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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/cross-claimant 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 defendantappellant 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 16 of money, goods or credits, as well as to judgments involving such loan or
forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs when the
transaction involves the payment of indemnities in the concept of damage arising from the breach or a
delay in the performance of obligations in general. Observe, too, that in these cases, a common time
frame in the computation of the 6% interest per annum has been applied, i.e., from the time the complaint
is filed until the adjudged amount is fully paid.
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 quasidelicts 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.

[G.R. No. 128721. March 9, 1999]


CRISMINA GARMENTS, INC., petitioner, vs. COURT OF APPEAL AND NORMA
SIAPNO, respondents.
DECISION
PANGANIBAN, J.:
Interest shall be computed in accordance with the stipulation of the parties. In the absence of such
agreement, the rate shall be twelve percent (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%).
The Case

On May 5, 1997, Crismina Garments, Inc. filed a Petition for Review on Certiorari [1] assailing the December
28, 1995 Decision[2] and March 17, 1997 Resolution[3] of the Court of Appeals in CA-GR CV No. 28973. On

September 24, 1997, this Court issued a minute Resolution [4] denying the petition for its failure to show any
reversible error on the part of the Court of Appeals.
Petitioner then filed a Motion for Reconsideration, [5] arguing that the interest rate should be computed at 6
percent per annum as provided under Article 2209 of the Civil Code, not 12 percent per annum as
prescribed under Circular No. 416 of the Central Bank of the Philippines. Acting on the Motion, the Court
reinstated[6] the Petition, but only with respect to the issue of which interest rate should be applied. [7]
The Facts

As the facts of the case are no longer disputed, we are reproducing hereunder the findings of the appellate
court:
During the period from February 1979 to April 1979, the [herein petitioner], which was engaged in the
export of girls denim pants, contracted the services of the [respondent], the sole proprietress of the
DWilmar Garments, for the sewing of 20,762 pieces of assorted girls[] denims supplied by the [petitioner]
under Purchase Orders Nos. 1404, dated February 15, 1979, 0430 dated February 1, 1979, 1453 dated
April 30, 1979. The [petitioner] was obliged to pay the [respondent], for her services, in the total amount
of P76,410.00. The [respondent] sew[ed] the materials and delivered the same to the [petitioner] which
acknowledged the same per Delivery Receipt Nos. 0030, dated February 9, 1979; 0032, dated February 15,
1979; 0033 dated February 21, 1979; 0034, dated February 24, 1979; 0036, dated February 20, 1979;
0038, dated March 11, 1979[;] 0039, dated March 24, 1979; 0040 dated March 27, 1979; 0041, dated
March 29, 1979; 0044, dated Marc[h] 25, 1979; 0101 dated May 18, 1979[;] 0037, dated March 10, 1979
and 0042 dated March 10, 1979, in good order condition. At first, the [respondent] was told that the sewing
of some of the pants w[as] defective. She offered to take delivery of the defective pants.However, she was
later told by [petitioner]s representative that the goods were already good. She was told to just return for
her check of P76,410.00. However, the [petitioner] failed to pay her the aforesaid amount. This prompted
her to hire the services of counsel who, on November 12, 1979, wrote a letter to the [petitioner]
demanding payment of the aforesaid amount within ten (10) days from receipt thereof.On February 7,
1990, the [petitioner]s [v]ice-[p]resident-[c]omptroller, wrote a letter to [respondent]s counsel,
averring, inter alia, that the pairs of jeans sewn by her, numbering 6,164 pairs, were defective and that she
was liable to the [petitioner] for the amount of P49,925.51 which was the value of the damaged pairs of
denim pants and demanded refund of the aforesaid amount.
On January 8, 1981, the [respondent] filed her complaint against the [petitioner] with the [trial court] for
the collection of the principal amount of P76,410.00. x x x
xxxxxxxxx
After due proceedings, the [trial court] rendered judgment, on February 28, 1989, in favor of the
[respondent] against the [petitioner], the dispositive portion of which reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering the
latter to pay the former:
(1) The sum of P76,140.00 with interest thereon at 12% per annum, to be counted from the filing of this
complaint on January 8, 1981, until fully paid;
(2) The sum of P5,000 as attorney[]s fees; and
(3) The costs of this suit;
(4) Defendants counterclaim is hereby dismissed. [8]
The Court of Appeals (CA) affirmed the trial courts ruling, except for the award of attorneys fees which was
deleted.[9] Subsequently, the CA denied the Motion for Reconsideration. [10]
Hence, this recourse to this Court.[11]
Sole Issue

In light of the Courts Resolution dated April 27, 1998, petitioner submits for our consideration this sole
issue:
Whether or not it is proper to impose interest at the rate of twelve percent (12%) per annum for an
obligation that does not involve a loan or forbearance of money in the absence of stipulation of the parties.
[12]
This Courts Ruling

We sustain petitioners contention that the interest rate should be computed at six percent (6%) per
annum.
Sole Issue: Interest Rate

