Republic of the Philippinesp

SUPREME COURT

Manila

EN BANC

DECISION

August 12, 1927

G.R. No. 26085

SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants,

vs.

BENITO GONZALEZ SY CHIAM, defendants-appellee.

Araneta and Zaragoza for appellants.

Eusebio Orense for appelle.

Johnson, J.:

PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL

The principal questions presented by this appeal are:

(a) Is the contract in question a pacto de retro or a mortgage?

(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and agrees to pay a certain

amount per month as rent, may such rent render such a contract usurious when the amount paid as rent,

computed upon the purchase price, amounts to a higher rate of interest upon said amount than that allowed

by law?

(c) May the contract in the present case may be modified by parol evidence?

ANTECEDENT FACTS

Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon Rice Mills, Inc., a

piece or parcel of land with the camarin located thereon, situated in the municipality of Tarlac of the Province

of Tarlac for the price of P25,000, promising to pay therefor in three installments. The first installment of

P2,000 was due on or before the 2d day of May, 1921; the second installment of P8,000 was due on or before

31st day of May, 1921; the balance of P15,000 at 12 per cent interest was due and payable on or about the

30th day of November, 1922. One of the conditions of that contract of purchase was that on failure of the

purchaser (plaintiffs and appellants) to pay the balance of said purchase price or any of the installments on

the date agreed upon, the property bought would revert to the original owner.

The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far as the record

shows upon the due dates. The balance of P15,000 due on said contract of purchase was paid on or about the

1st day of December, 1922, in the manner which will be explained below. On the date when the balance of

P15,000 with interest was paid, the vendor of said property had issued to the purchasers transfer certificate

1

of title to said property, No. 528. Said transfer certificate of title (No. 528) was transfer certificate of title from

No. 40, which shows that said land was originally registered in the name of the vendor on the 7th day of

November, 1913.

PRESENT FACTS

On the 7th day of November, 1922 the representative of the vendor of the property in question wrote a letter

to the appellant Potenciana Manio (Exhibit A, p. 50), notifying the latter that if the balance of said

indebtedness was not paid, an action would be brought for the purpose of recovering the property, together

with damages for non compliance with the condition of the contract of purchase. The pertinent parts of said

letter read as follows:

Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente, procederemos judicialmente

contra Vd. para reclamar la devolucion del camarin y los daños y perjuicios ocasionados a la compañia por su

incumplimiento al contrato.

Somos de Vd. atentos y S. S.

SMITH, BELL & CO., LTD.

By (Sgd.) F. I. HIGHAM

Treasurer.

General Managers

LUZON RICE MILLS INC.

According to Exhibits B and D, which represent the account rendered by the vendor, there was due and

payable upon said contract of purchase on the 30th day of November, 1922, the sum P16,965.09. Upon

receiving the letter of the vendor of said property of November 7, 1922, the purchasers, the appellants herein,

realizing that they would be unable to pay the balance due, began to make an effort to borrow money with

which to pay the balance due, began to make an effort to borrow money with which to pay the balance of

their indebtedness on the purchase price of the property involved. Finally an application was made to the

defendant for a loan for the purpose of satisfying their indebtedness to the vendor of said property. After

some negotiations the defendants agreed to loan the plaintiffs to loan the plaintiffs the sum of P17,500 upon

condition that the plaintiffs execute and deliver to him a pacto de retro of said property.

In accordance with that agreement the defendant paid to the plaintiffs by means of a check the sum of

P16,965.09. The defendant, in addition to said amount paid by check, delivered to the plaintiffs the sum of

P354.91 together with the sum of P180 which the plaintiffs paid to the attorneys for drafting said contract of

pacto de retro, making a total paid by the defendant to the plaintiffs and for the plaintiffs of P17,500 upon the

execution and delivery of said contract. Said contracts was dated the 28th day of November, 1922, and is in

the words and figures following:

2

Sepan todos por la presente:

Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores de edad, residentes en el

Municipio de Calumpit, Provincia de Bulacan, propietarios y transeuntes en esta Ciudad de Manila, de una

parte, y de otra, Benito Gonzalez Sy Chiam, mayor de edad, casado con Maria Santiago, comerciante y vecinos

de esta Ciudad de Manila.

MANIFESTAMOS Y HACEMOS CONSTAR:

Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en consideracion a la cantidad de

diecisiete mil quinientos pesos (P17,500) moneda filipina, que en este acto hemos recibido a nuestra entera

satisfaccion de Don Benito Gonzalez Sy Chiam, cedemos, vendemos y traspasamos a favor de dicho Don

Benito Gonzalez Sy Chiam, sus herederos y causahabientes, una finca que, segun el Certificado de

Transferencia de Titulo No. 40 expedido por el Registrador de Titulos de la Provincia de Tarlac a favor de

“Luzon Rice Mills Company Limited” que al incorporarse se donomino y se denomina “Luzon Rice Mills Inc.,” y

que esta corporacion nos ha transferido en venta absoluta, se describe como sigue:

Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el Municipio de Tarlac. Linda por el

O. y N. con propiedad de Manuel Urquico; por el E. con propiedad de la Manila Railroad Co.; y por el S. con un

camino. Partiendo de un punto marcado 1 en el plano, cuyo punto se halla al N. 41 gds. 17′ E.859.42 m. del

mojon de localizacion No. 2 de la Oficina de Terrenos en Tarlac; y desde dicho punto 1 N. 81 gds. 31′ O., 77 m.

al punto 2; desde este punto N. 4 gds. 22′ E.; 54.70 m. al punto 3; desde este punto S. 86 gds. 17′ E.; 69.25 m. al

punto 4; desde este punto S. 2 gds. 42′ E., 61.48 m. al punto de partida; midiendo una extension superficcial

de cuatro mil doscientos diez y seis metros cuadrados (4,216) mas o menos. Todos los puntos nombrados se

hallan marcados en el plano y sobre el terreno los puntos 1 y 2 estan determinados por mojones de P. L. S. de

20 x 20 x 70 centimetros y los puntos 3 y 4 por mojones del P. L. S. B. L.: la orientacion seguida es la

verdadera, siendo la declinacion magnetica de 0 gds. 45′ E. y la fecha de la medicion, 1.º de febrero de

1913.

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) años contados desde el dia 1.º

de diciembre de 1922, devolvemos al expresado Don Benito Gonzalez Sy Chiam el referido precio de

diecisiete mil quinientos pesos (P17,500) queda obligado dicho Sr. Benito Gonzalez y Chiam a retrovendernos

la finca arriba descrita; pero si transcurre dicho plazo de cinco años sin ejercitar el derecho de retracto que

nos hemos reservado, entonces quedara esta venta absoluta e irrevocable.

Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca arriba descrita,

sujeto a condiciones siguientes:

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito Gonzalez Sy Chiam y en

su domicilio, era de trescientos setenta y cinco pesos (P375) moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy Chiam, asi como

tambien la prima del seguro contra incendios, si el conviniera al referido Sr. Benito Gonzalez Sy Chiam

asegurar dicha finca.

3

(c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos dara lugar a la terminacion de

este arrendamieno y a la perdida del derecho de retracto que nos hemos reservado, como si naturalmente

hubiera expirado el termino para ello, pudiendo en su virtud dicho Sr. Gonzalez Sy Chiam tomar posesion de

la finca y desahuciarnos de la misma.

Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta escritura en los precisos terminos

en que la dejan otorgada los conyuges Severino Tolentino y Potenciana Manio.

En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila, por cuadruplicado en Manila,

hoy a 28 de noviembre de 1922.

(Fdo.) SEVERINO TOLENTINO

(Fda.) POTENCIANA MANIO

(Fdo.) BENITO GONZALEZ SY CHIAM

Firmado en presencia de:

(Fdos.) MOISES M. BUHAIN

B. S. BANAAG

An examination of said contract of sale with reference to the first question above, shows clearly that it is a

pacto de retro and not a mortgage. There is no pretension on the part of the appellant that said contract,

standing alone, is a mortgage. The pertinent language of the contract is:

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) años contados desde el dia 1.º

de diciembre de 1922, devolvemos al expresado Don Benito Gonzales Sy Chiam el referido precio de

diecisiete mil quinientos pesos (P17,500) queda obligado dicho Sr. Benito Gonzales Sy Chiam a

retrovendornos la finca arriba descrita; pero si transcurre dicho plazo de cinco (5) años sin ejercitar al

derecho de retracto que nos hemos reservado, entonces quedara esta venta absoluta e irrevocable.

Language cannot be clearer. The purpose of the contract is expressed clearly in said quotation that there can

certainly be not doubt as to the purpose of the plaintiff to sell the property in question, reserving the right

only to repurchase the same. The intention to sell with the right to repurchase cannot be more clearly

expressed.

It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the absolute sale of

the property, entered into a contract with the purchaser by virtue of which she became the “tenant” of the

purchaser. That contract of rent appears in said quoted document above as follows:

Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca arriba descrita,

sujeto a condiciones siguientes:

4

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito Gonzalez Sy Chiam y en

su domicilio, sera de trescientos setenta y cinco pesos (P375) moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy Chiam, asi como

tambien la prima del seguro contra incendios, si le conviniera al referido Sr. Benito Gonzalez Sy Chiam

asegurar dicha finca.

From the foregoing, we are driven to the following conclusions: First, that the contract of pacto de retro is an

absolute sale of the property with the right to repurchase and not a mortgage; and, second, that by virtue of

the said contract the vendor became the tenant of the purchaser, under the conditions mentioned in

paragraph 3 of said contact quoted above.

It has been the uniform theory of this court, due to the severity of a contract of pacto de retro, to declare the

same to be a mortgage and not a sale whenever the interpretation of such a contract justifies that conclusion.

There must be something, however, in the language of the contract or in the conduct of the parties which

shows clearly and beyond doubt that they intended the contract to be a “mortgage” and not a pacto de retro.

(International Banking Corporation vs. Martinez, 10 Phil., 252; Padilla vs. Linsangan, 19 Phil., 65; Cumagun vs.

Alingay, 19 Phil., 415; Olino vs. Medina, 13 Phil., 379; Manalo vs. Gueco, 42 Phil., 925; Velazquez vs. Teodoro,

46 Phil., 757; Villa vs. Santiago, 38 Phil., 157.)

We are not unmindful of the fact that sales with pacto de retro are not favored and that the court will not

construe an instrument to one of sale with pacto de retro, with the stringent and onerous effect which

follows, unless the terms of the document and the surrounding circumstances require it.

While it is general rule that parol evidence is not admissible for the purpose of varying the terms of a

contract, but when an issue is squarely presented that a contract does not express the intention of the parties,

courts will, when a proper foundation is laid therefor, hear evidence for the purpose of ascertaining the true

intention of the parties.

In the present case the plaintiffs allege in their complaint that the contract in question is a pacto de retro.

They admit that they signed it. They admit they sold the property in question with the right to repurchase it.

The terms of the contract quoted by the plaintiffs to the defendant was a “sale” with pacto de retro, and the

plaintiffs have shown no circumstance whatever which would justify us in construing said contract to be a

mere “loan” with guaranty. In every case in which this court has construed a contract to be a mortgage or a

loan instead of a sale with pacto de retro, it has done so, either because the terms of such contract were

incompatible or inconsistent with the theory that said contract was one of purchase and sale. (Olino vs.

Medina, supra; Padilla vs. Linsangan, supra; Manlagnit vs. Dy Puico, 34 Phil., 325; Rodriguez vs. Pamintuan

and De Jesus, 37 Phil., 876.)

In the case of Padilla vs. Linsangan the term employed in the contract to indicate the nature of the conveyance

of the land was “pledged” instead of “sold”. In the case of Manlagnit vs. Dy Puico, while the vendor used to the

terms “sale and transfer with the right to repurchase,” yet in said contract he described himself as a “debtor”

the purchaser as a “creditor” and the contract as a “mortgage”. In the case of Rodriguez vs. Pamintuan and De

Jesus the person who executed the instrument, purporting on its face to be a deed of sale of certain parcels of

5

land, had merely acted under a power of attorney from the owner of said land, “authorizing him to borrow

money in such amount and upon such terms and conditions as he might deem proper, and to secure payment

of the loan by a mortgage.” In the case of Villa vs. Santiago (38 Phil., 157), although a contract purporting to be

a deed of sale was executed, the supposed vendor remained in possession of the land and invested the money

he had obtained from the supposed vendee in making improvements thereon, which fact justified the court in

holding that the transaction was a mere loan and not a sale. In the case of Cuyugan vs. Santos (39 Phil., 970),

the purchaser accepted partial payments from the vendor, and such acceptance of partial payments is

absolutely incompatible with the idea of irrevocability of the title of ownership of the purchaser at the

expiration of the term stipulated in the original contract for the exercise of the right of repurchase.”

Referring again to the right of the parties to vary the terms of written contract, we quote from the dissenting

opinion of Chief Justice Cayetano S. Arellano in the case of Government of the Philippine Islands vs. Philippine

Sugar Estates Development Co., which case was appealed to the Supreme Court of the United States and the

contention of the Chief Justice in his dissenting opinion was affirmed and the decision of the Supreme Court of

the Philippine Islands was reversed. (See decision of the Supreme Court of the United States, June 3, 1918.)1

The Chief Justice said in discussing that question:

According to article 1282 of the Civil Code, in order to judge of the intention of the contracting parties,

consideration must chiefly be paid to those acts executed by said parties which are contemporary with and

subsequent to the contract. And according to article 1283, however general the terms of a contract may be,

they must not be held to include things and cases different from those with regard to which the interested

parties agreed to contract. “The Supreme Court of the Philippine Islands held the parol evidence was

admissible in that case to vary the terms of the contract between the Government of the Philippine Islands

and the Philippine Sugar Estates Development Co. In the course of the opinion of the Supreme Court of the

United States Mr. Justice Brandeis, speaking for the court, said:

It is well settled that courts of equity will reform a written contract where, owing to mutual mistake, the

language used therein did not fully or accurately express the agreement and intention of the parties. The fact

that interpretation or construction of a contract presents a question of law and that, therefore, the mistake

was one of law is not a bar to granting relief. . . . This court is always disposed to accept the construction

which the highest court of a territory or possession has placed upon a local statute. But that disposition may

not be yielded to where the lower court has clearly erred. Here the construction adopted was rested upon a

clearly erroneous assumption as to an established rule of equity. . . . The burden of proof resting upon the

appellant cannot be satisfied by mere preponderance of the evidence. It is settled that relief by way of

reformation will not be granted unless the proof of mutual mistake be of the clearest and most satisfactory

character.

