E.

Rights and obligations of bailor and bailee

1. G.R. No. L-4150 February 10, 1910 FELIX DE LOS SANTOS, plaintiff-appelle, vs. AGUSTINA JARRA, administratrix of the estate of Magdaleno Jimenea, deceased, defendant-appellant. On the 1st of September, 1906, Felix de los Santos brought suit against Agustina Jarra, the administratrix of the estate of Magdaleno Jimenea, alleging that in the latter part of 1901 Jimenea borrowed and obtained from the plaintiff ten first-class carabaos, to be used at the animal-power mill of his hacienda during the season of 1901-2, without recompense or remuneration whatever for the use thereof, under the sole condition that they should be returned to the owner as soon as the work at the mill was terminated; that Magdaleno Jimenea, however, did not return the carabaos, notwithstanding the fact that the plaintiff claimed their return after the work at the mill was finished; that Magdaleno Jimenea died on the 28th of October, 1904, and the defendant herein was appointed by the Court of First Instance of Occidental Negros administratrix of his estate and she took over the administration of the same and is still performing her duties as such administratrix; that the plaintiff presented his claim to the commissioners of the estate of Jimenea, within the legal term, for the return of the said ten carabaos, but the said commissioners rejected his claim as appears in their report; therefore, the plaintiff prayed that judgment be entered against the defendant as administratrix of the estate of the deceased, ordering her to return the ten first-class carabaos loaned to the late Jimenea, or their present value, and to pay the costs. The defendant was duly summoned, and on the 25th of September, 1906, she demurred in writing to the complaint on the ground that it was vague; but on the 2d of October of the same year, in answer to the complaint, she said that it was true that the late Magdaleno Jimenea asked the plaintiff to loan him ten carabaos, but that he only obtained three second-class animals, which were afterwards transferred by sale by the plaintiff to the said Jimenea; that she denied the allegations contained in paragraph 3 of the complaint; for all of which she asked the court to absolve her of the complaint with the cost against the plaintiff. By a writing dated the 11th of December, 1906, Attorney Jose Felix Martinez notified the defendant and her counsel, Matias Hilado, that he had made an agreement with the plaintiff to the effect that the latter would not compromise the controversy without his consent, and that as fees for his professional services he was to receive one half of the amount allowed in the judgment if the same were entered in favor of the plaintiff. The case came up for trial, evidence was adduced by both parties, and either exhibits were made of record. On the 10th of January, 1907, the court below entered judgment sentencing Agustina Jarra, as administratrix of

the estate of Magdaleno Jimenea, to return to the plaintiff, Felix de los Santos, the remaining six second and third class carabaos, or the value thereof at the rate of P120 each, or a total of P720 with the costs. Counsel for the defendant excepted to the foregoing judgment, and, by a writing dated January 19, moved for anew trial on the ground that the findings of fact were openly and manifestly contrary to the weight of the evidence. The motion was overruled, the defendant duly excepted, and in due course submitted the corresponding bill of exceptions, which was approved and submitted to this court. The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan of ten carabaos which are now claimed by the latter, as shown by two letters addressed by the said Jimenea to Felix de los Santos; but in her answer the said defendant alleged that the late Jimenea only obtained three second-class carabaos, which were subsequently sold to him by the owner, Santos; therefore, in order to decide this litigation it is indispensable that proof be forthcoming that Jimenea only received three carabaos from his son-in-law Santos, and that they were sold by the latter to him. The record discloses that it has been fully proven from the testimony of a sufficient number of witnesses that the plaintiff, Santos, sent in charge of various persons the ten carabaos requested by his father-in-law, Magdaleno Jimenea, in the two letters produced at the trial by the plaintiff, and that Jimenea received them in the presence of some of said persons, one being a brother of said Jimenea, who saw the animals arrive at the hacienda where it was proposed to employ them. Four died of rinderpest, and it is for this reason that the judgment appealed from only deals with six surviving carabaos. The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not evidenced by any trustworthy documents such as those of transfer, nor were the declarations of the witnesses presented by the defendant affirming it satisfactory; for said reason it can not be considered that Jimenea only received three carabaos on loan from his son-in-law, and that he afterwards kept them definitely by virtue of the purchase. By the laws in force the transfer of large cattle was and is still made by means of official documents issued by the local authorities; these documents constitute the title of ownership of the carabao or horse so acquired. Furthermore, not only should the purchaser be provided with a new certificate or credential, a document which has not been produced in evidence by the defendant, nor has the loss of the same been shown in the case, but the old documents ought to be on file in the municipality, or they should have been delivered to the new purchaser, and in the case at bar neither did the defendant present the old credential on which should be stated the name of the previous owner of each of the three carabaos said to have been sold by the plaintiff. From the foregoing it may be logically inferred that the carabaos loaned or given on commodatum to the now deceased Magdaleno Jimenea were ten in number; that they, or at any rate the six surviving ones, have not been

returned to the owner thereof, Felix de los Santos, and that it is not true that the latter sold to the former three carabaos that the purchaser was already using; therefore, as the said six carabaos were not the property of the deceased nor of any of his descendants, it is the duty of the administratrix of the estate to return them or indemnify the owner for their value. The Civil Code, in dealing with loans in general, from which generic denomination the specific one of commodatum is derived, establishes prescriptions in relation to the last-mentioned contract by the following articles: ART. 1740. By the contract of loan, one of the parties delivers to the other, either anything not perishable, in order that the latter may use it during a certain period and return it to the former, in which case it is called commodatum, or money or any other perishable thing, under the condition to return an equal amount of the same kind and quality, in which case it is merely called a loan. Commodatum is essentially gratuitous. A simple loan may be gratuitous, or made under a stipulation to pay interest. ART. 1741. The bailee acquires retains the ownership of the thing loaned. The bailee acquires the use thereof, but not its fruits; if any compensation is involved, to be paid by the person requiring the use, the agreement ceases to be a commodatum. ART. 1742. The obligations and rights which arise from the commodatum pass to the heirs of both contracting parties, unless the loan has been in consideration for the person of the bailee, in which case his heirs shall not have the right to continue using the thing loaned. The carabaos delivered to be used not being returned by the defendant upon demand, there is no doubt that she is under obligation to indemnify the owner thereof by paying him their value. Article 1101 of said code reads: Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and those who in any manner whatsoever act in contravention of the stipulations of the same, shall be subjected to indemnify for the losses and damages caused thereby. The obligation of the bailee or of his successors to return either the thing loaned or its value, is sustained by the supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out with precision the legal doctrine touching commodatum as follows: Although it is true that in a contract of commodatum the bailor retains the ownership of the thing loaned, and at the expiration of the period, or after the use for which it was loaned has been accomplished, it is the imperative duty of the bailee to return the thing itself to its owner, or to pay him damages if through the fault of the bailee the thing should have been lost or injured, it is clear that where public securities are involved, the trial court, in deferring to the claim of the bailor that the amount loaned be returned him by the bailee in bonds of the same class as those which constituted the contract, thereby properly applies law 9 of title 11 ofpartida 5.