The controversy revolves around petitioners payment of the price beyond the period prescribed in a
contract for a piece of work. Article 1589 of the Civil Code provides that [t]he vendee [herein petitioner]
shall owe interest for the period between the delivery of the thing and the payment of the price x x x
should he be in default, from the time of judicial or extrajudicial demand for the payment of the price. The
only issue now is the applicable rate of interest for the late payment.
Because the case before us is an action for the enforcement of an obligation for payment of money arising
from a contract for a piece of work,[13] petitioner submits that the interest rate should be six percent (6%),
pursuant to Article 2209 of the Civil Code, which states:
If the obligation consists in the payment 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. (Emphasis supplied.)
On the other hand, private respondent maintains that the interest rate should be twelve percent (12%) per
annum, in accordance with Central Bank (CB) Circular No. 416, which reads:
By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise known as
the Usury Law, the Monetary Board, in its Resolution No. 1622 dated July 29, 1974, has prescribed that the
rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of express contract as to such rate of interest, shall be twelve per cent (12%)
per annum. (Emphasis supplied.)
She argues that the circular applies, since the money sought to be recovered by her is in the form of
forbearance.[14]
We agree with the petitioner. In Reformina v. Tomol Jr.,[15] this Court stressed that the interest rate under CB
Circular No. 416 applies to (1) loans; (2) forbearance of money, goods or credits; or (3) a judgment
involving a loan or forbearance of money, goods or credits. Cases beyond the scope of the said circular are
governed by Article 2209 of the Civil Code,[16] which considers interest a form of indemnity for the delay in
the performance of an obligation. [17]
In Eastern Shipping Lines, Inc. v. Court of Appeals, [18] the Court gave the following guidelines for the
application of the proper interest rates:
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 xxx 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.[19]
In Keng Hua Paper Products Co., Inc. v. CA,[20] we also ruled that the monetary award shall earn interest at
twelve percent (12%) per annum from the date of the finality of the judgment until its satisfaction,
regardless of whether or not the case involves a loan or forbearance of money. The interim period is
deemed to be equivalent to a forbearance of credit. [21]
Because the amount due in this case arose from a contract for a piece of work, not from a loan or
forbearance of money, the legal interest of six percent (6%) per annum should be applied. Furthermore,

since the amount of the demand could be established with certainty when the Complaint was filed, the six
percent (6%) interest should be computed from the filing of the said Complaint. But after the judgment
becomes final and executory until the obligation is satisfied, the interest should be reckoned at twelve
percent (12%) per year.
Private respondent maintains that the twelve percent (12%) interest should be imposed, because the
obligation arose from a forbearance of money.[22] This is erroneous. In Eastern Shipping,[23] the Court
observed that a forbearance in the context of the usury law is 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. Using this standard, the obligation in this case was obviously not a forbearance of
money, goods or credit.
WHEREFORE, the appealed Decision is MODIFIED. The rate of interest shall be six percent (6%) per
annum, computed from the time of the filing of the Complaint in the trial court until the finality of the
judgment. If the adjudged principal and the interest (or any part thereof) remain unpaid thereafter, the
interest rate shall be twelve percent (12%) per annum computed from the time the judgment becomes
final and executory until it is fully satisfied. No pronouncement as to costs.
SO ORDERED.

[G.R. No. 113926. October 23, 1996]


SECURITY BANK AND TRUST COMPANY, petitioner, vs. REGIONAL TRIAL COURT OF MAKATI,
BRANCH 61, MAGTANGGOL EUSEBIO and LEILA VENTURA, respondents.
DECISION
HERMOSISIMA, JR., J.:

Questions of law which are the first impression are sought to be resolved in this case: Should the rate of
interest on a loan or forbearance of money, goods or credits, as stipulated in a contract, far in excess of
the ceiling prescribed under or pursuant to the Usury Law, prevail over Section 2 of Central Bank Circular
No. 905 which prescribes that the rate of interest thereof shall continue to be 12% per annum? Do the
Courts have the discretion to arbitrarily override stipulated interest rates of promissory notes and
stipulated interest rates of promissory notes and thereby impose a 12% interest on the loans, in the
absence of evidence justifying the impositions of a higher rate?
This is a petition for review on certiorari for the purpose of assailing the decision of Honorable Judge
Fernando V. Gorospe of the Regional Trial Court of Makati, Branch 61, dated March 30, 1993, which found
private respondent Eusebio liable to petitioner for a sum of money. Interest was lowered by the court a
quo from 23% per annum as agreed upon by the parties to 12% per annum.
The undisputed facts are as follows:
On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory Note No. TL/74/178/83 in
favor of petitioner Security Bank and Trust Co. (SBTC) in the total amount of One Hundred Thousand Pesos
(P100,000.00) payable in six monthly installments with a stipulated interest of 23% per annum up to the
fifth installments.[1]
On July 28, 1983, respondent Eusebio again executed Promissory note No TL/74/1296/83 in favor of
petitioner SBTC. Respondent bound himself to pay the sum of One Hundred Thousand Pesos (P100.000.00)
in six (6) monthly installments plus 23% interest per annum. [2]
Finally, another Promissory Note No. TL74/1491/83 was executed on August 31, 1983 in the amount of
Sixty Five Thousand Pesos (P65,000.00). Respondent agreed to pay this note in six (6) monthly
installments plus interest at the rate of 23% per annum. [3]
On all the abovementioned notes, private respondents Leila Ventura had signed as co-maker. [4]
Upon maturity which fell on the different dates below, the principal balance remaining on the notes stood
at:
1) PN No. TL/74/748/83 P16,665.00 as of September 1983.
2) PN No. TL/74/1296/83 P83,333.00 as of August 1983
3) PN No. TL/74/1991/83 P65,000.00 as of August 1983.
Upon the failure and refusal of respondent Eusebio to pay the aforestated balance payable, a collectible
case was filed in court by petitioner SBTC. [5] On March 30, 1993, the court a quo rendered a judgment in
favor of petitioner SBTC, the dispositive portion which reads:
WHEREFORE, premises above-considered, and plaintiffs claim having been duly proven, judgment is
hereby rendered in favor of plaintiff and as against defendant Eusebio who is hereby ordered to:
1. Pay the sum of P16,665.00, plus interest of 12% per annum starting 27 September 1983, until fully paid;
2. Pay the sum of P83,333.00, plus interest of 12% per annum starting 28 August 1983, until fully paid;
3. Pay the sum of P65,000.00, plus interest of 12% per annum starting 31 August 1983, until fully paid;
4. Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as and by way of
attorneys fees; and to
5. Pay the cost of this suit.
SO ORDERED.[6]
On August 6, 1993, a motion for partial reconsideration was filed by petitioner SBTC contending that:
(1) the interest rate agreed upon by the parties during the signing of the promissory notes was 23% per
annum;
(2) the interests awarded should be compounded quarterly from due date as provided in three (3)
promissory notes;
(3) defendant Leila Ventura should likewise be held liable to pay the balance on the promissory notes since
she has signed as co-maker and as such, is liable jointly and severally with defendant Eusebio without a
need for demand upon her. [7]
Consequently, an Order was issued by the court a quo denying the motion to grant the rates of interest
beyond 12% per annum; and holding defendant Leila Ventura jointly and severally liable with co-defendant
Eusebio.
Hence, this petition.

