterally and arbitrarily accelerated the interest rates
without any declared basis of such increases, of which PERMANENT HOMES had not agreed to, or at
the very least, been informed of. This is contrary to their earlier agreement that any interest rate changes
will be subject to mutual agreement of the parties. PERMANENT HOMES further admits that it was not
able to protest such arbitrary increases at the time they were imposed by SOLIDBANK, for fear that
SOLIDBANK might cut off the credit facility it extended to PERMANENT HOMES. Permanent was
then in the midst of the construction of its project in Merville, Paraaque City, and SOLIDBANK knew
that it was relying substantially on the credit facility the latter extended to it.
[Permanent] thus filed a case before the trial court seeking the following: (1) the annulment of the
increases in interest rates on the loans it obtained from SOLIDBANK, on the ground that it was violative
of the principle of mutuality of agreement of the parties, as enunciated in Article 1409 of the New Civil
Code, (2) the fixing of the interest rates at the applicable interest rate, and (3) for the trial court to order
SOLIDBANK to make an accounting of the payments it made, so as to determine the amount of refund
PERMANENT is entitled to, as well as to order SOLIDBANK to release the remaining available balance
of the loan it extended to PERMANENT. In addition, [Permanent] prays for the payment of
compensatory, moral and exemplary damages.
SOLIDBANK, on the other hand, avers that PERMANENT HOMES has no cause of action against it, in
view of the pertinent provisions of the Omnibus Credit Line and the promissory notes agreed to and
signed by PERMANENT HOMES. Thus, in accordance with said provisions, SOLIDBANK was
authorized to, upon due notice, periodically adjust the interest rates on PERMANENT HOMES loan
availments during the monthly interest repricing dates, depending on the changes in prevailing interest
rates in the local and international capital markets. In fact, SOLIDBANK avers that four (4) days before
July 15, 1997, the Bangko Sentral ng Pilipinas (BSP) declared that it could no longer support the
Philippine currency from external speculative forces, hence, the local currency was allowed to seek its
own exchange rate level. As a result of the volatile exchange rate ratio, banks were then hesitant to extend
loans, and in some instances that it granted loans, they had to ensure that they will not be at the losing end
of the deal, so to speak, by the repricing of the interest rates every month. SOLIDBANK insists that
PERMANENT HOMES should not be allowed to renege on its contractual obligations, as it freely and
voluntarily bound itself to the provisions of the Omnibus Credit Line and the promissory notes.
PERMANENT HOMES presented as witnesses Jacqueline S. Lim, its Vice President and Chief Financial
Officer, Engr. Rey A. Romasanta, its Executive Vice President and Chief Operating Officer, and Martha
Julia Flores, its Treasury Officer.
On March 24, 1998, the trial court issued a temporary restraining order (TRO), after a summary hearing,
which enjoined SOLIDBANK from implementing and collecting the increases in interest rates and from
initiating any action, including the foreclosure of the mortgaged properties.
Ms. Lims testimony centered on PERMANENT HOMES allegations that the repricing of the interest
rates was done by SOLIDBANK without any written agreement entered into between the parties. In fact,
Ms. Lim accounted that SOLIDBANK will merely advise them of the interest rate for the period, after
said period had already commenced, and at times very late in the period, by fax messages. When
PERMANENT HOMES called SOLIDBANKs attention to the seemingly surging rates it imposed on its
loan, SOLIDBANK will merely answer that it was the banks policy, without offering any basis for such
increase. Furthermore, Ms. Lim also mentioned SOLIDBANKs alleged practice of imposing interest on

unpaid interest, at the highest rate of 30% p.a.. Ms. Lim also presented a tabulation, which presents the
number of days their billing statements were sent late, from the time the interest period started. It is
PERMANENT HOMES stand that since the purpose of the billing statements was to inform
them beforehand of the applicable interest rate for the period, the late billings will clearly show
SOLIDBANKs arbitrary imposition of the repriced interest rates, as well as its indifference to
PERMANENT HOMES plight.
To illustrate, for the first loan availment in the amount of P19.6 million, the billing statements which
should have notified PERMANENT HOMES of the repriced interest rates were faxed to PERMANENT
HOMES between eighteen (18) to thirty-three (33) days late. For the second loan availment in the amount
of P18 million, the faxed billings were late between six (6) to twenty-one (21) days, and one instance
where PERMANENT HOMES received no billing at all. For the third loan availment in the amount
of P3.9 million, the faxed billings were late between seven (7) to twenty-nine (29) days, and also an
instance where PERMANENT HOMES received no billing at all.
This practice, according to Ms. Lim, clearly affected its operations, as the completion of its construction
project was unnecessarily delayed, to its prejudice and its buyers. This was the import of the testimony of
PERMANENT HOMES second witness, Engr. Rey A. Romasanta. According to Engr. Rey, the target date
of completion was August 1997, but in view of the shortage of funds by reason of SOLIDBANKs refusal
for PERMANENT HOMES to make further availments on its omnibus credit line, the project was
completed only on February 1998.
PERMANENT HOMES third and final witness was Martha Julia Flores, its Treasury Officer, who
explained that as such, it was her who received the late billings from SOLIDBANK. She would also call
up SOLIDBANK to ask what the repriced interest rate for the coming interest period, to no avail, as
SOLIDBANK will merely fax its billings almost always, as abovementioned, late in the period. Ms.
Flores admitted that she prepared the tabulation presented before the court, which showed how late
SOLIDBANKs billings were sent to PERMANENT HOMES, as well as the computation of interest rates
that SOLIDBANK had allegedly overcharged on its loan, vis-a-vis the average of the high and the low
published lending rates of SOLIDBANK.
SOLIDBANK, to establish its defense, presented its lone witness, Mr. Cesar Lugtu, who testified to the
effect that, contrary to PERMANENT HOMES assertions that it was not promptly informed of the
repriced interest rates, SOLIDBANKs officers verbally advised PERMANENT HOMES of the repriced
rates at the start of the period, and even added that their transaction[s] were based on trust. Aside from
these allegations, however, no written memorandum or note was presented by SOLIDBANK to support
their assertion that PERMANENT HOMES was timely advised of the repriced interests. [4]

The Trial Courts Ruling

On 5 July 2002, the trial court promulgated its Decision in favor of Solidbank. The trial court ratiocinated and ruled thus:
It becomes crystal clear that there is sufficient proof to show that the instant case was instituted by
[Permanent] as an after-thought and as an obvious subterfuge intended to completely lay on the defendant
the blame for the debacle of its Buena Vida project. An afterthought because the records of the case show
that the complaint was filed in March 16, 1998, already after it was having difficulty making the
amortization payments, the last of which being in February 1998. A subterfuge because plaintiff, instead
of blaming itself and its own business judgment that went sour, would rather put the blame on
[Solidbank], taking advantage of every conceivable gray area of its contract with [Solidbank] to avoid its
own liabilities. In fact, this complaint was made the very basis for [Permanent] to altogether stop the
payment of its loan from [Solidbank] including the interest payment (TSN, May 07, 1998, p. 60).
xxxx

WHEREFORE, finding the complaint not impressed with merit, judgment is hereby rendered dismissing
the said complaint. The Counterclaim is likewise dismissed for lack of evidence to support the same.
SO ORDERED.[5]
Permanent filed an appeal before the appellate court.

The Appellate Courts Ruling

The appellate court granted Permanents appeal, and set aside the trial courts ruling. The appellate court not only
recognized the validity of escalation clauses, but also underscored the necessity of a basis for the increase in interest rates
and of the principle of mutuality of contracts.
The dispositive portion of the appellate courts decision reads, thus:
THE FOREGOING CONSIDERED, the instant appeal is hereby GRANTED, the assailed decision dated
July 5, 2002 is REVERSED and SET ASIDE, and a new one is hereby entered as follows:
(1) Unless the parties herein subsequently enter into an express agreement regarding the applicable
interest rates on PERMANENT HOMES loan availments subsequent to the initial thirty-day (30) period,
the legal rate of twelve percent (12%) per annum is hereby FIXED, to be applied on the outstanding
balance of the loan;
(2) SOLIDBANK is ordered to render an accounting of all the payments made by PERMANENT
HOMES, and in case there is excess payment by reason of the wrongful imposition of the repriced
interest rates, to apply such amount to the interest payment at the legal rate, and thereafter to the
outstanding principal amount;
(3) SOLIDBANK is directed not to impose penalties, particularly interest on interest, upon
PERMANENT HOMES loan, there being no evidence that the latter was in default on its payments;
(4) SOLIDBANK is hereby ordered to release the remaining amount available under the omnibus credit
line, subject, however, to availability of funds on the part of SOLIDBANK.
No pronouncement as to costs.
SO ORDERED.[6]

The appellate court resolved to deny Solidbanks Motion for Reconsideration for lack of merit.[7]

The Issues

Solidbank raised the following issues in their petition:

(A) Whether the Honorable Court of Appeals was correct in ruling that the increases in the interest rates
on [Permanents] loans are void for having been unilaterally imposed without basis.

(B) Whether the Honorable Court of Appeals was correct in ordering the parties to enter into an express
agreement regarding the applicable interest rates on Permanents loan availments subsequent to the
initial thirty-day (30) period.
(C) Whether the Honorable Court of Appeals was correct in ruling that [Permanent] is entitled to attorneys
fees notwithstanding the absence of bad faith or malice on the part of [Solidbank]. [8]

The Courts Ruling

The petition has merit.
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. [9] 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.
In order that obligations arising from contracts may have the force of law between the parties, there must be a mutuality
between the parties based on their essential equality. [10]A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the contracting parties is void. [11] There was no showing that

either Solidbank or Permanent coerced each other to enter into the loan agreements. The terms of the Omnibus Line
Agreement and the promissory notes were mutually and freely agreed upon by the parties.
Moreover, Solidbanks range of lending rates were consistent with prevailing rates in the local or international capital
markets. Permanent presented a tabulation[12] of the range of Solidbanks lending rates, as reported to Bangko Sentral ng
Pilipinas and compared the lending rates with the interest rates charged by Solidbank on Permanents loans, thus:
Solidbanks range of lending rates as
per BSP records
High

Low

Interest rates
charged by
Solidbank on
Permanents loans

Excess Interest
Rate Over the
Average of High
and Low Rates

Sept. 12, 1997

25.0%

22.0%

23.0%

Sept. 17, 1997

27.0%

24.0%

24.0%

Sept. 22, 1997

26.0%

23.0%

22.5%

Oct. 13, 1997

29.0%

26.0%

28.0%

Oct. 17, 1997

30.0%

27.0%

30.0%

Oct. 22, 1997

32.0%

29.0%

30.0%

Nov. 12, 1997

28.0%

25.0%

27.0%

Nov. 17, 1997

28.0%

25.0%

27.0%

Nov. 21, 1997

27.0%

24.0%

27.0%

Dec. 12, 1997

25.0%

23.0%

26.0%

2.0%

Dec. 17, 1997

25.0%

23.0%

34.0%

10.0%

Dec. 22, 1997

25.0%

23.0%

32.0%

8.0%

Jan. 12, 1998

26.0%

24.0%

30.0%

5.0%

Jan. 16, 1998

28.0%

25.0%

30.0%

3.5%

Jan. 22, 1998

28.0%

25.0%

30.0%

3.5%

Feb. 9, 1998

27.0%

24.0%

30.0%

3.5%

Feb. 11, 1998

27.0%

24.0%

29.0%

4.5%

Feb. 12, 1998

27.0%

24.0%

30.0%

4.5%

The repriced interest rates from 12 September to 21 November 1997 conformed to the range of Solidbanks lending rates
to other borrowers. The 12 December 1997 to 12 February 1998 repriced interest rates were not unconscionably out of
line with the upper range of lending rates to other borrowers. The interest rate repricing happened at the height of the
Asian financial crises in late 1997, when banks clamped down on lendings because of higher credit risks across industries,
particularly the real estate industry.

We also recognize that Solidbank admitted that it did not promptly send Permanent written repriced rates, but rather
verbally advised Permanents officers over the phone at the start of the period. Solidbank did not present any written
memorandum to support its allegation that it promptly advised Permanent of the change in interest rates. [13] Solidbank
advised Permanent on the repriced interest rate applicable for the 30-day interest period only after the period had
begun. Permanent presented a tabulation which showed thatSolidbank either did not send a billing statement, or sent a
billing statement 6 to 33 days late.[14] We reproduce the tabulation below:
PN #435 P19.6MM
Reference
No.

Interest Period

Date Billing Statements

were faxed to Permanent

Number of days Billing

Statement was Late

03/20/97

04/18/97

04/17/97

28

04/18/97

05/19/97

05/16/97

28

05/19/97

06/19/97

06/19/97

07/18/97

07/12/97

23

07/18/97

08/18/97

08/05/97

18

08/18/97

09/17/97

09/10/97

23

09/17/97

10/17/97

10/06/97

19

10/17/97

11/17/97

11/11/97

25

11/17/97

12/17/97

12/12/97

25

12/17/97

01/16/98

01/09/98

23

14

01/16/98

02/20/98

02/18/98

33

Date Billing Statements

were faxed to Permanent

Number of days Billing

Statement was Late

no statement received

PN #969 P18MM
Reference
No.

Interest Period

06/24/97

07/24/97

07/12/97

18

07/24/97

08/22/97

08/05/97

12

08/22/97

09/22/97

09/10/97

19

09/22/97

10/22/97

10/06/97

14

10/22/97

11/21/97

11/11/97

20

11/21/97

12/22/97

12/12/97

21

12/22/97

01/22/98

01/09/98

18

01/22/98

02/12/97

02/12/98

02/20/98

14

no statement received
02/18/98

Date Billing Statements

were faxed to Permanent

Number of days Billing

Statement was Late

08/14/97

30

PN #1077 P3.9MM
Reference
No.
10

Interest Period
07/15/97

08/14/97

11

08/14/97

08/26/97

08/26/97

12

08/26/97

09/12/97

09/10/97

15

09/12/97

10/13/97

10/06/97

24

10/13/97

11/12/97

11/11/97

29

12

11/12/97

12/12/97

12/10/97

28

12/12/97

01/12/98

01/09/98

28

13

01/12/98

02/09/98

02/09/98

28

02/09/98

02/11/98

02/11/98

03/13/98

14

no statement received
02/18/98

We rule that Solidbanks computation of the interest due from Permanent should be adjusted to take effect only upon
Permanents receipt of the written notice from Solidbank.
WHEREFORE, we GRANT the petition in part. We SET ASIDE the Decision of the Court of Appeals promulgated on
29 June 2005 as well as the Resolution promulgated on 14 March 2006 in CA-G.R. CV No. 75926 and AFFIRM the
decision of the Regional Trial Court of Makati City, Branch 58 dated 5 July 2002 in Civil Case No. 98-654 with
theMODIFICATION that the repricing of the interest rates should take effect only upon Permanent Homes,
Incorporateds receipt of the written notice from Solidbank Corporation of the adjustment in interest rate. The records of
this case are therefore remanded to the trial court for the computation of the proper interest payments based on the dates of
receipt of written notice.
SO ORDERED
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-66826 August 19, 1988
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.
Pacis & Reyes Law Office for petitioner.
Ernesto T. Zshornack, Jr. for private respondent.

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

Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instance of Rizal Caloocan
City a complaint against COMTRUST alleging four causes of action. Except for the third cause of action, the CFI
ruled in favor of Zshornack. The bank appealed to the Intermediate Appellate Court which modified the CFI decision
absolving the bank from liability on the fourth cause of action. The pertinent portions of the judgment, as modified,
read:
IN VIEW OF THE FOREGOING, the Court renders judgment as follows:
1. Ordering the defendant COMTRUST to restore to the dollar savings account of plaintiff (No. 254109) the amount of U.S $1,000.00 as of October 27, 1975 to earn interest together with the
remaining balance of the said account at the rate fixed by the bank for dollar deposits under Central
Bank Circular 343;
2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S. $3,000.00
immediately upon the finality of this decision, without interest for the reason that the said amount
was merely held in custody for safekeeping, but was not actually deposited with the defendant
COMTRUST because being cash currency, it cannot by law be deposited with plaintiffs dollar
account and defendant's only obligation is to return the same to plaintiff upon demand;
xxx xxx xxx
5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as damages in the
concept of litigation expenses and attorney's fees suffered by plaintiff as a result of the failure of the
defendant bank to restore to his (plaintiffs) account the amount of U.S. $1,000.00 and to return to
him (plaintiff) the U.S. $3,000.00 cash left for safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it be totally absolved from any liability to Zshornack. The latter
not having appealed the Court of Appeals decision, the issues facing this Court are limited to the bank's liability with
regard to the first and second causes of action and its liability for damages.
1. We first consider the first cause of action, On the dates material to this case, Rizaldy Zshornack and his wife,
Shirley Gorospe, maintained in COMTRUST, Quezon City Branch, a dollar savings account and a peso current
account.
On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia, Assistant Branch
Manager of COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon in the amount of $1,000.00. In the
application, Garcia indicated that the amount was to be charged to Dollar Savings Acct. No. 25-4109, the savings
account of the Zshornacks; the charges for commission, documentary stamp tax and others totalling P17.46 were to
be charged to Current Acct. No. 210465-29, again, the current account of the Zshornacks. There was no indication
of the name of the purchaser of the dollar draft.
On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia, issued a check payable
to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on the Chase Manhattan Bank, New York, with an
indication that it was to be charged to Dollar Savings Acct. No. 25-4109.
When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an explanation from the
bank. In answer, COMTRUST claimed that the peso value of the withdrawal was given to Atty. Ernesto Zshornack,
Jr., brother of Rizaldy, on October 27, 1975 when he (Ernesto) encashed with COMTRUST a cashier's check for
P8,450.00 issued by the Manila Banking Corporation payable to Ernesto.

Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both the trial court and
the Appellate Court on the first cause of action. Petitioner must be held liable for the unauthorized withdrawal of
US$1,000.00 from private respondent's dollar account.
In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the bank has adopted
inconsistent theories. First, it still maintains that the peso value of the amount withdrawn was given to Atty. Ernesto
Zshornack, Jr. when the latter encashed the Manilabank Cashier's Check. At the same time, the bank claims that
the withdrawal was made pursuant to an agreement where Zshornack allegedly authorized the bank to withdraw
from his dollar savings account such amount which, when converted to pesos, would be needed to fund his peso
current account. If indeed the peso equivalent of the amount withdrawn from the dollar account was credited to the
peso current account, why did the bank still have to pay Ernesto?
At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank has not shown
how the transaction involving the cashier's check is related to the transaction involving the dollar draft in favor of
Dizon financed by the withdrawal from Rizaldy's dollar account. The two transactions appear entirely independent of
each other. Moreover, Ernesto Zshornack, Jr., possesses a personality distinct and separate from Rizaldy
Zshornack. Payment made to Ernesto cannot be considered payment to Rizaldy.
As to the second explanation, even if we assume that there was such an agreement, the evidence do not show that
the withdrawal was made pursuant to it. Instead, the record reveals that the amount withdrawn was used to finance
a dollar draft in favor of Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There is no
proof whatsoever that peso Current Account No. 210-465-29 was ever credited with the peso equivalent of the
US$1,000.00 withdrawn on October 27, 1975 from Dollar Savings Account No. 25-4109.
2. As for the second cause of action, the complaint filed with the trial court alleged that on December 8, 1975,
Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash (popularly known as greenbacks)
forsafekeeping, and that the agreement was embodied in a document, a copy of which was attached to and made
part of the complaint. The document reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
Decem
ber 8,
1975
MR. RIZALDY T. ZSHORNACK
&/OR MRS SHIRLEY E. ZSHORNACK
Sir/Madam:
We acknowledged (sic) having received from you today the sum of US DOLLARS:
THREE THOUSAND ONLY (US$3,000.00) for safekeeping.
Received by:

(Sgd.) VIRGILIO V.
GARCIA
It was also alleged in the complaint that despite demands, the bank refused to return the money.
In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current account at
prevailing conversion rates.
It must be emphasized that COMTRUST did not deny specifically under oath the authenticity and due execution of
the above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US $3,000 for
safekeeping. When he requested the return of the money on May 10, 1976, COMTRUST explained that the sum
was disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to
P14,920.00 were deposited to Zshornack's current account per deposit slip accomplished by Garcia; the remaining
US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00 were deposited to his
current account per deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at prevailing
conversion rates, BPI now posits another ground to defeat private respondent's claim. It now argues that the
contract embodied in the document is the contract of depositum (as defined in Article 1962, New Civil Code), which
banks do not enter into. The bank alleges that Garcia exceeded his powers when he entered into the transaction.
Hence, it is claimed, the bank cannot be liable under the contract, and the obligation is purely personal to Garcia.
Before we go into the nature of the contract entered into, an important point which arises on the pleadings, must be
considered.
The second cause of action is based on a document purporting to be signed by COMTRUST, a copy of which
document was attached to the complaint. In short, the second cause of action was based on an actionable
document. It was therefore incumbent upon the bank to specifically deny under oath the due execution of the
document, as prescribed under Rule 8, Section 8, if it desired: (1) to question the authority of Garcia to bind the
corporation; and (2) to deny its capacity to enter into such contract. [See, E.B. Merchant v. International Banking
Corporation, 6 Phil. 314 (1906).] No sworn answer denying the due execution of the document in question, or
questioning the authority of Garcia to bind the bank, or denying the bank's capacity to enter into the contract, was
ever filed. Hence, the bank is deemed to have admitted not only Garcia's authority, but also the bank's power, to
enter into the contract in question.
In the past, this Court had occasion to explain the reason behind this procedural requirement.
The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated.
In dealing with corporations the public at large is bound to rely to a large extent upon outward
appearances. If a man is found acting for a corporation with the external indicia of authority, any
person, not having notice of want of authority, may usually rely upon those appearances; and if it be
found that the directors had permitted the agent to exercise that authority and thereby held him out
as a person competent to bind the corporation, or had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the
actual authority may never have been granted
... Whether a particular officer actually possesses the authority which he assumes to exercise is
frequently known to very few, and the proof of it usually is not readily accessible to the stranger who
deals with the corporation on the faith of the ostensible authority exercised by some of the corporate
officers. It is therefore reasonable, in a case where an officer of a corporation has made a contract in
its name, that the corporation should be required, if it denies his authority, to state such defense in
its answer. By this means the plaintiff is apprised of the fact that the agent's authority is contested;

and he is given an opportunity to adduce evidence showing either that the authority existed or that
the contract was ratified and approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634, 645646 (1918).]
Petitioner's argument must also be rejected for another reason. The practical effect of absolving a corporation from
liability every time an officer enters into a contract which is beyond corporate powers, even without the proper
allegation or proof that the corporation has not authorized nor ratified the officer's act, is to cast corporations in so
perfect a mold that transgressions and wrongs by such artificial beings become impossible [Bissell v. Michigan
Southern and N.I.R. Cos 22 N.Y 258 (1860).] "To say that a corporation has no right to do unauthorized acts is only
to put forth a very plain truism but to say that such bodies have no power or capacity to err is to impute to them an
excellence which does not belong to any created existence with which we are acquainted. The distinction between
power and right is no more to be lost sight of in respect to artificial than in respect to natural persons." [Ibid.]
Having determined that Garcia's act of entering into the contract binds the corporation, we now determine the
correct nature of the contract, and its legal consequences, including its enforceability.
The document which embodies the contract states that the US$3,000.00 was received by the bank for safekeeping.
The subsequent acts of the parties also show that the intent of the parties was really for the bank to safely keep the
dollars and to return it to Zshornack at a later time, Thus, Zshornack demanded the return of the money on May 10,
1976, or over five months later.
The above arrangement is that contract defined under Article 1962, New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another,
with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing
delivered is not the principal purpose of the contract, there is no deposit but some other contract.
Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the
transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange Transactions,
promulgated on December 9, 1949, which was in force at the time the parties entered into the transaction involved
in this case. The circular provides:
xxx xxx xxx
2. Transactions in the assets described below and all dealings in them of whatever nature, including,
where applicable their exportation and importation, shall NOT be effected, except with respect to
deposit accounts included in sub-paragraphs (b) and (c) of this paragraph, when such deposit
accounts are owned by and in the name of, banks.
(a) Any and all assets, provided they are held through, in, or with banks or banking
institutions located in the Philippines, including money, checks, drafts, bullions bank
drafts, deposit accounts (demand, time and savings), all debts, indebtedness or
obligations, financial brokers and investment houses, notes, debentures, stocks,
bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in the
nature of security, expressed in foreign currencies, or if payable abroad, irrespective
of the currency in which they are expressed, and belonging to any person, firm,
partnership, association, branch office, agency, company or other unincorporated
body or corporation residing or located within the Philippines;
(b) Any and all assets of the kinds included and/or described in subparagraph (a)
above, whether or not held through, in, or with banks or banking institutions, and
existent within the Philippines, which belong to any person, firm, partnership,
association, branch office, agency, company or other unincorporated body or
corporation not residing or located within the Philippines;

(c) Any and all assets existent within the Philippines including money, checks, drafts,
bullions, bank drafts, all debts, indebtedness or obligations, financial securities
commonly dealt in by bankers, brokers and investment houses, notes, debentures,
stock, bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights
in the nature of security expressed in foreign currencies, or if payable abroad,
irrespective of the currency in which they are expressed, and belonging to any
person, firm, partnership, association, branch office, agency, company or other
unincorporated body or corporation residing or located within the Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those authorized to
deal in foreign exchange. All receipts of foreign exchange by any person, firm, partnership,
association, branch office, agency, company or other unincorporated body or corporation shall be
sold to the authorized agents of the Central Bank by the recipients within one business day following
the receipt of such foreign exchange. Any person, firm, partnership, association, branch office,
agency, company or other unincorporated body or corporation, residing or located within the
Philippines, who acquires on and after the date of this Circular foreign exchange shall not, unless
licensed by the Central Bank, dispose of such foreign exchange in whole or in part, nor receive less
than its full value, nor delay taking ownership thereof except as such delay is customary; Provided,
further, That within one day upon taking ownership, or receiving payment, of foreign exchange the
aforementioned persons and entities shall sell such foreign exchange to designated agents of the
Central Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined; and any person, firm or corporation,
foreign or domestic, who being bound to the observance thereof, or of such other rules, regulations
or directives as may hereafter be issued in implementation of this Circular, shall fail or refuse to
comply with, or abide by, or shall violate the same, shall be subject to the penal sanctions provided
in the Central Bank Act.
xxx xxx xxx
Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations on Foreign
Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippine residents only. Section 6
provides:
SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporation shall
be sold to authorized agents of the Central Bank by the recipients within one business day following
the receipt of such foreign exchange. Any resident person, firm, company or corporation residing or
located within the Philippines, who acquires foreign exchange shall not, unless authorized by the
Central Bank, dispose of such foreign exchange in whole or in part, nor receive less than its full
value, nor delay taking ownership thereof except as such delay is customary; Provided, That, within
one business day upon taking ownership or receiving payment of foreign exchange the
aforementioned persons and entities shall sell such foreign exchange to the authorized agents of the
Central Bank.
As earlier stated, the document and the subsequent acts of the parties show that they intended the bank to
safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine
resident. The parties did not intended to sell the US dollars to the Central Bank within one business day from
receipt. Otherwise, the contract of depositum would never have been entered into at all.

Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day
from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which falls
under the general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having
been executed against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of the
parties a cause of action against the other. "When the nullity proceeds from the illegality of the cause or object of the
contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no cause of
action against each other. . ." [Art. 1411, New Civil Code.] The only remedy is one on behalf of the State to
prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the second cause of action.
3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of litigation expenses and
attorney's fees to be reasonable. The award is sustained.
WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to the dollar
savings account of private respondent the amount of US$1,000.00 as of October 27, 1975 to earn interest at the
rate fixed by the bank for dollar savings deposits. Petitioner is further ordered to pay private respondent the amount
of P8,000.00 as damages. The other causes of action of private respondent are ordered dismissed.

G.R. No. 120528

January 29, 2001

ATTY. DIONISIO CALIBO, JR., petitioner,

vs.
COURT OF APPEALS and DR. PABLO U. ABELLA, respondents.
QUISUMBING, J.:

Before us is the petition for review on certiorari by petitioner Dionisio Calibo, Jr., assailing the decision of the Court
of Appeals in CA-G.R. CV No. 39705, which affirmed the decision of the Regional Trial Court of Cebu, Branch 11,
declaring private respondent as the lawful possessor of a tractor subject of a replevin suit and ordering petitioner to
pay private respondent actual damages and attorney's fees.
The facts of the case, as summarized by respondent court, are undisputed.
"on January 25, 1979, plaintiff-appellee [herein petitioner] Pablo U. Abella purchased an MF 210
agricultural tractor with Serial No. 00105 and Engine No. P126M00199 (Exhibit A; Record, p.5) which he
used in his farm in Dagohoy, Bohol.
Sometimes in October or November 1985, Pablo Abella's son, Mike abella rented for residential purpose the
house of defendant-appellant Dionosio R. Calibo, Jr., in Tagbilaran City.
In October 1986, Pablo Abella pulled out his aforementioned tractor from his farm in Dagohoy, Bohol, and
left it in the safekeeping of his son, Mike Abella, in Tagbilaran City. Mike kept the tractor in the garage of the
house he was leasing from Calibo.
Since he started renting Calibo's house, Mike had been religiously paying the monthly rentals therefor, but
beginning November of 1986, he stopped doing so. The following month, Calibo learned that Mike had never
paid the charges for electric and water consumption in the leased premises which the latter was duty-bound
to shoulder. Thus, Calibo confronted Mike about his rental arrears and the unpaid electric and water bills.
During this confrontation, Mike informed Calibo that he (Mike) would be staying in the leased property only
until the end of December 1986. Mike also assured Calibo that he would be settling his account with the
latter, offering the tractor as security. Mike even asked Calibo to help him find a buyer for the tractor so he
could sooner pay his outstanding obligation.
1wphi1.nt

In January 1987 when a new tenant moved into the house formerly leased to Mike, Calibo had the tractor
moved to the garage of his father's house, also in Tagbilaran City.
Apprehensive over Mike's unsettled account, Calibo visited him in his Cebu City address in January,
February and March, 1987 and tried to collect payment. On all three occasions, Calibo was unable to talk to
Mike as the latter was reportedly out of town. On his third trip to Cebu City, Calibo left word with the
occupants of the Abella residence thereat that there was a prospective buyer for the tractor. The following
week, Mike saw Calibo in Tagbilaran City to inquire about the possible tractor buyer. The sale, however, did
not push through as the buyer did not come back anymore. When again confronted with his outstanding
obligation, Mike reassured Calibo that the tractor would stand as a guarantee for its payment. That was the
last time Calibo saw or heard from Mike.
After a long while, or on November 22, 1988, Mike's father, Pablo Abella, came to Tagbilaran City to claim
and take possession of the tractor. Calibo, however, informed Pablo that Mike left the tractor with him as
security for the payment of Mike's obligation to him. Pablo offered to write Mike a check for P2,000.00 in
payment of Mike's unpaid lease rentals, in addition to issuing postdated checks to cover the unpaid electric
and water bills the correctness of which Pablo said he still had to verify with Mike. Calibo told Pablo that he
would accept the P2,000.00-check only if the latter would execute a promissory note in his favor to cover the
amount of the unpaid electric and water bills. Pablo was not amenable to this proposal. The two of them
having failed to come to an agreement, Pablo left and went back to Cebu City, unsuccessful in his attempt to
take possession of the tractor."1
On November 25, 1988, private respondent instituted an action for replevin, claiming ownership of the tractor and
seeking to recover possession thereof from petitioner. As adverted to above, the trial court ruled in favor of private
respondent; so did the Court of Appeals when petitioner appealed.

The Court of Appeals sustained the ruling of the trial court that Mike Abella could not have validly pledged the
subject tractor to petitioner since he was not the owner thereof, nor was he authorized by its owner to pledge the
tractor. Respondent court also rejected petitioner's contention that, if not a pledge, then a deposit was created. The
Court of Appeals said that under the Civil Code, the primary purpose of a deposit is only safekeeping and not, as in
this case, securing payment of a debt.
The Court of Appeals reduced the amount of actual damages payable to private respondent, deducting therefrom
the cost of transporting the tractor from Tagbilaran, Bohol, to Cebu City.
Hence, this petition.
Essentially, petitioner claims that the tractor in question was validly pledged to him by private respondent's son Mike
Abella to answer for the latter's monetary obligations to petitioner. In the alternative, petitioner asserts that the
tractor was left with him, in the concept of an innkeeper, on deposit and that he may validly hold on thereto until
Mike Abella pays his obligations.
Petitioner maintains that even if Mike Abella were not the owner of the tractor, a principal-agent relationship may be
implied between Mike Abella and private respondent. He contends that the latter failed to repudiate the alleged
agency, knowing that his son is acting on his behalf without authority when he pledged the tractor to petitioner.
Petitioner argues that, under Article 1911 of the Civil Code, private respondent is bound by the pledge, even if it
were beyond the authority of his son to pledge the tractor, since he allowed his son to act as though he had full
powers.
On the other hand, private respondent asserts that respondent court had correctly ruled on the matter.
In a contract of pledge, the creditor is given the right to retain his debtor's movable property in his possession, or in
that of a third person to whom it has been delivered, until the debt is paid. For the contract to be valid, it is
necessary that: (1) the pledge is constituted to secure the fulfillment of a principal obligation; (2) the pledgor be the
absolute owner of the thing pledged; and (3) the person constituting the pledge has the free disposal of his property,
and in the absence thereof, that he be legally authorized for the purpose. 2
As found by the trial court and affirmed by respondent court, the pledgor in this case, Mike Abella, was not the
absolute owner of the tractor that was allegedly pledged to petitioner. The tractor was owned by his father, private
respondent, who left the equipment with him for safekeeping. Clearly, the second requisite for a valid pledge, that
the pledgor be the absolute owner of the property, is absent in this case. Hence, there is no valid pledge.
"He who is not the owner or proprietor of the property pledged or mortgaged to guarantee the fulfillment of a
principal obligation, cannot legally constitute such a guaranty as may validly bind the property in favor of his
creditor, and the pledgee or mortgagee in such a case acquires no right whatsoever in the property pledged
or mortgaged."3
There also does not appear to be any agency in this case. We agree with the Court of Appeals that:
"As indicated in Article 1869, for an agency relationship to be deemed as implied, the principal must know
that another person is acting on his behalf without authority. Here, appellee categorically stated that the only
purpose for his leaving the subject tractor in the care and custody of Mike Abella was for safekeeping, and
definitely not for him to pledge or alienate the same. If it were true that Mike pledged appeellee's tractor to
appellant, then Mike was acting not only without appellee's authority but without the latter's knowledge as
well.
Article 1911, on the other hand, mandates that the principal is solidarily liable with the agent if the former
allowed the latter to act as though he had full powers. Again, in view of appellee's lack of knowledge of
Mike's pledging the tractor without any authority from him, it stands to reason that the former could not have
allowed the latter to pledge the tractor as if he had full powers to do so." 4

There is likewise no valid deposit in this case. In a contract of deposit, a person receives an object belonging to
another with the obligation of safely keeping it and of returning the same. 5 Petitioner himself states that he received
the tractor not to safely keep it but as a form of security for the payment of Mike Abella's obligations. There is no
deposit where the principal purpose for receiving the object is not safekeeping. 6
Consequently, petitioner had no right to refuse delivery of the tractor to its lawful owner. On the other hand, private
respondent, as owner, had every right to seek to repossess the tractor, including the institution of the instant action
for replevin.
1wphi1.nt

We do not here pass upon the other assignment of errors made by petitioner concerning alleged irregularities in the
raffle and disposition of the case at the trial court. A petition for review on certiorari is not the proper vehicle for such
allegations.
WHEREFORE, the instant petition is DENIED for lack of merit, and the decision of the Court of Appeals in CA-G.R.
CV No. 39705 is AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 142591

April 30, 2003

JOSEPH CHAN, WILSON CHAN and LILY CHAN, petitioners,

vs.
BONIFACIO S. MACEDA, JR., * respondent.
SANDOVAL-GUTIERREZ, J.:
A judgment of default does not automatically imply admission by the defendant of the facts and causes of action of
the plaintiff. The Rules of Court require the latter to adduce evidence in support of his allegations as an
indispensable condition before final judgment could be given in his favor.1 The trial judge has to evaluate the
allegations with the highest degree of objectivity and certainty. He may sustain an allegation for which the plaintiff
has adduced sufficient evidence, otherwise, he has to reject it. In the case at bar, judicial review is imperative to
avert the award of damages that is unreasonable and without evidentiary support.
Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, is the
Decision2dated June 17, 1999 of the Court of Appeals in CA-G.R. CV No. 57323, entitled "Bonifacio S. Maceda, Jr.
versus Joseph Chan, et al.," affirming in toto the Decision3 dated December 26, 1996 of the Regional Trial Court,
Branch 160, Pasig City, in Civil Case No. 53044.
The essential antecedents are as follows:
On July 28, 1976, Bonifacio S. Maceda, Jr., herein respondent, obtained a P7.3 million loan from the Development
Bank of the Philippines for the construction of his New Gran Hotel Project in Tacloban City.
Thereafter, on September 29, 1976, respondent entered into a building construction contract with Moreman Builders
Co., Inc., (Moreman). They agreed that the construction would be finished not later than December 22, 1977.
Respondent purchased various construction materials and equipment in Manila. Moreman, in turn, deposited them
in the warehouse of Wilson and Lily Chan, herein petitioners. The deposit was free of charge.
Unfortunately, Moreman failed to finish the construction of the hotel at the stipulated time. Hence, on February 1,
1978, respondent filed with the then Court of First Instance (CFI, now Regional Trial Court), Branch 39, Manila, an
action for rescission and damages against Moreman, docketed as Civil Case No. 113498.
On November 28, 1978, the CFI rendered its Decision4 rescinding the contract between Moreman and respondent
and awarding to the latter P445,000.00 as actual, moral and liquidated damages; P20,000.00 representing the
increase in the construction materials; and P35,000.00 as attorney's fees. Moreman interposed an appeal to the
Court of Appeals but the same was dismissed on March 7, 1989 for being dilatory. He elevated the case to this
Court via a petition for review on certiorari. In a Decision 5 dated February 21, 1990, we denied the petition. On April
23, 1990,6 an Entry of Judgment was issued.
Meanwhile, during the pendency of the case, respondent ordered petitioners to return to him the construction
materials and equipment which Moreman deposited in their warehouse. Petitioners, however, told them that
Moreman withdrew those construction materials in 1977.
Hence, on December 11, 1985, respondent filed with the Regional Trial Court, Branch 160, Pasig City, an action for
damages with an application for a writ of preliminary attachment against petitioners, 7 docketed as Civil Case No.
53044.
In the meantime, on October 30, 1986, respondent was appointed Judge of the Regional Trial Court, Branch 12,
San Jose Antique.8
On August 25, 1989, or after almost four (4) years, the trial court dismissed respondent's complaint for his failure to
prosecute and for lack of interest."9 On September 6, 1994, or five years thereafter, respondent filed a motion for

reconsideration, but the same was denied in the Order dated September 9, 1994 because of the failure of
respondent and his counsel to appear on the scheduled hearing. 10
On October 14, 1994, respondent filed a second motion for reconsideration. This time, the motion was granted and
the case was ordered reinstated on January 10, 1995, or ten (10) years from the time the action was originally
filed.11 Thereafter, summons, together with the copies of the complaint and its annexes, were served on petitioners.
On March 2, 1995, counsel for petitioners filed a motion to dismiss on several grounds.12 Respondent, on the other
hand, moved to declare petitioners in default on the ground that their motion to dismiss was filed out of time and that
it did not contain any notice of hearing.13
On April 27, 1995, the trial court issued an order declaring petitioners in default. 14
Petitioners filed with the Court of Appeals a petition for certiorari 15 to annul the trial court's order of default, but the
same was dismissed in its Order16 dated August 31, 1995. The case reached this Court, and in a Resolution dated
October 25, 1995,17 we affirmed the assailed order of the Court of Appeals. On November 29, 1995, 18 the
corresponding Entry of Judgment was issued.
Thus, upon the return of the records to the RTC, Branch 160, Pasig City, respondent was allowed to present his
evidence ex-parte.
Upon motion of respondent, which was granted by the trial court in its Order dated April 29, 1996, 19 the depositions
of his witnesses, namely, Leonardo Conge, Alfredo Maceda and Engr. Damiano Nadera were taken in the
Metropolitan Trial Court in Cities, Branch 2, Tacloban City.20 Deponent Leonardo Conge, a labor contractor, testified
that on December 14 up to December 24, 1977, he was contracted by petitioner Lily Chan to get bags of cement
from the New Gran Hotel construction site and to store the same into the latter's warehouse in Tacloban City. Aside
from those bags of cement, deponent also hauled about 400 bundles of steel bars from the same construction site,
upon order of petitioners. Corresponding delivery receipts were presented and marked as Exhibits "A", "A-1", "A-2",
"A-3" and "A-4".21
Deponent Alfredo Maceda testified that he was respondent's Disbursement and Payroll Officer who supervised the
construction and kept inventory of the properties of the New Gran Hotel. While conducting the inventory on
November 23, 1977, he found that the approximate total value of the materials stored in petitioners' warehouse was
P214,310.00. This amount was accordingly reflected in the certification signed by Mario Ramos, store clerk and
representative of Moreman who was present during the inventory.22
Deponent Damiano Nadera testified on the current cost of the architectural and structural requirements needed to
complete the construction of the New Gran Hotel.23
On December 26, 1996, the trial court rendered a decision in favor of respondent, thus:
"WHEREFORE, foregoing considered, judgment is hereby rendered ordering defendants to jointly and
severally pay plaintiff:
1) P1,930,000.00 as actual damages;
2) P2,549,000.00 as actual damages;
3) Moral damages of P150,000.00; exemplary damages of P50,000.00 and attorney's fees of
P50,000.00 and to pay the costs.
"SO ORDERED."
The trial court ratiocinated as follows:

"The inventory of other materials, aside from the steel bars and cement is found highly reliable based on
first, the affidavit of Arthur Edralin dated September 15, 1979, personnel officer of Moreman Builders that he
was assigned with others to guard the warehouse; (Exhs. "M" & "O"); secondly, the inventory (Exh. "C")
dated November 23, 1977 shows (sic) deposit of assorted materials; thirdly, that there were items in the
warehouse as of February 3, 1978 as shown in the balance sheet of Moreman's stock clerk Jose Cedilla.
"Plaintiff is entitled to payment of damages for the overhauling of materials from the construction site by Lily
Chan without the knowledge and consent of its owner. Article 20 of the Civil Code provides:
'Art. 20. Every person who contrary to law, willfully or negligently caused damage to another, shall
indemnify the latter for the same.'
"As to the materials stored inside the bodega of defendant Wilson Chan, the inventory (Exh. "C") show (sic),
that the same were owned by the New Gran Hotel. Said materials were stored by Moreman Builders Co.,
Inc. since it was attested to by the warehouseman as without any lien or encumbrances, the defendants are
duty bound to release it. Article 21 of the Civil Code provides:
'Art. 21. Any person who willfully caused loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.'
"Plaintiff is entitled to payment of actual damages based on the inventory as of November 23, 1977
amounting to P1,930,080.00 (Exhs. "Q" & "Q-1"). The inventory was signed by the agent Moreman Builders
Corporation and defendants.
"Plaintiff is likewise entitled to payment of 12,500 bags of cement and 400 bundles of steel bars totaling
P2,549,000.00 (Exhs. "S" & "S-1"; Exhs. "B" & "B-3").
"Defendants should pay plaintiff moral damages of P150,000.00; exemplary damages of P50,000.00 and
attorney's fees of P50,000.00 and to pay the costs.
"The claim of defendant for payment of damages with respect to the materials appearing in the balance
sheets as of February 3, 1978 in the amount of P3,286,690.00, not having been established with enough
preponderance of evidence cannot be given weight."24
Petitioners then elevated the case to the Court of Appeals, docketed as CA-G.R. CV No. 57323. On June 17, 1999,
the Appellate Court rendered the assailed Decision25 affirming in toto the trial court's judgment, ratiocinating as
follows:
"Moreover, although the prayer in the complaint did not specify the amount of damages sought, the same
was satisfactorily proved during the trial. For damages to be awarded, it is essential that the claimant
satisfactorily prove during the trial the existence of the factual basis thereof and its causal connection with
the adverse party's act (PAL, Inc. vs. NLRC, 259 SCRA 459). In sustaining appellee's claim for damages,
the court a quo held as follows:
'The Court finds the contention of plaintiff that materials and equipment of plaintiff were stored in the
warehouse of defendants and admitted by defendants in the certification issued to Sheriff Borja. x x x
'Evidence further revealed that assorted materials owned by the New Gran Hotel (Exh. "C") were
deposited in the bodega of defendant Wilson Chan with a total market value of P1,930,000.00,
current price.
'The inventory of other materials, aside from the steel bars and cement, is highly reliable based on
first, the affidavit of Arthur Edralin dated September 15, 1979, personnel officer of Moreman Builders;
that he was assigned, with others to guard the warehouse (Exhs. M & O); secondly, the inventory

(Exh. C) November 23, 1977 shows deposit of assorted materials; thirdly, that there were items in
the warehouse as of February 3, 1978, as shown in the balance sheet of Moreman's stock clerk,
Jose Cedilla (pp. 6061, Rollo).'
"The Court affirms the above findings.
"Well settled is the rule that 'absent any proper reason to depart from the rule, factual conclusions reached
by the trial court are not to be disturbed (People vs. Dupali, 230 SCRA 62).' Hence, in the absence of any
showing that serious and substantial errors were committed by the lower court in the appraisal of the
evidence, the trial judge's assessment of the credibility of the witnesses is accorded great weight and
respect (People vs. Jain, 254 SCRA 686). And, there being absolutely nothing on record to show that the
court a quooverlooked, disregarded, or misinterpreted facts of weight and significance, its factual findings
and conclusions must be given great weight and should not be disturbed on appeal.
"WHEREFORE, being in accord with law and evidence, the appealed decision is hereby AFFIRMED in toto."
Hence, this petition for review on certiorari anchored on the following grounds:
"I
The Court of Appeals acted with grave abuse of discretion and under a misapprehension of the law and the facts
when it affirmed in toto the award of actual damages made by the trial court in favor of respondent in this case.
II
The awards of moral and exemplary damages of the trial court to respondent in this case and affirmed in toto by the
Court of Appeals are unwarranted by the evidence presented by respondent at the ex parte hearing of this case and
should, therefore, be eliminated or at least reduced.
III
The award of attorney's fees by the trial court to respondent in this case and affirmed by the Court of Appeals should
be deleted because of the failure of the trial court to state the legal and factual basis of such award."
Petitioners contend inter alia that the actual damages claimed by respondent in the present case were already
awarded to him in Civil Case No. 11349826 and hence, cannot be recovered by him again. Even assuming that
respondent is entitled to damages, he can not recover P4,479,000.00 which is eleven (11) times more than the total
actual damages of P365,000.00 awarded to him in Civil Case No. 113498. 27
In his comment on the petition, respondent maintains that petitioners, as depositaries under the law, have both the
fiduciary and extraordinary obligations not only to safely keep the construction material deposited, but also to return
them with all their products, accessories and accessions, pursuant to Articles 1972, 28 1979,29 1983,30 and 198831of
the Civil Code. Considering that petitioners' duty to return the construction materials in question has already become
impossible, it is only proper that the prices of those construction materials in 1996 should be the basis of the award
of actual damages. This is the only way to fulfill the "duty to return" contemplated in the applicable
laws.32Respondent further claims that petitioners must bear the increase in market prices from 1977 to 1996
because liability for fraud includes "all damages which may be reasonably attributed to the non-performance of the
obligation." Lastly, respondent insists that there can be no double recovery because in Civil Case No. 113498, 33 the
parties were respondent himself and Moreman and the cause of action was the rescission of their building contract.
In the present case, however, the parties are respondent and petitioners and the cause of action between them is
for recovery of damages arising from petitioners' failure to return the construction materials and equipment.
Obviously, petitioners' assigned errors call for a review of the lower court's findings of fact.

Succinct is the rule that this Court is not a trier of facts and does not normally undertake the re-examination of the
evidence submitted by the contending parties during the trial of the case considering that findings of fact of the
Court of Appeals are generally binding and conclusive on this Court. 34 The jurisdiction of this Court in a petition for
review on certiorari is limited to reviewing only errors of law,35 not of fact, unless it is shown, inter alia, that: (1) the
conclusion is a finding grounded on speculations, surmises or conjectures; (2) the inference is manifestly mistaken,
absurd and impossible; (3) there is grave abuse of discretion; (4) the judgment is based on misapprehension of
facts; (5) the findings of fact are conflicting; and (6) the Court of Appeals, in making its findings went beyond the
issues of the case and the same is contrary to the admission of both parties. 36
Petitioners submit that this case is an exception to the general rule since both the trial court and the Court of
Appeals based their judgments on misapprehension of facts.
We agree.
At the outset, the case should have been dismissed outright by the trial court because of patent procedural
infirmities. It bears stressing that the case was originally filed on December 11, 1985. Four (4) years thereafter, or on
August 25, 1989, the case was dismissed for respondent's failure to prosecute. Five (5) years after, or on
September 6, 1994, respondent filed his motion for reconsideration. From here, the trial court already erred in its
ruling because it should have dismissed the motion for reconsideration outright as it was filed far beyond the fifteenday reglementary period.37 Worse, when respondent filed his second motion for reconsideration on October 14,
1994, a prohibited pleading,38 the trial court still granted the same and reinstated the case on January 10, 1995. This
is a glaring gross procedural error committed by both the trial court and the Court of Appeals.
Even without such serious procedural flaw, the case should also be dismissed for utter lack of merit.
It must be stressed that respondent's claim for damages is based on petitioners' failure to return or to release to him
the construction materials and equipment deposited by Moreman to their warehouse. Hence, the essential issues to
be resolved are: (1) Has respondent presented proof that the construction materials and equipment were actually in
petitioners' warehouse when he asked that the same be turned over to him? (2) If so, does respondent have the
right to demand the release of the said materials and equipment or claim for damages?
Under Article 1311 of the Civil Code, contracts are binding upon the parties (and their assigns and heirs) who
execute them. When there is no privity of contract, there is likewise no obligation or liability to speak about and thus
no cause of action arises. Specifically, in an action against the depositary, the burden is on the plaintiff to prove the
bailment or deposit and the performance of conditions precedent to the right of action. 39 A depositary is obliged to
return the thing to the depositor, or to his heirs or successors, or to the person who may have been designated in
the contract.40
In the present case, the record is bereft of any contract of deposit, oral or written, between petitioners and
respondent. If at all, it was only between petitioners and Moreman. And granting arguendo that there was indeed a
contract of deposit between petitioners and Moreman, it is still incumbent upon respondent to prove its existence
and that it was executed in his favor. However, respondent miserably failed to do so. The only pieces of evidence
respondent presented to prove the contract of deposit were the delivery receipts.41 Significantly, they are unsigned
and not duly received or authenticated by either Moreman, petitioners or respondent or any of their authorized
representatives. Hence, those delivery receipts have no probative value at all. While our laws grant a person the
remedial right to prosecute or institute a civil action against another for the enforcement or protection of a right, or
the prevention or redress of a wrong,42 every cause of action ex-contractu must be founded upon a contract, oral or
written, express or implied.
Moreover, respondent also failed to prove that there were construction materials and equipment in petitioners'
warehouse at the time he made a demand for their return.
Considering that respondent failed to prove (1) the existence of any contract of deposit between him and petitioners,
nor between the latter and Moreman in his favor, and (2) that there were construction materials in petitioners'

warehouse at the time of respondent's demand to return the same, we hold that petitioners have no corresponding
obligation or liability to respondent with respect to those construction materials.
Anent the issue of damages, petitioners are still not liable because, as expressly provided for in Article 2199 of the
Civil Code,43 actual or compensatory damages cannot be presumed, but must be proved with reasonable degree of
certainty. A court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of damages, but
must depend upon competent proof that they have been suffered by the injured party and on the best obtainable
evidence of the actual amount thereof. It must point out specific facts which could afford a basis for measuring
whatever compensatory or actual damages are borne. 44
Considering our findings that there was no contract of deposit between petitioners and respondent or Moreman and
that actually there were no more construction materials or equipment in petitioners' warehouse when respondent
made a demand for their return, we hold that he has no right whatsoever to claim for damages.
As we stressed in the beginning, a judgment of default does not automatically imply admission by the defendant of
plaintiff's causes of action. Here, the trial court merely adopted respondent's allegations in his complaint and
evidence without evaluating them with the highest degree of objectivity and certainty.
WHEREFORE, the petition is GRANTED. The challenged Decision of the Court of Appeals dated June 17, 1999 is
REVERSED and SET ASIDE. Costs against respondent.
SO ORDERED.

G.R. No. 102970 May 13, 1993

LUZAN SIA, petitioner,
vs.
COURT OF APPEALS and SECURITY BANK and TRUST COMPANY, respondents.
Asuncion Law Offices for petitioner.
Cauton, Banares, Carpio & Associates for private respondent.

DAVIDE, JR., J.:

The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737, promulgated on 21 August
1991, 1reversing and setting aside the Decision, dated 19 February 1990, 2 of Branch 47 of the Regional Trial Court (RTC)
of Manila in Civil Case No. 87-42601, entitled "LUZAN SIA vs. SECURITY BANK and TRUST CO.," is challenged in this
petition for review on certiorari under Rule 45 of the Rules Court.
Civil Case No. 87-42601 is an action for damages arising out of the destruction or loss of the stamp collection of the
plaintiff (petitioner herein) contained in Safety Deposit Box No. 54 which had been rented from the defendant
pursuant to a contract denominated as a Lease Agreement. 3 Judgment therein was rendered in favor of the dispositive
portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against the defendant, Security Bank & Trust Company, ordering the defendant bank to pay the
plaintiff the sum of
a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as actual damages;
b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as moral damages; and
c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's fees and legal expenses.
The counterclaim set up by the defendant are hereby dismissed for lack of merit.
No costs.
SO ORDERED. 4

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

The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of the defendant bank at its
Binondo Branch located at the Fookien Times Building, Soler St., Binondo, Manila wherein he placed
his collection of stamps. The said safety deposit box leased by the plaintiff was at the bottom or at
the lowest level of the safety deposit boxes of the defendant bank at its aforesaid Binondo Branch.
During the floods that took place in 1985 and 1986, floodwater entered into the defendant bank's
premises, seeped into the safety deposit box leased by the plaintiff and caused, according to the
plaintiff, damage to his stamps collection. The defendant bank rejected the plaintiff's claim for
compensation for his damaged stamps collection, so, the plaintiff instituted an action for damages
against the defendant bank.
The defendant bank denied liability for the damaged stamps collection of the plaintiff on the basis of
the "Rules and Regulations Governing the Lease of Safe Deposit Boxes" (Exhs. "A-1", "1-A"),
particularly paragraphs 9 and 13, which reads (sic):
"9. The liability of the Bank by reason of the lease, is limited to the exercise of the diligence to
prevent the opening of the safe by any person other than the Renter, his authorized agent or legal
representative;
xxx xxx xxx
"13. The Bank is not a depository of the contents of the safe and it has neither the possession nor
the control of the same. The Bank has no interest whatsoever in said contents, except as herein
provided, and it assumes absolutely no liability in connection therewith."
The defendant bank also contended that its contract with the plaintiff over safety deposit box No. 54
was one of lease and not of deposit and, therefore, governed by the lease agreement (Exhs. "A",
"L") which should be the applicable law; that the destruction of the plaintiff's stamps collection was
due to a calamity beyond obligation on its part to notify the plaintiff about the floodwaters that
inundated its premises at Binondo branch which allegedly seeped into the safety deposit box leased
to the plaintiff.
The trial court then directed that an ocular inspection on (sic) the contents of the safety deposit box
be conducted, which was done on December 8, 1988 by its clerk of court in the presence of the
parties and their counsels. A report thereon was then submitted on December 12, 1988 (Records, p.
98-A) and confirmed in open court by both parties thru counsel during the hearing on the same date
(Ibid., p. 102) stating:
"That the Safety Box Deposit No. 54 was opened by both plaintiff Luzan Sia and the
Acting Branch Manager Jimmy B. Ynion in the presence of the undersigned,
plaintiff's and defendant's counsel. Said Safety Box when opened contains two
albums of different sizes and thickness, length and width and a tin box with printed
word 'Tai Ping Shiang Roast Pork in pieces with Chinese designs and character."
Condition of the above-stated Items
"Both albums are wet, moldy and badly damaged.
1. The first album measures 10 1/8 inches in length, 8 inches in width and 3/4 in thick. The leaves of
the album are attached to every page and cannot be lifted without destroying it, hence the stamps
contained therein are no longer visible.

2. The second album measure 12 1/2 inches in length, 9 3/4 in width 1 inch thick. Some of its pages
can still be lifted. The stamps therein can still be distinguished but beyond restoration. Others have
lost its original form.
3. The tin box is rusty inside. It contains an album with several pieces of papers stuck up to the cover
of the box. The condition of the album is the second abovementioned album." 5
The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC, appealed the trial court's decision to the
public respondent Court of Appeals. The appeal was docketed as CA-G.R. CV No. 26737.

In urging the public respondent to reverse the decision of the trial court, SBTC contended that the latter erred in (a)
holding that the lease agreement is a contract of adhesion; (b) finding that the defendant had failed to exercise the
required diligence expected of a bank in maintaining the safety deposit box; (c) awarding to the plaintiff actual
damages in the amount of P20,000.00, moral damages in the amount of P100,000.00 and attorney's fees and legal
expenses in the amount of P5,000.00; and (d) dismissing the counterclaim.
On 21 August 1991, the respondent promulgated its decision the dispositive portion of which reads:
WHEREFORE, the decision appealed from is hereby REVERSED and instead the appellee's
complaint is hereby DISMISSED. The appellant bank's counterclaim is likewise DISMISSED. No
costs. 6
In reversing the trial court's decision and absolving SBTC from liability, the public respondent found and ruled that:

a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" ) constitutes the terms and conditions of the contract
of lease which the appellee (now petitioner) had voluntarily and knowingly executed with SBTC;
b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was not a contract of deposit wherein
the bank became a depositary of the subject stamp collection; hence, as contended by SBTC, the provisions of
Book IV, Title XII of the Civil Code on deposits do not apply;
c) The following provisions of the questioned lease agreement of the safety deposit box limiting SBTC's liability:
9. The liability of the bank by reason of the lease, is limited to the exercise of the diligence to prevent
the opening of the Safe by any person other than the Renter, his authorized agent or legal
representative.
xxx xxx xxx
13. The bank is not a depository of the contents of the Safe and it has neither the possession nor the
control of the same. The Bank has no interest whatsoever in said contents, except as herein
provided, and it assumes absolutely no liability in connection therewith.
are valid since said stipulations are not contrary to law, morals, good customs, public order or public policy; and
d) there is no concrete evidence to show that SBTC failed to exercise the required diligence in maintaining the
safety deposit box; what was proven was that the floods of 1985 and 1986, which were beyond the control of SBTC,
caused the damage to the stamp collection; said floods were fortuitous events which SBTC should not be held liable
for since it was not shown to have participated in the aggravation of the damage to the stamp collection; on the
contrary, it offered its services to secure the assistance of an expert in order to save most of the stamps, but the
appellee refused; appellee must then bear the lose under the principle of "res perit domino."
Unsuccessful in his bid to have the above decision reconsidered by the public respondent, 7 petitioner filed the instant
petition wherein he contends that:

I
IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE PART OF THE
RESPONDENT COURT WHEN IT RULED THAT RESPONDENT SBTC DID NOT FAIL TO
EXERCISE THE REQUIRED DILIGENCE IN MAINTAINING THE SAFETY DEPOSIT BOX OF THE
PETITIONER CONSIDERING THAT SUBSTANTIAL EVIDENCE EXIST (sic) PROVING THE
CONTRARY.
II
THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING PRIVATE RESPONDENT
FROM ANY LIABILITY WHATSOEVER BY REASON OF THE PROVISIONS OF PARAGRAPHS 9
AND 13 OF THE AGREEMENT (EXHS. "A" AND "A-1").
III
THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING THE AWARDS OF THE
TRIAL COURT FOR ACTUAL AND MORAL DAMAGES, INCLUDING ATTORNEY'S FEES AND
LEGAL EXPENSES, IN FAVOR OF THE PETITIONER. 8
We subsequently gave due course the petition and required both parties to submit their respective memoranda, which
they complied with. 9
Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise the required diligence expected of a
bank maintaining such safety deposit box . . . in the light of the environmental circumstance of said safety deposit box
after the floods of 1985 and 1986." He argues that such a conclusion is supported by the evidence on record, to wit: SBTC
was fully cognizant of the exact location of the safety deposit box in question; it knew that the premises were inundated by
floodwaters in 1985 and 1986 and considering that the bank is guarded twenty-four (24) hours a day , it is safe to
conclude that it was also aware of the inundation of the premises where the safety deposit box was located; despite such
knowledge, however, it never bothered to inform the petitioner of the flooding or take any appropriate measures to insure
the safety and good maintenance of the safety deposit box in question.

SBTC does not squarely dispute these facts; rather, it relies on the rule that findings of facts of the Court of Appeals,
when supported by substantial exidence, are not reviewable on appeal by certiorari. 10
The foregoing rule is, of course, subject to certain exceptions such as when there exists a disparity between the factual
findings and conclusions of the Court of Appeals and the trial court. 11 Such a disparity obtains in the present case.

As We see it, SBTC's theory, which was upheld by the public respondent, is that the "Lease Agreement " covering
Safe Deposit Box No. 54 (Exhibit "A and "1") is just that a contract of lease and not a contract of deposit, and
that paragraphs 9 and 13 thereof, which expressly limit the bank's liability as follows:
9. The liability of the bank by reason of the lease, is limited to the exercise of the diligence to prevent
the opening of the Safe by any person other than the Renter, his autliorized agent or legal
representative;
xxx xxx xxx
13. The bank is not a depository of the contents of the Safe and it has neither the possession nor the
control of the same. The Bank has no interest whatsoever said contents, except as herein provided,
and it assumes absolutely no liability in connection therewith. 12
are valid and binding upon the parties. In the challenged decision, the public respondent further avers that even without
such a limitation of liability, SBTC should still be absolved from any responsibility for the damage sustained by the

petitioner as it appears that such damage was occasioned by a fortuitous event and that the respondent bank was free
from any participation in the aggravation of the injury.

We cannot accept this theory and ratiocination. Consequently, this Court finds the petition to be impressed with
merit.
In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals, 13 this Court explicitly rejected the
contention that a contract for the use of a safety deposit box is a contract of lease governed by Title VII, Book IV of the
Civil Code. Nor did We fully subscribe to the view that it is a contract of deposit to be strictly governed by the Civil Code
provision on deposit; 14 it is, as We declared, a special kind of deposit. The prevailing rule in American jurisprudence
that the relation between a bank renting out safe deposit boxes and its customer with respect to the contents of the box is
that of a bailor and bailee, the bailment for hire and mutual benefit 15 has been adopted in this jurisdiction, thus:
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is
clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of
the General Banking Act [R.A. 337, as amended] pertinently provides:
"Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking
institutions other than building and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety
deposit boxes for the safequarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of this section
asdepositories or as agents. . . ."(emphasis supplied)
Note that the primary function is still found within the parameters of a contract of deposit, i.e., the
receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out
of the safety deposit boxes is not independent from, but related to or in conjunction with, this
principal function. A contract of deposit may be entered into orally or in writing (Art. 1969, Civil Code]
and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order or public policy. The depositary's responsibility for the
safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil
Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of
fraud, negligence, delay or contravention of the tenor of the agreement [Art. 1170, id.]. In the
absence of any stipulation prescribing the degree of diligence required, that of a good father of a
family is to be observed [Art. 1173, id.]. Hence, any stipulation exempting the depositary from any
liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be
void for being contrary to law and public policy. In the instant case, petitioner maintains that
conditions 13 and l4 of the questioned contract of lease of the safety deposit box, which read:
"13. The bank is a depositary of the contents of the safe and it has neither the possession nor
control of the same.
"14. The bank has no interest whatsoever in said contents, except as herein expressly provided, and
it assumes absolutely no liability in connection therewith."
are void as they are contrary to law and public policy. We find Ourselves in agreement with this
proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a
depositary under Section 72 (a) of the General Banking Act. Both exempt the latter from any liability

except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence
only with respect to who shall be admitted to any rented safe, to wit:
"8. The Bank shall use due diligence that no unauthorized person shall be admitted
to any rented safe and beyond this, the Bank will not be responsible for the contents
of any safe rented from it."
Furthermore condition 13 stands on a wrong premise and is contrary to the actual practice of the
Bank. It is not correct to assert that the Bank has neither the possession nor control of the contents
of the box since in fact, the safety deposit box itself is located in its premises and is under its
absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated
earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and
using this guard key. Clearly then, to the extent above stated, the foregoing conditions in the contract
in question are void and ineffective. It has been said:
"With respect to property deposited in a safe-deposit box by a customer of a safedeposit company, the parties, since the relation is a contractual one, may by special
contract define their respective duties or provide for increasing or limiting the liability
of the deposit company, provided such contract is not in violation of law or public
policy. It must clearly appear that there actually was such a special contract,
however, in order to vary the ordinary obligations implied by law from the relationship
of the parties; liability of the deposit company will not be enlarged or restricted by
words of doubtful meaning. The company, in renting safe-deposit boxes, cannot
exempt itself from liability for loss of the contents by its own fraud or negligence or
that, of its agents or servants, and if a provision of the contract may be construed as
an attempt to do so, it will be held ineffective for the purpose. Although it has been
held that the lessor of a safe-deposit box cannot limit its liability for loss of the
contents thereof through its own negligence, the view has been taken that such a
lessor may limit its liability to some extent by agreement or stipulation ."[10 AM JUR
2d., 466]. (citations omitted) 16
It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety Deposit Box in CA AgroIndustrial Development Corp. are strikingly similar to condition No. 13 in the instant case. On the other hand, both
condition No. 8 in CA Agro-Industrial Development Corp. and condition No. 9 in the present case limit the scope of
the exercise of due diligence by the banks involved to merely seeing to it that only the renter, his authorized agent or
his legal representative should open or have access to the safety deposit box. In short, in all other situations, it
would seem that SBTC is not bound to exercise diligence of any kind at all. Assayed in the light of Our
aforementioned pronouncements in CA Agro-lndustrial Development Corp., it is not at all difficult to conclude that
both conditions No. 9 and No. 13 of the "Lease Agreement" covering the safety deposit box in question (Exhibits "A"
and "1") must be stricken down for being contrary to law and public policy as they are meant to exempt SBTC from
any liability for damage, loss or destruction of the contents of the safety deposit box which may arise from its own or
its agents' fraud, negligence or delay. Accordingly, SBTC cannot take refuge under the said conditions.
Public respondent further postulates that SBTC cannot be held responsible for the destruction or loss of the stamp
collection because the flooding was a fortuitous event and there was no showing of SBTC's participation in the
aggravation of the loss or injury. It states:
Article 1174 of the Civil Code provides:
"Except in cases expressly specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no
person shall be responsible for those events which could not be foreseen, or which,
though foreseen, were inevitable.'

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

Here, the unforeseen or unexpected inundating floods were independent of the will of the appellant
bank and the latter was not shown to have participated in aggravating damage (sic) to the stamps
collection of the appellee. In fact, the appellant bank offered its services to secure the assistance of
an expert to save most of the then good stamps but the appelle refused and let (sic) these
recoverable stamps inside the safety deposit box until they were ruined. 20
Both the law and authority cited are clear enough and require no further elucidation. Unfortunately, however, the public
respondent failed to consider that in the instant case, as correctly held by the trial court, SBTC was guilty of negligence.
The facts constituting negligence are enumerated in the petition and have been summarized in this ponencia. SBTC's
negligenceaggravated the injury or damage to the stamp collection. SBTC was aware of the floods of 1985 and 1986; it
also knew that the floodwaters inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it should
have lost no time in notifying the petitioner in order that the box could have been opened to retrieve the stamps, thus
saving the same from further deterioration and loss. In this respect, it failed to exercise the reasonable care and prudence
expected of a good father of a family, thereby becoming a party to the aggravation of the injury or loss. Accordingly, the
aforementioned fourth characteristic of a fortuitous event is absent Article 1170 of the Civil Code, which reads:

Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof, are liable for damages,
thus comes to the succor of the petitioner. The destruction or loss of the stamp collection which was, in the language
of the trial court, the "product of 27 years of patience and diligence" 21 caused the petitioner pecuniary loss; hence, he
must be compensated therefor.
We cannot, however, place Our imprimatur on the trial court's award of moral damages. Since the relationship
between the petitioner and SBTC is based on a contract, either of them may be held liable for moral damages for
breach thereof only if said party had acted fraudulently or in bad faith. 22 There is here no proof of fraud or bad faith on
the part of SBTC.
WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision and Resolution of the public
respondent Court of Appeals of 21 August 1991 and 21 November 1991, respectively, in CA-G.R. CV No. 26737,
are hereby SET ASIDE and the Decision of 19 February 1990 of Branch 47 of the Regional Trial Court of Manila in
Civil Case No. 87-42601 is hereby REINSTATED in full, except as to the award of moral damages which is hereby
set aside.
Costs against the private respondent.
SO ORDERED.

G.R. No. 90027 March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.

DAVIDE, JR., J.:

Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box
with respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao entered
into an agreement whereby the former purchased from the latter two (2) parcels of land for a consideration of
P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance was covered by three (3)
postdated checks. Among the terms and conditions of the agreement embodied in a Memorandum of True and
Actual Agreement of Sale of Land were that the titles to the lots shall be transferred to the petitioner upon full

payment of the purchase price and that the owner's copies of the certificates of titles thereto, Transfer Certificates of
Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box of any bank. The same could be
withdrawn only upon the joint signatures of a representative of the petitioner and the Pugaos upon full payment of
the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of
private respondent Security Bank and Trust Company, a domestic banking corporation hereinafter referred to as the
respondent Bank. For this purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia, the
following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor
control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it
assumes absolutely no liability in connection therewith. 1
After the execution of the contract, two (2) renter's keys were given to the renters one to Aguirre (for the
petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent Bank. The safety
deposit box has two (2) keyholes, one for the guard key and the other for the renter's key, and can be opened only
with the use of both keys. Petitioner claims that the certificates of title were placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of P225.00
per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per square meter or a
total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed of sale which
necessarily entailed the production of the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos,
then proceeded to the respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates of
title. However, when opened in the presence of the Bank's representative, the box yielded no such certificates.
Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as
a consequence thereof, the petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the latter
filed on 1 September 1980 a complaint 2 for damages against the respondent Bank with the Court of First Instance (now
Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.
In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of action because of
paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles contained in the
box could not give rise to an action against it. It then interposed a counterclaim for exemplary damages as well as
attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an answer to the counterclaim. 4
In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig, Metro
Manila, rendered a decision 5 adverse to the petitioner on 8 December 1986, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay defendant the
amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees.
With costs against plaintiff. 6
The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the contract of
lease, the Bank has no liability for the loss of the certificates of title. The court declared that the said provisions are
binding on the parties.
Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse decision to the respondent
Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse
the challenged decision because the trial court erred in (a) absolving the respondent Bank from liability from the loss, (b)
not declaring as null and void, for being contrary to law, public order and public policy, the provisions in the contract for
lease of the safety deposit box absolving the Bank from any liability for loss, (c) not concluding that in this jurisdiction, as

well as under American jurisprudence, the liability of the Bank is settled and (d) awarding attorney's fees to the Bank and
denying the petitioner's prayer for nominal and exemplary damages and attorney's fees. 8

In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision principally on the theory
that the contract (Exhibit "2") executed by the petitioner and respondent Bank is in the nature of a contract of lease by
virtue of which the petitioner and its co-renter were given control over the safety deposit box and its contents while the
Bank retained no right to open the said box because it had neither the possession nor control over it and its contents. As
such, the contract is governed by Article 1643 of the Civil Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or
use of a thing for a price certain, and for a period which may be definite or indefinite. However, no
lease for more than ninety-nine years shall be valid.
It invoked Tolentino vs. Gonzales 11 which held that the owner of the property loses his control over the
property leased during the period of the contract and Article 1975 of the Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest
shall be bound to collect the latter when it becomes due, and to take such steps as may be
necessary in order that the securities may preserve their value and the rights corresponding to them
according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the contents of
the box. The stipulation absolving the defendant-appellee from liability is in accordance with the nature of
the contract of lease and cannot be regarded as contrary to law, public order and public policy." 12 The
appellate court was quick to add, however, that under the contract of lease of the safety deposit box, respondent
Bank is not completely free from liability as it may still be made answerable in case unauthorized persons enter
into the vault area or when the rented box is forced open. Thus, as expressly provided for in stipulation number 8
of the contract in question:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented
safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it.

13

Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August 1989, 15 petitioner
took this recourse under Rule 45 of the Rules of Court and urges Us to review and set aside the respondent Court's ruling.
Petitioner avers that both the respondent Court and the trial court (a) did not properly and legally apply the correct law in
this case, (b) acted with grave abuse of discretion or in excess of jurisdiction amounting to lack thereof and (c) set a
precedent that is contrary to, or is a departure from precedents adhered to and affirmed by decisions of this Court and
precepts in American jurisprudence adopted in the Philippines. It reiterates the arguments it had raised in its motion to
reconsider the trial court's decision, the brief submitted to the respondent Court and the motion to reconsider the latter's
decision. In a nutshell, petitioner maintains that regardless of nomenclature, the contract for the rent of the safety deposit
box (Exhibit "2") is actually a contract of deposit governed by Title XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of title pursuant to
Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the
depositor, or to his heirs and successors, or to the person who may have been designated in the
contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be
governed by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that
the depositary must observe.