With regard to the third assignment of error, based on the fact that the plaintiff Santos had not appealed from the decision of the commissioners rejecting his claim for the recovery of his carabaos, it is sufficient to estate that we are not dealing with a claim for the payment of a certain sum, the collection of a debt from the estate, or payment for losses and damages (sec. 119, Code of Civil Procedure), but with the exclusion from the inventory of the property of the late Jimenea, or from his capital, of six carabaos which did not belong to him, and which formed no part of the inheritance. The demand for the exclusion of the said carabaos belonging to a third party and which did not form part of the property of the deceased, must be the subject of a direct decision of the court in an ordinary action, wherein the right of the third party to the property which he seeks to have excluded from the inheritance and the right of the deceased has been discussed, and rendered in view of the result of the evidence adduced by the administrator of the estate and of the claimant, since it is so provided by the second part of section 699 and by section 703 of the Code of Civil Procedure; the refusal of the commissioners before whom the plaintiff unnecessarily appeared can not affect nor reduce the unquestionable right of ownership of the latter, inasmuch as there is no law nor principle of justice authorizing the successors of the late Jimenea to enrich themselves at the cost and to the prejudice of Felix de los Santos. For the reasons above set forth, by which the errors assigned to the judgment appealed from have been refuted, and considering that the same is in accordance with the law and the merits of the case, it is our opinion that it should be affirmed and we do hereby affirm it with the costs against the appellant. So ordered. 2. Mina vs. Pascual., No. 8321, 25 Phil. 540 , October 14, 1913 G.R. No. L-8321 October 14, 1913 ALEJANDRA MINA, ET AL., plaintiffs-appellants, vs. RUPERTA PASCUAL, ET AL., defendants-appellees. Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired during his lifetime, on March 12, 1874, a lot in the center of the town of Laoag, the capital of the Province of Ilocos Norte, the property having been awarded to him through its purchase at a public auction held by the alcalde mayor of that province. The lot has a frontage of 120 meters and a depth of 15. Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of the said lot, embracing 14 meters of its frontage by 11 meters of its depth. Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandro Mina, et al., were recognized without discussion as his heirs. Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta Pascual were recognized likes without discussion,

though it is not said how, and consequently are entitled to the said building, or rather, as Ruperta Pascual herself stated, to only six-sevenths of one-half of it, the other half belonging, as it appears, to the plaintiffs themselves, and the remaining one-seventh of the first one-half to the children of one of the plaintiffs, Elena de Villanueva. The fact is that the plaintiffs and the defendants are virtually, to all appearance, the owners of the warehouse; while the plaintiffs are undoubtedly, the owners of the part of the lot occupied by that building, as well as of the remainder thereof. This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the guardian of her minor children, the herein defendants, petitioned the Curt of First Instance of Ilocos Norte for authorization to sell "the six-sevenths of theone-half of the warehouse, of 14 by 11 meters, together with its lot." The plaintiffs that is Alejandra Mina, et al. opposed the petition of Ruperta Pascual for the reason that the latter had included therein the lot occupied by the warehouse, which they claimed was their exclusive property. All this action was taken in a special proceeding in re guardianship. The plaintiffs did more than oppose Pascual's petition; they requested the court, through motion, to decide the question of the ownership of the lot before it pass upon the petition for the sale of the warehouse. But the court before determining the matter of the ownership of the lot occupied by the warehouse, ordered the sale of this building, saying: While the trial continues with respect to the ownership of the lot, the court orders the sale at public auction of the said warehouse and of the lot on which it is built, with the present boundaries of the land and condition of the building, at a price of not less than P2,890 Philippine currency . . . . So, the warehouse, together with the lot on which it stands, was sold to Cu Joco, the other defendant in this case, for the price mentioned. The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the court decided it by holding that this land belonged to the owner of the warehouse which had been built thereon thirty years before. The plaintiffs appealed and this court reversed the judgment of the lower court and held that the appellants 1 were the owners of the lot in question. When the judgment became final and executory, a writ of execution issued and the plaintiffs were given possession of the lot; but soon thereafter the trial court annulled this possession for the reason that it affected Cu Joco, who had not been a party to the suit in which that writ was served. It was then that the plaintiffs commenced the present action for the purpose of having the sale of the said lot declared null and void and of no force and effect. An agreement was had ad to the facts, the ninth paragraph of which is as follows: 9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the Supreme Court which found for them by holding that they are the owners

of the lot in question, although there existed and still exists a commodatum by virtue of which the guardianship (meaning the defendants) had and has the use, and the plaintiffs the ownership, of the property, with no finding concerning the decree of the lower court that ordered the sale. The obvious purport of the cause "although there existed and still exists a commodatum," etc., appears to be that it is a part of the decision of the Supreme Court and that, while finding the plaintiffs to be the owners of the lot, we recognized in principle the existence of a commodatum under which the defendants held the lot. Nothing could be more inexact. Possibly, also, the meaning of that clause is that, notwithstanding the finding made by the Supreme Court that the plaintiffs were the owners, these former and the defendants agree that there existed, and still exists, a commodatum, etc. But such an agreement would not affect the truth of the contents of the decision of this court, and the opinions held by the litigants in regard to this point could have no bearing whatever on the present decision. Nor did the decree of the lower court that ordered the sale have the least influence in our previous decision to require our making any finding in regard thereto, for, with or without that decree, the Supreme Court had to decide the ownership of the lot consistently with its titles and not in accordance with the judicial acts or proceedings had prior to the setting up of the issue in respect to the ownership of the property that was the subject of the judicial decree. What is essentially pertinent to the case is the fact that the defendant agree that the plaintiffs have the ownership, and they themselves only the use, of the said lot. On this premise, the nullity of the sale of the lot is in all respects quite evident, whatsoever be the manner in which the sale was effected, whether judicially or extrajudicially. He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale being a transfer of the ownership of the thing, it is evident that he who has only the mere use of the thing cannot transfer its ownership. The sale of a thing effected by one who is not its owner is null and void. The defendants never were the owners of the lot sold. The sale of it by them is necessarily null and void. On cannot convey to another what he has never had himself. The returns of the auction contain the following statements: I, Ruperta Pascual, the guardian of the minors, etc., by virtue of the authorization conferred upon me on the 31st of July, 1909, by the Court of First Instance of Ilocos Norte, proceeded with the sale at public auction of the six-sevenths part of the one-half of the warehouse constructed of rubble stone, etc. Whereas I, Ruperta Pascual, the guardian of the minors, etc., sold at public auction all the land and all the rights title, interest, and ownership in the said property to Cu Joco, who was the highest bidder, etc.

Therefore, . . . I cede and deliver forever to the said purchaser, Cu Joco, his heirs and assigns, all the interest, ownership and inheritance rights and others that, as the guardian of the said minors, I have and may have in the said property, etc. The purchaser could not acquire anything more than the interest that might be held by a person to whom realty in possession of the vendor might be sold, for at a judicial auction nothing else is disposed of. What the minor children of Ruperta Pascual had in their possession was the ownership of the six-sevenths part of one-half of the warehouse and the use of the lot occupied by his building. This, and nothing more, could the Chinaman Cu Joco acquire at that sale: not the ownership of the lot; neither the other half, nor the remaining one-seventh of the said first half, of the warehouse. Consequently, the sale made to him of this one-seventh of one-half and the entire other half of the building was null and void, and likewise with still more reason the sale of the lot the building occupies. The purchaser could and should have known what it was that was offered for sale and what it was that he purchased. There is nothing that can justify the acquisition by the purchaser of the warehouse of the ownership of the lot that this building occupies, since the minors represented by Ruperta Pascual never were the owners of the said lot, nor were they ever considered to be such. The trial court, in the judgment rendered, held that there were no grounds for the requested annulment of the sale, and that the plaintiffs were entitled to the P600 deposited with the clerk of the court as the value of the lot in question. The defendants, Ruperta Pascual and the Chinaman Cu Joco, were absolved from the complaint, without express finding as to costs. The plaintiffs cannot be obliged to acquiesce in or allow the sale made and be compelled to accept the price set on the lot by expert appraisers, not even though the plaintiffs be considered as coowner of the warehouse. It would be much indeed that, on the ground of coownership, they should have to abide by and tolerate the sale of the said building, which point this court does not decide as it is not a question submitted to us for decision, but, as regards the sale of the lot, it is in all respects impossible to hold that the plaintiffs must abide by it and tolerate, it, and this conclusion is based on the fact that they did not give their consent (art. 1261, Civil Code), and only the contracting parties who have given it are obliged to comply (art. 1091, idem). The sole purpose of the action in the beginning was to obtain an annulment of the sale of the lot; but subsequently the plaintiffs, through motion, asked for an amendment by their complaint in the sense that the action should be deemed to be one for the recovery of possession of a lot and for the annulment of its sale. The plaintiff's petition was opposed by the defendant's attorney, but was allowed by the court; therefore the complaint seeks, after the judicial annulment of the sale of the lot, to have the defendants sentenced immediately to deliver the same to the plaintiffs.