The sole issue to be settled in this petition is whether or not the 23% rate of interest per annum agreed
upon by petitioner bank and respondents is allowable and not against the Usury Law.
We find merit in this petition.
From the examination of the records, it appears that indeed the agreed rate of interest as stipulated on the
three (3) promissory notes is 23% per annum. [8] The applicable provision of law is the Central Bank Circular
No. 905 which took effect on December 22, 1982, particularly Sections 1 and 2 which state: [9]
Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or
forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured,
that may be charged or collected by any person, whether natural or judicial, shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as amended.
Sec. 2. 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 continue to be twelve per
cent (12%) per annum.
CB Circular 905 was issued by the Central Banks Monetary Board pursuant to P.D. 1684 empowering them
to prescribe the maximum rates of interest for loans and certain forbearances, to wit:
SECTION 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as follows:
SEC. 1-a The Monetary Board is hereby authorized to prescribed the maximum rate or rates of interest for
the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or
rates whenever warranted by prevailing economic and social conditions: Provided, That changes in such
rates or rates may be effected gradually on scheduled dates announced in advance.
In the exercise of the authority herein granted, the Monetary Board may prescribed higher maximum rates
for loans of low priority, such as 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. The Monetary Board is also authorized to prescribed different
maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or
loans of financial intermediaries.[10]
This court has ruled in the case of Philippine National Bank v. Court of Appeals [11] that:
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding
any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods
or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated.
All the promissory notes were signed in 1983 and, therefore, were already covered by CB Circular No.
905. Contrary to the claim of respondent court, this circular did not repeal nor in anyway amend the Usury
Law but simply suspended the latters effectivity.
Basic is the rule of statutory construction that when the law is clear and unambiguous, the court is left with
no alternative but to apply the same according to its clear language. As we have held in the case of
Quijano v. Development Bank of the Philippines:[12]
xxx We cannot see any room for interpretation or construction in the clear and unambiguous language of
the above-quoted provision of law. This Court had steadfastly adhered to the doctrine that its first and
fundamental duty is the application of the law according to its express terms, interpretation being called
for only when such literal application is impossible. No process of interpretation or construction need be
resorted to where a provision of law peremptorily calls for application. Where a requirement or condition is
made in explicit and unambiguous terms, no discretion is left to the judiciary. It must see to it that its
mandate is obeyed.
The rate of interest was agreed upon by the parties freely. Significantly, respondent did not question that
rate. It is not for respondent court a quo to change the stipulations in the contract where it is not
illegal. Furthermore, Article 1306 of the New Civil code provides that contracting parties may establish
such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy. We find no valid reason for the
respondent court a quo to impose a 12% rate of interest on the principal balance owing to petitioner by
respondent in the presence of a valid stipulation. In a loan or forbearance of money, the interest due
should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum.
[13]
Hence, only in the absence of a stipulation can the court impose the 12% rate of interest.
The promissory notes were signed by both parties voluntarily. Therefore, stipulations therein are binding
between them. Respondent Eusebio, likewise, did not question any of the stipulations therein. In fact, in
the Comment file by respondent Eusebio to this court, he chose not to question the decision and instead
expressed his desire to negotiate with the petitioner bank for terms within which to settle his obligation. [14]

IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is hereby AFFIRMED with the
MODIFICATION that the rate of interest that should be imposed be 23% per annum.
SO ORDERED.