The evidence introduced by the appellant in the present case does not meet with that stringent requirement.

There is not a word, a phrase, a sentence or a paragraph in the entire record, which justifies this court in

holding that the said contract of pacto de retro is a mortgage and not a sale with the right to repurchase.

Article 1281 of the Civil Code provides: “If the terms of a contract are clear and leave no doubt as to the

intention of the contracting parties, the literal sense of its stipulations shall be followed.” Article 1282

6

provides: “in order to judge as to the intention of the contracting parties, attention must be paid principally to

their conduct at the time of making the contract and subsequently thereto.”

We cannot thereto conclude this branch of our discussion of the question involved, without quoting from that

very well reasoned decision of the late Chief Justice Arellano, one of the greatest jurists of his time. He said, in

discussing the question whether or not the contract, in the case of Lichauco vs. Berenguer (20 Phil., 12), was a

pacto de retro or a mortgage:

The public instrument, Exhibit C, in part reads as follows: “Don Macarion Berenguer declares and states that

he is the proprietor in fee simple of two parcels of fallow unappropriated crown land situated within the

district of his pueblo. The first has an area of 73 quiñones, 8 balitas and 8 loanes, located in the sitio of

Batasan, and its boundaries are, etc., etc. The second is in the sitio of Panantaglay, barrio of Calumpang has as

area of 73 hectares, 22 ares, and 6 centares, and is bounded on the north, etc., etc.”

In the executory part of the said instrument, it is stated:

‘That under condition of right to repurchase (pacto de retro) he sells the said properties to the

aforementioned Doña Cornelia Laochangco for P4,000 and upon the following conditions: First, the sale

stipulated shall be for the period of two years, counting from this date, within which time the deponent shall

be entitled to repurchase the land sold upon payment of its price; second, the lands sold shall, during the term

of the present contract, be held in lease by the undersigned who shall pay, as rental therefor, the sum of 400

pesos per annum, or the equivalent in sugar at the option of the vendor; third, all the fruits of the said lands

shall be deposited in the sugar depository of the vendee, situated in the district of Quiapo of this city, and the

value of which shall be applied on account of the price of this sale; fourth, the deponent acknowledges that he

has received from the vendor the purchase price of P4,000 already paid, and in legal tender currency of this

country . . .; fifth, all the taxes which may be assessed against the lands surveyed by competent authority, shall

be payable by and constitute a charge against the vendor; sixth, if, through any unusual event, such as flood,

tempest, etc., the properties hereinbefore enumerated should be destroyed, wholly or in part, it shall be

incumbent upon the vendor to repair the damage thereto at his own expense and to put them into a good

state of cultivation, and should he fail to do so he binds himself to give to the vendee other lands of the same

area, quality and value.’

x x x x x x x x x

The opponent maintained, and his theory was accepted by the trial court, that Berenguer’s contract with

Laochangco was not one of sale with right of repurchase, but merely one of loan secured by those properties,

and, consequently, that the ownership of the lands in questions could not have been conveyed to Laochangco,

inasmuch as it continued to be held by Berenguer, as well as their possession, which he had not ceased to

enjoy.

Such a theory is, as argued by the appellant, erroneous. The instrument executed by Macario Berenguer, the

text of which has been transcribed in this decision, is very clear. Berenguer’s heirs may not go counter to the

literal tenor of the obligation, the exact expression of the consent of the contracting contained in the

instrument, Exhibit C. Not because the lands may have continued in possession of the vendor, not because the

7

latter may have assumed the payment of the taxes on such properties, nor yet because the same party may

have bound himself to substitute by another any one of the properties which might be destroyed, does the

contract cease to be what it is, as set forth in detail in the public instrument. The vendor continued in the

possession of the lands, not as the owner thereof as before their sale, but as the lessee which he became after

its consummation, by virtue of a contract executed in his favor by the vendee in the deed itself, Exhibit C.

Right of ownership is not implied by the circumstance of the lessee’s assuming the responsibility of the

payment is of the taxes on the property leased, for their payment is not peculiarly incumbent upon the owner,

nor is such right implied by the obligation to substitute the thing sold for another while in his possession

under lease, since that obligation came from him and he continues under another character in its possession-

a reason why he guarantees its integrity and obligates himself to return the thing even in a case of force

majeure. Such liability, as a general rule, is foreign to contracts of lease and, if required, is exorbitant, but

possible and lawful, if voluntarily agreed to and such agreement does not on this account involve any sign of

ownership, nor other meaning than the will to impose upon oneself scrupulous diligence in the care of a thing

belonging to another.

The purchase and sale, once consummated, is a contract which by its nature transfers the ownership and

other rights in the thing sold. A pacto de retro, or sale with right to repurchase, is nothing but a personal right

stipulated between the vendee and the vendor, to the end that the latter may again acquire the ownership of

the thing alienated.

It is true, very true indeed, that the sale with right of repurchase is employed as a method of loan; it is

likewise true that in practice many cases occur where the consummation of a pacto de retro sale means the

financial ruin of a person; it is also, unquestionable that in pacto de retro sales very important interests often

intervene, in the form of the price of the lease of the thing sold, which is stipulated as an additional covenant.

(Manresa, Civil Code, p. 274.)

But in the present case, unlike others heard by this court, there is no proof that the sale with right of

repurchase, made by Berenguer in favor of Laonchangco is rather a mortgage to secure a loan.

We come now to a discussion of the second question presented above, and that is, stating the same in another

form: May a tenant charge his landlord with a violation of the Usury Law upon the ground that the amount of

rent he pays, based upon the real value of the property, amounts to a usurious rate of interest? When the

vendor of property under a pacto de retro rents the property and agrees to pay a rental value for the property

during the period of his right to repurchase, he thereby becomes a “tenant” and in all respects stands in the

same relation with the purchaser as a tenant under any other contract of lease.

The appellant contends that the rental price paid during the period of the existence of the right to repurchase,

or the sum of P375 per month, based upon the value of the property, amounted to usury. Usury, generally

speaking, may be defined as contracting for or receiving something in excess of the amount allowed by law

for the loan or forbearance of money-the taking of more interest for the use of money than the law allows. It

seems that the taking of interest for the loan of money, at least the taking of excessive interest has been

regarded with abhorrence from the earliest times. (Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the

middle ages the people of England, and especially the English Church, entertained the opinion, then, current

8

in Europe, that the taking of any interest for the loan of money was a detestable vice, hateful to man and

contrary to the laws of God. (3 Coke’s Institute, 150; Tayler on Usury, 44.)

Chancellor Kent, in the case of Dunham vs. Gould, supra, said: “If we look back upon history, we shall find that

there is scarcely any people, ancient or modern, that have not had usury laws. . . . The Romans, through the

greater part of their history, had the deepest abhorrence of usury. . . . It will be deemed a little singular, that

the same voice against usury should have been raised in the laws of China, in the Hindu institutes of Menu, in

the Koran of Mahomet, and perhaps, we may say, in the laws of all nations that we know of, whether Greek or

Barbarian.”

The collection of a rate of interest higher than that allowed by law is condemned by the Philippine Legislature

(Acts Nos. 2655, 2662 and 2992). But is it unlawful for the owner of a property to enter into a contract with

the tenant for the payment of a specific amount of rent for the use and occupation of said property, even

though the amount paid as “rent,” based upon the value of the property, might exceed the rate of interest

allowed by law? That question has never been decided in this jurisdiction. It is one of first impression. No

cases have been found in this jurisdiction answering that question. Act No. 2655 is “An Act fixing rates of

interest upon ‘loans’ and declaring the effect of receiving or taking usurious rates.”

It will be noted that said statute imposes a penalty upon a “loan” or forbearance of any money, goods, chattels

or credits, etc. The central idea of said statute is to prohibit a rate of interest on “loans.” A contract of “loan,” is

very different contract from that of “rent”. A “loan,” as that term is used in the statute, signifies the giving of a

sum of money, goods or credits to another, with a promise to repay, but not a promise to return the same

thing. To “loan,” in general parlance, is to deliver to another for temporary use, on condition that the thing or

its equivalent be returned; or to deliver for temporary use on condition that an equivalent in kind shall be

returned with a compensation for its use. The word “loan,” however, as used in the statute, has a technical

meaning. It never means the return of the same thing. It means the return of an equivalent only, but never the

same thing loaned. A “loan” has been properly defined as an advance payment of money, goods or credits

upon a contract or stipulation to repay, not to return, the thing loaned at some future day in accordance with

the terms of the contract. Under the contract of “loan,” as used in said statute, the moment the contract is

completed the money, goods or chattels given cease to be the property of the former owner and becomes the

property of the obligor to be used according to his own will, unless the contract itself expressly provides for a

special or specific use of the same. At all events, the money, goods or chattels, the moment the contract is

executed, cease to be the property of the former owner and becomes the absolute property of the obligor.

A contract of “loan” differs materially from a contract of “rent.” In a contract of “rent” the owner of the

property does not lose his ownership. He simply loses his control over the property rented during the period

of the contract. In a contract of “loan” the thing loaned becomes the property of the obligor. In a contract of

“rent” the thing still remains the property of the lessor. He simply loses control of the same in a limited way

during the period of the contract of “rent” or lease. In a contract of “rent” the relation between the contractors

is that of landlord and tenant. In a contract of “loan” of money, goods, chattels or credits, the relation between

the parties is that of obligor and obligee. “Rent” may be defined as the compensation either in money,

provisions, chattels, or labor, received by the owner of the soil from the occupant thereof. It is defined as the

return or compensation for the possession of some corporeal inheritance, and is a profit issuing out of lands

9

or tenements, in return for their use. It is that, which is to paid for the use of land, whether in money, labor or

other thing agreed upon. A contract of “rent” is a contract by which one of the parties delivers to the other

some nonconsumable thing, in order that the latter may use it during a certain period and return it to the

former; whereas a contract of “loan”, as that word is used in the statute, signifies the delivery of money or

other consumable things upon condition of returning an equivalent amount of the same kind or quantity, in

which cases it is called merely a “loan.” In the case of a contract of “rent,” under the civil law, it is called a

“commodatum.”

From the foregoing it will be seen that there is a while distinction between a contract of “loan,” as that word is

used in the statute, and a contract of “rent” even though those words are used in ordinary parlance as

interchangeable terms.

The value of money, goods or credits is easily ascertained while the amount of rent to be paid for the use and

occupation of the property may depend upon a thousand different conditions; as for example, farm lands of

exactly equal productive capacity and of the same physical value may have a different rental value, depending

upon location, prices of commodities, proximity to the market, etc. Houses may have a different rental value

due to location, conditions of business, general prosperity or depression, adaptability to particular purposes,

even though they have exactly the same original cost. A store on the Escolta, in the center of business,

constructed exactly like a store located outside of the business center, will have a much higher rental value

than the other. Two places of business located in different sections of the city may be constructed exactly on

the same architectural plan and yet one, due to particular location or adaptability to a particular business

which the lessor desires to conduct, may have a very much higher rental value than one not so located and

not so well adapted to the particular business. A very cheap building on the carnival ground may rent for

more money, due to the particular circumstances and surroundings, than a much more valuable property

located elsewhere. It will thus be seen that the rent to be paid for the use and occupation of property is not

necessarily fixed upon the value of the property. The amount of rent is fixed, based upon a thousand different

conditions and may or may not have any direct reference to the value of the property rented. To hold that

“usury” can be based upon the comparative actual rental value and the actual value of the property, is to

subject every landlord to an annoyance not contemplated by the law, and would create a very great

disturbance in every business or rural community. We cannot bring ourselves to believe that the Legislature

contemplated any such disturbance in the equilibrium of the business of the country.

In the present case the property in question was sold. It was an absolute sale with the right only to

repurchase. During the period of redemption the purchaser was the absolute owner of the property. During

the period of redemption the vendor was not the owner of the property. During the period of redemption the

vendor was a tenant of the purchaser. During the period of redemption the relation which existed between

the vendor and the vendee was that of landlord and tenant. That relation can only be terminated by a

repurchase of the property by the vendor in accordance with the terms of the said contract. The contract was

one of rent. The contract was not a loan, as that word is used in Act No. 2655.

As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no right to make contracts

for parties. They made their own contract in the present case. There is not a word, a phrase, a sentence or

paragraph, which in the slightest way indicates that the parties to the contract in question did not intend to

10

sell the property in question absolutely, simply with the right to repurchase. People who make their own beds

must lie thereon.

What has been said above with reference to the right to modify contracts by parol evidence, sufficiently

answers the third questions presented above. The language of the contract is explicit, clear, unambiguous and

beyond question. It expresses the exact intention of the parties at the time it was made. There is not a word, a

phrase, a sentence or paragraph found in said contract which needs explanation. The parties thereto entered

into said contract with the full understanding of its terms and should not now be permitted to change or

modify it by parol evidence.

With reference to the improvements made upon said property by the plaintiffs during the life of the contract,

Exhibit C, there is hereby reserved to the plaintiffs the right to exercise in a separate action the right

guaranteed to them under article 361 of the Civil Code.

For all of the foregoing reasons, we are fully persuaded from the facts of the record, in relation with the law

applicable thereto, that the judgment appealed from should be and is hereby affirmed, with costs. So ordered.

Avanceña, C. J., Street, Villamor, Romualdez and Villa-Real, JJ., concur.