Such a finding appears to be in harmony with the decision rendered by the Supreme Court in previous suit, wherein it was held that the ownership of the lot lay in the plaintiffs, and for this reason steps were taken to give possession thereof to the defendants; but, as the purchaser Cu Joco was not a party to that suit, the present action is strictly one for recover against Cu Joco to compel him, once the sale has been annulled, to deliver the lot to its lawful owners, the plaintiffs. As respects this action for recovery, this Supreme Court finds: 1. That it is a fact admitted by the litigating parties, both in this and in the previous suit, that Andres Fontanilla, the defendants' predecessor in interest, erected the warehouse on the lot, some thirty years ago, with the explicit consent of his brother Francisco Fontanilla, the plaintiff's predecessor in interest. 2. That it also appears to be an admitted fact that the plaintiffs and the defendants are the coowners of the warehouse. 3. That it is a fact explicitly admitted in the agreement, that neither Andres Fontanilla nor his successors paid any consideration or price whatever for the use of the lot occupied by the said building; whence it is, perhaps, that both parties have denominated that use a commodatum. Upon the premise of these facts, or even merely upon that of the first of them, the sentencing of the defendants to deliver the lot to the plaintiffs does not follow as a necessary corollary of the judicial declaration of ownership made in the previous suit, nor of that of the nullity of the sale of the lot, made in the present case. The defendants do not hold lawful possession of the lot in question.1awphil.net But, although both litigating parties may have agreed in their idea of the commodatum, on account of its not being, as indeed it is not, a question of fact but of law, yet that denomination given by them to the use of the lot granted by Francisco Fontanilla to his brother, Andres Fontanilla, is not acceptable. Contracts are not to be interpreted in conformity with the name that the parties thereto agree to give them, but must be construed, duly considering their constitutive elements, as they are defined and denominated by law. By the contract of loan, one of the parties delivers to the other, either anything not perishable, in order that the latter may use it during the certain period and return it to the former, in which case it is calledcommodatum . . . (art. 1740, Civil Code). It is, therefore, an essential feature of the commodatum that the use of the thing belonging to another shall for a certain period. Francisco Fontanilla did not fix any definite period or time during which Andres Fontanilla could have the use of the lot whereon the latter was to erect a stone warehouse of considerable value, and so it is that for the past thirty years of the lot has been used by both Andres and his successors in interest. The present contention of the plaintiffs that Cu Joco, now in possession of the lot, should pay rent for it at the rate of P5 a month, would destroy the theory of the commodatum sustained by

them, since, according to the second paragraph of the aforecited article 1740, "commodatum is essentially gratuitous," and, if what the plaintiffs themselves aver on page 7 of their brief is to be believed, it never entered Francisco's mind to limit the period during which his brother Andres was to have the use of the lot, because he expected that the warehouse would eventually fall into the hands of his son, Fructuoso Fontanilla, called the adopted son of Andres, which did not come to pass for the reason that Fructuoso died before his uncle Andres. With that expectation in view, it appears more likely that Francisco intended to allow his brother Andres a surface right; but this right supposes the payment of an annual rent, and Andres had the gratuitous use of the lot. Hence, as the facts aforestated only show that a building was erected on another's ground, the question should be decided in accordance with the statutes that, thirty years ago, governed accessions to real estate, and which were Laws 41 and 42, title 28, of the third Partida, nearly identical with the provisions of articles 361 and 362 of the Civil Code. So, then, pursuant to article 361, the owner of the land on which a building is erected in good faith has a right to appropriate such edifice to himself, after payment of the indemnity prescribed in articles 453 and 454, or to oblige the builder to pay him the value of the land. Such, and no other, is the right to which the plaintiff are entitled. For the foregoing reasons, it is only necessary to annul the sale of the said lot which was made by Ruperta Pascual, in representation of her minor children, to Cu Joco, and to maintain the latter in the use of the lot until the plaintiffs shall choose one or the other of the two rights granted them by article 361 of the Civil Code.1awphil.net The judgment appealed from is reversed and the sale of the lot in question is held to be null and void and of no force or effect. No special finding is made as to the costs of both instances. 3. Briones vs. Cammayo, No. L-23559, 41 SCRA 404 , October 04, 1971 G.R. No. L-23559 October 4, 1971 AURELIO G. BRIONES, plaintiff-appellee, vs. PRIMITIVO P. CAMMAYO, ET AL., defendantsappellants. On February 22, 1962, Aurelio G. Briones filed an action in the Municipal Court of Manila against Primitivo, Nicasio, Pedro, Hilario and Artemio, all surnamed Cammayo, to recover from them, jointly and severally, the amount of P1,500.00, plus damages, attorney's fees and costs of suit. The defendants answered the complaint with specific denials and the following special defenses and compulsory counterclaim: ...; By way of SPECIAL DEFENSES Defendants allege:

4. Defendants executed the real estate mortgage, Annex "A" of the complaint, as security for the loan of P1,200.00 given to defendant Primitivo P. Cammayo upon the usurious agreement that defendant pays to the plaintiff and that the plaintiff reserve and secure, as in fact plaintiff reserved and secured himself, out of the alleged loan of P1,500.00 as interest the sum of P300.00 for one year; 5. That although the mortgage contract, Annex "A" was executed for securing the payment of P1,500.00 for a period of one year, without interest, the truth and the real fact is that plaintiff delivered to the defendant Primitivo P. Cammayo only the sum of P1,200.00 and withheld the sum of P300.00 which was intended as advance interest for one year; 6. That on account of said loan of P1,200.00, defendant Primitivo P. Cammayo paid to the plaintiff during the period from October 1955 to July 1956 the total sum of P330.00 which plaintiff, illegally and unlawfully refuse to acknowledge as part payment of the account but as in interest of the said loan for an extension of another term of one year; 7. That said contract of loan entered into between plaintiff and defendant Primitivo P. Cammayo is a usurious contract and is contrary to law, morals, good customs, public order or public policy and is, therefore, in existent and void from the beginning (Art. 1407 Civil Code); And as COMPULSORY COUNTERCLAIM Defendants replead all their allegations in the preceding paragraphs; 8. That plaintiff, by taking and receiving interest in excess of that allowed by law, with full intention to violate the law, at the expense of the defendants, committed a flagrant violation of Act 2655, otherwise known as the Usury Law, causing the defendants damages and attorney's fees, the amount of which will be proven at the trial; 9. That this is the second time this same case is filed before this court, the first having been previously filed and docketed in this court as Civil Case No. 75845 (Branch VII) and the same was dismissed by the Court of First Instance of Manila on July 13, 1961 in Civil Case No. 43121 (Branch XVII) and for repeatedly bringing this case to the court, harassing and persecuting defendants in that manner, defendants have suffered mental anguish and anxiety for which they should be compensated for moral damages. On September 7, 1962, Briones filed an unverified reply in which he merely denied the allegations of the counterclaim. Thereupon the defendants moved for the rendition of a summary judgment on the ground that, upon the record, there was no genuine issue of fact between the parties. The Municipal Court granted the motion and rendered judgment sentencing the defendants to pay the plaintiff the sum of P1,500.00, with interests thereon at the legal rate from February 22, 1962, plus the sum of P150.00 as attorney's fees. From this judgment, the defendants appealed to the Court of