G.R. No. 113412 April 17, 1996


Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

KAPUNAN, J.:p
On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses Ponciano
L. Almeda and Eufemia P. Almeda several loan/credit accommodations totaling P18.0 Million pesos payable
in a period of six years at an interest rate of 21% per annum. To secure the loan, the spouses Almeda
executed a Real Estate Mortgage Contract covering a 3,500 square meter parcel of land, together with the
building erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati, Metro Manila. A credit
agreement embodying the terms and conditions of the loan was executed between the parties. Pertinent
portions of the said agreement are quoted below:
SPECIAL CONDITIONS
xxx xxx xxx
The loan shall be subject to interest at the rate of twenty one per cent (21%) per annum, payable semiannually in arrears, the first interest payment to become due and payable six (6) months from date of
initial release of the loan. The loan shall likewise be subject to the appropriate service charge and a
penalty charge of three per cent (30%) per annum to be imposed on any amount remaining unpaid or not
rendered when due.
xxx xxx xxx
III. OTHER CONDITIONS
(c) Interest and Charges
(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these
accommodations shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed
upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate. 1
Between 1981 and 1984, petitioners made several partial payments on the loan totaling.
P7,735,004.66, 2 a substantial portion of which was applied to accrued interest. 3 On March 31, 1984,
respondent bank, over petitioners' protestations, raised the interest rate to 28%, allegedly pursuant to
Section III-c (1) of its credit agreement. Said interest rate thereupon increased from an initial 21% to a high
of 68% between March of 1984 to September, 1986. 4
Petitioner protested the increase in interest rates, to no avail. Before the loan was to mature in March,
1988, the spouses filed on February 6, 1988 a petition for declaratory relief with prayer for a writ of
preliminary injunction and temporary restraining order with the Regional Trial Court of Makati, docketed as
Civil Case No. 18872. In said petition, which was raffled to Branch 134 presided by Judge Ignacio Capulong,
the spouses sought clarification as to whether or not the PNB could unilaterally raise interest rates on the
loan, pursuant to the credit agreement's escalation clause, and in relation to Central Bank Circular No. 905.
As a preliminary measure, the lower court, on March 3, 1988, issued a writ of preliminary injunction
enjoining the Philippine National Bank from enforcing an interest rate above the 21% stipulated in the
credit agreement. By this time the spouses were already in default of their loan obligations.
Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB countered by
ordering the extrajudicial foreclosure of petitioner's mortgaged properties and scheduled an auction sale
for March 14, 1989. Upon motion by petitioners, however, the lower court, on April 5, 1989, granted a
supplemental writ of preliminary injunction, staying the public auction of the mortgaged property.
On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court dissolved the
supplemental writ of preliminary injunction. Petitioners filed a motion for reconsideration. In the interim,
respondent bank once more set a new date for the foreclosure sale of Marvin Plaza which was March 12,
1990. Prior to the scheduled date, however, petitioners tendered to respondent bank the amount of
P40,142,518.00, consisting of the principal (P18,000,000.00) and accrued interest calculated at the
originally stipulated rate of 21%. The PNB refused to accept the payment. 5

As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990, formally consigned the
amount of P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-663. They prayed therein for a
writ of preliminary injunction with a temporary restraining order. The case was raffled to Branch 147,
presided by Judge Teofilo Guadiz. On March 15, 1990, respondent bank sought the dismissal of the case.
On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the writ of preliminary
injunction enjoining the foreclosure sale of "Marvin Plaza" scheduled on March 12, 1990. On April 17, 1990
respondent bank filed a motion for reconsideration of the said order.
On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by Judge Eriberto Rosario
who issued an order consolidating said case with Civil Case 18871 presided by Judge Ignacio Capulong.
For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30, 1990, respondent bank
filed a petition for Certiorari, Prohibition and Mandamus with respondent Court of Appeals, assailing the
following orders of the Regional Trial Court:
1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary injunction restraining the
foreclosure sale of Mavin Plaza set on March 12, 1990;
2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent bank's motion to lift the
writ of injunction issued by Judge Guadiz as well as its motion to dismiss Civil Case No. 90-663;
3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's subsequent motion to lift the writ
of preliminary injunction; and
4. Order of Judge Capulong dated October 20, 1992 denying respondent bank's motion for reconsideration.
On August 27, 1993, respondent court rendered its decision setting aside the assailed orders and
upholding respondent bank's right to foreclose the mortgaged property pursuant to Act 3135, as amended
and P.D. 385. Petitioners' Motion for Reconsideration and Supplemental Motion for Reconsideration, dated
September 15, 1993 and October 28, 1993, respectively, were denied by respondent court in its resolution
dated January 10, 1994.
Hence the instant petition.
This appeal by certiorari from the respondent court's decision dated August 27, 1993 raises two principal
issues namely: 1) Whether or not respondent bank was authorized to raise its interest rates from 21% to as
high as 68% under the credit agreement; and 2) Whether or not respondent bank is granted the authority
to foreclose the Marvin Plaza under the mandatory foreclosure provisions of P.D. 385.
In its comment dated April 19, 1994, respondent bank vigorously denied that the increases in the interest
rates were illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of interest it
imposed was based on the agreement of the parties. Respondent bank further contends that it had a right
to foreclose the mortgaged property pursuant to P.D. 385, after petitioners were unable to pay their loan
obligations to the bank based on the increased rates upon maturity in 1984.
The instant petition is impressed with merit.
The binding effect of any agreement between parties to a contract is premised on two settled principles:
(1) that any obligation arising from contract has the force of law between the parties; and (2) that there
must be mutuality between the parties based on their essential equality. 6 Any contract which appears to
be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any
stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the
parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally
altered the terms of its contract with petitioners by increasing the interest rates on the loan without the
prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by the Civil Code
when it provides, in Article 1956 that "No interest shall be due unless it has been expressly stipulated in
writing." What has been "stipulated in writing" from a perusal of interest rate provision of the credit
agreement signed between the parties is that petitioners were bound merely to pay 21% interest, subject
to a possible escalation or de-escalation, when 1) the circumstances warrant such escalation or deescalation; 2) within the limits allowed by law; and 3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this
case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily resolved
by a careful reading of the credit agreement because the same plainly uses the phrase "interest
rate agreed upon," in reference to the original 21% interest rate. The interest provision states:
(c) interest and Charges
(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these