Petitioner then quotes a passage from American Jurisprudence 17 which is supposed to expound on the
prevailing rule in the United States, to wit:
The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit box or
safe and the lessee takes possession of the box or safe and places therein his securities or other
valuables, the relation of bailee and bail or is created between the parties to the transaction as to
such securities or other valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it shall know, the character or
description of the property which is deposited in such safe-deposit box or safe does not change that
relation. That access to the contents of the safe-deposit box can be had only by the use of a key
retained by the lessee ( whether it is the sole key or one to be used in connection with one retained
by the lessor) does not operate to alter the foregoing rule. The argument that there is not, in such a
case, a delivery of exclusive possession and control to the deposit company, and that therefore the
situation is entirely different from that of ordinary bailment, has been generally rejected by the courts,
usually on the ground that as possession must be either in the depositor or in the company, it should
reasonably be considered as in the latter rather than in the former, since the company is, by the
nature of the contract, given absolute control of access to the property, and the depositor cannot
gain access thereto without the consent and active participation of the company. . . . (citations
omitted).
and a segment from Words and Phrases 18 which states that a contract for the rental of a bank safety deposit
box in consideration of a fixed amount at stated periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and public policy
and should be declared null and void. In support thereof, it cites Article 1306 of the Civil Code which provides that
parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order or public policy.
After the respondent Bank filed its comment, this Court gave due course to the petition and required the parties to
simultaneously submit their respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an ordinary
contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the
same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; 19 the
contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under
Article 1643 because the full and absolute possession and control of the safety deposit box was not given to the joint
renters the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this key,
neither of the renters could open the box. On the other hand, the respondent Bank could not likewise open the box without
the renter's key. In this case, the said key had a duplicate which was made so that both renters could have access to the
box.
Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article 1975, also relied
upon by the respondent Court, be invoked as an argument against the deposit theory. Obviously, the first paragraph of
such provision cannot apply to a depositary of certificates, bonds, securities or instruments which earn interest if such
documents are kept in a rented safety deposit box. It is clear that the depositary cannot open the box without the renter
being present.
We observe, however, that the deposit theory itself does not altogether find unanimous support even in American
jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation between a
bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bail or and
bailee, the bailment being for hire and mutual benefit. 21 This is just the prevailing view because:

There is, however, some support for the view that the relationship in question might be more
properly characterized as that of landlord and tenant, or lessor and lessee. It has also been
suggested that it should be characterized as that of licensor and licensee. The relation between a
bank, safe-deposit company, or storage company, and the renter of a safe-deposit box therein, is
often described as contractual, express or implied, oral or written, in whole or in part. But there is
apparently no jurisdiction in which any rule other than that applicable to bailments governs questions
of the liability and rights of the parties in respect of loss of the contents of safe-deposit
boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this
jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking
Act 23pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking
institutions other than building and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety
deposit boxes for the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of this section
asdepositories or as agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in
custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes
is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be
entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order or public policy. The depositary's responsibility for the safekeeping of the objects deposited in
the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in
performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 In
the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be
observed. 27 Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited
on account of fraud, negligence or delay would be void for being contrary to law and public policy. In the instant case,
petitioner maintains that conditions 13 and 14 of the questioned contract of lease of the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor
control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it
assumes absolutely no liability in connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition
for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a depositary under
Section 72(a) of the General Banking Act. Both exempt the latter from any liability except as contemplated in
condition 8 thereof which limits its duty to exercise reasonable diligence only with respect to who shall be
admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented
safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it.

29

Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is
not correct to assert that the Bank has neither the possession nor control of the contents of the box since in

fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover, the
respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective
boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the extent above
stated, the foregoing conditions in the contract in question are void and ineffective. It has been said:
With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company,
the parties, since the relation is a contractual one, may by special contract define their respective
duties or provide for increasing or limiting the liability of the deposit company, provided such contract
is not in violation of law or public policy. It must clearly appear that there actually was such a special
contract, however, in order to vary the ordinary obligations implied by law from the relationship of the
parties; liability of the deposit company will not be enlarged or restricted by words of doubtful
meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or
negligence or that of its agents or servants, and if a provision of the contract may be construed as an
attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor
of a safe-deposit box cannot limit its liability for loss of the contents thereof through its own
negligence, the view has been taken that such a lessor may limits its liability to some extent by
agreement or stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be
dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the
respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed from
a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent proof
was presented to show that respondent Bank was aware of the agreement between the petitioner and the Pugaos
to the effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint
signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud
or negligence of the respondent Bank. This in turn flows from this Court's determination that the contract involved
was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter's key, it
was obvious that either of them could ask the Bank for access to the safety deposit box and, with the use of such
key and the Bank's own guard key, could open the said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part had been
established, the trial court erred in condemning the petitioner to pay the respondent Bank attorney's fees. To this
extent, the Decision (dispositive portion) of public respondent Court of Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from the 4
July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to the
pronouncement We made above on the nature of the relationship between the parties in a contract of lease of safety
deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED and the instant Petition for Review
is otherwise DENIED for lack of merit.
No pronouncement as to costs.
SO ORDERED.

G.R. Nos. L-26948 and L-26949

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

October 8, 1927

GUILLERMO BARON, plaintiff-appellant,

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

STREET, J.:
These two actions were instituted in the Court of First Instance of the Province of Pampanga by the respective
plaintiffs, Silvestra Baron and Guillermo Baron, for the purpose of recovering from the defendant, Pablo David, the
value of palay alleged to have been sold by the plaintiffs to the defendant in the year 1920. Owing to the fact that the
defendant is the same in both cases and that the two cases depend in part upon the same facts, the cases were
heard together in the trial court and determined in a single opinion. The same course will accordingly be followed
here.
In the first case, i. e., that which Silvestra Baron is plaintiff, the court gave judgment for her to recover of the
defendant the sum of P5,238.51, with costs. From this judgment both the plaintiff and the defendant appealed.
In the second case, i. e., that in which Guillermo Baron, is plaintiff, the court gave judgment for him to recover of the
defendant the sum of P5,734.60, with costs, from which judgment both the plaintiff and the defendant also appealed.
In the same case the defendant interposed a counterclaim in which he asked credit for the sum of P2,800 which he
had advanced to the plaintiff Guillermo Baron on various occasions. This credit was admitted by the plaintiff and
allowed by the trial court. But the defendant also interposed a cross-action against Guillermo Baron in which the
defendant claimed compensation for damages alleged to have Ben suffered by him by reason of the alleged
malicious and false statements made by the plaintiff against the defendant in suing out an attachment against the
defendant's property soon after the institution of the action. In the same cross-action the defendant also sought
compensation for damages incident to the shutting down of the defendant's rice mill for the period of one hundred
seventy days during which the above-mentioned attachment was in force. The trial judge disallowed these claims for
damages, and from this feature of the decision the defendant appealed. We are therefore confronted with five
distinct appeals in this record.
Prior to January 17, 1921, the defendant Pablo David has been engaged in running a rice mill in the municipality of
Magalang, in the Province of Pampanga, a mill which was well patronized by the rice growers of the vicinity and
almost constantly running. On the date stated a fire occurred that destroyed the mill and its contents, and it was
some time before the mill could be rebuilt and put in operation again. Silvestra Baron, the plaintiff in the first of the
actions before us, is an aunt of the defendant; while Guillermo Baron, the plaintiff in the other action; is his uncle. In
the months of March, April, and May, 1920, Silvestra Baron placed a quantity of palay in the defendant's mill; and
this, in connection with some that she took over from Guillermo Baron, amounted to 1,012 cavans and 24 kilos.
During approximately the same period Guillermo Baron placed other 1,865 cavans and 43 kilos of palay in the mill.
No compensation has ever been received by Silvestra Baron upon account of the palay delivered by Guillermo
Baron, he has received from the defendant advancements amounting to P2,800; but apart from this he has not been
compensated. Both the plaintiffs claim that the palay which was delivered by them to the defendant was sold to the
defendant; while the defendant, on the other hand, claims that the palay was deposited subject to future withdrawal
by the depositors or subject to some future sale which was never effected. He therefore supposes himself to be
relieved from all responsibility by virtue of the fire of January 17, 1921, already mentioned.
The plaintiff further say that their palay was delivered to the defendant at his special request, coupled with a promise
on his part to pay for the same at the highest price per cavan at which palay would sell during the year 1920; and
they say that in August of that year the defendant promised to pay them severally the price of P8.40 per cavan,
which was about the top of the market for the season, provided they would wait for payment until December. The

trial judge found that no such promise had been given; and the incredulity of the court upon this point seems to us to
be justified. A careful examination of the proof, however, leads us to the conclusion that the plaintiffs did, some time
in the early part of August, 1920, make demand upon the defendant for a settlement, which he evaded or postponed
leaving the exact amount due to the plaintiffs undetermined.
It should be stated that the palay in question was place by the plaintiffs in the defendant's mill with the
understanding that the defendant was at liberty to convert it into rice and dispose of it at his pleasure. The mill was
actively running during the entire season, and as palay was daily coming in from many customers and as rice was
being constantly shipped by the defendant to Manila, or other rice markets, it was impossible to keep the plaintiffs'
palay segregated. In fact the defendant admits that the plaintiffs' palay was mixed with that of others. In view of the
nature of the defendant's activities and the way in which the palay was handled in the defendant's mill, it is quite
certain that all of the plaintiffs' palay, which was put in before June 1, 1920, been milled and disposed of long prior to
the fire of January 17, 1921. Furthermore, the proof shows that when the fire occurred there could not have been
more than about 360 cavans of palay in the mill, none of which by any reasonable probability could have been any
part of the palay delivered by the plaintiffs. Considering the fact that the defendant had thus milled and doubtless
sold the plaintiffs' palay prior to the date of the fire, it result that he is bound to account for its value, and his liability
was not extinguished by the occurence of the fire. In the briefs before us it seems to have been assumed by the
opposing attorneys that in order for the plaintiffs to recover, it is necessary that they should be able to establish that
the plaintiffs' palay was delivered in the character of a sale, and that if, on the contrary, the defendant should prove
that the delivery was made in the character of deposit, the defendant should be absolved. But the case does not
depend precisely upon this explicit alternative; for even supposing that the palay may have been delivered in the
character of deposit, subject to future sale or withdrawal at plaintiffs' election, nevertheless if it was understood that
the defendant might mill the palay and he has in fact appropriated it to his own use, he is of course bound to
account for its value. Under article 1768 of the Civil Code, when the depository has permission to make use of the
thing deposited, the contract loses the character of mere deposit and becomes a loan or a commodatum; and of
course by appropriating the thing, the bailee becomes responsible for its value. In this connection we wholly reject
the defendant's pretense that the palay delivered by the plaintiffs or any part of it was actually consumed in the fire
of January, 1921. Nor is the liability of the defendant in any wise affected by the circumstance that, by a custom
prevailing among rice millers in this country, persons placing palay with them without special agreement as to price
are at liberty to withdraw it later, proper allowance being made for storage and shrinkage, a thing that is sometimes
done, though rarely.
In view of what has been said it becomes necessary to discover the price which the defendant should be required to
pay for the plaintiffs' palay. Upon this point the trial judge fixed upon P6.15 per cavan; and although we are not
exactly in agreement with him as to the propriety of the method by which he arrived at this figure, we are
nevertheless of the opinion that, all things considered, the result is approximately correct. It appears that the price of
palay during the months of April, May, and June, 1920, had been excessively high in the Philippine Islands and even
prior to that period the Government of the Philippine Islands had been attempting to hold the price in check by
executive regulation. The highest point was touched in this season was apparently about P8.50 per cavan, but the
market began to sag in May or June and presently entered upon a precipitate decline. As we have already stated,
the plaintiffs made demand upon the defendant for settlement in the early part of August; and, so far as we are able
to judge from the proof, the price of P6.15 per cavan, fixed by the trial court, is about the price at which the
defendant should be required to settle as of that date. It was the date of the demand of the plaintiffs for settlement
that determined the price to be paid by the defendant, and this is true whether the palay was delivered in the
character of sale with price undetermined or in the character of deposit subject to use by the defendant. It results
that the plaintiffs are respectively entitle to recover the value of the palay which they had placed with the defendant
during the period referred to, with interest from the date of the filing of their several complaints.
As already stated, the trial court found that at the time of the fire there were about 360 cavans of palay in the mill
and that this palay was destroyed. His Honor assumed that this was part of the palay delivered by the plaintiffs, and
he held that the defendant should be credited with said amount. His Honor therefore deducted from the claims of the
plaintiffs their respective proportionate shares of this amount of palay. We are unable to see the propriety of this
feature of the decision. There were many customers of the defendant's rice mill who had placed their palay with the
defendant under the same conditions as the plaintiffs, and nothing can be more certain than that the palay which
was burned did not belong to the plaintiffs. That palay without a doubt had long been sold and marketed. The

assignments of error of each of the plaintiffs-appellants in which this feature of the decision is attacked are therefore
well taken; and the appealed judgments must be modified by eliminating the deductions which the trial court allowed
from the plaintiffs' claims.
The trial judge also allowed a deduction from the claim of the plaintiff Guillermo Baron of 167 cavans of palay, as
indicated in Exhibit 12, 13, 14, and 16. This was also erroneous. These exhibits relate to transactions that occurred
nearly two years after the transactions with which we are here concerned, and they were offered in evidence merely
to show the character of subsequent transactions between the parties, it appearing that at the time said exhibits
came into existence the defendant had reconstructed his mill and that business relations with Guillermo Baron had
been resumed. The transactions shown by these exhibits (which relate to palay withdrawn by the plaintiff from the
defendant's mill) were not made the subject of controversy in either the complaint or the cross-complaint of the
defendant in the second case. They therefore should not have been taken into account as a credit in favor of the
defendant. Said credit must therefore be likewise of course be without prejudice to any proper adjustment of the
rights of the parties with respect to these subsequent transactions that they have heretofore or may hereafter effect.
The preceding discussion disposes of all vital contentions relative to the liability of the defendant upon the causes of
action stated in the complaints. We proceed therefore now to consider the question of the liability of the plaintiff
Guillermo Baron upon the cross-complaint of Pablo David in case R. G. No. 26949. In this cross-action the
defendant seek, as the stated in the third paragraph of this opinion, to recover damages for the wrongful suing out of
an attachment by the plaintiff and the levy of the same upon the defendant's rice mill. It appears that about two and
one-half months after said action was begun, the plaintiff, Guillermo Baron, asked for an attachment to be issued
against the property of the defendant; and to procure the issuance of said writ the plaintiff made affidavit to the effect
that the defendant was disposing, or attempting the plaintiff. Upon this affidavit an attachment was issued as prayed,
and on March 27, 1924, it was levied upon the defendant's rice mill, and other property, real and personal.
1awph!l.net

Upon attaching the property the sheriff closed the mill and placed it in the care of a deputy. Operations were not
resumed until September 13, 1924, when the attachment was dissolved by an order of the court and the defendant
was permitted to resume control. At the time the attachment was levied there were, in the bodega, more than 20,000
cavans of palay belonging to persons who held receipts therefor; and in order to get this grain away from the sheriff,
twenty-four of the depositors found it necessary to submit third-party claims to the sheriff. When these claims were
put in the sheriff notified the plaintiff that a bond in the amount of P50,000 must be given, otherwise the grain would
be released. The plaintiff, being unable or unwilling to give this bond, the sheriff surrendered the palay to the
claimants; but the attachment on the rice mill was maintained until September 13, as above stated, covering a
period of one hundred seventy days during which the mill was idle. The ground upon which the attachment was
based, as set forth in the plaintiff's affidavit was that the defendant was disposing or attempting to dispose of his
property for the purpose of defrauding the plaintiff. That this allegation was false is clearly apparent, and not a word
of proof has been submitted in support of the assertion. On the contrary, the defendant testified that at the time this
attachment was secured he was solvent and could have paid his indebtedness to the plaintiff if judgment had been
rendered against him in ordinary course. His financial conditions was of course well known to the plaintiff, who is his
uncle. The defendant also states that he had not conveyed away any of his property, nor had intended to do so, for
the purpose of defrauding the plaintiff. We have before us therefore a case of a baseless attachment, recklessly
sued out upon a false affidavit and levied upon the defendant's property to his great and needless damage. That the
act of the plaintiff in suing out the writ was wholly unjustifiable is perhaps also indicated in the circumstance that the
attachment was finally dissolved upon the motion of the plaintiff himself.
The defendant testified that his mill was accustomed to clean from 400 to 450 cavans of palay per day, producing
225 cavans of rice of 57 kilos each. The price charged for cleaning each cavan rice was 30 centavos. The defendant
also stated that the expense of running the mill per day was from P18 to P25, and that the net profit per day on the
mill was more than P40. As the mill was not accustomed to run on Sundays and holiday, we estimate that the
defendant lost the profit that would have been earned on not less than one hundred forty work days. Figuring his
profits at P40 per day, which would appear to be a conservative estimate, the actual net loss resulting from his
failure to operate the mill during the time stated could not have been less than P5,600. The reasonableness of these
figures is also indicated in the fact that the twenty-four customers who intervened with third-party claims took out of
the camarin 20,000 cavans of palay, practically all of which, in the ordinary course of events, would have been

milled in this plant by the defendant. And of course other grain would have found its way to this mill if it had
remained open during the one hundred forty days when it was closed.
But this is not all. When the attachment was dissolved and the mill again opened, the defendant found that his
customers had become scattered and could not be easily gotten back. So slow, indeed, was his patronage in
returning that during the remainder of the year 1924 the defendant was able to mill scarcely more than the grain
belonging to himself and his brothers; and even after the next season opened many of his old customers did not
return. Several of these individuals, testifying as witnesses in this case, stated that, owing to the unpleasant
experience which they had in getting back their grain from the sheriff to the mill of the defendant, though they had
previously had much confidence in him.
As against the defendant's proof showing the facts above stated the plaintiff submitted no evidence whatever. We
are therefore constrained to hold that the defendant was damaged by the attachment to the extent of P5,600, in
profits lost by the closure of the mill, and to the extent of P1,400 for injury to the good-will of his business, making a
total of P7,000. For this amount the defendant must recover judgment on his cross-complaint.
The trial court, in dismissing the defendant's cross-complaint for damages resulting from the wrongful suing out of
the attachment, suggested that the closure of the rice mill was a mere act of the sheriff for which the plaintiff was not
responsible and that the defendant might have been permitted by the sheriff to continue running the mill if he had
applied to the sheriff for permission to operate it. This singular suggestion will not bear a moment's criticism. It was
of course the duty of the sheriff, in levying the attachment, to take the attached property into his possession, and the
closure of the mill was a natural, and even necessary, consequence of the attachment. For the damage thus inflicted
upon the defendant the plaintiff is undoubtedly responsible.
One feature of the cross-complaint consist in the claim of the defendant (cross-complaint) for the sum of P20,000 as
damages caused to the defendant by the false and alleged malicious statements contained in the affidavit upon
which the attachment was procured. The additional sum of P5,000 is also claimed as exemplary damages. It is clear
that with respect to these damages the cross-action cannot be maintained, for the reason that the affidavit in
question was used in course of a legal proceeding for the purpose of obtaining a legal remedy, and it is therefore
privileged. But though the affidavit is not actionable as a libelous publication, this fact in no obstacle to the
maintenance of an action to recover the damage resulting from the levy of the attachment.
Before closing this opinion a word should be said upon the point raised in the first assignment of error of Pablo
David as defendant in case R. G. No. 26949. In this connection it appears that the deposition of Guillermo Baron
was presented in court as evidence and was admitted as an exhibit, without being actually read to the court. It is
supposed in the assignment of error now under consideration that the deposition is not available as evidence to the
plaintiff because it was not actually read out in court. This connection is not well founded. It is true that in section
364 of the Code of Civil Procedure it is said that a deposition, once taken, may be read by either party and will then
be deemed the evidence of the party reading it. The use of the word "read" in this section finds its explanation of
course in the American practice of trying cases for the most part before juries. When a case is thus tried the actual
reading of the deposition is necessary in order that the jurymen may become acquainted with its contents. But in
courts of equity, and in all courts where judges have the evidence before them for perusal at their pleasure, it is not
necessary that the deposition should be actually read when presented as evidence.
From what has been said it result that judgment of the court below must be modified with respect to the amounts
recoverable by the respective plaintiffs in the two actions R. G. Nos. 26948 and 26949 and must be reversed in
respect to the disposition of the cross-complaint interposed by the defendant in case R. G. No. 26949, with the
following result: In case R. G. No. 26948 the plaintiff Silvestra Baron will recover of the Pablo David the sum of
P6,227.24, with interest from November 21, 1923, the date of the filing of her complaint, and with costs. In case R.
G. No. 26949 the plaintiff Guillermo Baron will recover of the defendant Pablo David the sum of P8,669.75, with
interest from January 9, 1924. In the same case the defendant Pablo David, as plaintiff in the cross-complaint, will
recover of Guillermo Baron the sum of P7,000, without costs. So ordered.
Avancea, C.J., Johnson, Malcolm, Villamor, Romualdez and Villa-Real, JJ., concur.

Separate Opinions

JOHNS, J., dissenting and concurring:

The plaintiff Silvestra Baron is the aunt of the defendant, and Guillermo Baron, the plaintiff in the other action, is his
uncle. There is no dispute as to the amount of palay which each delivered to the mill of the defendant. Owing to the
fact that they were relatives and that the plaintiffs reposed special reposed special trust and confidence in the
defendant, who was their nephew, they were not as careful and prudent in their business dealings with him as they
should have been. Plaintiffs allege that their respective palay was delivered to the defendant at his mill with the
understanding and agreement between them that they should receive the highest market price for the palay for that
season, which was P8.50 per cavan. They further allege that about August first they made another contract in and
by which he promised and agreed to pay them P8.40 per cavan for their palay, in consideration of which they agreed
to extend the time for payment to the first of December of that year. The amount of palay is not in dispute, and the
defendant admits that it was delivered to his mill, but he claims that he kept it on deposit and as bailee without hire
for the plaintiffs and at their own risk, and that the mill was burned down, and that at the time of the fire, plaintiffs'
palay was in the mill. The lower court found as a fact that there was no merit in that defense, and that there was but
little, if any, palay in the mill at the time of the fire and that in truth and in fact that defense was based upon perjured
testimony.
The two cases were tried separately in the court below, but all of the evidence in the case was substituted and used
in the other. Both plaintiffs testified to the making of the respective contracts as alleged in their complaint; to wit, that
they delivered the palay to the defendant with the express understanding and agreement that he would pay them for
the palay the highest market price for the season, and to the making of the second contract about the first of August,
in which they had a settlement, and that the defendant then agreed to pay them P8.40 per cavan, such payment to
be made on December first. It appears that the highest market price for palay for that season was P8.50 per cavan.
The defendant denied the making of either one of those contracts, and offered no other evidence on that question.
That is to say, we have the evidence of both Silvestra Baron and Guillermo Baron to the making of those contracts,
which is denied by the defendant only. Plaintiffs' evidence is also corroborated by the usual and customary manner
in which the growers sell their palay. That is to say, it is their custom to sell the palay at or about the time it is
delivered at the mill and as soon as it is made ready for market in the form of rice. As stated the lower court found
as a fact that the evidence of the defendants as to plaintiffs' palay being in the mill at the time of the fire was not
worthy of belief, and that in legal effect it was a manufactured defense. Yet, strange as it may seem, both the lower
court and this court have found as a fact that upon the question of the alleged contracts, the evidence for the
defendant is true and entitled to more weight than the evidence of both plaintiffs which is false.
It appears that the plaintiff Silvestra Baron is an old lady about 80 years of age and the aunt of the defendant, and
Guillermo Baron is the uncle. Under the theory of the lower court and of this court, both of them at all the time during
the high prices held their palay in defendant's mill at their own risk, and that upon that point the evidence of the
defendant, standing alone is entitled to more weight and is more convincing than the combined evidence of the two
plaintiffs. In the very nature of things, if defendant's evidence upon that point is true, it stands to reason that,
following the custom of growers, the plaintiffs would have sold their palay during the period of high prices, and would
not have waited until it dropped from P8.50 per cavan to P6.15 per cavan about the first of August. Upon that
question, both the weight and the credibility of the evidence is with the plaintiffs, and they should have judgment for
the full amount of their palay on the basis of P8.40 per cavan. For such reason, I vigorously dissent from the
majority opinion.

I frankly concede that the attachment was wrongful, and that it should never have been levied. It remained in force
for a period of one hundred and seventy days at which time it was released on motion of the plaintiffs. The
defendant now claims, and the majority opinion has allowed him, damages for that full period, exclusive of Sundays,
at the rate, of P40 per day, found to be the net profit for the operation of the rice mill. It further appears, and this
court finds, that the defendant was a responsible man, and that he had ample property out which to satisfy plaintiffs'
claim. Assuming that to be true, there was no valid reason why he could not had given a counter bond and released
the attachment. Upon the theory of the majority opinion, if the plaintiffs had not released the attachment, they would
still be liable to the defendant at the rate of P40 per day up to the present time. When the mill was attached, if he
was in a position to do so, it was the duty of the defendant to give a counter bond and release the attachment and
resume its operation. The majority opinion also allowed the defendant P1,400 "for injury to the goodwill of his
business." The very fact that after a delay of about four years, both of the plaintiffs were compelled to bring to their
respective actions against the defendant to recover from him on a just and meritorious claim, as found by this court
and the lower court, and the further fact that after such long delay, the defendant has sought to defeat the actions by
a sham and manufactured defense, as found by this and the lower court, would arouse the suspicion of any
customers the defendant ever had, and shake their confidence in his business honor and integrity, and destroy any
goodwill which he ever did have. Under such conditions, it would be strange that the defendant would have any
customers left. He is not entitled to any compensation for the loss of goodwill, and P5,000 should be the very limit of
the amount of his damages for the wrongful attachment, and upon that point I vigorously dissent. In all other
respects, I agree with the majority opinion.

G.R. No. 4015

August 24, 1908

ANGEL JAVELLANA, plaintiff-appellee,

vs.
JOSE LIM, ET AL., defendants-appellants.
R. Zaldarriaga for appellants.
B. Montinola for appellee.
TORRES, J.:
The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th of October, 1906, with the Court of First
Instance of Iloilo, praying that the defendants, Jose Lim and Ceferino Domingo Lim, he sentenced to jointly and
severally pay the sum of P2,686.58, with interest thereon at the rate of 15 per cent per annum from the 20th of
January, 1898, until full payment should be made, deducting from the amount of interest due the sum of P1,102.16,
and to pay the costs of the proceedings.
Authority from the court having been previously obtained, the complaint was amended on the 10th of January, 1907;
it was then alleged, on the 26th of May, 1897, the defendants executed and subscribed a document in favor of the
plaintiff reading as follows:
We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six hundred and
eighty-six cents of pesos fuertes, which we will return to the said gentleman, jointly and severally, on the 20th of
January, 1898. Jaro, 26th of May, 1897. Signed Jose Lim. Signed: Ceferino Domingo Lim.
That, when the obligation became due, the defendants begged the plaintiff for an extension of time for the payment
thereof, building themselves to pay interest at the rate of 15 per cent on the amount of their indebtedness, to which
the plaintiff acceded; that on the 15th of May, 1902, the debtors paid on account of interest due the sum of P1,000
pesos, with the exception of either capital or interest, had thereby been subjected to loss and damages.
A demurrer to the original complaint was overruled, and on the 4th of January, 1907, the defendants answered the
original complaint before its amendment, setting forth that they acknowledged the facts stated in Nos. 1 and 2 of the
complaint; that they admitted the statements of the plaintiff relative to the payment of 1,102.16 pesos made on the
15th of November, 1902, not, however, as payment of interest on the amount stated in the foregoing document, but
on account of the principal, and denied that there had been any agreement as to an extension of the time for
payment and the payment of interest at the rate of 15 per cent per annum as alleged in paragraph 3 of the
complaint, and also denied all the other statements contained therein.
As a counterclaim, the defendants alleged that they had paid to the plaintiff sums which, together with the P1,102.16
acknowledged in the complaint, aggregated the total sum of P5,602.16, and that, deducting therefrom the total sum
of P2,686.58 stated in the document transcribed in the complaint, the plaintiff still owed the defendants P2,915.58;
therefore, they asked that judgment be entered absolving them, and sentencing the plaintiff to pay them the sum of
P2,915.58 with the costs.

Evidence was adduced by both parties and, upon their exhibits, together with an account book having been made of
record, the court below rendered judgment on the 15th of January, 1907, in favor of the plaintiff for the recovery of
the sum of P5,714.44 and costs.
The defendants excepted to the above decision and moved for a new trial. This motion was overruled and was also
excepted to by them; the bill of exceptions presented by the appellants having been approved, the same was in due
course submitted to this court.
The document of indebtedness inserted in the complaint states that the plaintiff left on deposit with the defendants a
given sum of money which they were jointly and severally obliged to return on a certain date fixed in the document;
but that, nevertheless, when the document appearing as Exhibits 2, written in the Visayan dialect and followed by a
translation into Spanish was executed, it was acknowledged, at the date thereof, the 15th of November, 1902, that
the amount deposited had not yet been returned to the creditor, whereby he was subjected to losses and damages
amounting to 830 pesos since the 20th of January, 1898, when the return was again stipulated with the further
agreement that the amount deposited should bear interest at the rate of 15 per cent per annum, from the aforesaid
date of January 20, and that the 1,000 pesos paid to the depositor on the 15th of May, 1900, according to the receipt
issued by him to the debtors, would be included, and that the said rate of interest would obtain until the debtors on
the 20th of May, 1897, it is called a deposit consisted, and they could have accomplished the return agreed upon by
the delivery of a sum equal to the one received by them. For this reason it must be understood that the debtors were
lawfully authorized to make use of the amount deposited, which they have done, as subsequent shown when asking
for an extension of the time for the return thereof, inasmuch as, acknowledging that they have subjected the letter,
their creditor, to losses and damages for not complying with what had been stipulated, and being conscious that
they had used, for their own profit and gain, the money that they received apparently as a deposit, they engaged to
pay interest to the creditor from the date named until the time when the refund should be made. Such conduct on
the part of the debtors is unquestionable evidence that the transaction entered into between the interested parties
was not a deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that
The depository can not make use of the thing deposited without the express permission of the depositor.
Otherwise he shall be liable for losses and damages.
Article 1768 also provides that
When the depository has permission to make use of the thing deposited, the contract loses the character of
a deposit and becomes a loan or bailment.
The permission shall not be presumed, and its existence must be proven.
When on one of the latter days of January, 1898, Jose Lim went to the office of the creditor asking for an extension
of one year, in view of the fact the money was scare, and because neither himself nor the other defendant were able
to return the amount deposited, for which reason he agreed to pay interest at the rate of 15 per cent per annum, it
was because, as a matter of fact, he did not have in his possession the amount deposited, he having made use of
the same in his business and for his own profit; and the creditor, by granting them the extension, evidently confirmed
the express permission previously given to use and dispose of the amount stated as having bee deposited, which, in
accordance with the loan, to all intents and purposes gratuitously, until the 20th of January, 1898, and from that
dated with interest at 15 per cent per annum until its full payment, deducting from the total amount of interest the
sum of 1,000 pesos, in accordance with the provisions of article 1173 of the Civil Code.
Notwithstanding that it does not appear that Jose Lim signed the document (Exhibit 2) executed in the presence of
three witnesses on the 15th of November, 1902, by Ceferino Domingo Lim on behalf of himself and the former,
nevertheless, the said document has not been contested as false, either by a criminal or by a civil proceeding, nor
has any doubt been cast upon the authenticity of the signatures of the witnesses who attested the execution of the

same; and from the evidence in the case one is sufficiently convinced that the said Jose Lim was perfectly aware of
and authorized his joint codebtor to liquidate the interest, to pay the sum of 1,000 pesos, on account thereof, and to
execute the aforesaid document No. 2. A true ratification of the original document of deposit was thus made, and not
the least proof is shown in the record that Jose Lim had ever paid the whole or any part of the capital stated in the
original document, Exhibit 1.
If the amount, together with interest claimed in the complaint, less 1,000 pesos appears as fully established, such is
not the case with the defendant's counterclaim for P5,602.16, because the existence and certainty of said
indebtedness imputed to the plaintiff has not been proven, and the defendants, who call themselves creditors for the
said amount have not proven in a satisfactory manner that the plaintiff had received partial payments on account of
the same; the latter alleges with good reason, that they should produce the receipts which he may have issued, and
which he did issue whenever they paid him any money on account. The plaintiffs allegation that the two amounts of
400 and 1,200 pesos, referred to in documents marked "C" and "D" offered in evidence by the defendants, had been
received from Ceferino Domingo Lim on account of other debts of his, has not been contradicted, and the fact that in
the original complaint the sum of 1,102.16 pesos, was expressed in lieu of 1,000 pesos, the only payment made on
account of interest on the amount deposited according to documents No. 2 and letter "B" above referred to, was due
to a mistake.
Moreover, for the reason above set forth it may, as a matter of course, be inferred that there was no renewal of the
contract deposited converted into a loan, because, as has already been stated, the defendants received said
amount by virtue of real loan contract under the name of a deposit, since the so-called bailees were forthwith
authorized to dispose of the amount deposited. This they have done, as has been clearly shown.
The original joint obligation contracted by the defendant debtor still exists, and it has not been shown or proven in
the proceedings that the creditor had released Joe Lim from complying with his obligation in order that he should not
be sued for or sentenced to pay the amount of capital and interest together with his codebtor, Ceferino Domingo
Lim, because the record offers satisfactory evidence against the pretension of Jose Lim, and it further appears that
document No. 2 was executed by the other debtor, Ceferino Domingo Lim, for himself and on behalf of Jose Lim;
and it has also been proven that Jose Lim, being fully aware that his debt had not yet been settled, took steps to
secure an extension of the time for payment, and consented to pay interest in return for the concession requested
from the creditor.
In view of the foregoing, and adopting the findings in the judgment appealed from, it is our opinion that the same
should be and is hereby affirmed with the costs of this instance against the appellant, provided that the interest
agreed upon shall be paid until the complete liquidation of the debt. So ordered.

G.R. No. L-32778

November 14, 1930

Involuntary insolvency of Mariano Velasco and Co., et al. COMPAIA AGRICOLA DE ULTRAMAR, claimantappellee,
vs.
VICENTE NEPOMUCENO, assignee-appellant.
The appellant in his own behalf.
Eusebio Orense and Nicolas Belmonte for appellee.

OSTRAND, J.:
It appears from the record that on March 17, 1927, the registered partnerships, Mariano Velasco & Co., Mariano
Velasco, Sons, & Co., and Mariano Velasco & Co., Inc., were, on petition of the creditors, declared insolvent by the
Court of First Instance of Manila.
On the 16th day of April, 1927, the Compania Agricola de Ultramar filed a claim against one of the insolvents
Mariano Velasco & Co., claiming the sum of P10,000, with the agreed interest thereon at the rate of 6 per cent per
annum from April 5, 1918, until its full payment was a deposit with said Mariano Velasco & Co. and asked the court
to declare it a preferred claim.
The assignee of the insolvency answered the claim by interposing a general denial. The claim was thereupon
referred by the court to a Commissioner to receive the evidence, and on September 23, 1929, the court rendered a
decision declaring that the alleged deposit was a preferred claim for the sum mentioned, with interest at 6 per cent
per annum from April 5, 1918, until paid. From this decision the assignee appealed.
The evidence presented by the claimant Compania Agricola de Ultramar consisted of a receipt in writing, and the
testimony of Jose Velasco who was manager of Mariano Velasco & Co. at the time the note was executed. The
receipt reads as follow (translation):
MANILA, P. I., April 5, 1918.
Received from the "Compania Agricola de Ultramar" the sum of ten thousand Philippine pesos as a deposit
at the interest of six per cent annually, for the term of three months from date.

In witness thereof, I sign the present.

MARIANO VELASCO & CO.
By (Sgd.) JOSE VELASCO
Manager.
P10,000.00.
In his testimony, Jose Velasco stated that his signature on the receipt was authentic and that he received the said
sum of P10,000 from the appellee and deposited it with the bank in the current account of Mariano Velasco & Co.
In our opinion the court below erred in finding that the claim of the appellee should be considered a deposit and a
preferred claim. In the case of Gavieres vs. De Tavera (1 Phil., 17), very similar to the present case, this court held
that the transaction therein involved was a loan and not a deposit. The facts of the case were that in 1859 Ignacia
de Gorricho delivered P3,000 to Felix Pardo de Tavera. The agreement between them read as follows (translation):
Received of Seorita Ignacia de Gorricho the sum of 3,000 pesos, gold (3,000 pesos), as a deposit payable
on two months' notice in advance, with interest at 6 percent per annum with a hypothecation of the goods
now owned by me or which may be owned hereafter, as security of the payment.
In witness whereof I sign in Binondo, January 31, 1859.
FELIX PARDO DE TAVERA
After the death of both parties, Gavieres, as plaintiff and successor in interest of the deceased Ignacia de Gorricho,
brought the action against Trinidad H. Pardo de Tavera, the successor in interest of the deceased Felix Pardo de
Tavera, for the collection of the sum of P1,423.75, the remaining portion of the 3,000 pesos. The plaintiff Gavieres
alleged that the money was delivered to Felix Pardo de Tavera as a deposit, but the defendant insisted that the
agreement above quoted was not a contract of deposit but one of loan. This court said:
Although in the document in question a deposit is spoken of, nevertheless from an examination of the entire
document it clearly appears that the contract was a loan and that such was the intention of the parties. It is
unnecessary to recur to the cannons of interpretation to arrive at this conclusion. The obligation of the
depository to pay interest at the rate of 6 per cent to the depositor suffices to cause the obligation to be
considered as a loan and makes it likewise evident that it was the intention of the parties that the depository
should have the right to make use of the amount deposited, since it was stipulated that the amount could be
collected after notice of two months in advance. Such being the case, the contract lost the character of a
deposit and acquired that of a loan. (Art. 1768, Civil Code.)
In the case of Javellana vs. Lim (11 Phil., 141) this court, speaking through Justice Torres said:
Authority from the court having been previously obtained, the complaint was amended on the 10th of
January, 1907; it was then alleged, that on the 26th of May, 1897, the defendants executed and subscribed
a document in favor of the plaintiff reading as follows:
We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six hundred
and eighty-six pesos and fifty-eight cents of pesos fuertes, which we will return to the said gentleman, jointly
and severally on the 20th of January, 1898. Jaro, 26th of May 1879. Signed: JOSE LIM. Signed:
CEFERINO DOMINGO LIM.
That, when the obligation became due, the defendants begged the plaintiff for an extension of time for the
payment thereof binding themselves to pay interest at the rate of 15 per cent on the amount of their
indebtedness, to which the plaintiff acceded; that on the 15th of May, 1902, the debtors paid on account of
interest due the sum of 1,000 pesos, with the exception of which they had not paid any other sum on

account of either capital or interest, notwithstanding the requests made by the plaintiff, who had thereby
been subjected to loss and damages.
xxx

xxx

xxx

The document of indebtedness inserted in the complaint states that the plaintiff left on deposit with the
defendants a given sum of money which they were jointly and severally obliged to return on a certain date
fixed in the document; but that, nevertheless, when the document appearing as Exhibit 2, written in the
Visayan dialect and followed by a translation into Spanish was executed, it was acknowledged, at the date
thereof, the 15th of November, 1902 that the amount deposited had not yet been returned to the creditor,
whereby he was subjected to losses and damages amounting to 830 pesos since the 20th of January, 1898,
when the return was again stipulated with the further agreement that the amount deposited should bear
interest at the rate of 15 per cent per annum from the aforesaid date of January 20, and that the 1,000 pesos
paid to the depositor on the 15th of May, 1900, according to the receipt issued by him to the debtors, would
be included, and that the said rate of interest would obtain until the debtors paid the creditor the said amount
in full. In this second document the contract between the parties, which is a real loan of money with interest,
appears perfectly defined, notwithstanding the fact that in the original document executed by the debtors on
the 26th of May, 1897, it is called a deposit; so that when they bound themselves jointly and severally to
refund the sum of 2,686.58 pesos to the depositor, Javellana, they did not engage to return the same coins
received and of which the amount deposited consisted, and they could have accomplished the return agreed
upon by the delivery of a sum equal to the one received by them. For this reason it must be understood that
the debtors were lawfully authorized to make use of the amount deposited, which they have done, as
subsequently shown when asking for an extension of the time for the return thereof, inasmuch as,
acknowledging that they have subjected the lender, their creditor, to losses and damages for not complying
with what had been stipulated, and being conscious that they had used, for their own profit and gain, the
money that they received apparently as a deposit, they engaged to pay interest to the creditor from the date
named until the time when the refund should be made. Such conduct on the part of the debtors is
unquestionable evidence that the transaction entered in to between the interested parties was not a deposit,
but a real contract of loan.
Article 1767 of the Civil Code provides that
"The depository cannot make use of the thing deposited without the express permission of the
depositor."
"Otherwise he shall be liable for losses and damages."
Article 1768 also provides that
"When the depository has permission to make use of the thing deposited, the contract loses the
character of a deposit and becomes a loan or bailment."
"The permission not be presumed, and its existence must be proven."
xxx

xxx

xxx

Moreover, for the reasons above set forth it may, as a matter of course, be inferred that there was no
renewal of the contract of deposit converted into a loan, because, as has already been stated, the
defendants received said amount by virtue of a real loan contract under the name of a deposit, since the socalled bailees were forthwith authorized to dispose of the amount deposited. This they have done, as has
been clearly shown.
lawphil.net

The two cases quoted are sufficient to show that the ten thousand pesos delivered by the appellee to Mariano
Velasco & Co. cannot de regarded as a technical deposit. But the appellee argues that it is at least an "irregular

deposit." This argument is, we think, sufficiently answered in the case of Rogers vs. Smith, Bell & Co. (10 Phil.,
319). There this court said:
. . . Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664), states that there are three points of
difference between a loan and an irregular deposit. The first difference which he points out consists in the
fact that in an irregular deposit the only benefit is that which accrues to the depositor, while in a loan the
essential cause for the transaction is the necessity of the borrower. The contract in question does not fulfill
this requirement of an irregular deposit. It is very apparent that it was not for the sole benefit of Rogers. It,
like any other loan of money, was for the benefit of both parties. The benefit which Smith, Bell & Co.
received was the use of the money; the benefit which Rogers received was the interest on his money. In the
letter in which Smith, Bell & Co. on the 30th of June, 1888, notified the plaintiff of the reduction of the
interest, they said: "We call your attention to this matter in order that you may if you think best employ your
money in some other place."
Nor does the contract in question fulfill the third requisite indicated by Manresa, which is, that in an irregular
deposit, the depositor can demand the return of the article at any time, while a lender is bound by the
provisions of the contract and cannot seek restitution until the time for payment, as provided in the contract,
has arisen. It is apparent from the terms of this documents that the plaintiff could not demand his money at
any time. He was bound to give notice of his desire for its return and then to wait for six months before he
could insist upon payment.
In the present case the transaction in question was clearly not for the sole benefit of the Compania Agricola de
Ultramar; it was evidently for the benefit of both parties. Neither could the alleged depositor demand payment until
the expiration of the term of three months.
For the reasons stated, the appealed judgment is reversed, and we hold that the transaction in question must be
regarded as a loan, without preference. Without costs. So ordered.
Johnson, Street, Malcolm, Villamor, Johns and Villa-Real, JJ., concur.

Separate Opinions

ROMUALDEZ, J., dissenting:

We are here concerned, I take it, with an irregular deposit and following Manresa's commentaries on this point (11
Manresa, 694-697, 3d edition), as well as the case he cites from the Supreme Court of Spain, decided on April 8,
1881, I am of the opinion that although the deposit in question earned interest, it was a preferred credit .The
judgment appealed from should therefore, as I think, be affirmed.
G.R. No. L-4347

March 9, 1908

JOSE ROGERS, plaintiff-appellant,

vs.
SMITH, BELL, & CO., defendants-appellees.
Chicote and Miranda for appellant.
Kinney and Lawrence for appellees.
WILLARD, J.:

The plaintiff brought this action in the Court of First Instance of the city of Manila upon the following document:
No. 1418. $12,000.
The sum of pesos twelve thousand has been deposited with us, received from Jose Rogers, which sum we
will pay on the last day of the six months after the presentation of this document, to the order of Mr. Jose
Rogers.
Manila, February 17, 1876.
SMITH, BELL & CO.
The said sum of twelve thousand pesos shall bear interest at the rate of eight per centum (8%) per annum
from this date, February 17, 1876.
SMITH, BELL & CO.
When this document was delivered by the defendants to the plaintiff the former delivered to the latter the following
letter:
MANILA, 17 February, 1876.
JOSE ROGERS, Esq., Present.
DEAR SIR: We have this day signed a receipt (quedan No. 1418) in your favor for twelve thousand dollars,
deposited in our hands, at interest of 8% per annum, commencing from to-day.
This interest will be paid to your order every three months, either in Manila or in London, as you may wish.
If at any time you should desire to receive said deposit of twelve thousand dollars in London it will be paid to
you, or your order, by Messrs. Smith, Wood and Co., of that place, after two months' notice, and on
presentation of said receipt or quedan No. 1418.
We are, dear sir, yours, truly,
SMITH, BELL & CO.
The only question in the case is, whether upon these documents the plaintiff is entitled to recover 12,000 pesos or
24,000 pesos. The court below held that he was entitled to recover only 12,000 pesos, and the defendants having
deposited that amount in court, judgment was ordered in their favor, from which judgment the plaintiff has appealed.
The facts in the case are disputed. When this document was delivered 12,000 pesos in silver were worth more than
12,000 pesos in gold. the plaintiff delivered to the defendants in consideration of the execution of the document
12,000 in gold. Soon thereafter the plaintiff removed to Barcelona and has since resided there. The defendants
remitted the interest to him every three months at the rate of 8 per cent per annum until the 30th day of January,
1888, when they notified him that thereafter the interest would be 6 per cent. The plaintiff accepted this reduction
and interest at that rate was remitted to him by the defendants until the 10th of February, 1904. This interest was
remitted in silver; that is to say, every three months the defendants took 180 pesos in silver and with it bought
exchange on Barcelona or other European point converted into pesetas. The plaintiff received this payments in
silver without any protest whatever until the 10th day of February, 1904. He then, in his letter of that date, called the
attention of the defendants to the fact that by the new American law in force in the Philippines the gold standard had
been introduced and that by reason thereof he was entitled to receive his interest in gold, in view of the fact that
when he delivered the money to the defendants in 1876 he delivered it in gold coin. In another letter of the 15th of
December, 1904, he expressly refers to the act of Congress of March 2, 1903, and to the subsequent proclamations

of the Governor-General relating to coinage. These are practically all the fat in the case, and the claim of the plaintiff
is that, having paid to the defendants 12,000 pesos in gold coin, he is now entitled to receive from them the value of
12,000 pesos in gold coin; that is to say, 24,000 pesos in silver.
It is necessary to determine in the first place the nature of the contract evidenced by the document of the 17th of
February, 1876.
The important, and to our minds decisive, question in the case is, whether or not this document is evidence of an
ordinary loan which created between the plaintiff and the defendants the simple relation of debtor and creditor. The
appellant in his brief repeatedly calls it a deposit, but we do not understand that he claims that it is or ever was a
deposit in the technical sense of the term; that is, that he ownership of the particular coin which was delivered by
him to Smith, Bell & Co. did not pass to Smith, Bell & Co. but remained in him and that Smith, Bell & Co. was bound
to return to him the identical coin which they had received. It is apparent that no such claim could be maintained in
view of that part of the instrument which provides for the payment of interest.
It is claimed, however, by the appellant, that while not a deposit in the strict sense of the word, the document
evidences what is known as an "irregular deposit." The parties agree that the case must be decided in this respect
in view of the legislation in force prior to the adoption of the Civil Code, and the appellant says that the definition of
an irregular deposit is found in Law II, Title III of the Fifth Partida. Manresa, in his Commentaries on the Civil Code
(vol. 11, p. 664), states that there are three points of difference between a loan and an irregular deposit. The first
difference which he points out consists in the fact that in an irregular deposit the only benefit is that which accrues to
the depositor, while in loan the essential cause for the transaction is the necessity of the borrower. The contract in
question does not fulfill this requirement of an irregular deposit. It is very apparent that is was not for the sole benefit
of Rogers. It, like any other loan of money, was for the benefit of both parties. The benefit which Smith, Bell & Co.
received was the use of the money; the benefit which Rogers received was the interest of his money. In the letter
which Smith, Bell & Co. on the 30th of June, 1888, notified the plaintiff of the reduction of the interest, they said: "We
call your attention to this matter in order that you may if you think best employ your money in some other place."
Nor does the contract in question fulfill the third requisite indicated by Manresa, which is, in an irregular deposit, the
depositor can demand the return of the article at any time, while a lender is bound by the provisions of the contract
and can not seek restitution until the time for payment, as provided in the contract, has arisen. It is apparent from
the terms of this document that the plaintiff could not demand his money at any time. He was bound to give notice of
his desire for its return and then to wait for six months before he could insist upon payment.
The second difference which exists, according to Manresa, between an irregular deposit and a loan lies in the fact
that in an irregular deposit the depositor has a preference over other creditors in the distribution of the debtor's
property. That this preference may exist and the transaction be still a loan, appears from the decision of the
supreme court of Spain of the 8th of April, 1881. The court there said:
Whereas, although the irregular deposit is considered as mutual, with respect to the repayment between the
depositor and the depositary, notwithstanding this, the latter retains the original status of personal creditor
and is simply privileged, in concurrence with other creditors against the former, and he must be paid after
the mortgage creditors and before the creditors whose right appears only by written instruments, in
accordance with Law XII, Title XIV, fifth Partida.
It is apparent, therefore, that this document does not state those requisites which are essential to an irregular
deposit.
But even if it did, it seems that the appellant's contention could not be sustained. He claims that in accordance with
said Law II, title III, Fifth Partida, the defendants are bound to return to him the same kind of money which was
received. That law is in part as follows:
And the ownership of the thing given in deposit is not transferred to the one who receives the same; but,
should the thing be one of those which can be counted, weighed, or measured, if, when receiving it, the

same were given by count, weight, or measure, then the ownership would be transferred to him. Yet he
would be obliged to return the same thing, or the same quantity, or another similar to the one received, to
him who gave it to him in deposit.
An examination, however, of Law II, Title I, of the Fifth Partida, which relates to loans, will show that the obligation of
the borrower in such case is stated in almost exactly the same words. That law is in part as follows:
A man may loan to another any of the things mentioned in the last law which are susceptible of being
counted, weighed, or measured. And this is understood with regard to things belonging to him who lends
them, or which are loaned by another by authority of his principal; provided, however, that once the thing is
in the possession of him who secures the loan, he may dispose of it as though it were his own. But he must
return to the owner of the thing equal amount of the same kind and quality, although the creditor should not
specify either of the conditions.
The supreme court of Spain in the judgment of the 27th of October, 1868, speaking of the obligation of the borrower
in such case, says:
Whereas the principle in Laws I and II of Title I of the Fifth Partida, according to which the borrower, acquires
ownership of the thing and is bound to return an equal amount of the same kind and quality, have special
application to cases relating to loans of money or its equivalent; whereas the thing loaned not being in such
cases what properly constitutes the material or the object of deposit, as happens with other perishable
things, but rather the value that the coins or the paper money represents, the obligation of the depository in
this kind of contracts is to return the sum or amount therein expressed, whatever may have been the
increase or depreciation suffered by the specific kind of coin or paper, unless the contrary be stipulated.
It seems clear from these citations that the document in question is evidence of an ordinary loan and created
between the plaintiff and defendants the relation of debtor and creditor. The two judgments of the supreme court of
Spain cited by the appellant in his brief have no bearing upon the question. In that of the 9th of July, 1889, it
appeared that the Bank of Havana returned to the plaintiff the same kind of money which it had received from him.
The other judgment, of the 7th of February, 1891, simply held that a servant who had left her money with her master
and had taken a written obligation from him to pay the same was not, in the distribution of his property, entitled to
preference over other creditors on the ground that her debt was for personal labor.
It having been determined that the contract between the parties created the common relation of debtor and creditor,
the case is easily resolved. Section 3 of the act of Congress of March 2, 1903, entitled "An act to establish a
standard of value and to provide for a coinage system in the Philippine Islands," is as follows:
That the silver Philippine pesos authorized by this act shall be legal tender in the Philippine Islands for all
debts, public and private, unless otherwise specifically provided by contract: Provided, That debts contracted
prior to the thirty-first day of December, nineteen hundred and three, may be paid in the legal tender
currency of said Islands existing at the time of the making of said contracts, unless otherwise expressly
provided by contract.
That this case falls within the terms of this section is very clear. The debt in question is a private debt, calling for the
payment of 12,000 pesos. This section authorizes the payment of that debt in the Philippine pesos authorized by the
act. That the act applies as well to debts created prior to its passage as to those created after, appears from the
proviso. The effect of that proviso is to give the debtor and not the creditor the option as to the kind of money with
which the debt shall be paid.
The only possible way to avoid the application of this section to the case at bar is by saying that Congress had no
power to pass the act and that sa to debts created prior to its passage it is therefore null and void. That the act can
not be declared void on this ground is well settled by the decisions of the Supreme Court of the United States.
(Legal Tender Cases, 12 Wall., 457; Dooley vs. Smith, 13 Wall., 604; Railroad Company vs. Johnson, 15 Wall., 195;;
Maryland vs. Railroad Company, 22 Wall., 105 and Julliard vs. Greenman, 110 U. S., 421.) In the first four of those

cases it was held that debts created when the only legal-tender money was gold and silver could be paid in paper
money issued by the Government and which had no intrinsic value.
The appellant in his brief discusses at length the meaning of the word "dollars." We do not see how such a
discussion is material. The contract provides for the payment of "pesos," not "dollars." It is very evident that the
contract was not changed nor intended to be changed by the use of the word "dollars" in the letter of February 17,
1876. That in English houses especially the word "dollars" was, until very recently, used to indicate pesos of local
currency, whether Mexican, Spanish, or Hongkong, is well known.
In conclusion it may be said that the plaintiff, in 1876, delivered to the defendants the cheapest kind of money then
in use. If he had desired to be repaid in the same money which he delivered, he should have so provided expressly
in the contract. He had a perfect right to do so, and if he had done so he could now, by reason of the provisions of
the said act of Congress, demand payment in gold.
That the plaintiff's protest in 1904 was based entirely upon his construction of this act of Congress admits of no
doubt; that he delivered that by the terms of the contract, without the act of Congress, Smith, Bell & Co. had the right
to pay him in silver is beyond question. This belief is shown not only by his letters of protest which expressly refer to
the act of Congress as the basis of his claim but also by his conduct during more than twenty-five years in receiving
interest in silver without a sign of protest. That he would have received the principal also in silver had the defendants
tendered it to him at any time prior to 1903 is also free from doubt. In making his protest in 1904 he evidently
believed that the act of Congress required the payment of the 12,000 pesos in gold and that he thereby has
acquired additional rights. His construction of the act is, as we have seen, wrong.
The judgment of the court below is affirmed, with the costs of this instance against the appellant. So ordered.

G.R. No. 104612 May 10, 1994

BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND TRUST CO.), petitioner,
vs.
HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D. LIM, respondents.
Leonen, Ramirez & Associates for petitioner.
Constante A. Ancheta for private respondents.

DAVIDE, JR., J.:

The petitioner urges us to review and set aside the amended Decision 1 of 6 March 1992 of respondent Court of
Appeals in CA- G.R. CV No. 25739 which modified the Decision of 15 November 1990 of Branch 19 of the Regional Trial
Court (RTC) of Manila in Civil Case No. 87-42967, entitled Bank of the Philippine Islands (successor-in-interest of
Commercial Bank and Trust Company) versus Eastern Plywood Corporation and Benigno D. Lim. The Court of Appeals
had affirmed the dismissal of the complaint but had granted the defendants' counterclaim for P331,261.44 which
represents the outstanding balance of their account with the plaintiff.
As culled from the records and the pleadings of the parties, the following facts were duly established:
Private respondents Eastern Plywood Corporation (Eastern) and
Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint bank account ("and/or" account)
with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of the Philippine
Islands (BPI). Sometime in March 1975, a joint checking account ("and" account) with Lim in the amount of
P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim. Various
amounts were later deposited or withdrawn from the joint account of Velasco and Lim. The money therein was
placed in the money market.
Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account stood at P662,522.87.
On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for himself and as President and General
Manager of Eastern, 2 one-half of this amount was provisionally released and transferred to one of the bank accounts of
Eastern with CBTC. 3
Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as "Additional Working Capital,"
evidenced by the "Disclosure Statement on Loan/Credit Transaction" (Disclosure Statement) signed by CBTC
through its branch manager, Ceferino Jimenez, and Eastern, through Lim, as its President and General
Manager. 4The loan was payable on demand with interest at 14% per annum.
For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00 payable on demand to
the order of CBTC with interest at 14% per annum. 5 The note was signed by Lim both in his own capacity and as
President and General Manager of Eastern. No reference to any security for the loan appears on the note. In the
Disclosure Statement, the box with the printed word "UNSECURED" was marked with "X" meaning unsecured, while
the line with the words "this loan is wholly/partly secured by" is followed by the typewritten words "Hold-Out on a 1:1 on
C/A No. 2310-001-42," which refers to the joint account of Velasco and Lim with a balance of P331,261.44.
In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement," also dated 18
August 1978, 6 wherein it was stated that "as security for the Loan [Lim and Eastern] have offered [CBTC] and the latter
accepts a holdout on said [Current Account No. 2310-011-42 in the joint names of Lim and Velasco] to the full extent of
their alleged interests therein as these may appear as a result of final and definitive judicial action or a settlement between
and among the contesting parties thereto." 7 Paragraph 02 of the Agreement provides as follows:
Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their alleged
interests in the Account Balance shall have been established with finality, ample and sufficient power
as shall be necessary to retain said Account Balance and enable Comtrust to apply the Account
Balance for the purpose of liquidating the Loan in respect of principal and/or accrued interest.
And paragraph 05 thereof reads:
The acceptance of this holdout shall not impair the right of Comtrust to declare the loan payable on
demand at any time, nor shall the existence hereof and the non-resolution of the dispute between
the contending parties in respect of entitlement to the Account Balance, preclude Comtrust from
instituting an action for recovery against Eastply and/or Mr. Lim in the event the Loan is declared due
and payable and Eastply and/or Mr. Lim shall default in payment of all obligations and liabilities
thereunder.

In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the RTC of Pasig,
entitled "In re Intestate Estate of Mariano Velasco," and docketed as Sp. Proc. No. 8959. In the said case, the whole
balance of P331,261.44 in the aforesaid joint account of Velasco and Lim was being claimed as part of Velasco's
estate. On 9 September 1986, the intestate court granted the urgent motion of the heirs of Velasco to withdraw the
deposit under the joint account of Lim and Velasco and authorized the heirs to divide among themselves the amount
withdrawn. 8
Sometime in 1980, CBTC was merged with BPI. 9 On 2 December 1987, BPI filed with the RTC of Manila a complaint
against Lim and Eastern demanding payment of the promissory note for P73,000.00. The complaint was docketed as Civil
Case No. 87- 42967 and was raffled to Branch 19 of the said court, then presided over by Judge Wenceslao M. Polo.
Defendants Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the disputed account
subject of the Holdout Agreement and the interests thereon after deducting the amount due on the promissory note.
After due proceedings, the trial court rendered its decision on
15 November 1990 dismissing the complaint because BPI failed to make out its case. Furthermore, it ruled that "the
promissory note in question is subject to the 'hold-out' agreement," 10 and that based on this agreement, "it was the
duty of plaintiff Bank [BPI] to debit the account of the defendants under the promissory note to set off the loan even
though the same has no fixed maturity." 11 As to the defendants' counterclaim, the trial court, recognizing the fact that the
entire amount in question had been withdrawn by Velasco's heirs pursuant to the order of the intestate court in Sp. Proc.
No. 8959, denied it because the "said claim cannot be awarded without disturbing the resolution" of the intestate court. 12
Both parties appealed from the said decision to the Court of Appeals. Their appeal was docketed as CA-G.R. CV
No. 25739.
On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the trial court. It, however,
failed to rule on the defendants' (private respondents') partial appeal from the trial court's denial of their
counterclaim. Upon their motion for reconsideration, the Court of Appeals promulgated on 6 March 1992 an
Amended Decision 13 wherein it ruled that the settlement of Velasco's estate had nothing to do with the claim of the
defendants for the return of the balance of their account with CBTC/BPI as they were not privy to that case, and that the
defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI should have protected the
defendants' interest in Sp. Proc. No. 8959 when the said account was claimed by Velasco's estate. It then ordered BPI "to
pay defendants the amount of P331,261.44 representing the outstanding balance in the bank account of defendants." 14
On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement in question was subject to
a suspensive condition stated therein, viz., that the "P331,261.44 shall become a security for respondent Lim's
promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to that amount are
established as a result of a final and definitive judicial action or a settlement between and among the contesting
parties thereto." 15 Hence, BPI asserts, the Court of Appeals erred in affirming the trial court's decision dismissing the
complaint on the ground that it was the duty of CBTC to debit the account of the defendants to set off the amount of
P73,000.00 covered by the promissory note.
Private respondents Eastern and Lim dispute the "suspensive condition" argument of the petitioner. They interpret
the findings of both the trial and appellate courts that the money deposited in the joint account of Velasco and Lim
came from Eastern and Lim's own account as a finding that the money deposited in the joint account of Lim and
Velasco "rightfully belong[ed] to Eastern Plywood Corporation and/or Benigno Lim." And because the latter are the
rightful owners of the money in question, the suspensive condition does not find any application in this case and the
bank had the duty to set off this deposit with the loan. They add that the ruling of the lower court that they own the
disputed amount is the final and definitive judicial action required by the Holdout Agreement; hence, the petitioner
can only hold the amount of P73,000.00 representing the security required for the note and must return the rest. 16
The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a Rejoinder thereto.
We gave due course to the petition and required the parties to submit simultaneously their memoranda.

The key issues in this case are whether BPI can demand payment of the loan of P73,000.00 despite the existence
of the Holdout Agreement and whether BPI is still liable to the private respondents on the account subject of the
Holdout Agreement after its withdrawal by the heirs of Velasco.
The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note is an unconditional
promise to pay the said amount, and as stated by the respondent Court of Appeals, "[t]here is no question that the
promissory note is a negotiable instrument." 17 It further correctly ruled that BPI was not a holder in due course because
the note was not indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement could have operated as a valid
transfer to make BPI a holder in due course. It acquired the note from CBTC by the contract of merger or sale between
the two banks. BPI, therefore, took the note subject to the Holdout Agreement.
We disagree, however, with the Court of Appeals in its interpretation of the Holdout Agreement. It is clear from
paragraph 02 thereof that CBTC, or BPI as its successor-in-interest, had every right to demand that Eastern and Lim
settle their liability under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and
Velasco's joint account to the payment of the note. What the agreement conferred on CBTC was a power, not a
duty. Generally, a bank is under no duty or obligation to make the application. 18 To apply the deposit to the payment of
a loan is a privilege, a right of set-off which the bank has the option to exercise. 19
Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, CBTC was not in any
way precluded from demanding payment from Eastern and from instituting an action to recover payment of the loan.
What it provides is an alternative, not an exclusive, method of enforcing its claim on the note. When it demanded
payment of the debt directly from Eastern and Lim, BPI had opted not to exercise its right to apply part of the deposit
subject of the Holdout Agreement to the payment of the promissory note for P73,000.00. Its suit for the enforcement
of the note was then in order and it was error for the trial court to dismiss it on the theory that it was set off by an
equivalent portion in C/A No. 2310-001-42 which BPI should have debited. The Court of Appeals also erred in
affirming such dismissal.
The "suspensive condition" theory of the petitioner is, therefore, untenable.
The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for the return of
the P331,261.44 20 was equivalent to a demand that they be allowed to withdraw their deposit with the bank. Article 1980
of the Civil Code expressly provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan." In Serrano vs. Central Bank of the Philippines, 21 we held
that bank deposits are in the nature of irregular deposits; they are really loans because they earn interest. The relationship
then between a depositor and a bank is one of creditor and debtor. The deposit under the questioned account was an
ordinary bank deposit; hence, it was payable on demand of the depositor. 22
The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and
Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment thereof. BPI
cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the
whole balance of the account. The petitioner should not have allowed such withdrawal because it had admitted in
the Holdout Agreement the questioned ownership of the money deposited in the account. As early as 12 May 1979,
CBTC was notified by the Corporate Secretary of Eastern that the deposit in the joint account of Velasco and Lim
was being claimed by them and that one-half was being claimed by the heirs of Velasco. 23
Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to withdraw the
account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial
compulsion to do so. The authorization given to the heirs of Velasco cannot be construed as a final determination or
adjudication that the account belonged to Velasco. We have ruled that when the ownership of a particular property is
disputed, the determination by a probate court of whether that property is included in the estate of a deceased is
merely provisional in character and cannot be the subject of execution. 24
Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto, had no right
to pay to persons other than those in whose favor the obligation was constituted or whose right or authority to
receive payment is indisputable. The payment of the money deposited with BPI that will extinguish its obligation to

the creditor-depositor is payment to the person of the creditor or to one authorized by him or by the law to receive
it.25 Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without
fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or
through error induced by fraud of a third person. 26 The payment then by BPI to the heirs of Velasco, even if done in good
faith, did not extinguish its obligation to the true depositor, Eastern.
In the light of the above findings, the dismissal of the petitioner's complaint is reversed and set aside. The award on
the counterclaim is sustained subject to a modification of the interest.
WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in CA-G.R. CV No.
25735 is hereby MODIFIED. As modified:
(1) Private respondents are ordered to pay the petitioner the promissory note for P73,000.00 with
interest at:
(a) 14% per annum on the principal, computed from
18 August 1978 until payment;
(b) 12% per annum on the interest which had accrued up to the date of the filing of
the complaint, computed from that date until payment pursuant to Article 2212 of the
Civil Code.
(2) The award of P331,264.44 in favor of the private respondents shall bear interest at the rate of
12%per annum computed from the filing of the counterclaim.
No pronouncement as to costs.
SO ORDERED.

METROPOLITAN BANK AND TRUST

COMPANY (formerly ASIANBANK
CORPORATION),
Petitioner,

- versus BA FINANCE CORPORATION and

MALAYAN INSURANCE CO., INC.,
Respondents.

G.R. No. 179952

Present:
PUNO, C.J., Chairperson,
CARPIO MORALES,
LEONARDO-DE CASTRO,
BERSAMIN, and
VILLARAMA, JR., JJ.

Promulgated:
December 4, 2009

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

CARPIO MORALES, J.:

Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation (BA Finance) a P329,280[1] loan to
secure which, he mortgaged his car to respondent BA Finance. [2] The mortgage contained the following stipulation:
The MORTGAGOR covenants and agrees that he/it will cause the property(ies) hereinabove
mortgaged to be insured against loss or damage by accident, theft and fire for a period of one year
from date hereof with an insurance company or companies acceptable to the MORTGAGEE in an
amount not less than the outstanding balance of mortgage obligations and that he/it will make all loss,
if any, under such policy or policies, payable to the MORTGAGEE or its assigns as its interest may
appear x x x.[3] (emphasis and underscoring supplied)

Bitanga thus had the mortgaged car insured by respondent Malayan Insurance Co., Inc. (Malayan Insurance)
[4]

which issued a policy stipulating that, inter alia,

Loss, if any shall be payable to BA FINANCE CORP. as its interest may appear. It is hereby
expressly understood that this policy or any renewal thereof, shall not be cancelled without prior
notification and conformity by BA FINANCE CORPORATION. [5] (emphasis and underscoring
supplied)

The car was stolen. On Bitangas claim, Malayan Insurance issued a check payable to the order of B.A. Finance
Corporation and Lamberto Bitanga for P224,500, drawn against China Banking Corporation (China Bank). The check was
crossed with the notation For Deposit Payees Account Only.[6]
Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to his account with
the Asianbank Corporation (Asianbank), now merged with herein petitioner Metropolitan Bank and Trust Company
(Metrobank). Bitanga subsequently withdrew the entire proceeds of the check.

In the meantime, Bitangas loan became past due, but despite demands, he failed to settle it.

BA Finance eventually learned of the loss of the car and of Malayan Insurances issuance of a crossed check
payable to it and Bitanga, and of Bitangas depositing it in his account at Asianbank and withdrawing the entire proceeds
thereof.
BA Finance thereupon demanded the payment of the value of the check from Asianbank [7] but to no avail,
prompting it to file a complaint before the Regional Trial Court (RTC) of Makati for sum of money and damages against
Asianbank and Bitanga,[8] alleging that, inter alia, it is entitled to the entire proceeds of the check.
In its Answer with Counterclaim,[9] Asianbank alleged that BA Finance instituted [the] complaint in bad faith to
coerce [it] into paying the whole amount of the CHECK knowing fully well that its rightful claim, if any, is against
Malayan [Insurance].[10]
Asianbank thereafter filed a cross-claim against Bitanga,[11] alleging that he fraudulently induced its personnel to
release to him the full amount of the check; and that on being later informed that the entire amount of the check did not
belong to Bitanga, it took steps to get in touch with him but he had changed residence without leaving any forwarding
address.[12]
And Asianbank filed a third-party complaint against Malayan Insurance,[13] alleging that Malayan Insurance was
grossly negligent in issuing the check payable to both Bitanga and BA Finance and delivering it to Bitanga without the
consent of BA Finance.[14]
Bitanga was declared in default in Asianbanks cross-claim. [15]
Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy to the contract between BA Finance
and Bitanga, and noting the claim of Malayan Insurance that it is its policy to issue checks to both the insured and the
financing company, held that Malayan Insurance cannot be faulted for negligence for issuing the check payable to both BA
Finance and Bitanga.
The trial court, holding that Asianbank was negligent in allowing Bitanga to deposit the check to his account and
to withdraw the proceeds thereof, without his co-payee BA Finance having either indorsed it or authorized him to indorse it
in its behalf,[16] found Asianbank and Bitanga jointly and severally liable to BA Finance following Section 41 of
the Negotiable Instruments Law and Associated Bank v. Court of Appeals.[17]
Thus the trial court disposed:
WHEREFORE, premises considered, judgment is hereby rendered ordering defendants Asian
Bank Corporation and Lamberto Bitanga:
1)

To pay plaintiff jointly and severally the sum of P224,500.00 with interest
thereon at the rate of 12% from September 25, 1992 until fully paid;

2)
3)

To pay plaintiff the sum of P50,000.00 as exemplary damages; P20,000.00

as actual damages; P30,000.00 as attorneys fee; and
To pay the costs of suit.

Asianbanks and Bitangas [sic] counterclaims are dismissed.

The third party complaint of defendant/third party plaintiff against third-party defendant
Malayan Insurance, Co., Inc. is hereby dismissed. Asianbank is ordered to pay Malayan attorneys fee
of P50,000.00 and a per appearance fee of P500.00.
On the cross-claim of defendant Asianbank, co-defendant Lamberto Bitanga is ordered
to pay the former the amounts the latter is ordered to pay the plaintiff in Nos. 1, 2 and 3 abovementioned.
SO ORDERED.[18] (emphasis and underscoring supplied)

Before the Court of Appeals, Asianbank, in its Appellants Brief, submitted the following issues for consideration:
3.01.1.1

Whether BA Finance has a cause of action against Asianbank.

3.01.1.2
Assuming that BA Finance has a valid cause of action, may it claim from
Asianbank more than one-half of the value of the check considering that it is a mere co-payee or joint
payee of the check?
3.01.1.3
Whether BA Finance is liable to Asianbank for actual and exemplary
damages for wrongfully bringing the case to court.
3.01.1.4
Whether Malayan is liable to Asianbank for reimbursement of any sum of
money which this Honorable Court may award to BA Finance in this case. [19] (underscoring supplied)

And it proffered the following arguments:

A. BA Finance has no cause of action against Asianbank as it has no legal right and title to the check considering
that the check was not delivered to BA Finance. Hence, BA Finance is not a holder thereof under the
Negotiable Instruments Law.
B. Asianbank, as collecting bank, is not liable to BA Finance as there was no privity of contract between them.
C. Asianbank, as collecting bank, is not liable to BA Finance, considering that, as the intermediary between the
payee and the drawee Chinabank, it merely acted on the instructions of drawee Chinabank to pay the
amount of the check to Bitanga, hence, the consequent damage to BA Finance was due to the negligence
of Chinabank.
D. Malayans act of issuing and delivering the check solely to Bitanga in violation of the loss payee clause in the
Policy, is the proximate cause of the alleged damage to BA Finance.
E. Assuming Asianbank is liable, BA Finance can claim only his proportionate interest on the check as it is a joint
payee thereof.
F. Bitanga alone is liable for the amount to BA Finance on the ground of unjust enrichment or solutio indebiti.
G. BA Finance is liable to pay Asianbank actual and exemplary damages.[20] (underscoring supplied)

The appellate court, summarizing the errors attributed to the trial court by Asianbank to be whetherBA Finance
has a cause of action against [it] even if the subject check had not been delivered toBA Finance by the issuer itself, held in
the affirmative and accordingly affirmed the trial courts decision but deleted the award of P20,000 as actual damages.[21]
Hence, the present Petition for Review on Certiorari [22] filed by Metrobank (hereafter petitioner) to which
Asianbank was, as earlier stated, merged, faulting the appellate court
I.
II.
III.
IV.
V.

VII.

x x x in applying the case of Associated Bank v. Court of Appeals, in the

absence of factual similarity and of the legal relationships necessary for the
application of the desirable shortcut rule. x x x
x x x in not finding that x x x the general rule that the payee has no cause of
action against the collecting bank absent delivery to him must be applied.
x x x in finding that all the elements of a cause of action by BA Finance
Corporation against Asianbank Corporation are present.
x x x in finding that Article 1208 of the Civil Code is not applicable.
x x x in awarding of exemplary damages even in the absence of moral,
temperate, liquidated or compensatory damages and a finding of fact that
Asianbank acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner.
xxxx
x x x in dismissing Asianbanks counterclaim and Third Party complaint [against
Malayan Insurance].[23] (italics in the original; underscoring supplied)

Petitioner proffers the following arguments against the application of Associated Bank v. CA to the case:
x x x [T]he rule established in the Associated Bank case has provided a speedier remedy for
the payee to recover from erring collecting banks despite the absence of delivery of the negotiable
instrument. However, the application of the rule demands careful consideration of the factual settings
and issues raised in the case x x x.
One of the relevant circumstances raised in Associated Bank is the existence of forgery or
unauthorized indorsement. x x x
xxxx
In the case at bar, Bitanga is authorized to indorse the check as the drawer names him as one
of the payees. Moreover, his signature is not a forgery nor has he or anyone forged the signature of the
representative of BA Finance Corporation. No unauthorized indorsement appears on the check.
xxxx
Absent the indispensable fact of forgery or unauthorized indorsement, the desirable shortcut
rule cannot be applied,[24] (underscoring supplied)

The petition fails.