Separate Opinions

MALCOLM, J., dissenting:

I regret to have to dissent from the comprehensive majority decision. I stand squarely on the proposition that

the contract executed by the parties was merely a clever device to cover up the payment of usurious interest.

The fact that the document purports to be a true sale with right of repurchase means nothing. The fact that

the instrument includes a contract of lease on the property whereby the lessees as vendors apparently bind

themselves to pay rent at the rate of P375 per month and whereby “Default in the payment of the rent agreed

for two consecutive months will terminate this lease and will forfeit our right of repurchase, as though the

term had expired naturally” does mean something, and taken together with the oral testimony is indicative of

a subterfuge hiding a usurious loan. (Usury Law, Act No. 2655, sec. 7, as amended; Padilla vs. Linsangan

[1911], 19 Phil., 65; U. S. vs. Tan Quingco Chua [1919], 39 Phil., 552; Russel vs. Southard [1851], 53 U. S., 139

Monagas vs. Albertucci y Alvarez [1914], 235 U. S., 81; 10 Manresa, Codigo Civil Español, 3rd ed., p. 318.) The

transaction should be considered as in the nature of an equitable mortgage. My vote is for a modification of

the judgment of the trial court.

Republic of the PhilippinesSUPREME COURT

Manila

11

EN BANC

G.R. No. L-46240             November 3, 1939

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants, vs.BECK, defendant-appellee.

Mauricio Carlos for appellants.Felipe Buencamino, Jr. for appellee.

IMPERIAL, J.:

          The plaintiff brought this action to compel the defendant to return her certain furniture which she lent him for his use. She appealed from the judgment of the Court of First Instance of Manila which ordered that the defendant return to her the three has heaters and the four electric lamps found in the possession of the Sheriff of said city, that she call for the other furniture from the said sheriff of Manila at her own expense, and that the fees which the Sheriff may charge for the deposit of the furniture be paid pro rata by both parties, without pronouncement as to the costs.

          The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture described in the third paragraph of the stipulation of facts, subject to the condition that the defendant would return them to the plaintiff upon the latter's demand. The plaintiff sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified the defendant of the conveyance, giving him sixty days to vacate the premises under one of the clauses of the contract of lease. There after the plaintiff required the defendant to return all the furniture transferred to him for them in the house where they were found. On             November 5, 1936, the defendant, through another person, wrote to the plaintiff reiterating that she may call for the furniture in the ground floor of the house. On the 7th of the same month, the defendant wrote another letter to the plaintiff informing her that he could not give up the three gas heaters and the four electric lamps because he would use them until the 15th of the same month when the lease in due to expire. The plaintiff refused to get the furniture in view of the fact that the defendant had declined to make delivery of all of them. On             November 15th, before vacating the house, the defendant deposited with the Sheriff all the furniture belonging to the plaintiff and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.

          In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in holding that they violated the contract by not calling for all the furniture on November 5, 1936, when the defendant placed them at their disposal; in not ordering the defendant to pay them the value of the furniture in case they are not delivered; in holding that they should get all the furniture from the Sheriff at their expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the deposit of the furniture; in ruling that both parties should pay their respective legal expenses or the costs; and in denying pay their respective legal expenses or the costs; and in denying the motions for reconsideration and new trial. To dispose of the case, it is only necessary to decide whether the defendant complied with his obligation to return the furniture upon the plaintiff's demand; whether the latter is bound to bear the deposit fees thereof, and whether she is entitled to the costs of litigation.lawphi1.net

          The contract entered into between the parties is one of commadatum, because under it the plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand, means that he

12

should return all of them to the plaintiff at the latter's residence or house. The defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. The provisions of article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial court, therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with her obligation to get the furniture when they were offered to her.

          As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the defendant wanted to retain the three gas heaters and the four electric lamps.

          As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof by the defendant in case of his inability to return some of the furniture because under paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the said value. Should the defendant fail to deliver some of the furniture, the value thereof should be latter determined by the trial Court through evidence which the parties may desire to present.

          The costs in both instances should be borne by the defendant because the plaintiff is the prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the contract ofcommodatum, and without any reason he refused to return and deliver all the furniture upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which the plaintiff would not have otherwise defrayed.

          The appealed judgment is modified and the defendant is ordered to return and deliver to the plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of the latter, all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The expenses which may be occasioned by the delivery to and deposit of the furniture with the Sheriff shall be for the account of the defendant. the defendant shall pay the costs in both instances. So ordered.

Avanceña, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.

--------------------------------------------------------------------------------------------------------------------------------------------

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-20240      December 31, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs.JOSE GRIJALDO, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.Isabelo P. Samson for defendant-appellant.

ZALDIVAR, J.:

13

In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank of Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per annum, compounded quarterly. These loans are evidenced by five promissory notes executed by the appellant in favor of the Bank of Taiwan, Ltd., as follows: On June 1, 1943, P600.00; on June 3, 1943, P159.11; on June 18, 1943, P22.86; on August 9, 1943,P300.00; on August 13, 1943, P200.00, all notes without due dates, but because the loans were due one year after they were incurred. To secure the payment of the loans the appellant executed a chattel mortgage on the standing crops on his land, Lot No. 1494 known as Hacienda Campugas in Hinigiran, Negros Occidental.

By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided for in the Trading with the Enemy Act, as amended, the assets in the Philippines of the Bank of Taiwan, Ltd. were vested in the Government of the United States. Pursuant to the Philippine Property Act of 1946 of the United States, these assets, including the loans in question, were subsequently transferred to the Republic of the Philippines by the Government of the United States under Transfer Agreement dated July 20, 1954. These assets were among the properties that were placed under the administration of the Board of Liquidators created under Executive Order No. 372, dated November 24, 1950, and in accordance with Republic Acts Nos. 8 and 477 and other pertinent laws.

On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman of the Board of Liquidators, made a written extrajudicial demand upon the appellant for the payment of the account in question. The record shows that the appellant had actually received the written demand for payment, but he failed to pay.

The aggregate amount due as principal of the five loans in question, computed under the Ballantyne scale of values as of the time that the loans were incurred in 1943, was P889.64; and the interest due thereon at the rate of 6% per annum compounded quarterly, computed as of December 31, 1959 was P2,377.23.

On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of Hinigaran, Negros Occidental, to collect from the appellant the unpaid account in question. The Justice of the Peace Of Hinigaran, after hearing, dismissed the case on the ground that the action had prescribed. The appellee appealed to the Court of First Instance of Negros Occidental and on March 26, 1962 the court a quo rendered a decision ordering the appellant to pay the appellee the sum of P2,377.23 as of December 31, 1959, plus interest at the rate of 6% per annum compounded quarterly from the date of the filing of the complaint until full payment was made. The appellant was also ordered to pay the sum equivalent to 10% of the amount due as attorney's fees and costs.

The appellant appealed directly to this Court. During the pendency of this appeal the appellant Jose Grijaldo died. Upon motion by the Solicitor General this Court, in a resolution of May 13, 1963, required Manuel Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are the legal heirs of Jose Grijaldo to appear and be substituted as appellants in accordance with Section 17 of Rule 3 of the Rules of Court.

In the present appeal the appellant contends: (1) that the appellee has no cause of action against the appellant; (2) that if the appellee has a cause of action at all, that action had prescribed; and (3) that the lower court erred in ordering the appellant to pay the amount of P2,377.23.

In discussing the first point of contention, the appellant maintains that the appellee has no privity of contract with the appellant. It is claimed that the transaction between the Taiwan Bank, Ltd. and the appellant, so that the appellee, Republic of the Philippines, could not legally bring action against the appellant for the enforcement of the obligation involved in said transaction. This contention has no merit. It is true that the Bank of Taiwan, Ltd. was the original creditor and the transaction between the appellant and the Bank of Taiwan was a private contract of loan. However, pursuant to the Trading with the Enemy Act, as amended, and Executive Order No. 9095 of the United States; and under Vesting Order No. P-4, dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity which was declared to be under the jurisdiction of the enemy country (Japan), were vested in the United States Government and the Republic of the Philippines, the

14

assets of the Bank of Taiwan, Ltd. were transferred to and vested in the Republic of the Philippines. The successive transfer of the rights over the loans in question from the Bank of Taiwan, Ltd. to the United States Government, and from the United States Government to the government of the Republic of the Philippines, made the Republic of the Philippines the successor of the rights, title and interest in said loans, thereby creating a privity of contract between the appellee and the appellant. In defining the word "privy" this Court, in a case, said:

The word "privy" denotes the idea of succession ... hence an assignee of a credit, and one subrogated to it, etc. will be privies; in short, he who by succession is placed in the position of one of those who contracted the judicial relation and executed the private document and appears to be substituting him in the personal rights and obligation is a privy (Alpurto vs. Perez, 38 Phil. 785, 790).

The United States of America acting as a belligerent sovereign power seized the assets of the Bank of Taiwan, Ltd. which belonged to an enemy country. The confiscation of the assets of the Bank of Taiwan, Ltd. being an involuntary act of war, and sanctioned by international law, the United States succeeded to the rights and interests of said Bank of Taiwan, Ltd. over the assets of said bank. As successor in interest in, and transferee of, the property rights of the United States of America over the loans in question, the Republic of the Philippines had thereby become a privy to the original contracts of loan between the Bank of Taiwan, Ltd. and the appellant. It follows, therefore, that the Republic of the Philippines has a legal right to bring the present action against the appellant Jose Grijaldo.

The appellant likewise maintains, in support of his contention that the appellee has no cause of action, that because the loans were secured by a chattel mortgage on the standing crops on a land owned by him and these crops were lost or destroyed through enemy action his obligation to pay the loans was thereby extinguished. This argument is untenable. The terms of the promissory notes and the chattel mortgage that the appellant executed in favor of the Bank of Taiwan, Ltd. do not support the claim of appellant. The obligation of the appellant under the five promissory notes was not to deliver a determinate thing namely, the crops to be harvested from his land, or the value of the crops that would be harvested from his land. Rather, his obligation was to pay a generic thing — the amount of money representing the total sum of the five loans, with interest. The transaction between the appellant and the Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money. "By a contract of (simple) loan, one of the parties delivers to another ... money or other consumable thing upon the condition that the same amount of the same kind and quality shall be paid." (Article 1933, Civil Code) The obligation of the appellant under the five promissory notes evidencing the loans in questions is to pay the value thereof; that is, to deliver a sum of money — a clear case of an obligation to deliver, a generic thing. Article 1263 of the Civil Code provides:

In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation.

The chattel mortgage on the crops growing on appellant's land simply stood as a security for the fulfillment of appellant's obligation covered by the five promissory notes, and the loss of the crops did not extinguish his obligation to pay, because the account could still be paid from other sources aside from the mortgaged crops.

In his second point of contention, the appellant maintains that the action of the appellee had prescribed. The appellant points out that the loans became due on June 1, 1944; and when the complaint was filed on January 17,1961 a period of more than 16 years had already elapsed — far beyond the period of ten years when an action based on a written contract should be brought to court.

This contention of the appellant has no merit. Firstly, it should be considered that the complaint in the present case was brought by the Republic of the Philippines not as a nominal party but in the exercise of its sovereign functions, to protect the interests of the State over a public property. Under paragraph 4 of Article 1108 of the Civil Code prescription, both acquisitive and extinctive, does not run against the State. This Court has held that the statute of limitations does not run against the right of action of the Government of the Philippines (Government of the Philippine Islands vs. Monte de Piedad, etc., 35 Phil. 738-751).Secondly, the

15

running of the period of prescription of the action to collect the loan from the appellant was interrupted by the moratorium laws (Executive Orders No. 25, dated November 18, 1944; Executive Order No. 32. dated March 10, 1945; and Republic Act No. 342, approved on July 26, 1948). The loan in question, as evidenced by the five promissory notes, were incurred in the year 1943, or during the period of Japanese occupation of the Philippines. This case is squarely covered by Executive Order No. 25, which became effective on November 18, 1944, providing for the suspension of payments of debts incurred after December 31, 1941. The period of prescription was, therefore, suspended beginning November 18, 1944. This Court, in the case of Rutter vs. Esteban (L-3708, May 18, 1953, 93 Phil. 68), declared on May 18, 1953 that the Moratorium Laws, R.A. No. 342 and Executive Orders Nos. 25 and 32, are unconstitutional; but in that case this Court ruled that the moratorium laws had suspended the prescriptive period until May 18, 1953. This ruling was categorically reiterated in the decision in the case of Manila Motors vs. Flores, L-9396, August 16, 1956. It follows, therefore, that the prescriptive period in the case now before US was suspended from November 18,1944, when Executive Orders Nos. 25 and 32 were declared unconstitutional by this Court. Computed accordingly, the prescriptive period was suspended for 8 years and 6 months. By the appellant's own admission, the cause of action on the five promissory notes in question arose on June 1, 1944. The complaint in the present case was filed on January 17, 1961, or after a period of 16 years, 6 months and 16 days when the cause of action arose. If the prescriptive period was not interrupted by the moratorium laws, the action would have prescribed already; but, as We have stated, the prescriptive period was suspended by the moratorium laws for a period of 8 years and 6 months. If we deduct the period of suspension (8 years and 6 months) from the period that elapsed from the time the cause of action arose to the time when the complaint was filed (16 years, 6 months and 16 days) there remains a period of 8 years and 16 days. In other words, the prescriptive period ran for only 8 years and 16 days. There still remained a period of one year, 11 months and 14 days of the prescriptive period when the complaint was filed.

In his third point of contention the appellant maintains that the lower court erred in ordering him to pay the amount of P2,377.23. It is claimed by the appellant that it was error on the part of the lower court to apply the Ballantyne Scale of values in evaluating the Japanese war notes as of June 1943 when the loans were incurred, because what should be done is to evaluate the loans on the basis of the Ballantyne Scale as of the time the loans became due, and that was in June 1944. This contention of the appellant is also without merit.