accommodations shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed
upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate.
In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent bank from unilaterally
raising the interest rate in the borrower's loan from 18% to 32%, 41% and 48% partly because the
aforestated increases violated the principle of mutuality of contracts expressed in Article 1308 of the Civil
Code. The Court held:
CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates
. . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law.
but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the
agreed interest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116 which
limits such changes to once every twelve months.
Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private
respondent's loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:
Art. 308. The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them.
In order that obligations arising from contracts may have the force of law between the parties, there must
be mutuality between the parties based on their essential equality. A contract containing a condition which
makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is
void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan
agreement between the PNB and the private respondent gave the PNB a license (although in fact there
was none) to increase the interest rate at will during the term of the loan, that license would have been
null and void for being violative of the principle of mutuality essential in contracts. It would have invested
the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal
footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or lease it"
(Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker
party whom the courts of justice must protect against abuse and imposition.
PNB's successive increases of the interest rate on the private respondent's loan, over the latter's protest,
were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its
terms "may be amended only by an instrument in writing signed by the party to be bound as burdened by
such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil Code which
provides that "no interest shall be due unless it has been expressly stipulated in writing."
The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24%per
annum, hence, he is not bound to pay a higher rate than that.
That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as
found by the Court of Appeals, is indisputable.
Clearly, the galloping increases in interest rate imposed by respondent bank on petitioners' loan, over the
latter's vehement protests, were arbitrary.
Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not authorize the bank,
or any lending institution for that matter, to progressively increase interest rates on borrowings to an
extent which would have made it virtually impossible for debtors to comply with their own obligations.
True, escalation clauses in credit agreements are perfectly valid and do not contravene public policy. Such
clauses, however, (as are stipulations in other contracts) are nonetheless still subject to laws and
provisions governing agreements between parties, which agreements while they may be the law
between the contracting parties implicitly incorporate provisions of existing law. Consequently, while the
Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could
possibly be read as granting respondent bank carte blanche authority to raise interest rates to levels which
would either enslave its borrowers or lead to a hemorrhaging of their assets. Borrowing represents a
transfusion of capital from lending institutions to industries and businesses in order to stimulate growth.
This would not, obviously, be the effect of PNB's unilateral and lopsided policy regarding the interest rates
of petitioners' borrowings in the instant case.
Apart from violating the principle of mutuality of contracts, there is authority for disallowing the interest
rates imposed by respondent bank, for the credit agreement specifically requires that the increase be
"within the limits allowed by law". In the case of PNB v. Court of Appeals, cited above, this Court clearly
emphasized that C.B. Circular No. 905 could not be properly invoked to justify the escalation clauses of
such contracts, not being a grant of specific authority.
Furthermore, the escalation clause of the credit agreement requires that the same be made "within the
limits allowed by law," obviously referring specifically to legislative enactments not administrative

circulars. Note that the phrase "limits imposed by law," refers only to the escalation clause. However, the
same agreement allows reduction on the basis of law or the Monetary Board. Had the parties intended the
word "law" to refer to both legislative enactments and administrative circulars and issuances, the
agreement would not have gone as far as making a distinction between "law or the Monetary Board
Circulars" in referring to mutually agreed upon reductions in interest rates. This distinction was the subject
of the Court's disquisition in the case of Banco Filipino Savings and Mortgage Bank v. Navarro 8 where the
Court held that:
What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12%
to 17% per annum under the Escalation Clause. It is our considered opinion that it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino to correspondingly increase.
the interest rate stipulated in this contract without advance notice to me/us in the event.
a law
increasing
the lawful rates of interest that may be charged
on this particular
kind of loan. (Paragraphing and emphasis supplied)
It is clear from the stipulation between the parties that the interest rate may be increased "in the event
a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind
of loan." The Escalation Clause was dependent on an increase of rate made by "law" alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not
strictly a statute or a law, it has, however, the force and effect of law." (Emphasis supplied). "An
administrative regulation adopted pursuant to law has the force and effect of law." "That administrative
rules and regulations have the force of law can no longer be questioned."
The distinction between a law and an administrative regulation is recognized in the Monetary Board
guidelines quoted in the latter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According
to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there
must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is
promulgated increasing the maximum rate for loans." The guidelines thus presuppose that a Central Bank
regulation is not within the term "any law."
The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to
the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of
interest agreed upon may be increased in the event that the applicable maximum rate of interest is
increased "by law or by the Monetary Board." To quote:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may
stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum
rate of interest
is increased by law or by the Monetary Board:
Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the
rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is
reduced by law or by the Monetary Board;
Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the
effectivity of the increase or decrease in the maximum rate of interest.' (Paragraphing and emphasis
supplied).
It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that
there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such
stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that
the applicable maximum rate of interest is reduced by law or by the Monetary Board."
Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in
contravention to the tenor of their credit agreement. That an increase in interest rates from 18% to as
much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984, petitioners had
paid an amount equivalent to virtually half of the entire principal (P7,735,004.66) which was applied to
interest alone. By the time the spouses tendered the amount of P40,142,518.00 in settlement of their
obligations; respondent bank was demanding P58,377,487.00 over and above those amounts already
previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely
potestative but based on reasonable and valid grounds. 9 Here, as clearly demonstrated above, not only
the increases of the interest rates on the basis of the escalation clause patently unreasonable and
unconscionable, but also there are no valid and reasonable standards upon which the increases are
anchored.
We go now to respondent bank's claim that the principal issue in the case at bench involves its right to
foreclose petitioners' properties under P.D. 385. We find respondent's pretense untenable.
Presidential Decree No. 385 was issued principally to guarantee that government financial institutions
would not be denied substantial cash inflows necessary to finance the government's development projects
all over the country by large borrowers who resort to litigation to prevent or delay the government's
collection of their debts or loans. 10 In facilitating collection of debts through its automatic foreclosure
provisions, the government is however, not exempted from observing basic principles of law, and ordinary
fairness and decency under the due process clause of the Constitution. 11
In the first place, because of the dispute regarding the interest rate increases, an issue which was never
settled on merit in the courts below, the exact amount of petitioner's obligations could not be determined.
Thus, the foreclosure provisions of P.D. 385 could be validly invoked by respondent only after settlement of
the question involving the interest rate on the loan, and only after the spouses refused to meet their
obligations following such determination. In Filipinas Marble Corporation v. Intermediate Appellate
Court, 12 involving P.D. 385's provisions on mandatory foreclosure, we held that:
We cannot, at this point, conclude that respondent DBP together with the Bancom people actually
misappropriated and misspent the $5 million loan in whole or in part although the trial court found that
there is "persuasive" evidence that such acts were committed by the respondent. This matter should
rightfully be litigated below in the main action. Pending the outcome of such litigation, P.D. 385 cannot
automatically be applied for if it is really proven that respondent DBP is responsible for the
misappropriation of the loan, even if only in part, then the foreclosure of the petitioner's properties under
the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It would
unduly prejudice the petitioner, its employees and their families.
Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or
not, for the benefit of the petitioner be determined. Consequently, the extent of the loan where there was
no failure of consideration and which may be properly satisfied by foreclosure proceedings under P.D. 385
will have to await the presentation of evidence in a trial on the merits.
In Republic Planters Bank v. Court of Appeals
Corporation, held:

13

the Court reiterating the dictum in Filipinas Marble

The enforcement of P.D. 385 will sweep under the rug' this iceberg of a scandal in the sugar industry during
the Marcos Martial Law years. This we can not allow to happen. For the benefit of future generations, all
the dirty linen in the PHILSUCUCOM/NASUTRA/RPB closets have to be exposed in public so that the same
may NEVER be repeated.
It is of paramount national interest, that we allow the trial court to proceed with dispatch to allow the
parties below to present their evidence.
Furthermore, petitioners made a valid consignation of what they, in good faith and in compliance with the
letter of the Credit Agreement, honestly believed to be the real amount of their remaining obligations with
the respondent bank. The latter could not therefore claim that there was no honest-to-goodness attempt
on the part of the spouse to settle their obligations. Respondent's rush to inequitably invoke the
foreclosure provisions of P.D. 385 through its legal machinations in the courts below, in spite of the
unsettled differences in interpretation of the credit agreement was obviously made in bad faith, to gain the
upper hand over petitioners.
In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the
parties to agree to changes in the interest rate in writing, we hold that the unilateral and progressive
increases imposed by respondent PNB were null and void. Their effect was to increase the total obligation
on an eighteen million peso loan to an amount way over three times that which was originally granted to
the borrowers. That these increases, occasioned by crafty manipulations in the interest rates is
unconscionable and neutralizes the salutary policies of extending loans to spur business cannot be
disputed.
WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August 27, 1993, as well
as the resolution dated February 10, 1994 is hereby REVERSED AND SET ASIDE. The case is remanded to
the Regional Trial Court of Makati for further proceedings.
SO ORDERED.

[G.R. No. 118248. April 5, 2000]


DKC HOLDINGS CORPORATION, petitioner, vs. COURT OF APPEALS, VICTOR U. BARTOLOME and
REGISTER OF DEEDS FOR METRO MANILA, DISTRICT III, respondents. francis
DECISION
YNARES_SANTIAGO, J.:
This is a petition for review on certiorari seeking the reversal of the December 5, 1994 Decision of the
Court of Appeals in CA-G.R. CV No. 40849 entitled "DKC Holdings Corporation vs. Victor U. Bartolome, et
al.",[1] affirming in toto the January 4, 1993 Decision of the Regional Trial Court of Valenzuela, Branch 172,
[2]
which dismissed Civil Case No. 3337-V-90 and ordered petitioner to pay P30,000.00 as attorneys fees.
The subject of the controversy is a 14,021 square meter parcel of land located in Malinta, Valenzuela,
Metro Manila which was originally owned by private respondent Victor U. Bartolomes deceased mother,
Encarnacion Bartolome, under Transfer Certificate of Title No. B-37615 of the Register of Deeds of Metro
Manila, District III. This lot was in front of one of the textile plants of petitioner and, as such, was seen by
the latter as a potential warehouse site.
On March 16, 1988, petitioner entered into a Contract of Lease with Option to Buy with Encarnacion
Bartolome, whereby petitioner was given the option to lease or lease with purchase the subject land, which
option must be exercised within a period of two years counted from the signing of the Contract. In turn,
petitioner undertook to pay P3,000.00 a month as consideration for the reservation of its option. Within the
two-year period, petitioner shall serve formal written notice upon the lessor Encarnacion Bartolome of its
desire to exercise its option. The contract also provided that in case petitioner chose to lease the property,
it may take actual possession of the premises. In such an event, the lease shall be for a period of six years,
renewable for another six years, and the monthly rental fee shall be P15,000.00 for the first six years and
P18,000.00 for the next six years, in case of renewal.
Petitioner regularly paid the monthly P3,000.00 provided for by the Contract to Encarnacion until her death
in January 1990. Thereafter, petitioner coursed its payment to private respondent Victor Bartolome, being
the sole heir of Encarnacion. Victor, however, refused to accept these payments. iska
Meanwhile, on January 10, 1990, Victor executed an Affidavit of Self-Adjudication over all the properties of
Encarnacion, including the subject lot. Accordingly, respondent Register of Deeds cancelled Transfer
Certificate of Title No. B-37615 and issued Transfer Certificate of Title No. V-14249 in the name of Victor
Bartolome.