First Instance of Manila where, according to the appealed decision, "defendant has asked for summary judgment and plaintiff has agreed to the same." (Record on Appeal p. 21). Having found the motion for summary judgment to be in order, the court then, proceeded to render judgment as follows: Judgment is, therefore, rendered, ordering Defendant to pay plaintiff the sum of P1,180.00 with interest thereon at the legal rate from October 16, 1962 until fully paid. This judgment represents Defendant's debt of P1,500.00 less usurious interest of P120.00 and the additional sum of P200.00 as attorney's fees or a total deduction of P320.00. Plaintiff shall pay the costs. In the present appeal defendants claim that the trial court erred in sentencing them to pay the principal of the loan notwithstanding its finding that the same was tainted with usury, and erred likewise in not dismissing the case. It is not now disputed that the contract of loan in question was tainted with usury. The only questions to be resolved, therefore, are firstly, whether the creditor is entitled to collect from the debtor the amount representing the principal obligation; secondly, in the affirmative, if he is entitled to collect interests thereon, and if so, at what rate. The Usury Law penalizes any person or corporation who, for any loan or renewal thereof or forbearance, shall collect or receive a higher rate or greater sum or value than is allowed by law, and provides further that, in such case, the debtor may recover the whole interest, commissions, premiums, penalties and surcharges paid or delivered, with costs and attorney's fees, in an appropriate action against his creditor, within two (2) years after such payment or delivery (Section 6, Act 2655, as amended by Acts 3291 and 3998). Construing the above provision, We held in Go Chioco vs. Martinez, 45 Phil. 256 that even if the contract of loan is declared usurious the creditor is entitled to collect the money actually loaned and the legal interest due thereon. In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in any event, the debtor in a usurious contract of loan should pay the creditor the amount which he justly owes him citing in support of this ruling its previous decisions in Go Chioco Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and Delgado vs. Duque Valgona, 44 Phil. 739. In all the above cited cases it was recognized and held that under Act 2655 a usurious contract is void; that the creditor had no right of action to recover the interest in excess of the lawful rate; but that this did not mean that the debtor may keep the principal received by him as loan thus unjustly enriching himself to the damage of the creditor. Then in Lopez and Javelona vs. El Hogar Filipino, 47 249, We also held that the standing jurisprudence of this Court on the question under consideration was clearly to the effect that the Usury Law, by its letter and spirit, did not deprive the lender of his right to recover from the borrower the money actually loaned to and enjoyed by

the latter. This Court went further to say that the Usury Law did not provide for the forfeiture of the capital in favor of the debtor in usurious contracts, and that while the forfeiture might appear to be convenient as a drastic measure to eradicate the evil of usury, the legal question involved should not be resolved on the basis of convenience. Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 andPascua vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter We expressly held that when a contract is found to be tainted with usury "the only right of the respondent (creditor) ... was merely to collect the amount of the loan, plus interest due thereon." The view has been expressed, however, that the ruling thus consistently adhered to should now be abandoned because Article 1957 of the new Civil Code a subsequent law provides that contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury, shall be void, and that in such cases "the power may recover in accordance with the laws on usury." From this the conclusion is drawn that the whole contract is void and that, therefore, the creditor has no right to recover not even his capital. The meaning and scope of our ruling in the cases mentioned heretofore is clearly stated, and the view referred to in the preceding paragraph is adequately answered, in Angel Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On the question of whether a creditor in a usurious contract may or may not recover the principal of the loan, and, in the affirmative, whether or not he may also recover interest thereon at the legal rate, We said the following: ... . 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 P19,247.35 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 () of the unsatisfied portion of this judgment. With costs against the defendants. 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? 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 a 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. 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 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 the whole 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 20% per annum or 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 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. In answer to the contention that the forfeiture of the principal of the usurious loan is necessary to punish the usurer, We say this: Under the Usury Law there is already provision for adequate punishment for the usurer namely, criminal prosecution where, if convicted, he may

be sentence to pay a fine of not less than P50 nor more than P500, or imprisonment of not less than 30 days nor more than one year, or both, in the discretion of the court. He may further be sentenced to return the entire sum received as interest, with subsidiary imprisonment in case of non-payment thereof. lt is, of course, to be assumed that this last penalty may be imposed only if the return of the entire sum received as interest had not yet been the subject of judgment in a civil action involving the usurious contract of load. In arriving at the above conclusion We also considered our decision in Mulet vs. The People of the Philippines (73 Phil. p. 60), but found that the same does not apply to the present case. The facts therein involved were as follows: On July 25, 1929, Alejandra Rubillos and Espectacion Rubillos secured from petitioner Miguel Mulet a loan of P550, payable within 5 years at 30 per cent interest per annum. In the deed of mortgage executed by the Rubillos as a security; the sum of P1,375 was made to appear as the capital of the loan. This amount obviously represented the actual loan of P550 and the total interest of P825 computed at 30 per cent per annum for 5 years. Within four years of following the execution of the mortgage, the debtors made partial payments aggregating P278.27, on account of interest. Thereafter, the debtors paid the whole capital of P550, due to petitioner's promise to condone the unpaid interest upon payment of such capital. But to their surprise, petitioner informed them that they were still indebted in the sum of P546.73 which represented the balance of the usurious interest. And in consideration of this amount, petitioner pressed upon the debtors to execute in October, 1933, in his favor, a deed of sale with pacto de retro of a parcel of land, in substitution of the original mortgage which was cancelled. From the date of the execution of the new deed up to 1936, petitioner received, as his share of the products of the land, the total sum of P480. Prosecuted on November 18, 1936, for the violation of the Usury Law, petitioner was convicted by the trial court, and on appeal, the judgment was affirmed by the Court of Appeals. The instant petition for certiorari is directed at that portion of the decision of the appellate court ordering petitioner to return to the offended parties the sum of P373.27, representing interests received by him in excess of that allowed by law. It was Mulet's claim that, as the amount of P373.27 had been paid more than two years prior to the filing of the complaint for usury against him, its return could no longer be ordered in accordance with the prescriptive period provided therefor in Section 6 of the Usury Law. Said amount was made up of the usurious interest amounting to P278.27 paid to Mulet, in cash, and the sum of P480.00 paid to him in kind, from the total of which two amounts 14% interest allowed by law amounting to P385.85 was deducted. Our decision was that Mulet should return the amount of P480.00 which represented the value of the produce of the land sold to him under pacto de retro which, with the unpaid balance of the usurious interest, was the consideration

of the transaction meaning thepacto de retro sale. This Court then said: ... . This last amount is not usurious interest on the capital of the loan but the value of the produce of the land sold to petitioner under pacto de retro with the unpaid balance of the usurious interest (P546.73) as the consideration of the transaction. This consideration, because contrary to law, is illicit, and the contract which results therefrom, null and void. (Art. 1275, Civil Code). And, under the provisions of article 1305, in connection with article 1303, of the Civil Code, when the nullity of a contract arises from the illegality of the consideration which in itself constitutes a felony, the guilty party shall be subject to criminal proceeding while the innocent party may recover whatever he has given, including the fruits thereof. (emphasis supplied). It is clear, therefore, that in the Mulet case, the principal of the obligation had been fully paid by the debtor to the creditor; that the latter was not sentenced to pay it back to the former, and that what this Court declared recoverable by the debtor were only the usurious interest paid as well as the fruits of the property sold under pacto de retro. IN VIEW OF THE FOREGOING, the decision, appealed from is modified in the sense that appellee may recover from appellant the principal of the loan (P1,180.00) only, with interest thereon at the legal rate of 6% per annum from the date of the filing of the complaint. With costs. 4. Lopez vs. Del Rosario and Quiogue, No. 19189, 44 Phil. 98 , November 27, 1922 G.R. No. L-19189 November 27, 1922 FROILAN LOPEZ, plaintiff-appellant, vs. SALVADOR V. DEL ROSARIO and BENITA QUIOGUE DE V. DEL ROSARIO, defendants-appellants. Both parties to this action appeal from the judgment of Judge Simplicio del Rosario of the Court of First Instance of Manila awarding the plaintiff the sum of 88,495.21 with legal interest from May 13, 1921, without special finding as to costs. The many points pressed by contending counsel can be best disposed of by, first, making a statement of the facts; next, considering plaintiff's appeal; next, considering defendant's appeal; and, lastly, rendering judgment. STATEMENT OF THE FACTS On and prior to June 6, 1920, Benita Quiogue de V. del Rosario, whom we will hereafter call Mrs. Del Rosario, was the owner of a bonded warehouse situated in the City of Manila. She was engaged in the business of a warehouse keeper, and stored copra and other merchandise in the said building. Among the persons who had copra deposited in the Del Rosario warehouse was Froilan Lopez, the holder of fourteen warehouse receipts in his own name, and the name of Elias T. Zamora. (Exhibits C, D, and R.) The warehouse receipts, or negotiable warrants, or quedans (as they are variously termed) of Lopez