The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of December 31, 1959, plus interest rate of 6% per annum compounded quarterly from the date of the filing of the complaint. The sum total of the five loans obtained by the appellant from the Bank of Taiwan, Ltd. was P1,281.97 in Japanese war notes. Computed under the Ballantyne Scale of values as of June 1943, this sum of P1,281.97 in Japanese war notes in June 1943 is equivalent to P889.64 in genuine Philippine currency which was considered the aggregate amount due as principal of the five loans, and the amount of P2,377.23 as of December 31, 1959 was arrived at after computing the interest on the principal sum of P889.64 compounded quarterly from the time the obligations were incurred in 1943.

It is the stand of the appellee that the Ballantyne scale of values should be applied as of the time the obligation was incurred, and that was in June 1943. This stand of the appellee was upheld by the lower court; and the decision of the lower court is supported by the ruling of this Court in the case of Hilado vs. De la Costa (G.R. No. L-150, April 30, 1949; 46 O.G. 5472), which states:

... Contracts stipulating for payments presumably in Japanese war notes may be enforced in our Courts after the liberation to the extent of the just obligation of the contracting parties and, as said notes have become worthless, in order that justice may be done and the party entitled to be paid can recover their actual value in Philippine Currency, what the debtor or defendant bank should return or pay is the value of the Japanese military notes in relation to the peso in Philippine Currency obtaining on the date when and at the place where the obligation was incurred unless the parties had agreed otherwise. ... . (italics supplied)

16

IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs against the appellant. Inasmuch as the appellant Jose Grijaldo died during the pendency of this appeal, his estate must answer in the execution of the judgment in the present case.

Bengzon, C.J., Concepcion, Barrera, Regala, Bautista Angelo, Reyes, J.B.L., Makalintal and Bengzon, J.P., JJ.,concur.

--------------------------------------------------------------------------------------------------------------------------------------------Republic of the Philippines

SUPREME COURTManila

THIRD DIVISION

G.R. No. 155223             April 4, 2007

BOBIE ROSE V. FRIAS, represented by her Attorney-in-fact, MARIE F. FUJITA, Petitioner, vs.FLORA SAN DIEGO-SISON, Respondent.

D E C I S I O N

AUSTRIA-MARTINEZ, J.:

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

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

On December 7, 1990, petitioner, as the FIRST PARTY, and Dra. Flora San Diego-Sison (respondent), as the SECOND PARTY, entered into a Memorandum of Agreement5 over the property with the following terms:

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

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

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

17

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

x x x x.6

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

Respondent decided not to purchase the property and notified petitioner through a letter8 dated March 20, 1991, which petitioner received only on June 11, 1991,9 reminding petitioner of their agreement that the amount of two million pesos which petitioner received from respondent should be considered as a loan payable within six months. Petitioner subsequently failed to pay respondent the amount of two million pesos.

On April 1, 1993, respondent filed with the Regional Trial Court (RTC) of Manila, a complaint10 for sum of money with preliminary attachment against petitioner. The case was docketed as Civil Case No. 93-65367 and raffled to Branch 30. Respondent alleged the foregoing facts and in addition thereto averred that petitioner tried to deprive her of the security for the loan by making a false report11 of the loss of her owner’s copy of TCT No. 168173 to the Tagig Police Station on June 3, 1991, executing an affidavit of loss and by filing a petition12 for the issuance of a new owner’s duplicate copy of said title with the RTC of Makati, Branch 142; that the petition was granted in an Order13 dated August 31, 1991; that said Order was subsequently set aside in an Order dated April 10, 199214where the RTC Makati granted respondent’s petition for relief from judgment due to the fact that respondent is in possession of the owner’s duplicate copy of TCT No. 168173, and ordered the provincial public prosecutor to conduct an investigation of petitioner for perjury and false testimony. Respondent prayed for the ex-parte issuance of a writ of preliminary attachment and payment of two million pesos with interest at 36% per annum from December 7, 1991, P100,000.00 moral, corrective and exemplary damages and P200,000.00 for attorney’s fees.

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

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

18

against her; that no interest could be due as there was no valid mortgage over the property as the principal obligation is vitiated with fraud and deception. She prayed for the dismissal of the complaint, counter-claim for damages and attorney’s fees.

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

WHEREFORE, judgment is hereby RENDERED:

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

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

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

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

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

The RTC further found that petitioner admitted that she received from respondent the two million pesos in cash but the fact that petitioner gave the one million pesos to Atty. Lozada was without respondent’s knowledge thus it is not binding on respondent; that respondent had also proven that in 1993, she initially paid the sum ofP30,000.00 as premium for the issuance of the attachment bond, P20,000.00 for its renewal in 1994, andP20,000.00 for the renewal in 1995, thus plaintiff should be reimbursed considering that she was compelled to go to court and ask for a writ of preliminary attachment to protect her rights under the agreement.

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

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

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

The CA concluded that there was no basis for petitioner to say that the interest should be charged for six months only and no more; that a loan always bears interest otherwise it is not a loan; that interest should

19

commence on June 7, 199120 with compounded bank interest prevailing at the time the two million was considered as a loan which was in June 1991; that the bank interest rate for loans secured by a real estate mortgage in 1991 ranged from 25% to 32% per annum as certified to by Prudential Bank,21 that in fairness to petitioner, the rate to be charged should be 25% only.

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

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

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

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

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

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

We are not persuaded.

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

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

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

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

20

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

The payment of regular interest constitutes the price or cost of the use of money and thus, until the principal sum due is returned to the creditor, regular interest continues to accrue since the debtor continues to use such principal amount.28 It has been held that for a debtor to continue in possession of the principal of the loan and to continue to use the same after maturity of the loan without payment of the monetary interest, would constitute unjust enrichment on the part of the debtor at the expense of the creditor.29

Petitioner and respondent stipulated that the loaned amount shall earn compounded bank interests, and per the certification issued by Prudential Bank, the interest rate for loans in 1991 ranged from 25% to 32% per annum. The CA reduced the interest rate to 25% instead of the 32% awarded by the trial court which petitioner no longer assailed.1awphi1.nét

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

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

We are not persuaded.

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

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

We agree with the findings of the trial court and the CA that petitioner’s act of trying to deprive respondent of the security of her loan by executing an affidavit of loss of the title and instituting a petition for the issuance of a new owner’s duplicate copy of TCT No. 168173 entitles respondent to moral damages.1a\^/phi1.net Moral damages may be awarded in culpa contractual or breach of contract cases when the defendant acted fraudulently or in bad faith. Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It partakes of the nature of fraud.33

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

21

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

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

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

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

We agree.

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

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

No pronouncement as to costs. SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

22

G.R. No. L-25704             April 24, 1968

ANGEL JOSE WAREHOUSING CO., INC., plaintiff-appellee, vs.CHELDA ENTERPRISES and DAVID SYJUECO, defendants-appellants.

Luis A. Guerrero for plaintiff-appellee.Burgos and Sarte for defendants-appellants.

BENGZON, J.P., J.:

Plaintiff corporation filed suit in the Court of First Instance of Manila on May 29, 1964 against the partnership Chelda Enterprises and David Syjueco, its capitalist partner, for recovery of alleged unpaid loans in the total amount of P20,880.00, with legal interest from the filing of the complaint, plus attorney's fees of P5,000.00. Alleging that post dated checks issued by defendants to pay said account were dishonored, that defendants' industrial partner, Chellaram I. Mohinani, had left the country, and that defendants have removed or disposed of their property, or are about to do so, with intent to defraud their creditors, preliminary attachment was also sought.

Answering, defendants averred that they obtained four loans from plaintiff in the total amount of P26,500.00, of which P5,620.00 had been paid, leaving a balance of P20,880.00; that plaintiff charged and deducted from the loan usurious interests thereon, at rates of 2% and 2.5% per month, and, consequently, plaintiff has no cause of action against defendants and should not be permitted to recover under the law. A counterclaim for P2,000.00 attorney's fees was interposed.

Plaintiff filed on June 25, 1964 an answer to the counterclaim, specifically denying under oath the allegations of usury.

After trial, decision was rendered, on November 10, 1965. The court found that there remained due from defendants an unpaid principal amount of P20,287.50; that plaintiff charged usurious interests, of which P1,048.15 had actually been deducted in advance by plaintiff from the loan; that said amount of P1,048.15 should therefore be deducted from the unpaid principal of P20,287.50, leaving a balance of P19,247.351 still payable to the plaintiff. Said court held that notwithstanding the usurious interests charged, plaintiff is not barred from collecting the principal of the loan or its balance of P19,247.35. Accordingly, it stated, in the dispositive portion of the decision, thus:

WHEREFORE, judgment is hereby rendered, ordering the defendant partnership to pay to the plaintiff the amount of P19,247.35, with legal interest thereon from May 29, 1964 until paid, plus an additional sum of P2,000.00 as damages for attorney's fee; and, in case the assets of defendant partnership be insufficient to satisfy this judgment in full, ordering the defendant David Syjueco to pay to the plaintiff one-half (1/2) of the unsatisfied portion of this judgment.

With costs against the defendants.1äwphï1.ñët

Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious interest, may the creditor recover the principal of the loan? (2) Should attorney's fees be awarded in plaintiff's favor?

To refute the lower court's decision which is based on the doctrine laid down by this Court in Lopez v. El Hogar Filipino, 47 Phil. 249, holding that a contract of loan with usurious interest is valid as to the loan but void as to the usurious interest, appellants argue that in light of the New Civil Code provisions said doctrine no longer applies. In support thereof, they cite the case decided by the Court of Appeals in Sebastian v. Bautista, 58 O.G. No. 15, p. 3146.

23

The Sebastian case was an action for recovery of a parcel of land. The Court of First Instance therein decided in plaintiff's favor, on the ground that the so-called sale with pacto de retro of said land was in fact only an equitable mortgage. In affirming the trial court, the writer of the opinion of the Court of Appeals went further to state the view that the loan secured by said mortgage was usurious in nature, and, thus, totally void. Such reasoning of the writer, however, was not concurred in by the other members of the Court, who concurred in the result and voted for affirmance on the grounds stated by the trial court. Furthermore, the affirmance of the existence of equitable mortgage necessarily implies the existence of a valid contract of loan, because the former is an accessory contract to the latter.

Great reliance is made by appellants on Art. 1411 of the New Civil Code which states:

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise.

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

We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is the same as Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for departing from previous interpretation that, as provided in the Usury Law (Act No. 2655, as amended), a loan with usurious interest is not totally void only as to the interest.

True, as stated in Article 1411 of the New Civil Code, the rule of pari delicto applies where a contract's nullity proceeds from illegality of the cause or object of said contract.

However, appellants fail to consider that a contract of loan with usurious interest consists of principal and accessory stipulations; the principal one is to pay the debt; the accessory stipulation is to pay interest thereon.2

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

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

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the

24

prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal.

Neither is there a conflict between the New Civil Code and the Usury Law. Under the latter, in Sec. 6, any person who for a loan shall have paid a higher rate or greater sum or value than is allowed in said law, may recover thewhole interest paid. The New Civil Code, in Article 1413 states: "Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of payment." Article 1413, in speaking of "interest paid in excess of the interest allowed by the usury laws" means the whole usurious interest; that is, in a loan of P1,000, with interest of P20% per annum P200 for one year, if the borrower pays said P200, the whole P200 is the usurious interest, not just that part thereof in excess of the interest allowed by law. It is in this case that the law does not allow division. The whole stipulation as to interest is void, since payment of said interest is the cause or object and said interest is illegal. The only change effected, therefore, by Article 1413, New Civil Code, is not to provide for the recovery of the interest paid in excess of that allowed by law, which the Usury Law already provided for, but to add that the same can be recovered "with interest thereon from the date of payment."

The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage stipulations on usurious interest, said stipulations are treated as wholly void, so that the loan becomes one without stipulation as to payment of interest. It should not, however, be interpreted to mean forfeiture even of the principal, for this would unjustly enrich the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a further deterrence to usury.

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

As regards, however, the attorney's fees, the court a quo stated no basis for its award, beyond saying that as a result of defendants' refusal to pay the amount of P19,247.35 notwithstanding repeated demands, plaintiff was obliged to retain the services of counsel. The rule as to attorney's fees is that the same are not recoverable, in the absence of stipulation. Several exceptions to this rule are provided (Art. 2208, Civil Code). Unless shown to fall under an exception, the act of plaintiff in engaging counsel's services due to refusal of defendants to pay his demand, does not justify award of attorney's fees (Estate of Buan v. Camaganacan, L-21569, Feb. 28, 1966). Defendants, moreover, had reason to resist the claim, since there was yet no definite ruling of this Court on the point of law involved herein in light of the New Civil Code. Said award should therefore be deleted.

WHEREFORE, with the modification that the award of attorney's fees in plaintiff's favor is deleted therefrom, and the correction of the clerical error as to the principal still recoverable, from P19,247.35 to P19,239.35, the appealed judgment is hereby affirmed. No costs. So ordered.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

 

G.R. No. 97412 July 12, 1994

25

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.)

26

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

27

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

28

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.

29

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) —

30

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 8modified 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

31

contravention of law." The Court 10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained:

There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit; and (3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is neither a loan or a forbearance, but then no interest is actually imposed provided the sums referred to in the judgment are paid upon the finality of the judgment. It is delay in the payment of such final judgment, that will cause the imposition of the interest.

It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum, from the filing of the complaint until paid; in other words, as part of the judgment for damages. Clearly, they are not applicable to the instant case. (Emphasis supplied.)

The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court 11 was a petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the right of the private respondent to recover damages, held the award, however, for moral damages by the trial court, later sustained by the IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court and rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied)

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from a breach of employment contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral and exemplary damages without, however, providing any legal interest thereon. When the decision was appealed to the Court of Appeals, the latter held:

WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except defendant-appellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in the dispositive portion of the decision, including the sum of P1,400.00 in concept of compensatory damages, with interest at the legal rate from the date of the filing of the complaint until fully paid(Emphasis supplied.)