On March 14, 1990, petitioner served upon Victor, via registered mail, notice that it was exercising its
option to lease the property, tendering the amount of P15,000.00 as rent for the month of March. Again,
Victor refused to accept the tendered rental fee and to surrender possession of the property to petitioner.
Petitioner thus opened Savings Account No. 1-04-02558-I-1 with the China Banking Corporation, Cubao
Branch, in the name of Victor Bartolome and deposited therein the P15,000.00 rental fee for March as well
as P6,000.00 reservation fees for the months of February and March.
Petitioner also tried to register and annotate the Contract on the title of Victor to the property. Although
respondent Register of Deeds accepted the required fees, he nevertheless refused to register or annotate
the same or even enter it in the day book or primary register.
Thus, on April 23, 1990, petitioner filed a complaint for specific performance and damages against Victor
and the Register of Deeds,[3] docketed as Civil Case No. 3337-V-90 which was raffled off to Branch 171 of
the Regional Trial Court of Valenzuela. Petitioner prayed for the surrender and delivery of possession of the
subject land in accordance with the Contract terms; the surrender of title for registration and annotation
thereon of the Contract; and the payment of P500,000.00 as actual damages, P500,000.00 as moral
damages, P500,000.00 as exemplary damages and P300,000.00 as attorneys fees.
Meanwhile, on May 8, 1990, a Motion for Intervention with Motion to Dismiss [4] was filed by one Andres
Lanozo, who claimed that he was and has been a tenant-tiller of the subject property, which was
agricultural riceland, for forty-five years. He questioned the jurisdiction of the lower court over the property
and invoked the Comprehensive Agrarian Reform Law to protect his rights that would be affected by the
dispute between the original parties to the case. ella
On May 18, 1990, the lower court issued an Order [5] referring the case to the Department of Agrarian
Reform for preliminary determination and certification as to whether it was proper for trial by said court.
On July 4, 1990, the lower court issued another Order [6] referring the case to Branch 172 of the RTC of
Valenzuela which was designated to hear cases involving agrarian land, after the Department of Agrarian
Reform issued a letter-certification stating that referral to it for preliminary determination is no longer
required.
On July 16, 1990, the lower court issued an Order denying the Motion to Intervene, [7] holding that Lanozos
rights may well be ventilated in another proceeding in due time.
After trial on the merits, the RTC of Valenzuela, branch 172 rendered its Decision on January 4, 1993,
dismissing the Complaint and ordering petitioner to pay Victor P30,000.00 as attorneys fees. On appeal to
the CA, the Decision was affirmed in toto.
Hence, the instant Petition assigning the following errors:
(A)
FIRST ASSIGNMENT OF ERROR
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PROVISION ON THE NOTICE TO
EXERCISE OPTION WAS NOT TRANSMISSIBLE.
(B)
SECOND ASSIGNMENT OF ERROR
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE NOTICE OF OPTION MUST BE SERVED BY
DKC UPON ENCARNACION BARTOLOME PERSONALLY.
(C) nigel
THIRD ASSIGNMENT OF ERROR
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE CONTRACT WAS ONE-SIDED AND
ONEROUS IN FAVOR OF DKC.
(D)
FOURTH ASSIGNMENT OF ERROR
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE EXISTENCE OF A REGISTERED TENANCY
WAS FATAL TO THE VALIDITY OF THE CONTRACT.
(E)
FIFTH ASSIGNMENT OF ERROR
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PLAINTIFF-APPELLANT WAS LIABLE TO
DEFENDANT-APPELLEE FOR ATTORNEYS FEES.[8]

The issue to be resolved in this case is whether or not the Contract of Lease with Option to Buy entered
into by the late Encarnacion Bartolome with petitioner was terminated upon her death or whether it binds
her sole heir, Victor, even after her demise.
Both the lower court and the Court of Appeals held that the said contract was terminated upon the death
of Encarnacion Bartolome and did not bind Victor because he was not a party thereto.
Article 1311 of the Civil Code provides, as follows"ART. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where
the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation
or by provision of law. The heir is not liable beyond the value of the property he received from the
decedent. brnado
x x x x x x x x x."
The general rule, therefore, is that heirs are bound by contracts entered into by their predecessors-ininterest except when the rights and obligations arising therefrom are not transmissible by (1) their nature,
(2) stipulation or (3) provision of law.
In the case at bar, there is neither contractual stipulation nor legal provision making the rights and
obligations under the contract intransmissible. More importantly, the nature of the rights and obligations
therein are, by their nature, transmissible.
The nature of intransmissible rights as explained by Arturo Tolentino, an eminent civilist, is as follows:
"Among contracts which are intransmissible are those which are purely personal, either by provision of law,
such as in cases of partnerships and agency, or by the very nature of the obligations arising therefrom,
such as those requiring special personal qualifications of the obligor. It may also be stated that contracts
for the payment of money debts are not transmitted to the heirs of a party, but constitute a charge against
his estate. Thus, where the client in a contract for professional services of a lawyer died, leaving minor
heirs, and the lawyer, instead of presenting his claim for professional services under the contract to the
probate court, substituted the minors as parties for his client, it was held that the contract could not be
enforced against the minors; the lawyer was limited to a recovery on the basis of quantum meruit."[9]
In American jurisprudence, "(W)here acts stipulated in a contract require the exercise of special
knowledge, genius, skill, taste, ability, experience, judgment, discretion, integrity, or other personal
qualification of one or both parties, the agreement is of a personal nature, and terminates on the death of
the party who is required to render such service." [10] marinella
It has also been held that a good measure for determining whether a contract terminates upon the death
of one of the parties is whether it is of such a character that it may be performed by the promissors
personal representative. Contracts to perform personal acts which cannot be as well performed by others
are discharged by the death of the promissor. Conversely, where the service or act is of such a character
that it may as well be performed by another, or where the contract, by its terms, shows that performance
by others was contemplated, death does not terminate the contract or excuse nonperformance. [11]
In the case at bar, there is no personal act required from the late Encarnacion Bartolome. Rather, the
obligation of Encarnacion in the contract to deliver possession of the subject property to petitioner upon
the exercise by the latter of its option to lease the same may very well be performed by her heir Victor.
As early as 1903, it was held that "(H)e who contracts does so for himself and his heirs." [12] In 1952, it was
ruled that if the predecessor was duty-bound to reconvey land to another, and at his death the
reconveyance had not been made, the heirs can be compelled to execute the proper deed for
reconveyance. This was grounded upon the principle that heirs cannot escape the legal consequence of a
transaction entered into by their predecessor-in-interest because they have inherited the property subject
to the liability affecting their common ancestor. [13]
It is futile for Victor to insist that he is not a party to the contract because of the clear provision of Article
1311 of the Civil Code. Indeed, being an heir of Encarnacion, there is privity of interest between him and
his deceased mother. He only succeeds to what rights his mother had and what is valid and binding
against her is also valid and binding as against him. [14] This is clear from Paraaque Kings Enterprises vs.
Court of Appeals,[15] where this Court rejected a similar defense-alonzo
With respect to the contention of respondent Raymundo that he is not privy to the lease contract, not
being the lessor nor the lessee referred to therein, he could thus not have violated its provisions, but he is
nevertheless a proper party. Clearly, he stepped into the shoes of the owner-lessor of the land as, by virtue
of his purchase, he assumed all the obligations of the lessor under the lease contract. Moreover, he
received benefits in the form of rental payments. Furthermore, the complaint, as well as the petition,
prayed for the annulment of the sale of the properties to him. Both pleadings also alleged collusion
between him and respondent Santos which defeated the exercise by petitioner of its right of first refusal.