named a declared value of P107,990.40 (Exhibits L-1 to L-13). The warehouse receipts provided: (1) For insurance at the rate of 1 per cent per month on the declared value; (2) the company reserves to itself the right to raise and/or lower the rates of storage and/or of insurance on giving one calendar month's notice in writing; (3) this warrant carries no insurance unless so noted on the face hereof, cost of which is in addition to storage; (4) the time for which storage and/or insurance is charged is thirty (30) days; (5) payment for storage and/or insurance, etc., shall be made in advance, and/or within five (5) days after presentation of bill. It is admitted that insurance was paid by Lopez to May 18, 1920, but not thereafter. Mrs. Del Rosario secured insurance on the warehouse and its contents with the National Insurance Co., Inc., the Commercial Union Insurance Company, the Alliance Insurance Company, the South British Insurance Co., Ltd., and the British Traders Insurance Co., Ltd., in the amount of P404,800. All the policies were in the name of Sra. Benita Quiogue de V. del Rosario, with the exception of one of the National Insurance Company, Inc., for P40,000, in favor of the Compaia Coprera de Tayabas. (Exhibits N, O, P, R-1 to R-4.) The warehouse of Mrs. Del Rosario and its contents were destroyed by fire on June 6, 1920. The warehouse was a total loss, while of the copra stored therein, only an amount equal to P49,985 was salvaged. Following an unsuccessful attempt by Henry Hunter Bayne, Fire Loss Adjuster, to effect a settlement between the insurance companies and Mrs. Del Rosario, the latter, on August 24, 1920, authorized Attorney F. C. Fisher to negotiate with the various insurance companies. (Exhibit A.) As a result, an agreement between Mrs. Del Rosario and the insurance companies to submit the matter to administration was executed in September, 1920. (Exhibit B.) Mrs. Del Rosario laid claim before the arbitrators, Messrs. Muir and Campbell, to P419,683.95, and the proceeds of the salvage sale. The arbitrators in their report allowed Mrs. Del Rosario P363,610, which, with the addition of the money received from the salvaged copra amounting to P49,985, and interest, made a total of P414,258, collected by her from the companies. (Exhibits E, F, G, H, and Q.) Mrs. Del Rosario seems to have satisfied all of the persons who had copra stored in her warehouse, including the stockholders in the Compaia Coprera de Tayabas (whose stock she took over), with the exception of Froilan Lopez, the plaintiff. Ineffectual attempts by Mrs. Del Rosario to effect a compromise with Lopez first for P71,994, later raised to P72,724, and finally reduced to P17,000, were made. (Exhibits Y, 1, 3, 4, 6, 7, 8, 12.) But Lopez stubbornly contended, or, at least, his attorney contended for him, that he should receive not a centavo less than P88,595.43. (Exhibits 4, 5.) PLAINTIFF'S APPEAL Plaintiff, by means of his assignment of error, lays claim to P88,595.43 in lieu of P88,495.21 allowed by the trial court. The slight difference of P100.22 is asked for

so that plaintiff can participate in the interest money which accrued on the amount received for the salvaged copra. (Exhibits EE and FF.) Defendant makes no specific denial of this claim. We think the additional sum should accrue to the plaintiff. Plaintiff's second and third assignment of error present the point that the defendant has fraudulently and even criminally refrained from paying the plaintiff, and that the plaintiff should recover interest at the rate of 12 per cent per annum. We fail to grasp plaintiff's point of view. The defendant has not sought to elude her moral and legal obligations. The controversy is merely one which unfortunately all too often arises between litigious persons. Plaintiff has exactly the rights of any litigant, equally situated, and no more. It has been the constant practice of the court to make article 1108 of the Civil Code the basis for the calculation of interest. Damages in the form of interest at the rate of 12 per cent, as claimed by the plaintiff, are too remote and speculative to be allowed. The deprivation of an opportunity for making money which might have proved beneficial or might have been ruinous is of too uncertain character to be weighed in the even balances of the law. (Civil Code, art. 1108; Gonzales Quiros vs. Palanca Tan-Guinlay [1906], 5 Phil., 675; Tin Fian vs.Tan [1909], 14 Phil., 126; Sun Life Insurance Co. of Canada vs. Rueda Hermanos & Co. and Delgado [1918], 37 Phil., 844; Scvola, Codigo Civil, vol. 19, p. 576; 8 R. C. L., 463; 17 C. J., 864.) DEFENDANT'S APPEAL Counsel for defendant have adroitly and ingeniously attempted to avoid all liability. However, we remain unimpressed by many of these arguments.lawph!l.net Much time has been spent by counsel for both parties in discussing the question, of whether the defendant acted as the agent of the plaintiff, in taking out insurance on the contents of the bodega, or whether the defendant acted as a reinsurer of the copra. Giving a natural expression to the terms of the warehouse receipts, the first hypothesis is the correct one. The agency can be deduced from the warehouse receipts, the insurance policies, and the circumstances surrounding the transaction. After all, however, this is not so vitally important, for it might well be although we do not have to decide that under any aspect of the case, the defendant would be liable. The law is that a policy effected by bailee and covering by its terms his own property and property held in trust; inures, in the event of a loss, equally and proportionately to the benefit of all the owners of the property insured. Even if one secured insurance covering his own goods and goods stored with him, and even if the owner of the stored goods did not request or know of the insurance, and did not ratify it before the payment of the loss, yet it has been held by a reputable court that the warehouseman is liable to the owner of such stored goods for his share. (Snow vs. Carr [1878], 61 Ala., 363; 32 Am. Rep., 3; Broussard vs. South Texas Rice Co., [1910], 103 Tex.,

535; Ann. Cas., 1913-A, 142, and note; Home Insurance Co. of New York vs. Baltimore Warehouse Co. [1876], 93 U. S., 527.) Moreover, it has not escaped our notice that in two documents, one the agreement for arbitration, and the other the statement of claim of Mrs. Del Rosario, against the insurance companies, she acknowledged her responsibility to the owners of the stored merchandise, against risk of loss by fire. (Exhibits B and C-3.) The award of the arbitrators covered not alone Mrs. Del Rosario's warehouse but the products stored in the warehouse by Lopez and others. Plaintiff's rights to the insurance money have not been forfeited by failure to pay the insurance provided for in the warehouse receipts. A preponderance of the proof does not demonstrate that the plaintiff ever ordered the cancellation of his insurance with the defendant. Nor is it shown that the plaintiff ever refused to pay the insurance when the bills were presented to him, and that notice of an intention to cancel the insurance was ever given the plaintiff. The record of the proceedings before the board of arbitrators, and its report and findings, were properly taken into consideration by the trial court as a basis for the determination of the amount due from the defendant to the plaintiff. In a case of contributing policies, adjustments of loss made by an expert or by a board of arbitrators may be submitted to the court not as evidence of the facts stated therein, or as obligatory, but for the purpose of assisting the court in calculating the amount of liability. (Home Insurance Co. vs. Baltimore Warehouse Co., supra.) Counsel for the defendant have dwelt at length on the phraseology of the policies of the National Insurance Company, Inc. Special emphasis has been laid upon one policy (Exhibit 9) in the name of the Compaia Coprera de Tayabas. In this connection it may be said that three members of the court, including the writer of this opinion, have been favorable impressed by this argument, and would have preferred at least to eliminate the policy for which premiums were paid, not by Mrs. Del Rosario on behalf of Lopez and others, but by Compaia Coprera de Tayabas. A majority of the court, however, believe that all the assets should be marshalled and that the plaintiff should receive the benefit accruing from the gross amount realized from all the policies. Consequently, no deduction for this claim can be made. The remaining contention of the defendant that the plaintiff cannot claim the benefits of the agency without sharing in the expenses, is well taken. Although the plaintiff did not expressly authorize the agreement to submit the matter to arbitration, yet on his own theory of the case, Mrs. Del Rosario was acting as his agent in securing insurance, while he benefits from the amicable adjustment of the insurance claims. As no intimation is made that the expenses were exorbitant, we necessarily accept the statement of the same appearing in Exhibits Q and 8. Of the insurance money, totalling P414,258, P382,558 was for copra and the remainder for buildings,