Section 41 of the Negotiable Instruments Law provides:
Where an instrument is payable to the order of two or more payees or indorsees who are not
partners, all must indorse unless the one indorsing has authority to indorse for the others.(emphasis
and underscoring supplied)

Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release of the proceeds thereof,
despite the absence of authority of Bitangas co-payee BA Finance to endorse it on its behalf. [25]
Denying any irregularity in accepting the check, petitioner maintains that it followed normal banking
procedure. The testimony of Imelda Cruz, Asianbanks then accounting head, shows otherwise, however, viz:
Q Now, could you be familiar with a particular policy of the bank with respect to checks with
joined (sic) payees?
A Yes, sir.
Q And what would be the particular policy of the bank regarding this transaction?
A The bank policy and procedure regarding the joint checks. Once it is deposited to a
single account, we are not accepting joint checks for single account, depositing to
a single account (sic).
Q What happened to the bank employee who allowed this particular transaction to occur?
A Once the branch personnel, the bank personnel (sic) accepted it, he is liable.
Q What do you mean by the branch personnel being held liable?
A Because since (sic) the bank policy, we are not supposed to accept joint checks to a
[single] account, so we mean that personnel would be held liable in the sense that
(sic) once it is withdrawn or encashed, it will not be allowed.
Q In your experience, have you encountered any bank employee who was subjected to
disciplinary action by not following bank policies?
A The one that happened in that case, since I really dont know who that personnel is, he is no
longer connected with the bank.
Q What about in general, do you know of any disciplinary action, Madam witness?
A Since theres a negligence on the part of the bank personnel, it will be a ground for his
separation [from] the bank.[26] (emphasis, italics and underscoring supplied)

Admittedly, petitioner dismissed the employee who allowed the deposit of the check in Bitangas account.
Petitioners argument that since there was neither forgery, nor unauthorized indorsement because Bitanga was a copayee in the subject check, the dictum in Associated Bank v. CA does not apply in the present case fails. The payment of an
instrument over a missing indorsement is the equivalent of payment on a forged indorsement [27] or an unauthorized
indorsement in itself in the case of joint payees.[28]
Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the crossed check, despite
the lone endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it bears repeating, carry the
indorsement of BA Finance.[29]
As has been repeatedly emphasized, the banking business is imbued with public interest such that the highest
degree of diligence and highest standards of integrity and performance are expected of banks in order to maintain the trust
and confidence of the public in general in the banking sector. [30] Undoubtedly, BA Finance has a cause of action against
petitioner.

Is petitioner liable to BA Finance for the full value of the check?

Petitioner, at all events, argue that its liability to BA Finance should only be one-half of the amount covered by the
check as there is no indication in the check that Bitanga and BA Finance are solidary creditors to thus make them
presumptively joint creditors under Articles 1207 and 1208 of the Civil Code which respectively provide:
Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the
same obligation does not imply that each one of the former has a right to demand, or that each one of
the latter is bound to render, entire compliance with the prestations. There is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the obligation requires
solidarity.
Art. 1208. If from the law, or the nature or wording of the obligations to which the preceding
article refers to the contrary does not appear, the credit or debt shall be presumed to be divided into as
many equal shares as there are creditors or debtors, the debts or credits being considered distinct from
one another, subject to the Rules of Court governing the multiplicity of suits.
Petitioners argument is flawed.
The provisions of the Negotiable Instruments Law and underlying jurisprudential teachings on the black-letter law
provide definitive justification for petitioners fullliability on the value of the check.
To be sure, a collecting bank, Asianbank in this case, where a check is deposited and which indorses the check
upon presentment with the drawee bank, is an indorser.[31]This is because in indorsing a check to the drawee bank, a
collecting bank stamps the back of the check with the phrase all prior endorsements and/or lack of endorsement
guaranteed[32] and, for all intents and purposes, treats the check as a negotiable instrument, hence, assumes the warranty of
an indorser.[33] Without Asianbanks warranty, the drawee bank (China Bank in this case) would not have paid the value of
the subject check.

Petitioner, as the collecting bank or last indorser, generally suffers the loss because it has the duty to ascertain the
genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has done its duty to ascertain the genuineness of prior indorsements. [34]
Accordingly, one who credits the proceeds of a check to the account of the indorsing payee is liable in conversion
to the non-indorsing payee for the entire amount of the check.[35]
It bears noting that in petitioners cross-claim against Bitanga, the trial court ordered Bitanga to return to petitioner
the entire value of the check P224,500.00 with interest as well as damages and cost of suit. Petitioner never
questioned this aspect of the trial courts disposition, yet it now prays for the modification of its liability to BA Finance to
only one-half of said amount. To pander to petitioners supplication would certainly amount to unjust enrichment at BA
Finances expense. Petitioners remedywhich is the reimbursement for the full amount of the check from the perpetrator of
the irregularity lies with Bitanga.

Articles 1207 and 1208 of the Civil Code cannot be applied to the present case as these are completely
irrelevant. The drawer, Malayan Insurance in this case, issued the check to answer for an underlying contractual obligation
(payment of insurance proceeds). The obligation is merely reflected in the instrument and whether the payees would
jointly share in the proceeds or not is beside the point.
Moreover, granting petitioners appeal for partial liability would run counter to the existing principles on the
liabilities of parties on negotiable instruments, particularly on Section 68 of the Negotiable Instruments Law which
instructs that joint payees who indorse are deemed to indorse jointly and severally.[36] Recall that when the maker
dishonors the instrument, the holder thereof can turn to those secondarily liable the indorser for recovery. [37] And since the
law explicitly mandates a solidary liability on the partof the joint payees who indorse the instrument, the holder thereof
(assuming the check was further negotiated) can turn to either Bitanga or BA Finance for full recompense.
Respecting petitioners challenge to the award by the appellate court of exemplary damages to BA Finance, the
same fails. Contrary to petitioners claim that no moral, temperate, liquidated or compensatory damages were awarded by
the trial court,[38] the RTC did in fact award compensatory or actual damages of P224,500, the value of the check, plus
interest thereon.
Petitioner argues, however, that assuming arguendo that compensatory damages had been awarded, the same
contravened Article 2232 of the Civil Code which provides that in contracts or quasi-contracts, the court may award
exemplary damages only if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.Since,
so petitioner concludes, there was no finding that it acted in a wanton, fraudulent, reckless, oppressive, or malevolent
manner,[39] it is not liable for exemplary damages.
The argument fails. To reiterate, petitioners liability is based not on contract or quasi-contract but on quasidelict since there is no pre-existing contractual relation between the parties. [40] Article 2231 of the Civil Code, which
provides that in quasi-delict, exemplary damages may be granted if the defendant acted with gross negligence, thus
applies.For gross negligence implies a want or absence of or failure to exercise even slight care or diligence, or the entire
absence of care,[41] evincing a thoughtless disregard of consequences without exerting any effort to avoid them. [42]
x x x The law allows the grant of exemplary damages to set an example for the public
good. The business of a bank is affected with public interest; thus it makes a sworn profession of
diligence and meticulousness in giving irreproachable service. For this reason, the bank should guard
against in injury attributable to negligence or bad faith on its part. The award ofexemplary damages is
proper as a warning to [the petitioner] and all concerned not to recklessly disregard their obligation to
exercise the highest and strictest diligence in serving their depositors.[43] (Italics and underscoring
supplied)

As for the dismissal by the appellate court of petitioners third-party complaint against Malayan Insurance, the
same is well-taken. Petitioner based its third-party complaint on Malayan Insurances alleged gross negligence in issuing
the check payable to both BA Finance and Bitanga, despite the stipulation in the mortgage and in the insurance policy that
liability for loss shall be payable to BA Finance. [44] Malayan Insurance countered, however, that it

x x x paid the amount of P224,500 to BA Finance Corporation and Lamberto Bitanga in compliance
with the decision in the case of Lamberto Bitanga versus Malayan Insurance Co., Inc., Civil Case No.
88-2802, RTC-Makati Br. 132, and affirmed on appeal by the Supreme Court [3 rd Division], G.R. no.
101964, April 8, 1992 x x x.[45] (underscoring supplied)

It is noted that Malayan Insurance, which stated that it was a matter of company policy to issue checks in the
name of the insured and the financing company, presented a witness to rebut its supposed negligence.

[46]

Perforce, it thus

wrote a crossed check with joint payees so as to serve warning that the check was issued for a definite purpose.
[47]

Petitioner never ever disputed these assertions.

The Court takes exception, however, to the appellate courts affirmance of the trial courts grant of legal interest of

12% per annum on the value of the check. For the obligation in this case did not arise out of a loan or forbearance of
money, goods or credit. While Article 1980 of the Civil Code provides that:
Fixed savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan,

said provision does not find application in this case since the nature of the relationship between BA Finance and petitioner
is one of agency whereby petitioner, as collecting bank, is to collect for BA Finance the corresponding proceeds from the
check.[48] Not being a loan or forbearance of money, the interest should be 6% per annum computed from the date of
extrajudicial demand on September 25, 1992 until finality of judgment; and 12% per annum from finality of judgment
until payment, conformably with Eastern Shipping Lines, Inc. v. Court of Appeals.[49]

WHEREFORE, the Decision of the Court of Appeals dated May 18, 2007 is AFFIRMED with MODIFICATION in
that the rate of interest on the judgment obligation ofP224,500 should be 6% per annum, computed from the time of
extrajudicial demand on September 25, 1992 until its full payment before finality of judgment; thereafter, if the amount
adjudged remains unpaid, the interest rate shall be 12% per annum computed from the time the judgment becomes final
and executory until fully satisfied.
Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 118492

August 15, 2001

GREGORIO H. REYES and CONSUELO PUYAT-REYES, petitioners,

vs.
THE HON. COURT OF APPEALS and FAR EAST BANK AND TRUST COMPANY, respondents.
DE LEON, JR., J.:
Before us is a petition for review of the Decision1 dated July 22, 1994 and Resolution2 dated December 29, 1994 of
the Court of Appeals3 affirming with modification the Decision4 dated November 12, 1992 of the Regional Trial Court
of Makati, Metro Manila, Branch 64, which dismissed the complaint for damages of petitioners spouses Gregorio H.
Reyes and Consuelo Puyat-Reyes against respondent Far East Bank and Trust Company.
The undisputed facts of the case are as follows:
In view of the 20th Asian Racing Conference then scheduled to be held in September, 1988 in Sydney, Australia, the
Philippine Racing Club, Inc. (PRCI, for brevity) sent four (4) delegates to the said conference. Petitioner Gregorio H.
Reyes, as vice-president for finance, racing manager, treasurer, and director of PRCI, sent Godofredo Reyes, the
club's chief cashier, to the respondent bank to apply for a foreign exchange demand draft in Australian dollars.
Godofredo went to respondent bank's Buendia Branch in Makati City to apply for a demand draft in the amount One
Thousand Six Hundred Ten Australian Dollars (AU$1,610.00) payable to the order of the 20 th Asian Racing
Conference Secretariat of Sydney, Australia. He was attended to by respondent bank's assistant cashier, Mr. Yasis,
who at first denied the application for the reason that respondent bank did not have an Australian dollar account in
any bank in Sydney. Godofredo asked if there could be a way for respondent bank to accommodate PRCI's urgent
need to remit Australian dollars to Sydney. Yasis of respondent bank then informed Godofredo of a roundabout way
of effecting the requested remittance to Sydney thus: the respondent bank would draw a demand draft against
Westpac Bank in Sydney, Australia (Westpac-Sydney for brevity) and have the latter reimburse itself from the U.S.
dollar account of the respondent in Westpac Bank in New York, U.S.A. (Westpac-New York for brevity). This
arrangement has been customarily resorted to since the 1960's and the procedure has proven to be problem-free.
PRCI and the petitioner Gregorio H. Reyes, acting through Godofredo, agreed to this arrangement or approach in
order to effect the urgent transfer of Australian dollars payable to the Secretariat of the 20 th Asian Racing
Conference.
On July 28, 1988, the respondent bank approved the said application of PRCI and issued Foreign Exchange
Demand Draft (FXDD) No. 209968 in the sum applied for, that is, One Thousand Six Hundred Ten Australian Dollars
(AU$ 1,610.00), payable to the order of the 20th Asian Racing Conference Secretariat of Sydney, Australia, and
addressed to Westpac-Sydney as the drawee bank.
1wphi1.nt

On August 10, 1988, upon due presentment of the foreign exchange demand draft, denominated as FXDD No.
209968, the same was dishonored, with the notice of dishonor stating the following: "xxx No account held with
Westpac." Meanwhile, on August 16, 1988, Wespac-New York sent a cable to respondent bank informing the latter
that its dollar account in the sum of One Thousand Six Hundred Ten Australian Dollars (AU$ 1,610.00) was debited.
On August 19, 1988, in response to PRCI's complaint about the dishonor of the said foreign exchange demand
draft, respondent bank informed Westpac-Sydney of the issuance of the said demand draft FXDD No. 209968,
drawn against the Wespac-Sydney and informing the latter to be reimbursed from the respondent bank's dollar
account in Westpac-New York. The respondent bank on the same day likewise informed Wespac-New York
requesting the latter to honor the reimbursement claim of Wespac-Sydney. On September 14, 1988, upon its second

presentment for payment, FXDD No. 209968 was again dishonored by Westpac-Sydney for the same reason, that
is, that the respondent bank has no deposit dollar account with the drawee Wespac-Sydney.
On September 17, 1988 and September 18, 1988, respectively, petitioners spouses Gregorio H. Reyes and
Consuelo Puyat-Reyes left for Australia to attend the said racing conference. When petitioner Gregorio H. Reyes
arrived in Sydney in the morning of September 18, 1988, he went directly to the lobby of Hotel Regent Sydney to
register as a conference delegate. At the registration desk, in the presence of other delegates from various member
of the conference secretariat that he could not register because the foreign exchange demand draft for his
registration fee had been dishonored for the second time. A discussion ensued in the presence and within the
hearing of many delegates who were also registering. Feeling terribly embarrassed and humiliated, petitioner
Gregorio H. Reyes asked the lady member of the conference secretariat that he be shown the subject foreign
exchange demand draft that had been dishonored as well as the covering letter after which he promised that he
would pay the registration fees in cash. In the meantime he demanded that he be given his name plate and
conference kit. The lady member of the conference secretariat relented and gave him his name plate and
conference kit. It was only two (2) days later, or on September 20, 1988, that he was given the dishonored demand
draft and a covering letter. It was then that he actually paid in cash the registration fees as he had earlier promised.
Meanwhile, on September 19, 1988, petitioner Consuelo Puyat-Reyes arrived in Sydney. She too was embarassed
and humiliated at the registration desk of the conference secretariat when she was told in the presence and within
the hearing of other delegates that she could not be registered due to the dishonor of the subject foreign exchange
demand draft. She felt herself trembling and unable to look at the people around her. Fortunately, she saw her
husband, coming toward her. He saved the situation for her by telling the secretariat member that he had already
arranged for the payment of the registration fee in cash once he was shown the dishonored demand draft. Only then
was petitioner Puyat-Reyes given her name plate and conference kit.
At the time the incident took place, petitioner Consuelo Puyat-Reyes was a member of the House of
Representatives representing the lone Congressional District of Makati, Metro Manila. She has been an officer of
the Manila Banking Corporation and was cited by Archbishop Jaime Cardinal Sin as the top lady banker of the year
in connection with her conferment of the Pro-Ecclesia et Pontifice Award. She has also been awarded a plaque of
appreciation from the Philippine Tuberculosis Society for her extraordinary service as the Society's campaign
chairman for the ninth (9th) consecutive year.
On November 23, 1988, the petitioners filed in the Regional Trial Court of Makati, Metro Manila, a complaint for
damages, docketed as Civil Case No. 88-2468, against the respondent bank due to the dishonor of the said foreign
exchange demand draft issued by the respondent bank. The petitioners claim that as a result of the dishonor of the
said demand draft, they were exposed to unnecessary shock, social humiliation, and deep mental anguish in a
foreign country, and in the presence of an international audience.
On November 12, 1992, the trial court rendered judgment in favor of the defendant (respondent bank) and against
the plaintiffs (herein petitioners), the dispositive portion of which states:
WHEREFORE, judgment is hereby rendered in favor of the defendant, dismissing plaintiff's complaint, and
ordering plaintiffs to pay to defendant, on its counterclaim, the amount of P50,000.00, as reasonable
attorney's fees. Costs against the plaintiff.
SO ORDERED.5
The petitioners appealed the decision of the trial court to the Court of Appeals. On July 22, 1994, the appellate court
affirmed the decision of the trial court but in effect deleted the award of attorney's fees to the defendant (herein
respondent bank) and the pronouncement as to the costs. The decretal portion of the decision of the appellate court
states:

WHEREFORE, the judgment appealed from, insofar as it dismissed plaintiff's complaint, is hereby
AFFIRMED, but is hereby REVERSED and SET ASIDE in all other respect. No special pronouncement as to
costs.
SO ORDERED.6
According to the appellate court, there is no basis to hold the respondent bank liable for damages for the reason
that it exerted every effort for the subject foreign exchange demand draft to be honored. The appellate court found
and declared that:
xxx

xxx

xxx

Thus, the Bank had every reason to believe that the transaction finally went through smoothly, considering
that its New York account had been debited and that there was no miscommunication between it and
Westpac-New York. SWIFT is a world wide association used by almost all banks and is known to be the
most reliable mode of communication in the international banking business. Besides, the above procedure,
with the Bank as drawer and Westpac-Sydney as drawee, and with Westpac-New York as the
reimbursement Bank had been in place since 1960s and there was no reason for the Bank to suspect that
this particular demand draft would not be honored by Westpac-Sydney.
From the evidence, it appears that the root cause of the miscommunications of the Bank's SWIFT message
is the erroneous decoding on the part of Westpac-Sydney of the Bank's SWIFT message as an MT799
format. However, a closer look at the Bank's Exhs. "6" and "7" would show that despite what appears to be
an asterick written over the figure before "99", the figure can still be distinctly seen as a number "1" and not
number "7", to the effect that Westpac-Sydney was responsible for the dishonor and not the Bank.
Moreover, it is not said asterisk that caused the misleading on the part of the Westpac-Sydney of the
numbers "1" to "7", since Exhs. "6" and "7" are just documentary copies of the cable message sent to
Wespac-Sydney. Hence, if there was mistake committed by Westpac-Sydney in decoding the cable
message which caused the Bank's message to be sent to the wrong department, the mistake was
Westpac's, not the Bank's. The Bank had done what an ordinary prudent person is required to do in the
particular situation, although appellants expect the Bank to have done more. The Bank having done
everything necessary or usual in the ordinary course of banking transaction, it cannot be held liable for any
embarrassment and corresponding damage that appellants may have incurred. 7
xxx

xxx

xxx

Hence, this petition, anchored on the following assignment of errors:

I
THE HONORABLE COURT OF APPEALS ERRED IN FINDING PRIVATE RESPONDENT NOT
NEGLIGENT BY ERRONEOUSLY APPLYING THE STANDARD OF DILIGENCE OF AN "ORDINARY
PRUDENT PERSON" WHEN IN TRUTH A HIGHER DEGREE OF DILIGENCE IS IMPOSED BY LAW
UPON THE BANKS.
II
THE HONORABLE COURT OF APPEALS ERRED IN ABSOLVING PRIVATE RESPONDENT FROM
LIABILITY BY OVERLOOKING THE FACT THAT THE DISHONOR OF THE DEMAND DRAFT WAS A
BREACH OF PRIVATE RESPONDENT'S WARRANTY AS THE DRAWER THEREOF.
III

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT AS SHOWN

OVERWHELMINGLY BY THE EVIDENCE, THE DISHONOR OF THE DEMAND DRAFT AS DUE TO
PRIVATE RESPONDENT'S NEGLIGENCE AND NOT THE DRAWEE BANK.8
The petitioners contend that due to the fiduciary nature of the relationship between the respondent bank and its
clients, the respondent should have exercised a higher degree of diligence than that expected of an ordinary
prudent person in the handling of its affairs as in the case at bar. The appellate court, according to petitioners, erred
in applying the standard of diligence of an ordinary prudent person only. Petitioners also claim that the respondent
bank violate Section 61 of the Negotiable Instruments Law9 which provides the warranty of a drawer that "xxx on
due presentment, the instrument will be accepted or paid, or both, according to its tenor xxx." Thus, the petitioners
argue that respondent bank should be held liable for damages for violation of this warranty. The petitioners pray this
Court to re-examine the facts to cite certain instances of negligence.
It is our view and we hold that there is no reversible error in the decision of the appellate court.
Section 1 of Rule 45 of the Revised Rules of Court provides that "(T)he petition (for review) shall raise only
questions of law which must be distinctly set forth." Thus, we have ruled that factual findings of the Court of Appeals
are conclusive on the parties and not reviewable by this Court and they carry even more weight when the Court of
Appeals affirms the factual findings of the trial court.10
The courts a quo found that respondent bank did not misrepresent that it was maintaining a deposit account with
Westpac-Sydney. Respondent bank's assistant cashier explained to Godofredo Reyes, representing PRCI and
petitioner Gregorio H. Reyes, how the transfer of Australian dollars would be effected through Westpac-New York
where the respondent bank has a dollar account to Westpac-Sydney where the subject foreign exchange demand
draft (FXDD No. 209968) could be encashed by the payee, the 20 th Asian Racing Conference Secretariat. PRCI and
its Vice-President for finance, petitioner Gregorio H. Reyes, through their said representative, agreed to that
arrangement or procedure. In other words, the petitioners are estopped from denying the said arrangement or
procedure. Similar arrangements have been a long standing practice in banking to facilitate international commercial
transactions. In fact, the SWIFT cable message sent by respondent bank to the drawee bank, Westpac-Sydney,
stated that it may claim reimbursement from its New York branch, Westpac-New York, where respondent bank has a
deposit dollar account. The facts as found by the courts a quo show that respondent bank did not cause an
erroneous transmittal of its SWIFT cable message to Westpac-Sydney. It was the erroneous decoding of the cable
message on the part of Westpac-Sydney that caused the dishonor of the subject foreign exchange demand draft. An
employee of Westpac-Sydney in Sydney, Australia mistakenly read the printed figures in the SWIFT cable message
of respondent bank as "MT799" instead of as "MT199". As a result, Westpac-Sydney construed the said cable
message as a format for a letter of credit, and not for a demand draft. The appellate court correct found that "the
figure before '99' can still be distinctly seen as a number '1' and not number '7'." Indeed, the line of a "7" is in a
slanting position while the line of a "1" is in a horizontal position. Thus, the number "1" in "MT199" cannot be
construed as "7".11
The evidence also shows that the respondent bank exercised that degree of diligence expected of an ordinary
prudent person under the circumstances obtaining. Prior to the first dishonor of the subject foreign exchange
demand draft, the respondent bank advised Westpac-New York to honor the reimbursement claim of WestpacSydney and to debit the dollar account12 of respondent bank with the former. As soon as the demand draft was
dishonored, the respondent bank, thinking that the problem was with the reimbursement and without any idea that it
was due to miscommunication, re-confirmed the authority of Westpac-New York to debit its dollar account for the
purpose of reimbursing Westpac-Sydney.13 Respondent bank also sent two (2) more cable messages to WestpacNew York inquiring why the demand draft was not honored.14
With these established facts, we now determine the degree of diligence that banks are required to exert in their
commercial dealings. In Philippine Bank of Commerce v. Court of Appeals15 upholding a long standing doctrine, we
ruled that the degree of diligence required of banks, is more than that of a good father of a family where the fiduciary
nature of their relationship with their depositors is concerned. In other words banks are duty bound to treat the
deposit accounts of their depositors with the highest degree of care. But the said ruling applies only to cases where

banks act under their fiduciary capacity, that is, as depositary of the deposits of their depositors. But the same
higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve
their fiduciary relationship with their depositors.
Considering the foregoing, the respondent bank was not required to exert more than the diligence of a good father
of a family in regard to the sale and issuance of the subject foreign exchange demand draft. The case at bar does
not involve the handling of petitioners' deposit, if any, with the respondent bank. Instead, the relationship involved
was that of a buyer and seller, that is, between the respondent bank as the seller of the subject foreign exchange
demand draft, and PRCI as the buyer of the same, with the 20th Asian Racing conference Secretariat in Sydney,
Australia as the payee thereof. As earlier mentioned, the said foreign exchange demand draft was intended for the
payment of the registration fees of the petitioners as delegates of the PRCI to the 20 th Asian Racing Conference in
Sydney.
The evidence shows that the respondent bank did everything within its power to prevent the dishonor of the subject
foreign exchange demand draft. The erroneous reading of its cable message to Westpac-Sydney by an employee of
the latter could not have been foreseen by the respondent bank. Being unaware that its employee erroneously read
the said cable message, Westpac-Sydney merely stated that the respondent bank has no deposit account with it to
cover for the amount of One Thousand Six Hundred Ten Australian Dollar (AU $1610.00) indicated in the foreign
exchange demand draft. Thus, the respondent bank had the impression that Westpac-New York had not yet made
available the amount for reimbursement to Westpac-Sydney despite the fact that respondent bank has a sufficient
deposit dollar account with Westpac-New York. That was the reason why the respondent bank had to re-confirm and
repeatedly notify Westpac-New York to debit its (respondent bank's) deposit dollar account with it and to transfer or
credit the corresponding amount to Westpac-Sydney to cover the amount of the said demand draft.
In view of all the foregoing, and considering that the dishonor of the subject foreign exchange demand draft is not
attributable to any fault of the respondent bank, whereas the petitioners appeared to be under estoppel as earlier
mentioned, it is no longer necessary to discuss the alleged application of Section 61 of the Negotiable Instruments
Law to the case at bar. In any event, it was established that the respondent bank acted in good faith and that it did
not cause the embarrassment of the petitioners in Sydney, Australia. Hence, the Court of Appeals did not commit
any reversable error in its challenged decision.
WHEREFORE, the petition is hereby DENIED, and the assailed decision of the Court of Appeals is AFFIRMED.
Costs against the petitioners.
SO ORDERED.

1wphi1.nt

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-60033 April 4, 1984
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS, petitioners,
vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA and
CLEMENT DAVID, respondents.

MAKASIAR, Actg. C.J.:

+.wph!1

This is a petition for prohibition and injunction with a prayer for the immediate issuance of restraining order and/or
writ of preliminary injunction filed by petitioners on March 26, 1982.
On March 31, 1982, by virtue of a court resolution issued by this Court on the same date, a temporary restraining
order was duly issued ordering the respondents, their officers, agents, representatives and/or person or persons
acting upon their (respondents') orders or in their place or stead to refrain from proceeding with the preliminary
investigation in Case No. 8131938 of the Office of the City Fiscal of Manila (pp. 47-48, rec.). On January 24, 1983,
private respondent Clement David filed a motion to lift restraining order which was denied in the resolution of this
Court dated May 18, 1983.
As can be gleaned from the above, the instant petition seeks to prohibit public respondents from proceeding with the
preliminary investigation of I.S. No. 81-31938, in which petitioners were charged by private respondent Clement
David, with estafa and violation of Central Bank Circular No. 364 and related regulations regarding foreign exchange
transactions principally, on the ground of lack of jurisdiction in that the allegations of the charged, as well as the
testimony of private respondent's principal witness and the evidence through said witness, showed that petitioners'
obligation is civil in nature.
For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor General in its Comment
dated June 28,1982, as follows:
t.hqw

On December 23,1981, private respondent David filed I.S. No. 81-31938 in the Office of the City
Fiscal of Manila, which case was assigned to respondent Lota for preliminary investigation (Petition,
p. 8).
In I.S. No. 81-31938, David charged petitioners (together with one Robert Marshall and the following
directors of the Nation Savings and Loan Association, Inc., namely Homero Gonzales, Juan Merino,
Flavio Macasaet, Victor Gomez, Jr., Perfecto Manalac, Jaime V. Paz, Paulino B. Dionisio, and one
John Doe) with estafa and violation of Central Bank Circular No. 364 and related Central Bank
regulations on foreign exchange transactions, allegedly committed as follows (Petition, Annex "A"):
t.hqw

"From March 20, 1979 to March, 1981, David invested with the Nation Savings and
Loan Association, (hereinafter called NSLA) the sum of P1,145,546.20 on nine
deposits, P13,531.94 on savings account deposits (jointly with his sister, Denise
Kuhne), US$10,000.00 on time deposit, US$15,000.00 under a receipt and
guarantee of payment and US$50,000.00 under a receipt dated June 8, 1980 (au
jointly with Denise Kuhne), that David was induced into making the aforestated
investments by Robert Marshall an Australian national who was allegedly a close
associate of petitioner Guingona Jr., then NSLA President, petitioner Martin, then
NSLA Executive Vice-President of NSLA and petitioner Santos, then NSLA General
Manager; that on March 21, 1981 N LA was placed under receivership by the Central
Bank, so that David filed claims therewith for his investments and those of his sister;
that on July 22, 1981 David received a report from the Central Bank that only
P305,821.92 of those investments were entered in the records of NSLA; that,
therefore, the respondents in I.S. No. 81-31938 misappropriated the balance of the
investments, at the same time violating Central Bank Circular No. 364 and related
Central Bank regulations on foreign exchange transactions; that after demands,
petitioner Guingona Jr. paid only P200,000.00, thereby reducing the amounts
misappropriated to P959,078.14 and US$75,000.00."
Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in which they stated
the following.
t.hqw

"That Martin became President of NSLA in March 1978 (after the resignation of
Guingona, Jr.) and served as such until October 30, 1980, while Santos was General
Manager up to November 1980; that because NSLA was urgently in need of funds
and at David's insistence, his investments were treated as special- accounts with
interest above the legal rate, an recorded in separate confidential documents only a
portion of which were to be reported because he did not want the Australian
government to tax his total earnings (nor) to know his total investments; that all
transactions with David were recorded except the sum of US$15,000.00 which was a
personal loan of Santos; that David's check for US$50,000.00 was cleared through
Guingona, Jr.'s dollar account because NSLA did not have one, that a draft of
US$30,000.00 was placed in the name of one Paz Roces because of a pending
transaction with her; that the Philippine Deposit Insurance Corporation had already
reimbursed David within the legal limits; that majority of the stockholders of NSLA
had filed Special Proceedings No. 82-1695 in the Court of First Instance to contest its
(NSLA's) closure; that after NSLA was placed under receivership, Martin executed a
promissory note in David's favor and caused the transfer to him of a nine and on
behalf (9 1/2) carat diamond ring with a net value of P510,000.00; and, that the
liabilities of NSLA to David were civil in nature."
Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the following:

t.hqw

"That he had no hand whatsoever in the transactions between David and NSLA since
he (Guingona Jr.) had resigned as NSLA president in March 1978, or prior to those
transactions; that he assumed a portion o; the liabilities of NSLA to David because of
the latter's insistence that he placed his investments with NSLA because of his faith
in Guingona, Jr.; that in a Promissory Note dated June 17, 1981 (Petition, Annex "D")
he (Guingona, Jr.) bound himself to pay David the sums of P668.307.01 and
US$37,500.00 in stated installments; that he (Guingona, Jr.) secured payment of
those amounts with second mortgages over two (2) parcels of land under a deed of
Second Real Estate Mortgage (Petition, Annex "E") in which it was provided that the
mortgage over one (1) parcel shall be cancelled upon payment of one-half of the
obligation to David; that he (Guingona, Jr.) paid P200,000.00 and tendered another
P300,000.00 which David refused to accept, hence, he (Guingona, Jr.) filed Civil
Case No. Q-33865 in the Court of First Instance of Rizal at Quezon City, to effect the
release of the mortgage over one (1) of the two parcels of land conveyed to David
under second mortgages."
At the inception of the preliminary investigation before respondent Lota, petitioners moved to dismiss
the charges against them for lack of jurisdiction because David's claims allegedly comprised a purely
civil obligation which was itself novated. Fiscal Lota denied the motion to dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners filed the instant petition because:
(a) the production of the Promisory Notes, Banker's Acceptance, Certificates of Time Deposits and
Savings Account allegedly showed that the transactions between David and NSLA were simple
loans, i.e., civil obligations on the part of NSLA which were novated when Guingona, Jr. and Martin
assumed them; and (b) David's principal witness allegedly testified that the duplicate originals of the
aforesaid instruments of indebtedness were all on file with NSLA, contrary to David's claim that
some of his investments were not record (Petition, pp. 8-9).
Petitioners alleged that they did not exhaust available administrative remedies because to do so
would be futile (Petition, p. 9) [pp. 153-157, rec.].
As correctly pointed out by the Solicitor General, the sole issue for resolution is whether public respondents acted
without jurisdiction when they investigated the charges (estafa and violation of CB Circular No. 364 and related
regulations regarding foreign exchange transactions) subject matter of I.S. No. 81-31938.
There is merit in the contention of the petitioners that their liability is civil in nature and therefore, public respondents
have no jurisdiction over the charge of estafa.
A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the City Fiscal of Manila by
private respondent David against petitioners Teopisto Guingona, Jr., Antonio I. Martin and Teresita G. Santos,
together with one Robert Marshall and the other directors of the Nation Savings and Loan Association, will show that
from March 20, 1979 to March, 1981, private respondent David, together with his sister, Denise Kuhne, invested
with the Nation Savings and Loan Association the sum of P1,145,546.20 on time deposits covered by Bankers
Acceptances and Certificates of Time Deposits and the sum of P13,531.94 on savings account deposits covered by
passbook nos. 6-632 and 29-742, or a total of P1,159,078.14 (pp. 15-16, roc.). It appears further that private
respondent David, together with his sister, made investments in the aforesaid bank in the amount of US$75,000.00
(p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was placed under receivership on March 21, 1981,
petitioners Guingona and Martin, upon the request of private respondent David, assumed the obligation of the bank
to private respondent David by executing on June 17, 1981 a joint promissory note in favor of private respondent
acknowledging an indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This promissory note was based
on the statement of account as of June 30, 1981 prepared by the private respondent (p. 81, rec.). The amount of

indebtedness assumed appears to be bigger than the original claim because of the added interest and the inclusion
of other deposits of private respondent's sister in the amount of P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said indebtedness, and
petitioner Guingona executed another promissory note antedated to June 17, 1981 whereby he personally
acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in
favor of private respondent (p. 25, rec.). The aforesaid promissory notes were executed as a result of deposits made
by Clement David and Denise Kuhne with the Nation Savings and Loan Association.
Furthermore, the various pleadings and documents filed by private respondent David, before this Court indisputably
show that he has indeed invested his money on time and savings deposits with the Nation Savings and Loan
Association.
It must be pointed out that when private respondent David invested his money on nine. and savings deposits with
the aforesaid bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of
deposit. Thus, Article 1980 of the New Civil Code provides that:
t.hqw

Article 1980. Fixed, savings, and current deposits of-money in banks and similar institutions shall be
governed by the provisions concerning simple loan.
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We said:

t.hqw

It should be noted that fixed, savings, and current deposits of money in banks and similar institutions
are hat true deposits. are considered simple loans and, as such, are not preferred credits (Art. 1980
Civil Code; In re Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American Apothecaries
Co., 66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association 65 Phil. 375; Fletcher
American National Bank vs. Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs. American
Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA 102 [1980])
that:
t.hqw

Bank deposits are in the nature of irregular deposits. They are really 'loans because they earn
interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and
are to be covered by the law on loans (Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil.
519). Current and saving deposits, are loans to a bank because it can use the same. The petitioner
here in making time deposits that earn interests will respondent Overseas Bank of Manila was in
reality a creditor of the respondent Bank and not a depositor. The respondent Bank was in turn a
debtor of petitioner.Failure of the respondent Bank to honor the time deposit is failure to pay its
obligation as a debtor and not a breach of trust arising from a depositary's failure to return the
subject matter of the deposit(Emphasis supplied).
Hence, the relationship between the private respondent and the Nation Savings and Loan Association is that of
creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the
perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay
interests on deposits and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it
has, however, no obligation to return or deliver the same money that was deposited. And, the failure of the Bank to
return the amount deposited will not constitute estafa through misappropriation punishable under Article 315, par.
l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the public respondents have nojurisdiction.
WE have already laid down the rule that:

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In order that a person can be convicted under the above-quoted provision, it must be proven that he
has the obligation to deliver or return the some money, goods or personal property that he
receivedPetitioners had no such obligation to return the same money, i.e., the bills or coins, which
they received from private respondents. This is so because as clearly as stated in criminal
complaints, the related civil complaints and the supporting sworn statements, the sums of money
that petitioners received were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.

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"Art. 1933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain timeand return it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of the same kind and
quality shall he paid in which case the contract is simply called a loan or mutuum.
"Commodatum is essentially gratuitous.
"Simple loan may be gratuitous or with a stipulation to pay interest.
"In commodatum the bailor retains the ownership of the thing loaned while in simple
loan, ownership passes to the borrower.
"Art. 1953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal amount
of the same kind and quality."
It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted
to commodatum the borrower acquires ownership of the money, goods or personal property
borrowed Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code)
and his act will not be considered misappropriation thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979];
Emphasis supplied).
But even granting that the failure of the bank to pay the time and savings deposits of private respondent David
would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any incipient
criminal liability was deemed avoided, because when the aforesaid bank was placed under receivership by the
Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to private respondent David,
thereby resulting in the novation of the original contractual obligation arising from deposit into a contract of loan and
converting the original trust relation between the bank and private respondent David into an ordinary debtor-creditor
relation between the petitioners and private respondent. Consequently, the failure of the bank or petitioners
Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust but would
merely be a failure to pay the obligation as a debtor.
Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent the rise of
criminal liability as long as it occurs prior to the filing of the criminal information in court. Thus, in Gonzales vs.
Serrano ( 25 SCRA 64, 69 [1968]) We held that:
t.hqw

As pointed out in People vs. Nery, novation prior to the filing of the criminal information as in the
case at bar may convert the relation between the parties into an ordinary creditor-debtor relation,
and place the complainant in estoppel to insist on the original transaction or "cast doubt on the true
nature" thereof.
Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581 [1983] ), this Court
reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring that:
t.hqw

The novation theory may perhaps apply prior to the filling of the criminal information in court by the
state prosecutors because up to that time the original trust relation may be converted by the parties
into an ordinary creditor-debtor situation, thereby placing the complainant in estoppel to insist on the
original trust. But after the justice authorities have taken cognizance of the crime and instituted
action in court, the offended party may no longer divest the prosecution of its power to exact the
criminal liability, as distinguished from the civil. The crime being an offense against the state, only
the latter can renounce it (People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76;
U.S. vs. Montanes, 8 Phil. 620).
It may be observed in this regard that novation is not one of the means recognized by the Penal
Code whereby criminal liability can be extinguished; hence, the role of novation may only be to either
prevent the rise of criminal habihty or to cast doubt on the true nature of the original basic
transaction, whether or not it was such that its breach would not give rise to penal responsibility, as
when money loaned is made to appear as a deposit, or other similar disguise is resorted to (cf.
Abeto vs. People, 90 Phil. 581; U.S. vs. Villareal, 27 Phil. 481).
In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory note on June 17,
1981 assuming the obligation of the bank to private respondent David; while the criminal complaint for estafa was
filed on December 23, 1981 with the Office of the City Fiscal. Hence, it is clear that novation occurred long before
the filing of the criminal complaint with the Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability would be avoided but there will still be a civil liability on
the part of petitioners Guingona and Martin to pay the assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of Central Bank Circular No. 364 and other
related regulations regarding foreign exchange transactions by accepting foreign currency deposit in the amount of
US$75,000.00 without authority from the Central Bank. They contend however, that the US dollars intended by
respondent David for deposit were all converted into Philippine currency before acceptance and deposit into Nation
Savings and Loan Association.
Petitioners' contention is worthy of behelf for the following reasons:
1. It appears from the records that when respondent David was about to make a deposit of bank draft issued in his
name in the amount of US$50,000.00 with the Nation Savings and Loan Association, the same had to be cleared
first and converted into Philippine currency. Accordingly, the bank draft was endorsed by respondent David to
petitioner Guingona, who in turn deposited it to his dollar account with the Security Bank and Trust Company.
Petitioner Guingona merely accommodated the request of the Nation Savings and loan Association in order to clear
the bank draft through his dollar account because the bank did not have a dollar account. Immediately after the
bank draft was cleared, petitioner Guingona authorized Nation Savings and Loan Association to withdraw the same
in order to be utilized by the bank for its operations.
2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they were accepted and
deposited in Nation Savings and Loan Association, because the bank is presumed to have followed the ordinary
course of the business which is to accept deposits in Philippine currency only, and that the transaction was regular
and fair, in the absence of a clear and convincing evidence to the contrary (see paragraphs p and q, Sec. 5, Rule
131, Rules of Court).
3. Respondent David has not denied the aforesaid contention of herein petitioners despite the fact that it was raised.
in petitioners' reply filed on May 7, 1982 to private respondent's comment and in the July 27, 1982 reply to public
respondents' comment and reiterated in petitioners' memorandum filed on October 30, 1982, thereby adding more
support to the conclusion that the US$75,000.00 were really converted into Philippine currency before they were
accepted and deposited into Nation Savings and Loan Association. Considering that this might adversely affect his
case, respondent David should have promptly denied petitioners' allegation.

In conclusion, considering that the liability of the petitioners is purely civil in nature and that there is no clear
showing that they engaged in foreign exchange transactions, We hold that the public respondents acted without
jurisdiction when they investigated the charges against the petitioners. Consequently, public respondents should be
restrained from further proceeding with the criminal case for to allow the case to continue, even if the petitioners
could have appealed to the Ministry of Justice, would work great injustice to petitioners and would render
meaningless the proper administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition and injunction, this court
has recognized the resort to the extraordinary writs of prohibition and injunction in extreme cases, thus:
t.hqw

On the issue of whether a writ of injunction can restrain the proceedings in Criminal Case No. 3140,
the general rule is that "ordinarily, criminal prosecution may not be blocked by court prohibition or
injunction." Exceptions, however, are allowed in the following instances:
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"1. for the orderly administration of justice;

"2. to prevent the use of the strong arm of the law in an oppressive and vindictive
manner;
"3. to avoid multiplicity of actions;
"4. to afford adequate protection to constitutional rights;
"5. in proper cases, because the statute relied upon is unconstitutional or was held
invalid" ( Primicias vs. Municipality of Urdaneta, Pangasinan, 93 SCRA 462, 469-470
[1979]; citing Ramos vs. Torres, 25 SCRA 557 [1968]; and Hernandez vs. Albano, 19
SCRA 95, 96 [1967]).
Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We held that:

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The writs of certiorari and prohibition, as extraordinary legal remedies, are in the ultimate analysis,
intended to annul void proceedings; to prevent the unlawful and oppressive exercise of legal
authority and to provide for a fair and orderly administration of justice. Thus, in Yu Kong Eng vs.
Trinidad, 47 Phil. 385, We took cognizance of a petition for certiorari and prohibition although the
accused in the case could have appealed in due time from the order complained of, our action in the
premises being based on the public welfare policy the advancement of public policy. In Dimayuga
vs. Fajardo, 43 Phil. 304, We also admitted a petition to restrain the prosecution of certain
chiropractors although, if convicted, they could have appealed. We gave due course to their petition
for the orderly administration of justice and to avoid possible oppression by the strong arm of the
law. And in Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the trial
court's action admitting an amended information was sustained despite the availability of appeal at
the proper time.
WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY RESTRAINING ORDER PREVIOUSLY
ISSUED IS MADE PERMANENT. COSTS AGAINST THE PRIVATE RESPONDENT.
SO ORDERED.

1wph1.t

[G.R. No. 129995. October 19, 2001]

THE PROVINCE OF BATAAN, petitioner-appellant, vs. HON. PEDRO VILLAFUERTE, JR., as Presiding Judge
of the Regional Trial Court of Bataan (Branch 4), and THE PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT, respondents-appellees.
DECISION
BUENA, J.:
Sought to be reversed in the instant Petition for Review on Certiorari is the Decision[1] of the Court of Appeals, dated
19 December 1996, in C.A. G.R. SP. No. 33344, upholding the twin orders dated 28 July 1993 and 11 November 1993 of
the Regional Trial Court (RTC) of Bataan, Branch 4, in Civil Case No. 210-ML, for annulment of sale.
In its order dated 28 July 1993, [2] the lower court directed that herein petitioner Province of Bataan remit to said court
whatever lease rentals petitioner may receive from lessees 7-R Port Services and Marina Port Services, and that such lease
rentals be placed under a special time deposit with the Land Bank of the Philippines, Balanga Branch, for the account of

the RTC-Balanga, Branch 4, in escrow, for the person or persons, natural or juridical, who may be adjudged lawfully
entitled thereto. The order dated 11 November 1993, [3] denied herein petitioners motion for reconsideration of the 28 July,
1993 order.
Involved in the present controversy is an expanse of real property (hereinafter referred to as the BASECO property)
situated at Mariveles, Bataan and formerly registered and titled in the name of either the Bataan Shipyard and Engineering
Corporation (BASECO), the Philippine Dockyard Corporation or the Baseco Drydock and Construction Co., Inc..
Pursuant to Presidential Decree No. 464, otherwise known as the Real Property Tax Code of 1974, the Provincial
Treasurer of Bataan advertised for auction sale the BASECO property due to real estate tax delinquency amounting to
P7,914,281.72, inclusive of penalties.[4] At the auction sale held on 12 February 1988, no bidder vied for said property as a
result of which, the Provincial Treasurer of Bataan adjudged the property to, and acquired the same for, and in the name of
herein petitioner Province of Bataan. Upon the expiration of the one-year redemption period, and without the owner
exercising its right to redeem the subject property, the Provincial Government of Bataan consolidated its title thereon; the
corresponding certificates of title were then issued in the name of herein petitioner Province of Bataan.
Eventually, petitioner, thru then Provincial Governor Enrique T. Garcia, entered into a ten-year contract of lease with
7-R Port Services, Inc., whereby portions of the BASECO property including facilities and improvements thereon, were
leased to the latter for a minimum escalating annual rental of Eighteen Million Pesos (P18 million). On 10 May 1993,
petitioner forged another contract of lease with Marina Port Services, over a ten-hectare portion of the BASECO property.
On 11 May 1993, The Presidential Commission on Good Government (PCGG), for itself and on behalf of the
Republic of the Philippines and the BASECO, the Philippine Dockyard Corporation and the Baseco Drydock and
Construction Co. Inc., filed with the RTC-Bataan a complaint for annulment of sale, [5] principally assailing the validity of
the tax delinquency sale of the BASECO property in favor of petitioner Province of Bataan. Among others, the complaint
alleged that the auction sale held on 12 February 1988, is void for having been conducted: [6]
a) In defiance of an injunctive order issued by the PCGG in the exercise of its powers under Executive Order
No. 1, Series of 1986;
b) in contravention of the Real Property Tax Code of 1974;
c) while the issue of ownership of the Baseco property and of whether the same partakes of the nature of illgotten wealth is pending litigation in Civil Case No. 0010 before the Sandiganbayan; and
d) despite the inscription of the sequestration order at the back of each title of the BASECO property.
In its prayer, the complaint asked for the following reliefs:
1) The tax delinquency sale held on February 12, 1988 be declared null and void; and the defendant Province of Bataan be
ordered to reconvey all the properties thus sold to its rightful owners, the Republic of the Philippines and/or the other
plaintiffs herein;
2) The defendants be ordered to render an accounting to, and pay plaintiffs all earnings, fruits and income which they have
received or could have received from the time they claimed ownership and took possession and control of all the
auctioned properties; and to account and pay for all the losses, deterioration and destruction thereof;
3) The defendants be ordered, jointly and severally to pay plaintiffs for all damages suffered by it/them by reason of the
unlawful actuations of the defendants, in the sum herein claimed and proven at the trial of this case, including attorneys
fees and costs of suit;

4) The defendant 7-R Port Services, Inc. be ordered to immediately cease and desist from paying any lease rentals to the
Province of Bataan, and instead to pay the same directly to the plaintiffs;
5) The Register of Deeds of Bataan be ordered to cancel the Torrens titles it had issued in favor of the Province of Bataan,
and issue a new Torrens titles (sic) in favor of plaintiffs in lieu of the cancelled ones.
Herein respondent PCGG, upon learning of the lease contracts entered into by and between petitioner and Marina
Port Services, filed with the RTC an urgent motion for the issuance of a writ of preliminary injunction to enjoin herein
petitioner from entering into a lease contract with Marina Port Services, Inc. (Marina), or any other entity, and/or from
implementing/enforcing such lease contract, if one has already been executed, and to maintain the status quo until further
orders from the Court.
On 06 July 1993, the lower court denied the motion ratiocinating that the lease contract with Marina was already
a fait accompli when the motion was filed, and that Marina was not a party to the suit for not having been impleaded as
party-defendant.
On 30 June 1993, the PCGG filed with the lower court an Urgent Motion to Deposit Lease Rentals, alleging inter
alia that the rentals amounting to Hundreds of Millions of Pesos are in danger of being unlawfully spent, squandered and
dissipated to the great and irreparable damage of plaintiffs who are the rightful owners of the property leased.
On 28 July 1993, the lower court granted the PCGGs urgent motion and issued its assailed order the dispositive
portion of which reads:
ACCORDINGLY, the defendant Province of Bataan is hereby ordered to remit to this Court the lease rentals it may
receive from the defendant 7-R Port Services, Inc. and the Marina Port Services, Inc. to commence from its receipt of this
Order and for the Clerk of Court of this Branch to deposit said amount under special time deposit with the Land Bank of
the Philippines, Balanga Branch, in Balanga, Bataan in the name and/or account of this Court to be held in ESCROW for
the person or persons, natural or juridical, who may be finally adjudged lawfully entitled thereto, and subject to further
orders from this Court.[7]
Petitioner moved to reconsider the aforementioned order, which motion the lower court denied via its assailed order
dated 11 November 1993.[8] Aggrieved by the lower courts twin orders, petitioner filed before the Court of Appeals a
petition for certiorari with prayer for issuance of a temporary restraining order and writ of preliminary injunction. [9]
On 01 December 1995, the Bataan Shipyard and Engineering Corporation, the Philippine Dockyard Corporation and
the Baseco Drydock and Construction Co., Inc., filed a motion for leave to intervene before the Court of Appeals. In a
Resolution dated 26 March 1996, the appellate court granted the motion.
On 16 April 1996, the intervenors-respondents filed their Answer-in-Intervention praying for the dismissal of the
petition before the Court of Appeals and the dissolution of the preliminary injunction issued in favor of petitioners. [10]
In its Decision dated 19 December 1996, the Court of Appeals dismissed the petition to which a motion for
reconsideration was filed by petitioner. In a Resolution dated 21 July 1997, respondent court likewise denied the motion
for reconsideration, hence, the instant appeal where petitioner Province of Bataan imputes to the Court of Appeals a lone
assignment of error, to wit:
The Court of Appeals manifestly erred in refusing to declare and/or hold that the respondent judge acted without
jurisdiction or with grave abuse of discretion in ordering the deposit in escrow of the rental payments pertaining to the
petitioner province.
In simpler terms, the sole issue for resolution revolves around the propriety of the escrow order issued by the lower
court in the civil suit for annulment of sale.

The instant petition is devoid of merit.

In the main, petitioner insists that the issuance of the escrow order by the trial court was patently irregular, if not
downright anomalous, reasoning that nowhere in the Revised Rules of Court is the trial court, or any court for that matter,
authorized to issue such escrow order, whether as a provisional or permanent remedy. According to petitioner, the escrow
orders in question are null and void ab initio for having been issued absent any legal basis and are merely calculated to
prejudice the petitioner province without any practical or worthwhile, much less legal objective.
We do not agree. An escrow[11] fills a definite niche in the body of the law; it has a distinct legal character. [12] The
usual definition is that an escrow is a written instrument which by its terms imports a legal obligation and which is
deposited by the grantor, promisor, or obligor, or his agent with a stranger or third party, to be kept by the depositary until
the performance of a condition or the happening of a certain event, and then to be delivered over to the grantee, promisee,
or obligee.[13]
While originally, the doctrine of escrow applied only to deeds by way of grant, [14] or as otherwise stated, instruments
for the conveyance of land,[15] under modern theories of law, the term escrow is not limited in its application to deeds, but
is applied to the deposit of any written instrument with a third person. [16] Particular instruments which have been held to
be the subject of an escrow include bonds or covenants, deeds, mortgages, oil and gas leases, contracts for the sale of land
or for the purchase of personal property, corporate stocks and stock subscriptions, promissory notes or other commercial
paper, insurance applications and policies, contracts for the settlement of will-contest cases, indentures of apprenticeship,
receipts assigning concessions and discontinuances and releases of causes of action. [17]Moreover, it is no longer open to
question that money may be delivered in escrow.[18]
In our jurisdiction, an escrow order issued by a court of law may find ample basis and support in the courts intrinsic
power to issue orders and other ancillary writs and processes incidental or reasonably necessary to the exercise of its main
jurisdiction. Evidently, judicial power connotes certain incidental and inherent attributes reasonably necessary for an
effective administration of justice.[19]
In a manner of speaking, courts have not only the power to maintain their life, but they have also the power to make
that existence effective for the purpose for which the judiciary was created. They can, by appropriate means, do all things
necessary to preserve and maintain every quality needful to make the judiciary an effective institution of
Government. Courts have therefore inherent power to preserve their integrity, maintain their dignity and to insure
effectiveness in the administration of justice. [20]
To lend flesh and blood to this legal aphorism, Rule 135 of the Rules of Court explicitly provides:
Section 5. Inherent powers of courts- Every court shall have power:
X X X (g) To amend and control its process and orders so as to make them conformable to law and justice.
Section 6. Means to carry jurisdiction into effect - When by law jurisdiction is conferred on a court or judicial
officer, all auxiliary writs, processes and other means necessary to carry it into effect may be employed by such
court or officer, and if the procedure to be followed in the exercise of such jurisdiction is not specifically pointed out by
law or by these rules, any suitable process or mode of proceeding may be adopted which appears conformable to the
spirit of said law or rules. (Emphasis ours)
It is beyond dispute that the lower court exercised jurisdiction over the main action docketed as Civil Case No. 210ML, which involved the annulment of sale and reconveyance of the subject properties.Under this circumstance, we are of
the firm view that the trial court, in issuing the assailed escrow orders, acted well within its province and sphere of power
inasmuch as the subject orders were adopted in accordance with the Rules and jurisprudence and were merely incidental
to the courts exercise of jurisdiction over the main case, thus:

X X X Jurisdiction attaching, the courts powers as a necessary incident to their general jurisdiction, to make such orders
in relation to the cases pending before them are as necessary to the progress of the cases and the dispatch of business
follow. Deming v. Foster, 42 N.H. 165, 178 cited in Burleigh v. Wong Sung De Leon 139 A. 184,83 N.H. 115.
XXXXXXXXX
X X X A court is vested, not only with the powers expressly granted by the statute, but also with all such powers as are
incidentally necessary to the effective exercise of the powers expressly conferred(In re McLures Estate, 68 Mont. 556,
220 P. 527) and to render its orders, made under such express powers effective. Brown v. Clark, 102 Tex. 323, 116
S.W. 360, 24 L.R.A. (N.S.) 670 cited in State v.District Court, 272 P. 525.
XXXXXXXXX
In the absence of prohibitive legislation, courts have inherent power to provide themselves with appropriate procedures
required for the performance of their tasks. Ex parte Peterson, 253 U.S. 300, 312, 313, 40 S. Ct. 543, 64 L. Ed. 919;
Funk v. U.S., 290 U.S. 371,381-384, 54 A. Ct. 212, 78 L.Ed. 369, 93 A.L.R. 1136 cited in Ex parte U.S. C.C.A. Wis., 101
F 2d 870.
XXXXXXXXX
A court has inherent power to make such interlocutory orders as may be necessary to protect its jurisdiction, and to
make certain that its eventual decree may not be ineffective. (Boynton v. Moffat Tunnel Improvement Dist. C.C.A.
Colo, 57 F, 2d 772.
XXXXXXXXX
In the ordinary case the courts can proceed to the enforcement of the plaintiffs rights only after a trial had in the manner
prescribed by the laws of the land, which involves due notice, the right of the trial by jury, etc. Preliminary to such an
adjucation, the power of the court is generally to preserve the subject matter of the litigation to maintain the status,
or issue some extraordinary writs provided by law, such as attachments, etc. None of these powers, however, are
exercised on the theory that the court should, in advance of the final adjudication determine the rights of the parties in any
summary way and put either of them in the enjoyment thereof; but such actions taken merely, as means for securing an
effective adjudication and enforcement of rights of the parties after such adjudication. Colby c. Osgood Tex. Civ. App.,
230 S.W. 459;)[21] (emphasis ours)
On this score, the incisive disquisition of the Court of Appeals is worthy of mention, to wit:
X X X Given the jurisdiction of the trial court to pass upon the raised question of ownership and possession of the
disputed property, there then can hardly be any doubt as to the competence of the same court, as an adjunct of its main
jurisdiction, to require the deposit in escrow of the rentals thereof pending final resolution of such question. To paraphrase
the teaching in Manila Herald Publishing Co., Inc. vs. Ramos (G.R. No. L-4268, January 18, 1951, cited in
Francisco, Revised Rules of Court, Vol. 1, 2nd ed., p. 133), jurisdiction over an action carries with it jurisdiction over an
interlocutory matter incidental to the cause and deemed essential to preserve the subject matter of the suit or to protect the
parties interest. X X X
X X X the impugned orders appear to us as a fair response to the exigencies and equities of the situation. Parenthetically,
it is not disputed that even before the institution of the main case below, the Province of Bataan has been utilizing the
rental payments on the Baseco Property to meet its financial requirements. To us, this circumstance adds a more
compelling dimension for the issuance of the assailed orders. X X X
Applying the foregoing principles and considering the peculiarities of the instant case, the lower court, in the course
of adjudicating and resolving the issues presented in the main suit, is clearly empowered to control the proceedings therein

through the adoption, formulation and issuance of orders and other ancillary writs, including the authority to place the
properties in custodia legis, for the purpose of effectuating its judgment or decree and protecting further the interests of
the rightful claimants of the subject property.
To trace its source, the courts authority proceeds from its jurisdiction and power to decide, adjudicate and resolve the
issues raised in the principal suit. Stated differently, the deposit of the rentals in escrow with the bank, in the name of the
lower court, is only an incident in the main proceeding.[22] To be sure, placing property in litigation under judicial
possession, whether in the hands of a receiver, and administrator, or as in this case, in a government bank, [23] is an ancient
and accepted procedure.[24] Consequently, we find no cogency to disturb the questioned orders of the lower court and in
effect uphold the propriety of the subject escrow orders. (emphasis ours)
IN VIEW WHEREOF, the instant petition is hereby DENIED for lack of merit. ACCORDINGLY, the assailed
decision of the Court of Appeals is hereby AFFIRMED.

[G.R. No. 126780. February 17, 2005]

YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM, petitioners, vs. THE COURT OF
APPEALS and MAURICE McLOUGHLIN,respondents.
DECISION
TINGA, J.:
The primary question of interest before this Court is the only legal issue in the case: It is whether a hotel
may evade liability for the loss of items left with it for safekeeping by its guests, by having these guests execute

written waivers holding the establishment or its employees free from blame for such loss in light of Article 2003
of the Civil Code which voids such waivers.
Before this Court is a Rule 45 petition for review of the Decision[1] dated 19 October 1995 of the Court of
Appeals which affirmed the Decision[2] dated 16 December 1991 of the Regional Trial Court (RTC), Branch 13,
of Manila, finding YHT Realty Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez (Lainez) and Anicia
Payam (Payam) jointly and solidarily liable for damages in an action filed by Maurice McLoughlin (McLoughlin)
for the loss of his American and Australian dollars deposited in the safety deposit box of Tropicana
Copacabana Apartment Hotel, owned and operated by YHT Realty Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-philanthropist, used to stay at Sheraton Hotel
during his trips to the Philippines prior to 1984 when he met Tan. Tan befriended McLoughlin by showing him
around, introducing him to important people, accompanying him in visiting impoverished street children and
assisting him in buying gifts for the children and in distributing the same to charitable institutions for poor
children. Tan convinced McLoughlin to transfer from Sheraton Hotel to Tropicana where Lainez, Payam and
Danilo Lopez were employed. Lopez served as manager of the hotel while Lainez and Payam had custody of
the keys for the safety deposit boxes of Tropicana. Tan took care of McLoughlins booking at the Tropicana
where he started staying during his trips to the Philippines from December 1984 to September 1987.[3]
On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana. He rented a safety
deposit box as it was his practice to rent a safety deposit box every time he registered at Tropicana in previous
trips. As a tourist, McLoughlin was aware of the procedure observed by Tropicana relative to its safety deposit
boxes. The safety deposit box could only be opened through the use of two keys, one of which is given to the
registered guest, and the other remaining in the possession of the management of the hotel. When a
registered guest wished to open his safety deposit box, he alone could personally request the management
who then would assign one of its employees to accompany the guest and assist him in opening the safety
deposit box with the two keys.[4]
McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand US Dollars
(US$15,000.00) which he placed in two envelopes, one envelope containing Ten Thousand US Dollars
(US$10,000.00) and the other envelope Five Thousand US Dollars (US$5,000.00); Ten Thousand Australian
Dollars (AUS$10,000.00) which he also placed in another envelope; two (2) other envelopes containing letters
and credit cards; two (2) bankbooks; and a checkbook, arranged side by side inside the safety deposit box.[5]
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin opened his safety deposit
box with his key and with the key of the management and took therefrom the envelope containing Five
Thousand US Dollars (US$5,000.00), the envelope containing Ten Thousand Australian Dollars
(AUS$10,000.00), his passports and his credit cards. [6]McLoughlin left the other items in the box as he did not
check out of his room at the Tropicana during his short visit to Hongkong. When he arrived in Hongkong, he
opened the envelope which contained Five Thousand US Dollars (US$5,000.00) and discovered upon
counting that only Three Thousand US Dollars (US$3,000.00) were enclosed therein. [7] Since he had no idea
whether somebody else had tampered with his safety deposit box, he thought that it was just a result of bad
accounting since he did not spend anything from that envelope.[8]
After returning to Manila, he checked out of Tropicana on 18 December 1987 and left for Australia. When
he arrived in Australia, he discovered that the envelope with Ten Thousand US Dollars (US$10,000.00) was
short of Five Thousand US Dollars (US$5,000). He also noticed that the jewelry which he bought in Hongkong
and stored in the safety deposit box upon his return to Tropicana was likewise missing, except for a diamond
bracelet.[9]

When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if some money and/or
jewelry which he had lost were found and returned to her or to the management. However, Lainez told him that
no one in the hotel found such things and none were turned over to the management. He again registered at
Tropicana and rented a safety deposit box. He placed therein one (1) envelope containing Fifteen Thousand
US Dollars (US$15,000.00), another envelope containing Ten Thousand Australian Dollars (AUS$10,000.00)
and other envelopes containing his traveling papers/documents. On 16 April 1988, McLoughlin requested
Lainez and Payam to open his safety deposit box. He noticed that in the envelope containing Fifteen Thousand
US Dollars (US$15,000.00), Two Thousand US Dollars (US$2,000.00) were missing and in the envelope
previously containing Ten Thousand Australian Dollars (AUS$10,000.00), Four Thousand Five Hundred
Australian Dollars (AUS$4,500.00) were missing.[10]
When McLoughlin discovered the loss, he immediately confronted Lainez and Payam who admitted that
Tan opened the safety deposit box with the key assigned to him. [11] McLoughlin went up to his room where Tan
was staying and confronted her. Tan admitted that she had stolen McLoughlins key and was able to open the
safety deposit box with the assistance of Lopez, Payam and Lainez. [12] Lopez also told McLoughlin that Tan
stole the key assigned to McLoughlin while the latter was asleep.[13]
McLoughlin requested the management for an investigation of the incident. Lopez got in touch with Tan
and arranged for a meeting with the police and McLoughlin. When the police did not arrive, Lopez and Tan
went to the room of McLoughlin at Tropicana and thereat, Lopez wrote on a piece of paper a promissory note
dated 21 April 1988. The promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and US$2,000.00 or its equivalent in Philippine
currency on or before May 5, 1988.[14]
Lopez requested Tan to sign the promissory note which the latter did and Lopez also signed as a witness.
Despite the execution of promissory note by Tan, McLoughlin insisted that it must be the hotel who must
assume responsibility for the loss he suffered. However, Lopez refused to accept the responsibility relying on
the conditions for renting the safety deposit box entitled Undertaking For the Use Of Safety Deposit Box,
[15]
specifically paragraphs (2) and (4) thereof, to wit:
2. To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability arising from
any loss in the contents and/or use of the said deposit box for any cause whatsoever, including but not limited to
the presentation or use thereof by any other person should the key be lost;
...
4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT HOTEL upon giving
up the use of the box.[16]
On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as to the validity of the
abovementioned stipulations. They opined that the stipulations are void for being violative of universal hotel
practices and customs. His lawyers prepared a letter dated 30 May 1988 which was signed by McLoughlin and
sent to President Corazon Aquino.[17] The Office of the President referred the letter to the Department of Justice
(DOJ) which forwarded the same to the Western Police District (WPD).[18]
After receiving a copy of the indorsement in Australia, McLoughlin came to the Philippines and registered
again as a hotel guest of Tropicana. McLoughlin went to Malacaang to follow up on his letter but he was
instructed to go to the DOJ. The DOJ directed him to proceed to the WPD for documentation. But McLoughlin
went back to Australia as he had an urgent business matter to attend to.

For several times, McLoughlin left for Australia to attend to his business and came back to the Philippines
to follow up on his letter to the President but he failed to obtain any concrete assistance.[19]
McLoughlin left again for Australia and upon his return to the Philippines on 25 August 1989 to pursue his
claims against petitioners, the WPD conducted an investigation which resulted in the preparation of an affidavit
which was forwarded to the Manila City Fiscals Office. Said affidavit became the basis of preliminary
investigation. However, McLoughlin left again for Australia without receiving the notice of the hearing on 24
November 1989. Thus, the case at the Fiscals Office was dismissed for failure to prosecute. Mcloughlin
requested the reinstatement of the criminal charge for theft. In the meantime, McLoughlin and his lawyers
wrote letters of demand to those having responsibility to pay the damage. Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate, Manila. Meetings
were held between McLoughlin and his lawyer which resulted to the filing of a complaint for damages on 3
December 1990 against YHT Realty Corporation, Lopez, Lainez, Payam and Tan (defendants) for the loss of
McLoughlins money which was discovered on 16 April 1988. After filing the complaint, McLoughlin left again for
Australia to attend to an urgent business matter. Tan and Lopez, however, were not served with summons, and
trial proceeded with only Lainez, Payam and YHT Realty Corporation as defendants.
After defendants had filed their Pre-Trial Brief admitting that they had previously allowed and assisted Tan
to open the safety deposit box, McLoughlin filed an Amended/Supplemental Complaint[20] dated 10 June 1991
which included another incident of loss of money and jewelry in the safety deposit box rented by McLoughlin in
the same hotel which took place prior to 16 April 1988.[21] The trial court admitted the Amended/Supplemental
Complaint.
During the trial of the case, McLoughlin had been in and out of the country to attend to urgent business in
Australia, and while staying in the Philippines to attend the hearing, he incurred expenses for hotel bills, airfare
and other transportation expenses, long distance calls to Australia, Meralco power expenses, and expenses for
food and maintenance, among others.[22]
After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the dispositive portion of which
reads:
WHEREFORE, above premises considered, judgment is hereby rendered by this Court in favor of plaintiff and against the
defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff the sum of US$11,400.00 or its equivalent
in Philippine Currency of P342,000.00, more or less, and the sum of AUS$4,500.00 or its
equivalent in Philippine Currency of P99,000.00, or a total of P441,000.00, more or less, with 12%
interest from April 16 1988 until said amount has been paid to plaintiff (Item 1, Exhibit CC);
2. Ordering defendants, jointly and severally to pay plaintiff the sum of P3,674,238.00 as actual and
consequential damages arising from the loss of his Australian and American dollars and jewelries
complained against and in prosecuting his claim and rights administratively and judicially (Items II,
III, IV, V, VI, VII, VIII, and IX, Exh. CC);
3. Ordering defendants, jointly and severally, to pay plaintiff the sum of P500,000.00 as moral
damages (Item X, Exh. CC);
4. Ordering defendants, jointly and severally, to pay plaintiff the sum of P350,000.00 as exemplary
damages (Item XI, Exh. CC);

5. And ordering defendants, jointly and severally, to pay litigation expenses in the sum of P200,000.00
(Item XII, Exh. CC);
6. Ordering defendants, jointly and severally, to pay plaintiff the sum of P200,000.00 as attorneys
fees, and a fee of P3,000.00 for every appearance; and
7. Plus costs of suit.
SO ORDERED.[23]
The trial court found that McLoughlins allegations as to the fact of loss and as to the amount of money he
lost were sufficiently shown by his direct and straightforward manner of testifying in court and found him to be
credible and worthy of belief as it was established that McLoughlins money, kept in Tropicanas safety deposit
box, was taken by Tan without McLoughlins consent. The taking was effected through the use of the master
key which was in the possession of the management. Payam and Lainez allowed Tan to use the master key
without authority from McLoughlin. The trial court added that if McLoughlin had not lost his dollars, he would
not have gone through the trouble and personal inconvenience of seeking aid and assistance from the Office of
the President, DOJ, police authorities and the City Fiscals Office in his desire to recover his losses from the
hotel management and Tan.[24]
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth approximately One
Thousand Two Hundred US Dollars (US$1,200.00) which allegedly occurred during his stay at Tropicana
previous to 4 April 1988, no claim was made by McLoughlin for such losses in his complaint dated 21
November 1990 because he was not sure how they were lost and who the responsible persons were. But
considering the admission of the defendants in their pre-trial brief that on three previous occasions they
allowed Tan to open the box, the trial court opined that it was logical and reasonable to presume that his
personal assets consisting of Seven Thousand US Dollars (US$7,000.00) and jewelry were taken by Tan from
the safety deposit box without McLoughlins consent through the cooperation of Payam and Lainez.[25]
The trial court also found that defendants acted with gross negligence in the performance and exercise of
their duties and obligations as innkeepers and were therefore liable to answer for the losses incurred by
McLoughlin.[26]
Moreover, the trial court ruled that paragraphs (2) and (4) of the Undertaking For The Use Of Safety
Deposit Box are not valid for being contrary to the express mandate of Article 2003 of the New Civil Code and
against public policy.[27] Thus, there being fraud or wanton conduct on the part of defendants, they should be
responsible for all damages which may be attributed to the non-performance of their contractual obligations.[28]
The Court of Appeals affirmed the disquisitions made by the lower court except as to the amount of
damages awarded. The decretal text of the appellate courts decision reads:
THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED but modified as follows:
The appellants are directed jointly and severally to pay the plaintiff/appellee the following amounts:
1) P153,200.00 representing the peso equivalent of US$2,000.00 and AUS$4,500.00;
2) P308,880.80, representing the peso value for the air fares from Sidney [sic] to Manila and back for a total of
eleven (11) trips;
3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Apartment Hotel;

4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;

5) One-half of P179,863.20 or P89,931.60 for the taxi xxx transportation from the residence to Sidney [sic]
Airport and from MIA to the hotel here in Manila, for the eleven (11) trips;
6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
7) One-half of P356,400.00 or P178,000.00 representing expenses for food and maintenance;
8) P50,000.00 for moral damages;
9) P10,000.00 as exemplary damages; and
10) P200,000 representing attorneys fees.
With costs.
SO ORDERED.[29]
Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this appeal by certiorari.
Petitioners submit for resolution by this Court the following issues: (a) whether the appellate courts
conclusion on the alleged prior existence and subsequent loss of the subject money and jewelry is supported
by the evidence on record; (b) whether the finding of gross negligence on the part of petitioners in the
performance of their duties as innkeepers is supported by the evidence on record; (c) whether the Undertaking
For The Use of Safety Deposit Box admittedly executed by private respondent is null and void; and (d) whether
the damages awarded to private respondent, as well as the amounts thereof, are proper under the
circumstances.[30]
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution only of questions of law and any peripheral
factual question addressed to this Court is beyond the bounds of this mode of review.
Petitioners point out that the evidence on record is insufficient to prove the fact of prior existence of the
dollars and the jewelry which had been lost while deposited in the safety deposit boxes of Tropicana, the basis
of the trial court and the appellate court being the sole testimony of McLoughlin as to the contents thereof.
Likewise, petitioners dispute the finding of gross negligence on their part as not supported by the evidence on
record.
We are not persuaded. We adhere to the findings of the trial court as affirmed by the appellate court that
the fact of loss was established by the credible testimony in open court by McLoughlin. Such findings are
factual and therefore beyond the ambit of the present petition.
The trial court had the occasion to observe the demeanor of McLoughlin while testifying which reflected
the veracity of the facts testified to by him. On this score, we give full credence to the appreciation of
testimonial evidence by the trial court especially if what is at issue is the credibility of the witness. The oftrepeated principle is that where the credibility of a witness is an issue, the established rule is that great respect
is accorded to the evaluation of the credibility of witnesses by the trial court. [31] The trial court is in the best
position to assess the credibility of witnesses and their testimonies because of its unique opportunity to
observe the witnesses firsthand and note their demeanor, conduct and attitude under grilling examination.[32]

We are also not impressed by petitioners argument that the finding of gross negligence by the lower court
as affirmed by the appellate court is not supported by evidence. The evidence reveals that two keys are
required to open the safety deposit boxes of Tropicana. One key is assigned to the guest while the other
remains in the possession of the management. If the guest desires to open his safety deposit box, he must
request the management for the other key to open the same. In other words, the guest alone cannot open the
safety deposit box without the assistance of the management or its employees. With more reason that access
to the safety deposit box should be denied if the one requesting for the opening of the safety deposit box is a
stranger. Thus, in case of loss of any item deposited in the safety deposit box, it is inevitable to conclude that
the management had at least a hand in the consummation of the taking, unless the reason for the loss is force
majeure.
Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had custody of the
master key of the management when the loss took place. In fact, they even admitted that they assisted Tan on
three separate occasions in opening McLoughlins safety deposit box. [33] This only proves that Tropicana had
prior knowledge that a person aside from the registered guest had access to the safety deposit box. Yet the
management failed to notify McLoughlin of the incident and waited for him to discover the taking before it
disclosed the matter to him. Therefore, Tropicana should be held responsible for the damage suffered by
McLoughlin by reason of the negligence of its employees.
The management should have guarded against the occurrence of this incident considering that Payam
admitted in open court that she assisted Tan three times in opening the safety deposit box of McLoughlin at
around 6:30 A.M. to 7:30 A.M. while the latter was still asleep. [34] In light of the circumstances surrounding this
case, it is undeniable that without the acquiescence of the employees of Tropicana to the opening of the safety
deposit box, the loss of McLoughlins money could and should have been avoided.
The management contends, however, that McLoughlin, by his act, made its employees believe that Tan
was his spouse for she was always with him most of the time. The evidence on record, however, is bereft of
any showing that McLoughlin introduced Tan to the management as his wife. Such an inference from the act of
McLoughlin will not exculpate the petitioners from liability in the absence of any showing that he made the
management believe that Tan was his wife or was duly authorized to have access to the safety deposit box.
Mere close companionship and intimacy are not enough to warrant such conclusion considering that what is
involved in the instant case is the very safety of McLoughlins deposit. If only petitioners exercised due
diligence in taking care of McLoughlins safety deposit box, they should have confronted him as to his
relationship with Tan considering that the latter had been observed opening McLoughlins safety deposit box a
number of times at the early hours of the morning. Tans acts should have prompted the management to
investigate her relationship with McLoughlin. Then, petitioners would have exercised due diligence required of
them. Failure to do so warrants the conclusion that the management had been remiss in complying with the
obligations imposed upon hotel-keepers under the law.
Under Article 1170 of the New Civil Code, those who, in the performance of their obligations, are guilty of
negligence, are liable for damages. As to who shall bear the burden of paying damages, Article 2180,
paragraph (4) of the same Code provides that the owners and managers of an establishment or enterprise
are likewise responsible for damages caused by their employees in the service of the branches in which the
latter are employed or on the occasion of their functions. Also, this Court has ruled that if an employee is found
negligent, it is presumed that the employer was negligent in selecting and/or supervising him for it is hard for
the victim to prove the negligence of such employer.[35] Thus, given the fact that the loss of McLoughlins money
was consummated through the negligence of Tropicanas employees in allowing Tan to open the safety deposit
box without the guests consent, both the assisting employees and YHT Realty Corporation itself, as owner and
operator of Tropicana, should be held solidarily liable pursuant to Article 2193.[36]
The issue of whether the Undertaking For The Use of Safety Deposit Box executed by McLoughlin is
tainted with nullity presents a legal question appropriate for resolution in this petition. Notably, both the trial

court and the appellate court found the same to be null and void. We find no reason to reverse their common
conclusion. Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for
the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the
former as set forth in Articles 1998 to 2001[37] is suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to apply to
situations such as that presented in this case. The hotel business like the common carriers business is imbued
with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for hotel guests
and security to their persons and belongings. The twin duty constitutes the essence of the business. The law in
turn does not allow such duty to the public to be negated or diluted by any contrary stipulation in so-called
undertakings that ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature.
In an early case,[38] the Court of Appeals through its then Presiding Justice (later Associate Justice of the
Court) Jose P. Bengzon, ruled that to hold hotelkeepers or innkeeper liable for the effects of their guests, it is
not necessary that they be actually delivered to the innkeepers or their employees. It is enough that such
effects are within the hotel or inn.[39] With greater reason should the liability of the hotelkeeper be enforced
when the missing items are taken without the guests knowledge and consent from a safety deposit box
provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the undertaking manifestly contravene Article 2003 of the New Civil Code for
they allow Tropicana to be released from liability arising from any loss in the contents and/or use of the safety
deposit box for any cause whatsoever.[40] Evidently, the undertaking was intended to bar any claim against
Tropicana for any loss of the contents of the safety deposit box whether or not negligence was incurred by
Tropicana or its employees. The New Civil Code is explicit that the responsibility of the hotel-keeper shall
extend to loss of, or injury to, the personal property of the guests even if caused by servants or employees of
the keepers of hotels or inns as well as by strangers, except as it may proceed from any force majeure.[41] It is
the loss through force majeure that may spare the hotel-keeper from liability. In the case at bar, there is no
showing that the act of the thief or robber was done with the use of arms or through an irresistible force to
qualify the same as force majeure.[42]
Petitioners likewise anchor their defense on Article 2002 [43] which exempts the hotel-keeper from liability if
the loss is due to the acts of his guest, his family, or visitors. Even a cursory reading of the provision would
lead us to reject petitioners contention. The justification they raise would render nugatory the public interest
sought to be protected by the provision. What if the negligence of the employer or its employees facilitated the
consummation of a crime committed by the registered guests relatives or visitor? Should the law exculpate the
hotel from liability since the loss was due to the act of the visitor of the registered guest of the hotel? Hence,
this provision presupposes that the hotel-keeper is not guilty of concurrent negligence or has not contributed in
any degree to the occurrence of the loss. A depositary is not responsible for the loss of goods by theft, unless
his actionable negligence contributes to the loss.[44]
In the case at bar, the responsibility of securing the safety deposit box was shared not only by the guest
himself but also by the management since two keys are necessary to open the safety deposit box. Without the
assistance of hotel employees, the loss would not have occurred. Thus, Tropicana was guilty of concurrent
negligence in allowing Tan, who was not the registered guest, to open the safety deposit box of McLoughlin,
even assuming that the latter was also guilty of negligence in allowing another person to use his key. To rule
otherwise would result in undermining the safety of the safety deposit boxes in hotels for the management will
be given imprimatur to allow any person, under the pretense of being a family member or a visitor of the guest,
to have access to the safety deposit box without fear of any liability that will attach thereafter in case such
person turns out to be a complete stranger. This will allow the hotel to evade responsibility for any liability
incurred by its employees in conspiracy with the guests relatives and visitors.