In order then to accord complete relief to petitioner, respondent Raymundo was a necessary, if not
indispensable, party to the case. A favorable judgment for the petitioner will necessarily affect the rights of
respondent Raymundo as the buyer of the property over which petitioner would like to assert its right of
first option to buy.
In the case at bar, the subject matter of the contract is likewise a lease, which is a property right. The
death of a party does not excuse nonperformance of a contract which involves a property right, and the
rights and obligations thereunder pass to the personal representatives of the deceased. Similarly,
nonperformance is not excused by the death of the party when the other party has a property interest in
the subject matter of the contract. [16]
Under both Article 1311 of the Civil Code and jurisprudence, therefore, Victor is bound by the subject
Contract of Lease with Option to Buy.
That being resolved, we now rule on the issue of whether petitioner had complied with its obligations
under the contract and with the requisites to exercise its option. The payment by petitioner of the
reservation fees during the two-year period within which it had the option to lease or purchase the
property is not disputed. In fact, the payment of such reservation fees, except those for February and
March, 1990 were admitted by Victor. [17] This is clear from the transcripts, to wit"ATTY. MOJADO:
One request, Your Honor. The last payment which was allegedly made in January 1990 just indicate in that
stipulation that it was issued November of 1989 and postdated Janaury 1990 and then we will admit
all. rodp;fo
COURT:
All reservation fee?
ATTY. MOJADO:
Yes, Your Honor.
COURT:
All as part of the lease?
ATTY. MOJADO:
Reservation fee, Your Honor. There was no payment with respect to payment of rentals." [18]
Petitioner also paid the P15,000.00 monthly rental fee on the subject property by depositing the same in
China Bank Savings Account No. 1-04-02558-I-1, in the name of Victor as the sole heir of Encarnacion
Bartolome,[19] for the months of March to July 30, 1990, or a total of five (5) months, despite the refusal of
Victor to turn over the subject property. [20]
Likewise, petitioner complied with its duty to inform the other party of its intention to exercise its option to
lease through its letter dated Match 12, 1990, [21] well within the two-year period for it to exercise its option.
Considering that at that time Encarnacion Bartolome had already passed away, it was legitimate for
petitioner to have addressed its letter to her heir.
It appears, therefore, that the exercise by petitioner of its option to lease the subject property was made in
accordance with the contractual provisions. Concomitantly, private respondent Victor Bartolome has the
obligation to surrender possession of and lease the premises to petitioner for a period of six (6) years,
pursuant to the Contract of Lease with Option to Buy. micks
Coming now to the issue of tenancy, we find that this is not for this Court to pass upon in the present
petition. We note that the Motion to Intervene and to Dismiss of the alleged tenant, Andres Lanozo, was
denied by the lower court and that such denial was never made the subject of an appeal. As the lower
court stated in its Order, the alleged right of the tenant may well be ventilated in another proceeding in
due time.
WHEREFORE, in view of the foregoing, the instant Petition for Review is GRANTED. The Decision of the
Court of Appeals in CA-G.R. CV No. 40849 and that of the Regional Trial Court of Valenzuela in Civil Case
No. 3337-V-90 are both SET ASIDE and a new one rendered ordering private respondent Victor Bartolome
to:
(a) surrender and deliver possession of that parcel of land covered by Transfer Certificate of Title No. V14249 by way of lease to petitioner and to perform all obligations of his predecessor-in-interest,
Encarnacion Bartolome, under the subject Contract of Lease with Option to Buy;
(b) surrender and deliver his copy of Transfer Certificate of Title No. V-14249 to respondent Register of
Deeds for registration and annotation thereon of the subject Contract of Lease with Option to Buy;

(c) pay costs of suit. Sc


Respondent Register of Deeds is, accordingly, ordered to register and annotate the subject Contract of
Lease with Option to Buy at the back of Transfer Certificate of Title No. V-14249 upon submission by
petitioner of a copy thereof to his office.
SO ORDERED.