The petition for review to this Court was denied. The records were thereupon transmitted to the trial court, and an entry of judgment was made. The writ of execution issued by the trial court directed that only compensatory damages should earn interest at 6% per annum from the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition for certiorari assailed the said order. This Court said:

. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate" from the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416] does not apply to actions based on a breach of employment contract like the case at bar. (Emphasis supplied)

32

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

33

case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest the following rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 20

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

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. 22 In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 23 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court 24 at the rate of 6% per annum. 25 No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. 26 Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

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

WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment thereof.

SO ORDERED.

Republic of the PhilippinesSupreme Court

Manila 

THIRD DIVISION  

MARIA SOLEDAD TOMIMBANG,                                            Petitioner,

    G.R. No. 165116

Present:

34

-versus -

ATTY. JOSE TOMIMBANG,Respondent.

YNARES-SANTIAGO, J.,         Chairperson,CHICO-NAZARIO,VELASCO, JR.,NACHURA, andPERALTA, JJ.

Promulgated:

                August 4, 2009

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

D E C I S I O N

PERALTA, J.:

 

          This resolves the petition for review on certiorari under Rule 45 of the Rules of Court,  praying that the

Decision[1] dated July 1, 2004 and Resolution[2] dated August 31, 2004 promulgated by the Court of Appeals

(CA), be reversed and set aside. 

 

          The antecedent facts are as follows.

 

         Petitioner and respondent are siblings.   Their parents donated to petitioner an eight-door apartment

located at 149 Santolan Road, Murphy, Quezon City, with the condition that during the parents' lifetime, they

shall retain control over the property and petitioner shall be the administrator thereof. 

 

         In 1995, petitioner applied for a loan from PAG-IBIG Fund to finance the renovations on Unit H, of said

apartment which she intended to use as her residence.  Petitioner failed to obtain a loan from PAG-IBIG Fund,

hence, respondent offered to extend a credit line to petitioner on the following conditions: (1) petitioner shall

keep a record of all the advances; (2) petitioner shall start paying the loan upon the completion of the

renovation; (3) upon completion of the renovation, a loan and mortgage agreement based on the amount of

the advances made shall be executed by petitioner and respondent; and (4) the loan agreement shall contain

comfortable terms and conditions which petitioner could have obtained from PAG-IBIG.[3]

 

         Petitioner accepted respondent's offer of a credit line and work on the apartment units

began.  Renovations on Units B to G were completed, and the work has just started on Unit A when an

altercation broke out between herein parties.  In view of said conflict, respondent and petitioner, along with

some family members, held a meeting in the house of their brother Genaro sometime in the second quarter of

35

1997.  Respondent and petitioner entered into a new agreement whereby petitioner was to start making

monthly payments on her loan.  Upon respondent's demand, petitioner turned over to respondent all the

records of the cash advances for the renovations.  Subsequently, or from June to October of 1997, petitioner

made monthly payments of P18,700.00, or a total of P93,500.00.   Petitioner never denied the fact that she

started making such monthly payments.

 

         In October of 1997, a quarrel also occurred between respondent and another sister, Maricion, who was

then defending the actions of petitioner.  Because of said incident, they had a hearing at the Barangay.  At said

hearing, respondent had the occasion to remind petitioner of her monthly payment.  Petitioner allegedly

answered, “Kalimutan mo na ang pera mo wala tayong pinirmahan. Hindi ako natatakot sa 'yo!”  Thereafter,

petitioner left Unit H and could no longer be found.  Petitioner being the owner of the apartments,

renovations on Unit A were discontinued when her whereabouts could not be located.  She also stopped

making monthly payments and ignored the demand letter dated December 2, 1997 sent by respondent's

counsel.

 

         On February 2, 1998, respondent filed a Complaint against petitioner, demanding the latter to pay the

former the net amount of P3,989,802.25 plus interest of 12% per annum from date of default. 

 

         At the pre-trial conference, the issues were narrowed down as follows:

 1.      Whether or not a loan was duly constituted between the plaintiff

and the defendant in connection with the improvements or renovations on apartment units A-H, which is in the name of the defendant [herein petitioner]; 

2.      Assuming that such a loan was duly constituted in favor of plaintiff [herein respondent], whether or not the same is already due and payable; 

3.      Assuming that said loan is already due and demandable, whether or not it is to be paid out of the rental proceeds  from the apartment units mentioned, presuming that such issue was raised in the Answer of the Defendant;

 4.      Assuming that the said loan was duly constituted in favor of

plaintiff [herein respondent], whether or not it is in the amount of P3,909,802.20 and whether or not it will earn legal interest at the rate of 12% per annum, compounded, as provided in Article 2212 of the Civil Code of the Philippines, from the date of the extrajudicial demand; and

 5.      Whether or not the plaintiff [herein respondent] is entitled to the

reliefs prayed for in his Complaint or whether or not it is the defendant [herein petitioner] who is entitled to the reliefs prayed for in her Answer with Counterclaim.[4]

        

36

         On November 15, 2002, the Regional Trial Court (RTC) of Quezon City, Branch 82, rendered a Decision,[5] the dispositive portion of which reads as follows:

          WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering the latter to pay the former the following: 

1.      The sum of P3,989,802.25 with interest thereon at the legal rate of 12% per annum computed from the date of default until the whole obligation is fully paid; 

2.      The sum of P50,000.00 as and by way of attorney's fees; and 

3.      The cost of suit. 

            SO ORDERED.[6]

  

         Petitioner appealed the foregoing RTC Decision to the CA, but on July 1, 2004, the Court of Appeals

promulgated its Decision affirming in toto said RTC judgment.  A motion for reconsideration of the CA

Decision was denied per Resolution dated August 31, 2004.

 

         Hence, this petition where petitioner alleges that:

 

I. 

THE COURT OF APPEALS ACTED NOT IN ACCORD WITH LAW AND APPLICABLE JURISPRUDENCE OF THE SUPREME COURT WHEN IT AFFIRMED THELOWER COURT'S FINDING THAT THE LOAN BETWEEN PETITIONER AND RESPONDENT IS ALREADY DUE AND DEMANDABLE. 

II. 

THE COURT OF APPEALS ERRED BY DEPARTING FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS – OF AFFIRMING THE DUE AND DEMANDABILITY OF THE LOAN CONTRARY TO THE EVIDENCE PRESENTED IN THE LOWER COURT –  AND SANCTIONING SUCH DEPARTURE BY THE LOWER COURT IN THE INSTANT CASE. 

III. 

THE COURT OF APPEALS ERRED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS – OF AFFIRMING THE AWARD OF ATTORNEY'S FEES TO THE RESPONDENT WITHOUT ANY BASIS – AND SANCTIONING SUCH DEPARTURE BY THE LOWER COURT IN THE INSTANT CASE.[7]

 

37

         The main issues in this case boil down to (1) whether petitioner's obligation is due and demandable; (2)

whether respondent is entitled to attorney's fees; and (3) whether interest should be imposed on petitioner's

indebtedness and, if in the affirmative, at what rate.

 

         Petitioner does not deny that she obtained a loan from respondent.  She, however, contends that the loan

is not yet due and demandable because the suspensive condition – the completion of the renovation of the

apartment units - has not yet been fulfilled.  She also assails the award of attorney's fees to respondent as

baseless.

 

         For his part, respondent admits that initially, they agreed that payment of the loan shall be made upon

completion of the renovations.  However, respondent claims that during their meeting with some family

members in the house of their brother Genaro sometime in the second quarter of 1997, he and petitioner

entered into a new agreement whereby petitioner was to start making monthly payments on her loan, which

she did from June to October of 1997.   In respondent's view, there was a novation of the original agreement,

and under the terms of their new agreement, petitioner's obligation was already due and demandable.

 

         Respondent also maintains that when petitioner disappeared from the family compound without leaving

information as to where she could be found, making it impossible to continue the renovations, petitioner

thereby prevented the fulfillment of said condition.  He claims that Article 1186 of the Civil Code, which

provides that “the condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment,” is

applicable to this case.

 

         In his Comment to the present petition, respondent raised for the first time, the issue that the loan

contract between him and petitioner is actually one with a period, not one with a suspensive condition.   In

his view, when petitioner began to make partial payments on the loan, the latter waived the benefit of the

term, making the loan immediately demandable. 

 

         Respondent also believes that he is entitled to attorney's fees, as petitioner allegedly showed bad faith by

absconding and compelling him to litigate.

 

         The Court finds the petition unmeritorious.      

 

         It is undisputed that herein parties entered into a valid loan contract.  The only question is, has

petitioner's obligation become due and demandable?  The Court resolves the question in the affirmative.

 

         The evidence on record clearly shows that after renovation of seven out of the eight apartment units had

been completed, petitioner and respondent agreed that the former shall already start making monthly

payments on the loan even if renovation on the last unit (Unit A) was still pending.  Genaro Tomimbang, the

38

younger brother of herein parties, testified that a meeting was held among  petitioner, respondent, himself

and their eldest sister Maricion, sometime during the first or second quarter of 1997, wherein respondent

demanded payment of the loan, and petitioner agreed to pay.  Indeed, petitioner began to make monthly

payments from June to October of 1997 totalling P93,500.00.[8] In fact, petitioner even admitted in her

Answer with Counterclaim that she had “started to make payments to plaintiff [herein respondent] as

the same was in accord with her commitment to pay whenever she was able;  x  x  x .”[9]

 

         Evidently, by virtue of the subsequent agreement, the parties mutually dispensed with the condition that

petitioner shall only begin paying after the completion of all renovations.  There was, in effect, a modificatory

or partial novation, of petitioner's obligation.  Article 1291 of the Civil Code provides, thus:

 Art. 1291.  Obligations may be modified by:

(1)      Changing their object or principal conditions;(2)      Substituting the person of the debtor;(3)      Subrogating a third person in the rights of the creditor. (Emphasis supplied)

 

In Iloilo Traders Finance, Inc. v. Heirs of Sps. Soriano,[10] the Court expounded on the nature of novation, to wit:

 Novation may either be extinctive or modificatory, much being dependent on the

nature of the change and the intention of the parties.   Extinctive novation is never presumed; there must be an express intention to novate;  x  x  x .

 An extinctive novation would thus have the twin effects of, first, extinguishing an

existing obligation and, second, creating a new one in its stead.  This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a new valid obligation. Novation is merely modificatory where the change brought about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay); in this instance, the new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant some but not all of its provisions.[11] 

  

In Ong v. Bogñalbal,[12] the Court also stated, thus:

          x   x   x   the effect of novation may be partial or total.  There is partial novation when there is only a modification or change in some principal conditions of the obligation.  It is total, when the obligation is completely extinguished.  Also, the term principal conditions in Article 1291 should be construed to include a change in the period to comply with the obligation.  Such a change in the period would only be a partial novation since the period merely affects the performance, not the creation of the obligation.[13]

 

As can be gleaned from the foregoing, the aforementioned four essential elements   and the

requirement that there be total incompatibility between the old and new obligation, apply only to extinctive

39

novation.  In partial novation, only the terms and conditions of the obligation are altered, thus, the main

obligation is not changed and it remains in force.

 

         Petitioner stated in her Answer with Counterclaim[14] that she agreed and complied with respondent's

demand for her to begin paying her loan, since she believed this was in accordance with her commitment to

pay whenever she was able.  Her partial performance of her obligation is unmistakable proof that indeed the

original agreement between her and respondent had been novated by the deletion of the condition that

payments shall be made only after completion of renovations.  Hence, by her very own admission and partial

performance of her obligation, there can be no other conclusion but that under the novated agreement,

petitioner's obligation is already due and demandable. 

 

         With the foregoing finding that petitioner's obligation is due and demandable, there is no longer any

need to discuss whether petitioner's disappearance from the family compound prevented the fulfillment of

the original condition, necessitating application of Article 1186 of the Civil Code, or whether the obligation is

one with a condition or a period.

 

         As to attorney's fees, however, the award therefor cannot be allowed by the Court.  It is an oft-repeated

rule that the trial court is required to state the factual, legal or equitable justification for awarding attorney's

fees.[15]  The Court explained in Buñing v. Santos,[16] to wit: 

x  x  x  While Article 2208 of the Civil Code allows attorney's fees to be awarded if the claimant is compelled to litigate with third persons or to incur expenses to protect his interest by reason of an unjustified act or omission of the party from whom it is sought, there must be a showing that the losing party acted willfully or in bad faith and practically compelled the claimant to litigate and incur litigation expenses.  In view of the declared policy of the law that awards of attorney's fees are the exception rather than the rule, it is necessary for the trial court to make express findings of facts and law that would bring the case within the exception and justify the grant of such award.   x   x   x.            Thus, the matter of attorney's fees cannot be touched upon only in the dispositive portion of the decision.  The text itself must state the reasons why attorney's fees are being awarded.  x  x  x[17] 

 

In the above-quoted case, there was a finding that defendants therein had no intention of fulfilling their

obligation in complete disregard of the plaintiff’s right, and yet, the Court did not deem this as sufficient

justification for the award of attorney's fees.  Verily, in the present case, where it is understandable that some

misunderstanding could arise as to when the obligation was indeed due and demandable, the Court must

likewise disallow the award of attorney's fees.

 

40

         We now come to a discussion of whether interest should be imposed on petitioner's

indebtedness.   In Royal Cargo Corp. v. DFS Sports Unlimited, Inc.,[18]  the Court reiterated the settled rule on

imposition of interest, thus:

 As to computation of legal interest, the seminal ruling in Eastern Shipping

Lines, Inc. v. Court of Appeals controls, to wit:

                        x x x x

 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 an obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2.             When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3.             When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.   