Petitioners contend that McLoughlins case was mounted on the theory of contract, but the trial court and
the appellate court upheld the grant of the claims of the latter on the basis of tort. [45] There is nothing
anomalous in how the lower courts decided the controversy for this Court has pronounced a jurisprudential rule
that tort liability can exist even if there are already contractual relations. The act that breaks the contract may
also be tort.[46]
As to damages awarded to McLoughlin, we see no reason to modify the amounts awarded by the
appellate court for the same were based on facts and law. It is within the province of lower courts to settle
factual issues such as the proper amount of damages awarded and such finding is binding upon this Court
especially if sufficiently proven by evidence and not unconscionable or excessive. Thus, the appellate court
correctly awarded McLoughlin Two Thousand US Dollars (US$2,000.00) and Four Thousand Five Hundred
Australian dollars (AUS$4,500.00) or their peso equivalent at the time of payment, [47] being the amounts duly
proven by evidence.[48] The alleged loss that took place prior to 16 April 1988 was not considered since the
amounts alleged to have been taken were not sufficiently established by evidence. The appellate court also
correctly awarded the sum of P308,880.80, representing the peso value for the air fares from Sydney to Manila
and back for a total of eleven (11) trips;[49] one-half of P336,207.05 or P168,103.52 representing payment to
Tropicana;[50] one-half ofP152,683.57 or P76,341.785 representing payment to Echelon Tower; [51] one-half
of P179,863.20 or P89,931.60 for the taxi or transportation expenses from McLoughlins residence to Sydney
Airport and from MIA to the hotel here in Manila, for the eleven (11) trips; [52] one-half of P7,801.94 or P3,900.97
representing Meralco power expenses;[53] one-half of P356,400.00 or P178,000.00 representing expenses for
food and maintenance.[54]
The amount of P50,000.00 for moral damages is reasonable. Although trial courts are given discretion to
determine the amount of moral damages, the appellate court may modify or change the amount awarded when
it is palpably and scandalously excessive. Moral damages are not intended to enrich a complainant at the
expense of a defendant. They are awarded only to enable the injured party to obtain means, diversion or
amusements that will serve to alleviate the moral suffering he has undergone, by reason of defendants
culpable action.[55]
The awards of P10,000.00 as exemplary damages and P200,000.00 representing attorneys fees are
likewise sustained.
WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals dated 19 October
1995 is hereby AFFIRMED. Petitioners are directed, jointly and severally, to pay private respondent the
following amounts:
(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of payment;
(2) P308,880.80, representing the peso value for the air fares from Sydney to Manila and back for a total of eleven
(11) trips;
(3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Copacabana Apartment Hotel;
(4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;
(5) One-half of P179,863.20 or P89,931.60 for the taxi or transportation expense from McLoughlins residence to
Sydney Airport and from MIA to the hotel here in Manila, for the eleven (11) trips;
(6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
(7) One-half of P356,400.00 or P178,200.00 representing expenses for food and maintenance;

(8) P50,000.00 for moral damages;

(9) P10,000.00 as exemplary damages; and
(10) P200,000 representing attorneys fees.
With costs.
SO ORDERED.

DURBAN APARTMENTS CORPORATION,

doing business under the name and
style of City Garden Hotel,

G.R. No. 179419

Present:

Petitioner,
CARPIO, J.,
Chairperson,
NACHURA,
PERALTA,
- versus -

ABAD, and
MENDOZA, JJ.

PIONEER INSURANCE AND SURETY

CORPORATION,

Promulgated:

Respondent.
January 12, 2011
x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

For review is the Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No. 86869, which affirmed
the decision[2] of the Regional Trial Court (RTC), Branch 66, Makati City, in Civil Case No. 03-857,
holding petitioner Durban Apartments Corporation solely liable to respondent Pioneer Insurance
and Surety Corporation for the loss of Jeffrey Sees (Sees) vehicle.

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

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

right of subrogation, filed [with the RTC of Makati City] a Complaint for Recovery of
Damages against [petitioner] Durban Apartments Corporation, doing business under

the name and style of City Garden Hotel, and [defendant before the RTC] Vicente
Justimbaste x x x. [Respondent averred] that: it is the insurer for loss and damage of
Jeffrey S. Sees [the insureds] 2001 Suzuki Grand Vitara x x x with Plate No. XBH-510
under Policy No. MC-CV-HO-01-0003846-00-D in the amount of P1,175,000.00; on
April 30, 2002, See arrived and checked in at the City Garden Hotel in Makati corner
Kalayaan Avenues, Makati City before midnight, and its parking attendant,
defendant x x x Justimbaste got the key to said Vitara from See to park it[. O]n May
1, 2002, at about 1:00 oclock in the morning, See was awakened in his room by
[a] telephone call from the Hotel Chief Security Officer who informed him that his
Vitara was carnapped while it was parked unattended at the parking area of
Equitable PCI Bank along Makati Avenue between the hours of 12:00 [a.m.] and 1:00
[a.m.]; See went to see the Hotel Chief Security Officer, thereafter reported the
incident to the Operations Division of the Makati City Police Anti-Carnapping Unit,
and a flash alarm was issued; the Makati City Police Anti-Carnapping Unit
investigated Hotel Security Officer, Ernesto T. Horlador, Jr. x x x and defendant x x x
Justimbaste; See gave his Sinumpaang Salaysay to the police investigator, and filed
a Complaint Sheet with the PNP Traffic Management Group in Camp Crame, Quezon
City; the Vitara has not yet been recovered since July 23, 2002 as evidenced by a
Certification of Non- Recovery issued by the PNP TMG; it paid the P1,163,250.00
money claim of See and mortgagee ABN AMRO Savings Bank, Inc. as indemnity for
the loss of the Vitara; the Vitara was lost due to the negligence of [petitioner]
Durban Apartments and [defendant] Justimbaste because it was discovered during
the investigation that this was the second time that a similar incident of carnapping
happened in the valet parking service of [petitioner] Durban Apartments and no
necessary precautions were taken to prevent its repetition; [petitioner] Durban
Apartments was wanting in due diligence in the selection and supervision of its
employees particularly defendant x x x Justimbaste; and defendant x x x
Justimbaste and [petitioner] Durban Apartments failed and refused to pay its valid,
just, and lawful claim despite written demands.

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

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

defendant x x x Justimbaste, and Horlador submitted themselves to police

investigation.

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

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

See testified that: on April 30, 2002, at about 11:30 in the evening, he drove his
Vitara and stopped in front of City Garden Hotel in Makati Avenue, Makati City; a
parking attendant, whom he had later known to be defendant x x x Justimbaste,
approached and asked for his ignition key, told him that the latter would park the
Vitara for him in front of the hotel, and issued him a valet parking customers claim
stub; he and Montero, thereafter, checked in at the said hotel; on May 1, 2002, at
around 1:00 in the morning, the Hotel Security Officer whom he later knew to be
Horlador called his attention to the fact that his Vitara was carnapped while it was
parked at the parking lot of Equitable PCI Bank which is in front of the hotel; his
Vitara was insured with [respondent] Pioneer Insurance; he together with Horlador
and defendant x x x Justimbaste went to Precinct 19 of the Makati City Police to
report the carnapping incident, and a police officer came accompanied them to the
Anti-Carnapping Unit of the said station for investigation, taking of their sworn
statements, and flashing of a voice alarm; he likewise reported the said incident in
PNP TMG in Camp Crame where another alarm was issued; he filed his claim with
[respondent] Pioneer Insurance, and a representative of the latter, who is also an
adjuster of Vesper Insurance Adjusters-Appraisers [Vesper], investigated the
incident; and [respondent] Pioneer Insurance required him to sign a Release of
Claim and Subrogation Receipt, and finally paid him the sum of P1,163,250.00 for
his claim.

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

Insurance tasked, among others, with the receipt of claims and documents from the
insured, investigation of the said claim, inspection of damages, taking of pictures of
insured unit, and monitoring of the processing of the claim until its payment; he
monitored the processing of Sees claim when the latter reported the incident to
[respondent] Pioneer Insurance; [respondent] Pioneer Insurance assigned the case
to Vesper who verified Sees report, conducted an investigation, obtained the
necessary documents for the processing of the claim, and tendered a settlement
check to See; they evaluated the case upon receipt of the subrogation documents
and the adjusters report, and eventually recommended for its settlement for the
sum of P1,163,250.00 which was accepted by See; the matter was referred and
forwarded to their counsel, R.B. Sarajan & Associates, who prepared and sent

demand letters to [petitioner] Durban Apartments and [defendant] Justimbaste, who

did not pay [respondent] Pioneer Insurance notwithstanding their receipt of the
demand letters; and the services of R.B. Sarajan & Associates were engaged,
for P100,000.00 as attorneys fees plus P3,000.00 per court appearance, to
prosecute the claims of [respondent] Pioneer Insurance against [petitioner] Durban
Apartments and Justimbaste before the lower court.

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

Insurance assigned to Vesper the investigation of Sees case, and he was the one
actually assigned to investigate it; he conducted his investigation of the matter by
interviewing See, going to the City Garden Hotel, required subrogation documents
from See, and verified the authenticity of the same; he learned that it is the
standard procedure of the said hotel as regards its valet parking service to assist
their guests as soon as they get to the lobby entrance, park the cars for their
guests, and place the ignition keys in their safety key box; considering that the
hotel has only twelve (12) available parking slots, it has an agreement with
Equitable PCI Bank permitting the hotel to use the parking space of the bank at
night; he also learned that a Hyundai Starex van was carnapped at the said place
barely a month before the occurrence of this incident because Liberty Insurance
assigned the said incident to Vespers, and Horlador and defendant x x x Justimbaste
admitted the occurrence of the same in their sworn statements before the AntiCarnapping Unit of the Makati City Police; upon verification with the PNP TMG [Unit]
in Camp Crame, he learned that Sees Vitara has not yet been recovered; upon
evaluation, Vesper recommended to [respondent] Pioneer Insurance to settle Sees
claim for P1,045,750.00; See contested the recommendation of Vesper by reasoning
out that the 10% depreciation should not be applied in this case considering the fact
that the Vitara was used for barely eight (8) months prior to its loss; and
[respondent] Pioneer Insurance acceded to Sees contention, tendered the sum
of P1,163,250.00 as settlement, the former accepted it, and signed a release of
claim and subrogation receipt.

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

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

WHEREFORE, judgment is hereby rendered ordering [petitioner Durban Apartments

Corporation] to pay [respondent Pioneer Insurance and Surety Corporation] the sum
of P1,163,250.00 with legal interest thereon from July 22, 2003 until the obligation
is fully paid and attorneys fees and litigation expenses amounting to P120,000.00.

SO ORDERED.[4]

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

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

SO ORDERED.[5]

Hence, this recourse by petitioner.

The issues for our resolution are:

1. Whether the lower courts erred in declaring petitioner as in default for failure to appear at the
pre-trial conference and to file a pre-trial brief;

2. Corollary thereto, whether the trial court correctly allowed respondent to present evidence exparte;

3. Whether petitioner is liable to respondent for attorneys fees in the amount of P120,000.00;
and

4. Ultimately, whether petitioner is liable to respondent for the loss of Sees vehicle.

The petition must fail.

We are in complete accord with the common ruling of the lower courts that petitioner was in
default for failure to appear at the pre-trial conference and to file a pre-trial brief, and thus,

correctly allowed respondent to present evidence ex-parte. Likewise, the lower courts did not err
in holding petitioner liable for the loss of Sees vehicle.

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

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

We are not persuaded.

Rule 18 of the Rules of Court leaves no room for equivocation; appearance of parties and their
counsel at the pre-trial conference, along with the filing of a corresponding pre-trial brief, is
mandatory, nay, their duty. Thus, Section 4 and Section 6 thereof provide:

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

SEC. 6. Pre-trial brief.The parties shall file with the court and serve on the adverse
party, in such manner as shall ensure their receipt thereof at least three (3) days

before the date of the pre-trial, their respective pre-trial briefs which shall contain,
among others:

xxxx

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

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

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

As pointed out by the CA, petitioner, through Atty. Lee, received the notice of pre-trial on October
27, 2003, thirty-two (32) days prior to the scheduled conference. In that span of time, Atty. Lee,
who was charged with the duty of notifying petitioner of the scheduled pre-trial conference,
[8]

petitioner, and Atty. Mejia should have discussed which lawyer would appear at the pre-trial

conference with petitioner, armed with the appropriate authority therefor. Sadly, petitioner failed
to comply with not just one rule; it also did not proffer a reason why it likewise failed to file a pretrial brief. In all, petitioner has not shown any persuasive reason why it should be exempt from
abiding by the rules.

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

Former Chief Justice Andres R. Narvasas words continue to resonate, thus:

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

xxxx

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

We are not unmindful that defendants (petitioners) preclusion from presenting evidence during
trial does not automatically result in a judgment in favor of plaintiff (respondent). The plaintiff
must still substantiate the allegations in its complaint. [10] Otherwise, it would be inutile to
continue with the plaintiffs presentation of evidence each time the defendant is declared in
default.

In this case, respondent substantiated the allegations in its complaint, i.e., a contract of
necessary deposit existed between the insured See and petitioner. On this score, we find no error
in the following disquisition of the appellate court:

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

Article 1962, in relation to Article 1998, of the Civil Code defines a contract of deposit and a
necessary deposit made by persons in hotels or inns:
Art. 1962. A deposit is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it and returning the
same. If the safekeeping of the thing delivered is not the principal purpose of the
contract, there is no deposit but some other contract.

Art. 1998. The deposit of effects made by travelers in hotels or inns shall also be
regarded as necessary. The keepers of hotels or inns shall be responsible for them
as depositaries, provided that notice was given to them, or to their employees, of
the effects brought by the guests and that, on the part of the latter, they take the
precautions which said hotel-keepers or their substitutes advised relative to the
care and vigilance of their effects.

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

Lastly, petitioner assails the lower courts award of attorneys fees to respondent in the
amount of P120,000.00. Petitioner claims that the award is not substantiated by the evidence on
record.

We disagree.

While it is a sound policy not to set a premium on the right to litigate, [12] we find that
respondent is entitled to reasonable attorneys fees. Attorneys fees may be awarded when a
party is compelled to litigate or incur expenses to protect its interest, [13] or when the court deems
it just and equitable.[14] In this case, petitioner refused to answer for the loss of Sees vehicle,
which was deposited with it for safekeeping. This refusal constrained respondent, the insurer of
See, and subrogated to the latters right, to litigate and incur expenses. However, we reduce the
award of P120,000.00 to P60,000.00 in view of the simplicity of the issues involved in this case.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV
No. 86869 is AFFIRMED with the MODIFICATION that the award of attorneys fees is reduced
to P60,000.00. Costs against petitioner.
SO ORDERED.

[G.R. No. 143994. July 11, 2002]

LOS BAOS RURAL BANK, INC., petitioner, vs. PACITA O. AFRICA, GLORIA AFRICA, ANTONIO AFRICA,
ARISTEO
AFRICA,
SOCORRO
AFRICA,
CONSUELO
AFRICA,
AND
LOURDES
AFRICA, respondents.
DECISION
PANGANIBAN, J.:
A writ of preliminary injunction is issued to preserve the status quo ante, upon an applicants showing of
two important requisite conditions; namely, (1) the right to be protected exists prima facie, and (2) the acts
sought to be enjoined are violative of that right. It must be proven that the violation sought to be prevented
would cause an irreparable injustice.

Statement of the Case

Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the June 30, 2000
Decision[1] of the Court of Appeals[2] (CA) in CA-GR SP No. 53355. The decretal portion of the Decision reads
as follows:
WHEREFORE, the petition is GRANTED. The Order dated April 19, 1999 insofar as it denied the petitioners
application for the issuance of a writ of preliminary injunction, is hereby RECALLED and SET ASIDE.
Let a writ of preliminary injunction issue in this case to restrain the respondent bank from proceeding with the
foreclosure and consolidation of the title over the subject property upon posting by petitioners of a bond in the
amount of Php20,000.00.[3]
The Order of the Regional Trial Court (RTC) of Quezon City (Branch 220), which was reversed by the CA,
reads as follows:
WHEREFORE, premises considered, the Order of the Court dated July 22, 1997 is hereby recalled and set
aside. The application for issuance of writ of preliminary injunction is hereby DENIED.
Issues in this case having been joined, let this case be set for pre-trial on May 28, 1999 at 8:30 o clock in the
morning. Send notice of pre-trial to the parties and counsels.[4]
The Facts
The factual antecedents of the case are summarized by the Court of Appeals in this wise:
Petitioner Pacita Africa (Pacita for brevity) is the widow of Alberto Africa and the rest of her co-petitioners are
their children.
Records disclose that sometime in June 1989, the Quezon City Hall building where the Register of Deeds was
then holding office was razed by fire, destroying some of its records/documents among which was the original
Transfer Certificate of Title (TCT) No. 203492 covering a parcel of land situated in Diliman, Quezon City, and
registered in the name of petitioner Pacita. The aforesaid property was part of the conjugal property of
petitioner Pacita and her late husband Alberto Africa.
On request of Pacita, private respondent Macy Africa, the common-law wife of petitioner Antonio Africa, worked
for the reconstitution of the aforesaid TCT No. 203492. The same was done and a new Transfer Certificate of
Title (TCT) No. RT-76140 (203492) PR-36463 was issued in the name of Pacita Africa. While the reconstituted
title was in her possession, Macy allegedly forged, or caused the forgery of, Pacitas signature on a Deed of
Absolute Sale dated December 29, 1992, purporting to transfer ownership of the subject property to Macy. On
the strength of the forged Deed of Absolute Sale, Macy was able to cause the issuance of TCT No. 81519 in
her name, without the knowledge of any of herein petitioners.
Still as part of the scheme to defraud petitioners, Macy caused the preparation of a fake TCT No. 81519 in the
name of Pacita, which the former showed to the latter to make Pacita believe that the said title was issued in
her (Pacitas) name.
Sometime in March 1994, petitioners discovered private respondents fraudulent act. They (petitioners) likewise
came to know that the subject property was mortgaged by Macy to the respondent bank. To protect their
interests over the subject property, petitioners lodged an action in court against Macy and the respondent bank
for Annulment of Title, Deed of Absolute Sale and Deed of Mortgage. The case was originally assigned to
Branch 99 of the RTC of Quezon City and docketed as Civil Case No. Q-94-20898.

After the filing of the aforesaid case, the respondent bank in utter bad faith, foreclosed the subject property on
June 11, 1996 without due notice to the petitioners, prompting the petitioners to amend [their] complaint, this
time incorporating therein a prayer for the issuance of a temporary restraining order and/or writ of preliminary
injunction, to stop the respondent bank from, among others, consolidating title to the subject property.
On July 2, 1997, RTC Branch 99 issued an Order granting petitioners application for a temporary restraining
order. Meanwhile, the respondent bank filed its Manifestation, Opposition and Motion to Postpone dated July
11, 1997, praying, inter alia, for the denial of petitioners application for a writ of preliminary injunction, or in the
alternative, for the cancellation of the hearing thereon. On July 18, 1997, the aforesaid court denied the
respondent banks motion to postpone and proceeded with the hearing of petitioners application. Thereafter,
petitioners application was considered submitted for resolution.
On July 22, 1997, the Court issued an Order granting petitioners application for a writ of preliminary injunction
to which respondent bank filed a Motion for Reconsideration dated July 11, 1997 followed by a Motion for
Inhibition on January 1, 1998 praying that Hon. Felix M. de Guzman, presiding judge of RTC, Branch 99, inhibit
himself from further trying the case. This latter motion was granted, and the case was re-raffled and assigned
to Branch 220.
On April 19, 1999, RTC Branch 220, public respondent herein, issued the questioned Order. [5]
Ruling of the Court of Appeals
The CA overturned the RTC Order dated April 19, 1999, and granted the issuance of a preliminary
injunction to restrain petitioner from proceeding with the foreclosure and the consolidation of title over the
subject property. The CA ruled that respondents had title to and possession of the property and were deprived
thereof by petitioner. Thus, respondents had a clear and unmistakable right to protect their title and
possession.[6]
Hence, this Petition.[7]
Issues
In its Memorandum, petitioner raises the following issues for the Courts consideration:
I
Whether the Court of Appeals acted with patent grave abuse of discretion in applying the ruling in Verzosa vs.
Court of Appeals, (299 SCRA 100), to the instant case to justify its reversal of the 19 April 1999 Order of
Branch 220 of the Regional Trial Court of Quezon City in Civil Case No. Q-94-20898[;]
II
Whether the Court of Appeals acted with patent grave abuse of discretion when it rationalized its decision by
citing factual premises therein that are not borne out by the records nor based on evidence and in fact contrary
to reality[;]
III
Whether the Court of Appeals acted with patent grave abuse of discretion when it ignored, disregarded and/or
deviated from established jurisprudence governing the issuance of preliminary injunction demanded by private
respondents against the petitioner bank[;]

IV
Whether the Court [of] Appeals acted with patent grave abuse of discretion when it disregarded the pertinent
provisions of Section 3, Rule 58, of the Revised Rules of Court providing for the grounds for issuance of
preliminary injunction.[8]
In sum, the issues boil down to whether the appellate court erred in issuing a writ of preliminary injunction
to stop petitioners consolidation of its title to the subject property.
This Courts Ruling
The Petition is not meritorious; it has not shown any reversible error in the CAs Decision.
Main Issue:
Propriety of Preliminary Injunction
Petitioner argues that respondents do not have a right to the relief demanded, because they merely have
possession of the property, as the legal title is in the name of Macy Africa. [9]Furthermore, it claims that the
consolidation of title in its name does not constitute an invasion of a right that is material and substantial.[10]
On the other hand, respondents maintain that they would suffer great irreparable damage if the writ of
preliminary injunction is not granted.[11] They likewise contend that if petitioner is allowed to consolidate its title
to the subject property, they would lose their ancestral home, a loss that would result in unnecessary and
protracted proceedings involving third parties.[12]
We agree with respondents.
The grounds for the issuance of a writ of preliminary injunction are enumerated in Rule 58, Section 3 of
the Revised Rules of Court, which reads as follows:
Sec. 3. Grounds for issuance of preliminary injunction. A preliminary injunction may be granted when it
is established;
(a)That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in
restraining the commission or continuance of the act or acts complained of, or in requiring the performance of
an act or acts, either for a limited period or perpetually;
(b)That the commission, continuance or non-performance of the act or acts complained of during the litigation
would probably work injustice to the applicant; or
(c)That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or
suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the subject
of the action or proceeding, and tending to render the judgment ineffectual.
Injunction is a preservative remedy aimed at no other purpose than to protect the complainants
substantive rights and interests[13] during the pendency of the principal action.[14] A preliminary injunction, as the
term itself suggests, is merely temporary.[15] It is to be resorted to only when there is a pressing necessity to
avoid injurious consequences that cannot be remedied under any standard of compensation.[16]
Moreover, injunction, like other equitable remedies, should be issued only at the instance of a suitor who
has sufficient interest in or title to the right or the property sought to be protected. [17] It is proper only when the

plaintiff appears to be entitled to the relief demanded in the complaint. [18] In particular, the existence of the right
and the violation thereof must appear in the allegations of the complaint [19] and must constitute at least a prima
facie showing of a right to the final relief.[20] Thus, there are two requisite conditions for the issuance of a
preliminary injunction, namely, (1) the right to be protected exists prima facie, and (2) the acts sought to be
enjoined are violative of that right.[21] It must be proven that the violation sought to be prevented would cause
an irreparable injustice.
Further, while a clear showing of the right is necessary, its existence need not be conclusively established.
In fact, the evidence required to justify the issuance of a writ of preliminary injunction in the hearing thereon
need not be conclusive or complete. The evidence need only be a sampling intended merely to give the court
an idea of the justification for the preliminary injunction, pending the decision of the case on the merits. [23] Thus,
to be entitled to the writ, respondents are only required to show that they have the ostensible right to the final
relief prayed for in their Complaint.[24]
[22]

First Requisite:
Existence of the Right
In the case at bar, we find ample justification for the issuance of a writ of preliminary injunction.
Evidently, the question on whether or not respondents possess the requisite right hinges on the prima facie
existence of their legal title to the subject property.[26] They have shown that they have that right, and that it is
directly threatened by the act sought to be enjoined.[27]
[25]

First, as alleged in the Complaint,[28] Respondent Pacita Africa is the registered owner of the subject
property. Her ownership is evidenced by the reconstituted Transfer Certificate of Title (TCT) No. RT-76140
(203492) PR-36463,[29] issued by the Registry of Deeds of Quezon City. Second, the validity of the Deed of
Sale[30] dated December 29, 1992, is still in dispute because Respondent Pacita Africa claims that her
signature was forged by the vendee, Macy Africa. [31] Third, there is doubt as to the validity of the mortgage in
favor of petitioner, because there exists on record two TCTs covering the mortgaged property: (1) TCT No.
81519[32] registered in the name of Pacita Africa and (2) TCT No. 81519 [33] registered in the name of Macy
Africa.
If indeed the Deed of Sale is a forgery, no parcel of land was ever transferred to the purported
buyer[34] who, not being the owner, could not have validly mortgaged the property.[35]Consequently, neither has
petitioner -- the buyer and mortgagee of the same lot -- ever acquired any title thereto. [36] Significantly, no
evidence was presented by petitioner to controvert these allegations put forward by respondents. Clearly then,
on the basis of the evidence presented, respondents possess the right to prevent petitioner from consolidating
the title in its name. The first requisite -- the existence of a right to be protected -- is thus present.[37]
Second Requisite:
Violation of Applicants Right
As to the second requisite, what is sought to be enjoined by respondents is the consolidation of the title to
the subject property in petitioners name. After having discovered that the property had been mortgaged to
petitioner, respondents filed on June 12, 1994 an action for Annulment of Title, Deed of Sale, and Mortgage to
protect their rights over the property.[38] This notwithstanding, petitioner foreclosed it on June 11, 1996.[39] To
enjoin petitioner from consolidating the title in its name, respondents then filed an Amended Complaint,
[40]
praying for a writ of preliminary injunction.
Unless legally stopped, petitioner may consolidate title to the property in its name and enjoy the unbridled
freedom to dispose of it to third persons, to the damage and prejudice of respondents. [41] What respondents

stand to lose is material and substantial. [42] They would lose their ancestral home even without the benefit of a
trial.[43] Clearly, the act sought to be enjoined is violative of their proprietary right over the property.[44]
A writ of preliminary injunction is issued precisely to preserve threatened or continuous irremediable injury
to some of the parties before their claims can be thoroughly studied and adjudicated. [45] Denial of the
application for the writ may make the Complaint of respondents moot and academic. Furthermore, it would
render ineffectual a final judgment in their favor or, at the very least, compel them to litigate needlessly with
third persons who may have acquired an interest in the property.[46] Such a situation cannot be countenanced.
[47]

Lis Pendens
Petitioner further contends that respondents are not entitled to the relief prayed for, because they caused
a notice of lis pendens to be annotated at the back of TCT No. 81519, registered in the name of Macy P. Africa;
thus, that notice provided ample protection of their rights and interests.[48]
We are not persuaded. A notice of lis pendens serves as an announcement to the whole world that a
particular real property is in litigation and as a warning that those who acquire an interest in the property do so
at their own risk -- they gamble on the result of the litigation over it. [49] However, the cancellation of such notice
may be ordered by the court that has jurisdiction over it at any given time. [50] Its continuance or removal -- like
the continuance or the removal of a preliminary attachment or injunction -- is not contingent on the existence of
a final judgment on the action and ordinarily has no effect on the merits thereof.[51] Thus, the notice of lis
pendens does not suffice to protect herein respondents rights over the property.[52] It does not provide complete
and ample protection.
Status Quo Ante
Petitioner further claims that the RTC erred in enjoining the foreclosure sale of the subject property.[53] It
argues that the foreclosure may no longer be enjoined, because it has long been effected since 1996. [54] We
agree with petitioner.
It is a well-entrenched rule that consummated acts can no longer be restrained by injunction [55] whose sole
objective is to preserve the status quo until the merits of the case are fully heard. [56] Status quo is defined as
the last actual peaceful uncontested situation that precedes a controversy, and its preservation is the office of
an injunctive writ.[57]
In the instant case, the status quo was the situation of the parties at the time of the filing of the Amended
Complaint[58] with a prayer for a writ of preliminary injunction. It was that point at which petitioner had already
foreclosed the subject property and, hence, could no longer be enjoined from going on with the
foreclosure. However, the last actual uncontested status that preceded the controversy was when the property
in dispute was still registered in the name of Macy Africa, petitioner not having consolidated in its name the title
thereto.[59] Thus, the issuance of the writ would no doubt preserve the status quo.[60]
We cannot rule on the allegation of petitioner that this case is a scam perpetrated by private respondents
to defraud it.[61] The truth or the falsity of that assertion cannot be ascertained by this Court at this time. Verily,
we refrain from expressing any opinion on the merits of the case, pending a full consideration of the evidence
that would be presented by the parties.[62]
WHEREFORE,
the
Petition
is DENIED and the
Appeals AFFIRMED. Costs against petitioner.
SO ORDERED.

assailed

Decision

of

the

Court

of

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 151953

June 29, 2007

SALVADOR P. ESCAO and MARIO M. SILOS, petitioner,

vs.
RAFAEL ORTIGAS, JR., respondent.
DECISION
TINGA, J.:
The main contention raised in this petition is that petitioners are not under obligation to reimburse respondent, a
claim that can be easily debunked. The more perplexing question is whether this obligation to repay is solidary, as
contended by respondent and the lower courts, or merely joint as argued by petitioners.
On 28 April 1980, Private Development Corporation of the Philippines (PDCP) 1 entered into a loan agreement with
Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make available and lend to Falcon the amount of
US$320,000.00, for specific purposes and subject to certain terms and conditions. 2 On the same day, three
stockholders-officers of Falcon, namely: respondent Rafael Ortigas, Jr. (Ortigas), George A. Scholey and George T.
Scholey executed an Assumption of Solidary Liability whereby they agreed "to assume in [their] individual capacity,
solidary liability with [Falcon] for the due and punctual payment" of the loan contracted by Falcon with PDCP.3 In the
meantime, two separate guaranties were executed to guarantee the payment of the same loan by other
stockholders and officers of Falcon, acting in their personal and individual capacities. One Guaranty 4 was executed
by petitioner Salvador Escao (Escao), while the other 5 by petitioner Mario M. Silos (Silos), Ricardo C. Silverio
(Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of Falcon to Escao, Silos and Joseph M. Matti (Matti).
Thus, contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of then already
deceased George T. Scholey assigned their shares of stock in Falcon to Escao, Silos and Matti. 6 Part of the
consideration that induced the sale of stock was a desire by Ortigas, et al., to relieve themselves of all liability
arising from their previous joint and several undertakings with Falcon, including those related to the loan with PDCP.
Thus, an Undertaking dated 11 June 1982 was executed by the concerned parties, 7 namely: with Escao, Silos and
Matti identified in the document as "SURETIES," on one hand, and Ortigas, Inductivo and the Scholeys as
"OBLIGORS," on the other. The Undertaking reads in part:
3. That whether or not SURETIES are able to immediately cause PDCP and PAIC to release OBLIGORS from their
said guarantees [sic], SURETIES hereby irrevocably agree and undertake to assume all of OBLIGORs said
guarantees [sic] to PDCP and PAIC under the following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP and/or PAIC for the payment of FALCONs
obligations with it, any of [the] OBLIGORS shall immediately inform SURETIES thereof so that the latter can timely
take appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC against any and/or all of OBLIGORS for collection of said loans
and/or credit facilities, SURETIES agree to defend OBLIGORS at their own expense, without prejudice to any and/or
all of OBLIGORS impleading SURETIES therein for contribution, indemnity, subrogation or other relief in respect to
any of the claims of PDCP and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for any reason made to pay any amount to PDCP and/or PAIC,
SURETIES shall reimburse OBLIGORS for said amount/s within seven (7) calendar days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all fees which may be due from FALCON arising out of,
or in connection with, their said guarantees[sic]. 8
Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by PDCP. It would also
execute a Deed of Chattel Mortgage over its personal properties to further secure the loan. However, Falcon

subsequently defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there remained a subsisting
deficiency of P5,031,004.07, which Falcon did not satisfy despite demand. 9
On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for sum of money with the Regional
Trial Court of Makati (RTC) against Falcon, Ortigas, Escao, Silos, Silverio and Inductivo. The case was docketed
as Civil Case No. 89-5128. For his part, Ortigas filed together with his answer a cross-claim against his codefendants Falcon, Escao and Silos, and also manifested his intent to file a third-party complaint against the
Scholeys and Matti.10 The cross-claim lodged against Escao and Silos was predicated on the 1982 Undertaking,
wherein they agreed to assume the liabilities of Ortigas with respect to the PDCP loan.
Escao, Ortigas and Silos each sought to seek a settlement with PDCP. The first to come to terms with PDCP was
Escao, who in December of 1993, entered into a compromise agreement whereby he agreed to pay the
bankP1,000,000.00. In exchange, PDCP waived or assigned in favor of Escao one-third (1/3) of its entire claim in
the complaint against all of the other defendants in the case. 11 The compromise agreement was approved by the
RTC in a Judgment12 dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own compromise agreement 13 with PDCP, allegedly without the
knowledge of Escao, Matti and Silos. Thereby, Ortigas agreed to pay PDCP P1,300,000.00 as "full satisfaction of
the PDCPs claim against Ortigas,"14 in exchange for PDCPs release of Ortigas from any liability or claim arising
from the Falcon loan agreement, and a renunciation of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he agreed to pay P500,000.00 in
exchange for PDCPs waiver of its claims against him.15
In the meantime, after having settled with PDCP, Ortigas pursued his claims against Escao, Silos and Matti, on the
basis of the 1982 Undertaking. He initiated a third-party complaint against Matti and Silos, 16 while he maintained his
cross-claim against Escao. In 1995, Ortigas filed a motion for Summary Judgment in his favor against Escao,
Silos and Matti. On 5 October 1995, the RTC issued the Summary Judgment, ordering Escao, Silos and Matti to
pay Ortigas, jointly and severally, the amount of P1,300,000.00, as well as P20,000.00 in attorneys fees.17 The trial
court ratiocinated that none of the third-party defendants disputed the 1982 Undertaking, and that "the mere denials
of defendants with respect to non-compliance of Ortigas of the terms and conditions of the Undertaking,
unaccompanied by any substantial fact which would be admissible in evidence at a hearing, are not sufficient to
raise genuine issues of fact necessary to defeat a motion for summary judgment, even if such facts were raised in
the pleadings."18 In an Order dated 7 March 1996, the trial court denied the motion for reconsideration of the
Summary Judgment and awarded Ortigas legal interest of 12% per annum to be computed from 28 February 1994. 19
From the Summary Judgment, recourse was had by way of appeal to the Court of Appeals. Escao and Silos
appealed jointly while Matti appealed by his lonesome. In a Decision 20 dated 23 January 2002, the Court of Appeals
dismissed the appeals and affirmed the Summary Judgment. The appellate court found that the RTC did not err in
rendering the summary judgment since the three appellants did not effectively deny their execution of the 1982
Undertaking. The special defenses that were raised, "payment and excussion," were characterized by the Court of
Appeals as "appear[ing] to be merely sham in the light of the pleadings and supporting documents and
affidavits."21Thus, it was concluded that there was no genuine issue that would still require the rigors of trial, and that
the appealed judgment was decided on the bases of the undisputed and established facts of the case.
Hence, the present petition for review filed by Escao and Silos.22 Two main issues are raised. First, petitioners
dispute that they are liable to Ortigas on the basis of the 1982 Undertaking, a document which they do not disavow
and have in fact annexed to their petition. Second, on the assumption that they are liable to Ortigas under the 1982
Undertaking, petitioners argue that they are jointly liable only, and not solidarily. Further assuming that they are
liable, petitioners also submit that they are not liable for interest and if at all, the proper interest rate is 6% and not
12%.
Interestingly, petitioners do not challenge, whether in their petition or their memorandum before the Court, the
appropriateness of the summary judgment as a relief favorable to Ortigas. Under Section 3, Rule 35 of the 1997

Rules of Civil Procedure, summary judgment may avail if the pleadings, supporting affidavits, depositions and
admissions on file show that, except as to the amount of damages, there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a matter of law. Petitioner have not attempted to demonstrate
before us that there existed a genuine issue as to any material fact that would preclude summary judgment. Thus,
we affirm with ease the common rulings of the lower courts that summary judgment is an appropriate recourse in
this case.
The vital issue actually raised before us is whether petitioners were correctly held liable to Ortigas on the basis of
the 1982 Undertaking in this Summary Judgment. An examination of the document reveals several clauses that
make it clear that the agreement was brought forth by the desire of Ortigas, Inductivo and the Scholeys to be
released from their liability under the loan agreement which release was, in turn, part of the consideration for the
assignment of their shares in Falcon to petitioners and Matti. The whereas clauses manifest that Ortigas had bound
himself with Falcon for the payment of the loan with PDCP, and that "amongst the consideration for OBLIGORS
and/or their principals aforesaid selling is SURETIES relieving OBLIGORS of any and all liability arising from their
said joint and several undertakings with FALCON."23 Most crucial is the clause in Paragraph 3 of the Undertaking
wherein petitioners "irrevocably agree and undertake to assume all of OBLIGORs said guarantees [sic] to PDCP x x
x under the following terms and conditions."24
At the same time, it is clear that the assumption by petitioners of Ortigass "guarantees" [sic] to PDCP is governed
by stipulated terms and conditions as set forth in sub-paragraphs (a) to (c) of Paragraph 3. First, upon receipt by
"any of OBLIGORS" of any demand from PDCP for the payment of Falcons obligations with it, "any of OBLIGORS"
was to immediately inform "SURETIES" thereof so that the latter can timely take appropriate measures. Second,
should "any and/or all of OBLIGORS" be impleaded by PDCP in a suit for collection of its loan, "SURETIES agree[d]
to defend OBLIGORS at their own expense, without prejudice to any and/or all of OBLIGORS impleading
SURETIES therein for contribution, indemnity, subrogation or other relief"25 in respect to any of the claims of PDCP.
Third, if any of the "OBLIGORS is for any reason made to pay any amount to [PDCP], SURETIES [were to]
reimburse OBLIGORS for said amount/s within seven (7) calendar days from such payment." 26
Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas was not "made to pay" PDCP the
amount now sought to be reimbursed, as Ortigas voluntarily paid PDCP the amount of P1.3 Million as an amicable
settlement of the claims posed by the bank against him. However, the subject clause in paragraph 3(c) actually
reads "[i]n the event that any of OBLIGORS is for any reason made to pay any amount to PDCP x x x" 27 As pointed
out by Ortigas, the phrase "for any reason" reasonably includes any extra-judicial settlement of obligation such as
what Ortigas had undertaken to pay to PDCP, as it is indeed obvious that the phrase was incorporated in the clause
to render the eventual payment adverted to therein unlimited and unqualified.
The interpretation posed by petitioners would have held water had the Undertaking made clear that the right of
Ortigas to seek reimbursement accrued only after he had delivered payment to PDCP as a consequence of a final
and executory judgment. On the contrary, the clear intent of the Undertaking was for petitioners and Matti to relieve
the burden on Ortigas and his fellow "OBLIGORS" as soon as possible, and not only after Ortigas had been
subjected to a final and executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to "exert all efforts to cause PDCP x x x to within a reasonable
time release all the OBLIGORS x x x from their guarantees [sic] to PDCP x x x" 28 In the event that Ortigas and his
fellow "OBLIGORS" could not be released from their guaranties, paragraph 2 commits petitioners and Matti to cause
the Board of Directors of Falcon to make a call on its stockholders for the payment of their unpaid subscriptions and
to pledge or assign such payments to Ortigas, et al., as security for whatever amounts the latter may be held liable
under their guaranties. In addition, paragraph 1 also makes clear that nothing in the Undertaking "shall prevent
OBLIGORS, or any one of them, from themselves negotiating with PDCP x x x for the release of their said
guarantees [sic]."29
There is no argument to support petitioners position on the import of the phrase "made to pay" in the Undertaking,
other than an unduly literalist reading that is clearly inconsistent with the thrust of the document. Under the Civil
Code, the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense

which may result from all of them taken jointly.30 Likewise applicable is the provision that if some stipulation of any
contract should admit of several meanings, it shall be understood as bearing
that import which is most adequate to render it effectual. 31 As a means to effect the general intent of the document to
relieve Ortigas from liability to PDCP, it is his interpretation, not that of petitioners, that holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of the other conditions set in paragraph 3, as they
claim. Following the general assertion in the petition that Ortigas violated the terms of the Undertaking, petitioners
add that Ortigas "paid PDCP BANK the amount of P1.3 million without petitioners ESCANO and SILOSs knowledge
and consent."32 Paragraph 3(a) of the Undertaking does impose a requirement that any of the "OBLIGORS" shall
immediately inform "SURETIES" if they received any demand for payment of FALCONs obligations to PDCP, but
that requirement is reasoned "so that the [SURETIES] can timely take appropriate measures" 33 presumably to settle
the obligation without having to burden the "OBLIGORS." This notice requirement in paragraph 3(a) is markedly way
off from the suggestion of petitioners that Ortigas, after already having been impleaded as a defendant in the
collection suit, was obliged under the 1982 Undertaking to notify them before settling with PDCP.
The other arguments petitioners have offered to escape liability to Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the first place. They note that Ortigas had, in his answer,
denied any liability to PDCP and had alleged that he signed the Assumption of Solidary Liability not in his personal
capacity, but as an officer of Falcon. However, such position, according to petitioners, could not be justified since
Ortigas later voluntarily paid PDCP the amount of P1.3 Million. Such circumstances, according to petitioners,
amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are still erroneous. The Partial Compromise Agreement
between PDCP and Ortigas expressly stipulated that Ortigass offer to pay PDCP was conditioned "without
[Ortigass] admitting liability to plaintiff PDCP Banks complaint, and to terminate and dismiss the said case as
against Ortigas solely."34 Petitioners profess it is "unthinkable" for Ortigas to have voluntarily paid PDCP without
admitting his liability,35 yet such contention based on assumption cannot supersede the literal terms of the Partial
Compromise Agreement.
Petitioners further observe that Ortigas made the payment to PDCP after he had already assigned his obligation to
petitioners through the 1982 Undertaking. Yet the fact is PDCP did pursue a judicial claim against Ortigas
notwithstanding the Undertaking he executed with petitioners. Not being a party to such Undertaking, PDCP was not
precluded by a contract from pursuing its claim against Ortigas based on the original Assumption of Solidary
Liability.
At the same time, the Undertaking did not preclude Ortigas from relieving his distress through a settlement with the
creditor bank. Indeed, paragraph 1 of the Undertaking expressly states that "nothing herein shall prevent
OBLIGORS, or any one of them, from themselves negotiating with PDCP x x x for the release of their said
guarantees [sic]."36 Simply put, the Undertaking did not bar Ortigas from pursuing his own settlement with PDCP.
Neither did the Undertaking bar Ortigas from recovering from petitioners whatever amount he may have paid PDCP
through his own settlement. The stipulation that if Ortigas was "for any reason made to pay any amount to PDCP[,] x
x x SURETIES shall reimburse OBLIGORS for said amount/s within seven (7) calendar days from such
payment"37makes it clear that petitioners remain liable to reimburse Ortigas for the sums he paid PDCP.
We now turn to the set of arguments posed by petitioners, in the alternative, that is, on the assumption that they are
indeed liable.
Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas, claiming that the Undertaking
did not provide for express solidarity. They cite Article 1207 of the New Civil Code, which states in part that "[t]here
is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation
requires solidarity."

Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable for the Undertaking, as the
language used in the agreement "clearly shows that it is a surety agreement" 38 between the obligors (Ortigas group)
and the sureties (Escao group). Ortigas points out that the Undertaking uses the word "SURETIES" although the
document, in describing the parties. It is further contended that the principal objective of the parties in executing the
Undertaking cannot be attained unless petitioners are solidarily liable "because the total loan obligation can not be
paid or settled to free or release the OBLIGORS if one or any of the SURETIES default from their obligation in the
Undertaking."39
In case, there is a concurrence of two or more creditors or of two or more debtors in one and the same obligation,
Article 1207 of the Civil Code states that among them, "[t]here is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires solidarity." Article 1210 supplies further
caution against the broad interpretation of solidarity by providing: "The indivisibility of an obligation does not
necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility."
These Civil Code provisions establish that in case of concurrence of two or more creditors or of two or more debtors
in one and the same obligation, and in the absence of express and indubitable terms characterizing the obligation
as solidary, the presumption is that the obligation is only joint. It thus becomes incumbent upon the party alleging
that the obligation is indeed solidary in character to prove such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the petitioners agreed "to bind themselves jointly and
severally" in their obligations to the Ortigas group, or any such terms to that effect. Hence, such obligation
established in the Undertaking is presumed only to be joint. Ortigas, as the party alleging that the obligation is in fact
solidary, bears the burden to overcome the presumption of jointness of obligations. We rule and so hold that he
failed to discharge such burden.
Ortigas places primary reliance on the fact that the petitioners and Matti identified themselves in the Undertaking as
"SURETIES", a term repeated no less than thirteen (13) times in the document. Ortigas claims that such manner of
identification sufficiently establishes that the obligation of petitioners to him was joint and solidary in nature.
The term "surety" has a specific meaning under our Civil Code. Article 2047 provides the statutory definition of a
surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this
Book shall be observed. In such case the contract is called a suretyship. [Emphasis supplied] 40
As provided in Article 2047 in a surety agreement the surety undertakes to be bound solidarily with the principal
debtor. Thus, a surety agreement is an ancillary contract as it presupposes the existence of a principal contract. It
appears that Ortigass argument rests solely on the solidary nature of the obligation of the surety under Article 2047.
In tandem with the nomenclature "SURETIES" accorded to petitioners and Matti in the Undertaking, however, this
argument can only be viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as defined under Article 2047 in the first place. That clearly is
not the case here, notwithstanding the use of the nomenclature "SURETIES" in the Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is solidarily bound by
way of an ancillary obligation of segregate identity from the obligation between the principal debtor and the creditor.
The suretyship does bind the surety to the creditor, inasmuch as the latter is vested with the right to proceed against
the former to collect the credit in lieu of proceeding against the principal debtor for the same obligation. 41 At the
same time, there is also a legal tie created between the surety and the principal debtor to which the creditor is not
privy or party to. The moment the surety fully answers to the creditor for the obligation created by the principal
debtor, such obligation is extinguished.42 At the same time, the surety may seek reimbursement from the principal

debtor for the amount paid, for the surety does in fact "become subrogated to all the rights and remedies of the
creditor."43
Note that Article 2047 itself specifically calls for the application of the provisions on joint and solidary obligations to
suretyship contracts.44 Article 1217 of the Civil Code thus comes into play, recognizing the right of reimbursement
from a co-debtor (the principal debtor, in case of suretyship) in favor of the one who paid (i.e., the surety). 45However,
a significant distinction still lies between a joint and several debtor, on one hand, and a surety on the other.
Solidarity signifies that the creditor can compel any one of the joint and several debtors or the surety alone to
answer for the entirety of the principal debt. The difference lies in the respective faculties of the joint and several
debtor and the surety to seek reimbursement for the sums they paid out to the creditor.
Dr. Tolentino explains the differences between a solidary co-debtor and a surety:
A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph
does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary codebtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt before the
property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to
him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section
4, Chapter 3, Title I, Book IV of the Civil Code.
The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship. The civil law suretyship
is, accordingly, nearly synonymous with the common law guaranty; and the civil law relationship existing between
the co-debtors liable in solidum is similar to the common law suretyship. 46
In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected the payment
to the creditor "may claim from his co-debtors only the share which corresponds to each, with the interest for the
payment already made." Such solidary debtor will not be able to recover from the co-debtors the full amount already
paid to the creditor, because the right to recovery extends only to the proportional share of the other co-debtors, and
not as to the particular proportional share of the solidary debtor who already paid. In contrast, even as the surety is
solidarily bound with the principal debtor to the creditor, the surety who does pay the creditor has the right to recover
the full amount paid, and not just any proportional share, from the principal debtor or debtors. Such right to full
reimbursement falls within the other rights, actions and benefits which pertain to the surety by reason of the
subsidiary obligation assumed by the surety.
What is the source of this right to full reimbursement by the surety? We find the right under Article 2066 of the Civil
Code, which assures that "[t]he guarantor who pays for a debtor must be indemnified by the latter," such indemnity
comprising of, among others, "the total amount of the debt."47 Further, Article 2067 of the Civil Code likewise
establishes that "[t]he guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had
against the debtor."48

Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions should not extend to
sureties, especially in light of the qualifier in Article 2047 that the provisions on joint and several obligations should
apply to sureties. We reject that argument, and instead adopt Dr. Tolentinos observation that "[t]he reference in the
second paragraph of [Article 2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several
obligations, however, does not mean that suretyship is withdrawn from the applicable provisions governing
guaranty."49 For if that were not the implication, there would be no material difference between the surety as defined
under Article 2047 and the joint and several debtors, for both classes of obligors would be governed by exactly the
same rules and limitations.
Accordingly, the rights to indemnification and subrogation as established and granted to the guarantor by Articles
2066 and 2067 extend as well to sureties as defined under Article 2047. These rights granted to the surety who pays
materially differ from those granted under Article 1217 to the solidary debtor who pays, since the "indemnification"
that pertains to the latter extends "only [to] the share which corresponds to each [co-debtor]." It is for this reason that

the Court cannot accord the conclusion that because petitioners are identified in the Undertaking as "SURETIES,"
they are consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the general presumption favoring joint liability, the
Court would have to be satisfied that among the petitioners and Matti, there is one or some of them who stand as
the principal debtor to Ortigas and another as surety who has the right to full reimbursement from the principal
debtor or debtors. No suggestion is made by the parties that such is the case, and certainly the Undertaking is not
revelatory of such intention. If the Court were to give full fruition to the use of the term "sureties" as conclusive
indication of the existence of a surety agreement that in turn gives rise to a solidary obligation to pay Ortigas, the
necessary implication would be to lay down a corresponding set of rights and obligations as between the
"SURETIES" which petitioners and Matti did not clearly intend.
It is not impossible that as between Escao, Silos and Matti, there was an agreement whereby in the event that
Ortigas were to seek reimbursement from them per the terms of the Undertaking, one of them was to act as surety
and to pay Ortigas in full, subject to his right to full reimbursement from the other two obligors. In such case, there
would have been, in fact, a surety agreement which evinces a solidary obligation in favor of Ortigas. Yet if there was
indeed such an agreement, it does not appear on the record. More consequentially, no such intention is reflected in
the Undertaking itself, the very document that creates the conditional obligation that petitioners and Matti reimburse
Ortigas should he be made to pay PDCP. The mere utilization of the term "SURETIES" could not work to such
effect, especially as it does not appear who exactly is the principal debtor whose obligation is "assured" or
"guaranteed" by the surety.
Ortigas further argues that the nature of the Undertaking requires "solidary obligation of the Sureties," since the
Undertaking expressly seeks to "reliev[e] obligors of any and all liability arising from their said joint and several
undertaking with [F]alcon," and for the "sureties" to "irrevocably agree and undertake to assume all of obligors said
guarantees to PDCP."50 We do not doubt that a finding of solidary liability among the petitioners works to the benefit
of Ortigas in the facilitation of these goals, yet the Undertaking itself contains no stipulation or clause that
establishes petitioners obligation to Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not by
themselves establish that the nature of the obligation requires solidarity. Even if the liability of petitioners and Matti
were adjudged as merely joint, the full relief and reimbursement of Ortigas arising from his payment to PDCP would
still be accomplished through the complete execution of such a judgment.
Petitioners further claim that they are not liable for attorneys fees since the Undertaking contained no such
stipulation for attorneys fees, and that the situation did not fall under the instances under Article 2208 of the Civil
Code where attorneys fees are recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the petitioners led to his being impleaded in the suit
filed by PDCP. The Undertaking was precisely executed as a means to obtain the release of Ortigas and the
Scholeys from their previous obligations as sureties of Falcon, especially considering that they were already
divesting their shares in the corporation. Specific provisions in the Undertaking obligate petitioners to work for the
release of Ortigas from his surety agreements with Falcon. Specific provisions likewise mandate the immediate
repayment of Ortigas should he still be made to pay PDCP by reason of the guaranty agreements from which he
was ostensibly to be released through the efforts of petitioners. None of these provisions were complied with by
petitioners, and Article 2208(2) precisely allows for the recovery of attorneys fees "[w]hen the defendants act or
omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest."
Finally, petitioners claim that they should not be liable for interest since the Undertaking does not contain any
stipulation for interest, and assuming that they are liable, that the rate of interest should not be 12% per annum, as
adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals 51 set forth the rules with respect to the manner
of computing legal interest:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. 52
Since what was the constituted in the Undertaking consisted of a payment in a sum of money, the rate of interest
thereon shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand. The interest
rate imposed by the RTC is thus proper. However, the computation should be reckoned from judicial or extrajudicial
demand. Per records, there is no indication that Ortigas made any extrajudicial demand to petitioners and Matti after
he paid PDCP, but on 14 March 1994, Ortigas made a judicial demand when he filed a Third-Party Complaint
praying that petitioners and Matti be made to reimburse him for the payments made to PDCP. It is the filing of this
Third Party Complaint on 14 March 1994 that should be considered as the date of judicial demand from which the
computation of interest should be reckoned.53 Since the RTC held that interest should be computed from 28
February 1994, the appropriate redefinition should be made.
WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial Court dated 5 October 1995 is
modified by declaring that petitioners and Joseph M. Matti are only jointly liable, not jointly and severally, to
respondent Rafael Ortigas, Jr. in the amount of P1,300,000.00. The Order of the Regional Trial Court dated 7 March
1996 is MODIFIED in that the legal interest of 12% per annum on the amount of P1,300,000.00 is to be computed
from 14 March 1994, the date of judicial demand, and not from 28 February 1994 as directed in the Order of the
lower court. The assailed rulings are affirmed in all other respects. Costs against petitioners.
SO ORDERED.

ASSET BUILDERS CORPORATION,

Petitioner,

G.R. No. 187116

Present:

- versus -

CARPIO, J., Chairperson,

NACHURA,
LEONARDO-DE CASTRO,
PERALTA, and
MENDOZA, JJ.

STRONGHOLD
INSURANCE
COMPANY, INCORPORATED,
Respondent.
Promulgated:
October 18, 2010

X --------------------------------------------------------------------------------------X

DECISION

MENDOZA, J.:

This petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure assails the February 27, 2009
Decision[1] of the Regional Trial Court, Pasig City, Branch 71 (RTC), in Civil Case No. 71034, ordering defendant Lucky
Star to pay petitioner Asset Builders Corporation the sum of P575,000.00 with damages, but absolving respondent
Stronghold Insurance Company, Incorporated (Stronghold) of any liability on its Surety Bond and Performance Bond.

THE FACTS
On April 28, 2006, Asset Builders Corporation (ABC) entered into an agreement with Lucky Star Drilling & Construction
Corporation (Lucky Star) as part of the completion of its project to construct the ACG Commercial Complex on NHA
Avenue corner Olalia Street, Barangay Dela Paz, Antipolo City.[2] As can be gleaned from the Purchase Order,[3] Lucky
Star was to supply labor, materials, tools, and equipment including technical supervision to drill one (1) exploratory
production well on the project site. The total contract price for the said project was P1,150,000.00. The salient terms and
conditions of said agreement are as follows:
i.
Lump sum price--------PHP1,150,000.00;
ii.

50% downpayment---upon submission of surety bond in an equivalent amount and performance

bond equivalent to 30 % of contract amount;

iii.

Completion date-----60 calendar days;

iv.

Penalty----2/10 of 1% of total contract amount for every day of delay;

v.
vi.

Terms---50% down payment to be released after submission of bonds;

RetentionSubject to 10% retention to be released after the project is accepted by the owner;

To guarantee faithful compliance with their agreement, Lucky Star engaged respondent Stronghold which issued
two (2) bonds in favor of petitioner. The first, SURETY BOND G(16) No. 141558, dated May 9, 2006, covers the sum
of P575,000.00[4] or the required downpayment for the drilling work. The full text of the surety bond is herein quoted:
KNOW ALL MEN BY THESE PRESENTS:
That we, LUCKY STAR DRILLING & CONSTRUCTION CORP., 168 ACACIA St.,
Octagon Industrial Estate Subd., Pasig City as principal, and STRONGHOLD INSURANCE
COMPANY, INC., a corporation duly organized and existing under and by virtue of laws of the
Philippines, as surety, are held and firmly bound unto ASSET BUILDERS CORPORATION to
the sum of Pesos FIVE HUNDRED SEVENTY FIVE THOUSAND ONLY (P575,000.00)
Philippine Currency, for the payment of which, well and truly to be made, we bind ourselves, our
heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these
presents.
THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:
To fully and faithfully guarantee the repayment to be done through deductions
from periodic billings of the advance payment made or to be made by the Obligee to the
Principal in connection with the supply of labor, materials, tools and equipment

including technical supervision to drill one (1) exploratory production well located at
NIA Ave. cor. Olalia St., Brgy. dela Paz, Antipolo City. This bond is callable on demand.
The liability of the surety company upon determination under this bond shall in
no case exceed the penal sum of PESOS: FIVE HUNDRED SEVENTY FIVE
THOUSAND (P575,000.00) only, Philippine Currency.
WHEREAS, the Obligee requires said principal to give a good and sufficient bond in the
above stated sum to secure the full and faithful performance on his part of said undertakings.
NOW, THEREFORE, if the above bounden principal shall in all respects duly and fully
observe and perform all and singular the aforesaid [co]-venants, conditions and agreements to
the true intent and meaning thereof, then this obligation shall be null and void, otherwise to
remain in full force and effect.
Liability of surety on this bond will expire on May 09, 2007 and said bond will be
cancelled five DAYS after its expiration, unless surety is notified of and existing obligations
hereunder.
x x x[5]
With respect to the second contract, PERFORMANCE BOND G(13) No. 115388, dated May 09, 2006, it covers
the sum of P345,000.00.[6] Thus:
KNOW ALL MEN BY THESE PRESENTS:
That we, LUCKY STAR DRILLING & CONSTRUCTION of 168 Acacia St., Octagon Indl.,
contractor, of Estate, Sub., Pasig City Philippines, as principal and the STRONGHOLD
INSURANCE COMPANY, INC. a corporation duly organized and existing under and by virtue of
the laws of the Philippines, with head office at Makati, as Surety, are held and firmly bound unto
the ASSET BUILDERS CORPORATION and to any individual, firm, partnership, corporation or
association supplying the principal with labor or materials in the penal sum of THREE
HUNDRED FORTY FIVE THOUSAND ONLY (P345,000.00), Philippine Currency, for the
payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally, firmly by these presents.
The CONDITIONS OF THIS OBLIGATION are as follows;
WHEREAS the above bounden principal on the ___ day of __________, 19__ entered into a
contract with the ASSET BUILDERS CORPORATION represented by _________________,
to fully and faithfully.
Comply with the supply of labor, materials, tools and equipment including technical
supervision to drill one (1) exploratory production well located at NIA Ave. cor.Olalia
St., Brgy. Dela Paz, Antipolo City. This bond is callable on demand.
WHEREAS, the liability of the Surety Company under this bond shall in no case exceed the sum
of PESOS THREE HUNDRED FORTY FIVE THOUSAND ONLY (P345,000.00) Philippine
Currency, inclusive of interest, attorneys fee, and other damages, and shall not be liable for any
advances of the obligee to the principal.
WHEREAS, said contract requires the said principal to give a good and sufficient bond in the
above-stated sum to secure the full and faithfull performance on its part of said contract, and the
satisfaction of obligations for materials used and labor employed upon the work;

NOW THEREFORE, if the principal shall perform well and truly and fulfill all the
undertakings, covenants, terms, conditions, and agreements of said contract during the original
term of said contract and any extension thereof that may be granted by the obligee, with notice
to the surety and during the life of any guaranty required under the contract, and shall also
perform well and truly and fulfill all the undertakings, covenants, terms, conditions, and
agreements of any and all duly authorized modifications of said contract that may hereinafter be
made, without notice to the surety except when such modifications increase the contract price;
and such principal contractor or his or its sub-contractors shall promptly make payment to any
individual, firm, partnership, corporation or association supplying the principal of its subcontractors with labor and materials in the prosecution of the work provided for in the said
contract, then, this obligation shall be null and void; otherwise it shall remain in full force and
effect. Any extension of the period of time which may be granted by the obligee to the contractor
shall be considered as given, and any modifications of said contract shall be considered as
authorized, with the express consent of the Surety.
The right of any individual, firm, partnership, corporation or association supplying the
contractor with labor or materials for the prosecution of the work hereinbefore stated, to
institute action on the penal bond, pursuant to the provision of Act No. 3688, is hereby
acknowledge and confirmed. x x x
On May 20, 2006, ABC paid Lucky Star P575,000.00 (with 2% withholding tax) as advance payment, representing 50%
of the contract price.[7] Lucky Star, thereafter, commenced the drilling work. By July 18, 2006, just a few days before the
agreed completion date of 60 calendar days, Lucky Star managed to accomplish only ten (10) % of the drilling work. On
the same date, petitioner sent a demand letter to Lucky Star for the immediate completion of the drilling work [8] with a
threat to cancel the agreement and forfeit the bonds should it still fail to complete said project within the agreed period.
On August 3, 2006, ABC sent a Notice of Rescission of Contract with Demand for Damages to Lucky Star. [9] Pertinent
portions of said notice read:
Pursuant to paragraph 1 of the Terms and Conditions of the service contract, notice is hereby
made on you of the rescission of the contract and accordingly demand is hereby made on you,
within seven (7) days from receipt hereof:
(1) to refund the down payment of PHP563,500.00, plus legal interest thereon;
(2) to pay liquidated damages equivalent to 2/10 of 1% of the contract price for every day of
delay, or a total of PHP138,000.00;
(3) to pay the amount guaranteed by your performance bond in the amount of PHP345,000.00;
(4) to pay PHP150,000.00 in other consequential damages;
(5) to pay exemplary damages in the amount of PHP150,000.00;
(6) to vacate the project site, together with all your men and equipment.
Should you refuse to comply with our demand within the above period, we shall be constrained
to sue you in court, in which event we shall demand payment of attorneys fees in the amount of
at least PHP100,000.0.

On August 16, 2006, ABC sent a Notice of Claim for payment to Stronghold to make good its obligation under its bonds.
[10]

Despite notice, ABC did not receive any reply either from Lucky Star or Stronghold, prompting it to file its Complaint for
Rescission with Damages against both before the RTC[11] on November 21, 2006.
In its Answer (with Complusory Counterclaim and Cross-Claim), dated January 24, 2007, Stronghold denied any liability
arguing that ABC had not shown any proof that it made an advance payment of 50% of the contract price of the project. It
further averred that ABCs rescission of its contract with Lucky Star virtually revoked the claims against the two bonds and
absolved them from further liability.[12]
Lucky Star, on the other hand, failed to file a responsive pleading within the prescribed period and, thus, was
declared in default by the RTC in its Order dated August 24, 2007.[13]
On February 27, 2009, the RTC rendered the assailed decision ordering Lucky Star to pay ABC but absolving Stronghold
from liability.[14] Relevant parts of the decision, including the decretal portion, read:
On the liability of defendant Stronghold Insurance, the Court rules on the negative.
The surety bond and performance bond executed by defendants Lucky Star and
Stronghold Insurance are in the nature of accessory contracts which depend for its existence
upon another contract. Thus, when the agreement (Exhibit A) between the plaintiff and
defendant Asset Builders was rescinded, the surety and performance bond were automatically
cancelled.
WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the
plaintiff and against defendant Lucky Star Drilling & Construction, ordering the latter as
follows:
1. to pay plaintiff in the amount of PHP575,000.00 as actual damages plus legal
interest from the filing of the complaint;
2. to pay plaintiff in the amount of PHP100,000.00 as liquidated damages;
3. to pay plaintiff in the amount of PHP50,000.00 as exemplary damages;
4. to pay plaintiff in the amount of PHP 50,000.00 as attorneys fees;
5. to pay the costs of the suit.
Defendant Stronghold Insurance Company, Inc.s compulsory counterclaim and cross-claim are
dismissed.[15]
Hence, this petition.
Petitioner ABC prays for the reversal of the challenged decision based on the following
GROUNDS
A.
The
Lower
Court
seriously erred and
unjustly ACTED
manifest bias and grave
abuse of
discretion, CONTRARY to applicable

ARBITRARILY with
lawsand established

jurisprudence in declaring the automatic CANCELLATION of respondent Strongholds Surety Bond

and Performance Bond, because:
(a) Despite rescission, there exists a continuing VALID PRINCIPAL
OBLIGATION guaranteed
by
Respondents
Bonds,
arising
out
of
the
Contractors DEFAULT and Non-performance.
(b) Upon breach by its Principal/contractor, the LIABILITIES of Respondents
bonds had already ACCRUED, automatically attached, and had become already DIRECT,
PRIMARY and ABSOLUTE, even before Petitioners legitimate exercise of its option under
Art. 1191 of the New Civil Code.
(c) Rescission does NOT AFFECT the liabilities of the Respondent Stronghold as
its LIABILITIES on
its
subject
bonds
have
already
becomeINTERWOVEN and INSEPARABLE with the liabilities of its Principal, the
Contractor Lucky Star.
B. With the Lower Courts completely erroneous ruling on the liabilities of Respondents
bonds, the Lower Court equally ERRED with manifest bias and grave abuse, in its FAILURE to
comply with the duty of court to make a finding of unreasonable denial or withholding by
Respondent Stronghold or Petitioners claims and impose upon the Respondent
the penalties provided for under Section 241 and 244 of the Insurance Code.[16]

Essentially, the primary issue is whether or not respondent insurance company, as surety, can be held liable under
its bonds.
The Court rules in the affirmative.
Respondent, along with its principal, Lucky Star, bound itself to the petitioner when it executed in its favor surety
and performance bonds. The contents of the said contracts clearly establish that the parties entered into a surety agreement
as defined under Article 2047 of the New Civil Code. Thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.
[Emphasis supplied]
As provided in Article 2047, the surety undertakes to be bound solidarily with the principal obligor. That
undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a principal
contract. Although the contract of a surety is in essence secondary only to a valid principal obligation, the surety becomes
liable for the debt or duty of another although it possesses no direct or personal interest over the obligations nor does it
receive any benefit therefrom. [17] Let it be stressed that notwithstanding the fact that the surety contract is secondary to the
principal obligation, the surety assumes liability as a regular party to the undertaking. [18]
Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation, [19] reiterating the ruling in Garcia v.
Court of Appeals,[20] expounds on the nature of the suretys liability:
X x x. The suretys obligation is not an original and direct one for the performance of his
own act, but merely accessory or collateral to the obligation contracted by the
principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid
principal obligation, his liability to the creditor or promisee of the principal is said to be direct,
primary and absolute; in other words, he is directly and equally bound with the principal.