corn, etc. The expenses for collecting the P414,258 totalled P33,600. 382,558/414,258 of 33,600 equals P31,028.85, the proportionate part of the expenses with reference to the copra. Of the expenses amounting, as we have said, to P31,028.85, plaintiff would be liable for his proportionate share or 88,595.43/382,558.00 of P31,028.85 or P7,185.875. The parties finally agree that the plaintiff at the time of the fire was indebted to the defendant for storage and insurance in the sum of P315.90. JUDGMENT In resume, the result is to sustain plaintiff's first assignment of error and to overrule his second and third assignments of error, to overrule defendant's assignment of error 1, 2, 3, and 4 in toto and to accede to defendant's assignments of error, 5, 6, and 7 in part. If our mathematics are correct, and the amounts can be figured in several different ways, plaintiff is entitled to P88,595.43 minus P7,185.88, his share of the expenses, minus P315.90, due for insurance and storage, or approximately a net amount of P81,093.65, with legal interest. This sum the defendant must disgorge. Wherefore, judgment is modified and the plaintiff shall have and recover from the defendants the sum of P81,093.65, with interest at 6 per cent per annum from May 13, 1921, until paid. Without special finding as to costs in either instance, it is so ordered. 5. Zobel vs. City of Manila, No. 22201, 47 Phil. 169 , January 12, 1925 G.R. No. L-22201 January 12, 1925 JACOBO ZOBEL, ET AL., plaintiffs-appellants, vs. THE CITY OF MANILA, defendant-appellant. This action was instituted in the Court of First Instance of the City of Manila on May 24, 1923, by the minors Jacobo Zobel, Alfonso Zobel, and Mercedes Zobel, under the guardianship of Fernando Zobel, to recover of the City of Manila the amount of the first two installments of the purchase price of a tract of land located in the Province of Rizal near the corporate limits of the City of Manila, which has been conveyed by the guardian of the minor-plaintiffs by deed (Exhibit E) dated 21st of February, 1922, said installments amounting respectively to P41,666.66 and with interest upon the first installment from May 21, 1922, and upon the second from the date of the making of the contract. Upon hearing the cause the trial judge gave judgment in favor of the plaintiffs to recover both the principal sums claimed, amounting to P83,333.32, with interest upon only one installment at the rate of five per centum per annum. From this judgment the plaintiffs appealed from so much of the decision as failed to allow interest on both installments at the rate claimed in the complaint, while the defendant appealed from so much of the judgment as was favorable to the plaintiffs. For convenience in the disposition of the controverted points, the appeal of the defendant will first be considered.

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It appears that for several years the responsible officials of the City of Manila have appreciated the necessity for the establishment of a cemetery near the city and on the south side of the Pasig River. Admittedly the only tract of land available for this purpose consists of a part of the Hacienda San Pedro Macati, belonging to the plaintiffs, who are minors. This estate lies in the Province of Rizal, beyond the corporate limits of the city, but one of its corners juts into the southern, or southeastern suburbs of the city, in such manner as to bring the desired tract close to populous centres. The hacienda, it may be stated, has never been built upon improved for city purposes and forms a solid block, practically untraversed by public streets or roads. Owing to the character of the subsoil the land has little value for agricultural purposes, which is the only use to which it has heretofore been put; and it is taxed in the Province of Rizal on the low basis of agricultural land. In February, 1920, the Municipal Board of the City of Manila passed an ordinance (No. 726) appropriating the sum of P703,750 to be used for "the establishment of a cemetery in the south district of Manila and the acquisition of the land necessary therefor." In consequence of the passage of this resolution the Honorable Ramon J. Fernandez, at that time the Mayor of the City, entered into negotiations with the guardian of the appellees, the result of which was a letter, written July 1, 1920, in which the appellees offered to sell to the city upon the terms therein set forth twenty-five hectares of the San Pedro Macati Estate for cemetery purposes (Exhibit A). Upon receipt of this letter the Mayor endorsed it for recommendation and comment to the city engineer, and made request in writing of the Honorable Francis Burton Harrison, then Governor-General, that he designate some one to continue negotiations for the purchase of the land. On July 10, 1920, the city engineer returned the papers to the Mayor, stating that in his opinion the site selected was "the best location available and the only one suitable for cemetery purposes on the south side of the city." On July 23, 1920, Governor-General Harrison appointed the city engineer, Mr. Artiaga, a committee of one to negotiate for the purchase of a tract of land to be used for the proposed south cemetery, whereupon the city engineer referred the communication of the Mayor to the Director of Health, requesting his concurrence. On August 18, 1920, the Director of Health returned the papers to the Mayor, concurring in the recommendation that the tract of land in question be purchased. Thereafter the city engineer reported to the Mayor that the proposed site was desirable and recommended its purchase at the rate of one peso per square meter. On August 26, 1920, the city engineer sent to the GovernorGeneral a copy of his report to the Mayor. Two or three days after the receipt of Mr. Artiaga's report, the Mayor referred the letter of offer and the other papers connected with the case, including the report of the city engineer, to the Municipal Board, requesting that

the Board concur in his selection of the San Pedro Macati site for the location of the proposed south cemetery. On August 31, 1920, the Municipal Board, at a meeting at which all the members were present, adopted unanimously a resolution which reads as follows: Endorsement by the Mayor requesting concurrence of the Board regarding the land selected by his office for the proposed south cemetery, namely, a parcel of land of the San Pedro Macati Estate belonging to Mr. Enrique Zobel, who is willing to sell it at the rate of one peso per square meter, apart from a tract of land which he offers to cede gratuitously to give access to the cemetery from Calle Vito Cruz, referred to the committee on cemeteries for comment and recommendation. In accordance with this resolution, the matter was referred to the committee on cemeteries of the Municipal Board of the City of Manila. Under date of September 10, 1920, that committee returned the papers to the Municipal Board "recommending the approval of the construction of the south cemetery on the site here indicated as the conditions of the said site are appropriate for the purpose." On September 10, 1920, the report of the committee was received by the Municipal Board and a resolution of the following tenor was adopted: Endorsement of the committee on cemeteries recommending the approval of the site selected by the Mayor for the south cemetery situated at the San Pedro Macati Estate, containing approximately twenty-five hectares. The recommendation is approved and it is ordered that the matter be returned to the Mayor inviting his attention to this approval. After the adoption of this resolution, on September 23, 1920, the Honorable Ramon J. Fernandez, at that time Mayor of the City of Manila, and acting on its behalf, and Mr. Enrique Zobel, as guardian of the appellees, acting on their behalf, entered into a preliminary contract in writing, prepared by the city fiscal of the City of Manila, embodying therein the terms of the agreement under which the City of Manila was to buy and the appellees were to sell the tract of land in question. (Exhibit C.) On December 10, 1920, the Municipal Board of Manila adopted a resolution requesting authority pursuant to Act No. 2894 to issue bonds for the construction of works and permanent improvements in the amount of P5,500,000. This resolution was duly approved, the bonds mentioned were issued and sold, and on February 21, 1922, there was an unexpended balance from the proceeds of these bonds, amounting to P1,341,994.35, which was available to defray the cost of the south cemetery project. The preliminary contract bears date of September 23, 1920; but on account of delay in the preparation of the plans and technical description of the property necessary to make possible its transfer under the Land Registration Act, it was not until February, 1922, that the final deed of conveyance (Exhibit E) was executed. On February 20, 1922, the Municipal Board of Manila adopted a resolution (Resolution No. 31, series of 1922) making an appropriation in the amount of P180,000 from