The foregoing rule on legal interest was explained in Sunga-Chan v. Court of Appeals,[19]   in this wise:

             Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of money, goods, or credits, as well as to judgments involving such loan or forbearance of money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code applies “when the transaction involves the payment of indemnities in the concept of damage

41

arising from the breach or a delay in the performance of obligations in general,” with the application of both rates reckoned “from the time the complaint was filed until the [adjudged] amount is fully paid.” In either instance, the reckoning period for the commencement of the running of the legal interest shall be subject to the condition “that the courts are vested with discretion, depending on the equities of each case, on the award of interest.”[20]

  

In accordance with the above ruling, since the obligation in this case involves a loan and there is no

stipulation in writing as to interest due, the rate of interest shall be 12% per annum computed from the date

of extrajudicial demand.

 

         IN VIEW OF THE FOREGOING, the petition is AFFIRMED with the MODIFICATION that the award for

attorney's fees is DELETED. 

 

         SO ORDERED.

-------------------------------------------------------------------------------------------------------------------------------------------Republic of the Philippines

SUPREME COURTManila

EN BANC

G.R. No. 126890               March 9, 2010

UNITED PLANTERS SUGAR MILLING CO., INC. (UPSUMCO), Petitioner, vs.THE HONORABLE COURT OF APPEALS, PHILIPPINE NATIONAL BANK (PNB) and ASSET PRIVATIZATION TRUST (APT), AS TRUSTEE OF THE REPUBLIC OF THE PHILIPPINES Respondents.

R E S O L U T I O N

PERALTA, J.:

For consideration is the Motion for Reconsideration of petitioner United Planters Sugar Milling Company, Inc. (UPSUMCO) seeking to reverse and set aside the Resolution of the Court dated April 2, 2009 which granted both Second Motions for Reconsideration filed by respondents Privatization and Management Office (PMO), formerly Asset Privatization Trust (APT), and Philippine National Bank (PNB), and reinstated the Decision of the Court of Appeals dated February 29, 1996 which, in turn, reversed and set aside the Decision of the Regional Trial Court, Branch 45, Bais, Negros Oriental. The dispositive portion of the CA Decision reads:

WHEREFORE, the appealed decision is hereby set aside and judgment is herein rendered declaring that the subject Deed of Assignment has not condoned all of UPSUMCO’s obligations to APT as assignee of PNB.

To determine how much APT is entitled to recover on its counterclaim, it is required to render an accounting before the Regional Trial Court on the total payments made by UPSUMCO on its obligations including the following amounts:

42

(1) The sum seized from it by APT whether in cash or in kind (from UPSUMCO’s bank deposits as well as sugar and molasses proceeds):

(2) The total obligations covered by the following documents:

(a) Credit agreement dated November 05, 1974 (Exh. "1," Record p. 528); and

(b)

(c) The Restructuring Agreements dated (i) June 24, 1982, (ii) December 10, 1982, and (3) May 9, 1984 and

(3) The P450,000,000.00 proceeds of the foreclosure

Should there be any deficiency due APT after deducting the foregoing amounts from UPSUMCO’s total obligation in the amount of (P2,137,076,433.15), the latter is hereby ordered to pay the same. However, if after such deduction there should be any excess payment, the same should be turned over to UPSUMCO.

The Regional Trial Court is hereby directed to receive APT’s accounting and thereafter, to render the proper disposal of this case in accordance with the foregoing findings and disposition.

Costs against appellees.

SO ORDERED.

Petitioner prefaces its arguments that it is the aggrieved party, not the government as represented by respondent APT (now the PMO), as its deposits with respondent PNB were taken without its prior knowledge and that it was reluctant to give assent to the desire of the government to forego redemption of its assets by reason of uncontested foreclosure.

Facts showed that in 1974, petitioner, engaged in the business of milling sugar, obtained "takeoff loans" from respondent PNB to finance the construction of a sugar milling plant which were covered by a Credit Agreement dated November 5, 1974. The said loans were thrice restructured through Restructuring Agreements dated June 24, 1982, December 10, 1982, and May 9, 1984. The takeoff loans were secured by a real estate mortgage over two parcels of land where the milling plant stood and chattel mortgages over certain machineries and equipment. Also included in the condition for the takeoff loans, petitioner agreed to "open and/or maintain a deposit account with [respondent PNB] and the bank is authorized at its option to apply to the payment of any unpaid obligations of the client any/and all monies, securities which may be in its hands on deposit."

From 1984 to 1987, petitioner contracted another set of loans from respondent PNB, denominated as"operational loans," for the purpose of financing its operations, which also contained setoff clauses relative to the application of payments from petitioner’s bank accounts. They were likewise secured by pledge contracts whereby petitioner assigned to respondent PNB all its sugar produce for the latter to sell and apply the proceeds to satisfy the indebtedness arising from the operational loans.

Later, respondent APT and petitioner agreed to an "uncontested" or "friendly foreclosure" of the mortgaged assets, in exchange for petitioner’s waiver of its right of redemption. On July 28, 1987, respondent PNB (as mortgagee) and respondent APT (as assignee and transferee of PNB’s rights, titles and interests) filed a Petition for Extrajudicial Foreclosure Sale with the Ex-Officio Regional Sheriff of Dumaguete City, seeking to foreclose on the real estate and chattel mortgages which were executed to secure the takeoff loans. The

43

foreclosure sale was conducted on August 27, 1987 whereby respondent APT purchased the auctioned properties forP450,000,000.00.

Seven (7) days after the foreclosure sale, or on September 3, 1987, petitioner executed a Deed of Assignment assigned to respondent APT its right to redeem the foreclosed properties, in exchange for or in consideration of respondent APT "condoning any deficiency amount it may be entitled to recover from the Petitioner under the Credit Agreement dated November 5, 1974, and the Restructuring Agreements[s] dated June 24 and December 10, 1982, and May 9, 1984, respectively, executed between [UPSUMCO] and PNB…" On the same day, the Board of Directors of petitioner approved the Board Resolution authorizing Joaquin Montenegro, its President, to enter into said Deed of Assignment.1avvphi1

Despite the Deed of Assignment, petitioner filed a complaint on March 10, 1989 for sum of money and damages against respondents PNB and APT before the Regional Trial Court (RTC) of Bais City alleging therein that respondents had illegally appropriated funds belonging to petitioner, through the following means: (1) withdrawals made from the bank accounts opened by petitioner beginning August 27, 1987 until February 12, 1990; (2) the application of the proceeds from the sale of the sugar of petitioner beginning August 27, 1987 until December 4, 1987; (3) the payment from the funds of petitioner with respondent PNB for the operating expenses of the sugar mill after September 3, 1987, allegedly upon the instruction of respondent APT and with the consent of respondent PNB.

The RTC rendered judgment in favor of the petitioner. On appeal, the CA reversed and set aside the RTC Decision and ruled that only the "takeoff" loans and not the operational loans were condoned by the Deed of Assignment. In a Decision dated November 28, 2006 and Resolution dated July 11, 2007, the Court (Third Division) reversed and set aside the CA Decision. The case was thereafter referred to the Court en banc which reversed the ruling of the Third Division.

In its Motion for Reconsideration, petitioner raises the following grounds:

1. The order of the Honorable Court En Banc reinstating the decision of the Honorable Court of Appeals would be inconsistent with the facts of the case and the findings of this Honorable Court.

2. There is no valid ground to conclude that APT has still the right to the deposit of UPSUMCO after the August 27, 1987 friendly foreclosure, and the withdrawal of P80,200,806.41 as payment could be applied either as repayment on the Take-off Loans or for the Operational Loans.

3. The findings that the condonation took effect only after the execution of the Deed of Assignment hence upholds the validity of APT’s taking of the deposit of P80,200,806.41 in UPSUMCO’s PNB account as payment of the deficiency is without basis.

4. The admission of the case by Honorable Court En Banc after the denial of the Second Division of the Second Motion for Reconsideration and the referral of the case to the Honorable Court En Banc appear not to be in accordance with the Rules of Procedure.

5. The basis for admission of the case to the Honorable Court En Banc are belated issues which have no other purpose but to give apparent reasons for the elevation of the case.

6. There is no legal basis for the withdrawals of UPSUMCO’s deposit on the ground of conventional compensation.

7. Since the amount of P17,773,185.24 could not be the subject of conventional compensation, it should be returned to petitioner immediately by respondents.

44

After a careful review of the arguments in the petitioner’s motion for reconsideration, the Court finds the same to be mere rehash of the main points already set forth in the Court’s En Banc Resolution of April 2, 2009 and, hence, denies the same for lack of merit. The pertinent portions of the decision read as follows:

The rulings of the lower courts, as well as the petition itself, are not clear as to the amount extended by way of takeoff loans by PNB to UPSUMCO. However, the Court of Appeals did enumerate the following transactions consisting of the operational loans, to wit:

(1) Trust Receipts dated August 26, 1987; February 5, 1987; and July 10, 1987;

(2) Deed of Assignment By Way of Payment dated November 16, 1984 (Exh. 3 [PNB]; Exh. 12 [APT]; Record, p. 545);

(3) Two (2) documents of Pledge both dated February 19, 1987;

(4) Sugar Quedans (Exh. 13 to 16; Record, pp 548 to 551);

(5) Credit Agreements dated February 19, 1987 (Exhs. "2" [PNB] & "4" [APT]; Record, pp. 541-544) and April 29, 1987 (Exh. "11" [APT]; Record, pp. 314-317).

(6) Promissory Notes dated February 20, 1987 (Exh. "17"; Record, p. 573); March 2, 1987 (Exh. "18"; Record, p. 574); March 3, 1987 (Exh. "19"; Record, p. 575); March 27, 1987; (Exh. "20"; Record, p. 576); March 30, 1987(Exh. "21"; Record, p. 577); April 7, 1987 (Exh. "22"; Record, p. 578); May 22, 1987 (Exh. "23"; Record, p. 579); and July 30, 1987 (Exh. "24"; record p. 580).

On 27 February 1987, through a Deed of Transfer, PNB assigned to the Government its "rights" titles and interests over UPSUMCO, among several other assets. The Deed of Transfer acknowledged that said assignment was being undertaken "in compliance with Presidential Proclamation No. 50." The Government subsequently transferred these "rights" titles and interests" over UPSUMCO to respondent Asset and Privatization Trust (APT), [now PMO].

x x x x

This much is clear. The Deed of Assignment condoned only the take-off loans, and not the operational loans. The Deed of Assignment in its operative part provides, thus:

That United Planter[s] Sugar Milling Co., Inc. (the "Corporation") – pursuant to a resolution passed by its board of Directors on September 3, 1087, and confirmed by the Corporation’s stockholders in a stockholders’ Meeting held on the same (date), for and in consideration of the Asset Privatization Trust ("APT") condoning any deficiency amount it may be entitled to recover from the Corporation under the Credit Agreement dated November 5, 1974 and the Restructuring Agreement[s] dated June 24, and December 10, 1982, and May 9, 1984, respectively, executed between the Corporation and the Philippine National Bank ("PNB"), which financial claims have been assigned to APT, through the National Government, by PNB, hereby irrevocably sells, assigns and transfer to APT its right to redeem the foreclosed real properties covered by Transfer Certificates of Titles Nos. T-16700 and T-16701.

IN WITNESS WHEREOF, the Corporation has caused this instrument to be executed on its behalf by Mr. Joaquin S. Montenegro, thereunto duly authorized, this 3rd day of September, 1997.

x x x x

45

This notwithstanding, the RTC Decision was based on the premise that all of UPSUMCO’s loans were condoned in the Deed of Assignment. In contrast, the Court of Appeals acknowledged that only the take-off loans were condoned, and thus ruled that APT was entitled to have the funds from UPSUMCOS’s accounts transferred to its own account "to the extent of UPSUMCO’s remaining obligation, less the amount condoned in the Deed of Assignment and the 450,000,000.00 proceeds of the foreclosure."

The challenged acts of respondents all occurred on or after 27 August 1987, the day of the execution sale. UPSUMCO argues that after that date, respondents no longer had the right to collect monies from the PNB bank accounts which UPSUMCO had opened and maintained as collateral for its operational take-off loans. UPSUMCO is wrong. After 27 August 1987, there were at least two causes for the application of payments from UPSUMCO’s PNB accounts. The first was for the repayment of the operational loans, which were never condoned. The second was for the repayment of the take-off loans which APT could obtain until 3 September 1987, the day the condonation took effect.

The error of the Court’s earlier rulings, particularly the Resolution dated 11 July 2007, was in assuming that the non-condonation of the operational loans was immaterial to the application of payments made in favor of APT from UPSUMCOS’s PNB accounts that occurred after 27 August 1987. For as long as there remained outstanding obligations due to APT (as PNB’s successor-in-interest), APT would be entitled to apply payments from the bank accounts of PNB. That right had been granted in favor of PNB, whether on account of the take-off loans or the operational loans.

Petitioner filed with the RTC the complaint which alleged that "among the conditions of the ‘friendly foreclosure’ are: (A) That all the accounts of [United Planters] are condoned, including the JSS notes at the time of the public bidding." It was incumbent on petitioner, not respondents, to prove that particular allegation in its complaint. Was petitioner able to establish that among the conditions of the "friendly foreclosure’ was that "all its accounts are condoned"? It did not, as it is now agreed by all that only the take-off loans were condoned.

This point is material, since the 2007 Resolution negated the findings that only the take-off loans were condoned by faulting respondents for failing to establish that there remained outstanding operational loans on which APT could apply payments from UPSUMCO’s bank accounts. By the very language of the Deed of Assignment, it was evident that UPSUMCO’s allegation in its complaint that all of its accounts were condoned was not proven. Even if neither PNB nor APT had filed an answer, there would have been no basis in fact for the trial court to conclude that all of UPSUMCO’s loans were condoned (as the RTC in this case did), or issue reliefs as if all the loans were condoned (as the 2007 Resolution did).

As noted earlier, APT had the right to apply payments from UPSUMCO’s bank accounts, by virtue of the terms of the operational loan agreements. Considering that UPSUMCO was spectacularly unable to repay the take-off loans it had earlier transacted, it simply beggars belief to assume that it had fully paid its operational loans. Moreover, APT had the right to obtain payment of the operational loans by simply applying payments from UPSUMCO’s bank accounts, without need of filing an action for collection with the courts. The bank accounts were established precisely to afford PNB (and later APT) extrajudicial and legal means to obtain repayment of UPSUMCO’s outstanding loans without hassle.