Suretyship, in essence, contains two types of relationship the principal relationship between the
obligee (petitioner) and the obligor (Lucky Star), and the accessory surety relationship between the principal (Lucky
Star) and the surety (respondent). In this arrangement, the obligee accepts the suretys solidary undertaking to pay if the
obligor does not pay. Such acceptance, however, does not change in any material way the obligees relationship with the
principal obligor. Neither does it make the surety an active party to the principal obligee-obligor relationship. Thus, the
acceptance does not give the surety the right to intervene in the principal contract. The suretys role arises only upon the
obligors default, at which time, it can be directly held liable by the obligee for payment as a solidary obligor. [21]
In the case at bench, when Lucky Star failed to finish the drilling work within the agreed time frame despite
petitioners demand for completion, it was already in delay.Due to this default, Lucky Stars liability attached and, as a
necessary consequence, respondents liability under the surety agreement arose.
Undeniably, when Lucky Star reneged on its undertaking with the petitioner and further failed to return
the P575,000.00 downpayment that was already advanced to it, respondent, as surety, became solidarily bound with Lucky
Star for the repayment of the said amount to petitioner. The clause, this bond is callable on demand, strongly speaks of
respondents primary and direct responsibility to the petitioner.
Accordingly, after liability has attached to the principal, the obligee or, in this case, the petitioner, can exercise the
right to proceed against Lucky Star or respondent or both. Article 1216 of the New Civil Code states:
The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which
may subsequently be directed against the others, so long as the debt has not been fully collected.
Contrary to the trial courts ruling, respondent insurance company was not automatically released from any
liability when petitioner resorted to the rescission of the principal contract for failure of the other party to perform its
undertaking. Precisely, the liability of the surety arising from the surety contracts comes to life upon the solidary obligors
default. It should be emphasized that petitioner had to choose rescission in order to prevent further loss that may arise
from the delay of the progress of the project.Without a doubt, Lucky Stars unsatisfactory progress in the drilling work and
its failure to complete it in due time amount to non-performance of its obligation.
In fine, respondent should be answerable to petitioner on account of Lucky Stars non-performance of its
obligation as guaranteed by the performance bond.
Finally, Article 1217[22] of the New Civil Code acknowledges the right of reimbursement from a co-debtor (the
principal co-debtor, in case of suretyship) in favor of the one who paid (the surety). Thus, respondent is entitled to
reimbursement from Lucky Star for the amount it may be required to pay petitioner arising from its bonds.
WHEREFORE, the February 27, 2009 Decision of the Regional Trial Court, Pasig City, Branch 71,
is AFFIRMED with MODIFICATION. Respondent Stronghold Insurance is hereby declared jointly and severally liable
with Lucky Star for the payment of P575,000.00 and the payment of P345,000.00 on the basis of its performance bond.
SO ORDERED.

[G.R. No. 15825. November 5, 1920. ]

CARMEN CASTELLVI DE HIGGINS and HORACE L. HIGGINS, Plaintiffs-Appellants, v. GEORGE C.
SELLNER, Defendant-Appellee.
Wolfson, Wolfson & Schwarzkopf for Appellants.
Williams & Ferrier for Appellee.
SYLLABUS
1. CONTRACTS; SURETY AND GUARANTY; COMPARATIVE JURISPRUDENCE CIVIL CODE TRANSLATION IN ENGLISH; FIANZA,
TRANSLATION IN ENGLISH. In the original Spanish of the Civil Code now in force in the Philippine Islands, Title XIV of
Book IV is entitled "De la Fianza." The Spanish word "ficrnza" is translated in the Washington and Walton editions of the Civil
Code "security." "Fianza" appears in the Fisher translation as "suretyship."
cralaw virtua1aw library

2. ID.; ID.; ID.; ID.; "FIADOR," TRANSLATION IN ENGLISH. The Spanish word "fiador" is found in all of the English
translations of the Civil Code as "surety."
cralaw virtua1aw library

3. ID.; ID.; ID.; ID.; SURETYSHIP AND GUARANTY IN THE CIVIL LAW. The law of guaranty is not treated of by that name
in the Civil Code, although indirect reference to the same is made in the Code of Commerce.
4. ID.; ID.; ID.; ID.; ID. In terminology at least, no distinction is made in the Civil Code between the obligation of a surety
and that of a guarantor.
5. ID.; ID.; ID.; ID.; ID. The substantive law of the Philippines although having a civil law origin, can be supplemented by
a reference to the precepts of the law merchant.
6. ID.; ID.; ID.; DIFFERENCES UNDER AMERICAN LAW. A surety and a guarantor are alike in that each promises to answer
for the debt or default of another.
7. ID.; ID.; ID.; ID. A surety and a guarantor are unlike in that the surety assumes liability as a regular party to the
undertaking, while the liability of the guarantor depends upon an independent agreement to pay the obligation if the primary
payor fails to do so. A surety is charged as an original promissor; the engagement of the guarantor is a collateral
undertaking. The obligation of the surety is primary; the obligation of the guarantor is secondary.
8 ID. ID.; ID.; ID.; CIVIL CODE PROVISIONS COMPARED WITH AMERICAN DOCTRINE. What the first portion of article
1822 of the Civil Code provides is somewhat akin to the contract of guaranty, while what is last provided is practically
equivalent to the contract of suretyship.
9. ID.; ID.; ID.; ID.; ID. When, in subsequent articles found in section 1 of chapter II of the title concerning fianza of the
Civil Code, the Code speaks of the effects of suretyship between surety and creditor, it has, in comparison with the common
law, the effect of guaranty between guarantor and creditor.
10 ID.; ID.; ID.; ID.; ID. The civil law suretyship is nearly synonymous with the common law guaranty; and the civil law
relation existing between codebtors liable in solidum is similar to the common law suretyship.
11. ID.; ID.; INSTANT CASE. The defendant George C. Sellner wrote to John T. Macleod, agent of the plaintiff, Mrs. Horace

L. Higgins, on May 31, 1915, a letter of the following tenor: "Dear Sir: I hereby obligate and bind myself, my heirs,
successors and assigns that if the promissory note executed the 29th day of May, 1915 by the Reystone Mining Co., W. I.
Clarke, and John Maye, jointly and severally, in your favor and due six months after date for P10,000 is not fully paid at
maturity with interest, I will, within fifteen days after notice of such default, pay you in cash the sum of P10,000 and interest
upon your surrendering to me the three thousand shares of stock of the Keystone Mining Co. held by you as security for the
payment of said note." Held: That defendant Sellner is a guarantor within the meaning of the provisions of the Civil Code.

DECISION

MALCOLM, J. :

This is an action brought by plaintiffs to recover from defendant from of P10.000. The brief decision of the trial court held
that the suit was premature, and absolved the defendant from the complaint, with the costs against the plaintiffs.
The basis of plaintiffs action is a letter written by defendant George C. Sellner to John T. Macleod, agent for Mrs. Horace L.
Higgins, on May 31, 1915, of the following tenor:
jgc:chanroble s.com.ph

"DEAR SIR: I hereby obligate and bind myself, my heirs successors and assigns that if the promissory note executed the 29th
day of May 1915 by the Keystone Mining Co W. H. Clarke, and John Maye, jointly and severally, in your favor and due six
months after date for P10,000 is not fully paid at maturity with interest, I will, within fifteen days after notice of such default,
pay you in cash the sum of P10,000 and interest upon your surrendering to me the three thousand shares of stock of the
Keystone Mining Co. held by you as security for the payment of said note.
"Respectfully,
(Sgd.) "GEO. C. SELLNER."

cralaw virtua1aw library

Counsel for both parties agree that the only point at issue is the determination of defendants status in the transaction
referred to. Plaintiffs contend that he is a surety; defendant contends that he is a guarantor. Plaintiffs also admit that if
defendant is a guarantor, articles 1830, 1831, and 1834 of the Civil Code govern.
In the original Spanish of the Civil Code now in force in the Philippine Islands, Title XIV of Book IV is entitled "De la Fuenza."
The Spanish word "fianza" is translated in the Washington and Walton editions of the Civil Code as "security." "Fianza"
appears in the Fisher translation as "suretyship." The Spanish word "fador" is found in all of the English translations of the
Civil Code as "surety." The law of guaranty is not treated of by that name in the Civil Code, although indirect reference to the
same is made in the Code of Commerce. In terminology at least, no distinction is made in the Civil Code between the
obligation of a surety and that of a guarantor.
As has been done in the State of Louisiana, where, like in the Philippines, the substantive law has a civil law origin, we feel
free to supplement the statutory law by a reference to the precepts of the law merchant.
The points-of difference between a surety and a guarantor are familiar to American authorities. A surety and a guarantor are
alike in that each promises to answer for the debt or default of another. A surety and a guarantor are unlike in that the
surety assumes liability as a regular party to the undertaking, while the liability of the guarantor depends upon an
independent agreement to pay the obligation if the primary payor fails to do so. A surety is charged as an original promissor;
the engagement of the guarantor is a collateral undertaking. The obligation of the surety is primary; the obligation of the
guarantor is secondary. (See U. S. v. Varadero de la Quinta [1919], 40 Phil., 48; Lachman v. Block [1894], 46 La. Ann., 649;
Bedford v. Kelley [1913], 173 Mich., 492; Brandt, on Suretyship and Guaranty, sec. 1, cited approvingly by many
authorities.)
Turning back again to our Civil Code, we first note that according to article 1822 "By fianza (security or suretyship) one
person binds himself to pay or perform for a third person in case the latter should fail to do so." But "If the surety binds
himself in solidum with the principal debtor, the provisions of Section fourth, Chapter third, Title first, shall be applicable."
What the first portion of the cited article provides is, consequently, seen to be somewhat akin to the contract of guaranty,
while what is last provided is practically equivalent to the contract of suretyship. When in subsequent articles found in section
1 of Chapter II of the title concerning fianza, the Code speaks of the effects of Suretyship between surety and creditor, it has,
in comparison with the common law, the effect of guaranty between guarantor and creditor. The civil law suretyship is,
accordingly, nearly synonymous with the common law guaranty; and the civil law relationship existing between codebtors le
in solidum is similar to the common law suretyship.
It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor, or, to be more precise, of the
fiador whose responsibility is fixed in the Civil Code. The letter of Mr. Sellner recites that if the promissory note is not paid at
maturity, then, within fifteen days after notice of such default and upon surrender to him if the three thousand shares of
Keystone Mining Company stock, he will assume responsibility. Sellner is not bound with the principals by the same
instrument executed at the same time and on the same consideration, but his responsibility is a secondary one found in an

independent collateral agreement. Neither is Sellner jointly and severally liable with the principal debtors.
With particular reference, therefore, to appellants assignments of error, we hold that defendant Sellner is a guarantor within
the meaning of the provisions of the Civil Code.
There is also an equitable aspect to the case which reenforces this conclusion. The note executed by the Key stone Mining
Company matured on November 29, 1916. Interest on the note was not accepted by the makers until September 30, 1916.
When the note became due, it is admitted that the shares of stock used as collateral security were selling at par; that is, they
were worth P30,000. Notice that the note had not been paid was not given to the defendant until just about three years,
after it matured and when the Keystone Mining Company stock was worthless. Defendant, consequently, through the laches
of plaintiff, has lost possible chance to recoup, through the sale of the stock, any amount which he might be compelled to pay
as a surety or guarantor. The "indulgence," as this word is used in the law of guaranty, of the creditors of the principal, as
evidenced by the acceptance of interest, and by failure promptly to notify the guarantor, may thus have served to discharge
the guarantor.
For quite different reasons, which, nevertheless, arrive at the same result, judgment is affirmed, with costs of this instance
against the appellants. So ordered.

G.R. No. 126490 March 31, 1998

ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING CORPORATION, respondents.

REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the
principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the former deemed to
be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation extended a loan
to the spouses Osmea and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of
P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per annum to be
computed every 30 days from the date thereof. On four occasions after the execution of the promissory note and
even after the loan matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby
leaving a balance of P13,700.00. No payments were made after the last payment on September 26, 1991.
1

Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent corporation filed a
complaint against petitioner Palmares as the lone party-defendant, to the exclusion of the principal debtors,
allegedly by reason of the insolvency of the latter.
3

In her Amended Answer with Counterclaim, petitioner alleged that sometime in August 1990, immediately after the
loan matured, she offered to settle the obligation with respondent corporation but the latter informed her that they
would try to collect from the spouses Azarraga and that she need not worry about it; that there has already been a
partial payment in the amount of P17,010.00; that the interest of 6% per month compounded at the same rate per
month, as well as the penalty charges of 3% per month, are usurious and unconscionable; and that while she
agrees to be liable on the note but only upon default of the principal debtor, respondent corporation acted in bad
faith in suing her alone without including the Azarragas when they were the only ones who benefited from the
proceeds of the loan.
4

During the pre-trial conference, the parties submitted the following issues for the resolution of the trial court: (1) what
the rate of interest, penalty and damages should be; (2) whether the liability of the defendant (herein petitioner) is
primary or subsidiary; and (3) whether the defendant Estrella Palmares is only a guarantor with a subsidiary liability
and not a co-maker with primary liability.
5

Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the memoranda to
be submitted by them. On November 26, 1992, the Regional Trial Court of Iloilo City, Branch 23, rendered judgment
dismissing the complaint without prejudice to the filing of a separate action for a sum of money against the spouses
Osmea and Merlyn Azarraga who are primarily liable on the instrument. This was based on the findings of the
court a quo that the filing of the complaint against herein petitioner Estrella Palmares, to the exclusion of the
Azarraga spouses, amounted to a discharge of a prior party; that the offer made by petitioner to pay the obligation is
considered a valid tender of payment sufficient to discharge a person's secondary liability on the instrument; as comaker, is only secondarily liable on the instrument; and that the promissory note is a contract of adhesion.
6

Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment declaring
herein petitioner Palmares liable to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding balance still due and owing with interest at six
percent (6%) per month computed from the date the loan was contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
4. Plus costs of suit.

Contrary to the findings of the trial court, respondent appellate court declared that petitioner Palmares is a surety
since she bound herself to be jointly and severally or solidarily liable with the principal debtors, the Azarraga
spouses, when she signed as a co-maker. As such, petitioner is primarily liable on the note and hence may be sued
by the creditor corporation for the entire obligation. It also adverted to the fact that petitioner admitted her liability in
her Answer although she claims that the Azarraga spouses should have been impleaded. Respondent court ordered
the imposition of the stipulated 6% interest and 3% penalty charges on the ground that the Usury Law is no longer
enforceable pursuant to Central Bank Circular No. 905. Finally, it rationalized that even if the promissory note were
to be considered as a contract of adhesion, the same is not entirely prohibited because the one who adheres to the
contract is free to reject it entirely; if he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable to pay
the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares' solidary
liability.
2. The promissory note contains provisions which establish the co-maker's liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares' liability is solidary.
4. The promissory note is a contract of adhesion and should be construed against M. B. Lending
Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly imposing the interests
and penalty charges on the outstanding balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted in their material points by respondent
corporation. They are further refuted by accepted doctrines in the American jurisdiction after which we patterned our
statutory law on surety and guaranty. This case then affords us the opportunity to make an extended exposition on
the ramifications of these two specialized contracts, for such guidance as may be taken therefrom in similar local
controversies in the future.

The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of
this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above
principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan
from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject to the
same conditions above-contained.
8

Petitioner contends that the provisions of the second and third paragraph are conflicting in that while the second
paragraph seems to define her liability as that of a surety which is joint and solidary with the principal maker, on the
other hand, under the third paragraph her liability is actually that of a mere guarantor because she bound herself to
fulfill the obligation only in case the principal debtor should fail to do so, which is the essence of a contract of
guaranty. More simply stated, although the second paragraph says that she is liable as a surety, the third paragraph
defines the nature of her liability as that of a guarantor. According to petitioner, these are two conflicting provisions in
the promissory note and the rule is that clauses in the contract should be interpreted in relation to one another and
not by parts. In other words, the second paragraph should not be taken in isolation, but should be read in relation to
the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that she could be held
liable only as a guarantor for several reasons. First, the words "jointly and severally or solidarily liable" used in the
second paragraph are technical and legal terms which are not fully appreciated by an ordinary layman like herein
petitioner, a 65-year old housewife who is likely to enter into such transactions without fully realizing the nature and
extent of her liability. On the contrary, the wordings used in the third paragraph are easier to comprehend. Second,
the law looks upon the contract of suretyship with a jealous eye and the rule is that the obligation of the surety
cannot be extended by implication beyond specified limits, taking into consideration the peculiar nature of a surety
agreement which holds the surety liable despite the absence of any direct consideration received from either the
principal obligor or the creditor. Third, the promissory note is a contract of adhesion since it was prepared by
respondent M.B. Lending Corporation. The note was brought to petitioner partially filled up, the contents thereof
were never explained to her, and her only participation was to sign thereon. Thus, any apparent ambiguity in the
contract should be strictly construed against private respondent pursuant to Art. 1377 of the Civil Code.
9

Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the third paragraph of
the promissory note to be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the principal debtors
cannot be considered in default in the absence of a judicial or extrajudicial demand. It is true that the complaint
alleges the fact of demand, but the purported demand letters were never attached to the pleadings filed by private
respondent before the trial court. And, while petitioner may have admitted in her Amended Answer that she received
a demand letter from respondent corporation sometime in 1990, the same did not effectively put her or the principal
debtors in default for the simple reason that the latter subsequently made a partial payment on the loan in
September, 1991, a fact which was never controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of P2,745,483.39 in favor of
private respondent when, in truth and in fact, the outstanding balance of the loan is only P13,700.00. Where the
interest charged on the loan is exorbitant, iniquitous or unconscionable, and the obligation has been partially
complied with, the court may equitably reduce the penalty on grounds of substantial justice. More importantly,
respondent corporation never refuted petitioner's allegation that immediately after the loan matured, she informed
said respondent of her desire to settle the obligation. The court should, therefore, mitigate the damages to be paid
since petitioner has shown a sincere desire for a compromise.
10

11

After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the petition for lack of
merit, but to except therefrom the issue anent the propriety of the monetary award adjudged to herein respondent
corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory note executed between the
parties is a contract of adhesion, it has been the consistent holding of the Court that contracts of adhesion are not
invalid per se and that on numerous occasions the binding effects thereof have been upheld. The peculiar nature of
such contracts necessitate a close scrutiny of the factual milieu to which the provisions are intended to apply.
Hence, just as consistently and unhesitatingly, but without categorically invalidating such contracts, the Court has
construed obscurities and ambiguities in the restrictive provisions of contracts of adhesion strictly albeit not
unreasonably against the drafter thereof when justified in light of the operative facts and surrounding
circumstances. The factual scenario obtaining in the case before us warrants a liberal application of the rule in
favor of respondent corporation.
12

The Civil Code pertinently provides:

Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed. In such case the contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its stipulation shall control. In the case at bar,
petitioner expressly bound herself to be jointly and severally or solidarily liable with the principal maker of the note.
The terms of the contract are clear, explicit and unequivocal that petitioner's liability is that of a surety.
13

Her pretension that the terms "jointly and severally or solidarily liable" contained in the second paragraph of her
contract are technical and legal terms which could not be easily understood by an ordinary layman like her is
diametrically opposed to her manifestation in the contract that she "fully understood the contents" of the promissory
note and that she is "fully aware" of her solidary liability with the principal maker. Petitioner admits that she
voluntarily affixed her signature thereto; ergo, she cannot now be heard to claim otherwise. Any reference to the
existence of fraud is unavailing. Fraud must be established by clear and convincing evidence, mere preponderance
of evidence not even being adequate. Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced
only by her own uncorroborated and, expectedly, self-serving allegations.
14

Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped to assert that
she did so under a misapprehension or in ignorance of their legal effect, or as to the legal effect of the
undertaking. The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of one
who signs it also applies to contracts of suretyship. And the mistake of a surety as to the legal effect of her obligation
is ordinarily no reason for relieving her of liability.
15

16

Petitioner would like to make capital of the fact that although she obligated herself to be jointly and severally liable
with the principal maker, her liability is deemed restricted by the provisions of the third paragraph of her contract
wherein she agreed "that M.B. Lending Corporation may demand payment of the above loan from me in case the
principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note," which makes her contract one of
guaranty and not suretyship. The purported discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an
undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. Stated differently, a
surety promises to pay the principal's debt if the principal will not pay, while a guarantor agrees that the creditor,
after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay. A surety
binds himself to perform if the principal does not, without regard to his ability to do so. A guarantor, on the other
hand, does not contract that the principal will pay, but simply that he is able to do so. In other words, a surety
undertakes directly for the payment and is so responsible at once if the principal debtor makes default, while a
guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor.
17

18

19

20

21

Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it from
the ambit of a contract of suretyship. The second and third paragraphs of the aforequoted portion of the promissory
note do not contain any other condition for the enforcement of respondent corporation's right against petitioner. It
has not been shown, either in the contract or the pleadings, that respondent corporation agreed to proceed against
herein petitioner only if and when the defaulting principal has become insolvent. A contract of suretyship, to repeat,
is that wherein one lends his credit by joining in the principal debtor's obligation, so as to render himself directly and
primarily responsible with him, and without reference to the solvency of the principal.
22

In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule on strictissimi juris,
which holds that when the meaning of a contract of indemnity or guaranty has once been judicially determined
under the rule of reasonable construction applicable to all written contracts, then the liability of the surety, under his
contract, as thus interpreted and construed, is not to be extended beyond its strict meaning. The rule, however, will
apply only after it has been definitely ascertained that the contract is one of suretyship and not a contract of
guaranty. It cannot be used as an aid in determining whether a party's undertaking is that of a surety or a guarantor.
23

Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in the third
paragraph of the controverted suretyship contract merely elucidated on and made more specific the obligation of
petitioner as generally defined in the second paragraph thereof. Resultantly, the theory advanced by petitioner, that
she is merely a guarantor because her liability attaches only upon default of the principal debtor, must necessarily
fail for being incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall also be principally considered. Several attendant factors in that genre lend support to our
finding that petitioner is a surety. For one, when petitioner was informed about the failure of the principal debtor to
pay the loan, she immediately offered to settle the account with respondent corporation. Obviously, in her mind, she
knew that she was directly and primarily liable upon default of her principal. For another, and this is most revealing,
petitioner presented the receipts of the payments already made, from the time of initial payment up to the last, which
were all issued in her name and of the Azarraga spouses. This can only be construed to mean that the payments
made by the principal debtors were considered by respondent corporation as creditable directly upon the account
and inuring to the benefit of petitioner. The concomitant and simultaneous compliance of petitioner's obligation with
that of her principals only goes to show that, from the very start, petitioner considered herself equally bound by the
contract of the principal makers.
24

25

In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the principal, and
as such is deemed an original promisor and debtor from the beginning. This is because in suretyship there is but
one contract, and the surety is bound by the same agreement which binds the principal. In essence, the contract of
a surety starts with the agreement, which is precisely the situation obtaining in this case before the Court.
26

27

28

29

It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and conditions
stipulated between respondent corporation, as creditor, and the principal obligors. A surety is usually bound with his
principal by the same instrument, executed at the same time and upon the same consideration; he is an original
debtor, and his liability is immediate and direct. Thus, it has been held that where a written agreement on the same
sheet of paper with and immediately following the principal contract between the buyer and seller is executed
simultaneously therewith, providing that the signers of the agreement agreed to the terms of the principal contract,
the signers were "sureties" jointly liable with the buyer. A surety usually enters into the same obligation as that of
his principal, and the signatures of both usually appear upon the same instrument, and the same consideration
usually supports the obligation for both the principal and the surety.
30

31

32

There is no merit in petitioner's contention that the complaint was prematurely filed because the principal debtors
cannot as yet be considered in default, there having been no judicial or extrajudicial demand made by respondent
corporation. Petitioner has agreed that respondent corporation may demand payment of the loan from her in case
the principal maker defaults, subject to the same conditions expressed in the promissory note. Significantly,
paragraph (G) of the note states that "should I fail to pay in accordance with the above schedule of payment, I
hereby waive my right to notice and demand." Hence, demand by the creditor is no longer necessary in order that
delay may exist since the contract itself already expressly so declares. As a surety, petitioner is equally bound by
such waiver.
33

Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the
commencement of the suit is a sufficient demand. On this point, it may be worth mentioning that a surety is not
even entitled, as a matter of right, to be given notice of the principal's default. Inasmuch as the creditor owes no duty
of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the
surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take
notice of the principal's default and to perform the obligation. He cannot complain that the creditor has not notified
him in the absence of a special agreement to that effect in the contract of suretyship.
34

35

The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not attaching
copies thereof to its pleadings, is likewise immaterial. In the absence of a statutory or contractual requirement, it is
not necessary that payment or performance of his obligation be first demanded of the principal, especially where
demand would have been useless; nor is it a requisite, before proceeding against the sureties, that the principal be
called on to account. The underlying principle therefor is that a suretyship is a direct contract to pay the debt of
another. A surety is liable as much as his principal is liable, and absolutely liable as soon as default is made, without
any demand upon the principal whatsoever or any notice of default. As an original promisor and debtor from the
beginning, he is held ordinarily to know every default of his principal.
36

37

38

Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the principal
debtors who allegedly were the only ones who benefited from the proceeds of the loan. What petitioner is trying to
imply is that the creditor, herein respondent corporation, should have proceeded first against the principal before
suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently of his right to proceed against the
principal. Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and several, the creditor has
the right to proceed even against the surety alone. Since, generally, it is not necessary for the creditor to proceed
against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety
is the same that of the principal, then soon as the principal is in default, the surety is likewise in default, and may be
sued immediately and before any proceedings are had against the principal. Perforce, in accordance with the rule
that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper
remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by
statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee,
before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where
both principal and surety are equally bound.
39

40

41

42

We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not
release her from liability. Where a creditor refrains from proceeding against the principal, the surety is not
exonerated. In other words, mere want of diligence or forbearance does not affect the creditor's rights vis-a-vis the
surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of
the principal does not discharge the surety whether given at the principal's request or without it, and whether it is
yielded by the creditor through sympathy or from an inclination to favor the principal, or is only the result of
passiveness. The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the
surety, even if such delay continues until the principal becomes insolvent. And, in the absence of proof of resultant
injury, a surety is not discharged by the creditor's mere statement that the creditor will not look to the surety, or that
he need not trouble himself. The consequences of the delay, such as the subsequent insolvency of the
principal, or the fact that the remedies against the principal may be lost by lapse of time, are immaterial.
43

44

45

46

47

The raison d'tre for the rule is that there is nothing to prevent the creditor from proceeding against the principal at
any time. At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of
his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor.
48

49

It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without
change in the time when the debt might be demanded, does not constitute an extension of the time of payment,
which would release the surety. In order to constitute an extension discharging the surety, it should appear that the
extension was for a definite period, pursuant to an enforceable agreement between the principal and the creditor,
and that it was made without the consent of the surety or with a reservation of rights with respect to him. The
contract must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract
50

within the period during which he could otherwise have enforced it, and which precludes the surety from paying the
debt.
51

None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave the
principal debtors an extended period of time within which to comply with their obligation did not effectively absolve
here in petitioner from the consequences of her undertaking. Besides, the burden is on the surety, herein petitioner,
to show that she has been discharged by some act of the creditor, herein respondent corporation, failing in which
we cannot grant the relief prayed for.
52

As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty charges on the
outstanding balance of the loan cannot be imposed for being illegal and unconscionable. Petitioner additionally
theorizes that respondent corporation intentionally delayed the collection of the loan in order that the interests and
penalty charges would accumulate. The statement, likewise traversed by said respondent, is misleading.
In an affidavit executed by petitioner, which was attached to her petition, she stated, among others, that:
53

8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan has been released and
that she has not paid the same upon its maturity. I received a telephone call from Mr. Augusto Banusing of
MB Lending informing me of this fact and of my liability arising from the promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea Azarraga. At the same time, I
offered to pay MB Lending the outstanding balance of the principal obligation should he fail to collect from
Merlyn and Osmea Azarraga. Mr. Banusing advised me not to worry because he will try to collect first from
Merlyn and Osmea Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that the
loan of Merlyn and Osmea Azarraga, together with interest and penalties thereon, has not been paid. Since
I had no available funds at that time, I offered to pay MB Lending by delivering to them a parcel of land
which I own. Mr. Banusing's secretary, however, refused my offer for the reason that they are not interested
in real estate.
11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB Lending
before the RTC-Iloilo. After learning that a complaint was filed against me, I instructed Sheila Gatia to go to
MB Lending and reiterate my first offer to pay the outstanding balance of the principal obligation of Merlyn
Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB
Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding
balance of the principal obligation loan (sic) of Merlyn and Osmea Azarraga is acceptable. Later, Atty.
Venus informed Ms. Gatia that my offer is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to effectively
discharge her from liability. There are a number of circumstances which conjointly inveigh against her aforesaid
theory.
1. Respondent corporation cannot be faulted for not immediately demanding payment from petitioner. It was
petitioner who initially requested that the creditor try to collect from her principal first, and she offered to pay only in
case the creditor fails to collect. The delay, if any, was occasioned by the fact that respondent corporation merely
acquiesced to the request of petitioner. At any rate, there was here no actual offer of payment to speak of but only a
commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she owned.
Respondent corporation was acting well within its rights when it refused to accept the offer. The debtor of a thing
cannot compel the creditor to receive a different one, although the latter may be of the same value, or more valuable

than that which is due. The obligee is entitled to demand fulfillment of the obligation or performance as stipulated. A
change of the object of the obligation would constitute novation requiring the express consent of the parties.
54

55

3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance of the
obligation in the amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation cannot
be blamed for refusing the amount being offered because it fell way below the amount it had computed, based on
the stipulated interests and penalty charges, as owing and due from herein petitioner. A debt shall not be understood
to have been paid unless the thing or service in which the obligation consists has been completely delivered or
rendered, as the case may be. In other words, the prestation must be fulfilled completely. A person entering into a
contract has a right to insist on its performance in all particulars.
56

57

Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the moment the
latter accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or
objection, then the obligation shall be deemed fully complied with. Precisely, this is what respondent corporation
wanted to avoid when it continually refused to settle with petitioner at less than what was actually due under their
contract.
58

This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorney's fees
equivalent to 25% of the total amount due are highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already been paid
even before the filing of the present case. Article 1229 of the Civil Code provides that the court shall equitably
reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. And,
even if there has been no performance, the penalty may also be reduced if it is iniquitous or leonine.
In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation,
and which is substantially on all fours with the one at bar, we decided to eliminate altogether the penalty interest for
being excessive and unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the
penalty interest of three percent (3 %) per month on total amount due but unpaid should be equitably
reduced. The purpose for which the penalty interest is intended that is, to punish the obligor will have
been sufficiently served by the effects of compounded interest. Under the exceptional circumstances in the
case at bar, e.g., the original amount loaned was only P15,000.00; partial payment of P8,600.00 was made
on due date; and the heavy (albeit still lawful) regular compensatory interest, the penalty interest stipulated
in the parties' promissory note is iniquitous and unconscionable and may be equitably reduced further by
eliminating such penalty interest altogether.
59

Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with an agreement
thereon between the parties, the court may nevertheless reduce such attorney's fees fixed in the contract when the
amount thereof appears to be unconscionable or unreasonable. To that end, it is not even necessary to show, as in
other contracts, that it is contrary to morals or public policy. The grant of attorney's fees equivalent to 25% of the
total amount due is, in our opinion, unreasonable and immoderate, considering the minimal unpaid amount involved
and the extent of the work involved in this simple action for collection of a sum of money. We, therefore, hold that
the amount of P10,000.00 as and for attorney's fee would be sufficient in this case.
60

61

62

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the penalty
interest of 3% per month is hereby deleted and the award of attorney's fees is reduced to P10,000.00.
SO ORDERED.

G.R. No. L-16666

April 10, 1922

ROMULO MACHETTI, plaintiff-appelle,

vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant
Ross and Laurence and Wolfson & Scwarzkopf for appellant.
Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.
OSTRAND, J.:
It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written agreement undertook to
construct a building on Calle Rosario in the city of Manila for the Hospicio de San Jose, the contract price being
P64,000. One of the conditions of the agreement was that the contractor should obtain the "guarantee" of the
Fidelity and Surety Company of the Philippine Islands to the amount of P128,800 and the following endorsement in
the English language appears upon the contract:
MANILA, July 15, 1916.
For value received we hereby guarantee compliance with the terms and conditions as outlined in the above
contract.
FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.
(Sgd) OTTO VORSTER,
Vice-President.
Machetti constructed the building under the supervision of architects representing the Hospicio de San Jose and, as
the work progressed, payments were made to him from time to time upon the recommendation of the architects,
until the entire contract price, with the exception of the sum of the P4,978.08, was paid. Subsequently it was found

that the work had not been carried out in accordance with the specifications which formed part of the contract and
that the workmanship was not of the standard required, and the Hospicio de San Jose therefore answered the
complaint and presented a counterclaim for damages for the partial noncompliance with the terms of the agreement
abovementioned, in the total sum of P71,350. After issue was thus joined, Machetti, on petition of his creditors, was,
on February 27, 1918, declared insolvent and on March 4, 1918, an order was entered suspending the proceeding
in the present case in accordance with section 60 of the Insolvency Law, Act No. 1956.
The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and Surety Company be
made cross-defendant to the exclusion of Machetti and that the proceedings be continued as to said company, but
still remain suspended as to Machetti. This motion was granted and on February 7, 1920, the Hospicio filed a
complaint against the Fidelity and Surety Company asking for a judgement for P12,800 against the company upon
its guaranty. After trial, the Court of First Instance rendered judgment against the Fidelity and Surety Company for
P12,800 in accordance with the complaint. The case is now before this court upon appeal by the Fidelity and Surety
Company form said judgment.
As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San Jose defendant, has
been converted into an action in which the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company,
the original plaintiff's guarantor, is the defendant, Machetti having been practically eliminated from the case.
But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of guaranty is
written in the English language and the terms employed must of course be given the signification which ordinarily
attaches to them in that language. In English the term "guarantor" implies an undertaking of guaranty, as
distinguished from suretyship. It is very true that notwithstanding the use of the words "guarantee" or "guaranty"
circumstances may be shown which convert the contract into one of suretyship but such circumstances do not exist
in the present case; on the contrary it appear affirmatively that the contract is the guarantor's separate undertaking
in which the principal does not join, that its rests on a separate consideration moving from the principal and that
although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking
separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the
principal cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of the debtor.
(Saint vs.Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de Higgins and
Higginsvs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity
and Surety Company assumed in the present case. The undertaking is perhaps not exactly that of a fianza under
the Civil Code, but is a perfectly valid contract and must be given the legal effect if ordinarily carries. The Fidelity
and Surety Company having bound itself to pay only the event its principal, Machetti, cannot pay it follows that it
cannot be compelled to pay until it is shown that Machetti is unable to pay. Such ability may be proven by the return
of a writ of execution unsatisfied or by other means, but is not sufficiently established by the mere fact that he has
been declared insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's inability
to pay is not determined until the final liquidation of his estate.
The judgment appealed from is therefore reversed without costs and without prejudice to such right of action as the
cross-complainant, the Hospicio de San Jose, may have after exhausting its remedy against the plaintiff Machetti.
So ordered.

G.R. No. 189563

April 7, 2014

GILAT SATELLITE NETWORKS, LTD., Petitioner,

vs.
UNITED COCONUT PLANTERS BANK GENERAL INSURANCE CO., INC., Respondent.
DECISION
SERENO, CJ:
This is an appeal via a Petition for Review on Certiorari filed 6 November 2009 assailing the Decision and
Resolution of the Court of Appeals (CA) in CA-G.R. CV No. 89263, which reversed the Decision of the Regional
Trial Court (RTC), Branch 141, Makati City in Civil Case No. 02-461, ordering respondent to pay petitioner a sum of
money.
1

The antecedent facts, as culled from the CA, are as follows:

On September 15, 1999, One Virtual placed with GILAT a purchase order for various telecommunications
equipment (sic), accessories, spares, services and software, at a total purchase price of Two Million One Hundred
Twenty Eight Thousand Two Hundred Fifty Dollars (US$2,128,250.00). Of the said purchase price for the goods
delivered, One Virtual promised to pay a portion thereof totalling US$1.2 Million in accordance with the payment
schedule dated 22 November 1999. To ensure the prompt payment of this amount, it obtained defendant UCPB
General Insurance Co., Inc.s surety bond dated 3 December 1999, in favor of GILAT.
During the period between [sic] September 1999 and June 2000, GILAT shipped and delivered to One Virtual the
purchased products and equipment, as evidenced by airway bills/Bill of Lading (Exhibits "F", "F-1" to "F-8"). All of
the equipment (including the software components for which payment was secured by the surety bond, was shipped
by GILAT and duly received by One Virtual. Under an endorsement dated December 23, 1999 (Exhibit "E"), the

surety issued, with One Virtuals conformity, an amendment to the surety bond, Annex "A" thereof, correcting its
expiry date from May 30, 2001 to July 30, 2001.
One Virtual failed to pay GILAT the amount of Four Hundred Thousand Dollars (US$400,000.00) on the due date of
May 30, 2000 in accordance with the payment schedule attached as Annex "A" to the surety bond, prompting GILAT
to write the surety defendant UCPB on June 5, 2000, a demand letter (Exhibit "G") for payment of the said amount
of US$400,000.00. No part of the amount set forth in this demand has been paid to date by either One Virtual or
defendant UCPB. One Virtual likewise failed to pay on the succeeding payment instalment date of 30 November
2000 as set out in Annex "A" of the surety bond, prompting GILAT to send a second demand letter dated January
24, 2001, for the payment of the full amount of US$1,200,000.00 guaranteed under the surety bond, plus interests
and expenses (Exhibits "H") and which letter was received by the defendant surety on January 25, 2001. However,
defendant UCPB failed to settle the amount of US$1,200,000.00 or a part thereof, hence, the instant
complaint." (Emphases in the original)
5

On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a Complaint against respondent UCPB General
Insurance Co., Inc., to recover the amounts supposedly covered by the surety bond, plus interests and expenses.
After due hearing, the RTC rendered its Decision, the dispositive portion of which is herein quoted:
6

WHEREFORE, premises considered, the Court hereby renders judgment for the plaintiff, and against the defendant,
ordering, to wit:
1. The defendant surety to pay the plaintiff the amount of One Million Two Hundred Thousand Dollars
(US$1,200,000.00) representing the principal debt under the Surety Bond, with legal interest thereon at the
rate of 12% per annum computed from the time the judgment becomes final and executory until the
obligation is fully settled; and
2. The defendant surety to pay the plaintiff the amount of Forty Four Thousand Four Dollars and Four Cents
(US$44,004.04) representing attorneys fees and litigation expenses.
Accordingly, defendants counterclaim is hereby dismissed for want of merit.
SO ORDERED. (Emphasis in the original)
In so ruling, the RTC reasoned that there is "no dispute that plaintiff [petitioner] delivered all the subject equipments
[sic] and the same was installed. Even with the delivery and installation made, One Virtual failed to pay any of the
payments agreed upon. Demand notwithstanding, defendant failed and refused and continued to fail and refused to
settle the obligation."
8

Considering that its liability was indeed that of a surety, as "spelled out in the Surety Bond executed by and between
One Virtual as Principal, UCPB as Surety and GILAT as Creditor/Bond Obligee," respondent agreed and bound
itself to pay in accordance with the Payment Milestones. This obligation was not made dependent on any condition
outside the terms and conditions of the Surety Bond and Payment Milestones.
9

10

Insofar as the interests were concerned, the RTC denied petitioners claim on the premise that while a surety can be
held liable for interest even if it becomes more onerous than the principal obligation, the surety shall only accrue
when the delay or refusal to pay the principal obligation is without any justifiable cause. Here, respondent failed to
pay its surety obligation because of the advice of its principal (One Virtual) not to pay. The RTC then obligated
respondent to pay petitioner the amount of USD1,200,000.00 representing the principal debt under the Surety Bond,
with legal interest at the rate of 12% per annum computed from the time the judgment becomes final and executory,
and USD44,004.04 representing attorneys fees and litigation expenses.
11

12

On 18 October 2007, respondent appealed to the CA. The appellate court rendered a Decision in the following
manner:
13

14

WHEREFORE, this appealed case is DISMISSED for lack of jurisdiction. The trial courts Decision dated December
28, 2006 is VACATED. Plaintiff-appellant Gilat Satellite Networks Ltd., and One Virtual are ordered to proceed to
arbitration, the outcome of which shall necessary bind the parties, including the surety, defendant-appellant United
Coconut Planters Bank General Insurance Co., Inc.
SO ORDERED. (Emphasis in the original)
The CA ruled that in "enforcing a surety contract, the complementary-contracts-construed-together doctrine finds
application." According to this doctrine, the accessory contract must be construed with the principal agreement. In
this case, the appellate court considered the Purchase Agreement entered into between petitioner and One Virtual
as the principal contract, whose stipulations are also binding on the parties to the suretyship. Bearing in mind the
arbitration clause contained in the Purchase Agreement and pursuant to the policy of the courts to encourage
alternative dispute resolution methods, the trial courts Decision was vacated; petitioner and One Virtual were
ordered to proceed to arbitration.
15

16

17

18

19

On 9 September 2008, petitioner filed a Motion for Reconsideration with Motion for Oral Argument. The motion was
denied for lack of merit in a Resolution issued by the CA on 16 September 2009.
20

Hence, the instant Petition.

On 31 August 2010, respondent filed a Comment on the Petition for Review. On 24 November 2010, petitioner filed
a Reply.
21

22

ISSUES
From the foregoing, we reduce the issues to the following:
1. Whether or not the CA erred in dismissing the case and ordering petitioner and One Virtual to arbitrate;
and
2. Whether or not petitioner is entitled to legal interest due to the delay in the fulfilment by respondent of its
obligation under the Suretyship Agreement.
THE COURTS RULING
The existence of a suretyship agreement does not give the surety the right to intervene in the principal contract, nor
can an arbitration clause between the buyer and the seller be invoked by a non-party such as the surety.
Petitioner alleges that arbitration laws mandate that no court can compel arbitration, unless a party entitled to it
applies for this relief. This referral, however, can only be demanded by one who is a party to the arbitration
agreement. Considering that neither petitioner nor One Virtual has asked for a referral, there is no basis for the
CAs order to arbitrate.
23

24

Moreover, Articles 1216 and 2047 of the Civil Code clearly provide that the creditor may proceed against the surety
without having first sued the principal debtor. Even the Surety Agreement itself states that respondent becomes
liable upon "mere failure of the Principal to make such prompt payment." Thus, petitioner should not be ordered to
make a separate claim against One Virtual (via arbitration) before proceeding against respondent.
25

26

27

28

On the other hand, respondent maintains that a surety contract is merely an accessory contract, which cannot exist
without a valid obligation. Thus, the surety may avail itself of all the defenses available to the principal debtor and
inherent in the debt that is, the right to invoke the arbitration clause in the Purchase Agreement.
29

30

We agree with petitioner.

In suretyship, the oft-repeated rule is that a suretys liability is joint and solidary with that of the principal debtor. This
undertaking makes a surety agreement an ancillary contract, as it presupposes the existence of a principal
contract. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation,
its liability to the creditor or "promise" of the principal is said to be direct, primary and absolute; in other words, a
surety is directly and equally bound with the principal. He becomes liable for the debt and duty of the principal
obligor, even without possessing a direct or personal interest in the obligations constituted by the latter. Thus, a
surety is not entitled to a separate notice of default or to the benefit of excussion. It may in fact be sued separately
or together with the principal debtor.
31

32

33

34

35

After a thorough examination of the pieces of evidence presented by both parties, the RTC found that petitioner
had delivered all the goods to One Virtual and installed them. Despite these compliances, One Virtual still failed to
pay its obligation, triggering respondents liability to petitioner as the formers surety. In other words, the failure of
One Virtual, as the principal debtor, to fulfill its monetary obligation to petitioner gave the latter an immediate right to
pursue respondent as the surety.
36

37

1wphi1

Consequently, we cannot sustain respondents claim that the Purchase Agreement, being the principal contract to
which the Suretyship Agreement is accessory, must take precedence over arbitration as the preferred mode of
settling disputes.
First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction Co. Ltd., that "[the] acceptance [of a
surety agreement], however, does not change in any material way the creditors relationship with the principal debtor
nor does it make the surety an active party to the principal creditor-debtor relationship. In other words, the
acceptance does not give the surety the right to intervene in the principal contract. The suretys role arises only
upon the debtors default, at which time, it can be directly held liable by the creditor for payment as a solidary
obligor." Hence, the surety remains a stranger to the Purchase Agreement. We agree with petitioner that respondent
cannot invoke in its favor the arbitration clause in the Purchase Agreement, because it is not a party to that
contract. An arbitration agreement being contractual in nature, it is binding only on the parties thereto, as well as
their assigns and heirs.
38

39

40

41

Second, Section 24 of Republic Act No. 9285 is clear in stating that a referral to arbitration may only take place "if
at least one party so requests not later than the pre-trial conference, or upon the request of both parties thereafter."
Respondent has not presented even an iota of evidence to show that either petitioner or One Virtual submitted its
contesting claim for arbitration.
42

Third, sureties do not insure the solvency of the debtor, but rather the debt itself. They are contracted precisely to
mitigate risks of non-performance on the part of the obligor. This responsibility necessarily places a surety on the
same level as that of the principal debtor. The effect is that the creditor is given the right to directly proceed against
either principal debtor or surety. This is the reason why excussion cannot be invoked. To require the creditor to
proceed to arbitration would render the very essence of suretyship nugatory and diminish its value in commerce. At
any rate, as we have held in Palmares v. Court of Appeals, "if the surety is dissatisfied with the degree of activity
displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all
the rights and remedies of the creditor."
43

44

45

46

Interest, as a form of indemnity, may be awarded to a creditor for the delay incurred by a debtor in the payment of
the latters obligation, provided that the delay is inexcusable.
Anent the issue of interests, petitioner alleges that it deserves to be paid legal interest of 12% per annum from the
time of its first demand on respondent on 5 June 2000 or at most, from the second demand on 24 January 2001
because of the latters delay in discharging its monetary obligation. Citing Article 1169 of the Civil Code, petitioner
insists that the delay started to run from the time it demanded the fulfilment of respondents obligation under the
suretyship contract. Significantly, respondent does not contest this point, but instead argues that it is only liable for
legal interest of 6% per annum from the date of petitioners last demand on 24 January 2001.
47

In rejecting petitioners position, the RTC stated that interests may only accrue when the delay or the refusal of a
party to pay is without any justifiable cause. In this case, respondents failure to heed the demand was due to the
advice of One Virtual that petitioner allegedly breached its undertakings as stated in the Purchase Agreement. The
CA, however, made no pronouncement on this matter.
48

49

We sustain petitioner.
Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the payment of a sum of money, and the debtor
incurs a delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal interest."
Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the performance of the
obligation, and the latter fails to comply. Delay, as used in Article 1169, is synonymous with default or mora, which
means delay in the fulfilment of obligations. It is the nonfulfillment of an obligation with respect to time. In order for
the debtor (in this case, the surety) to be in default, it is necessary that the following requisites be present: (1) that
the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the
creditor requires the performance judicially or extrajudicially.
50

51

52

53

Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in thus paying, its liability
becomes more than the principal obligation. The increased liability is not because of the contract, but because of
the default and the necessity of judicial collection.
54

55

However, for delay to merit interest, it must be inexcusable in nature. In Guanio v. Makati-Shangri-la Hotel, citing
RCPI v. Verchez, we held thus:
56

57

In culpa contractual x x x the mere proof of the existence of the contract and the failure of its compliance justify,
prima facie, a corresponding right of relief. The law, recognizing the obligatory force of contracts, will not permit a
party to be set free from liability for any kind of misperformance of the contractual undertaking or a contravention of
the tenor thereof. A breach upon the contract confers upon the injured party a valid cause for recovering that which
may have been lost or suffered. The remedy serves to preserve the interests of the promissee that may include his
"expectation interest," which is his interest in having the benefit of his bargain by being put in as good a position as
he would have been in had the contract been performed, or his "reliance interest," which is his interest in being
reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in
had the contract not been made; or his "restitution interest," which is his interest in having restored to him any
benefit that he has conferred on the other party. Indeed, agreements can accomplish little, either for their makers or
for society, unless they are made the basis for action. The effect of every infraction is to create a new duty, that is, to
make RECOMPENSE to the one who has been injured by the failure of another to observe his contractual obligation
unless he can show extenuating circumstances, like proof of his exercise of due diligence x x x or of the attendance
of fortuitous event, to excuse him from his ensuing liability. (Emphasis ours)
We agree with petitioner that records are bereft of proof to show that respondents delay was indeed justified by the
circumstances that is, One Virtuals advice regarding petitioners alleged breach of obligations. The lower courts
Decision itself belied this contention when it said that "plaintiff is not disputing that it did not complete commissioning
work on one of the two systems because One Virtual at that time is already in default and has not paid
GILAT." Assuming arguendo that the commissioning work was not completed, respondent has no one to blame but
its principal, One Virtual; if only it had paid its obligation on time, petitioner would not have been forced to stop
operations. Moreover, the deposition of Mr. Erez Antebi, vice president of Gilat, repeatedly stated that petitioner had
delivered all equipment, including the licensed software; and that the equipment had been installed and in fact, gone
into operation. Notwithstanding these compliances, respondent still failed to pay.
58

59

As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues from the time judicial
or extrajudicial demand is made on the surety. This ruling is in accordance with the provisions of Article 1169 of the
Civil Code and of the settled rule that where there has been an extra-judicial demand before an action for
performance was filed, interest on the amount due begins to run, not from the date of the filing of the complaint, but

from the date of that extra-judicial demand. Considering that respondent failed to pay its obligation on 30 May 2000
in accordance with the Purchase Agreement, and that the extrajudicial demand of petitioner was sent on 5 June
2000, we agree with the latter that interest must start to run from the time petitioner sent its first demand letter (5
June 2000), because the obligation was already due and demandable at that time.
60

61

With regard to the interest rate to be imposed, we take cue from Nacar v. Gallery Frames, which modified the
guidelines established in Eastern Shipping Lines v. CA in relation to Bangko Sentral-Monetary Board Circular No.
799 (Series of 2013), to wit:
62

63

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.
1wphi1

xxxx
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.
Applying the above-discussed concepts and in the absence of an agreement as to interests, we are hereby
compelled to award petitioner legal interest at the rate of 6% per annum from 5 June 2000, its first date of extra
judicial demand, until the satisfaction of the debt in accordance with the revised guidelines enunciated in Nacar.
WHEREFORE, the Petition for Review on Certiorari is hereby GRANTED. The assailed Decision and Resolution of
the Court of Appeals in CA-G.R. CV No. 89263 are REVERSED. The Decision of the Regional Trial Court, Branch
141, Makati City is REINSTATED, with MODIFICATION insofar as the award of legal interest is concerned.
Respondent is hereby ordered to pay legal interest at the rate of 6% per annum from 5 June 2000 until the
satisfaction of its obligation under the Suretyship Contract and Purchase Agreement.
SO ORDERED.

G.R. No. 103066 April 25, 1996

WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and INTERNATIONAL CORPORATE BANK, respondents.

MENDOZA, J.:p

This is a petition for review on certiorari of the decision 1 of the Court of Appeals in C.A.-G.R. CV No. 19094, affirming
the decision of the Regional Trial Court of the National Capital Judicial Region, Branch XLV, Manila, which ordered
petitioner Willex Plastic Industries Corporation and the Inter-Resin Industrial Corporation, jointly and severally, to pay
private respondent International Corporate Bank certain sums of money, and the appellate court's resolution of October
17, 1989 denying petitioner's motion for reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with the Manila Banking Corporation.
To secure payment of the credit accomodation, Inter-Resin Industrial and the Investment and Underwriting
Corporation of the Philippines (IUCP) executed two documents, both entitled "Continuing Surety Agreement" and
dated December 1, 1978, whereby they bound themselves solidarily to pay Manilabank "obligations of every kind,
on which the [Inter-Resin Industrial] may now be indebted or hereafter become indebted to the [Manilabank]." The
two agreements (Exhs. J and K) are the same in all respects, except as to the limit of liability of the surety, the first
surety agreement being limited to US$333,830.00, while the second one is limited to US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed a "Continuing
Guaranty" in favor of IUCP whereby "For and in consideration of the sum or sums obtained and/or to be obtained by
Inter-Resin Industrial Corporation" from IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally
guaranteed "the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S . . . to the extent
of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00) Philippine Currency and such interests,
charges and penalties as hereafter may be specified."
On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of P4,334,280.61 representing
Inter-Resin Industrial's outstanding obligation. (Exh. M-1) On February 23 and 24, 1981, Atrium Capital Corp., which
in the meantime had succeeded IUCP, demanded from Inter-Resin Industrial and Willex Plastic the payment of what
it (IUCP) had paid to Manilabank. As neither one of the sureties paid, Atrium filed this case in the court below
against Inter-Resin Industrial and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn succeeded Atrium, the sum of
P687,600.00 representing the proceeds of its fire insurance policy for the destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the "Continuing Guaranty" was intended to secure payment to
Atrium of the amount of P4,334,280.61 which the latter had paid to Manilabank. It claimed, however, that it had
already fully paid its obligation to Atrium Capital.
On the other hand, Willex Plastic denied the material allegations of the complaint and interposed the following
Special Affirmative Defenses:
(a) Assuming arguendo that main defendant is indebted to plaintiff, the former's liability is
extinguished due to the accidental fire that destroyed its premises, which liability is covered by
sufficient insurance assigned to plaintiff;
(b) Again, assuming arguendo, that the main defendant is indebted to plaintiff, its account is now
very much lesser than those stated in the complaint because of some payments made by the former;
(c) The complaint states no cause of action against WILLEX;
(d) WLLLEX is only a guarantor of the principal obliger, and thus, its liability is only secondary to that
of the principal;
(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the principal obliger;
(f) Plaintiff has no personality to sue.

On April 29, 1986, Interbank was substituted as plaintiff in the action. The case then proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the right to present evidence for its
failure to appear at the hearing despite due notice. On the other hand, Willex Plastic rested its case without
presenting any evidence. Thereafter Interbank and Willex Plastic submitted their respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial and Willex Plastic jointly and
severally to pay to Interbank the following amounts:
(a) P3, 646,780.61, representing their indebtedness to the plaintiff, with interest of 17% per
annum from August 11, 1982, when Inter-Resin Industrial paid P687,500.00 to the plaintiff, until full
payment of the said amount;
(b) Liquidated damages equivalent to 178 of the amount due; and
(c) Attorney's fees and expenses of litigation equivalent to 208 of the total amount due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex Plastic filed its brief, while InterResin Industrial presented a "Motion to Conduct Hearing and to Receive Evidence to Resolve Factual Issues and to
Defer Filing of the Appellant's Brief." After its motion was denied, Inter-Resin Industrial did not file its brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling of the trial court.
Willex Plastic filed a motion for reconsideration praying that it be allowed to present evidence to show that InterResin Industrial had already paid its obligation to Interbank, but its motion was denied on December 6, 1991:
The motion is denied for lack of merit. We denied defendant-appellant Inter-Resin Industrial's motion
for reception of evidence because the situation or situations in which we could exercise the power
under BP 129 did not exist. Movant here has not presented any argument which would show
otherwise.
Hence, this petition by Willex Plastic for the review of the decision of February 22, 1991 and the resolution of
December 6, 1991 of the Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the "Continuing Guaranty" signed on April 2, 1979 petitioner Willex
Plastic may be held jointly and severally liable with Inter-Resin Industrial for the amount paid by Interbank to
Manilabank.
As already stated, the amount had been paid by Interbank's predecessor-in-interest, Atrium Capital, to Manilabank
pursuant to the "Continuing Surety Agreements" made on December 1, 1978. In denying liability to Interbank for the
amount, Willex Plastic argues that under the "Continuing Guaranty," its liability is for sums obtained by Inter-Resin
Industrial from Interbank, not for sums paid by the latter to Manilabank for the account of Inter-Resin Industrial. In
support of this contention Willex Plastic cites the following portion of the "Continuing Guaranty":
For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN INDUSTRIAL
CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your principal/s as may
be evidenced by promissory note/s, checks, bills receivable/s and/or other evidence/s of
indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and severally and
unconditionally guarantee unto you and/or your principal/s, successor/s and assigns the prompt and
punctual payment at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your
principal/s, successor/s and assigns favor to the extent of the aggregate principal sum of FIVE

MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges and penalties
as may hereinafter be specified.
The contention is untenable. What Willex Plastic has overlooked is the fact that evidence aliunde was introduced in
the trial court to explain that it was actually to secure payment to Interbank (formerly IUCP) of amounts paid by the
latter to Manilabank that the "Continuing Guaranty" was executed. In its complaint below, Interbank's predecessorin-interest, Atrium Capital, alleged:
5. to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC
[Inter-Resin Industrial] by Manilabank, the plaintiff required defendant IRIC [Inter-Resin Industrial] to
execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the other
defendant WPIC [Willex Plastic].
In its answer, Inter-Resin Industrial admitted this allegation although it claimed that it had already paid its obligation
in its entirety. On the other hand, Willex Plastic, while denying the allegation in question, merely did so "for lack of
knowledge or information of the same." But, at the hearing of the case on September 16, 1986, when asked by the
trial judge whether Willex Plastic had not filed a crossclaim against Inter-Resin Industrial, Willex Plastic's counsel
replied in the negative and manifested that "the plaintiff in this case [Interbank] is the guarantor and my client [Willex
Plastic] only signed as a guarantor to the guarantee." 2
For its part Interbank adduced evidence to show that the "Continuing Guaranty" had been made to guarantee
payment of amounts made by it to Manilabank and not of any sums given by it as loan to Inter-Resin Industrial.
Interbank's witness testified under cross examination by counsel for Willex Plastic that Willex "guaranteed the
exposure/of whatever exposure of ACP [Atrium Capital] will later be made because of the guarantee to Manila
Banking Corporation." 3
It has been held that explanatory evidence may be received to show the circumstances under which a document
has been made and to what debt it relates. 4 At all events, Willex Plastic cannot now claim that its liability is limited to
any amount which Interbank, as creditor, might give directly to Inter-Resin Industrial as debtor because, by failing to object
to the parol evidence presented, Willex Plastic waived the protection of the parol evidence rule. 5
Accordingly, the trial court found that it was "to secure the guarantee made by plaintiff of the credit accommodation
granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, [that] the plaintiff required defendant IRIC to
execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the defendant Willex Plastic
Industries Corporation." 6
Similarly, the Court of Appeals found it to be an undisputed fact that "to secure the guarantee undertaken by plaintiffappellee [Interbank] of the credit accommodation granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee
required defendant-appellants to sign a Continuing Guaranty." These factual findings of the trial court and of the
Court of Appeals are binding on us not only because of the rule that on appeal to the Supreme Court such findings
are entitled to great weight and respect but also because our own examination of the record of the trial court
confirms these findings of the two courts. 7
Nor does the record show any other transaction under which Inter-Resin Industrial may have obtained sums of
money from Interbank. It can reasonably be assumed that Inter-Resin Industrial and Willex Plastic intended to
indemnify Interbank for amounts which it may have paid Manilabank on behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was "to secure the aforesaid guarantee,
that INTERBANK required principal debtor IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor,
and so a "Continuing Guaranty" was executed on April 2, 1979 by WILLEX PLASTIC INDUSTRIES CORPORATION
(WILLEX for brevity) in favor of INTERBANK for and in consideration of the loan obtained by IRIC [Inter-Resin
Industrial]."

[2] Willex Plastic argues that the "Continuing Guaranty," being an accessory contract, cannot legally exist because
of the absence of a valid principal obligation. 8 Its contention is based on the fact that it is not a party either to the
"Continuing Surety Agreement" or to the loan agreement between Manilabank and Interbank Industrial.
Put in another way the consideration necessary to support a surety obligation need not pass directly to the surety, a
consideration moving to the principal alone being sufficient. For a "guarantor or surety is bound by the same
consideration that makes the contract effective between the principal parties thereto. It is never necessary that a
guarantor or surety should receive any part or benefit, if such there be, accruing to his principal." 9 In an analogous
case, 10 this Court held:
At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of
having an additional capital for buying and selling coco-shell charcoal and importation of activated
carbon, the comprehensive surety agreement was admittedly in full force and effect. The loan was,
therefore, covered by the said agreement, and private respondent, even if he did not sign the
promissory note, is liable by virtue of the surety agreement. The only condition that would make him
liable thereunder is that the Borrower "is or may become liable as maker, endorser, acceptor or
otherwise." There is no doubt that Daicor is liable on the promissory note evidencing the
indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an
accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained
by Daicor as evidenced by a promissory note.
[3] Willex Plastic contends that the "Continuing Guaranty" cannot be retroactivelt applied so as to secure payments
made by Interbank under the two "Continuing Surety Agreements." Willex Plastic invokes the ruling in El Vencedor
v. Canlas 11 and Dio v. Court of Appeals 12 in support of its contention that a contract of suretyship or guaranty should be
applied prospectively.
The cases cited are, however, distinguishable from the present case. In El Vencedor v. Canlas we held that a
contract of suretyship "is not retrospective and no liability attaches for defaults occurring before it is entered into
unless an intent to be so liable is indicated." There we found nothing in the contract to show that the paries intended
the surety bonds to answer for the debts contracted previous to the execution of the bonds. In contrast, in this case,
the parties to the "Continuing Guaranty" clearly provided that the guaranty would cover "sums obtained and/or to be
obtained" by Inter-Resin Industrial from Interbank.
On the other hand, in Dio v. Court of Appeals the issue was whether the sureties could be held liable for an
obligation contracted after the execution of the continuing surety agreement. It was held that by its very nature a
continuing suretyship contemplates a future course of dealing. "It is prospective in its operation and
is generallyintended to provide security with respect to future transactions." By no means, however, was it meant in
that case that in all instances a contrast of guaranty or suretyship should be prospective in application.
Indeed, as we also held in Bank of the Philippine Islands v. Foerster, 13 although a contract of suretyship is ordinarily
not to be construed as retrospective, in the end the intention of the parties as revealed by the evidence is controlling.
What was said there 14 applies mutatis mutandis to the case at bar:
In our opinion, the appealed judgment is erroneous. It is very true that bonds or other contracts of
suretyship are ordinarily not to be construed as retrospective, but that rule must yield to the intention
of the contracting parties as revealed by the evidence, and does not interfere with the use of the
ordinary tests and canons of interpretation which apply in regard to other contracts.
In the present case the circumstances so clearly indicate that the bond given by Echevarria was
intended to cover all of the indebtedness of the Arrocera upon its current account with the plaintiff
Bank that we cannot possibly adopt the view of the court below in regard to the effect of the bond.

[4] Willex Plastic says that in any event it cannot be proceeded against without first exhausting all property of InterResin Industrial. Willex Plastic thus claims the benefit of excussion. The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
The pertinent portion of the "Continuing Guaranty" executed by Willex Plastic and Inter-Resin Industrial in favor of
IUCP (now Interbank) reads:
If default be made in the payment of the NOTE/s herein guaranteed you and/or your principal/s may
directly proceed against Me/Us without first proceeding against and exhausting DEBTOR/s
propertiesin the same manner as if all such liabilities constituted My/Our direct and primary
obligations. (emphasis supplied)
This stipulation embodies an express renunciation of the right of excussion. In addition, Willex Plastic bound itself
solidarily liable with Inter-Resin Industrial under the same agreement:
For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN INDUSTRIAL
CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your principal/s as may
be evidenced by promissory note/s, checks, bills receivable/s and/or other evidence/s of
indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and severally and
unconditionally guarantee unto you and/or your principal/s, successor/s and assigns the prompt and
punctual payment at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your
principal/s, successor/s and assigns favor to the extent of the aggregate principal sum of FIVE
MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges and penalties
as may hereinafter he specified.
[5] Finally it is contended that Inter-Resin Industrial had already paid its indebtedness to Interbank and that Willex
Plastic should have been allowed by the Court of Appeals to adduce evidence to prove this. Suffice it to say that
Inter-Resin Industrial had been given generous opportunity to present its evidence but it failed to make use of the
same. On the otherhand, Willex Plastic rested its case without presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but because of its failure to appear
on that date, the hearing was reset on March 12, 26 and April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of Willex Plastic, the hearings on
March 12 and 26, 1987 were cancelled and "reset for the last time" on April 2 and 30, 1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial court issued the following order:
Considering that, as shown by the records, the Court had exerted every earnest effort to cause the
service of notice or subpoena on the defendant Inter-Resin Industrial but to no avail, even with the
assistance of the defendant Willex the defendant Inter-Resin Industrial is hereby deemed to have
waived the right to present its evidence.
On the other hand, Willex Plastic announced it was resting its case without presenting any evidence.
Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order and set the hearing anew on
July 23, 1987. But Inter-Resin Industrial again moved for the postponement of the hearing be postponed to August
11, 1987. The hearing was, therefore, reset on September 8 and 22, 1987 but the hearings were reset on October
13, 1987, this time upon motion of Interbank. To give Interbank time to comment on a motion filed by Inter-Resin

Industrial, the reception of evidence for Inter-Resin Industrial was again reset on November 17, 26 and December
11, 1987. However, Inter-Resin Industrial again moved for the postponement of the hearing. Accordingly the hearing
was reset on November 26 and December 11, 1987, with warning that the hearings were intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was reset on January 22, 1988 and February 5, 1988
upon motion of its counsel. As Inter-Resin Industrial still failed to present its evidence, it was declared to have
waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its evidence, however, the hearing was postponed to
March 4, 1988. Again Inter-Resin Industrial's counsel did not appear. The trial court, therefore, finally declared InterResin Industrial to have waived the right to present its evidence. On the other hand, Willex Plastic, as before,
manifested that it was not presenting evidence and requested instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be given the opportunity of showing that InterResin Industrial has already paid its obligation to Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against the petitioner.
SO ORDERED.

G.R. No. L-49401 July 30, 1982

RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
HON. JOSE P. ARRO, Judge of the Court of First instance of Davao, and RESIDORO CHUA, respondents.
Laurente C. Ilagan for petitioner.
Victor A. Clapano for respondents.

DE CASTRO, J.:
Petition for certiorari to annul the orders of respondent judge dated October 6, 1978 and November 7, 1978 in Civil
Case No. 11-154 of the Court of First Instance of Davao, which granted the motion filed by private respondent to
dismiss the complaint of petitioner for a sum of money, on the ground that the complaint states no cause of action as
against private respondent.
After the petition had been filed, petitioner, on December 14, 1978 mailed a manifestation and motion requesting the
special civil action for certiorari be treated as a petition for review. 1 Said manifestation and motion was noted in the
resolution of January 10, 1979. 2
It appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a comprehensive surety
agreements 3 to guaranty among others, any existing indebtedness of Davao Agricultural Industries Corporation (referred
to therein as Borrower, and as Daicor in this decision), and/or induce the bank at any time or from time to time thereafter,
to make loans or advances or to extend credit in other manner to, or at the request, or for the account of the Borrower,
either with or without security, and/or to purchase on discount, or to make any loans or advances evidenced or secured by
any notes, bills, receivables, drafts, acceptances, checks or other evidences of indebtedness (all hereinafter called
"instruments") upon which the Borrower is or may become liable, provided that the liability shall not exceed at any one
time the aggregate principal sum of P100,000.00.
On April 29, 1977 a promissory note 4 in the amount of P100,000.00 was issued in favor of petitioner payable on June
13, 1977. Said note was signed by Enrique Go, Sr. in his personal capacity and in behalf of Daicor. The promissory note
was not fully paid despite repeated demands; hence, on June 30, 1978, petitioner filed a complaint for a sum of money
against Daicor, Enrique Go, Sr. and Residoro Chua. A motion to dismiss dated September 23, 1978 was filed by
respondent Residoro Chua on the ground that the complaint states no cause of action as against him. 5 It was alleged in
the motion that he can not be held liable under the promissory note because it was only Enrique Go, Sr. who signed the
same in behalf of Daicor and in his own personal capacity.
In an opposition dated September 26, 1978 6 petitioner alleged that by virtue of the execution of the comprehensive
surety agreement, private respondent is liable because said agreement covers not merely the promissory note subject of
the complaint, but is continuing; and it encompasses every other indebtedness the Borrower may, from time to time incur
with petitioner bank.
On October 6, 1978 respondent court rendered a decision granting private respondent's motion to dismiss the
complaint. 7 Petitioner filed a motion for reconsideration dated October 12, 1978 and on November 7, 1978 respondent
court issued an order denying the said motion. 8

The sole issue resolved by respondent court was the interpretation of the comprehensive surety agreement,
particularly in reference to the indebtedness evidenced by the promissory note involved in the instant case, said
comprehensive surety agreement having been signed by Enrique Go, Sr. and private respondent, binding
themselves as solidary debtors of said corporation not only to existing obligations but to future ones. Respondent
court said that corollary to that agreement must be another instrument evidencing the obligation in a form of a
promissory note or any other evidence of indebtedness without which the said agreement serves no purpose; that
since the promissory notes, which is primarily the basis of the cause of action of petitioner, is not signed by private
respondent, the latter can not be liable thereon.
Contesting the aforecited decision and order of respondent judge, the present petition was filed before this Court
assigning the following as errors committed by respondent court:
1. That the respondent court erred in dismissing the complaint against Chua simply on the reasons
that 'Chua is not a signatory to the promissory note" of April 29, 1977, or that Chua could not be held
liable on the note under the provisions of the comprehensive surety agreement of October 29, 1976;
and/or
2. That the respondent court erred in interpreting the provisions of the Comprehensive Surety
Agreement towards the conclusion that respondent Chua is not liable on the promissory note
because said note is not conformable to the Comprehensive Surety Agreement; and/or
3. That the respondent court erred in ordering that there is no cause of action against respondent
Chua in the petitioner's complaint.
The main issue involved in this case is whether private respondent is liable to pay the obligation evidence by the
promissory note dated April 29,1977 which he did not sign, in the light of the provisions of the comprehensive surety
agreement which petitioner and private respondent had earlier executed on October 19, 1976.
We find for the petitioner. The comprehensive surety agreement was jointly executed by Residoro Chua and Enrique
Go, Sr., President and General Manager, respectively of Daicor, on October 19, 1976 to cover existing as well as
future obligations which Daicor may incur with the petitioner bank, subject only to the proviso that their liability shall
not exceed at any one time the aggregate principal sum of P100,000.00. Thus, paragraph I of the agreement
provides:
For and in consideration of any existing indebtedness to you of Davao Agricultural Industries
Corporation with principal place of business and postal address at 530 J. P. Cabaguio Ave., Davao
City (hereinafter called the "Borrower), and/or in order to induce, you in your discretion, at any time
or from time to time hereafter, to make loans or advances or to extend credit in any other manner to,
or at he request or for the account of the Borrower, either with or without security, and/or to purchase
or discount or to make any loans or advances evidenced or secured by any notes, bills, receivables,
drafts, acceptances, checks or other instruments or evidences of indebtedness (all hereinafter called
"instruments") upon which the Borrower is or may become liable as maker, endorser, acceptor, or
otherwise) the undersigned agrees to guarantee, and does hereby guarantee in joint and several
capacity, the punctual payment at maturity to you of any and all such instruments, loans, advances,
credits and/or other obligations herein before referred to, and also any and all other indebtedness of
every kind which is now or may hereafter become due or owing to you by the Borrower, together with
any and all expenses which may be incurred by you in collecting an such instruments or other
indebtedness or obligations hereinbefore referred to ..., provided, however, that the liability of the
undersigned shag not exceed at any one time the aggregate principal sum of P100,000.00 ...
The agreement was executed obviously to induce petitioner to grant any application for a loan Daicor may desire to
obtain from petitioner bank. The guaranty is a continuing one which shall remain in full force and effect until the bank
is notified of its termination.

This is a continuing guaranty and shall remain in fun force and effect until written notice shall have
been received by you that it has been revoked by the undersigned, ... 9
At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of having an additional
capital for buying and selling coco-shell charcoal and importation of activated carbon, 10 the comprehensive surety
agreement was admittedly in full force and effect. The loan was, therefore, covered by the said agreement, and private
respondent, even if he did not sign the promisory note, is liable by virtue of the surety agreement. The only condition that
would make him liable thereunder is that the Borrower "is or may become liable as maker, endorser, acceptor or
otherwise". There is no doubt that Daicor is liable on the promissory note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory
obligation, it being dependent upon a principal one which, in this case is the loan obtained by Daicor as evidenced
by a promissory note. What obviously induced petitioner bank to grant the loan was the surety agreement whereby
Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that
are unequivocal, it can be clearly seen that the surety agreement was executed to guarantee future debts which
Daicor may incur with petitioner, as is legally allowable under the Civil Code. Thus
Article 2053. A guaranty may also be given as security for future debts, the amount of which is not
yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional
obligation may also be secured.
In view of the foregoing, the decision (which should have been a mere "order"), dismissing the complaint is reversed
and set side. The case is remanded to the court of origin with instructions to set aside the motion to dismiss, and to
require defendant Residoro Chua to answer the complaint after which the case shall proceed as provided by the
Rules of Court. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 80078 May 18, 1993

ATOK FINANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA,
PABLITO BERMUNDO and LEOPOLDO HALILI, respondents.
Syquia Law Offices for petitioner.
Batino, Angala, Allaga & Zara Law Offices for private respondents.