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the public works and permanent improvements bond issue fund of the city for the purpose of the south cemetery. This resolution was approved by the Secretary of the Interior in accordance with the provisions of section 1 of Act No. 2894. The day after Resolution No. 31 was adopted, the appellees' guardian, acting on their behalf, with the approval of the Court of First Instance of the City of Manila, and the Honorable Ramon J. Fernandez, acting on behalf of the City of Manila, executed a final deed of sale of the land in question. (Exhibit E.) This deed was drafted under the direction of the city fiscal of the City of Manila. On February 24, 1922, said deed was filed for record with the register of deeds of the Province of Rizal, together with appellees' certificates of title. Thereupon transfer certificates of title were duly issued to the City of Manila as owner. After the execution and delivery to it of the deed of sale to the land in question, and the issuance to it of the certificates of title thereto under the Land Registration Act, the City of Manila took possession of the property and placed boundary monuments on the corners of the land conveyed to it to mark the limits thereof. By the terms of the conveyance the purchase price of P250,000 was to be paid in six installments of P41,666.66 each, the first to be made three months after the date of the execution of the deed, and the remainder in yearly installments thereafter. The first installment was not to bear interest but the remaining installments were to bear interest at the rate of five per centum per annum. On the date of the execution of the deed of sale, ample funds were available to meet the payments, as appears from a statement in the record signed by the chief of the department of finance of the City of Manila. In anticipation of the falling due of the first installment of the purchase price, the city treasurer, on March 24, 1924, prepared and signed a warrant on the city depository for a sum sufficient to cover said installment. This warrant was then sent to the district auditor, one Crisanto Ticman, to be countersigned by him. Upon looking into the matter the fact came to Ticman's attention that the land which was being acquired by the city was assessed on the tax books of the Province of Rizal as uncultivated agricultural land, at a valuation of about sixty pesos per hectare. Observing the disparity between this valuation and the price which the city had contracted to pay, Ticman refused to countersign the warrant and addressed a letter to the Insular Auditor, E.M. Fullington, suggesting that the sale should not be permitted to go through and observing that if the city would institute condemnation proceedings it would surely get the land for very much less than the stipulated price of P250,000. The Insular Auditor approved the course taken by his subordinate and reported the matter to Governor-General Wood, who, through his secretary, appointed a committee of three, composed of Colonel C.E. Nathorst, of the Philippine Constabulary, Mr. M. del Rosario, district auditor for Rizal, and the city engineer, Mr. Artiaga, to investigate the matter and report to him. The result of the inquiry was that the majority of the

committee expressed the view that not more than fifty centavos per square meter should be paid for the land, while Artiaga maintained his former position that the price of one peso per square meter represented a reasonable valuation. The Nathorst report was forwarded to the Mayor by the secretary to the Governor-General, through the office of the Insular Auditor, with the indorsement, by authority of the Governor-General, that the action of the Auditor in refusing to countersign the warrant in any amount in excess of fifty centavos per square meter was approved. Meanwhile on May 21, 1922, the first installment of the purchase price of the land had fallen due, and on June 7, 1922, Mr. Zobel, guardian of the appellees, addressed a letter to the Mayor, reminding him that payment had not been made. On August 7, 1922, the Mayor replied to Mr. Zobel's letter, stating that while he recognized the obligation of the city to carry out its contract, nevertheless, in view of the intervention of the GovernorGeneral in the matter, he would take no further action. The result was that payment of the installment then due was not effected, and a similar default occurred later with respect to the second installment. This cause was tried in the lower court upon an agreed statements of fact, necessarily somewhat elaborate in its details. After the cause had been decided an error was discovered in the transcription of Resolution No. 31, series of 1922, into the agreed statements of fact, which was this: In the authentic resolution there appears a paragraph cancelling Resolution No. 276, series of 1921, but in the transcription of said resolution into the agreed statements the first two figures of the cancelled resolution were so transposed as to make it appear that Ordinance No. 726 was cancelled. It so happened that both Ordinance No. 726 and Resolution No. 276 related in part to the same subject, namely, the south cemetery; with the result that no one concerned in the litigation discovered the error, and the cause was tried in the lower court on the erroneous supposition that Ordinance No. 726 had been repealed in so far as relates to south cemetery by said Resolution No. 31, series of 1922. This error appears to have been first discovered by the attorneys for the appellees after the cause was brought to this court upon appeal, and investigations were conducted by them which revealed the further fact that on May 10, 1921, the Municipal Board had passed an ordinance (No. 966) reverting to the general funds the unexpended balance of the amount theretofore appropriated for the south cemetery in Ordinance No. 726. In view of the discovery of the error above-mentioned the appellees, on July 12, 1924, filed a motion in this court, asking to be relieved from the erroneous stipulation upon the point mentioned and that the court should admit as evidence the affidavits showing the facts to be as stated in the motion. The motion was opposed by the appellant, and this court deferred decision on the motion until the case should be considered on the merits. As it now becomes proper to pass upon the matter, we will say that while it is not clear that the error

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alluded to affects the fundamentals of the case, yet the mistake is obvious and the situation is one where the appellees are entitled to be relieved from any prejudicial results. Furthermore, it is desirable for the court to be able to state the facts with truthfulness. We shall therefore assume that the records stand corrected, with leave to the appellant's attorneys to show that the facts stated in the motion are erroneous, in the contingency that they desire to contest the same. In dismissing this matter we may observe that the general situation with reference to the appropriations available for the south cemetery may be summed up in the statement that at the time the preliminary contract (Exhibit C) was executed on September 23, 1920, there existed an appropriation of the general funds of the city under Ordinance No. 726, of the sum of P703,750 available for the purpose of establishing the south cemetery; while at the time the definitive contract of sale (Exhibit E) was made, on February 21, 1922, there existed an appropriation from the public works and permanent improvements bond issue fund in the amount of P180,000 for the same purpose, though the appropriation from the general funds was then no longer available. The opposition of the auditing department to the carrying of this contract into effect undoubtedly had its origin in a desire on the part of the district auditor to protect the interests of the city, based on the conviction that if the contract could be nullified and condemnation proceedings instituted the amount to be paid by the city would be considerably less than that named in the contract. Conceding the propriety of this point of view, the consideration is one that in no wise affects the legal aspects of the case; and it is but fair to say that the terms of purchase were apparently as favorable to the city as could be arranged by negotiation with the representative of the owners. At any rate the good faith of the city officials concerned in the deal is not called in question. We observe furthermore that in the Nathorst report the principal reason assigned for estimating the price that should be paid by the city at fifty centavos per square meter, instead of one peso per square meter as agreed, is that the construction by the city of the road to the cemetery will considerably increase the commercial value of the remainder of the estate. Considered as a basis for the proposed reduction in the price of the land to be taken, this suggestion is only partially sound. Even in condemnation proceedings the law does not unqualifiedly permit the offsetting of incidental benefits against the actual value of the property taken. The rule, we take it, is that incidental benefits may be set off against incidental damage but not against the basic value of the property. Otherwise an owner could be deprived of his property without any compensation at all, as where, for instance, only a small part of an entire parcel is taken for certain uses, with incidental benefit to the remainder. It follows that, even upon the face of the report itself, the fact that the agreed price is excessive is not demonstrated; and it is to be remembered that by the deed conveying the cemetery