B.

There is no question that the Deed of Assignment condoned the outstanding take-off loans of UPSUMCO due then to APT. The Deed of Assignment was executed on 3 September 1987 as was the UPSUMCO Board Resolution authorizing its President to sign the Deed of Assignment. However, despite the absence of any terms to that effect in the Deed of Assignment, it is UPSUMCO’s position that the condonation actually had retroacted to 27 August 1987. The previous rulings of the Court unfortunately upheld that position.

46

It is easy to see why UPSUMCO would pose such an argument. It appears that between 27 August 1987 and 3 September 1987. APT applied payments from UPSOMCO’s bank accounts in the amount of around 80 Million Pesos. UPSUMCO obviously desires the return of the said amount. But again, under the terms of the loan arguments, APT as successor-in-interest of PNB, had the right to seize any amounts deposited in UPSUMCO’S bank accounts as long as UPSUMCO remained indebted under the loan agreements. Since UPSUMCO was released from its take-off loans only on 3 September 1987, as indicated in the Deed of Assignment, then APT’s application of payments is perfectly legal.

The earlier rulings of the Court were predicated on a finding that there was a "friendly foreclosure" agreement between APT and UPSUMCO, whereby APT agreed to condone all of UPSUMCO’s outstanding obligations in exchange for UPSUMCO’s waiver of its right to redeem the foreclosed property. However, no such agreement to the effect was ever committed to writing or presented in evidence. The written agreement actually set forth was not as contended by UPSUMCO. For one, not all of the outstanding loans were condoned by APT since the take-off loans were left extant. For another, the agreement itself did not indicate any date of effectivity other than the date of the execution of the agreement, namely 3 September 1987.

It is argued that the use of the word "any" in "any deficiency amount" sufficiently establishes the retroactive nature of the condonation. The argument hardly convinces. The phrase "any deficiency amount" could refer not only to the remaining deficiency amount after the 27 August foreclosure sale, but also the remaining deficiency amount as of 3 September 1987, when the Deed of Assignment was executed and after APT had exercised its right as creditor to apply payments from petitioner’s PNB accounts. The Deed of Assignment was not cast in intractably precise terms, and both interpretations can certainly be accommodated.

It is in that context that the question of parol evidence comes into play. The parol evidence rule states that generally, when the terms of an agreement have been reduced into writing, it is considered as containing all the terms agreed upon and there can be no evidence of such terms other than the contents of the written agreement. Assuming that the Deed of Assignment failed to accurately reflect an intent of the parties to retroact the effect of condonation to the date of the foreclosure sale, none of the parties, particularly UPSUMCO, availed of its right to seek the reformation of the instrument to the end that such true intention may be expressed. As there is nothing in the text of Deed of Assignment that clearly gives retroactive effect to the condonation, the parol evidence rule generally bars any other evidence of such terms other than the contents of the written agreement, such as evidence that the said Deed had retroactive effect.

It is argued that under Section 9, Rule 130, a party may present evidence to modify, explain or add to the terms of the written agreement if it is put in issue in the pleading, "[t]he failure of the written agreement to express the true intent and the agreement of the parties thereto."

Petitioner did not exactly state in its Amended Complaint that the condonation effected in the Deed of Assignment had retroacted to the date of the foreclosure sale. What petitioner contented in its amended complaint was that the Deed of Assignment "released and discharged plaintiff from any and all obligations due the defendant PNB and defendant APT," that "after the foreclosure by PNB/APT plaintiff is entitled to all the funds it deposited or being held by PNB in all its branches," and that "among the conditions of the ‘friendly foreclosure’ are that all the accounts of the plaintiff are condoned." It remains unclear whether petitioner had indeed alleged in its Amended Complaint that the Deed of Assignment executed on 3 September1987 had retroacted effect as of the foreclosure sale, or on 27 August 1987. If petitioner were truly mindful to invoke the exception to the parol evidence rule and intent on claiming that the condonation had such retroactive effect, it should have employed more precise language to the effect in their original and amended complaints.

x x x x

The right of respondent PNB to set-off payments from UPSUMCO arose from conventional compensation rather than legal compensation, even if all the requisites for legal compensation were present between those two parties. The determinative factor is the mutual agreement between PNB and UPSUMCO to set-off

47

payments. Even without an express agreement stipulating compensation, PNB and UPSUMCO would have been entitled to set-off of payments, as the legal requisites for compensation under Article 1279 were present.

As soon as PNB assigned its credit to APT, the mutual creditor-debtor relation between PNB and UPSUMCO ceased to exist. However, PNB and UPSUMCO had agreed to a conventional compensation, a relationship which does not require the presence of all the requisites under Article 1279. And PNB too had assigned all its rights as creditor to APT, including its rights under conventional compensation. The absence of the mutual creditor-debtor relation between the new creditor APT and UPSUMCO cannot negate the conventional compensation. Accordingly, APT, as the assignee of credit of PNB, had the right to set-off the outstanding obligations of UPSUMCO on the basis of conventional compensation before the condonation took effect on 3 September 1987.

V.

The conclusions are clear. First. Between 27 August to 3 September 1987, APT had the right to apply payments from UPSUMCO’s bank accounts maintained with PNB as repayment for the take-off loans and/or the operational loans. Considering that as of 30 June 1987, the total indebtedness of UPSUMCO as to the take-off loans amounted to P2,137,076,433.15, and because the foreclosed properties were sold during the execution sale for only 450 Million Pesos, it is safe to conclude that the total amount of P80,200,806.41 debited from UPSUMCO’s bank accounts from 27 August to 3 September 1987 was very well less than the then outstanding indebtedness for the take-off loans. It was only on 3 September 1987 that the take-off loans were condoned by APT, which lost only on that date too the right to apply payments from UPSUMCO’S bank accounts to pay the take-off loans.

Second. After 3 September 1987, APT retained the right to apply payments from the bank accounts of UPSUMCO with PNB to answer for the outstanding indebtedness under the operational loan agreements. It appears that the amount of P17,773,185.24 was debited from UPSUMCO’s bank accounts after 3 September. At the same time, it remains unclear what were the amounts of outstanding indebtedness under the operational loans at the various points after 3 September 1987 when the bank accounts of UPSUMCO were debited.

The Court of Appeals ordered the remand of the case to the trial court, on the premise that it was unclear how much APT was entitled to recover by way of counterclaim. It is clear that the amount claimed by APT by way of counterclaim – over 1.6 Billion Pesos – is over and beyond what it can possibly be entitled to, since it is clear that the take-off loans were actually condoned as of 3 September 1987. At the same time, APT was still entitled to repayment of UPSUMCO’s operational loans. It is not clear to what extent, if at all, the amounts debited from UPSUMCO’s bank accounts after 3 September 1987 covered UPSUMCO’s outstanding indebtedness under the operational loans. Said amounts could be insufficient, just enough, or over and beyond what UPSUMCO actually owed, in which case the petitioner should be entitled to that excess amount debited after 3 September 1987. Because it is not evident from the voluminous records what was the outstanding balance of the operational loans at the various times post-September 3 UPSUMCO’s bank accounts were debited, the remand ordered by the Court of Appeal is ultimately the wisest and fairest recourse.1

Petitioner insists that the Court should not have taken cognizance of the respondents’ second motions for reconsideration with the prayer that the case be referred to the Court en banc as the same appear not to be in accordance with the rules.

Generally, under Section 3 of the Court’s Circular No. 2-89, effective March 1, 1989, the referral to the Court en banc of cases assigned to a Division is to be denied on the ground that the Court en banc is not an Appellate Court to which decisions or resolutions of a Division may be appealed. Moreover, a second motion for reconsideration of a judgment or final resolution shall not be entertained for being a prohibited pleading under Section 2, Rule 52, in relation to Section 4, Rule 56 of the Rules of Court, except for extraordinarily

48

persuasive reasons and only after an express leave shall have first been obtained.2 Accordingly, the Court, in the exercise of its sound discretion, determines the issues which are of transcendental importance, as in the present case, which necessitates it to accept the referral of a Division case before it and the grant of a second motion for reconsideration.

In sum, the Resolution of the Court En Banc reinstating the Decision of the CA categorically ruled that only its takeoff loans, not the operational loans, were condoned by the Deed of Assignment dated September 3, 1987. The Deed of Assignment expressly stipulated the particular loan agreements which were covered therein. As such, respondent APT was entitled to have the funds from petitioner’s savings accounts with respondent PNB transferred to its own account, to the extent of petitioner’s remaining obligations under the operational loans, less the amount condoned in the Deed of Assignment and the P450,000,000.00 proceeds of the foreclosure. As the En Banc Resolution explained, respondent APT had a right to go after the bank deposits of petitioner, in its capacity as the creditor of the latter. Likewise, respondent PNB had the right to apply the proceeds of the sale of petitioner’s sugar and molasses, in satisfaction of petitioner’s obligations. Respondent PNB never waived these rights and the same were transferred to respondent APT (now PMO) by virtue of the Deed of Transfer executed between them. Moreover, there was no conventional subrogation since such requires the consent of the original parties and of the third persons and there was no evidence that the consent of petitioner (as debtor) was secured when respondent PNB assigned its rights to respondent APT, and that the assignment by respondent PNB to respondent APT arose by mandate of law and not by the volition of the parties. Accordingly, the remand of the case to the RTC for computation of the parties’ remaining outstanding balances was proper.

The doctrine of stare decisis et no quieta movere3 or principle of adherence to precedents does not apply to the present case so as to bar the Court en banc from taking cognizance over the case which rectified the disposition of the case and reversed and set aside the Decision rendered by a Division thereof.

WHEREFORE, the Motion for Reconsideration filed by petitioner United Planters Sugar Milling Company, Inc. (UPSUMCO) is DENIED WITH FINALITY for lack of merit.

SO ORDERED.

--------------------------------------------------------------------------------------------------------------------------------------------Republic of the Philippines

SUPREME COURTManila 

THIRD DIVISION

ILEANA DR. MACALINAO,

                      Petitioner,

         -  versus  -

BANK OF THE PHILIPPINEISLANDS,

G.R. No. 175490

Present:

YNARES-SANTIAGO, J.,

                 Chairperson,

CHICO-NAZARIO,

49

                      Respondent.

.

VELASCO, JR.,

NACHURA, and

PERALTA, JJ.

Promulgated:

September 17, 2009

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

 

 

D E C I S I O N

VELASCO, JR., J.:

 

The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to reverse

and set aside the June 30, 2006 Decision[1] of the Court of Appeals (CA) and its November 21, 2006

Resolution[2] denying petitioner’s motion for reconsideration.

The Facts

Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of the credit

card facilities of respondent Bank of the Philippine Islands (BPI).[3]  Petitioner Macalinao made some

purchases through the use of the said credit card and defaulted in paying for said purchases. She

subsequently received a letter dated January 5, 2004 from respondent BPI, demanding payment of the

amount of one hundred forty-one thousand five hundred eighteen pesos and thirty-four centavos (PhP

141,518.34), as follows:

50

Statement Date

Previous Balance

Purchases (Payments)

Penalty Interest

Finance Charges

Balance Due

10/27/2002

94,843.70 559.72 3,061.99 98,456.41

11/27/2002

98,465.41 (15,000) 0 2,885.61 86,351.02

12/31/2002

86,351.02 30,308.80 259.05 2,806.41 119,752.28

1/27/2003 119,752.28 618.23 3,891.07 124,234.582/27/2003 124,234.58 990.93 4,037.62 129,263.133/27/2003 129,263.13 (18,000.00

)298.72 3,616.05 115,177.90

4/27/2003 115,177.90 644.26 3,743.28 119,565.445/27/2003 119,565.44 (10,000.00

)402.95 3,571.71 113,540.10

6/29/2003 113,540.10 8,362.50 (7,000.00)

323.57 3,607.32 118,833.49

7/27/2003 118,833.49 608.07 3,862.09 123,375.658/27/2003 123,375.65 1,050.20 4,009.71 128,435.569/28/2003 128,435.56 1,435.51 4,174.16 134,045.2310/28/200311/28/200312/28/20031/27/2004 141,518.34 8,491.10 4,599.34 154,608.78

 

Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI

Mastercard, the charges or balance thereof remaining unpaid after the payment due date indicated on the

monthly Statement of Accounts shall bear interest at the rate of 3% per month and an additional penalty

fee equivalent to another 3% per month. Particularly:

8. PAYMENT OF CHARGES – BCC shall furnish the Cardholder a monthly Statement of Account (SOA) and the Cardholder agrees that all charges made through the use of the CARD shall be paid by the Cardholder as stated in the SOA on or before the last day for payment, which is twenty (20) days from the date of the said SOA, and such payment due date may be changed to an earlier date if the Cardholder’s account is considered overdue and/or with balances in excess of the approved credit limit, or to such other date as may be deemed proper by the CARD issuer with notice to the Cardholder on the same monthly SOA. If the last day fall on a Saturday, Sunday or a holiday, the last day for the payment automatically becomes the last working day prior to said payment date. However, notwithstanding the absence or lack of proof of service of the SOA of the Cardholder, the latter shall pay any and all charges made through the use of the CARD within thirty (30) days from date or dates thereof. Failure of the Cardholder to pay the charges made through the CARD within the payment period as stated in the SOA or within thirty (30) days from actual date or dates of purchase whichever occur earlier, shall render him in default without the

51

necessity of demand from BCC, which the Cardholder expressly waives. The charges or balance thereof remaining unpaid after the payment due date indicated on the monthly Statement of Accounts shall bear interest at the rate of 3% per month for BPI Express Credit, BPI Gold Mastercard and an additional penalty fee equivalent to another 3% of the amount due for every month or a fraction of a month’s delay. PROVIDED that if there occurs any change on the prevailing market rates, BCC shall have the option to adjust the rate of interest and/or penalty fee due on the outstanding obligation with prior notice to the cardholder. The Cardholder hereby authorizes BCC to correspondingly increase the rate of such interest [in] the event of changes in the prevailing market rates, and to charge additional service fees as may be deemed necessary in order to maintain its service to the Cardholder. A CARD with outstanding balance unpaid after thirty (30) days from original billing statement date shall automatically be suspended, and those with accounts unpaid after ninety (90) days from said original billing/statement date shall automatically be cancel (sic), without prejudice to BCC’s right to suspend or cancel any card anytime and for whatever reason. In case of default in his obligation as provided herein, Cardholder shall surrender his/her card to BCC and in addition to the interest and penalty charges aforementioned , pay the following liquidated damages and/or fees (a) a collection fee of 25% of the amount due if the account is referred to a collection agency or attorney; (b) service fee for every dishonored check issued by the cardholder in payment of his account without prejudice, however, to BCC’s right of considering Cardholder’s account, and (c) a final fee equivalent to 25% of the unpaid balance, exclusive of litigation expenses and judicial cost, if the payment of the account is enforced though court action. Venue of all civil suits to enforce this Agreement or any other suit directly or indirectly arising from the relationship between the parties as established herein, whether arising from crimes, negligence or breach thereof, shall be in the process of courts of the City of Makati or in other courts at the option of BCC.[4] (Emphasis supplied.)