FELICIANO, J.:
Atok Finance Corporation ("Atok Finance") asks us to review and set aside the Decision of the Court of Appeals
which reversed a decision of the trial court ordering private respondents to pay jointly and severally to petitioner
Atok Finance certain sums of money.
On 27 July 1979, private respondents Sanyu Chemical corporation ("Sanyu Chemical") as principal and Sanyu
Trading Corporation ("Sanyu Trading") along with individual private stockholders of Sanyu Chemical, namely, private
respondent spouses Danilo E. Halili and Pablico Bermundo as sureties, executed in the continuing Suretyship
Agreement in favor of Atok Finance as creditor. Under this Agreement, Sanyu Trading and the individual private
respondents who were officers and stockholders of Sanyu Chemical did:
(1) For valuable and/or other consideration . . ., jointly and severally unconditionally guarantee to
ATOK FINANCE CORPORATION (hereinafter called Creditor), the full, faithful and prompt payment
and discharge of any and all indebtedness of [Sanyu Chemical] . . . (hereinafter called Principal) to
the Creditor. The word "indebtedness" is used herein in its most comprehensive sense and includes
any and all advances, debts, obligations and liabilities of Principal or any one or more of
them, here[to]fore, now or hereafter made, incurred or created, whether voluntary or involuntary
and however arising, whether direct or acquired by the Creditor by assignment or
succession, whether due or not due, absolute or contingent, liquidated or unliquidated, determined

or undetermined and whether the Principal may be may be liable individually of jointly with others,
or whether recovery upon such indebtedness may be or hereafter become barred by any statute of
limitations, or whether such indebtedness may be or otherwise become unenforceable. 1 (Emphasis
supplied)
Other relevant provisions of the Continuing Suretyship Agreement follow:
(2) This is a continuing suretyship relating to any indebtedness, including that arising under
successive transactions which shall either continue the indebtedness from time to time or renew it
after it has been satisfied. This suretyship is binding upon the heirs, successors, executors,
administrators and assigns of the surety, and the benefits hereof shall extend to and include the
successors and assigns of the Creditor.
(3) The obligations hereunder are joint and several and independent of the obligations of the
Principal. A separate action or actions may be prosecuted against the Principal and whether or not
the Principal be joined in any such action or actions.
xxx xxx xxx.
(6) In addition to liens upon, and rights of set-off against the moneys, securities or other property of
the Surety given to the Creditor by law, the Creditor shall have the lien upon and a right of self-off
against all moneys, securities, and other property of the Surety now and hereafter in the possession
of the Creditor; and every such lien or right of self-off may be exercised without need of demands
upon or notice to the Surety. No lien or right of set-off shall be deemed to have been waived by any
act, omission or conduct on the part of the Creditor, or by any neglect to exercise such right of set-off
or to enforce such lien, or by any delay in so doing, and every right of set-off or lien shall continue in
full force and effect until such right of set-off of lien is specifically waived or released by an
instrument in writing executed by the Creditor.
(7) Any indebtedness of the Principal now or hereafter held by the Surety is hereby subordinated to
the indebtedness of the Principal to the Creditor; and if the Creditor so requests, such indebtedness
of the Principal of the Surety shall be collected, enforced and shall be paid over to the Creditor and
shall be paid over to the Creditor and shall be paid over to the Creditor on account of the
indebtedness of the Principal to the Creditor but without reducing or affecting in any manner the
liability of the Surety under the provisions of this suretyship.
xxx xxx xxx 2
(Emphases supplied)

On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as of 27 November 1981 with a
total face value of P125,871.00, to Atok Finance in consideration of receipt from Atok Finance of the amount of
P105,000.00. The assigned receivables carried a standard term of thirty (30) days; it appeared, however, that the
standard commercial practice was to grant an extension up to one hundred twenty (120) days without penalties. The
relevant portions of this Deed of Assignment read as follows:
1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL, TRANSFER and ASSIGN all his/its
rights, title and interest in the contracts, receivables, accounts, notes, leases, deeds of sale with
reservation of title, invoices, mortgages, checks, negotiable instruments and evidences of
indebtedness listed in the schedule forming part hereinafter called "Contract" or "Contracts."
2. To induce the ASSIGNEE to purchase the above Contracts, the ASSIGNOR does hereby
certify,warrant and represent that :

(a). He/It is the sole owner of the assigned Contracts free and clear of
claims of any other party except the herein ASSIGNEE and has the
right to transfer absolute title thereto the ASSIGNEE;
(b). Each assigned Contract is bonafide and the amount owing and to
become due on each contract is correctly stated upon the schedule
or other evidences of the Contract delivered pursuant thereto;
(c). Each assigned Contract arises out of the sale of merchandise/s
which had been delivered and/or services which have been rendered
and none of the Contract is now, nor will at any time become,
contingent upon the fulfillment of any contract or condition
whatsoever, or subject to any defense, offset or counterclaim;
(d). No assigned Contract is represented by any note or other
evidence of indebtness or other security document except such as
may have been endorsed, assigned and delivered by the ASSIGNOR
to the ASSIGNEE simultaneously with the assignment of such
Contract;
(e). No agreement has been made, or will be made, with any debtor
for any deduction discount or return of merchandise, except as may
be specifically noted at the time of the assignment of the Contract;
(f). None of the terms or provisions of the assigned Contracts have
been amended, modified or waived;
(g). The debtor/s under the assigned Contract/s are solvent and
his/its/their failure to pay the assigned Contracts and/or any
installment thereon upon maturity thereof shall be conclusively
considered as a violation of this warranty; and
(h). Each assigned Contract is a valid obligation of the buyer of the
merchandise and/or service rendered under the Contract And that no
Contract is overdue.
The foregoing warranties and representations are in addition to those provided for in the Negotiable
Instruments Law and other applicable laws. Any violation thereof shall render the ASSIGNOR
immediately and unconditionally liable to pay the ASSIGNEE jointly and severally with the debtors
under the assigned contracts, the amounts due thereon.
xxx xxx xxx
4. The ASSIGNOR shall without compensation or cost, collect and receive in trust for the ASSIGNEE
all payments made upon the assigned contracts and shall remit to the ASSIGNEE all collections on
the said Contracts as follows :
P5,450.00 due on January 2, 1982 on every 15th day (semi-monthly) until November
1, 1982.
P110,550.00 balloon payment after 12 months. 3 (Emphasis supplied)
Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with a total face value of
P100,378.45.

On 13 January 1984, Atok Finance commenced action against Sanyu Chemical, the Arrieta spouses, Pablito
Bermundo and Leopoldo Halili before the Regional Trial Court of Manila to collect the sum of P120,240.00 plus
penalty charges amounting to P0.03 for every peso due and payable for each month starting from 1 September
1983. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the amount due under the trade
receivables.
Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground that such
claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The private respondents
contended that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the
time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance.
At the trial, Sanyu Chemical and the individual private respondents failed to present any evidence on their behalf,
although the individual private respondents submitted a memorandum in support of their argument. After trial, on 1
April 1985, the trial court rendered a decision in favor of Atok Finance. The dispositive portion of this decision reads
as follows:
ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff ATOK FINANCE
CORPORATION; and against the defendants SANYU CHEMICAL CORPORATION, DANILO E.
ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, ordering the said
defendants, jointly and severally, to pay the plaintiff:
(1) P120,240.00 plus P0.03 for each peso for each month from September 1, 1983 until the whole
amount is fully paid;
(2) P50,000.00 as attorney's fees; and
(3) To pay the costs.
SO ORDERED. 4
Private respondents went on appeal before the then Intermediate Appellate Court ("IAC"), and the appeal was there
docketed as AC-G.R. No. 07005-CV. The case was raffled to the Third Civil Cases Division of the IAC. In a
resolution dated 21 March 1986, that Division dismissed the appeal upon the ground of abandonment, since the
private respondents had failed to file their appeal brief notwithstanding receipt of the notice to do so. On 4 June
1986, entry of judgment was made by the Clerk of Court of the IAC. Accordingly, Atok Finance went before the trial
court and sought a writ of execution to enforce the decision of the trial court of 1 April 1985. The trial court issued a
writ of execution on 23 July 1986. 5 Petitioner alleged that the writ of execution was served on private respondents. 6
However, on 27 August 1986, private respondents filed a Petition for Relief from Judgment before the Court of
Appeals. This Petition was raffled off to the 15th Division of the Court of Appeals. In that Petition, private
respondents claimed that their failure to file their appeal brief was due to excusable negligence, that is, that their
previous counsel had entrusted the preparation and filing of the brief to one of his associates, which associate,
however, had unexpectedly resigned from the law firm without returning the records of cases he had been handling,
including the appeal of private respondents. Atok Finance opposed the Petition for Relief arguing that no valid
ground existed for setting aside the resolution of the Third Division of the then IAC.
The 15th Division of the Court of Appeals nonetheless granted the Petition for Relief from Judgment "in the
paramount interest of justice," 7 set aside the resolution of the Third Civil Cases Division of the then IAC, and gave
private respondents a non-extendible period of fifteen (15) days within which to file their appeal brief. Private respondents
did file their appeal brief.
The 15th Division, on 18 August 1987, rendered a Decision on the merits of the appeal, and reversed and set aside
the decision of the trial court and entered a new judgment dismissing the complaint of Atok Finance, ordering it to
pay private respondents P3,000.00 as attorney's fees and to pay the costs.

Atok Finance moved to set aside the decision of the 15th Division of the Court of Appeals, inviting attention to the
resolution of the IAC's Third Civil Cases Division of 21 March 1986 originally dismissing private respondent's appeal
for abandonment thereof. In a resolution dated 18 August 1987, the 15th Division denied Atok Finance's motion
stating that it had granted the Petition for Relief from Judgment and given private respondents herein fifteen (15)
days within which to file an appeal brief, while Atok Finance did not file an appellee's brief, and that its decision was
arrived at "on the basis of appellant's brief and the original records of the appeal case."
In the present Petition for Review, Atok Finance assigns the following as errors on the part of the Court of Appeals in
rendering its decision of 18 August 1987:
(1) that it had erred in ruling that a continuing suretyship agreement cannot be effected to secure
future debts;
(2) that it had erred in ruling that the continuing suretyship agreement was null and void for lack of
consideration without any evidence whatsoever [being] adduced by private respondents;
(3) that it had erred in granting the Petition for Relief from Judgment while execution proceedings
[were] on-going on the trial court. 8 (Emphasis in the original)
As a preliminary matter, we note that a Division of the Court of Appeals is co-equal with any other Division of the
same court. Accordingly, a Division of the Court of Appeals has no authority to consider and grant a petition for relief
from a judgment rendered by another Division of the same court. In the case at bar, however, we must note that an
intervening event had occurred between the resolution of 21 March 1986 of the Third Civil Cases Division of the IAC
dismissing private respondents' appeal and the 30 September 1986 order of the 15th Division of the Court of
Appeals granting the Petition for Relief from Judgment. On 28 July 1986, the old Intermediate Appellate Court went
out of existence and a new court, the Court of Appeals, came into being, was organized and commenced
functioning. 9 This event, and the probability that some confusion may have accompanied the period of transition from the
IAC to the Court of Appeals, lead us to believe that the defect here involved should be disregarded as being of secondary
importance. At the same time, nothing in this decision should be read as impliedly holding that a petition from relief
judgment is available in respect of a decision rendered by the Court of Appeals; this issue is best reserved for
determination in some future cases where it shall have been adequately argued by the parties.
We turn, therefore, to a consideration of the first substantive issue addressed by the Court of Appeals in rendering
its Decision on the merits of the appeal: whether the individual private respondents may be held solidarily liable with
Sanyu Chemical under the provisions of the Continuing Suretyship Agreement, or whether that Agreement must be
held null and void as having been executed without consideration and without a pre-existing principal obligation to
sustain it.
The Court of Appeals held on this first issue as follows:
It is the contention of private appellants that the suretyship agreement is null and void because it is
not in consonance with the laws on guaranty and security. The said agreement was entered into by
the parties two years before the Deed of Assignment was executed. Thus, allegedly, it ran counter to
the provision that guaranty cannot exist independently because by nature it is merely an accessory
contract. The law on guaranty is applicable to surety to some extent Manila Surety and Fidelity
Co. v.Baxter Construction & Co., 53 O.G. 8836; and, Arran v. Manila Fidelity & Surety Co., 53 O.G.
7247.
We find merit in this contention.
Although obligations arising from contracts have the force of law between the contracting parties,
(Article 1159 of the Civil Code) this does not mean that the law is inferior to it; the terms of the
contract could not be enforces if not valid. So, even if, as in this case, the agreement was for
a continuing suretyship to include obligations enumerated in paragraph 2 of the agreement, the

same could not be enforced. First, because this contract, just like guaranty, cannot exist without a
valid obligation (Art. 2052, Civil Code); and, second, although it may be given as security for future
debt (Art. 2053, C.C.),the obligation contemplated in the case at bar cannot be considered "future
debt" as envisioned by this law.
There is no proof that when the suretyship agreement was entered into, there was a pre-existing
obligation which served the principal obligation between the parties. Furthermore, the "future debts"
alluded to in Article 2053 refer to debts already existing at the time of the constitution of the
agreement but the amount thereof is unknown, unlike in the case at bar where the obligation was
acquired two years after the agreement. 10 (Emphasis supplied).
We consider that the Court of Appeals here was in serious error. It is true that a serious guaranty or a suretyship
agreement is an accessory contract in the sense that it is entered into for the purpose of securing the performance
of another obligation which is denominated as the principal obligation. It is also true that Article 2052 of the Civil
Code states that "a guarantee cannot exist without a valid obligation." This legal proposition is not, however, like
most legal principles, to be read in an absolute and literal manner and carried to the limit of its logic. This is clear
from Article 2052 of the Civil Code itself:
Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an
unenforceable contract. It may also guaranty a natural obligation." (Emphasis supplied).
Moreover, Article 2053 of the Civil Code states:
Art. 2053. A guaranty may also be given as security for future debts, the amount of which is not yet
known; there can be no claim against the guarantor until the debt is liquidated. A conditional
obligation may also be secured. (Emphasis supplied)
The Court of Appeals apparently overlooked our caselaw interpreting Articles 2052 and 2053 of the Civil Code.
InNational Rice and Corn Corporation (NARIC) v. Jose A. Fojas and Alto Surety Co., Inc., 11 the private respondents
assailed the decision of the trial court holding them liable under certain surety bonds filed by private respondent Fojas and
issued by private respondent Alto Surety Co. in favor of petitioner NARIC, upon the ground that those surety bonds were
null and void "there being no principal obligation to be secured by said bonds." In affirming the decision of the trial court,
this Court, speaking through Mr. Justice J.B.L. Reyes, made short shrift of the private respondents' doctrinaire argument:
Under his third assignment of error, appellant Fojas questions the validity of the additional
bonds(Exhs. D and D-1) on the theory that when they were executed, the principal obligation
referred to in said bonds had not yet been entered into, as no copy thereof was attached to the
deeds of suretyship.This defense is untenable, because in its complaint the NARIC averred, and the
appellant did not deny that these bonds were posted to secure the additional credit that Fojas has
applied for, and the credit increase over his original contract was sufficient consideration for the
bonds. That the latter were signed and filed before the additional credit was extended by the NARIC
is no ground for complaint.Article 1825 of the Civil Code of 1889, in force in 1948, expressly
recognized that "a guaranty may also be given as security for future debts the amount of which is not
yet known." (Emphasis supplied)
In Rizal Commercial Banking Corporation v. Arro, 12 the Court was confronted again with the same issue, that is,
whether private respondent was liable to pay a promissory note dated 29 April 1977 executed by the principal debtor in
the light of the provisions of a comprehensive surety agreement which petitioner bank and the private respondent had
earlier entered into on 19 October 1976. Under the comprehensive surety agreement, the private respondents had bound
themselves as solidary debtors of the Diacor Corporation not only in respect of existing obligations but also in respect of
future ones. In holding private respondent surety (Residoro Chua) liable under the comprehensive surety agreement, the
Court said:

The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an
accessory obligation, it being dependent upon a principal one, which, in this case is the loan
obtained by Daicor as evidenced by a promissory note. What obviously induced petitioner bank to
grant the loan was the surety agreement whereby Go and Chua bound themselves solidarily to
guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can be
clearly seen that the surety agreement was executed to guarantee future debts which Daicor may
incur with petitioner, as is legally allowable under the Civil Code. Thus
Article 2053. A guarantee may also be given as security for future debts, the
amount of which is not yet known; there can be no claim against the guarantor until
the debt is liquidated. A conditional obligation may also be secured. 13 (Emphasis
supplied)
It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases rejected the distinction which
the Court of Appeals in the case at bar sought to make with respect to Article 2053, that is, that the "future debts"
referred to in that Article relate to "debts already existing at the time of the constitution of the agreement but the
amount [of which] is unknown," and not to debts not yet incurred and existing at that time. Of course, a surety is not
bound under any particular principal obligation until that principal obligation is born. But there is no theoretical or
doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the
principal obligation intended to be secured thereby is born, any more that there would be in saying that obligations
which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent. 14
Comprehensive or continuing surety agreements are in fact quite commonm place in present day financial and
commercial practice. A bank or a financing company which anticipates entering into a series of credit transactions
with a particular company, commonly requires the projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter
into the projected series of transactions with its creditor; with such surety agreement, there would be no need to
execute a separate surety contract or bond for each financing or credit accommodation extended to the principal
debtor. As we understand it, this is precisely what happened in the case at bar.
We turn to the second substantive issue, that is, whether private respondents are liable under the Deed of
Assignment which they, along with the principal debtor Sanyu Chemical, executed in favor of petitioner, on the
receivables thereby assigned.
The contention of Sanyu Chemical was that Atok Finance had no cause of action under the Deed of Assignment for
the reason that Sanyu Chemical's warranty of the debtors' solvency had ceased. In submitting this contention,
Sanyu Chemical relied on Article 1629 of the Civil Code which reads as follows:
Art. 1629. In case the assignor in good faith should have made himself responsible for the solvency
of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it
shall last for one year only, from the time of the assignment if the period had already expired.
If the credit should be payable within a term or period which has not yet expired, the liability shall
cease one year after maturity.
Once more, the Court of Appeals upheld the contention of private respondents and held that Sanyu Chemical was
free from liability under the Deed of Assignment. The Court of Appeals said:
. . . Article 1629 provides for the duration of assignor's warranty of debtor's solvency depending on
whether there was a period agreed upon for the existence of such warranty, analyzing the law thus:
(1) if there is a period (or length of time) agreed upon, then for such period;
(2) if no period (or length of time) was agreed upon, then:

(a) one year from assignment if debt was due at the time of the assignment
(b) one year from maturity if debt was not yet due at the time of the assignment..
The debt referred to in this law is the debt under the assigned contract or the original debts in favor
of the assignor which were later assigned to the assignee. The debt alluded to in the law, is not the
debt incurred by the assignor to the assignee as contended by the appellant.
Applying the said law to the case at bar, the records disclose that none of the assigned receivables
had matured on November 27, 1981 when the Deed of Assignment was executed. The oldest debt
then existing was that contracted on November 3, 1981 and the latest was contracted on December
4, 1981.
Each of the invoices assigned to the assignee contained a term of 30 days (Exhibits B-3-A to 5 and
extended by the notation which appeared in the "Schedule of Assigned Receivables" which states
that the ". . . the terms stated on our invoices were normally extended up to a period of 120 days
. . ." (Exhibit B-2). Considering the terms in the invoices plus the ordinary practice of the company,
thus, the assigned debts matured between April 3, 1982 to May 4, 1982. The assignor's warranty for
debtor's warranty, in this case, would then be from the maturity period up to April 3, 1983 or May 4,
1983 to cover all of the receivables in the invoices.
The letter of demand executed by appellee was dated August 29, 1983 (Exhibit D) and the complaint
was filed on January 13, 1984. Both dates were beyond the warranty period.
In effect, therefore, company-appellant was right when it claimed that appellee had no cause of
action against it or had lost its cause of
action. 15 (Emphasis supplied)
Once again, however, we consider that the Court of Appeals was in reversible error in so concluding. The relevant
provision of the Deed of Assignment may be quoted again in this connection:
2. To induce the ASSIGNEE [Atok Finance] to purchase the above contracts, the ASSIGNOR [Sanyu
Chemical] does hereby certify, warrant and represent that . . .
(g) the debtor/s under the assigned contract/s are solvent and his/its/their failure to
pay the assigned contract/s and/or any installment thereon upon maturity thereof
shall be conclusively considered as a violation of this warranty; and . . .
The foregoing warranties and representations are in addition to those provided for in
the Negotiable Instruments Law and other applicable laws. Any violation thereof shall
render the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE
jointly and severally with the debtors under the assigned contracts, the amounts due
thereon.
xxx xxx xxx
(Emphasis supplied)
It may be stressed as a preliminary matter that the Deed of Assignment was valid and binding upon Sanyu
Chemical. Assignment of receivables is a commonplace commercial transaction today. It is an activity or operation
that permits the assignee to monetize or realize the value of the receivables before the maturity thereof. In other
words, Sanyu Chemical received from Atok Finance the value of its trade receivables it had assigned; Sanyu
Chemical obviously benefitted from the assignment. The payments due in the first instance from the trade debtors of

Sanyu Chemical would represent the return of the investment which Atok Finance had made when it paid Sanyu
Chemical the transfer value of such receivables.
Article 1629 of the Civil Code invoked by private respondents and accepted by the Court of Appeals is not, in the
case at bar, material. The liability of Sanyu Chemical to Atok Finance rests not on the breach of the warranty of
solvency; the liability of Sanyu Chemical was not ex lege (ex Article 1629) but rather ex contractu. Under the Deed
of Assignment, the effect of non-payment by the original trade debtors was breach of warranty of solvency by Sanyu
Chemical, resulting in turn in the assumption of solidary liability by the assignor under the receivables assigned. In
other words, the assignor Sanyu Chemical becomes a solidary debtor under the terms of the receivables covered
and transferred by virtue of the Deed of Assignment. And because assignor Sanyu Chemical became, under the
terms of the Deed of Assignment, solidary obligor under each of the assigned receivables, the other private
respondents (the Arrieta spouses, Pablito Bermundo and Leopoldo Halili), became solidarily liable for that obligation
of Sanyu Chemical, by virtue of the operation of the Continuing Suretyship Agreement. Put a little differently, the
obligations of individual private respondent officers and stockholders of Sanyu Chemical under the Continuing
Suretyship Agreement, were activated by the resulting obligations of Sanyu Chemical as solidary obligor under each
of the assigned receivables by virtue of the operation of the Deed of Assignment. That solidary liability of Sanyu
Chemical is not subject to the limiting period set out in Article 1629 of the Civil Code.
It follows that at the time the original complaint was filed by Atok Finance in the trial court, it had a valid and
enforceable cause of action against Sanyu Chemical and the other private respondents. We also agree with the
Court of Appeals that the original obligors under the receivables assigned to Atok Finance remain liable under the
terms of such receivables.
WHEREFORE, for all the foregoing, the Petition for Review is hereby GRANTED DUE COURSE, and the Decision
of the Court of Appeals dated 18 August 1987 and its Resolution dated 30 September 1987 are hereby REVERSED
and SET ASIDE. A new judgment is hereby entered REINSTATING the Decision of the trial court in Civil Case No.
84-22198 dated 1 April 1985, except only that, in the exercise of this Court's discretionary authority equitably to
mitigate the penalty clause attached to the Deed of Assignment, that penalty is hereby reduced to eighteen percent
(18%) per annum (instead of P0.03 for every peso monthly [or 36% per annum]). As so modified, the Decision of the
trial court is hereby AFFIRMED. Costs against private respondents.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 89775 November 26, 1992

JACINTO UY DIO and NORBERTO UY, petitioners,
vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents.

DAVIDE, JR., J.:

Continuing Suretyship Agreements signed by the petitioners set off this present controversy.
Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No. 17724 1 which reversed the 2 December
1987 Decision of Branch 45 of the Regional Trial Court (RTC) of Manila in a collection suit entitled "Metropolitan Bank and Trust Company vs. Uy Tiam, doing
business under the name of "UY TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto Uy Dio and Norberto Uy" and docketed as Civil Case No. 82-9303.
They likewise challenge public respondent's Resolution of 21 August 1989

denying their motion for the reconsideration of the former.

The impugned Decision of the Court summarizes the antecedent facts as follows:
It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter referred to as
UTEFS), thru its representative Uy Tiam, applied for and obtained credit accommodations (letter of
credit and trust receipt accommodations) from the Metropolitan Bank and Trust Company
(hereinafter referred to as METROBANK) in the sum of P700,000.00 (Original Records, p. 333). To
secure the aforementioned credit accommodations Norberto Uy and Jacinto Uy Dio executed
separate Continuing Suretyships (Exhibits "E" and "F" respectively), dated 25 February 1977, in
favor of the latter. Under the aforesaid agreements, Norberto Uy agreed to pay METROBANK any
indebtedness of UTEFS up to the aggregate sum of P300,000.00 while Jacinto Uy Dio agreed to be
bound up to the aggregate sum of P800,000.00.
Having paid the obligation under the above letter of credit in 1977, UTEFS, through Uy Tiam,
obtained another credit accommodation from METROBANK in 1978, which credit accommodation
was fully settled before an irrevocable letter of credit was applied for and obtained by the
abovementioned business entity in 1979 (September 8, 1987, tsn, pp. 14-15).
The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum of P815, 600.00,
covered UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It was
applied for and obtain by UTEFS without the participation of Norberto Uy and Jacinto Uy Dio as
they did not sign the document denominated as "Commercial Letter of Credit and Application." Also,
they were not asked to execute any suretyship to guarantee its payment. Neither did METROBANK
nor UTEFS inform them that the 1979 Letter of Credit has been opened and the Continuing
Suretyships separately executed in February, 1977 shall guarantee its payment (Appellees brief, pp.
2-3; rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid Planters Products the
amount of P815,600.00 which payment was covered by a Bill of Exchange (Exhibit "C"), dated 4
June 1979, in favor of (Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS executed and delivered to METROBANK and
Trust Receipt (Exh. "D"), dated 4 June 1979, whereby the former acknowledged receipt in trust from
the latter of the aforementioned goods from Planters Products which amounted to P815, 600.00.
Being the entrusted, the former agreed to deliver to METROBANK the entrusted goods in the event
of non-sale or, if sold, the proceeds of the sale thereof, on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. As a
consequence, METROBANK sent letters to the said principal obligor and its sureties, Norberto Uy
and Jacinto Uy Dio, demanding payment of the amount due. Informed of the amount due, UTEFS
made partial payments to the Bank which were accepted by the latter.
Answering one of the demand letters, Dio, thru counsel, denied his liability for the amount
demanded and requested METROBANK to send him copies of documents showing the source of his
liability. In its reply, the bank informed him that the source of his liability is the Continuing Suretyship
which he executed on February 25, 1977.

As a rejoinder, Dio maintained that he cannot be held liable for the 1979 credit accommodation
because it is a new obligation contracted without his participation. Besides, the 1977 credit
accommodation which he guaranteed has been fully paid.
Having sent the last demand letter to UTEFS, Dio and Uy and finding resort to extrajudicial
remedies to be futile, METROBANK filed a complaint for collection of a sum of money (P613,339.32,
as of January 31, 1982, inclusive of interest, commission penalty and bank charges) with a prayer
for the issuance of a writ of preliminary attachment, against Uy Tiam, representative of UTEFS and
impleaded Dio and Uy as parties-defendants.
The court issued an order, dated 29 July 1983, granting the attachment writ, which writ was returned
unserved and unsatisfied as defendant Uy Tiam was nowhere to be found at his given address and
his commercial enterprise was already non-operational (Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Dio (sureties-defendant herein) filed a motion to
dismiss the complaint on the ground of lack of cause of action. They maintained that the obligation
which they guaranteed in 1977 has been extinguished since it has already been paid in the same
year. Accordingly, the Continuing Suretyships executed in 1977 cannot be availed of to secure Uy
Tiam's Letter of Credit obtained in 1979 because a guaranty cannot exist without a valid obligation. It
was further argued that they can not be held liable for the obligation contracted in 1979 because
they are not privies thereto as it was contracted without their participation (Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to the motion to dismiss. Invoking the terms and
conditions embodied in the comprehensive suretyships separately executed by sureties-defendants,
the bank argued that sureties-movants bound themselves as solidary obligors of defendant Uy Tiam
to both existing obligations and future ones. It relied on Article 2053 of the new Civil Code which
provides: "A guaranty may also be given as security for future debts, the amount of which is not yet
known; . . . ." It was further asserted that the agreement was in full force and effect at the time the
letter of credit was obtained in 1979 as sureties-defendants did not exercise their right to revoke it by
giving notice to the bank. (Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to dismiss was held in abeyance pending the
introduction of evidence by the parties as per order dated February 21, 1986 (Ibid., p. 71).
Having been granted a period of fifteen (15) days from receipt of the order dated March 7, 1986
within which to file the answer, sureties-defendants filed their responsive pleading which merely
rehashed the arguments in their motion to dismiss and maintained that they are entitled to the
benefit of excussion (Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the complaint against defendant Uy Tiam on
the ground that it has no information as to the heirs or legal representatives of the latter who died
sometime in December, 1986, which motion was granted on the following day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of which reads:
The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Dioand Norberto Uy liable for the obligation
contracted by Uy Tiam under the Letter of Credit (Exh. B) issued on March 30, 1987
by virtue of the Continuing Suretyships they executed on February 25, 1977?
Under the admitted proven facts, the Court finds that they are not.

a) When Uy and Dio executed the continuing suretyships, exhibits E and F, on

February 25, 1977, Uy Tiam was obligated to the plaintiff in the amount of
P700,000.00 and this was the obligation which both obligation which both
defendants guaranteed to pay. Uy Tiam paid this 1977 obligation and such
payment extinguished the obligation they assumed as guarantors/sureties.
b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of Credit which
covered the 1977 account of Uy Tiam. Thus, the obligation under either is apart and
distinct from the obligation created in the other as evidenced by the fact that Uy
Tiam had to apply anew for the 1979 transaction (Exh. A). And Dio and Uy, being
strangers thereto, cannot be answerable thereunder.
c) The plaintiff did not serve notice to the defendants Dio and Uy when it extended
to Credit at least to inform them that the continuing suretyships they executed on
February 25, 1977 will be considered by the plaintiff to secure the 1979 transaction of
Uy Tiam.
d) There is no sufficient and credible showing that Dio and Uy were fully informed of
the import of the Continuing Suretyships when they affixed their signatures thereon
that they are thereby securing all future obligations which Uy Tiam may contract
the plaintiff. On the contrary, Dio and Uy categorically testified that they signed the
blank forms in the office of Uy Tiam at 623 Asuncion Street, Binondo, Manila, in
obedience to the instruction of Uy Tiam, their former employer. They denied having
gone to the office of the plaintiff to subscribe to the documents (October 1, 1987, tsn,
pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, 13-16). (Records, pp. 333-334). 3
xxx xxx xxx

In its Decision, the trial court decreed as follows:

PREMISES CONSIDERED, judgment is hereby rendered:
a) dismissing the COMPLAINT against JACINTO UY DIO and NORBERTO UY;
b) ordering the plaintiff to pay to Dio and Uy the amount of P6,000.00 as attorney's fees and
expenses of litigation; and
c) denying all other claims of the parties for want of legal and/or factual basis.
SO ORDERED. (Records, p. 336)

From the said Decision, the private respondent appealed to the Court of Appeals. The case was docketed as CAG.R. CV No. 17724. In support thereof, it made the following assignment of errors in its Brief:
I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING THAT
DEFENDANTS-APPELLEES JACINTO UY DIO AND NORBERTO UY ARE SOLIDARILY LIABLE
TO PLAINTIFF-APPELLANT FOR THE OBLIGATION OF DEFENDANT UY TIAM UNDER THE
LETTER OF CREDIT ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE CONTINUING
SURETYSHIPS THEY EXECUTED ON FEBRUARY 25, 1977.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS ANSWERABLE
TO DEFENDANTS-APPELLEES JACINTO UY DIO AND NORBERTO UY FOR ATTORNEY'S
FEES AND EXPENSES OF LITIGATION. 5

On 22 June 1989, public respondent promulgated the assailed Decision the dispositive portion of which reads:
WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED AND SET,
ASIDE. In lieu thereof, another one is rendered:
1) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and
severally, to appellant METROBANK the amount of P2,397,883.68 which represents
the amount due as of July 17, 1987 inclusive of principal, interest and charges;
2) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and
severally, appellant METROBANK the accruing interest, fees and charges thereon
from July 18, 1987 until the whole monetary obligation is paid; and
3) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and
severally, to plaintiff P20,000.00 as attorney's fees.
With costs against appellees.
SO ORDERED. 6
In ruling for the herein private respondent (hereinafter METROBANK), public respondent held that the Continuing
Suretyship Agreements separately executed by the petitioners in 1977 were intended to guarantee payment of Uy
Tiam's outstanding as well as future obligations; each suretyship arrangement was intended to remain in full force
and effect until METROBANK would have been notified of its revocation. Since no such notice was given by the
petitioners, the suretyships are deemed outstanding and hence, cover even the 1979 letter of credit issued by
METROBANK in favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing Decision. They questioned the public respondent's construction
of the suretyship agreements and its ruling with respect to the extent of their liability thereunder. They argued the
even if the agreements were in full force and effect when METROBANK granted Uy Tiam's application for a letter of
credit in 1979, the public respondent nonetheless seriously erred in holding them liable for an amount over and
above their respective face values.
In its Resolution of 21 August 1989, public respondent denied the motion:
. . . considering that the issues raised were substantially the same grounds utilized by the lower
court in rendering judgment for defendants-appellees which We upon appeal found and resolved to
be untenable, thereby reversing and setting aside said judgment and rendering another in favor of
plaintiff, and no new or fresh issues have been posited to justify reversal of Our decision
herein, . . . . 7
Hence, the instant petition which hinges on the issue of whether or not the petitioners may be held liable as sureties
for the obligation contracted by Uy Tiam with METROBANK on 30 May 1979 under and by virtue of the Continuing
Suretyship Agreements signed on 25 February 1977.
Petitioners vehemently deny such liability on the ground that the Continuing Suretyship Agreements were
automatically extinguished upon payment of the principal obligation secured thereby, i.e., the letter of credit obtained
by Uy Tiam in 1977. They further claim that they were not advised by either METROBANK or Uy Tiam that the
Continuing Suretyship Agreements would stand as security for the 1979 obligation. Moreover, it is posited that to
extend the application of such agreements to the 1979 obligation would amount to a violation of Article 2052 of the
Civil Code which expressly provides that a guaranty cannot exist without a valid obligation. Petitioners further argue
that even granting, for the sake of argument, that the Continuing Suretyship Agreements still subsisted and thereby
also secured the 1979 obligations incurred by Uy Tiam, they cannot be held liable for more than what they

guaranteed to pay because it s axiomatic that the obligations of a surety cannot extend beyond what is stipulated in
the agreement.
On 12 February 1990, this Court resolved to give due course to the petition after considering the allegations, issues
and arguments adduced therein, the Comment thereon by the private respondent and the Reply thereto by the
petitioners; the parties were required to submit their respective Memoranda.
The issues presented for determination are quite simple:
1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to METROBANK by
virtue of the Continuing Suretyship Agreements they separately signed in 1977; and
2. On the assumption that they are, what is the extent of their liabilities for said 1979 obligations.
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not known at
the time the guaranty is
executed. 8 This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single
transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in
its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for

Otherwise stated, a continuing guaranty is one which covers all transactions,

including those arising in the future, which are within the description or contemplation of the contract, of guaranty, until the
expiration or termination thereof. 10 A guaranty shall be construed as continuing when by the terms thereof it is evident that
the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain
period, especially if the right to recall the guaranty is expressly reserved. Hence, where the contract of guaranty states
that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a continuing
one. 11
which, as they accrue, the guarantor becomes liable. 9

In other jurisdictions, it has been held that the use of particular words and expressions such as payment of "any
debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be
furnished the principal debtor "at any time," or "on such time" that the principal debtor may require, have been
construed to indicate a continuing guaranty. 12
In the case at bar, the pertinent portion of paragraph I of the suretyship agreement executed by petitioner Uy
provides thus:
I. For and in consideration of any existing indebtedness to the BANK of UY TIAM (hereinafter called
the "Borrower"), for the payment of which the SURETY is now obligated to the BANK, either as
guarantor or otherwise, and/or in order to induce the BANK, in its discretion, at any time or from time
to time hereafter, to make loans or advances or to extend credit in any other manner to, or at the
request, or for the account of the Borrower, either with or without security, and/or to purchase or
discount, or to make any loans or advances evidence or secured by any notes, bills, receivables,
drafts, acceptances, checks, or other instruments or evidences of indebtedness (all hereinafter
called "instruments") upon which the Borrower is or may become liable as maker, endorser,
acceptor, or otherwise, the SURETY agrees to guarantee, and does hereby guarantee, the punctual
payment at maturity to the loans, advances credits and/or other obligations hereinbefore referred to,
and also any and all other indebtedness of every kind which is now or may hereafter become due or
owing to the BANK by the Borrower, together with any and all expenses which may be incurred by
the BANK in collecting all or any such instruments or other indebtedness or obligations herein before
referred to, and/or in enforcing any rights hereunder, and the SURETY also agrees that the BANK
may make or cause any and all such payments to be made strictly in accordance with the terms and
provisions of any agreement(s) express or implied, which has (have) been or may hereafter be made
or entered into by the Borrow in reference thereto, regardless of any law, regulation or decree,
unless the same is mandatory and non-waivable in character, nor or hereafter in effect, which might
in any manner affect any of the terms or provisions of any such agreement(s) or the Bank's rights
with respect thereto as against the Borrower, or cause or permit to be invoked any alteration in the

time, amount or manner of payment by the Borrower of any such instruments, obligations or
indebtedness; provided, however, that the liability of the SURETY hereunder shall not exceed at any
one time the aggregate principal sum of PESOS: THREE HUNDRED THOUSAND ONLY
(P300,000.00) (irrespective of the currenc(ies) in which the obligations hereby guaranteed are
payable), and such interest as may accrue thereon either before or after any maturity(ies) thereof
and such expenses as may be incurred by the BANK as referred to above. 13
Paragraph I of the Continuing Suretyship Agreement executed by petitioner Dio contains identical provisions
except with respect to the guaranteed aggregate principal amount which is EIGHT THOUSAND PESOS
(P800,000.00). 14
Paragraph IV of both agreements stipulate that:
VI. This is a continuing guaranty and shall remain in full force and effect until written notice shall
have been received by the BANK that it has been revoked by the SURETY, but any such notice shall
not release the SURETY, from any liability as to any instruments, loans, advances or other
obligations hereby guaranteed, which may be held by the BANK, or in which the BANK may have
any interest at the time of the receipt (sic) of such notice. No act or omission of any kind on the
BANK'S part in the premises shall in any event affect or impair this guaranty, nor shall same (sic) be
affected by any change which may arise by reason of the death of the SURETY, or of any partner(s)
of the SURETY, or of the Borrower, or of the accession to any such partnership of any one or more
new partners. 15
The foregoing stipulations unequivocally reveal that the suretyship agreement in the case at bar are continuing in
nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they denied the fact that they had
not revoked the suretyship agreements. Accordingly, as correctly held by the public respondent:
Undoubtedly, the purpose of the execution of the Continuing Suretyships was to induce appellant to
grant any application for credit accommodation (letter of credit/trust receipt) UTEFS may desire to
obtain from appellant bank. By its terms, each suretyship is a continuing one which shall remain in
full force and effect until the bank is notified of its revocation.
xxx xxx xxx
When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant bank, for the
purpose of obtaining goods (covered by a trust receipt) from Planters Products, the continuing
suretyships were in full force and effect. Hence, even if sureties-appellees did not sign the
"Commercial Letter of Credit and Application, they are still liable as the credit accommodation (letter
of credit/trust receipt) was covered by the said suretyships. What makes them liable thereunder is
the condition which provides that the Borrower "is or may become liable as maker, endorser,
acceptor or otherwise." And since UTEFS which (sic) was liable as principal obligor for having failed
to fulfill the obligatory stipulations in the trust receipt, they as insurers of its obligation, are liable
thereunder. 16
Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable to the 1979
obligation because the latter was not yet in existence when the agreements were executed in 1977; under Article
2052 of the Civil Code, a guaranty "cannot exist without a valid obligation." We cannot agree. First of all, the
succeeding article provides that "[a] guaranty may also be given as security for future debts, the amount of which is
not yet known." Secondly, Article 2052 speaks about a valid obligation, as distinguished from a void obligation, and
not an existing or current obligation. This distinction is made clearer in the second paragraph of Article 2052 which
reads:
Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee a natural obligation.

As to the amount of their liability under the Continuing Suretyship Agreements, petitioners contend that the public
respondent gravely erred in finding them liable for more than the amount specified in their respective agreements, to
wit: (a) P800,000.00 for petitioner Dio and (b) P300,000.00 for petitioner Uy.
The limit of the petitioners respective liabilities must be determined from the suretyship agreement each had signed.
It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule is settled
that the obligation of the surety cannot be extended by implication beyond its specified limits. To the extent, and in
the manner, and under the circumstances pointed out in his obligation, he is bound, and no farther. 17
Indeed, the Continuing Suretyship Agreements signed by petitioner Dio and petitioner Uy fix the aggregate amount
of their liability, at any given time, at P800,000.00 and P300,000.00, respectively. The law is clear that a guarantor
may bond himself for less, but not for more than the principal debtor, both as regards the amount and the onerous
nature of the conditions. 18 In the case at bar, both agreements provide for liability for interest and expenses, to wit:
. . . and such interest as may accrue thereon either before or after any maturity(ies) thereof and such
expenses as may be incurred by the BANK referred to above. 19
They further provide that:
In the event of judicial proceedings being instituted by the BANK against the SURETY to enforce any
of the terms and conditions of this undertaking, the SURETY further agrees to pay the BANK a
reasonable compensation for and as attorney's fees and costs of collection, which shall not in any
event be less than ten per cent (10%) of the amount due (the same to be due and payable
irrespective of whether the case is settled judicially or extrajudicially). 20
Thus, by express mandate of the Continuing Suretyship Agreements which they had signed, petitioners
separately bound themselves to pay interest, expenses, attorney's fees and costs. The last two items are
pegged at not less than ten percent (10%) of the amount due.
Even without such stipulations, the petitioners would, nevertheless, be liable for the interest and judicial costs.
Article 2055 of the Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is
stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its
accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall
only be liable for those costs incurred after he has been judicially required to pay.
Interest and damages are included in the term accessories. However, such interest should run only from the
date when the complaint was filed in court. Even attorney's fees may be imposed whenever appropriate,
pursuant to Article 2208 of the Civil Code. Thus, in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang
Machinery Co., Inc., 22 this Court held:
Petitioner objects to the payment of interest and attorney's fees because: (1) they were not
mentioned in the bond; and (2) the surety would become liable for more than the amount stated in
the contract of suretyship.
xxx xxx xxx
The objection has to be overruled, because as far back as the year 1922 this Court held in Tagawa
vs. Aldanese, 43 Phil. 852, that creditors suing on a suretyship bond may recover from the surety as
part of their damages, interest at the legal rate even if the surety would thereby become liable to pay
more than the total amount stipulated in the bond. The theory is that interest is allowed only by way

of damages for delay upon the part of the sureties in making payment after they should have done
so. In some states, the interest has been charged from the date of the interest has been charged
from the date of the judgment of the appellate court. In this jurisdiction, we rather prefer to follow the
general practice, which is to order that interest begin to run from the date when the complaint was
filed in court, . . .
Such theory aligned with sec. 510 of the Code of Civil Procedure which was subsequently
recognized in the Rules of Court (Rule 53, section 6) and with Article 1108 of the Civil Code (now Art.
2209 of the New Civil Code).
In other words the surety is made to pay interest, not by reason of the contract, but by reason of its
failure to pay when demanded and for having compelled the plaintiff to resort to the courts to obtain
payment. It should be observed that interest does not run from the time the obligation became due,
but from the filing of the complaint.
As to attorney's fees. Before the enactment of the New Civil Code, successful litigants could not
recover attorney's fees as part of the damages they suffered by reason of the litigation. Even if the
party paid thousands of pesos to his lawyers, he could not charge the amount to his opponent (Tan
Ti vs. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's fees in eleven cases enumerated in
Article 2208, among them, "where the court deems it just and equitable that attorney's (sic) fees and
expenses of litigation should be recovered" or "when the defendant acted in gross and evident bad
faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim." This gives the
courts discretion in apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid portion of the principal obligation of Uy Tiam to
MERTOBANK under Irrevocable Letter of Credit No. SN-Loc-309 dated 30 March 1979. In referring to the last
demand letter to Mr. Uy Tiam and the complaint filed in Civil Case No. 82-9303, the public respondent mentions the
amount of "P613,339.32, as of January 31, 1982, inclusive of interest commission penalty and bank charges." 23This
is the same amount stated by METROBANK in its Memorandum. 24 However, in summarizing Uy Tiam's outstanding
obligation as of 17 July 1987, public respondent states:
Hence, they are jointly and severally liable to appellant METROBANK of UTEFS' outstanding
obligation in the sum of P2,397,883.68 (as of July 17, 1987) P651,092.82 representing the
principal amount, P825,133.54, for past due interest (5-31-82 to 7-17-87) and P921,657.32, for
penalty charges at 12%per annum (5-31-82 to 7-17-87) as shown in the Statement of Account
(Exhibit I). 25
Since the complaint was filed on 18 May 1982, it is obvious that on that date, the outstanding principal
obligation of Uy Tiam, secured by the petitioners' Continuing Suretyship Agreements, was less than
P613,339.32. Such amount may be fully covered by the Continuing Suretyship Agreement executed by
petitioner Dio which stipulates an aggregate principal sum of not exceeding P800,000.00, and partly
covered by that of petitioner Uy which pegs his maximum liability at P300,000.00.
Consequently, the judgment of the public respondent shall have to be modified to conform to the foregoing
exposition, to which extent the instant petition is impressed with partial merit.
WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged decision has to be modified with
respect to the extend of petitioners' liability. As modified, petitioners JACINTO UY DIO and NORBERTO UY are
hereby declared liable for and are ordered to pay, up to the maximum limit only of their respective Continuing
Suretyship Agreement, the remaining unpaid balance of the principal obligation of UY TIAM or UY TIAM
ENTERPRISES & FREIGHT SERVICES under Irrevocable Letter of Credit No. SN-Loc-309, dated 30 March 1979,
together with the interest due thereon at the legal rate commencing from the date of the filing of the complaint in

Civil Case No. 82-9303 with Branch 45 of the Regional Trial Court of Manila, as well as the adjudged attorney's fees
and costs.
All other dispositions in the dispositive portion of the challenged decision not inconsistent with the above are
affirmed.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 112191 February 7, 1997

FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR L. RODRIGUEZA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and FILINVEST CREDIT CORPORATION, respondents.

PANGANIBAN, J.:
To fund their acquisition of new vehicles (which are later retailed or resold to the general public), car dealers
normally enter into wholesale automotive financing schemes whereby vehicles are delivered by the manufacturer or
assembler on the strength of trust receipts or drafts executed by the car dealers, which are backed up by sureties.
These trust receipts or drafts are then assigned and/or discounted by the manufacturer to/with financing companies,
which assume payment of the vehicles but with the corresponding right to collect such payment from the car dealers
and/or the sureties. In this manner, car dealers are able to secure delivery of their stock-in-trade without having to
pay cash therefor; manufacturers get paid without any receivables/collection problems; and financing companies
earn their margins with the assurance of payment not only from the dealers but also from the sureties. When the
vehicles are eventually resold, the car dealers are supposed to pay the financing companies and the business
goes merrily on. However, in the event the car dealer defaults in paying the financing company, may the surety
escape liability on the legal ground that the obligations were incurred subsequent to the execution of the surety
contract?
This is the principal legal question raised in this petition for review (under Rule 45 of the Rules of Court) seeking to
set aside the Decision 1 of the Court of Appeals (Tenth Division) 2 promulgated on September 30, 1993 in CA G.R. CV No.
09136 which affirmed in toto the decision 3 of the Regional Trial Court of Manila Branch 11 4 in Civil Case No. 83-21994,
the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, by
ordering the latter to pay, jointly and severally, the plaintiff the following amounts:
1. The sum of P1,348,033.89, plus interest thereon at the rate of P922.53 per day starting April 1,
1985 until the said principal amount is fully paid;

2. The amount of P50,000.00 as attorney's fees and another P50,000.00 as liquidated damages; and
3. That the defendants, although spared from paying exemplary damages, are further ordered to
pay, in solidum, the costs of this suit.
Plaintiff therein was the financing company and the defendants the car dealer and its sureties.
The Facts
On or about August 4, 1981, Joseph L. G. Chua and Petitioner Edgar Lee Rodrigueza ("Petitioner Rodrigueza")
each executed an undated "Surety Undertaking" 5 whereunder they "absolutely, unconditionally and solidarily
guarantee(d)" to Respondent Filinvest Credit Corporation ("Respondent Filinvest") and its affiliated and subsidiary
companies the "full, faithful and prompt performance, payment and discharge of any and all obligations and agreements"
of Fortune Motors (Phils.) Corporation ("Petitioner Fortune") "under or with respect to any and all such contracts and any
and all other agreements (whether by way of guaranty or otherwise)" of the latter with Filinvest and its affiliated and
subsidiary companies "now in force or hereafter made."
The following year or on April 6 5, 1982, Petitioner Fortune, Respondent Filinvest and Canlubang Automotive Resources
Corporation ("CARCO") entered into an "Automotive Wholesale Financing Agreement" 7 ("Financing Agreement") under
which CARCO will deliver motor vehicles to Fortune for the purpose of resale in the latter's ordinary course of business;
Fortune, in turn, will execute trust receipts over said vehicles and accept drafts drawn by CARCO, which will discount the
same together with the trust receipts and invoices and assign them in favor of Respondent Filinvest, which will pay the
motor vehicles for Fortune. Under the same agreement, Petitioner Fortune, as trustee of the motor vehicles, was to report
and remit proceeds of any sale for cash or on terms to Respondent Filinvest immediately without necessity of demand.
Subsequently, several motor vehicles were delivered by CARCO to Fortune, and trust receipts covered by demand
drafts and deeds of assignment were executed in favor of Respondent Filinvest. However, when the demand drafts
matured, not all the proceeds of the vehicles which Petitioner Fortune had sold were remitted to Respondent
Filinvest. Fortune likewise failed to turn over to Filinvest several unsold motor vehicles covered by the trust receipts.
Thus, Filinvest through counsel, sent a demand letter 8 dated December 12, 1983 to Fortune for the payment of its
unsettled account in the amount of P1,302,811.00. Filinvest sent similar demand letters 9 separately to Chua and
Rodrigueza as sureties. Despite said demands, the amount was not paid. Hence, Filinvest filed in the Regional Trial Court
of Manila a complaint for a sum of money with preliminary attachment against Fortune, Chua and Rodrigueza.
In an order dated September 26, 1984, the trial court declared that there was no factual issue to be resolved except
for the correct balance of defendants' account with Filinvest as agreed upon by the parties during pretrial. 10Subsequently, Filinvest presented testimonial and documentary evidence. Defendants (petitioners herein), instead
of presenting their evidence, filed a "Motion for Judgment on Demurrer to Evidence" 11 anchored principally on the ground
that the Surety Undertakings were null and void because, at the time they were executed, there was no principal
obligation existing. The trial court denied the motion and scheduled the case for reception of defendants' evidence. On
two scheduled dates, however, defendants failed to present their evidence, prompting the court to deem them to have
waived their right to present evidence. On December 17, 1985, the trial court rendered its decision earlier cited ordering
Fortune, Chua and Rodrigueza to pay Filinvest, jointly and severally, the sum of P1,348,033.83 plus interest at the rate of
P922.53 per day from April 1, 1985 until fully paid, P50,000.00 in attorney's fees, another P50,000.00 in liquidated
damages and costs of suit.
As earlier mentioned, their appeal was dismissed by the Court of Appeals (Tenth Division) which affirmed in toto the
trial court's decision. Hence, this recourse.
Issues
Petitioners assign the following errors in the appealed Decision:
1. that the Court of Appeals erred in declaring that surety can exist even if there was no existing
indebtedness at the time of its execution.

2. that the Court of Appeals erred when it declared that there was no novation.
3. that the Court of Appeals erred when it declared, that the evidence was sufficient to prove the
amount of the claim. 12
Petitioners argue that future debts which can be guaranteed under Article 2053 of the Civil Code refer only to "debts
existing at the time of the constitution of the guaranty but the amount thereof is unknown," and that a guaranty being
an accessory obligation cannot exist without a principal obligation. Petitioners claim that the surety undertakings
cannot be made to cover the Financing Agreement executed by Fortune, Filinvest and CARCO since the latter
contract was not yet in existence when said surety contracts were entered into.
Petitioners further aver that the Financing Agreement would effect a novation of the surety contracts since it
changed the principal terms of the surety contracts and imposed additional and onerous obligations upon the
sureties.
Lastly, petitioners claim that no accounting of the payments made by Petitioner Fortune to Respondent Filinvest was
done by the latter. Hence, there could be no way by which the sureties can ascertain the correct amount of the
balance, if any.
Respondent Filinvest, on the other hand, imputes "estoppel (by pleadings or by judicial admission)" upon petitioners
when in their "Motion to Discharge Attachment," they admitted their liability as sureties thus:
Defendants Chua and Rodrigueza could not have perpetrated fraud because they are only sureties
of defendant Fortune Motors . . .;
. . . The defendants (referring to Rodrigueza and Chua) are not parties to the trust receipts
agreements since they are ONLY sureties.
. . . 13
In rejecting the arguments of petitioners and in holding that they (Fortune and the sureties) were jointly and solidarily
liable to Filinvest, the trial court declared:
As to the alleged non-existence of a principal obligation when the surety agreement was signed, it is
enought (sic) to state that a guaranty may also be given as security for future debts, the amount of
which is not known (Art. 2053, New Civil Code). In the case of NARIC vs. Fojas, L-11517,
promulgated April 10, 1958, it was ruled that a bond posted to secure additional credit that the
principal debtor had applied for, is not void just because the said bond was signed and filed before
the additional credit was extended by the creditor. The obligation of the sureties on future obligations
of Fortune is apparent from a proviso under the Surety Undertakings marked Exhs. B and C that the
sureties agree with the plaintiff as follows:
In consideration of your entering into an arrangement with the party (Fortune) named
above, . . . by which you may purchase or otherwise require from, and or enter into
with obligor . . . trust receipt . . . arising out of wholesale and/or retail transactions by
or with obligor, the undersigned . . . absolutely, unconditionally, and solidarily
guarantee to you . . . the full, faithful and prompt performance, payment and
discharge of any and all obligations . . . of obligor under and with respect to any and
all such contracts and any and all agreements (whether by way of guaranty or
otherwise) of obligor with you . . . now in force or hereafter made. (Emphasis
supplied).
On the matter of novation, this has already been ruled upon when this Court denied defendants'
Motion to dismiss on the argument that what happened was really an assignment of credit, and not a
novation of contract, which does not require the consent of the debtors. The fact of knowledge is

enough. Besides, as explained by the plaintiff, the mother or the principal contract was the Financing
Agreement, whereas the trust receipts, the sight drafts, as well as the Deeds of assignment were
only collaterals or accidental modifications which do not extinguish the original contract by way of
novation. This proposition holds true even if the subsequent agreement would provide for more
onerous terms for, at any rate, it is the principal or mother contract that is to be followed. When the
changes refer to secondary agreements and not to the object or principal conditions of the contract,
there is no novation; such changes will produce modifications of incidental facts, but will not
extinguish the original obligation (Tolentino, Commentaries on Jurisprudence of the Civil Code of the
Philippines, 1973 Edition, Vol. IV, page 367; cited in plaintiff's Memorandum of September 6, 1985,
p. 3).
On the evidence adduced by the plaintiff to show the status of defendants' accounts, which took into
consideration payments by defendants made after the filing of the case, it is enough to state that a
statement was carefully prepared showing a balance of the principal obligation plus interest totalling
P1,348,033.89 as of March 31, 1985 (Exh. M). This accounting has not been traversed nor
contradicted by defendants although they had the opportunity to do so. Likewise, there was absolute
silence on the part of defendants as to the correctness of the previous statement of account made
as of December 16, 1983 (referring to Exh. I), but more important, however, is that defendants
received demand letters from the plaintiff stating that, as of December 1983 (Exhs. J, K and L), this
total amount of obligation was P1,302,811,00, and yet defendants were not heard to have responded
to said demand letters, let alone have taken any exception thereto. There is such a thing as
evidence by silence (Sec. 23, Rule 130, Revised Rules of Court). 14
The Court of Appeals, affirming the above decision of the trial court, further explained:
. . . In the case at bar, the surety undertakings in question unequivocally state that Chua and
Rodrigueza "absolutely, unconditionally and solidarily guarantee" to Filinvest the "full, faithful and
prompt performance, payment and discharge of any and all obligations and agreements" of Fortune
"under or with respect to any and all such contracts and any and all other agreements (whether by
way of guaranty or otherwise)" of the latter with Filinvest in force at the time of the execution of the
"Surety Undertakings" or made thereafter. Indeed, if Chua and Rodrigueza did not intend to
guarantee all of Fortune's future obligation with Filinvest, then they should have expressly stated in
their respective surety undertakings exactly what said surety agreements guaranteed or to which
obligations of Fortune the same were intended to apply. For another, if Chua and Rodrigueza truly
believed that the surety undertakings they executed should not cover Fortune's obligations under the
AWFA, then why did they not inform Filinvest of such fact when the latter sent them the
aforementioned demand letters (Exhs. 'K' and 'L') urging them to pay Fortune's liability under the
AWFA. Instead, quite uncharacteristic of persons who have just been asked to pay an obligation to
which they believe they are not liable, Chua and Rodrigueza elected or chose not to answer said
demand letters. Then, too, considering that appellant Chua is the corporate president of Fortune and
a signatory to the AWFA, he should have simply had it stated in the AWFA or in a separate document
that the "Surety Undertakings" do not cover Fortune's obligations in the aforementioned AWFA, trust
receipts or demand drafts.
Appellants argue that it was unfair for Filinvest to have executed the AWFA only after two (2) years
from the date of the "Surety undertakings" because Chua and Rodrigueza were thereby made to
wait for said number of years just to know what kind of obligation they had to guarantee.
The argument cannot hold water. In the first place, the "Surety Undertakings" did not provide that
after a period of time the same will lose its force and effect. In the second place, if Chua and
Rodrigueza did not want to guarantee the obligations of Fortune under the AWFA, trust receipts and
demand drafts, then why did they not simply terminate the 'Surety Undertakings' by serving ten (10)
days written notice to Filinvest as expressly allowed in said surety agreements. It is highly plausible
that the reason why the 'Surety Undertakings' were not terminated was because the execution of the

same was part of the consideration why Filinvest and CARCO agreed to enter into the AWFA with
Fortune. 15
The Court's Ruling
We affirm the decisions of the trial and appellate courts.
First Issue: Surety May Secure Future Obligations
The case at bench falls on all fours with Atok Finance Corporation vs. Court of Appeals 16 which reiterated our rulings
in National Rice and Corn Corporation (NARIC) vs. Court of Appeals 17 and Rizal Commercial Banking Corporation
vs. Arro.18 In Atok Finance, Sanyu Chemical as principal, and Sanyu Trading along with individual private stockholders of
Sanyu Chemical, namely, spouses Daniel and Nenita Arrieta, Leopoldo Halili and Pablito Bermundo, as sureties, executed
a continuing suretyship agreement in favor of Atok Finance as creditor. Under the agreement, Sanyu Trading and the
individual private stockholders and officers of Sanyu Chemical "jointly and severally unconditionally guarantee(d) to Atok
Finance Corporation (hereinafter called Creditor), the full, faithful and prompt payment and discharge of any and all
indebtedness of [Sanyu Chemical] . . . to the Creditor." Subsequently, Sanyu Chemical assigned its trade receivables
outstanding with a total face value of P125,871.00 to Atok Finance in consideration of receipt of the amount of
P105,000.00. Later, additional trade receivables with a total face value of P100,378.45 were also assigned. Due to
nonpayment upon maturity, Atok
Finance commenced action against Sanyu Chemical, the Arrieta spouses, Bermundo and Halili to collect the sum of
P120,240.00 plus penalty charges due and payable. The individual private respondents contended that the
continuing suretyship agreement, being an accessory contract, was null and void since, at the time of its execution,
Sanyu Chemical had no pre-existing obligation due to Atok Finance. The trial court rendered a decision in favor of
Atok Finance and ordered defendants to pay, jointly and severally, aforesaid amount to Atok.
On appeal, the then Intermediate Appellate Court reversed the trial court and dismissed the complaint on the ground
that there was "no proof that when the suretyship agreement was entered into, there was a pre-existing obligation
which served as the principal obligation between the parties. Furthermore, the 'future debts' alluded to in Article
2053 refer to debts already existing at the time of the constitution of the agreement but the amount thereof is
unknown, unlike in the case at bar where the obligation was acquired two years after the agreement."
We ruled then that the appellate court was in serious error. The distinction which said court sought to make with
respect to Article 2053 (that "future debts" referred to therein relate to "debts already existing at the time of the
constitution of the agreement but the amount [of which] is unknown" and not to debts not yet incurred and existing at
that time) has previously been rejected, citing the RCBC and NARIC cases. We further said:
. . . Of course, a surety is not bound under any particular principal obligation until that principal
obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the
suretyship agreement itself is valid and binding even before the principal obligation intended to be
secured thereby is born, any more than there would be in saying that obligations which are subject
to a condition precedent are valid and binding before the occurrence of the condition precedent.
Comprehensive or continuing surety agreements are in fact quite commonplace in present day
financial and commercial practice. A bank or financing company which anticipates entering into a
series of credit transactions with a particular company, commonly requires the projected principal
debtor to execute a continuing surety agreement along with its sureties. By executing such an
agreement, the principal places itself in a position to enter into the projected series of transactions
with its creditor; with such suretyship agreement, there would be no need to execute a separate
surety contract or bond for each financing or credit accommodation extended to the principal debtor.
In Dino vs. Court of Appeals, 19 we again had occasion to discourse on continuing guaranty/suretyship thus:

. . . A continuing guaranty is one which is not limited to a single transaction, but which contemplates
a future course of dealing, covering a series of transactions, generally for an indefinite time or until
revoked. It is prospective in its operation and is generally intended to provide security with respect to
future transactions within certain limits, and contemplates a succession of liabilities, for which, as
they accrue, the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which
covers all transactions, including those arising in the future, which are within the description or
contemplation of the contract, of guaranty, until the expiration or termination thereof. A guaranty shall
be construed as continuing when by the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time to time either indefinitely or until a certain
period; especially if the right to recall the guaranty is expressly reserved. Hence, where the contract
of guaranty states that the same is to secure advances to be made 'from time to time' the guaranty
will be construed to be a continuing one.
In other jurisdictions, it has been held that the use of particular words and expressions such as
payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any
transaction" or money to be furnished the principal debtor "at any time," or "on such time" that the
principal debtor may require, have been construed to indicate a continuing guaranty. 20
We have no reason to depart from our uniform ruling in the above-cited cases. The facts of the instant case bring us
to no other conclusion than that the surety undertakings executed by Chua and Rodrigueza were continuing
guaranties or suretyships covering all future obligations of Fortune Motors (Phils.) Corporation with Filinvest Credit
Corporation. This is evident from the written contract itself which contained the words "absolutely, unconditionally
and solidarily guarantee(d)" to Respondent Filinvest and its affiliated and subsidiary companies the "full, faithful and
prompt performance, payment and discharge of any and all obligations and agreements" of Petitioner Fortune
"under or with respect to any and all such contracts and any and all other agreements (whether by way of guaranty
or otherwise)" of the latter with Filinvest and its affiliated and subsidiary companies "now in force or hereafter made."
Moreover, Petitioner Rodrigueza and Joseph Chua knew exactly where they stood at the time they executed their
respective surety undertakings in favor of Fortune. As stated in the petition:
Before the execution of the new agreement, Edgar L. Rodrigueza and Joseph Chua were required to
sign blank surety agreements, without informing them how much amount they would be liable as
sureties. However, because of the desire of petitioners, Chua and Rodrigueza to have the cars
delivered to petitioner. Fortune, they signed the blank promissory notes. 21 (emphasis supplied)
It is obvious from the foregoing that Rodrigueza and Chua were fully aware of the business of Fortune, an
automobile dealer; Chua being the corporate president of Fortune and even a signatory to the Financial Agreement
with Filinvest. 22 Both sureties knew the purpose of the surety undertaking which they signed and they must have had an
estimate of the amount involved at that time. Their undertaking by way of the surety contracts was critical in enabling
Fortune to acquire credit facility from Filinvest and to procure cars for resale, which was the business of Fortune.
Respondent Filinvest, for its part, relied on the surety contracts when it agreed to be the assignee of CARCO with respect
to the liabilities of Fortune with CARCO. After benefiting therefrom, petitioners cannot now impugn the validity of the
surety contracts on the ground that there was no preexisting obligation to be guaranteed at the time said surety contracts
were executed. They cannot resort to equity to escape liability for their voluntary acts, and to heap injustice to Filinvest,
which relied on their signed word.
This is a clear case of estoppel by deed. By the acts of petitioners, Filinvest was made to believe that it can collect
from Chua and/or Rodrigueza in case of Fortune's default. Filinvest relied upon the surety contracts when it
demanded payment from the sureties of the unsettled liabilities of Fortune. A refusal to enforce said surety contracts
would virtually sanction the perpetration of fraud or injustice. 23
Second Issue: No Novation
Neither do we find merit in the averment of petitioners that the Financing Agreement contained onerous obligations
not contemplated in the surety undertakings, thus changing the principal terms thereof and effecting a novation.

We have ruled previously that there are only two ways to effect novation and thereby extinguish an obligation. First,
novation must be explicitly stated and declared in unequivocal terms. Novation is never presumed. Second, the old
and new obligations must be incompatible on every point. The test of incompatibility is whether the two obligations
can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter
obligation novates the first. 24 Novation must be established either by the express terms of the new agreement or by the
acts of the parties clearly demonstrating the intent to dissolve the old obligation as a consideration for the emergence of
the new one. The will to novate, whether totally or partially, must appear by express agreement of the parties, or by their
acts which are too clear and unequivocal to be mistaken. 25
Under the surety undertakings however, the obligation of the sureties referred to absolutely, unconditionally and
solidarily guaranteeing the full, faithful and prompt performance, payment and discharge of all obligations of
Petitioner Fortune with respect to any and all contracts and other agreements with Respondent Filinvest in force at
that time or thereafter made. There were to qualifications, conditions or reservations stated therein as to the extent
of the suretyship. The Financing Agreement, on the other hand, merely detailed the obligations of Fortune to
CARCO (succeeded by Filinvest as assignee). The allegation of novation by petitioners is, therefore, misplaced.
There is no incompatibility of obligations to speak of in the two contracts. They can stand together without conflict.
Furthermore, the parties have not performed any explicit and unequivocal act to manifest their agreement or
intention to novate their contract. Neither did the sureties object to the Financing Agreement nor try to avoid liability
thereunder at the time of its execution. As aptly discussed by the Court of Appeals:
. . . For another, if Chua and Rodrigueza truly believed that the surety undertakings they executed
should not cover Fortune's obligations under the AWFA (Financing Agreement), then why did they
not inform Filinvest of such fact when the latter sent them the aforementioned demand letters (Exhs.
"K" and "L") urging them to pay Fortune's liability under the AWFA. Instead, quite uncharacteristic of
persons who have just been asked to pay an obligation to which they are not liable, Chua and
Rodrigueza elected or chose not to answer said demand letters. Then, too, considering that
appellant Chua is the corporate president of Fortune and a signatory to the AWFA, he should have
simply had it stated in the AWFA or in a separate document that the 'Surety Undertakings' do not
cover Fortune's obligations in the aforementioned AWFA, trust receipts or demand drafts. 26
Third Issue: Amount of Claim Substantiated
The contest on the correct amount of the liability of petitioners is a purely factual issue. It is an oft repeated maxim
that the jurisdiction of this Court in cases brought before it from the Court of Appeals under Rule 45 of the Rules of
Court is limited to reviewing or revising errors of law. It is not the function of this Court to analyze or weigh evidence
all over again unless there is a showing that the findings of the lower court are totally devoid of support or are
glaringly erroneous as to constitute serious abuse of discretion. Factual findings of the Court of Appeals are
conclusive on the parties and carry even more weight when said court affirms the factual findings of the trial court. 27
In the case at bar, the findings of the trial court and the Court of Appeals with respect to the assigned error are
based on substantial evidence which were not refuted with contrary proof by petitioners. Hence, there is no
necessity to depart from the above judicial dictum.
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of Appeals
concurring with the decision of the trial court is hereby AFFIRMED. Costs against petitioners.
SO ORDERED.

BANK OF COMMERCE and STEPHEN Z.

TAALA,
Petitioners,

G.R. No. 174006

Present:

CARPIO, J.,
Chairperson,
NACHURA,
- versus -

PERALTA,
ABAD, and
MENDOZA, JJ.

Promulgated:
Spouses ANDRES and ELIZA FLORES,
Respondents.

December 8, 2010

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

DECISION
NACHURA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court,
assailing the Decision[1] dated February 28, 2006 and the Resolution [2] dated August 9, 2006 of
the Court of Appeals (CA) in CA-G.R. CV No. 80362.
The facts of the case are as follows:

Respondents filed a case for specific performance against petitioners before the Regional Trial
Court (RTC) of Quezon City, docketed as Civil Case No. Q-98-35425. Respondents are the
registered owners of a condominium unit in Embassy Garden Homes, West Triangle, Quezon City,
registered under Condominium Certificate of Title (CCT) No. 2130, [3] issued by the Register of
Deeds of Quezon City.[4]

On October 22, 1993, respondents borrowed money from petitioner bank in the amount of Nine
Hundred Thousand Pesos (P900,000.00). Respondents executed a Real Estate Mortgage [5] over
the condominium unit as collateral, and the same was annotated at the back of CCT No. 2130.

On October 3, 1995, respondents again borrowed One Million One Hundred Thousand Pesos
(P1,100,000.00) from petitioner bank, which was also secured by a mortgage over the same
property annotated at the back of CCT No. 2130. [6]

On January 2, 1996, respondents paid One Million Eleven Thousand Five Hundred Fifty-Five Pesos
and 54 centavos (P1,011,555.54), as evidenced by Official Receipt No. 147741 [7] issued by
petitioner bank. On the face of the receipt, it was written that the payment was in full payment of
the loan and interest. Respondents then asked petitioner bank to cancel the mortgage
annotations on CCT No. 2130 since the loans secured by the real estate mortgage were already
paid in full. However, the bank refused to cancel the same and demanded payment of Four
Million Six Hundred Thirty-Three Thousand Nine Hundred Sixteen Pesos and Sixty-Seven
Centavos (P 4,633,916.67), representing the outstanding obligation of respondents as of
February 27, 1998. Respondents requested for an accounting which would explain how the said
amount was arrived at. However, instead of heeding respondents request, petitioner bank
applied for extra-judicial foreclosure of the mortgages over the condominium unit. The public
auction sale was scheduled on September 4, 1998. Petitioner Stephen Z. Taala, a notary public,
was tasked to preside over the auction sale. [8]

Respondents filed suit with the RTC, Quezon City, assailing the validity of the foreclosure and
auction sale of the property. They averred that the loans secured by the property had already
been paid in full. Furthermore, they claimed that the Notice of Auction Sale by Notary
Public[9] failed to comply with the provisions of Act No. 3135, as amended by Act No. 4118,
requiring the publication and posting of the notice of auction sale in at least three (3) public
places in Quezon City.[10] Respondents likewise prayed for the payment of moral and exemplary
damages, and attorneys fees, and for the issuance of a temporary restraining order and/or writ of
preliminary injunction to enjoin the extra-judicial foreclosure sale of the property. [11]

On October 23, 1998, the RTC granted respondents prayer for issuance of a writ of
preliminary injunction, restraining petitioner bank from foreclosing on the mortgage. [12]

Petitioner bank admitted that there were only two (2) mortgage loans annotated at the back of
CCT No. 2130, but denied that respondents had already fully settled their outstanding obligations
with the bank.[13] It averred that several credit lines were granted to respondent Andres Flores by
petitioner bank that were secured by promissory notes executed by him, and which were either
increased or extended from time to time. The loan that was paid on January 2, 1996, in the
amount of P1,011,555.54, was only one of his loans with the bank. There were remaining loans
already due and demandable, and had not been paid by respondents despite repeated demands
by petitioner bank. The remaining loans, although not availed of at the same time, were similarly
secured by the subject real estate mortgage as provided in the continuing guaranty agreement
therein.[14]

Petitioner bank alleged that respondents requested and were granted an increase in their Bills
Discounted Line from Nine Hundred Thousand Pesos (P900,000.00) to Two Million Pesos
(P2,000,000.00), which was secured by the same real estate mortgage on CCT No. 2130.
However, the subject condominium unit commanded only a market value of One Million Seven
Hundred Twenty-Three Thousand Six Hundred Pesos (P1,723,600.00), and a loan value of Nine
Hundred Fifty-Nine Thousand Six Hundred Sixteen Pesos (P959,616.00). Since the market value
of the condominium unit was lower than the combined loans, the parties agreed to fix the
amount of the real estate mortgage atP1,100,000.00. Moreover, petitioner bank stressed that
under the terms of the two real estate mortgages, future loans of respondents were also covered.
[15]

On December 4, 2002, the RTC rendered a resolution, [16] the fallo of which reads:

FROM THE FOREGOING MILIEU, the present case for specific performance with
damages and injunction filed by plaintiffs, Sps. Andres and Eliza Flores against
defendants, Bank
of Commerce
and
Stephen
Z. Taala, is hereby
DISMISSED. Likewise, the counterclaim filed by defendants, Bank of Commerce and
Stephen Z. Taala against plaintiffs, Sps. Andres and Eliza Flores is DISMISSED for
insufficiency of evidence.

SO ORDERED.[17]

In denying respondents complaint for specific performance, the RTC ratiocinated that
respondents right of action hinged mainly on the veracity of their claim that they faithfully
complied with their loan obligations and had fully paid them in January 1996. The RTC stated that
the evidence submitted by petitioner bank, specifically the promissory notes and statement of
account dated February 27, 1998, negated this contention. The RTC declared that respondents
incurred other debts from petitioner bank, which must be paid first before they could be absolved
of liability, and, consequently, demand the release of the mortgage. The RTC also struck down
respondents assertion that petitioner bank did not comply with the posting and publication
requirements under Act No. 3135, as amended.

Respondents filed a motion for reconsideration, which was, however, denied by the RTC in
a decision[18] dated August 8, 2003.
Aggrieved, respondents appealed to the CA.
Meanwhile, on March 25, 2004, the auction sale of the subject property was conducted,
and petitioner bank was awarded the property, as the highest bidder.
On February 28, 2006, the CA rendered a Decision [19] reversing the decision and the
resolution of the RTC. The dispositive portion of the CA Decision reads:

IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED; the challenged
Decision dated December 4, 2002, is REVERSED and SET ASIDE; and a new one
entered:

(a) ordering the cancellation of the real estate mortgage

annotations on the dorsal side of CCT No. 2130 of the Registry of
Deeds of Quezon City;

(b) ordering appellee Bank to issue a corresponding release of

mortgages to plaintiffs-appellants CCT No. 2130;

(c) declaring null and void the challenged extra-judicial

foreclosure and public auction sale held on March 25, 2004 together
with the Certificate of Sale dated April 14, 2004 issued in favor of
appellee Bank; and,

(d) appellees counterclaims are ordered dismissed, for lack of

sufficient basis therefor.

No costs.