 

For failure of petitioner Macalinao to settle her obligations, respondent BPI filed with the

Metropolitan Trial Court (MeTC) of Makati City a complaint for a sum of money against her and her

husband, Danilo SJ. Macalinao. This was raffled to Branch 66 of the MeTC and was docketed as Civil Case

No. 84462 entitled Bank of the Philippine Islandsvs. Spouses Ileana Dr. Macalinao and Danilo SJ. Macalinao.

[5]

In said complaint, respondent BPI prayed for the payment of the amount of one hundred fifty-

four thousand six hundred eight pesos and seventy-eight centavos (PhP 154,608.78) plus 3.25% finance

charges and late payment charges equivalent to 6% of the amount due from February 29, 2004 and an

amount equivalent to 25% of the total amount due as attorney’s fees, and of the cost of suit.[6]

After the summons and a copy of the complaint were served upon petitioner Macalinao and her

husband, they failed to file their Answer.[7] Thus, respondent BPI moved that judgment be rendered in

accordance with Section 6 of the Rule on Summary Procedure.[8] This was granted in an Order dated June

16, 2004.[9]  Thereafter, respondent BPI submitted its documentary evidence.[10]

52

In its Decision dated August 2, 2004, the MeTC ruled in favor of respondent BPI and ordered

petitioner Macalinao and her husband to pay the amount of PhP 141,518.34 plus interest and penalty

charges of 2% per month, to wit:

WHEREFORE, finding merit in the allegations of the complaint supported by documentary evidence, judgment is hereby rendered in favor of the plaintiff, Bank of the Philippine Islands and against defendant-spouses Ileana DR Macalinao and Danilo SJ Macalinao by ordering the latter to pay the former jointly and severally the following:

1.      The amount of PESOS: ONE HUNDRED FORTY ONE THOUSAND FIVE HUNDRED EIGHTEEN AND 34/100 (P141,518.34) plus interest and penalty charges of 2% per month from January 05, 2004 until fully paid;2.      P10,000.00 as and by way of attorney’s fees; and3.      Cost of suit. SO ORDERED.[11]

 

Only petitioner Macalinao and her husband appealed to the Regional Trial Court (RTC)

of Makati City, their recourse docketed as Civil Case No. 04-1153. In its Decision dated October 14, 2004,

the RTC affirmed in toto the decision of the MeTC and held:

In any event, the sum of P141,518.34 adjudged by the trial court appeared to be the result of a recomputation at the reduced rate of 2% per month. Note that the total amount sought by the plaintiff-appellee was P154,608.75 exclusive of finance charge of 3.25% per month and late payment charge of 6% per month.

 WHEREFORE, the appealed decision is hereby affirmed in toto. No pronouncement as to costs. SO ORDERED.[12]

  

Unconvinced, petitioner Macalinao filed a petition for review with the CA, which was docketed as

CA-G.R. SP No. 92031. The CA affirmed with modification the Decision of the RTC:

WHEREFORE, the appealed decision is AFFIRMED but MODIFIED with respect to the total amount due and interest rate. Accordingly, petitioners are jointly and severally ordered to pay respondent Bank of the Philippine Islands the following:

 

53

1.      The amount of One Hundred Twenty Six Thousand Seven Hundred Six Pesos and Seventy Centavos plus interest and penalty charges of 3% per month from January 5, 2004 until fully paid;

2.      P10,000.00 as and by way of attorney’s fees; and3.      Cost of Suit.

 SO ORDERED.[13]

 

Although sued jointly with her husband, petitioner Macalinao was the only one who filed the petition

before the CA since her husband already passed away on October 18, 2005.[14]

In its assailed decision, the CA held that the amount of PhP 141,518.34 (the amount sought to be

satisfied in the demand letter of respondent BPI) is clearly not the result of the re-computation at the reduced

interest rate as previous higher interest rates were already incorporated in the said amount. Thus, the said

amount should not be made as basis in computing the total obligation of petitioner Macalinao. Further, the CA

also emphasized that respondent BPI should not compound the interest in the instant case absent a

stipulation to that effect. The CA also held, however, that the MeTC erred in modifying the amount of interest

rate from 3% monthly to only 2% considering that petitioner Macalinao freely availed herself of the credit

card facility offered by respondent BPI to the general public. It explained that contracts of adhesion are not

invalid per se and are not entirely prohibited.

Petitioner Macalinao’s motion for reconsideration was denied by the CA in its Resolution dated

November 21, 2006. Hence, petitioner Macalinao is now before this Court with the following assigned errors:

I.

THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%, SHOULD BE UPHELD SINCE THE STIPULATED RATE OF INTEREST WAS UNCONSCIONABLE AND INIQUITOUS, AND THUS ILLEGAL.

II.

THE COURT OF APPEALS ARBITRARILY MODIFIED THE REDUCED RATE OF INTEREST FROM 2% TO 3%, CONTRARY TO THE TENOR OF ITS OWN DECISION.

 

III.

54

THE COURT A QUO, INSTEAD OF PROCEEDING WITH A RECOMPUTATION, SHOULD HAVE DISMISSED THE CASE FOR FAILURE OF RESPONDENT BPI TO PROVE THE CORRECT AMOUNT OF PETITIONER’S OBLIGATION, OR IN THE ALTERNATIVE, REMANDED THE CASE TO THE LOWER COURT FOR RESPONDENT BPI TO PRESENT PROOF OF THE CORRECT AMOUNT THEREOF.

Our Ruling

The petition is partly meritorious.

The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be Reduced to 2% Per Month or 24% Per Annum

In its Complaint, respondent BPI originally imposed the interest and penalty charges at the rate of

9.25% per month or 111% per annum. This was declared as unconscionable by the lower courts for being

clearly excessive, and was thus reduced to 2% per month or 24% per annum. On appeal, the CA modified the

rate of interest and penalty charge and increased them to 3% per month or 36% per annum based on the

Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, which governs the transaction

between petitioner Macalinao and respondent BPI.

In the instant petition, Macalinao claims that the interest rate and penalty charge of 3% per month

imposed by the CA is iniquitous as the same translates to 36% per annum or thrice the legal rate of interest.[15] On the other hand, respondent BPI asserts that said interest rate and penalty charge are reasonable as the

same are based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card.[16]

We find for petitioner. We are of the opinion that the interest rate and penalty charge of 3% per

month should be equitably reduced to 2% per month or 24% per annum.

Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, there

was a stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first time that

this Court has considered the interest rate of 36% per annum as excessive and unconscionable. We held

in Chua vs. Timan:[17]

The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against the law. While

55

C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets. (Emphasis supplied.)

 

 

Since the stipulation on the interest rate is void, it is as if there was no express contract thereon.

Hence, courts may reduce the interest rate as reason and equity demand.[18]

The same is true with respect to the penalty charge. Notably, under the Terms and Conditions

Governing the Issuance and Use of the BPI Credit Card, it was also stated therein that respondent BPI shall

impose an additional penalty charge of 3% per month. Pertinently, Article 1229 of the Civil Code states:

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.

In exercising this power to determine what is iniquitous and unconscionable, courts must consider

the circumstances of each case since what may be iniquitous and unconscionable in one may be totally just

and equitable in another.[19]

In the instant case, the records would reveal that petitioner Macalinao made partial payments to

respondent BPI, as indicated in her Billing Statements.[20]  Further, the stipulated penalty charge of 3% per

month or 36% per annum, in addition to regular interests, is indeed iniquitous and unconscionable.

Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged by the

CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to 1% monthly or a

total of 2% per month or 24% per annum in line with the prevailing jurisprudence and in accordance with

Art. 1229 of the Civil Code.

 

There Is No Basis for the Dismissal of the Case,

Much Less a Remand of the Same for Further Reception of Evidence

 

56

 

Petitioner Macalinao claims that the basis of the re-computation of the CA, that is, the amount of PhP

94,843.70 stated on the October 27, 2002 Statement of Account, was not the amount of the principal

obligation. Thus, this allegedly necessitates a re-examination of the evidence presented by the parties. For

this reason, petitioner Macalinao further contends that the dismissal of the case or its remand to the lower

court would be a more appropriate disposition of the case.

Such contention is untenable. Based on the records, the summons and a copy of the complaint were

served upon petitioner Macalinao and her husband on May 4, 2004. Nevertheless, they failed to file their

Answer despite such service. Thus, respondent BPI moved that judgment be rendered accordingly.[21] Consequently, a decision was rendered by the MeTC on the basis of the evidence submitted by respondent

BPI. This is in consonance with Sec. 6 of the Revised Rule on Summary Procedure, which states:

Sec.  6.  Effect of failure to answer. — Should the defendant fail to answer the complaint within the period above provided, the court, motu proprio, or on motion of the plaintiff, shall render judgment as may be warranted by the facts alleged in the complaint and limited to what is prayed for therein: Provided, however, that the court may in its discretion reduce the amount of damages and attorney’s fees claimed for being excessive or otherwise unconscionable. This is without prejudice to the applicability of Section 3(c), Rule 10 of the Rules of Court, if there are two or more defendants. (As amended by the 1997 Rules of Civil Procedure; emphasis supplied.)

 

 

Considering the foregoing rule, respondent BPI should not be made to suffer for petitioner

Macalinao’s failure to file an answer and concomitantly, to allow the latter to submit additional evidence by

dismissing or remanding the case for further reception of evidence. Significantly, petitioner Macalinao herself

admitted the existence of her obligation to respondent BPI, albeit with reservation as to the principal amount.

Thus, a dismissal of the case would cause great injustice to respondent BPI. Similarly, a remand of the case for

further reception of evidence would unduly prolong the proceedings of the instant case and render inutile the

proceedings conducted before the lower courts.

Significantly, the CA correctly used the beginning balance of PhP 94,843.70 as basis for the re-

computation of the interest considering that this was the first amount which appeared on the Statement of

Account of petitioner Macalinao. There is no other amount on which the re-computation could be based, as

can be gathered from the evidence on record. Furthermore, barring a showing that the factual findings

complained of are totally devoid of support in the record or that they are so glaringly erroneous as to

57

constitute serious abuse of discretion, such findings must stand, for this Court is not expected or required to

examine or contrast the evidence submitted by the parties.[22]

In view of the ruling that only 1% monthly interest and 1% penalty charge can be applied to the

beginning balance of PhP 94,843.70, this Court finds the following computation more appropriate:

 

Statement Date

Previous

Balance

Purchases

(Payments)

Balance Interest (1%)

PenaltyCharge(1%)

Total Amount Due for

the Month

10/27/2002

94,843.70

94,843.70

948.44 948.44 96,740.58

11/27/2002

94,843.70

(15,000)

79,843.70

798.44 798.44 81,440.58

12/31/2002

79,843.70

30,308.80

110,152.50

1,101.53

1,101.53

112,355.56

1/27/2003

110,152.50

110,152.50

1,101.53

1,101.53

112,355.56

2/27/2003

110,152.50

110,152.50

1,101.53

1,101.53

112,355.56

3/27/2003

110,152.50

(18,000.00)

92,152.50

921.53 921.53 93,995.56

4/27/2003

92,152.50

92,152.50

921.53 921.53 93,995.56

5/27/2003

92,152.50

(10,000.00)

82,152.50

821.53 821.53 83,795.56

6/29/2003

82,152.50

8,362.50 (7,000.00)

83,515.00

835.15 835.15 85,185.30

7/27/2003

83,515.00

83,515.00

835.15 835.15 85,185.30

8/27/2003

83,515.00

83,515.00

835.15 835.15 85,185.30

9/28/2003

83,515.00

83,515.00

835.15 835.15 85,185.30

10/28/2003

83,515.00

83,515.00

835.15 835.15 85,185.30

11/28/2003

83,515.00

83,515.00

835.15 835.15 85,185.30

12/28/2003

83,515.00

83,515.00

835.15 835.15 85,185.30

1/27/2004

83,515.00

83,515.00

835.15 835.15 85,185.30

TOTAL 83,515.00

14,397.26

14,397.26

112,309.52

58

 WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated June 30, 2006 in CA-G.R. SP

No. 92031 is hereby MODIFIED with respect to the total amount due, interest rate, and penalty charge.

Accordingly, petitioner Macalinao is ordered to pay respondent BPI the following:

 

(1) The amount of one hundred twelve thousand three hundred nine pesos and fifty-two

centavos (PhP 112,309.52) plus interest and penalty charges of 2% per month from January 5, 2004 until

fully paid;

(2) PhP 10,000 as and by way of attorney’s fees; and

(3) Cost of suit.

SO ORDERED.

59