SO ORDERED.[20]

The CA ratiocinated that the principal obligation or loan was already extinguished by the full
payment thereof. Consequently, the real estate mortgages securing the principal obligation were
also extinguished. A real estate mortgage, being an accessory contract, cannot survive without
the principal obligation it secures. The CA also noted that the two mortgages were individually
annotated at the back of CCT No. 2130. Thus, the CA opined that the individual annotations
clearly indicated that the said mortgages were not meant to serve as a continuing guaranty for
any future loan that respondents would obtain from petitioner bank.

Petitioners filed a motion for reconsideration. On August 9, 2006, the CA issued a

Resolution[21] denying the same.
Hence, the instant petition.
The sole issue for resolution is whether the real estate mortgage over the subject condominium
unit is a continuing guaranty for the future loans of respondent spouses despite the full payment
of the principal loans annotated on the title of the subject property.
We resolve this issue in the affirmative.

The contested portion of the Deed of Real Estate Mortgage dated October 22, 1993 for the
principal obligation of P900,000.00 and of the second one dated October 3, 1995 for the sum
of P1,100,000.00, uniformly read:

WITNESSETH: That

for and in consideration of the credit accommodations granted by the MORTGAGEE

[Bank
of
Commerce]
to
the
MORTGAGOR
[Andres
Flores]
and/or
_____________________ hereby initially fixed at _____________________________PESOS:
(P____________), Philippine Currency, and as security for the payment of the
same, on demand or at maturity as the case may be, be the interest
accruing thereon, the cost of collecting the same, the cost of keeping the
mortgaged property(ies), of all amounts now owed or hereafter owing by
the MORTGAGOR to the MORTGAGEE under this or separate instruments
and agreements, or in respect of any bill, note, check, draft accepted, paid
or discounted, or advances made and all other obligations to every kind
already incurred or which may hereafter be incurred, for the use or
accommodation of the MORTGAGOR, as well as the faithful performance of
the terms and conditions of this mortgage and of the separate
instruments and/or documents under which credits have been or may
hereafter be advanced by the MORTGAGEE to the MORTGAGOR, including
their renewals, extensions and substitutions, any and all of which
separate instruments and/or documents and their renewals, extensions
and substitutions are hereunto incorporated and made integral parts
hereof, the MORTGAGOR [Andres Flores] has transferred and conveyed, as by these
presents it/he does hereby transfer and convey, by way of First Mortgage, to the
MORTGAGEE [Bank of Commerce], its successors and assigns, all its/ his rights, title
and interest to that parcel(s) of land, together with all the buildings and
improvements now existing or which may hereafter be erected or constructed
thereon, including all other rights or benefits annexed to or inherent therein now
existing or which may hereafter exist, situated in Embassy Garden Homes, Quezon
City, Philippines, and more particularly described in Original/Transfer Certificate(s)
of Title No. CCT No. 2130 of the Registry of Deeds [of] Quezon City, as follows:

CCT No. 2130

Unit No. L-2, located on Building L, consisting of Ninety Five point

Twenty (95.20) Square Meters, more of less, with Parking Space No. L2.[22]

It is petitioner banks contention that the said undertaking, stipulated in the Deed of Real Estate
Mortgage dated October 22, 1993 and October 3, 1995, is a continuing guaranty meant to secure
future debts or credit accommodations granted by petitioner bank in favor of respondents. On
the other hand, respondents posit that, since they have already paid the loans secured by the
real estate mortgages, the mortgage should not be foreclosed because it does not include future
debts of the spouses or debts not annotated at the back of CCT No. 2130.

A continuing guaranty is a recognized exception to the rule that an action to foreclose a

mortgage must be limited to the amount mentioned in the mortgage contract. [23] Under Article

2053 of the Civil Code, a guaranty may be given to secure even future debts, the amount of
which may not be known at the time the guaranty is executed. This is the basis for contracts
denominated as a continuing guaranty or suretyship. A continuing guaranty is not limited to a
single transaction, but contemplates a future course of dealing, covering a series of transactions,
generally for an indefinite time or until revoked. It is prospective in its operation and is generally
intended to provide security with respect to future transactions within certain limits, and
contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable.
In other words, a continuing guaranty is one that covers all transactions, including those arising
in the future, which are within the description or contemplation of the contract of guaranty, until
the expiration or termination thereof.[24]

A guaranty shall be construed as continuing when, by the terms thereof, it is evident that the
object is to give a standing credit to the principal debtor to be used from time to time either
indefinitely or until a certain period, especially if the right to recall the guaranty is expressly
reserved. In other jurisdictions, it has been held that the use of particular words and expressions,
such as payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or the
guaranty of "any transaction" or money to be furnished the principal debtor "at any time" or "on
such time" that the principal debtor may require, has been construed to indicate a continuing
guaranty.[25]

In the instant case, the language of the real estate mortgage unambiguously reveals that
the security provided in the real estate mortgage is continuing in nature. Thus, it was intended
as security for the payment of the loans annotated at the back of CCT No. 2130, and as security
for all amounts that respondents may owe petitioner bank. It is well settled that mortgages given
to secure future advance or loans are valid and legal contracts, and that the amounts named as
consideration in said contracts do not limit the amount for which the mortgage may stand as
security if from the four corners of the instrument the intent to secure future and other
indebtedness can be gathered.[26]

A mortgage given to secure advancements is a continuing security and is not discharged by

repayment of the amount named in the mortgage until the full amounts of the advancements are
paid.[27] Respondents full payment of the loans annotated on the title of the property shall not
effect the release of the mortgage because, by the express terms of the mortgage, it was meant
to secure all future debts of the spouses and such debts had been obtained and remain unpaid.
Unless full payment is made by the spouses of all the amounts that they have incurred from
petitioner bank, the property is burdened by the mortgage.

WHEREFORE, in view of the foregoing, the Decision dated February 28, 2006 and the Resolution
dated

August

9,

2006

of

the

Court

of

Appeals

in

CA-G.R.

CV

No.

80362

are

hereby REVERSED and SET ASIDE. The decision of the Regional Trial Court dated December 4,
2002 is hereby REINSTATED.
SO ORDERED.
[G. R. No. 135462. December 7, 2001]
SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.), PALAWAN LUMBER MANUFACTURING
CORPORATION, petitioners, vs. BA FINANCE CORPORATION, respondent.
DECISION
PARDO, J.:
The Case
The case is a petition to set aside the decision[1] of the Court of Appeals, the dispositive portion of which reads:
WHEREFORE, premises considered, the appealed Decision (as amended by that Order of July 22, 1992) of the lower
court in Civil Case No. 21944 is hereby AFFIRMED with the MODIFICATION that defendant-appellee South City
Homes, Inc. is hereby ordered to pay, jointly and severally, with Fortune Motors Corporation, Palawan Lumber
Manufacturing Corporation and Joseph L. G. Chua, the outstanding amounts due under the six (6) drafts and trust receipts,
with interest thereon at the legal rate from the date of filing of this case until said amounts shall have been fully paid, as
follows:
Date of Draft Amount Balance Due
July 26, 1983 P 244,269.00 P 198,659.52
July 27, 1983 967,765.50 324,767.41
July 28, 1983 1,138,941.00 1,138,941.00
August 2, 1983 244,269.00 244,269.00
August 5, 1983 275,079.00 275,079.60
August 8, 1983 475,046.10 475,046.10
and the attorneys fees and costs of suit.
SO ORDERED.[2]
The Facts
The facts, as found by the Court of Appeals, are as follows:
The present controversy relates to the rights of an assignee (financing company) of drafts and trust receipts backed up by
sureties, in the event of default by the debtor (car dealer) to whom the assignor creditor (car manufacturer) sold and

delivered motor vehicles for resale. A consistent ruling on these cases is hereby reiterated: that a surety may secure
obligations incurred subsequent to the execution of the surety contract.
Prior to the transactions covered by the subject drafts and trust receipts, defendant-appellant Fortune Motors Corporation
(Phils.) has been availing of the credit facilities of plaintiff-appellant BA Finance Corporation. On January 17, 1983,
Joseph L. G. Chua, President of Fortune Motors Corporation, executed in favor of plaintiff-appellant a Continuing
Suretyship Agreement, in which he jointly and severally unconditionally guaranteed the full, faithful and prompt payment
and discharge of any and all indebtedness of Fortune Motors Corporation to BA Finance Corporation (Folder of Exhibits,
pp. 21-22).
On February 3, 1983, Palawan Lumber Manufacturing Corporation represented by Joseph L.G. Chua, George D. Tan,
Edgar C. Rodrigueza and Joselito C. Baltazar, executed in favor of plaintiff-appellant a Continuing Suretyship Agreement
in which, said corporation jointly and severally unconditionally guaranteed the full, faithful and prompt payment and
discharge of any and all indebtedness of Fortune Motors Corporation to BA Finance Corporation (Folder of Exhibits, pp.
19-20). On the same date, South City Homes, Inc. represented by Edgar C. Rodrigueza and Aurelio F. Tablante, likewise
executed a Continuing Suretyship Agreement in which said corporation jointly and severally unconditionally guaranteed
the full, faithful and prompt payment and discharge of any and all indebtedness of Fortune Motors Corporation to BA
Finance Corporation (Folder of Exhibits, pp. 17-18).
Subsequently, Canlubang Automotive Resources Corporation (CARCO) drew six (6) Drafts in its own favor, payable
thirty (30) days after sight, charged to the account of Fortune Motors Corporation, as follows:
Date of Draft Amount
July 26, 1983 P 244,269.00
July 27, 1983 967,765.50
July 28, 1983 1,138,941.00
August 2, 1983 244,269.00
August 5, 1983 275,079.00
August 8, 1983 475,046.10
(Folder of Exhibits, pp. 1, 4, 7, 8, 11 and 14).
Fortune Motors Corporation thereafter executed trust receipts covering the motor vehicles delivered to it by CARCO
under which it agreed to remit to the Entruster (CARCO) the proceeds of any sale and immediately surrender the
remaining unsold vehicles (Folder of Exhibits, pp. 2, 5, 7-A, 9, 12 and 15). The drafts and trust receipts were assigned to
plaintiff-appellant, under Deeds of Assignment executed by CARCO (Folder of Exhibits, pp. 3, 6, 7-B, 10, 13 and 16).
Upon failure of the defendant-appellant Fortune Motors Corporation to pay the amounts due under the drafts and to remit
the proceeds of motor vehicles sold or to return those remaining unsold in accordance with the terms of the trust receipt
agreements, BA Finance Corporation sent demand letter to Edgar C. Rodrigueza, South City Homes, Inc., Aurelio
Tablante, Palawan Lumber Manufacturing Corporation, Joseph L. G. Chua, George D. Tan and Joselito C. Baltazar
(Folder of Exhibits, pp. 29-37). Since the defendants-appellants failed to settle their outstanding account with plaintiffappellant, the latter filed on December 22, 1983 a complaint for a sum of money with prayer for preliminary attachment,
with the Regional Trial Court of Manila, Branch 1, which was docketed as Civil Case No. 83-21944 (Record, pp. 112). Plaintiff-appellant filed a surety bond in the amount of P3,391,546.56 and accordingly, Judge Rosalio C. Segundo
ordered the issuance of a writ of preliminary attachment on January 3, 1984 (Record, pp. 37-47). Defendants Fortune

Motors Corporation, South City Homes, Inc., Edgar C. Rodrigueza, Aurelio F. Tablante, Palawan Lumber Manufacturing
Corporation, Joseph L. G. Chua, George D. Tan and Joselito C. Baltazar filed a Motion to Discharge Attachment, which
was opposed by plaintiff-appellant (Record, pp. 49-56). In an Order dated January 11, 1984, Judge Segundo dissolved the
writ of attachment except as against defendant Fortune Motors Corporation and set the said incident for hearing (Record,
p. 57). On January 19, 1984, the defendants filed a Motion to Dismiss. Therein, they alleged that conventional subrogation
effected a novation without the consent of the debtor (Fortune Motors Corporation) and thereby extinguished the latters
liability; that pursuant to the trust receipt transaction, it was premature under P. D. No. 115 to immediately file a complaint
for a sum of money as the remedy of the entruster is an action for specific performance; that the suretyship agreements are
null and void for having been entered into without an existing principal obligation; and that being such sureties does not
make them solidary debtors (Record, pp. 58-64).
After due hearing, the court denied the motion to discharge attachment with respect to defendant Fortune Motors
Corporation as well as the motion to dismiss by the defendants (Record, pp. 68 and 87). In their Answer, defendants
stressed that their obligations to the creditor (CARCO) was extinguished by the assignment of the drafts and trust receipts
to plaintiff-appellant without their knowledge and consent, and pursuant to legal provision on conventional subrogation a
novation was effected, thereby extinguishing the liability of the sureties; that plaintiff-appellant failed to immediately
demand the return of the goods under the trust receipt agreements or exercise the courses of action by the entruster as
provided for under P. D. No. 115; and that at the time the suretyship agreements were entered into, there were no principal
obligations, thus rendering them null and void. A counterclaim for the award of actual, moral and exemplary damages was
prayed for by defendants (Record, pp. 91-110).
During the pre-trial, efforts to reach a compromise was not successful, and in view of the retirement of Judge Rosalio C.
Segundo of RTC Manila, Branch 1, the case was-re-raffled off to Branch XXXIII, presided over by Judge Felix V. Barbers
(Record, pp. 155-160).
Fortune Motors Corporation filed a motion to lift the writ of attachment covering three (3) vehicles described in the ThirdParty Claim filed with the Office of Deputy Sheriff Jorge C. Victorino (RTC, Branch 1) by Fortune Equipment, Inc. which
was opposed by plaintiff-appellant (Record, pp. 173-181). On June 15, 1984, Deputy Sheriff Jorge C. Victorino issued a
Notice of Levy Upon Personal Properties Pursuant to Order of Attachment which was duly served on defendant Fortune
Motors Corporation (Record, pp. 191-199). In an Order dated April 28, 1986, the court a quo denied the motion to lift the
writ of attachment on three (3) vehicles described in the Third-Party Claim filed by Fortune Equipment Inc. (Record, p.
207). On motion of their respective counsel, the trial court granted the parties time to sit down and appraise the
machineries and spare parts owned by defendant Fortune Motors Corporation which are now in the possession of plaintiff
corporation by virtue of the attachment. A series of conferences was allowed by the court, as means toward possible
compromise agreement. In an Order dated June 2, 1987, the case was returned to Branch I, now presided over by Judge
Rebecca G. Salvador (Record, p. 237).The pre-trial period was terminated and the case was set for trial on the merits
(Record, p. 259).
Acting on the motion to sell levied properties filed by defendant George D. Tan, the trial court ordered the public sale of
the attached properties (Record, p. 406). The court likewise allowed the complaint-in-intervention filed by Fortune
Equipment Inc. and South Fortune Motors Corporation who claimed ownership of four (4) vehicles earlier seized and
attached (Record, p. 471-475). Plaintiff corporation admitted the allegations contained in the complaint-in-intervention
only with respect to one truck so attached but denied the rest of intervenors allegations (Record, pp. 479-482). Thereafter,
the parties submitted their respective pre-trial briefs on the complaint-in-intervention, and after the submission of
evidence thereon, the case was submitted for decision (Record, pp. 573-577).
On November 25, 1991, the lower court rendered its judgment, the dispositive portion of which reads as follows:
WHEREFORE, judgment is hereby rendered:

1. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing Corporation and Joseph Chua, jointly and
severally to pay the plaintiff on the July 27, 1983 Draft, the sum of P324,767.41 with the interest thereon at the legal rate
from the date of filing of this case, December 21, 1983 until the amount shall have been fully paid;
2. Ordering defendants Fortune Motors, Palawan Manufacturing Corporation and Joseph Chua jointly and severally to pay
to the plaintiff on the July 26, 1983 Draft, the sum of P198,659.52 with interest thereon at the legal rate from the date of
filing of this case, until the amount shall have been fully paid;
3. Ordering defendant Fortune Motors, Palawan Manufacturing Corporation and Joseph Chua jointly and severally to pay
to the plaintiff on the July 28, 1983 Draft the sum of P1,138,941.00 with interest thereon at the legal rate from the date of
filing of this case, until the amount shall have been fully paid;
4. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing Corporation and Joseph Chua jointly and
severally to pay to the plaintiff on the August 2, 1983 Draft, the sum of P244,269.00 with interest thereon at the legal rate
from the date of filing of this case, until the amount shall have been fully paid;
5. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing Corporation and Joseph Chua jointly and
severally to pay to the plaintiff on the August 5, 1983 Draft the sum of P275,079.60 with interest thereon at the legal rate
from the date of the filing of this case, until the amount shall have been fully paid;
6. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing Corporation and Joseph Chua jointly and
severally to pay to the plaintiff on the August 8, 1983 Draft the sum of P475,046.10 with interest thereon at legal rate from
the date of the filing of this case, until the amount shall been fully paid;
7. Ordering defendant Fortune Motors, Palawan Lumber Manufacturing Corporation and Joseph Chua jointly and
severally to pay the sum of P300,000.00 as attorneys fees and the costs of this suit;
8. Dismissing plaintiffs complaint against South City Homes, Aurelio Tablante, Joselito Baltazar, George Tan and Edgar
Rodrigueza and the latters counterclaim for lack of basis;
9. Ordering Deputy Sheriff Jorge Victorino to return to Intervenor Fortune Equipment the Mitsubishi Truck Canter with
Motor No. 310913 and Chassis No. 513234;
10. Dismissing the complaint-in-intervention in so far as the three other vehicles mentioned in the complaint-inintervention are concerned for lack of cause of action;
11. Dismissing the complaint-in-intervention against Fortune Motor for lack of basis; and
12. Ordering the parties-in-intervention to bear their respective damages, attorneys fees and the costs of the suit.
Upon execution, the sheriff may cause the judgment to be satisfied out of the properties attached with the exception of one
(1) unit Mitsubishi Truck Canter with Motor No. 310913 and Chassis No. 513234, if they be sufficient for that
purpose. The officer shall make a return in writing to the court of his proceedings. Whenever the judgment shall have
been paid, the officer, upon reasonable demand must return to the judgment debtor the attached properties remaining in
his hand, and any of the proceeds of the properties not applied to the judgment.
SO ORDERED.
On two (2) separate motions for reconsideration, one filed by plaintiffs-intervenors dated December 18, 1991 and the
other by plaintiff dated December 26, 1991, the trial court issued an Order dated July 22, 1992 amending its Decision
dated November 25, 1991. Specifically, said Order amended paragraphs 9 and 10 thereof and deleted the last paragraph of
the said Decision.

Paragraphs 9 and 10 now read:

9. Ordering Deputy Sheriff Jorge C. Victorino to return to Intervenor Fortune Equipment, Inc. the Mitsubishi Truck Canter
with Motor No. 310913 and Chassis No. 513234; Mitsubishi Truck Canter with Motor No. 4D30-313012 and Chassis No.
513696, and Fuso Truck with Motor No. 006769 and Chassis No. 20756, and to Intervenor South Fortune Motors
Corporation the Cimaron Jeepney with Plate No. NET-849;
10. Ordering the plaintiff, in the event the motor vehicles could no longer be returned to pay the estimated value thereof,
i.e., P750,000.00 for the three trucks, and P5,000.00 for the Cimaron Jeepney, to the plaintiffs-intervenors.
x x x (Records, pp. 664-665)
Plaintiffs BA Finance Corporation, defendants Fortune Motors Corp. (Phils.) and Palawan Lumber Manufacturing
Corporation, and intervenors Fortune Equipment and South Fortune Motors, interposed the present appeal and filed their
respective Briefs.[3]
On September 8, 1998, the Court of Appeals promulgated a decision, the dispositive portion of which is quoted in the
opening paragraph of this decision.
Hence, this appeal.[4]
The Issues
The issues presented are: (1) whether the suretyship agreement is valid; (2) whether there was a novation of the
obligation so as to extinguish the liability of the sureties; and (3) whether respondent BAFC has a valid cause of action for
a sum of money following the drafts and trust receipts transactions. [5]
The Courts Ruling
On the first issue, petitioners assert that the suretyship agreement they signed is void because there was no principal
obligation at the time of signing as the principal obligation was signed six (6) months later. The Civil Code, however,
allows a suretyship agreement to secure future loans even if the amount is not yet known.
Article 2053 of the Civil Code provides that:
Art. 2053 A guaranty may also be given as security for future debts, the amount of which is not yet known. x x x
In Fortune Motors (Phils.) Corporation v. Court of Appeals, [6] we held:
To fund their acquisition of new vehicles (which are later retailed or resold to the general public), car dealers normally
enter into wholesale automotive financing schemes whereby vehicles are delivered by the manufacturer or assembler on
the strength of trust receipts or drafts executed by the car dealers, which are backed up by sureties. These trust receipts or
drafts are then assigned and/or discounted by the manufacturer to/with financing companies, which assume payment of
the vehicles but with the corresponding right to collect such payment from the car dealers and/or the sureties. In this
manner, car dealers are able to secure delivery of their stock-in-trade without having to pay cash therefor; manufacturers
get paid without any receivables/collection problems; and financing companies earn their margins with the assurance of
payment not only from the dealers but also from the sureties. When the vehicles are eventually resold, the car dealers are
supposed to pay the financing companies -- and the business goes merrily on. However, in the event the car dealer defaults
in paying the financing company, may the surety escape liability on the legal ground that the obligations were
incurred subsequent to the execution of the surety contract?

x x x Of course, a surety is not bound under any particular principal obligation until that principal obligation is born. But
there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding
even before the principal obligation intended to be secured thereby is born, any more than there would be in saying that
obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition
precedent.
Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and commercial
practice. A bank or financing company which anticipates entering into a series of credit transactions with a particular
company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its
sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract
or bond for each financing or credit accommodation extended to the principal debtor.
Petitioners next posit (second issue) that a novation, as a result of the assignment of the drafts and trust receipts by
the creditor (CARCO) in favor of respondent BAFC without the consent of the principal debtor (Fortune Motors),
extinguished their liabilities.
An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal
cause, such as sale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his credit and
accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor
could enforce it against the debtor.[7] As a consequence, the third party steps into the shoes of the original creditor as
subrogee of the latter. Petitioners obligations were not extinguished. Thus:
x x x Moreover, in assignment, the debtors consent is not essential for the validity of the assignment (Art. 1624 in relation
to Art. 1475, Civil Code), his knowledge thereof affecting only the validity of the payment he might make (Article 1626,
Civil Code).
Article 1626 also shows that payment of an obligation which is already existing does not depend on the consent of the
debtor. It, in effect, mandates that such payment of the existing obligation shall already be made to the new creditor from
the time the debtor acquires knowledge of the assignment of the obligation.
The law is clear that the debtor had the obligation to pay and should have paid from the date of notice whether or not he
consented.
We have ruled in Sison & Sison vs. Yap Tico and Avancea, 37 Phil. 587 [1918] that definitely, consent is not necessary in
order that assignment may fully produce legal effects. Hence, the duty to pay does not depend on the consent of the
debtor. Otherwise, all creditors would be prevented from assigning their credits because of the possibility of the debtors
refusal to give consent.
What the law requires in an assignment of credit is not the consent of the debtor but merely notice to him. A creditor may,
therefore, validly assign his credit and its accessories without the debtors consent (National Investment and Development
Co. v. De Los Angeles, 40 SCRA 489 [1971]. The purpose of the notice is only to inform that debtor from the date of the
assignment, payment should be made to the assignee and not to the original creditor.[8]
Petitioners finally posit (third issue) that as an entruster, respondent BAFC must first demand the return of the unsold
vehicles from Fortune Motors Corporation, pursuant to the terms of the trust receipts.Having failed to do so, petitioners
had no cause of action whatsoever against Fortune Motors Corporation and the action for collection of sum of money was,
therefore, premature. A trust receipt is a security transaction intended to aid in financing importers and retail dealers who
do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able
to acquire credit except through utilization, as collateral, of the merchandise imported or purchased. [9] In the event of
default by the entrustee on his obligations under the trust receipt agreement, it is not absolutely necessary that the
entruster cancel the trust and take possession of the goods to be able to enforce his rights thereunder. We ruled:

x x x Significantly, the law uses the word may in granting to the entruster the right to cancel the trust and take possession
of the goods. Consequently, petitioner has the discretion to avail of such right or seek any alternative action, such as a
third party claim or a separate civil action which it deems best to protect its right, at any time upon default or failure of the
entrustee to comply with any of the terms and conditions of the trust agreement. [10]
The Judgment
WHEREFORE, the appealed decision is hereby AFFIRMED. However, the award of attorneys fees is deleted.
No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 72275 November 13, 1991

PACIFIC BANKING CORPORATION, petitioner,
vs.
HON INTERMEDIATE APPELLATE COURT AND ROBERTO REGALA, JR., respondents.
Ocampo, Dizon & Domingo for petitioner.
Angara, Concepcion, Regala & Cruz for private respondent.

MEDIALDEA, J.:p
This is a petition for review on certiorari of the decision (pp 21-31, Rollo) of the Intermediate Appellate Court (now
Court of Appeals) in AC-G.R. C.V. No. 02753, 1 which modified the decision of the trial court against herein private respondent Roberto Regala,
Jr., one of the defendants in the case for sum of money filed by Pacific Banking Corporation.

The facts of the case as adopted by the respondent appellant court from herein petitioner's brief before said court
are as follows:
On October 24, 1975, defendant Celia Syjuco Regala (hereinafter referred to as Celia Regala for
brevity), applied for and obtained from the plaintiff the issuance and use of Pacificard credit card
(Exhs. "A", "A-l",), under the Terms and Conditions Governing the Issuance and Use of Pacificard
(Exh. "B" and hereinafter referred to as Terms and Conditions), a copy of which was issued to and

received by the said defendant on the date of the application and expressly agreed that the use of
the Pacificard is governed by said Terms and Conditions. On the same date, the defendant-appelant
Robert Regala, Jr., spouse of defendant Celia Regala, executed a "Guarantor's Undertaking" (Exh.
"A-1-a") in favor of the appellee Bank, whereby the latter agreed "jointly and severally of Celia
Aurora Syjuco Regala, to pay the Pacific Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and incurred by said Celia Aurora Syjuco Regala
with the use of the Pacificard, or renewals thereof, issued in her favor by the Pacific Banking
Corporation". It was also agreed that "any changes of or novation in the terms and conditions in
connection with the issuance or use of the Pacificard, or any extension of time to pay such
obligations, charges or liabilities shall not in any manner release me/us from responsibility
hereunder, it being understood that I fully agree to such charges, novation or extension, and that this
understanding is a continuing one and shall subsist and bind me until the liabilities of the said Celia
Syjuco Regala have been fully satisfied or paid.
Plaintiff-appellee Pacific Banking Corporation has contracted with accredited business
establishments to honor purchases of goods and/or services by Pacificard holders and the cost
thereof to be advanced by the plaintiff-appellee for the account of the defendant cardholder, and the
latter undertook to pay any statements of account rendered by the plaintiff-appellee for the advances
thus made within thirty (30) days from the date of the statement, provided that any overdue account
shall earn interest at the rate of 14% per annum from date of default.
The defendant Celia Regala, as such Pacificard holder, had purchased goods and/or services on
credit (Exh. "C", "C-l" to "C-112") under her Pacificard, for which the plaintiff advanced the cost
amounting to P92,803.98 at the time of the filing of the complaint.
In view of defendant Celia Regala's failure to settle her account for the purchases made thru the use
of the Pacificard, a written demand (Exh. "D") was sent to the latter and also to the defendant
Roberto Regala, Jr. (Exh. " ") under his "Guarantor's Undertaking."
A complaint was subsequently filed in Court for defendant's (sic) repeated failure to settle their
obligation. Defendant Celia Regala was declared in default for her failure to file her answer within the
reglementary period. Defendant-appellant Roberto Regala, Jr., on the other hand, filed his Answer
with Counterclaim admitting his execution of the "Guarantor's Understanding", "but with the
understanding that his liability would be limited to P2,000.00 per month."
In view of the solidary nature of the liability of the parties, the presentation of evidence ex-parte as
against the defendant Celia Regala was jointly held with the trial of the case as against defendant
Roberto Regala.
After the presentation of plaintiff's testimonial and documentary evidence, fire struck the City Hall of
Manila, including the court where the instant case was pending, as well as all its records.
Upon plaintiff-appellee's petition for reconstitution, the records of the instant case were duly
reconstituted. Thereafter, the case was set for pre-trial conference with respect to the defendantappellant Roberto Regala on plaintiff-appellee's motion, after furnishing the latter a copy of the
same. No opposition thereto having been interposed by defendant-appellant, the trial court set the
case for pre-trial conference. Neither did said defendant-appellant nor his counsel appear on the
date scheduled by the trial court for said conference despite due notice. Consequently, plaintiffappellee moved that the defendant-appellant Roberto Regala he declared as in default and that it be
allowed to present its evidence ex-parte, which motion was granted. On July 21, 1983, plaintiffappellee presented its evidence ex-parte. (pp. 23-26, Rollo)
After trial, the court a quo rendered judgment on December 5, 1983, the dispositive portion of which reads:

WHEREFORE, the Court renders judgment for the plaintiff and against the defendants condemning
the latter, jointly and severally, to pay said plaintiff the amount of P92,803.98, with interest thereon at
14% per annum, compounded annually, from the time of demand on November 17, 1978 until said
principal amount is fully paid; plus 15% of the principal obligation as and for attorney's fees and
expense of suit; and the costs.
The counterclaim of defendant Roberto Regala, Jr. is dismissed for lack of merit.
SO ORDERED. (pp. 22-23, Rollo)
The defendants appealed from the decision of the court a quo to the Intermediate Appellate Court.
On August 12, 1985, respondent appellate court rendered judgment modifying the decision of the trial court. Private
respondent Roberto Regala, Jr. was made liable only to the extent of the monthly credit limit granted to Celia
Regala, i.e., at P2,000.00 a month and only for the advances made during the one year period of the card's
effectivity counted from October 29, 1975 up to October 29, 1976. The dispositive portion of the decision states:
WHEREFORE, the judgment of the trial court dated December 5, 1983 is modified only as to
appellant Roberto Regala, Jr., so as to make him liable only for the purchases made by defendant
Celia Aurora Syjuco Regala with the use of the Pacificard from October 29, 1975 up to October 29,
1976 up to the amount of P2,000.00 per month only, with interest from the filing of the complaint up
to the payment at the rate of 14% per annum without pronouncement as to costs. (p. 32, Rollo)
A motion for reconsideration was filed by Pacific Banking Corporation which the respondent appellate court denied
for lack of merit on September 19, 1985 (p. 33, Rollo).
On November 8, 1985, Pacificard filed this petition. The petitioner contends that while the appellate court correctly
recognized Celia Regala's obligation to Pacific Banking Corp. for the purchases of goods and services with the use
of a Pacificard credit card in the total amount of P92,803.98 with 14% interest per annum, it erred in limiting private
respondent Roberto Regala, Jr.'s liability only for purchases made by Celia Regala with the use of the card from
October 29, 1975 up to October 29, 1976 up to the amount of P2,000.00 per month with 14% interest from the filing
of the complaint.
There is merit in this petition.
The pertinent portion of the "Guarantor's Undertaking" which private respondent Roberto Regala, Jr. signed in favor
of Pacific Banking Corporation provides:
I/We, the undersigned, hereby agree, jointly and severally with Celia Syjuco Regala to pay the
Pacific Banking Corporation upon demand any and all indebtedness, obligations, charges or
liabilities due and incurred by said Celia Syjuco Regala with the use of the Pacificard or renewals
thereof issued in his favor by the Pacific Banking Corporation. Any changes of or Novation in the
terms and conditions in connection with the issuance or use of said Pacificard, or any extension of
time to pay such obligations, charges or liabilities shall not in any manner release me/us from the
responsibility hereunder, it being understood that the undertaking is a continuing one and shall
subsist and bind me/us until all the liabilities of the said Celia Syjuco Regala have been fully
satisfied or paid. (p. 12, Rollo)
The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's Undertaking," was in substance
a contract of surety. As distinguished from a contract of guaranty where the guarantor binds himself to the creditor to
fulfill the obligation of the principal debtor only in case the latter should fail to do so, in a contract of suretyship, the
surety binds himself solidarily with the principal debtor (Art. 2047, Civil Code of the Philippines).

We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.'s
undertaking. As a surety he bound himself jointly and severally with the debtor Celia Regala "to pay the Pacific
Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by
said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor by Pacific Banking
Corporation." This undertaking was also provided as a condition in the issuance of the Pacificard to Celia Regala,
thus:
5. A Pacificard is issued to a Pacificard-holder against the joint and several signature of a third party
and as such, the Pacificard holder and the guarantor assume joint and several liabilities for any and
all amount arising out of the use of the Pacificard. (p. 14, Rollo)
The respondent appellate court held that "all the other rights of the guarantor are not thereby lost by the guarantor
becoming liable solidarily and therefore a surety." It further ruled that although the surety's liability is like that of a
joint and several debtor, it does not make him the debtor but still the guarantor (or the surety), relying on the case of
Government of the Philippines v. Tizon. G.R. No. L-22108, August 30, 1967, 20 SCRA 1182. Consequently, Article
2054 of the Civil Code providing for a limited liability on the part of the guarantor or debtor still applies.
It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for less, but not for more than the
principal debtor, both as regards the amount and the onerous nature of the conditions. 2 It is likewise not disputed by the parties
that the credit limit granted to Celia Regala was P2,000.00 per month and that Celia Regala succeeded in using the card beyond the original period of its
effectivity, October 29, 1979. We do not agree however, that Roberto Jr.'s liability should be limited to that extent. Private respondent Roberto Regala, Jr., as surety
of his wife,expressly bound himself up to the extent of the debtor's (Celia) indebtedness likewise expressly waiving any "discharge in case of any change or
novation of the terms and conditions in connection with the issuance of the Pacificard credit card." Roberto, in fact, made his commitment as a surety a continuing
one, binding upon himself until all the liabilities of Celia Regala have been fully paid. All these were clear under the "Guarantor's Undertaking" Roberto signed,
thus:

. . . Any changes of or novation in the terms and conditions in connection with the issuance or use of
said Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any
manner release me/us from the responsibility hereunder, it being understood that the undertaking is
a continuing one and shall subsist and bind me/us until all the liabilities of the said Celia Syjuco
Regala have been fully satisfied or paid. (p. 12, supra; emphasis supplied)
Private respondent Roberto Regala, Jr. had been made aware by the terms of the undertaking of future changes in
the terms and conditions governing the issuance of the credit card to his wife and that, notwithstanding, he
voluntarily agreed to be bound as a surety. As in guaranty, a surety may secure additional and future debts of the
principal debtor the amount of which is not yet known (see Article 2053, supra).
The application by respondent court of the ruling in Government v. Tizon, supra is misplaced. It was held in that
case that:
. . . although the defendants bound themselves in solidum, the liability of the Surety under its bond
would arise only if its co-defendants, the principal obligor, should fail to comply with the contract. To
paraphrase the ruling in the case of Municipality of Orion vs. Concha, the liability of the Surety is
"consequent upon the liability" of Tizon, or "so dependent on that of the principal debtor" that the
Surety "is considered in law as being the same party as the debtor in relation to whatever is
adjudged, touching the obligation of the latter"; or the liabilities of the two defendants herein "are so
interwoven and dependent as to be inseparable." Changing the expression, if the defendants are
held liable, their liability to pay the plaintiff would be solidary, but the nature of the Surety's
undertaking is such that it does not incur liability unless and until the principal debtor is held liable.
A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this sense that a surety,
although solidarily liable with the principal debtor, is different from the debtor. It does not mean, however, that the
surety cannot be held liable to the same extent as the principal debtor. The nature and extent of the liabilities of a
guarantor or a surety is determined by the clauses in the contract of suretyship(see PCIB v. CA, L-34959, March 18,
1988, 159 SCRA 24).

ACCORDINGLY, the petition is GRANTED. The questioned decision of respondent appellate court is SET ASIDE
and the decision of the trial court is REINSTATED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 136780

August 16, 2001

JEANETTE D. MOLINO, petitioner,

vs.
SECURITY DINERS INTERNATIONAL CORPORATION, respondent.
GONZAGA-REYES, J.:
Assailed by this petition for review on certiorari is the decision of the Court of Appeals dated September 28,
19981which held petitioner liable as surety for the outstanding credit card debts of Danilo Alto with herein respondent
corporation.
The decision of the Court of Appeals satisfactorily sums up the facts that led to the filing of this case:
The Security Diners International Corporation ("SDIC') operates a credit card system under the name of
Diners Club through which it extends credit accommodation to its cardholders for the purchase of goods and

payment of services from its member establishments to be reimbursed later on by the cardholder upon
proper billing. There are two types of credit cards issued: one, the Regular (Local) Card which entitles the
cardholder to purchase goods and pay services from member establishments in an amount not exceeding
P10,000.00; and two, the Diamond (Edition) Card which entitles the cardholder to purchase goods and pay
services from member establishments in unlimited amounts. One of the requirements for the issuance of
either of these cards is that an applicant should have a surety.
On July 24, 1987, Danilo A. Alto applied for a Regular (Local) Card with SDIC. He got as his surety his own
sister-in-law Jeanette Molino Alto. Thus, Danilo signed the printed application form (Exhibit 'A') and Jeanette
signed the Surety Undertaking (Exhibit 'A-5"). Attached to the Application Form was an Agreement (Use of
Diners' Club Card), paragraph 16 of which reads:
16. SURETY. The cardholder shall furnish an adequate surety or sureties acceptable to Security
Diners who shall be jointly and severally liable with the cardholder to pay Security Diners all the
obligations and charges incurred and credit extended on the basis of the card. In the event the
surety/sureties furnished the cardholder are discharged the cardholder must furnish a new surety or
sureties acceptable to Security Diners within thirty (30) days. Otherwise the cardholder's privileges
shall be automatically terminated in accordance with Section 11 hereof."
The Surety Undertaking signed by Jeanette states:
"I/WE, the undersigned, bind myself/ourselves jointly and severally with Mr. Danilo Alto to pay
SECURITY DINERS INTERNATIONAL CORPORATION, hereinafter referred to as 'Security Diners'
all the obligations and charges including but not limited to fees, interest, attorney's fees and all other
costs incurred by him/her in connection with the use of the DINERS CLUB CARD in accordance with
the terms and conditions governing the issuance and use of the Diners Club Card. Any change or
novation in the agreement or any extension of time granted by SECURITY DINERS to pay such
obligations, charges and fees, shall not release me/us from this Surety Undertaking, it being
understood that said undertaking is a continuing one and shall subsist and bind me/us until all such
obligations, charges and fees have been fully paid and satisfied.
It is understood that the indication of a credit limit to the cardholder shall not relieve me/us of liability
for charges and all other amounts voluntarily incurred by the cardholder in excess of the credit limit.
On the basis of the completed and signed Application Form and Surety Undertaking, the SDIC issued to
Danilo Diners Card No. 36510293216-0006. The latter used this card and initially paid his obligations to
SDIC. On February 8, 1988, Danilo wrote SDIC a letter (Exhibit "B") requesting it to upgrade his Regular
(Local) Diners Club Card to a Diamond (Edition) one. As a requirement of SDIC, Danilo secured from
Jeanette her approval. The latter obliged and so on March 2, 1988, she signed a Note (Exhibit 'C') which
states:
"This certifies that I, Jeanette D. Molino, approve of the request of Danilo and Gloria Alto with Card
No. 3651-203216 0006 and 3651-203412-5007 to upgrade their card from regular to diamond
edition."
Danilo's request was granted and he was issued a Diamond (Edition) Diners Club Card. He used this card
and made purchases (Exhibits "D", "D-1" to "D-7") from member establishments. On October 1, 1988 Danilo
had incurred credit charged plus appropriate interest and service charges in the aggregate amount of
P166,408.31. He defaulted in the payment of this obligation.
SDIC demanded of Danilo and Jeanette to pay said obligation but they did not pay. So, on November 9,
1988, SDIC filed an action to collect said indebtedness against Danilo and Jeanette. This was docketed in
the Regional Trial Court of Makati, Branch 145 as Civil Case No. 88-2381 x x x2

Defendant Danilo Alto failed to file an Answer, and during the pre-trial conference respondent moved to have the
complaint dismissed against him, without prejudice to a subsequent re-filing. Petitioner was left as the lone
defendant, sued in her capacity as surety of Danilo.
In the Answer with Compulsory Counterclaim that she filed with the RTC, petitioner claimed that her liability under
the Surety Undertaking was limited to P10,000.00 and that she did not expressly and categorically agree to act as
surety for Danilo in an amount higher than P10,000.00. 3 By way of counterclaim, she asked for moral and exemplary
damages.
On August 19, 1991, the trial court rendered a decision dismissing the complaint for failure of respondent to prove
its case by a preponderance of the evidence. It found that while petitioner clearly bound herself as surety under the
terms of Danilo Alto's Regular Diners Club Card, there was no evidence that after the card had been upgraded to
Diamond (Edition) petitioner consented or agreed to act as surety for Danilo. Exhibit "C" or Exhibit "1", inter alia,
which was a note bearing petitioner's signature certifying to her approval of Danilo's request to have his card
upgraded should be read simply as a statement of and objection to his request for upgrading, and not as an
assumption of liability for the debts that Danilo may later owe through the said card. 4 The trial court also took note of
the testimony of Alfredo Vicente, an officer of respondent, who opined that the consent to be bound as surety to an
upgraded card should be categorical5 and not in a simple "no objection" form.
The trial court went on further to state that petitioner was not liable for any amount, not even for P10,000.00 which is
the maximum credit limit for Regular Diners Club Cards, since at the time of the upgrading Danilo had no
outstanding credit card debts.6 This is evident from the fact that Danilo's request for upgrading was approved, since
one of the requirements for the approval of a request for the upgrading of a credit card from Regular to Diamond is
that the applicant must have paid all his billings for the last three months prior to his request.
Hence, the trial court disposed of the case with these pronouncements:
WHEREFORE, judgment is rendered dismissing the complaint against defendant Jeanette D. Molino-Alto for
failure of the plaintiff to prove its case by a clear preponderance of evidence.
Said defendants counterclaim is also dismissed.
No pronouncement as to costs.
SO ORDERED.7
The Court of Appeals found contrary to the lower court, and declared that the Surety Undertaking signed by
petitioner when Danilo Alto first applied for a Regular Diners Club Card clearly applied to the unpaid purchases of
Danilo Alto under the Diamond card. In holding thus, the Court of Appeals referred to the terms of the said Surety
Undertaking, which stated that any change or novation in the agreement on the use of the Diners Club card does
not release the surety from his obligations, it being understood that the undertaking is a continuing one which
subsists until all obligations and charges under the subject credit card are paid and satisfied. It also cited Pacific
Banking Corporation vs. Intermediate Appellate Court,8 a 1991 decision which held the surety liable to the extent of
the credit cardholder's indebtedness, under the clear terms of the Guarantor's Undertaking that the surety signed
with the credit card company.
The Court of Appeals further declared that it was erroneous of the trial court to conclude that petitioner was
completely relieved of liability under Danilo Alto's credit card since the Surety Undertaking she signed remained
valid and enforceable even after the upgrading of the said card; besides, petitioner herself admitted that she was
liable to the extent of P10,000.00.
Additionally, the Court of Appeals reduced the attorney's fees (stipulated in the Agreement for the Use of Diners
Club Card) from 25% to 10% of the amount due, judging this to be a more reasonable rate under the circumstances.

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the appealed Decision is REVERSED and one is rendered ordering defendant-appellee
Jeanette D. Molino-Alto to pay plaintiff-appellant Security Diners Intentional, Inc. the following:
1. The sum of P166,408.31 plus interest of 3% per annum and 2% per month from November 9, 1988 until
the obligation is fully paid;
2. The amount equivalent to 10% of the obligation mentioned in the preceding paragraph as attorneys fees;
and
3. Costs.
SO ORDERED.9
Petitioner's motion for reconsideration of the above decision was denied for lack of merit on December 1, 1998.
Hence, the petition before us, which assigns the following errors:
I.
The material findings of the Court of Appeals, which are contrary to those of the lower court are erroneous.
II.
The findings of the Court of Appeals are conflicting and/or without citation of specific evidence on which they
are based.
III.
The Court of Appeals erred in disregarding the applicable legal principle established by this Honorable Court
that, unlike in ordinary solidary debtors, the surety does not incur liability unless the principal debtor is held
liable.10
Petitioner posits that she did not expressly give her consent to be bound as surety under the upgraded card. She
points out that the note she signed, marked as Exhibit "C", registering her approval of the request of Danilo Alto to
upgrade his card, renders the Surety Undertaking she signed under the terms of the previous card "without
probative value, immaterial and irrelevant as it covers only the liability of the surety in the use of the regular credit
card by the principal debtor x x x.11 " She argues further that because the principal debtor, Danilo Alto, was not held
liable, having been dropped as a defendant, she could not be said to have incurred liability as surety.
The petition is devoid of merit.
The resolution of whether petitioner is liable as surety under the Diamond card revolves around the effect of the
upgrading by Danilo Alto of his card. Was the upgrading a novation of the original agreement governing the use of
Danilo Alto's first credit card, as to extinguish that obligation and the Surety Undertaking which was simply
accessory to it?
Novation, as a mode of extinguishing obligations, may be done in two ways: by explicit declaration, or by material
incompatibility (implied novation). As we stated in Fortune Motors vs. Court of Appeals, supra:
x x x The test of incompatibility is whether the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and the latter obligation novates the first.
Novation must be established either by the express terms of the new agreement or by the acts of the parties
clearly demonstrating the intent to dissolve the old obligation as a consideration for the emergence of the

new one. The will to novate, whether totally or partially, must appear by express agreement of the parties, or
by their acts which are too clear or unequivocal to be mistaken.
There is no doubt that the upgrading was a novation of the original agreement covering the first credit card issued to
Danilo Alto, basically since it was committed with the intent of canceling and replacing the said card. However, the
novation did not serve to release petitioner from her surety obligations because in the Surety Undertaking she
expressly waived discharge in case of change or novation in the agreement governing the use of the first credit
card.
The nature and extent of petitioner's obligations are set out in clear and unmistakable terms in the Surety
Undertaking. Thus:
1. She bound herself jointly and severally with Danilo Alto to pay SDIC all obligations and charges in the use of the
Diners Club Card, including fees, interest, attorney's fees, and costs;
2. She declared that "any change or novation in the Agreement or any extension of time granted by SECURITY
DINERS to pay such obligation, charges, and fees, shall not release (her) from this Surety Undertaking";
3. "(S)aid undertaking is a continuous one and shall subsist and bind (her) until all such obligations, charges and
fees have been fully paid and satisfied"; and
4. "The indication of a credit limit to the cardholder shall not relieve (her) of liability for charges and all other amounts
voluntarily incurred by the cardholder in excess of said credit limit."12
We cannot give any additional meaning to the plain language of the subject undertaking. The extent of a surety's
liability is determined by the language of the suretyship contract or bond itself. 13 Article 1370 of the Civil Code
provides: "If the terms of contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control."
This case is no different from Pacific Banking Corporation vs. IAC, supra, correctly applied by the Court of Appeals,
which involved a Guarantor's Undertaking (although thus denominated, it was in substance a contract of surety
signed by the husband for the credit card application of his wife. Like herein petitioner, the husband also argued that
his liability should be limited to the credit limit allowed under his wife's card but the Court declared him liable to the
full extent of his wife's indebtedness. Thus:
We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.'s
undertaking. As a surety he bound himself jointly and severally with the debtor Celia Regala "to pay the
Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due
and incurred by said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor
by Pacific Banking Corporation. x x x.
xxx

xxx

xxx

It is likewise not disputed by the parties that the credit limit granted to Celia Regala was P2,000.00 per
month and that Celia Regala succeeded in using the card beyond the original period of its effectivity,
October 29, 1979. We do not agree, however, that Roberto Jr.'s liability should be limited to that extent.
Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of the
debtor's (Celia's) indebtedness likewise expressly waiving any "discharge in case of any change or novation
of the terms and conditions in connection with the issuance of the Pacificard credit card." Roberto, in fact,
made his commitment as a surety a continuing one, binding upon himself until all the liabilities of Celia
Regala have been fully paid. All these were clear under the "Guarantor's Undertaking" Roberto signed, thus:
"x x x Any changes of or novation in the terms and conditions in connection with the issuance or use
of said Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in

any manner release me/us from the responsibility hereunder, it being understood that the
undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the said
Celia Syjuco Regala have been fully satisfied or paid." (italics supplied)
As a last-ditch measure, petitioner asseverates that, being merely a surety, a pronouncement should first be made
declaring the principal debtor liable before she herself can be proceeded against. The argument, which is hinged
upon the dropping of Danilo as defendant in the complaint, is bereft of merit.
The Surety Undertaking expressly provides that petitioner's liability is solidary. A surety is considered in law as being
the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their
liabilities are interwoven as to be inseparable.14 Although the contract of a surety is in essence secondary only to a
valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt
and duty of another although he possesses no direct or personal interest over the obligations nor does he receive
any benefit therefrom.15 There being no question that Danilo Alto incurred debts of P166,408.31 in credit card
advances, an obligation shared solidarily by petitioner, respondent was certainly within its rights to proceed singly
against petitioner, as surety and solidary debtor, without prejudice to any action it may later file against Danilo Alto,
until the obligation is fully satisfied. This is so provided under Article 1216 of the Civil Code:
The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to those which may be subsequently directed
against the others, so long as the debt has not been fully collected.
Petitioner is a graduate of business administration, and possesses considerable work experience in several banks.
She knew the full import and consequence of the Surety Undertaking that she executed. She had the option to
withdraw her suretyship when Danilo upgraded his card to one that permitted unlimited purchases, but instead she
approved the upgrading. While we commiserate in the financial predicament she now faces, it is also evident that
the liability she incurred is only the legitimate consequence of an undertaking that she freely and intelligently obliged
to. Prospective sureties to credit card applicants would be well-advised to study carefully the terms of the
agreements prepared by the credit card companies before giving their consent, and pay heed to speculations that
could lead to onerous effects, like in the present case where the credit applied for was limitless. At the same time, it
bears articulating that although courts in appropriate cases may equitably reduce the award for penalty as provided
under such suretyship agreements if the same is iniquitous or unconscionable, 16 we are unable to give relief to
petitioner by way of reducing the amount of the principal liability as surety under the circumstances of this case.
WHEREFORE, the petition is dismissed for lack of merit The decision of the Court of Appeals is AFFIRMED in all
respects.
SO ORDERED

[ G.R. No. 138544, October 03, 2000 ]

SECURITY BANK AND TRUST COMPANY, INC., PETITIONER, VS. RODOLFO M. CUENCA,
RESPONDENT.
DECISION
PANGANIBAN, J.:

Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the
solidary debtor. The fundamental rules of fair play require the creditor to obtain the consent of the surety to any material alteration in the
principal loan agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained in
excess of the amount or beyond the period stipulated in the original agreement, absent any clear stipulation showing that the latter
waived his right to be notified thereof, or to give consent thereto. This is especially true where, as in this case, respondent was no longer
the principal officer or major stockholder of the corporate debtor at the time the later obligations were incurred. He was thus no longer in
a position to compel the debtor to pay the creditor and had no more reason to bind himself anew to the subsequent obligations.
The Case

This is the main principle used in denying the present Petition for Review under Rule 45 of the Rules of Court. Petitioner assails the
December 22, 1998 Decision[1] of the Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads as follows:
"WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-appellant Rodolfo M. Cuenca [herein
respondent] is RELEASED from liability to pay any amount stated in the judgment.

"Furthermore, [Respondent] Rodolfo M. Cuenca's counterclaim is hereby DISMISSED for lack of merit.

"In all other respect[s], the decision appealed from is AFFIRMED."[2]

Also challenged is the April 14, 1999 CA Resolution,[3] which denied petitioner's Motion for Reconsideration.

Modified by the CA was the March 6, 1997 Decision[4] of the Regional Trial Court (RTC) of Makati City (Branch 66) in Civil Case No. 931925, which disposed as follows:
"WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and Rodolfo M. Cuenca to pay, jointly
and severally, plaintiff Security Bank & Trust Company the sum of P39,129,124.73 representing the balance of the loan as of May 10,
1994 plus 12% interest per annum until fully paid, and the sum of P100,000.00 as attorney's fees and litigation expenses and to pay the
costs.

SO ORDERED."
The Facts

The facts are narrated by the Court of Appeals as follows:[5]

"The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (`Sta. Ines') is a corporation engaged in
logging operations. It was a holder of a Timber License Agreement issued by the Department of Environment and Natural Resources
(`DENR').

"On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale Corporation [SIMC] a credit line in
the amount of [e]ight [m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the additional capitalization requirements of its

logging operations.

"The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be effective until 30 November 1981:

`JOINT CONDITIONS:

`1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the lines plus JSS of Rodolfo M.
Cuenca.

`2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the company's duly authorized
signatory/ies;

`3. Reasonable/compensating deposit balances in current account shall be maintained at all times; in this connection, a Makati account
shall be opened prior to availment on lines;

`4. Lines shall expire on November 30, 1981; and

`5. The bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower.'
(Emphasis supplied.)

"To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line, SIMC executed a Chattel
Mortgage dated 23 December 1980 (Exhibit `A') over some of its machinery and equipment in favor of [Petitioner] SBTC. As additional
security for the payment of the loan, [Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated 17 December 1980
(Exhibit `B') in favor of [Petitioner] SBTC whereby he solidarily bound himself with SIMC as follows:
xxx

xxx

xxx

`Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor of the bank for the payment,
upon demand and without the benefit of excussion of whatever amount x x x the client may be indebted to the bank x x x by virtue of
aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s) x x x .' (Emphasis supplied).

"On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the P8M-Credit Loan Facility, appellant SIMC
made a first drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit `C').

"Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors of defendant-appellant Sta.
Ines. Subsequently, the shareholdings of [Respondent] Cuenca in defendant-appellant Sta. Ines were sold at a public auction relative to
Civil Case No. 18021 entitled `Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca'. Said shares were bought by
Adolfo Angala who was the highest bidder during the public auction.

"Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from [Petitioner] SBTC in the
aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50). Accordingly,
SIMC executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86
to cover the amounts of the abovementioned additional loans against the credit line.

"Appellant SIMC, however, encountered difficulty[6] in making the amortization payments on its loans and requested [Petitioner] SBTC for
a complete restructuring of its indebtedness. SBTC accommodated appellant SIMC's request and signified its approval in a letter dated
18 February 1988 (Exhibit `G') wherein SBTC and defendant-appellant Sta. Ines, without notice to or the prior consent of [Respondent]
Cuenca, agreed to restructure the past due obligations of defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to extend to
defendant-appellant Sta. Ines the following loans:
a.

Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (P8,800,000.00), to be applied to liquidate the
principal portion of defendant-appellant Sta. Ines[`] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit
`G', Expediente, at Vol. II, p. 336; Exhibit `5-B-Cuenca', Expediente, et Vol I, pp. 33 to 34) and

b.

Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (P3,400,000.00), to be applied to liquidate the
past due interest and penalty portion of the indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit
`G', Expediente, at Vol. II, p. 336; Exhibit `5-B-Cuenca', Expediente, at Vol. II, p. 33 to 34).'

"It should be pointed out that in restructuring defendant-appellant Sta. Ines' obligations to [Petitioner] Security Bank, Promissory Note
No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which was the only loan
incurred prior to the expiration of the P8M-Credit Loan Facility on 30 November 1981 and the only one covered by the Indemnity
Agreement dated 19 December 1980 (Exhibit `3-Cuenca', Expediente, at Vol. II, p. 331), was not segregated from, but was instead
lumped together with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits `D', `E', and
`F', Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta. Ines which were not secured by said Indemnity
Agreement.

"Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank, defendant-appellant Sta. Ines thus
executed the following promissory notes, both dated 09 March 1988 in favor of [Petitioner] Security Bank:

PROMISSORY NOTE
NO.

AMOUNT

RL/74/596/88

P8,800,000.00

RL/74/597/88

P3,400,000.00
------------------TOTAL
P12,200,000.00

(Exhibits `H' and `I', Expediente, at Vol. II, pp. 338 to 343).

"To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines, [Petitioner] Security Bank and

defendant-appellant Sta. Ines executed a Loan Agreement dated 31 October 1989 (Exhibit `5-Cuenca', Expediente, at Vol. I, pp. 33 to
41). Section 1.01 of the said Loan Agreement dated 31 October 1989 provides:
`1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE MILLION TWO HUNDRED
THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency (the `Loan'). The loan shall be released in two (2) tranches of
P8,800,000.00 for the first tranche (the `First Loan') and P3,400,000.00 for the second tranche (the `Second Loan') to be applied in the
manner and for the purpose stipulated hereinbelow.

`1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the Borrower's present total outstanding
indebtedness to the Lender (the `indebtedness') while the Second Loan shall be applied to liquidate the past due interest and penalty
portion of the Indebtedness.' (Underscoring supplied.) (cf. p. 1 of Exhibit `5-Cuenca', Expediente, at Vol. I, p. 33)
"From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to [Petitioner] Security Bank in the
amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits `8', `9-P-SIMC' up to `9-GGSIMC', Expediente, at Vol. II, pp. 38, 70 to 165)

"Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite demands made upon
appellant SIMC and CUENCA, the last of which were made through separate letters dated 5 June 1991 (Exhibit `K') and 27 June 1991
(Exhibit `L'), respectively.

"Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a complaint for collection of sum of
money on 14 June 1993, resulting after trial on the merits in a decision by the court a quo, x x x from which [Respondent] Cuenca
appealed."
Ruling of the Court of Appeals

In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had novated the 1980 credit accommodation
earlier granted by the bank to Sta. Ines. Accordingly, such novation extinguished the Indemnity Agreement, by which Cuenca, who was
then the Board chairman and president of Sta. Ines, had bound himself solidarily liable for the payment of the loans secured by that
credit accommodation. It noted that the 1989 Loan Agreement had been executed without notice to, much less consent from, Cuenca
who at the time was no longer a stockholder of the corporation.

The appellate court also noted that the Credit Approval Memorandum had specified that the credit accommodation was for a total
amount of P8 million, and that its expiry date was November 30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained
prior to November 30, 1981, and only for an amount not exceeding P8 million.

It further held that the restructuring of Sta. Ines' obligation under the 1989 Loan Agreement was tantamount to a grant of an extension of
time to the debtor without the consent of the surety. Under Article 2079 of the Civil Code, such extension extinguished the surety.

The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided to materially alter or modify the
principal obligation after the expiry date of the credit accommodation.

Hence, this recourse to this Court.[7]

The Issues

In its Memorandum, petitioner submits the following for our consideration:[8]

"A.

Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from
liability as surety under the Indemnity Agreement for the payment of the principal amount
of twelve million two hundred thousand pesos (P12,200,000.00) under Promissory Note No.
RL/74/596/88 dated 9 March 1988 and Promissory Note No. RL/74/597/88 dated 9 March
1988, plus stipulated interests, penalties and other charges due thereon;

i.

Whether or not the Honorable Court of Appeals erred in ruling that Respondent
Cuenca's liability under the Indemnity Agreement covered only availments on SIMC's
credit line to the extent of eight million pesos (P8,000,000.00) and made on or before
30 November 1981;

ii.

Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of
SIMC's indebtedness under the P8 million credit accommodation was tantamount to an
extension granted to SIMC without Respondent Cuenca's consent, thus extinguishing
his liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code;

iii.

Whether or not the Honorable Court of appeals erred in ruling that the restructuring of
SIMC's indebtedness under the P8 million credit accommodation constituted a novation
of the principal obligation, thus extinguishing Respondent Cuenca's liability under the
indemnity agreement;

B.

Whether or not Respondent Cuenca's liability under the Indemnity Agreement was
extinguished by the payments made by SIMC;

C.

Whether or not petitioner's Motion for Reconsideration was pro-forma;

D.

Whether or not service of the Petition by registered mail sufficiently complied with Section
11, Rule 13 of the 1997 Rules of Civil Procedure."

Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan Agreement novated the original credit
accommodation and Cuenca's liability under the Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and to
give consent to any substitution, renewal, extension, increase, amendment, conversion or revival of the said credit accommodation. As
preliminary matters, the procedural questions raised by respondent will also be addressed.

The Court's Ruling

The Petition has no merit.

Preliminary Matters:
Procedural Questions

Motion for Reconsideration Not Pro Forma

Respondent contends that petitioner's Motion for Reconsideration of the CA Decision, in merely rehashing the arguments already
passed upon by the appellate court, was pro forma; that as such, it did not toll the period for filing the present Petition for Review.
[9]

Consequently, the Petition was filed out of time.[10]

We disagree. A motion for reconsideration is not pro forma just because it reiterated the arguments earlier passed upon and rejected by
the appellate court. The Court has explained that a movant may raise the same arguments, precisely to convince the court that its ruling
was erroneous.[11]

Moreover, there is no clear showing of intent on the part of petitioner to delay the proceedings. In Marikina Valley Development
Corporation v. Flojo,[12] the Court explained that a pro forma motion had no other purpose than to gain time and to delay or impede the
proceedings. Hence, "where the circumstances of a case do not show an intent on the part of the movant merely to delay the
proceedings, our Court has refused to characterize the motion as simply pro forma." It held:
"We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon the reality and substance of
the statutory right of appeal, that doctrine should be applied reasonably, rather than literally. The right to appeal, where it exists, is an
important and valuable right. Public policy would be better served by according the appellate court an effective opportunity to review the
decision of the trial court on the merits, rather than by aborting the right to appeal by a literal application of the procedural rules relating
to pro forma motions for reconsideration."
Service by Registered Mail Sufficiently Explained

Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:

"SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing of pleadings and other papers shall be
done personally. Except with respect to papers emanating from the court, a resort to other modes must be accompanied by a written
explanation why the service or filing was not done personally. A violation of this Rule may be cause to consider the paper as not filed."
Respondent maintains that the present Petition for Review does not contain a sufficient written explanation why it was served by
registered mail.

We do not think so. The Court held in Solar Entertainment v. Ricafort[13] that the aforecited rule was mandatory, and that "only when
personal service or filing is not practicable may resort to other modes be had, which must then be accompanied by a written explanation
as to why personal service or filing was not practicable to begin with."

In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and Cuenca "by registered mail in lieu of
personal service due to limitations in time and distance."[14] This explanation sufficiently shows that personal service was not practicable.
In any event, we find no adequate reason to reject the contention of petitioner and thereby deprive it of the opportunity to fully argue its
cause.
First Issue:
Original Obligation Extinguished by Novation

An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which reads as follows:
"ART. 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared
in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other."
Novation of a contract is never presumed. It has been held that "[i]n the absence of an express agreement, novation takes place only
when the old and the new obligations are incompatible on every point."[15] Indeed, the following requisites must be established: (1) there
is a previous valid obligation; (2) the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a
valid new contract.[16]

Petitioner contends that there was no absolute incompatibility between the old and the new obligations, and that the latter did not
extinguish the earlier one. It further argues that the 1989 Agreement did not change the original loan in respect to the parties involved or
the obligations incurred. It adds that the terms of the 1989 Contract were "not more onerous."[17] Since the original credit accomodation
was not extinguished, it concludes that Cuenca is still liable under the Indemnity Agreement.

We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement extinguished the
obligation[18] obtained under the 1980 credit accomodation. This is evident from its explicit provision to "liquidate" the principal and the
interest of the earlier indebtedness, as the following shows:
"1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrower's present total outstanding
Indebtedness to the Lender (the "Indebtedness") while the Second Loan shall be applied to liquidatethe past due interest and penalty
portion of the Indebtedness."[19] (Italics supplied.)
The testimony of an officer[20] of the bank that the proceeds of the 1989 Loan Agreement were used "to pay-off" the original
indebtedness serves to strengthen this ruling.[21]

Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate that the two cannot
coexist. While the 1980 credit accommodation had stipulated that the amount of loan was not to exceed P8 million,[22] the 1989
Agreement provided that the loan was P12.2 million. The periods for payment were also different.

Likewise, the later contract contained conditions, "positive covenants" and "negative covenants" not found in the earlier obligation. As an
example of a positive covenant, Sta. Ines undertook "from time to time and upon request by the Lender, [to] perform such further acts
and/or execute and deliver such additional documents and writings as may be necessary or proper to effectively carry out the provisions

and purposes of this Loan Agreement."[23]Likewise, SIMC agreed that it would not create any mortgage or encumbrance on any asset
owned or hereafter acquired, nor would it participate in any merger or consolidation.[24]

Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity Agreement, an accessory
obligation, was necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which provides:
"ART. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar
as they may benefit third persons who did not give their consent."
Alleged Extension

Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8 million original accommodation; it was not a
novation.[25]

This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated that its purpose was to "liquidate," not to
renew or extend, the outstanding indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which had
allegedly extended the original P8 million credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to
Article 2079 of the Civil Code, which specifically states that "[a]n extension granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guaranty. x x x." In an earlier case,[26] the Court explained the rationale of this provision in this wise:
"The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety's consent
would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor's remedies against the principal
debtor upon the maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the
indemnitors becoming insolvent during the extended period."
Binding Nature of the Credit Approval Memorandum

As noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum in holding that the credit
accommodation was only for P8 million, and that it was for a period of one year ending on November 30, 1981. Petitioner objects to the
appellate court's reliance on that document, contending that it was not a binding agreement because it was not signed by the parties. It
adds that it was merely for its internal use.

We disagree. It was petitioner itself which presented the said document to prove the accommodation. Attached to the Complaint as
Annex A was a copy thereof "evidencing the accommodation."[27] Moreover, in its Petition before this Court, it alluded to the Credit
Approval Memorandum in this wise:
"4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC") was granted by the Bank a credit line in the aggregate amount of
Eight Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional capitalization requirements for its logging operations. For
this purpose, the Bank issued a Credit Approval Memorandum dated 10 November 1980."
Clearly, respondent is estopped from denying the terms and conditions of the P8 million credit accommodation as contained in the very
document it presented to the courts. Indeed, it cannot take advantage of that document by agreeing to be bound only by those portions
that are favorable to it, while denying those that are disadvantageous.

Second Issue:
Alleged Waiver of Consent

Pursuing another course, petitioner contends that Respondent Cuenca "impliedly gave his consent to any modification of the credit
accommodation or otherwise waived his right to be notified of, or to give consent to, the same."[28] Respondent's consent or waiver
thereof is allegedly found in the Indemnity Agreement, in which he held himself liable for the "credit accommodation including [its]
substitutions, renewals, extensions, increases, amendments, conversions and revival." It explains that the novation of the original credit
accommodation by the 1989 Loan Agreement is merely its "renewal," which "connotes cessation of an old contract and birth of another
one x x x."[29]

At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement without the consent of the surety
extinguishes the latter's obligation. As the Court held in National Bank v. Veraguth,[30] "[i]t is fundamental in the law of suretyship that any
agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract, without the consent
of the surety, will release the surety from liability."

In this case, petitioner's assertion - that respondent consented to the alterations in the credit accommodation -- finds no support in the
text of the Indemnity Agreement, which is reproduced hereunder:
"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext.,
Makati Metro Manila for and in consideration of the credit accommodation in the total amount of eight million pesos (P8,000,000.00)
granted by the SECURITY BANK AND TRUST COMPANY, a commercial bank duly organized and existing under and by virtue of the
laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila hereinafter referred to as the BANK in favor of STA. INES MELALE
FOREST PRODUCTS CORP., x x x ---- hereinafter referred to as the CLIENT, with the stipulated interests and charges thereon,
evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed and delivered by the CLIENT in favor of the BANK
hereby bind(s) himself/themselves jointly and severally with the CLIENT in favor of the BANK for the payment , upon demand and
without benefit of excussion of whatever amount or amounts the CLIENT may be indebted to the BANK under and by virtue of aforesaid
credit accommodation(s) including the substitutions, renewals, extensions, increases, amendment, conversions and revivals of the
aforesaid credit accommodation(s), as well as of the amount or amounts of such other obligations that the CLIENT may owe the BANK,
whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the BANK, plus interest and
expenses arising from any agreement or agreements that may have heretofore been made, or may hereafter be executed by and
between the parties thereto, including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the
aforesaid credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor of the BANK for the faithful
compliance of all the terms and conditions contained in the aforesaid credit accommodation(s), all of which are incorporated herein and
made part hereof by reference."
While respondent held himself liable for the credit accommodation or any modification thereof, such clause should be understood in the
context of the P8 million limit and the November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the nature and
scope of the original credit accommodation, without informing or getting the consent of respondent who was solidarily liable. Taking the
bank's submission to the extreme, respondent (or his successors) would be liable for loans even amounting to, say, P100 billion
obtained 100 years after the expiration of the credit accommodation, on the ground that he consented to all alterations and extensions
thereof.

Indeed, it has been held that a contract of surety "cannot extend to more than what is stipulated. It is strictly construed against the
creditor, every doubt being resolved against enlarging the liability of the surety."[31]Likewise, the Court has ruled that "it is a well-settled
legal principle that if there is any doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of the
surety x x x. Ambiguous contracts are construed against the party who caused the ambiguity."[32] In the absence of an unequivocal
provision that respondent waived his right to be notified of or to give consent to any alteration of the credit accommodation, we cannot
sustain petitioner's view that there was such a waiver.

It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not have absolute authority to
unilaterally change the terms of the loan accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this
condition:
"5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower."[33]
We reject petitioner's submission that only Sta. Ines as the borrower, not respondent, was entitled to be notified of any modification in
the original loan accommodation.[34] Following the bank's reasoning, such modification would not be valid as to Sta. Ines if no notice
were given; but would still be valid as to respondent to whom no notice need be given. The latter's liability would thus be more
burdensome than that of the former. Such untenable theory is contrary to the principle that a surety cannot assume an obligation more
onerous than that of the principal.[35]

The present controversy must be distinguished from Philamgen v. Mutuc,[36] in which the Court sustained a stipulation whereby the
surety consented to be bound not only for the specified period, "but to any extension thereafter made, an extension x x x that could be
had without his having to be notified."

In that case, the surety agreement contained this unequivocal stipulation: "It is hereby further agreed that in case of any extension of
renewal of the bond, we equally bind ourselves to the Company under the same terms and conditions as herein provided without the
necessity of executing another indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any
renewal or extension of the bond which may be granted under this indemnity agreement."

In the present case, there is no such express stipulation. At most, the alleged basis of respondent's waiver is vague and uncertain. It
confers no clear authorization on the bank or Sta. Ines to modify or extend the original obligation without the consent of the surety or
notice thereto.

Continuing Surety

Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner maintains that there was no need for
respondent to execute another surety contract to secure the 1989 Loan Agreement.

This argument is incorrect. That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the scope of the
principal obligation inordinately.[37] In Dino v. CA,[38] the Court held that "a continuing guaranty is one which covers all transactions,
including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or

termination thereof."

To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit accommodation: (1) that the
obligation should not exceed P8 million, and (2) that the accommodation should expire not later than November 30, 1981. Hence, it was
a continuing surety only in regard to loans obtained on or before the aforementioned expiry date and not exceeding the total of P8
million.

Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on November 26, 1991. It did not secure the
subsequent loans, purportedly under the 1980 credit accommodation, that were obtained in 1986. Certainly, he could not have
guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981 and which exceeded the stipulated P8 million
ceiling.

Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan obtained after the payment of the original
one, which was covered by a continuing surety agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement
specifically provided that "each suretyship is a continuing one which shall remain in full force and effect until this bank is notified of its
revocation." Since the bank had not been notified of such revocation, the surety was held liable even for the subsequent obligations of
the principal borrower.

No similar provision is found in the present case. On the contrary, respondent's liability was confined to the 1980 credit accommodation,
the amount and the expiry date of which were set down in the Credit Approval Memorandum.

Special Nature of the JSS

It is a common banking practice to require the JSS ("joint and solidary signature") of a major stockholder or corporate officer, as an
additional security for loans granted to corporations. There are at least two reasons for this.First, in case of default, the creditor's
recourse, which is normally limited to the corporate properties under the veil of separate corporate personality, would extend to the
personal assets of the surety. Second, such surety would be compelled to ensure that the loan would be used for the purpose agreed
upon, and that it would be paid by the corporation.

Following this practice, it was therefore logical and reasonable for the bank to have required the JSS of respondent, who was the
chairman and president of Sta. Ines in 1980 when the credit accommodation was granted. There was no reason or logic, however, for
the bank or Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that time, he was no
longer an officer or a stockholder of the debtor-corporation. Verily, he was not in a position then to ensure the payment of the obligation.
Neither did he have any reason to bind himself further to a bigger and more onerous obligation.

Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without even informing him, smacks of
negligence on the part of the bank and bad faith on that of the principal debtor. Since that Loan Agreement constituted a new
indebtedness, the old loan having been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask somebody else to
act as a surety for the new loan.

In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who was in a position to ensure the
payment of the loan. Even a perfunctory attempt at credit investigation would have revealed that respondent was no longer connected
with the corporation at the time. As it is, the bank is now relying on an unclear Indemnity Agreement in order to collect an obligation that
could have been secured by a fairly obtained surety. For its defeat in this litigation, the bank has only itself to blame.

In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the 1980 P8 million credit
accommodation. Hence, the Indemnity Agreement, which had been an accessory to the 1980 credit accommodation, was also
extinguished. Furthermore, we reject petitioner's submission that respondent waived his right to be notified of, or to give consent to, any
modification or extension of the 1980 credit accommodation.

In this light, we find no more need to resolve the issue of whether the loan obtained before the expiry date of the credit accommodation
has been paid.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. L-29139 November 15, 1974

CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P. ALCANTARA, plaintiffs-appellants,
vs.
ESTEBAN PICZON and SOSING-LOBOS & CO., INC., defendants-appellees.
Vicente C. Santos for plaintiffs-appellants.
Jacinto R. Bohol for defendant-appellee Sosing-Lobos & Co., Inc.
Vicente M. Macabidang for defendant-appellee Esteban Piczon.

BARREDO, J.:p
Appeal from the decision of the Court of First Instance of Samar in its Civil Case No. 5156, entitled Consuelo P.
Piczon, et al. vs. Esteban Piczon, et al., sentencing defendants-appellees, Sosing Lobos and Co., Inc., as principal,
and Esteban Piczon, as guarantor, to pay plaintiffs-appellants "the sum of P12,500.00 with 12% interest from August
6, 1964 until said principal amount of P12,500.00 shall have been duly paid, and the costs."
After issues were joined and at the end of the pre-trial held on August 22, 1967, the trial court issued the following
order:
"When this case was called for pre-trial, plaintiffs and defendants through their lawyers, appeared
and entered into the following agreement:
1. That defendants admit the due execution of Annexes "A" and "B" of the complaint;
2. That consequently defendant Sosing-Lobos and Co., Inc. binds itself to the plaintiffs for
P12,500.00, the same to be paid on or before October 31, 1967 together with the interest that this
court may determine.
That the issues in this case are legal ones namely:
(a) Will the payment of twelve per cent interest of P12,500.00 commence to run from August 6, 1964
when plaintiffs made the first demand or from August 29, 1956 when the obligation becomes due
and demandable?
(b) Is defendant Esteban Piczon liable as a guarantor or a surety?
That the parties are hereby required to file their respective memorandum if they so desire on or
before September 15, 1967 to discuss the legal issues and therewith the case will be considered
submitted for decision.
WHEREFORE, the instant case is hereby considered submitted based on the aforesaid facts agreed
upon and upon submission of the parties of their respective memorandum on or before September
15, 1967.
SO ORDERED. 1 (Record on Appeal pp. 28-30.)
Annex "A", the actionable document of appellants reads thus:
AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE PRESENTS:
That I, ESTEBAN PICZON, of legal age, married, Filipino, and resident of and with postal address in
the municipality of Catbalogan, Province of Samar, Philippines, in my capacity as the President of
the corporation known as the "SOSING-LOBOS and CO., INC.," as controlling stockholder, and at
the same time as guarantor for the same, do by these presents contract a loan of Twelve Thousand
Five Hundred Pesos (P12,500.00), Philippine Currency, the receipt of which is hereby
acknowledged, from the "Piczon and Co., Inc." another corporation, the main offices of the two
corporations being in Catbalogan, Samar, for which I undertake, bind and agree to use the loan as
surety cash deposit for registration with the Securities and Exchange Commission of the
incorporation papers relative to the "Sosing-Lobos and Co., Inc.," and to return or pay the same
amount with Twelve Per Cent (12%) interest per annum, commencing from the date of execution

hereof, to the "Piczon and Co., Inc., as soon as the said incorporation papers are duly registered and
the Certificate of Incorporation issued by the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed my name in Catbalogan, Samar, Philippines, this 28th
day of September, 1956.
(Sgd.) ESTEBAN
PICZON
(Record on Appeal, pp. 6-7.)
The trial court having rendered judgment in the tenor aforequoted, appellants assign the following alleged errors:
I
THE TRIAL COURT ERRED IN ORDERING THE PAYMENT OF 12% INTEREST ON THE
PRINCIPAL OF P12,500.00 FROM AUGUST 6, 1964, ONLY, INSTEAD OF FROM SEPTEMBER 28,
1956, WHEN ANNEX "A" WAS DULY EXECUTED.
II
THE TRIAL COURT ERRED IN CONSIDERING DEFENDANT ESTEBAN PICZON AS
GUARANTOR ONLY AND NOT AS SURETY.
III
THE TRIAL COURT ERRED IN NOT ADJUDICATING DAMAGES IN FAVOR OF THE PLAINTIFFSAPPELLANTS. (Appellants' Brief, pp. a to b.)
Appellants' first assignment of error is well taken. Instead of requiring appellees to pay interest at 12% only from
August 6, 1964, the trial court should have adhered to the terms of the agreement which plainly provides that
Esteban Piczon had obligated Sosing-Lobos and Co., Inc. and himself to "return or pay (to Piczon and Co., Inc.) the
same amount (P12,500.00) with Twelve Per Cent (12%) interest per annum commencing from the date of the
execution hereof", Annex A, which was on September 28, 1956. Under Article 2209 of the Civil Code "(i)f the
obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent per annum." In the case at bar, the "interest agreed upon" by the
parties in Annex A was to commence from the execution of said document.
Appellees' contention that the reference in Article 2209 to delay incurred by the debtor which can serve as the basis
for liability for interest is to that defined in Article 1169 of the Civil Code reading thus:
Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears that the designation of
the time when the thing is to be delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to
perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins.
is untenable. In Quiroz vs. Tan Guinlay, 5 Phil. 675, it was held that the article cited by appellees (which was Article
1100 of the Old Civil Code read in relation to Art. 1101) is applicable only when the obligation is to do something
other than the payment of money. And in Firestone Tire & Rubber Co. (P.I.) vs. Delgado, 104 Phil. 920, the Court
squarely ruled that if the contract stipulates from what time interest will be counted, said stipulated time controls,
and, therefore interest is payable from such time, and not from the date of the filing of the complaint (at p. 925).
Were that not the law, there would be no basis for the provision of Article 2212 of the Civil Code providing that
"(I)nterest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent
upon this point." Incidentally, appellants would have been entitled to the benefit of this article, had they not failed to
plead the same in their complaint. Their prayer for it in their brief is much too late. Appellees had no opportunity to
meet the issue squarely at the pre-trial.
As regards the other two assignments of error, appellants' pose cannot be sustained. Under the terms of the
contract, Annex A, Esteban Piczon expressly bound himself only as guarantor, and there are no circumstances in
the record from which it can be deduced that his liability could be that of a surety. A guaranty must be express,
(Article 2055, Civil Code) and it would be violative of the law to consider a party to be bound as a surety when the
very word used in the agreement is "guarantor."
Moreover, as well pointed out in appellees' brief, under the terms of the pre-trial order, appellants accepted the
express assumption of liability by Sosing-Lobos & Co., Inc. for the payment of the obligation in question, thereby
modifying their original posture that inasmuch as that corporation did not exist yet at the time of the agreement,
Piczon necessarily must have bound himself as insurer.
As already explained earlier, appellants' prayer for payment of legal interest upon interest due from the filing of the
complaint can no longer be entertained, the same not having been made an issue in the pleadings in the court
below. We do not believe that such a substantial matter can be deemed included in a general prayer for "any other
relief just and equitable in the premises", especially when, as in this case, the pre-trial order does not mention it in
the enumeration of the issues to be resolved by the court.
PREMISES CONSIDERED, the judgment of the trial court is modified so as to make appellees liable for the
stipulated interest of 12% per annum from September 28, 1956, instead of August 6, 1964. In all other respects,
said judgment is affirmed. Costs against appellees.

G.R. No. 94566 July 3, 1992

BA FINANCE CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and TRADERS ROYAL BANK, respondents.

MEDIALDEA, J.:
This is a petition for review on certiorari of the decision of the respondent appellate court which reversed the ruling
of the trial court dismissing the case against petitioner.
The antecedent facts are as follows:
On December 17, 1980, Renato Gaytano, doing business under the name Gebbs International, applied for and was
granted a loan with respondent Traders Royal Bank in the amount of P60,000.00. As security for the payment of
said loan, the Gaytano spouses executed a deed of suretyship whereby they agreed to pay jointly and severally to
respondent bank the amount of the loan including interests, penalty and other bank charges.
In a letter dated December 5, 1980 addressed to respondent bank, Philip Wong as credit administrator of BA
Finance Corporation for and in behalf of the latter, undertook to guarantee the loan of the Gaytano spouses. The
letter reads:
This is in reference to the application of Gebbs International for a twenty-five (25) month term loan of
60,000.00 with your Bank.
In this connection, please be advised that we unconditionally guarantee full payment in peso value
the said accommodation (sic) upon non-payment by subject up to a maximum amount of
P60,000.00.
Hoping this would meet your requirement and expedite the early processing of their application.
Thank you.
Very truly yours,
BA FINANCE
CORPORATION
(signed
)
PHILIP
H.
WONG
Credit
Admini
strator
(p. 12, Rollo)
Partial payments were made on the loan leaving an unpaid balance in the amount of P85,807.25. Since the
Gaytano spouses refused to pay their obligation, respondent bank filed with the trial court complaint for sum of
money against the Gaytano spouses and petitioner corporation as alternative defendant.
The Gaytano spouses did not present evidence for their defense. Petitioner corporation, on the other hand, raised
the defense of lack of authority of its credit administrator to bind the corporation.

On December 12, 1988, the trial court rendered a decision the dispositive portion of which states:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of plaintiff and against
defendants/Gaytano spouses, ordering the latter to jointly and severally pay the plaintiff the
following:
1) EIGHTY FIVE THOUSAND EIGHT HUNDRED SEVEN AND 25/100 (P85,807.25), representing
the total unpaid balance with accumulated interests, penalties and bank charges as of September
22, 1987, plus interests, penalties and bank charges thereafter until the whole obligation shall have
been fully paid.
2) Attorney's fees at the stipulated rate of ten (10%) percent computed from the total obligation; and
3) The costs of suit.
The dismissal of the case against defendant BA Finance Corporation is hereby ordered without
pronouncement as to cost.
SO ORDERED. (p. 31, Rollo)
Not satisfied with the decision, respondent bank appealed with the Court of Appeals. On March 13, 1990,
respondent appellate court rendered judgment modifying the decision of the trial court as follows:
In view of the foregoing, the judgment is hereby rendered ordering the defendants Gaytano spouses
and alternative defendant BA Finance Corporation, jointly and severally, to pay the plaintiff the
amount of P85,807.25 as of September 8, 1987, including interests, penalties and other back (sic)
charges thereon, until the full obligation shall have been fully paid. No pronouncement as to costs.
SO ORDERED. (p. 27 Rollo)
Hence this petition was filed with the petitioner assigning the following errors committed by respondent appellate
court:
1. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT PETITIONER IS
JOINTLY AND SEVERALLY LIABLE WITH GAYTANO SPOUSES DESPITE ITS FINDINGS THAT
THE LETTER GUARANTY (EXH. "C") IS "INVALID AT ITS INCEPTION";
2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE
PETITIONER WAS GUILTY OF ESTOPPEL DESPITE THE FACT THAT IT NEVER KNEW OF
SUCH ALLEGED LETTER-GUARANTY;
3. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT RULING THAT SUCH
LETTER GUARANTY (EXHIBIT "C") BEING PATENTLY ULTRA VIRES, IS UNENFORCEABLE;
4. THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING RELIEF ON
PETITIONER'S COUNTERCLAIM
(p. 10, Rollo).
Since the issues are interrelated, it would be well to discuss them jointly.
Petitioner contends that the letter guaranty is ultra vires, and therefore unenforceable; that said letter-guaranty was
issued by an employee of petitioner corporation beyond the scope of his authority since the petitioner itself is not
even empowered by its articles of incorporation and by-laws to issue guaranties. Petitioner also submits that it is not
guilty of estoppel to make it liable under the letter-guaranty because petitioner had no knowledge or notice of such

letter-guaranty; that the allegation of Philip Wong, credit administrator, that there was an audit was not supported by
evidence of any audit report or record of such transaction in the office files.
We find the petitioner's contentions meritorious. It is a settled rule that persons dealing with an assumed agent,
whether the assumed agency be a general or special one are bound at their peril, if they would hold the principal
liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is
controverted, the burden of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil. 19). Hence, the
burden is on respondent bank to satisfactorily prove that the credit administrator with whom they transacted acted
within the authority given to him by his principal, petitioner corporation. The only evidence presented by respondent
bank was the testimony of Philip Wong, credit administrator, who testified that he had authority to issue guarantees
as can be deduced from the wording of the memorandum given to him by petitioner corporation on his lending
authority. The said memorandum which allegedly authorized Wong not only to approve and grant loans but also to
enter into contracts of guaranty in behalf of the corporation, partly reads:
To: Philip H. Wong, SAM
Credit Administrator
From: Hospicio B. Bayona, Jr., VP and
Head of Credit Administration
Re: Lending Authority
I am pleased to delegate to you in your capacity as Credit Administrator the following lending limits:
a) P650,000.00 Secured Loans
b) P550,000.00 Supported Loans
c) P350,000.00 Truck Loans/Contracts/Leases
d) P350,000.00 Auto Loan Contracts/Leases
e) P350,000.00 Appliance Loan Contracts
f) P350,000.00 Unsecured Loans
Total loans and/or credits [combination of (a) thru (f) extended to any one borrower including
parents, affiliates and/or subsidiaries, should not exceed P750,000.00. In exercising the limits
aforementioned, both direct and contingent commitments to the borrower(s) should be considered.
All loans must be within the Company's established lending guideline and policies.
xxx xxx xxx
LEVELS OF APPROVAL
All transactions in excess of any branch's limit must be recommended to you through the Official
Credit Report for approval. If the transaction exceeds your limit, you must concur in application
before submitting it to the Vice President, Credit Administration for approval or concurrence.
. . . (pp. 62-63, Rollo) (Emphasis ours)
Although Wong was clearly authorized to approve loans even up to P350,000.00 without any security requirement,
which is far above the amount subject of the guaranty in the amount of P60,000.00, nothing in the said
memorandum expressly vests on the credit administrator power to issue guarantees. We cannot agree with
respondent's contention that the phrase "contingent commitment" set forth in the memorandum means guarantees.
It has been held that a power of attorney or authority of an agent should not be inferred from the use of vague or
general words. Guaranty is not presumed, it must be expressed and cannot be extended beyond its specified limits
(Director v. Sing Juco, 53 Phil. 205). In one case, where it appears that a wife gave her husband power of attorney

to loan money, this Court ruled that such fact did not authorize him to make her liable as a surety for the payment of
the debt of a third person (Bank of Philippine Islands v. Coster, 47 Phil. 594).
The sole allegation of the credit administrator in the absence of any other proof that he is authorized to bind
petitioner in a contract of guaranty with third persons should not be given weight. The representation of one who
acts as agent cannot by itself serve as proof of his authority to act as agent or of the extent of his authority as agent
(Velasco v. La Urbana, 58 Phil. 681). Wong's testimony that he had entered into similar transactions of guaranty in
the past for and in behalf of the petitioner, lacks credence due to his failure to show documents or records of the
alleged past transactions. The actuation of Wong in claiming and testifying that he has the authority is
understandable. He would naturally take steps to save himself from personal liability for damages to respondent
bank considering that he had exceeded his authority. The rule is clear that an agent who exceeds his authority is
personally liable for damages (National Power Corporation v. National Merchandising Corporation, Nos. L-33819
and
L-33897, October 23, 1982, 117 SCRA 789).
Anent the conclusion of respondent appellate court that petitioner is estopped from alleging lack of authority due to
its failure to cancel or disallow the guaranty, We find that the said conclusion has no basis in fact. Respondent bank
had not shown any evidence aside from the testimony of the credit administrator that the disputed transaction of
guaranty was in fact entered into the official records or files of petitioner corporation, which will show notice or
knowledge on the latter's part and its consequent ratification of the said transaction. In the absence of clear proof, it
would be unfair to hold petitioner corporation guilty of estoppel in allowing its credit administrator to act as though
the latter had power to guarantee.
ACCORDINGLY, the petition is GRANTED and the assailed decision of the respondent appellate court dated March
13, 1990 is hereby REVERSED and SET ASIDE and another one is rendered dismissing the complaint for sum of
money against BA Finance Corporation.
SO ORDERED.

G.R. No. L-47495

August 14, 1941

THE TEXAS COMPANY (PHIL.), INC., petitioner,

vs.
TOMAS ALONSO, respondent.
C. D. Johnston & A. P. Deen for petitioner.
Tomas Alonso in his own behalf.
LAUREL, J.:
On November 5, 1935 Leonor S. Bantug and Tomas Alonso were sued by the Texas Company (P.I.), Inc. in the
Court of First Instance of Cebu for the recovery of the sum of P629, unpaid balance of the account of Leonora S.
Bantug in connection with the agency contract with the Texas Company for the faithful performance of which Tomas
Alonso signed the following:
For value received, we jointly and severally do hereby bind ourselves and each of us, in solidum, with
Leonor S. Bantug the agent named in the within and foregoing agreement, for full and complete
performance of same hereby waiving notice of non-performance by or demand upon said agent, and the
consent to any and all extensions of time for performance. Liability under this undertaking, however, shall
not exceed the sum of P2,000, Philippine currency.
Witness the hand and seal of the undersigned affixed in the presence of two witness, this 12th day of
August, 1929.
Leonor S. Bantug was declared in default as a result of her failure to appear or answer, but Tomas Alonso filed an
answer setting up a general denial and the special defenses that Leonor S. Bantug made him believe that he was
merely a co-security of one Vicente Palanca and he was never notified of the acceptance of his bond by the Texas
Company. After trial, the Court of First Instance of Cebu rendered judgment on July 10, 1973, which was amended
on February 1, 1938, sentencing Leonor S. Bantug and Tomas Alonso to pay jointly and severally to the Texas
Company the sum of P629, with interest at the rate of six per cent (6%) from the date of filing of the complaint, and
with proportional costs. Upon appeal by Tomas Alonso, the Court of Appeals modified the judgment of the Court of
First Instance of Cebu in the sense that Leonor S. Bantug was held solely liable for the payment of the aforesaid
sum of P629 to the Texas Company, with the consequent absolution of Tomas Alonso. This case is now before us on
petition for review by certiorari of the decision of the Court of Appeals. It is contended by the petitioner that the Court
of Appeals erred in holding that there was merely an offer of guaranty on the part of the respondent, Tomas Alonso,
and that the latter cannot be held liable thereunder because he was never notified by the Texas Company of its
acceptance.
The Court of Appeals has placed reliance upon our decision in National Bank vs. Garcia (47 Phil., 662), while the
petitioner invokes the case of National Bank vs. Escueta, (50 Phil., 991). In the first case, it was held that there was
merely an offer to give bond and, as there was no acceptance of the offer, this court refused to give effect to the
bond. In the second case, the sureties were held liable under their surety agreement which was found to have been
accepted by the creditor, and it was therein ruled that an acceptance need not always be express or in writing. For
the purpose of this decision, it is not indispensable for us to invoke one or the other case above cited. The Court of
Appeals found as a fact, and this is conclusive in this instance, that the bond in question was executed at the
request of the petitioner by virtue of the following clause of the agency contract:

Additional Security. The Agent shall whenever requested by the Company in addition to the guaranty
herewith provided, furnish further guaranty or bond, conditioned upon the Agent's faithful performance of this
contract, in such individuals of firms as joint and several sureties as shall be satisfactory to the Company.
In view of the foregoing clause which should be the law between the parties, it is obvious that, before a bond is
accepted by the petitioner, it has to be in such form and amount and with such sureties as shall be satisfactory
hereto; in other words, the bond is subject to petitioner's approval. The logical implication arising from this
requirement is that, if the petitioner is satisfied with any such bond, notice of its acceptance or approval should
necessarily be given to the property party in interest, namely, the surety or guarantor. In this connection, we are
likewise bound by the finding of the Court of Appeals that there is no evidence in this case tending to show that the
respondent, Tomas Alonso, ever had knowledge of any act on the part of petitioner amounting to an implied
acceptance, so as to justify the application of our decision in National Bank vs. Escueta (50 Phil., 991).
While unnecessary to this decision, we choose to add a few words explanatory of the rule regarding the necessity of
acceptance in case of bonds. Where there is merely an offer of, or proposition for, a guaranty, or merely a
conditional guaranty in the sense that it requires action by the creditor before the obligation becomes fixed, it does
not become a binding obligation until it is accepted and, unless there is a waiver of notice of such acceptance is
given to, or acquired by, the guarantor, or until he has notice or knowledge that the creditor has performed the
conditions and intends to act upon the guaranty. (National Bank vs. Garcia, 47 Phil., 662; C. J., sec. 21, p. 901; 24
Am. Jur., sec. 37, p. 899.) The acceptance need not necessarily be express or in writing, but may be indicated by
acts amounting to acceptance. (National Bank vs. Escueta, 50 Phil., 991.) Where, upon the other hand, the
transaction is not merely an offer of guaranty but amounts to direct or unconditional promise of guaranty, unless
notice of acceptance is made a condition of the guaranty, all that is necessary to make the promise binding is that
the promise should act upon it, and notice of acceptance is not necessary (28 C. J., sec. 25, p. 904; 24 Am. Jur., sec
37, p. 899), the reason being that the contract of guaranty is unilateral (Visayan Surety and Insurance Corporation
vs. Laperal, G.R. No. 46515, promulgated June 14, 1940).
The decision appealed from will be, as the same is hereby, affirmed, with costs of this instance against the
petitioner. So ordered.
Avancea, C.J., Abad Santos, and Diaz, JJ., concur.

Separate Opinions
OZAETA, J., with whom concur MORAN and HORRILENO, JJ., dissenting:
We concede that the statement of fact made by the Court of Appeals is conclusive upon this Court in a petition for
review on certiorari. But when it appears from the decision of the Court of Appeals itself that such a statement is but
a conclusion drawn by that Court from the facts found by it, and that such conclusion is patently erroneous, we hold
that this Court should disregard it.
Of the nature, we believe, is the following statement made by the Court of Appeals in the course of its ratiocination:
La fianza prestada por el apelante se otorgo a requerimiento de la demandante en virtud de la siguiente
clausula (15) del contrato de agencia Exhibit A, que dice asi:
"ADDITIONAL SECURITY. The Agent shall, whenever requested by the Company in addition to
the guaranty herewith provided, furnish further guaranty or bond, conditioned upon the agent's
faithful performance of this contract, in such form and amount and with such bank as surety or with
such individuals or firms as joint and several sureties as shall be satisfactory to the Company."
(Pages 8-9, appendix to petitioner's brief.)
It is important to note that the above-quoted statement forms part of the court's ratio decidendi and not of its findings
of fact. Its findings of fact appear in the first three paragraphs of its decision, which we quote as follows:

El 12 de agosto de 1929 la demandante y el demandado Leonor S. Bantug celebraron un contrato, (Exhibit

A) por virtud del cual aquella nombro a este Agente vendedor de sus productos petroliferos en el Municipio
de Maasin, Provincia de Leyte, mediante pago de una comision sobre el valor de todos los efectos que
llegase a vender, obligandose por su parte Leonor S. Bantug como Agente, a ingresar y pagar a la
compaia el importe neto de las ventas realizadas, despues de deducir su comision y los demas gastos de
agencia que se estipularon en el referido contrato.
En el mismo documento Exhibit A, el otro demandado Tomas Alonso suscribio una fianza, obligandose
mancomunada y solidariamente con el Agente Leonor S. Bantug a cumplir fielmente las condiciones del
contrato de Agencia hasta la suma de P2,000.
El estado de cuentas de la agencia que se presento en el juicio como Exhibit B, demuestra que la ultima
liquidacion arroja un balance contra el Agente Leonor S. Bantug por la cantidad de P629; y como esta suma
no ha sido pagado ni por Leonor S. Bantug ni por su fiador Tomas Alonso, a pesar de los requerimientos
que se les ha hecho, de ahi que la demandante, el 18 de noviembre de 1938, dedujo accion en el Juzgado
de Primera Instancia de Cebu para el cobro de dicha suma y sus intereses legales desde la presentacion de
la demanda. (Pages 1-3, appendix to petitioner's brief.)
Now if, as found by the Court of Appeals itself, the agency contract between the petitioner and Leonor S. Bantug
was Exhibit A, dated August 12, 1929, and that very same document was on the same date signed by the
respondent Tomas Alonso as bondsman or surety of the agent, how could the bond in question, which formed part
of Exhibit A, be held to have been executed by virtue of clause 15 of said document providing for additional
security? Indeed, that very clause says that the agent shall furnish further guaranty or bond "in addition to the
guaranty herewith provided," whenever requested by the company. The "guaranty herewith provided" was obviously
the bond or guaranty given by the respondent on the same date and in the same document. It appears clear to us,
therefore, that the bond Exhibit A, being the original guaranty, could not be the "additional guaranty" mentioned in
clause 15 of said Exhibit A. Moreover, it does not appear that any bond or guaranty, other than that of the
respondent, to secure the performance of the agency contract in question was in force on and after August 12,
1929.
Another illogical conclusion drawn by the Court of Appeals is this:
"Por el requerimiento que contiene la clausula preinserta, de que el Agente puede prestar una garantia adicional a
satisfaccion de la compaia, debe entenderse que la fianza prestada por el apelante era una oferta o proposicion
de garantia, cuya efectividad dependia de la acceptacion de la compaia, comunicada al garante." (Page 9,
appendix to petitioner's brief.) .
If, as previously found by the Court of Appeals, the herein respondent executed the bond in question "a
requerimiento de la demandante," how could said bond be understood as an "offer or proposition of guaranty" from
Alonso to the plaintiff? .
Yet the judgment of the Court of Appeals, as well as the affirming decision of the majority of this court, is based on
the conclusion that the bond sued upon was an additional guaranty; that it constituted a mere offer of guaranty and,
therefore, had to be accepted by the petitioner; and that, not having been accepted, it is inefficacious. We have
shown that such conclusion is unwarranted.
Our vote is to reverse the decision of the Court of Appeals and to affirm that of Judge Felix Martinez of the Court of
First Instance of Cebu, who tried this case.

G.R. No. 127261

September 7, 2001

VISAYAN SURETY & INSURANCE CORPORATION, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, SPOUSES JUN BARTOLOME+ and SUSAN BARTOLOME and
DOMINADOR V. IBAJAN+, respondents.
PARDO, J.:
The Case
The case is a petition to review and set aside a decision1 of the Court of Appeals affirming that of the Regional Trial
Court, Bian, Laguna, Branch 24, holding the surety liable to the intervenor in lieu of the principal on a replevin
bond.
The Facts
The facts, as found by the Court of Appeals,2 are as follows:
On February 2, 1993, the spouses Danilo Ibajan and Mila Ambe Ibajan filed with the Regional Trial Court, Laguna,
Bian a complaint against spouses Jun and Susan Bartolome, for replevin to recover from them the possession of
an Isuzu jeepney, with damages. Plaintiffs Ibajan alleged that they were the owners of an Isuzu jeepney which was
forcibly and unlawfully taken by defendants Jun and Susan Bartolome on December 8, 1992, while parked at their
residence.
On February 8, 1993, plaintiffs filed a replevin bond through petitioner Visayan Surety & Insurance Corporation. The
contract of surety provided thus:
"WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan and the VISAYAN SURETY & INSURANCE CORP.,
of Cebu, Cebu, with branch office at Manila, jointly and severally bind ourselves in the sum of Three
Hundred Thousand Pesos (P300,000.00) for the return of the property to the defendant, if the return thereof
be adjudged, and for the payment to the defendant of such sum as he/she may recover from the plaintiff in
the action."3
On February 8, 1993, the trial court granted issuance of a writ of replevin directing the sheriff to take the Isuzu
jeepney into his custody. Consequently, on February 22, 1993, Sheriff Arnel Magat seized the subject vehicle and
turned over the same to plaintiff spouses Ibajan.4
On February 15, 1993, the spouses Bartolome filed with the trial court a motion to quash the writ of replevin and to
order the return of the jeepney to them.
On May 3, 1993, Dominador V. Ibajan, father of plaintiff Danilo Ibajan, filed with the trial court a motion for leave of
court to intervene, stating that he has a right superior to the plaintiffs over the ownership and possession of the
subject vehicle.

On June 1, 1993, the trial court granted the motion to intervene.

On August 8, 1993, the trial court issued an order granting the motion to quash the writ of replevin and ordering
plaintiff Mila Ibajan to return the subject jeepney to the intervenor Dominador Ibajan. 5
On August 31, 1993, the trial court ordered the issuance of a writ of replevin directing the sheriff to take into his
custody the subject motor vehicle and to deliver the same to the intervenor who was the registered owner.6
On September 1, 1993, the trial court issued a writ of replevin in favor of intervenor Dominador Ibajan but it was
returned unsatisfied.
On March 7, 1994, intervenor Dominador Ibajan filed with the trial court a motion/application for judgment against
plaintiffs bond.
On June 6, 1994, the trial court rendered judgement the dispositive portion of which reads:
"WHEREFORE, in the light of the foregoing premises, judgment is hereby rendered in favor of Dominador
Ibajan and against Mila Ibajan and the Visayan Surety and Insurance Corporation ordering them to pay the
former jointly and severally the value of the subject jeepney in the amount of P150,000.00 and such other
damages as may be proved by Dominador Ibajan plus costs." 7
On June 28, 1994, Visayan Surety and Insurance Corporation and Mila Ibajan filed with the trial court their
respective motions for reconsideration.
On August 16, 1994, the trial court denied both motions.
On November 24, 1995, Visayan Surety and Insurance Corporation (hereafter Visayan Surety) appealed the
decision to the Court of Appeals.8
On August 30, 1996, the Court of Appeals promulgated its decision affirming the judgment of the trial court. 9 On
September 19, 1996, petitioner filed a motion for reconsideration. 10 On December 2, 1996, the Court of Appeals
denied the motion for reconsideration for lack of merit. 11
Hence, this petition.12
The Issue
The issue in this case is whether the surety is liable to an intervenor on a replevin bond posted by petitioner in favor
of respondents.13
Respondent Dominador Ibajan asserts that as intervenor, he assumed the personality of the original defendants in
relation to the plaintiffs bond for the issuance of a writ of replevin.
Petitioner Visayan Surety contends that it is not liable to the intervenor, Dominador Ibajan, because the intervention
of the intervenor makes him a party to the suit, but not a beneficiary to the plaintiffs bond. The intervenor was not a
party to the contract of surety, hence, he was not bound by the contract.
The Courts Ruling
The petition is meritorious.

An intervenor is a person, not originally impleaded in a proceeding, who has legal interest in the matter in litigation,
or in the success of either of the parties, or an interest against both, or is so situated as to be adversely affected by
a distribution or other disposition of property in the custody of the court or of an officer thereof. 14
May an intervenor be considered a party to a contract of surety which he did not sign and which was executed by
plaintiffs and defendants?
It is a basic principle in law that contracts can bind only the parties who had entered into it; it cannot favor or
prejudice a third person.15 Contracts take effect between the parties, their assigns, and heirs, except in cases where
the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by
provision of law.16
A contract of surety is an agreement where a party called the surety guarantees the performance by another party
called the principal or obligor of an obligation or undertaking in favor of a third person called the
obligee.17Specifically, suretyship is a contractual relation resulting from an agreement whereby one person, the
surety, engages to be answerable for the debt, default or miscarriage of another, known as the principal. 18
The obligation of a surety cannot be extended by implication beyond its specified limits. 19 "When a surety executes a
bond, it does not guarantee that the plaintiffs cause of action is meritorious, and that it will be responsible for all the
costs that may be adjudicated against its principal in case the action fails. The extent of a suretys liability is
determined only by the clause of the contract of suretyship." 20 A contract of surety is not presumed; it cannot extend
to more than what is stipulated.21
Since the obligation of the surety cannot be extended by implication, it follows that the surety cannot be held liable
to the intervenor when the relationship and obligation of the surety is limited to the defendants specified in the
contract of surety.
WHEREFORE, the Court REVERSES and sets aside the decision of the Court of Appeals in CA-G. R. CV No.
49094. The Court rules that petitioner Visayan Surety & Insurance Corporation is not liable under the replevin bond
to the intervenor, respondent Dominador V. Ibajan.
1wphi1.nt

No costs.
SO ORDERED.

G.R. No. L-8437

March 23, 1915

THE HONGKONG & SHANGHAI BANKING CORPORATION, plaintiff-appellee,

vs.
ALDECOA & CO., in liquidation, JOAQUIN IBAEZ DE ALDECOA Y PALET, ZOILO IBAEZ DE ALDECOA Y
PALET, CECILIA IBAEZ DE ALDECOA Y PALET, and ISABEL PALET DE GABARRO, defendants-appellants.
WILLIAM URQUHART, intervener-appellant.
Antonio Sanz and Chicote and Miranda for appellants.
Hausermann, Cohn and Fisher for appellee.
TRENT, J.:
This action was brought on January 31, 1911, by the plaintiff bank against the above-named defendants for the
purpose of recovering from the principal defendant, Aldecoa & Co., an amount due from the latter as the balance to
its debit in an account current with the plaintiff, and to enforce the subsidiary liability of the other defendants for the
payment of this indebtedness, as partners of Aldecoa & Co., and to foreclose certain mortgages executed by the
defendants to secure the indebtedness sued upon.
Judgment was entered on the 10th of August, 1912, in favor of the plaintiff and against the defendants for the sum of
P344,924.23, together with interest thereon at the rate of 7 per cent per annum from the date of the judgment until
paid, and for costs, and for the foreclosure of the mortgages. The court decreed that in the event of there being a
deficiency, after the foreclosure of the mortgages, the plaintiff must resort to and exhaust the property of the
principal defendant before taking out execution against the individual defendants held to be liable in solidum with the
principal defendant, but subsidiarily. Judgment was also entered denying the relief sought by the intervener. All of
the defendants and the intervener have appealed.
The defendants, Joaquin Ibaez de Alcoa, Zoilo Ibaez de Alcoa, and Cecilia Ibaez de Alcoa, were born in the
Philippine Islands on March 27, 1884, July 4, 1885, and . . . , 1887, respectively, the legitimate children of Zoilo
Ibaez de Alcoa and the defendant, Isabel Palet. Both parents were native of Spain. The father's domicile was in
Manila, and he died here on October 4, 1895. The widow, still retaining her Manila domicile, left the Philippine
Islands and went to Spain in 1897 because of her health, and did not return until the latter part of 1902. the firm of
Aldecoa & Co., of which Zoilo Ibaez de Aldecoa, deceased, had been a member and managing director, was
reorganized in December, 1896, and the widow became one of the general or "capitalistic" partners of the firm. The
three children, above mentioned, appear in the articles of agreement as industrial partners.
On July 31, 1903, Isabel Palet, the widowed mother of Joaquin Ibaez de Aldecoa and Zoilo Ibaez de Aldecoa,
who were then over the age of 18 years, went before a notary public and executed two instruments (Exhibits T and
U), wherein and whereby she emancipated her two sons, with their consent and acceptance. No guardian of the
person or property of these two sons had ever been applied for or appointed under or by virtue of the provisions of
the Code of Civil Procedure since the promulgation of the Code in 1901. After the execution of Exhibit T and U, both
Joaquin Ibaez de Aldecoa and Zoilo Ibaez de Aldecoa participated in the management of Aldecoa and Co, as
partners by being present and voting at meetings of the partners of the company upon matters connected with its
affairs.

On the 23rd of February, 1906, the defendant firm of Aldeco and Co. obtained from the bank a credit in account
current up to the sum of P450,000 upon the terms and conditions set forth in the instrument executed on that date
(Exhibit A). Later it was agreed that the defendants, Isabel Palet and her two sons, Joaquin and Zoilo, should
mortgage, in addition to certain securities of Aldecoa and Co., as set forth in Exhibit A, certain of their real properties
as additional security for the obligations of Aldecoa and Co. So, on March 23, 1906, the mortgage, Exhibit B, was
executed wherein certain corrections in the description of some of the real property mortgaged to the bank by
Exhibit A were made and the amount for which each of the mortgaged properties should be liable was set forth.
These two mortgages, Exhibits A and B, were duly recorded in the registry of property of the city of Manila on March
23, 1906.
On the 31st day of December, 1906, the firm of Aldecoa and Co. went into liquidation on account of the expiration of
the term for which it had been organized, and the intervener, Urquhart, was duly elected by the parties as liquidator,
and be resolution dated January 24, 1907, he was granted the authority expressed in that resolution (Exhibit G).
On June 30, 1907, Aldeco and Co. in liquidation, for the purposes of certain litigation about to be commenced in its
behalf, required an injunction bond in the sum of P50,000, which was furnished by the bank upon the condition that
any liability incurred on the part of the bank upon this injunction bond would be covered by the mortgage of
February 23, 1906. An agreement to this effect was executed by Aldecoa and Co. in liquidation, by Isabel Palet, by
Joaquin Ibaez de Aldecoa, who had then attained his full majority, and by Zoilo Ibaez de Aldecoa, who was not
yet twenty-three years of age. In 1908, Joaquin Ibaez de Aldecoa, Zoilo Ibaez de Aldecoa, and Cecilia Ibaez de
Aldecoa commenced an action against their mother, Isabel Palet, and Aldecoa and Co., in which the bank was not a
party, and in September of that year procured a judgment of the Court of First Instance annulling the articles of
copartnership of Aldecoa and Co., in so far as they were concerned, and decreeing that they were creditors and not
partners of that firm.
The real property of the defendant Isabel Palet, mortgaged to the plaintiff, corporation by the instrument of March
23, 1906 (Exhibit B), was, at the instance of the defendant, registered under the provisions of the Land Registration
Act, subject to the mortgage thereon in favor of the plaintiff, by decree, of the land court dated March 8, 1907.
On the 6th of November, 1906, the defendants, Isabel Palet and her three children, Joaquin Ibaez de Aldecoa,
Zoilo Ibaez de Aldecoa, and Cecilia Ibaez de Aldecoa, applied to the land court for the registration of their title to
the real property described in paragraph 4 of the instrument of March 23, 1906 (Exhibit B), in which application they
stated that the undivided three-fourths of said properties belonging to the defendants, Isabel Palet, Joaquin Ibaez
de Aldecoa, and Zoilo Ibaez de Aldecoa, were subject to the mortgage in favor of the plaintiff to secure the sum of
P203,985.97 under the terms of the instrument dated March 22, 1906. Pursuant to this petition the Court of Land
Registration, by decree dated September 8, 1907, registered the title to the undivided three-fourths interest therein
pertaining to the defendants, Isabel Palet and her two sons, Joaquin and Zoilo, to the mortgage in favor of the
plaintiff to secure the sun of P203,985.97.
On December 22, 1906, Aldecoa and Co., by a public instrument executed before a notary public, as additional
security for the performance of the obligations in favor of the plaintiff under the terms of the contracts Exhibits A and
B, mortgaged to the bank the right of mortgage pertaining to Aldecoa and Co. upon certain real property in the
Province of Albay, mortgaged to said company by one Zubeldia to secure an indebtedness to that firm. Subsequent
to the execution of this instrument, Zubeldia caused his title to the mortgaged property to be registered under the
provisions of the Land Registration Act, subject to a mortgage of Aldecoa and Co. to secure the sum of P103,943.84
and to the mortgage of the mortgage right of Aldecoa and Co. to the plaintiff.
As the result of the litigation Aldecoa and Co. and A. S. Macleod, wherein the injunction bond for P50,000 was made
by the bank in the manner and for the purpose above set forth, Aldecoa and Co. became the owner, through a
compromise agreement executed in Manila on the 14th of August, 1907, of the shares of the Pasay Estate
Company Limited (referred to in the contract of March 13, 1907, Exhibit V), and on the 30th day of August of that
year Urquhart, as liquidator, under the authority vested in him as such, and in compliance with the terms of the
contract of June 13, 1907, mortgaged to the plaintiff, by way of additional security for the performance of the
obligations set forth in Exhibits A and B, the 312 shares of the Pasay Estate Company, Limited, acquired by Aldecoa
and Co.
On the 31st day of March, 1907, Aldecoa and Co. mortgaged, as additional security for the performance of those
obligations, to the plaintiff the right of mortgage, pertaining to the firm of Aldecoa and Co., upon certain real estate in

that Province of Ambos Camarines, mortgaged to Aldecoa and Co. by one Andres Garchitorena to secure a balance
of indebtedness to that firm of the sum of P20,280.19. The mortgage thus created in favor of the bank was duly
recorded in the registry of deeds f that province. On the 31st day of March, 1907, Aldecoa and Co. mortgaged as
further additional security for the performance of the obligations set forth in Exhibits A and B, the right of mortgage
pertaining to the firm of Aldecoa and Co. upon other real property in the same province, mortgaged by the firm of
Tremoya Hermanos and Liborio Tremoya, to secure the indebtedness of that firm to the firm of Aldecoa and Co. of
P43,117.40 and the personal debt of the latter of P75,463.54. the mortgage thus created in favor of the bank was
filed for record with the registrar of deeds of that province.
On the 30th day of January, 1907, Aldecoa and Co. duly authorized the bank to collect from certain persons and
firms, named in the instrument granting this authority, any and all debts owing by them to Aldecoa and Co. and to
apply all amounts so collected to the satisfaction, pro tanto, of any indebtedness of Aldecoa and Co. to the bank.
By a public instrument dated February 18, 1907, Aldecoa and Co. acknowledged as indebtedness to Joaquin Ibaez
de Aldecoa in the sum of P154,589.20, a like indebtedness to Zoilo Ibaez de Aldecoa in the sum of P89,177.07. On
September 30, 1908, Joaquin, Zoilo, and Cecilia recovered a judgment in the Court of First Instance of Manila for
the payment to them f the sum of P155,127.31, as the balance due them upon the indebtedness acknowledged in
the public instrument dated February 18, 1907.
On November 30, 1907, Joaquin, Zoilo, and Cecilia instituted an action in the Court of First Instance of the city of
the Manila against the plaintiff bank for the purpose of obtaining a judicial declaration to the effect that the contract
whereby Aldecoa and Co. mortgaged to the bank the shares of the Pasay Estate Company recovered from
Alejandro S. Macleod, was null and void, and for a judgment of that these shares be sold and applied to the
satisfaction of their judgment obtained on September 30, 1908. Judgment was rendered by the lower court in favor
of the plaintiffs in that action in accordance with their prayer, but upon appeal this court reversed that judgment and
declared that the mortgage of the shares of stock in the Pasay Estate Co. to the bank was valid.
In October, 1908, Joaquin and Zoilo Ibaez de Aldecoa instituted an action against the plaintiff bank for the purpose
of obtaining a judgment annulling the mortgages created by them upon their interest in the properties described in
Exhibits A and B, upon the ground that the emancipation buy their mother was void and of no effect, and that,
therefore, they were minors incapable of creating a valid mortgage upon their real property. The Court of First
Instance dismissed the complaint as to Joaquin upon the ground that he had ratified those mortgages after
becoming of age, but entered a judgment annulling said mortgages with respect to Zoilo. Both parties appealed from
this decision and the case was given registry No. 6889 in the Supreme Court. 1
On the 31st day of December, 1906, on which date the defendant Aldecoa and Co. went into liquidation, the amount
of indebtedness to the bank upon the overdraft created by the terms of the contract, Exhibit A, was P516,517.98.
Neither the defendant Aldecoa and Co., nor any of the defendants herein, have paid or caused to be paid to the
bank the yearly partial payments due under the terms of the contract, Exhibit A. But from time to time the bank has
collected and received from provincial debtors of Aldecoa and Co. the various sums shown in Exhibit Q, all of which
sums so received have been placed to the credit of Aldecoa and Co. and notice duty given. Also, the bank, from
time to time, since the date upon which Aldecoa and Co. went into liquidation, has received various other sums
from, or for the account of, Aldecoa and Co., all of which have been duly placed to the credit of that firm, including
the sum of P22,552.63, the amount of the credit against one Achaval, assigned to the bank by Aldecoa and Co. The
balance to the credit of the bank on the 31st day of December, 1911, as shown on the books of Aldecoa and Co.,
was for the sum of P416.853.46. It appeared that an error had been committed by the bank in liquidating the interest
charged to Aldecoa and Co., and this error was corrected so that the actual amount of the indebtedness of Aldecoa
and Co. to the plaintiff on the 15th of February, 1912, with interest to December 10, 1912, the date of the judgment,
the amount was P344,924.23.
The trial court found that there was no competent evidence that the bank induced, or attempted to induce, any
customer of Aldecoa and Co. to discontinue business relations with that company. The court further found that
Urquhart had failed to show that he had any legal interest in the matter in litigation between plaintiff and defendants,
or in the success of either of the parties, or an interest against both, as required by section 121 of the Code of Civil
Procedure. No further findings, with respect to the facts alleged in the complaint of the intervener, were made.
Aldecoa and Co. insist that the court erred:

1. In overruling the defendant's demurrer based upon the alleged ambiguity and vagueness of the complaint.
2. In ruling that there was no competent evidence that the plaintiff had induced Aldecoa and Co.'s provincial
debtors to cease making consignments to that firm.
3. In rendering a judgment in a special proceeding for the foreclosure of a mortgage, Aldecoa and Co. not
having mortgaged any real estate of any kind within the jurisdiction of the trial court, and the obligation of the
persons who had signed the contract of suretyship in favor of the bank having been extinguished by
operation of law.
The argument on behalf of the defendant in support of its first assignment of error from the complaint that Aldecoa
and Co. authorized the plaintiff bank, by the instrument Exhibit G, to make collections on behalf of this defendant,
and that the complaint failed to specify the amount obtained by the bank in the exercise of the authority conferred
upon it, the complaint was thereby rendered vague and indefinite. Upon this point it is sufficient to say that the
complaint alleges that a certain specific amount was due from the defendant firm as a balance of its indebtedness to
the plaintiff, and this necessarily implies that there were no credits in favor of the defendant firm of any kind
whatsoever which had not already been deducted from the original obligation.
With respect to the contention set forth in the second assignment of error to the effect that the bank has prejudiced
Aldecoa and Co. by having induced customers of the latter to cease their commercial relations with this defendant,
the ruling of the court that there is no evidence to show that there was any such inducement is fully supported by the
record. It may be possible that some of Aldecoa and Co.'s customers ceased doing business with that firm after it
went into liquidation. This is the ordinary effect of a commercial firm going consideration, for the reason that it was a
well known fact that Aldecoa and Co. was insolvent. It is hardly probable that the bank, with so large a claim against
Aldecoa and Co. and with unsatisfactory security for the payment of its claim, would have taken any action whatever
which might have had the effect of diminishing Aldecoa and Co.'s ability to discharge their claim. The contention that
the customers of Aldecoa and Co. included in the list of debtors ceased to make consignments to the firm because
they had been advised by the bank that Aldecoa and Co. had authorized the bank to collect these credits from the
defendant's provincial customers and apply the amounts so collected to the partial discharge of the indebtedness of
the defendant to the bank. Furthermore, the bank was expressly empowered to take any steps which might be
necessary, judicially or extrajudicially, for the collection of these credits. The real reason which caused the
defendant's provincial customers to cease making shipments was due to the fact that the defendant, being out of
funds, could not give its customers any further credit. It is therefore clear that the bank, having exercised the
authority conferred upon it by the company in a legal manner, is not responsible for any damages which might have
resulted from the failure of the defendant's provincial customers to continue doing business with that firm.
In the third assignments of errors two propositions are insisted upon: (1) that in these foreclosure proceedings the
court was without jurisdiction to render judgment against Aldecoa and Co. for the reason that firm had mortgaged no
real property within the city of Manila to the plaintiff; and (2) that the mortgages given by this defendant have been
extinguished by reason of the fact that the bank extended the time within which the defendant's provincial debtors
might make their payments.
We understand that the bank is not seeking to exercise its mortgages rights upon the mortgages which the
defendant firm holds upon certain real properties in the Provinces of Albay and Ambros Camarines and to sell these
properties at public auction in these proceedings. Nor do we understand that the judgment of the trial courts directs
that this be done. Before that property can be sold the original mortgagors will have to be made parties. The banks
is not trying to foreclose, in this section, any mortgages on real property executed by Aldecoa and Co. It is true that
the bank sought and obtained a money judgment against that firm, and at the same time and in the same action
obtained a foreclosure judgment against the other defendants. If two or more persons are in solidum the debtors
mortgage any of their real property situate in the jurisdiction of the court, the creditor, in case of the solidary debtors
in the same suit and secure a joint and several judgment against them, as well as judgments of foreclosure upon the
respective mortgages.
The contention that the extensions granted to Aldecoa and Co.'s debtors, with the consent and authority of that firm
itself, has resulted in extinguishment of the mortgages created by Aldecoa and Co. or of the mortgages created by
partners of that company to secure its liabilities to the bank, is not tenable. The record shows that all the sureties
were represented by Urquhart, the person elected by them as liquidator of the firm, when he agreed with the bank

upon the extensions granted to those debtors. The authority to grant these extensions was conferred upon the bank
by the liquidator, and he was given authority by all the sureties to authorized the bank to proceed in this manner.
With respect to the contention that the bank should be required to render an account of collections made under
authority of Exhibit G, it is sufficient to say that the bank has properly accounted for all amounts collected from the
defendant's debtors, and has applied all such amounts to the partial liquidation of the defendant's debt die to the
bank. It is true that the sum for which judgment was rendered against Aldecoa and Co. is less than the amount
originally demanded in the complaint, but this difference is due to the fact that certain amounts which had been
collected from Aldecoa and Co.'s provincial debtors by the bank were credited to the latter between the date on
which the complaint was filed and the date when the case came on for trial, and the further fact that it was
necessary to correct an entry concerning one of the claims inasmuch as it appears that this claim had been
assigned to the bank absolutely, and not merely for the purposes of collection, as the bookkeeper of the bank
supposed, the result being that instead of crediting Aldecoa and Co. with the full face value of this claim, the
bookkeeper had merely credited from time to time the amounts collected from this debtor. We, therefore, find no
error prejudicial to the rights of this defendant.
Doa Isabel Palt makes the following assignment of errors:
1. That the court erred in failing to hold that her obligation as surety had been extinguished in accordance
with the provisions of article 1851 of the Civil Code.
2. That the court erred in refusing to order for the benefit of this appellant that the property of Aldecoa and
Co. should be exhausted before the plaintiff firm should be entitled to have recourse to the property of this
defendant and appellant for the satisfaction of its judgment.
This appellant does not contend that she is not personally liable in solidum with Aldecoa and Co. for the liability of
the latter firm to the plaintiff in the event that the appeal taken by Aldecoa and Co. should unsuccessful. We have
just held that the judgment appealed from by Aldecoa and Co. should be affirmed. But Doa Isabel Palet does not
contend that her liability as a partner for the obligations of Aldecoa and Co., although solidary, is subsidiary, and that
she is entitled to insist that the property of Aldecoa and Co. be first applied in its entirety to the satisfaction of the
firm's obligations before the bank shall proceed against her in the execution of its judgment.
The trial court directed that the mortgaged properties, including the properties mortgaged in the event that Aldecoa
and Co. should fail to pay into court the amount of the judgment within the time designated for that purpose. the
court recognized the subsidiary character of the personal liability of Doa Isabel Palet as a member of the firm of
Aldecoa and Co. and decreed that as to any deficiency which might result after the sale of the mortgaged
properties, execution should not issue against the properties of Doa Isabel Palet until all the property of Aldecoa
and Co. shall have been exhausted. The properties mortgaged by Doa Isabel Palet were so mortgaged not merely
as security for the performance of her own solidary subsidiary obligation as a partner bound for all the debts of
Aldecoa and Co., but for the purpose of securing the direct obligation of the firm itself to the bank. We are, therefore,
of the opinion that the trial court committed no error upon this point.
It is urged on behalf of Doa Isabel Palet that the mortgages executed by her upon her individual property have
been canceled. The ground for this contention is that Aldecoa and Co. undertook by the contract of February 23,
1906, to discharge its liability to the plaintiff bank at the rate of not less than P50,000 per annum, and that therefore
it was the duty of the bank to sue Aldecoa and Co. as soon as that firm failed to pay at maturity any one of the
partial payments which it had promised to make, and to apply the proceeds, from the sale of the property of Aldecoa
and Co. to the satisfaction of this indebtedness, and that the fact that the bank failed to do so is equivalent to an
extension of the term of the principal debtor, and that the effect of this extension has been to extinguish the
obligation of this defendant as a surety of Aldecoa and Co. It is also contended that the bank expressly extended the
term within which Aldecoa and Co. was to satisfy its obligation by allowing Aldecoa and Co. to furnish additional
security. Doa Isabel Palet alleges that all these acts were done without her knowledge or consent.
The extension of the term which, in accordance with the provisions of article 1851 of the Civil Code produces the
extinction of the liability of the surety must of necessity be based on some new agreement between the creditor and
principal debtor, by virtue of which the creditor deprives himself of his right to immediately bring an action for the
enforcement of his claim. The mere failure to bring an action upon a credit, as soon as the same or any part of its
matures, does not constitute an extension of the term of the obligation.

Doa Isabel Palet is a personal debtor jointly and severally with Aldecoa and Co. for the whole indebtedness of the
latter firm to the bank, and not a mere surety of the performance of the obligations of Aldecoa and Co. without any
solidary liability. It is true that certain additional deeds of mortgage and pledge were executed by Aldecoa and Co. in
favor of the bank as additional security after Aldecoa and Co. had failed to meet its obligation to pay the first
installment due under the agreement of February 23, 1906, but there is no stipulation whatever in any of these
documents or deeds which can in any way be interpreted in the sense of constituting an extension which would bind
the bank to waiter for the expiration of any new term before suing upon its claim against Aldecoa and Co. We find
nothing in the record showing either directly or indirectly that the bank at any time has granted any extension in
favor of Aldecoa and Co. for the performance of its obligations. The liquidator of Aldecoa and Co. authorized the
bank to grant certain extensions to some of the provincial debtors of Aldecoa and Co. whose debts were to be paid
to the bank under the authority conferred upon the bank by Aldecoa and Co. There is a marked difference between
the extension of time within which Aldecoa and Co.'s debtors might pay their respective debts, and the extension of
time for the payment of Aldecoa and Co.'s own obligations to the bank. If the bank was had brought suit on its credit
against Aldecoa and Co., for the amount then due, on the day following the extension of the time of Aldecoa and
Co.'s debtors for the payments of their debts, it is evident that the fact of such extension having been granted could
not served in any sense as a defense in favor of Aldecoa and Co. against the bank's action, although this extension
would have been available to Aldecoa and Co.'s debtors if suit had been brought to enforce their liabilities to
Aldecoa and Co. We must, therefore, conclude that the judgment appealed from, in so far as it relates to Doa
Isabel Palet, must likewise be affirmed.
The intervener, William Urquhart, assigns these errors:
1. The court erred in holding that the proof fails to show a case for intervention within the meaning of section
121 of the Code of Civil Procedure.
2. The court erred in failing to give preference to the credit of the liquidator Urquhart for his salary.
The trial court found, as we have said, that Urquhart had failed to show that he had any legal interest in the matter in
litigation between the plaintiffs and the defendants, or in the success of any of the parties, or any interest against
both. The proof upon this branch of the case consists of the following agreed statement of facts:
Mr. Urquhart is a creditor of Aldecoa and Co. in the sum of P21,000 due him for money loaned by him to
Aldecoa and Co. before they went into liquidation.
Aldecoa and Co., in liquidation, owe Mr. Urquhart the liquidator P14,000 as salary.
Section 121 of the Code of civil Procedure provides that:
A person may, at any period of a trial, upon motion, be permitted by the court to intervene in an action or
proceeding, if he has legal interest in the matter in litigation, or in the success of either of the parties, or an
interest against both.
The intervener is seeking to have himself declared a preferred creditor over the bank. According to the abovequoted agreed statement of facts, he is a mere creditor of Aldecoa and Co. for the sum of P21,000, loaned that firm
before it went into liquidation. This amount is not evidenced by a public document, or any document for that matter,
nor secured by pledge or mortgage, while the amount due the bank appears in a public instrument and is also
secured by pledges and mortgages on the property of Aldecoa and Co., out of which the intervener seeks to have
his indebtedness satisfied. It is, therefore, clear that the intervener is not entitled to the relief sought, in so far as the
P21,000 is concerned.
The bank insists that, as the intervener had been in the employ of Aldecoa and Co. for several years prior to the
time that the latter went into liquidation, it cannot be determined what part of the P14,000 is for salary as such
employee and what part is for salary as liquidator. We find no trouble in reaching the conclusion that all of the
P14,000 represents Urquhart's salary as liquidator of the firm of Aldecoa and Co. The agreed statement of facts
clearly supports this view. It is there stated that Aldecoa and Co. in liquidation owed the liquidator P14,000 as salary.
The agreement does not say, nor can it be even inferred from the same, that Aldecoa and Co. owed Urquhart

P14,000, or any other sum for salary as an employee of that firm before it went into liquidation. Under these facts, is
the intervener a preferred creditor over the bank for this amount?
In support of his contention that he should be declared a preferred creditor over the bank for the P14,000, the
appellant cites the decision of the supreme court of Spain of March 16, 1897, and quotes the following from the
syllabus of that case:
That the expense of maintenance of property is bound to affect such persons as have an interest therein,
whether they be the owners or creditors of the property; therefore payment for this object has preference
over any other debt, since such other debts are recoverable to the extent that the property is preserved and
maintained.
There can be no question about the correctness of this ruling of the supreme court of Spain to the effect that the
fees of a receiver, appointed by the court to preserve property in litigation, must be paid in preference to the claims
of creditors. But this is not at all the case under consideration, for the reason that Urquhart was elected liquidator by
the members of the firm of Aldecoa and Co. Neither do we believe that the contention of the appellant can be
sustained under article 1922 of the Civil Code, which provides that, with regard to specified personal property of the
debtor, the following are preferred:
1. Credits for the construction, repair, preservation, or for the amount of the sale of personal property which
may be in the possession of the debtor to the extent of the value of the same.
The only personal property of Aldecoa and Co. is 16 shares of the stock of the Banco-Espaol-Filipino; 450 shares
of the stock of the Compaia Maritima; 330 shares of the stock of the Pasay Estate Co., Ltd; and certain claims
against debtors of Aldecoa and Co., mentioned in Exhibit G.
The shares of stock in the Banco Espaol-Filipino and the Compaia Maritima were pledged to the bank before
Aldecoa and Co. went into liquidation, so Urquhart had nothing to do with the preservation of these. The stock of the
Pasay Estate co., Ltd., was pledged to the bank on August 30, 1907, on the same day that it came into the
possession of Aldecoa and Co. and by the terms of the pledge the bank was authorized to collect all dividends on
the stock and apply the proceeds to the satisfaction of its claim against Aldecoa and Co. The credits set forth in
Exhibit G were assigned to the bank on January 30, 1907, so, it will be seen, that the Pasay Estate shares were in
the possession of Aldecoa and Co., or its liquidator, only one day. Urquhart had been liquidator twenty-eight days
when the credits, mentioned in Exhibit G, were assigned to the bank. If it could be held that these two items bring
him within the above quoted provisions of article 1922, he could not be declared a preferred creditor over the bank
for the P14,000 salary for the reason that, according to his own showing, he had been paid for his services as
liquidator up to January, 1910. It is the salary since that date which is now in question. The only property of Aldecoa
and Co. which the liquidator had anything to do with after 1910 was the real estate mortgages on real property
cannot be regarded as personal property, and it is only of personal property that article 1922 speaks.
The judgment appealed from, in so far as it relates to Urquhart, being in accordance with the law and the merits of
the case, is hereby affirmed.
The appellants, Joaquin and Zoilo Ibaez de Aldecoa, make the following assignments of error:
1. The court erred in not sustaining the plea of lis pendens with respect to the validity of mortgages claimed
by the plaintiff, which plea was set up as a special defense by the defendants Joaquin and Zoilo Ibaez de
Aldecoa, and in taking jurisdiction of the case and in deciding therein a matter already submitted for
adjudication and not yet finally disposed of.
2. The court erred in hot sustaining the plea of res adjudicata set up as a special defense by these
defendants with respect to the contention of plaintiff that these defendants are industrial and general
partners of the firm of Aldecoa and Co.
3. The court erred in holding that the defendants Joaquin and Zoilo Ibaez de Aldecoa were general
partners (socios colectivos) of the firm of Aldecoa and Co., and is rendering judgment against them
subsidiarily for the payment of the amount claimed in the complaint.

The basis of the first alleged error is the pendency of an action instituted by the appellants, Joaquin and Zoilo, in
1908, to have the mortgages which the bank seeks to foreclose in the present action annulled in so far as their
liability thereon is concerned. That action was pending in this Supreme Court on appeal when the present action
was instituted (1911), tried, and decided in the court below.
The principle upon which plea of another action pending is sustained is that the latter action is deemed unnecessary
and vexatious. (Williams vs. Gaston, 148 Ala., 214; 42 Sou., 552; 1 Cyc. 21; 1 R. C. L., sec. 1.) A statement of the
rule to which the litigant to its benefits, and which has often met with approval, is found in Watson vs. Jones (13
Wall., 679, 715; 20 L. ed., 666):
But when the pendency of such a suit is set up to defeat another, the case must be the same. There must be
the same parties, or at least such as represent the same interest, there must be the same rights asserted,
and the same relief prayed for. This relief must be founded on the same facts, and the title or essential basis
of the relief sought must be the same. The identity in these particulars should be such that if the pending
case has already been disposed of, it could be pleaded in bar as a former adjudication of the same matter
between the same parties.
It will be noted that the cases must be identical in a number of ways. It will be conceded that in so far as the plea is
concerned, the parties are the same in the case at bar as they were in the action to have the mortgages annulled.
Their position is simple reversed, the defendants there being the plaintiffs here, and vice versa. This fact does not
affect the application of the rule. The inquiry must therefore proceed to the other requisites demanded by the rule.
Are the same rights asserted? Is the same relief prayed for?
The test of identity in these respects is thus stated in 1 Cyc., 28:
A plea of the pendency of a prior action is not available unless the prior action is of such a character that,
had a judgment been rendered therein on the merits, such a judgment would be conclusive between the
parties and could be pleaded in bar of the second action.
This test has been approved, citing the quotation, in Williams vs. Gaston (148 Ala., 214; 42 Sou., 552); Van Vleck
vs. Anderson (136 Iowa, 366; 113 N. W., 853); Wetzstein vs. Mining Co. (28 Mont., 451; 72 P., 865). It seems to us
that unless the pending action, which the appellants refer to, can be shown to approach the action at bar to this
extent, the plea ought to fail.
The former suit is one to annul the mortgages. The present suit is one for the foreclosure of the mortgages. It may
be conceded that if the final judgment in the former action is that the mortgages be annulled, such an adjudication
will deny the right of the bank to foreclose the mortgages. But will a decree holding them valid prevent the bank from
foreclosing them. Most certainly not. In such an event, the judgment would not be a bar to the prosecution of the
present action. The rule is not predicated upon such a contingency. It is applicable, between the same parties, only
when the judgment to be rendered in the action first instituted will be such that, regardless of which party is
successful, it will amount to res adjudicata against the second action. It has often been held that a pending action
upon an insurance policy to recover its value is not a bar to the commencement of an action to have the policy
reformed. The effect is quite different after final judgment has been rendered in an action upon the policy. Such a
judgment may be pleaded in bar to an action seeking to reform the policy. The case are collected in the note
toNational Fire Insurance Co. vs. Hughes (12 L. R. A., [N. S.], 907). So, it was held in the famous case of Sharon
vs. Hill (26 Fed., 337), that the action brought by Miss hill for the purpose of establishing the genuineness of a
writing purporting to be a declaration of marriage and thereby establishing the relation of husband and wife between
the parties could not be pleaded in abatement of Senator Sharon's action seeking to have the writing declared false
and forged. The court said:
This suit and the action of Sharon vs. Sharon are not brought on the same claim or demand. The subject
matter and the relief sought are not identical. This suit is brought to cancel and annul an alleged false and
forged writing, and enjoin the use of it by the defendant to the prejudice and injury of the plaintiff, while the
other is brought to establish the validity of said writing as a declaration of marriage, as well as the marriage
itself, and also to procure a dissolution thereof, and for a division of the common property, and for alimony.
Incidentally, it was held in this case that a judgment of the trial court declaring the writing genuine was not res
adjudicata after an appeal had been taken from the judgment of the Supreme Court. So, in the case ta bar, the fact

that the trial court in the former action holds the mortgages invalid as to one of the herein appellants is not final by
reason of the appeal entered by the bank from that judgment.
Cases are also numerous in which an action for separation has been held not to be a bar to an action for divorce or
vice versa. (Cook vs. Cook, [N. C.], 40 L. R. S., [N. S.], 83, and cases collected in the note.) In Cook vs. Cook it was
held that a pending action for absolute divorce was not a bar to the commencement of an action for separation. The
above authorities are so analogous in principle to the case at bar that we deem the conclusion irresistible, that the
pending action to annul the liability of the two appellant children on the mortgages cannot operates as a plea in
abatement in the case in hand which seeks to foreclose these mortgages. The subject matter and the relief asked
for are entirely different. The facts do not conform to the rule and it is therefore not applicable.
With reference to the second alleged error, it appears that a certified copy of the judgment entered in the former
case, wherein it was declared that these two appellants, together with their sister Cecilia, were creditors and
partners of Aldecoa and Co., was offered in evidence and marked Exhibit 5. This evidence was objected to by the
plaintiff on the ground that it was res inter alios acta and not competent evidence against the plaintiff or binding upon
it in any way because it was not a party to that action. This objection was sustained and the proffered evidence
excluded. If the evidence had been admitted, what would be its legal effect? That was an action in personam and
the bank was not a party. The judgment is, therefore, binding only upon the parties to the suit and their successors
in interest (sec. 306, Code of Civil Procedure, No. 2).
The question raised by the third assignment of errors will be dealt with in a separate opinion wherein the appeal of
Cecilia Ibaez de Aldecoa will be disposed of.
The appellants whose appeals are herein determined will pay their respective portions of the cost. So ordered.
Arellano, C. J., Torres and Araullo, JJ., concur.
Moreland, J.. concurs in the result.
Johnson, J., dissents.

TRENT, J.:
In Hongkong and Shanghai Banking Corporation vs. Aldecoa and Co. et al., R. G. No. 8437, just decided, we said
that the correctness of the judgment declaring that the defendants, Joaquin, Zoilo, and Cecilia Ibaez de Aldecoa,
are subsidiarily liable to the bank as industrial partners of Aldecoa and Co. for the debts of the latter, would be
determined in a separate opinion.
The facts are these: Joaquin, Zoilo, and Cecilia Ibaez de Aldecoa were born in the Philippine Islands, being the
legitimate children of Zoilo Ibaez de Aldecoa and Isabel Palet. Both parent were native of Spain, but domiciled in
Manila, where the father died in 1895. At the time of his death the father was a member and managing director of an
ordinary general mercantile partnership known as Adecoa and Co. In December, 1896, Isabel Palet, for herself and
as the parent of her above-named three children, exercising the patria potestad, entered into a new contract with
various persons whereby the property and good will, together with the liabilities of the firm of which her husband
was a partner, were taken over. The new firm was also an ordinary general mercantile partnership and likewise
denominated Aldecoa and Co. Although having the same name, the new firm was entirely distinct from the old one
and was, in fact, a new enterprise. The widow entered into the new partnership as a capitalistic partner and caused
her three children to appear in the articles of partnership as industrial partners. At the time of the execution of this
new contract Joaquin was twelve years of age, Zoilo eleven, and Cecilia nine.
Clauses 9 and 12 of the new contract of partnership read:
9. The industrial partners shall bear in proportion to the shares the losses which may result to the
partnership from bad business, but only from the reserve fund which shall be established, as set forth in the
12th clause, and if the loss suffered shall exhaust said fund the balance shall fall exclusively upon the
partners furnishing the capital.

12. The industrial partner shall likewise contribute 50 per cent of his net profits to the formation of said
reserve fund, but may freely dispose of the other 50 per cent.
The question is presented, Could the mother of the three children legally bind them as industrial partners of the firm
of Aldecoa and Co. under the above facts? If so, are they liable jointly and severally with all their property, both real
and personal, for the debts of the firm? That all industrial partners of an ordinary general mercantile partnership are
liable with all their property, both personal and real, for all the debts of the firm owing to third parties precisely as a
capitalistic partner has long since been definitely settled in this jurisdiction, notwithstanding provisions to the
contrary in the articles of agreement. (Compaia Maritima vs. Muoz, 9 Phil. Re., 326.)
There are various provisions of law, in force in 1896, which must be considered in determining whether or not the
mother had the power to make her children industrial partners of the new firm Aldecoa and Co.
Article 5 of the Code of Commerce reads:
Persons under twenty-one years of age and incapacitated persons may continue, through their guardians,
the commerce which their parents or persons from whom the right is derived may have been engaged in. If
the guardians do not have legal capacity to trade, or have some incompatibility, they shall be under the
obligation to appoint one or more factors who possess the legal qualifications, and we shall take their places
in the trade.
As the firm of which it is claimed the children are industrial partners was not a continuation of the firm of which their
deceased father was a member, but was a new partnership operating under its own articles of agreement, it is clear
that article 5, supra, does not sustain the mother's power to bind her children as industrial partners of the new firm.
Article 4 of the Code of Commerce reads:
The persons having the following conditions shall have legal capacity to customarily engage in commerce:
1. Those who have reached the age of twenty-one years.
2. Those who are not subject to the authority of a father or mother or to a marital authority.
3. Those who have the free disposition of their property.
The appellant children had not a single one of these qualifications in 1896 when the mother attempted to enter them
as industrial partners of the firm of Aldecoa and Co.
It is claimed that the power of the mother to bind her children as industrial partners is within her parental authority as
defined by the Civil Code. Articles 159 to 166 which compose chapter 3 of the Civil Code, entitled "Effect of parental
authority with regard to the property of the children," defined the extent of the parental authority over the property of
minor children. Article 159 provides that the father, or, in his absence, the mother, is the legal administrator of the
property of this children who are under their authority. Article 160 gives to such parent the administration and
usufruct of property acquired by the child by its work or industry or for any good consideration. We take it that all the
property possessed by the children at the time the contract of partnership was entered into in 1896 had been
acquired by them either by their work or industry or for a good consideration. The children were at that time under
the authority of their mother.
Article 164 reads:
The father, or the mother in a proper case, cannot alienate the real property of the child, the usufruct or
administration of which belongs to them, nor encumber the same, except for sufficient reasons of utility or
necessity, and after authorization from the judge of the domicile, upon hearing by the department of public
prosecution, excepting the provisions which, with regard to the effects of transfers, the mortgage law
establishes.

The mother did not secure judicial approval to enter into the contract of partnership on behalf of her children. Does
member ship in an ordinary general mercantile partnership alienate or encumber the real property of an industrial
partner? Clearly a partner alienates what he contributes to the firm as capital by transferring its ownership to the
firm. But this, in the case of an industrial partner, is nothing. An industrial partner does not alienate any portion of his
property by becoming a member of such a firm. Therefore, the mother did not violate this prohibition of article 164 in
attempting to make her children industrial partners. But the article in question also prohibited her
from encumberingtheir real property. This undoubtedly prohibits formal encumbrances such as mortgages, voluntary
easements, usufructuary rights, and others which create specific liens upon specific real property. it has been held
to prohibit the creation of real rights, and especially registrable leases in favor of third persons. (Res., Aug. 30,
1893.) The same word is used in article 317 of the Civil Code in placing restrictions upon the capacity of a child
emancipated by the concession of the parent to deal with his own property. In commenting on this latter article,
Manresa asks the question, "To what encumbrances does the code in speaking of emancipated children?" and
answers it as follows:
The prohibition against encumbering real property is so explicit . . . that we consider it unnecessary to
enumerate what are the incumbrances to which the law refers. All that signifies a limitation upon property,
such as the creation, modification, or extinction of the right of usufruct, use, habituation, emphyteusis,
mortgages, annuities, easements, pensions affecting real property, bonds, etc., is, in an express consent of
the persons who are mentioned in the said article 317. (Vol. 2, p. 689.)
In commenting upon the same article, Sanchez Roan says practically the same thing. (Vol. 5, p. 1179.) Neither of
these commentators refers to the right of an emancipated child to enter into a contract of partnership without the
parent's consent. The question, in so far as we have been able to ascertain, does not appear to have ever been
discussed, either by the courts or the commentators. It is significant, however, that a contract of surety is placed by
both the above mentioned commentators among the prohibited contracts. The encumbrance placed upon the real
property of a surety is precisely the same as the encumbrance placed upon the real property of an industrial partner.
That is, prior to judgment on the principal obligation or judgment against the partnership, the property is not
specifically liable, and the creditor has n preferred lien thereon or right thereto by reason of the bond or partnership
contract, as the case may be. After judgment, the property of the surety or of the industrial partner, both real and
personal, is subsidiarily subject to execution. The evident purpose of both article 164, prohibiting the parent from
encumbering the real property of his child without judicial approval, and of article 317, placing the same prohibition
upon the emancipated child in the absence of the parent's approval, is the same. It is desired that the child's real
property shall be frittered away by hasty and ill-advised contracts entered into by the one having the administration
thereof. Both articles would fail of their purpose if the parent or the child, as the case might be, could do indirectly
what could not be done directly. In other words, there would be little purpose in prohibiting a formal encumbrance by
means of a mortgage, for instance, when a subsidiary liability by means of a bond or membership in a partnership
could as effectually deprive the child of its real property. This proposition rests upon the theory that the mother could
have freely disposed of the child's personal property in 1896 and that the only recourse open to them would have
been an action against their mother for the value of such property. If this theory be true, the result would not be
changed for the reason that children were either industrial partners or they were not. If they were, they are liable to
the extent of both their real and personal property for the debts of the firm. If they were not, they are in no way
liable. There can be only two kinds or classes of partners in a firm of this kind, capitalistic and industrial. Both are
personally liable to third persons for the debts of such a firm. To say that the children are industrial partners, but
liable only to the extent of their personal property, would be to place them in a different class of partners. As the
mother did not secure judicial approval, the contract wherein she attempted to make her children industrial partners,
with all the consequences flowing therefrom, was, therefore, defective and that act of itself in no way made the
children liable for the debts of the new firm.
The question remains, Did any of the children validly ratify the contract after acquiring capacity to do so? Cecilia
was never emancipated and there is no evidence indicating that she has ever ratified the contract by word or deed.
She is, therefore, completely exonerated from liability for the debts of Aldecoa and Co.
The other two children, Joaquin and Zoilo, were emancipated by their mother after they had reached the age of
eighteen and prior to seeking annullment of the contract of partnership had participated by vote and otherwise in the
management of the firm, as is evidenced by Exhibits W, Y, and Z. These various acts sufficiently show a ratification
of the partnership contract and would have the effect of making the two children industrial partners if they had been
of age at that time. Ratification is in the nature of the contract. It is the adoption of, and assent to be bound by, the
act of another. (Words and Phrases, vol. 7, p. 5930.) From the effect of emancipation it cannot be doubted that the

two children had capacity, with their mother's consent, to enter into a contract of partnership, and, by so doing, make
themselves industrial partners, thereby encumbering their property. Conceding that the children under these
circumstances could enter into such a contract with their mother, her express consent to the ratification of the
contract by the two children does not appear of record. The result flowing from the ratification being the
encumbrance of their property, their mother's express consent was necessary.
For the foregoing reasons the judgment appealed from, in so far as it holds the three children liable as industrial
partners, is reversed, without costs in so far as this branch of the case is concerned. So ordered.