site to the city the plaintiffs have gratuitously transferred many thousands of square meters to the city for the construction of a road to the cemetery, with the result that if this land be included in the estimate the price of the whole is less than eighty centavos per square meter. The circumstance that the land in question is assessed on the tax books of the Province of Rizal at sixty pesos per hectare is of little moment when we come to consider the value of the land in relation with its propinquity to the City of Manila and its utility for the purpose for which it is inevitably destined to be used. The brief of the defendant as appellant raises several questions of a purely legal nature, which will be discussed in the order of their logical sequence; and we shall first consider that which relates to the antecedent appropriation necessary before a binding contract can be made requiring the expenditure of public funds. The provision of law here applicable is found in section 606 of the Administrative Code, wherein it is declared that no contract involving the expenditure of public funds shall be made until there is an appropriation therefor, the unexpended balance of which, free from other obligations, is sufficient to cover the proposed expenditure. As we have already seen, at the time the preliminary contract was made, Ordinance No. 726, appropriating the sum of P703,750 for the proposed cemetery was in force. This in our opinion is a sufficient compliance with the legal requirement; and the circumstance that before the definitive contract was made this money was reverted to the general funds of the city did not have the effect of nullifying said contract. The question whether the contract is valid depends upon the situation existing at the time the first agreement was made. The second question to be considered has reference to the applicability of section 607 of the Administrative Code to contracts made by the City of Manila. In the second paragraph of said section it is declared that no contract involving the expenditure by any province, municipality, township, or settlement of two thousand pesos or more shall be entered into or authorized until the treasurer of the political division concerned shall have certified to the officer entering into such contract that funds have been duly appropriated for such purpose and that the amount necessary to cover the proposed contract is available for expenditure on account thereof. It is admitted that no such certificate was made by the treasurer of Manila at the time the contract now in question was made. We are of the opinion that the provision cited has no application to contracts of a chartered city, such as the City of Manila. Upon examining said provision (sec. 607) it will be found that the term chartered city, or other similar expression, such as would include the City of Manila, is not used; and it is quite manifest from the careful use of terms in said section that chartered cities were intended to be excluded. In this connection the definitions of "province," "municipality," and "chartered city," given in section 2 of the Administrative Code are instructive. The circumstance that for certain purposes the City of Manila

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has the status both of a province and a municipality (as is true in the distribution of revenue) is not inconsistent with this conclusion. The next contention is that the contract in question is void because the approval of the city council was not expressed in the form of an ordinance. The provisions of law applicable upon this point are found partly in section 2434, subsection (i), as amended by section 4 of Act No. 2774 of the Philippine Legislature, and partly in section 2443 of the Administrative Code. Subsection (i) of section 2434, as it originally stood in the Administrative Code, among other things declared that the Mayor shall represent the city in all its business matters and sign on its behalf all its bonds, contracts and obligations made in accordance with law or lawful ordinance or resolution. The corresponding provision in the amendatory Act (No. 2774) makes it his duty to represent the city in all its business matters and sign on its behalf all its bonds, contracts and obligations made in accordance with the laws or ordinances. Section 2443 of the Administrative Code, as it now and at all times has stood, clearly recognizes the power of the board to adoptresolutions creating liability, and in the same section the Mayor is given authority to veto such resolutions. Now, from the omission of the word "resolution" from the amendment of subsection (i) of section 2434, it is argued that it was the intention of the Legislature to suppress the power of the Municipal Board to authorize the making of contracts by resolution. The validity of this contention cannot be admitted; for even supposing that the Legislature may have entertained the purpose attributed to it in amending subsection (i) of section 2434, this intention was not fully accomplished by said amendment alone, the other provision (sec. 2443) having remained without alteration. But we incline to the view that the expression "laws or ordinances," found in the amendment of subsection (i) of section 2434, is there used in a sense broad enough to include resolutions. The reason for this is that we find the same verbal change in two other paragraphs of the same section, in respect to which there can be no doubt that resolution was intended to be included in the broader expression. Thus, in subsection (a) of section 2434 of the Administrative Code, it was made the duty of the Mayor to see that the "laws, ordinances and resolutions" should be faithfully executed and enforced. In subsection (m) of the same section it was made the duty of the Mayor "to perform such other executive duties as may be prescribed by law or be required of him by ordinance or resolution of the board." In the two corresponding provisions of the amendatory Act (No. 2774) the word "resolution," or "resolutions," is omitted and the inclusive expression "laws and ordinances" or "law or ordinance" is used. Can it be maintained that the intention of the Legislature in making these changes was to relieve the Mayor of all executive responsibility as to the enforcement of resolutions? Certainly not: he has the same duty to enforce lawful resolutions as to enforce any law or ordinance. Yet if the argument relied upon by the appellant is valid as to the effect of the omission of

the word resolution in subsection (i), it would necessarily follow that the Mayor has no administrative responsibility whatever as to the enforcement of resolutions. It is next insisted that the resolution of the Board dated September 10, 1920, approving the Mayor's action with respect to the cemetery site, was intended merely as an expression by the Board of its approval of the location of the land chosen for the site, without any commitment as to the terms upon which the property was to be acquired. We are of the opinion that this is not a fair interpretation of the resolution. At the time the resolution was adopted, the Board had before it the offer made by the guardian of the plaintiffs, stating the terms upon which the sale would be made. This offer was accompanied by the favorable report and recommendation of the city engineer, the approval of the proposed site by the Director of Health, and the recommendation of the committee on cemeteries of the Board that the cemetery be constructed on the site indicated. The indorsement by which the Board, with all members present, referred the matter to this committee expressly recites that the price to be paid for the land was at the rate of one peso per square meter, apart from the tract to be ceded gratuitously to give access to the cemetery. In the light of these facts it is impossible to suppose that any member of the Board was unaware of the conditions upon which the land was to be acquired. Again, it is obvious that the matter before the Board was not the mere question of a choice between one or more available tracts of land then at the disposal of the city. It had reference to the only tract available for cemetery purposes. There was no possible choice as between competitive lots, and the sole question was whether this lot was acceptable under the terms stated in the offer. Considered as a mere expression of the preference of the Board as to the location of the cemetery, the resolution was wholly without efficacy and could not advance the negotiations in the slightest degree. We are of the opinion that the intention was to approve the construction of the cemetery on the site chosen and on the terms expressed in the offer. As a consequence the Mayor was clothed with authority to execute the contract which he subsequently made. The attorneys for the appellant further insist that, even supposing the resolution to have constituted a sufficient approval of the contract in the terms expressed in the offer, nevertheless the efficacy of the resolution was destroyed by the subsequent introduction of material changes into the agreement. In this connection reference is made to a portion of clause V of the deed, in which it is declared that the land shall be used exclusively for a cemetery to be known as South Cemetery. The insertion of this term in the contract is supposed to constitute a material variance from the offer. We are unable to agree with this contention, as the clause to which exception is taken seems to be a mere unfolding of what was implicit, if not actually expressed in the offer. The letter of offer (Exhibit A) used the name South Cemetery to identify the proposed burial ground, and the fact that the land was intended solely for

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cemetery purposes was patent throughout the negotiations. It will be borne in mind that the city has no authority to acquire land for speculative or commercial uses, and as no other purpose for this acquisition has been suggested than for the establishment of a cemetery, we think that no material mistake was committed by the city fiscal in stating in the deed that the property should be used exclusively for that purpose. Another reason advanced for supposing the contract for the purchase of this property to be invalid, or at least unenforcible, is that the Insular Auditor has refused to countersign the warrant for the first installment of the purchase price; and it is insisted for the defendant that this action on his part is conclusive against the plaintiffs. Their sole recourse, so it is claimed, is, or rather was, by way of administrative appeal from the action of the Auditor to the Governor-General. The suggestion is in our opinion without merit. The general provisions of law defining the jurisdiction and powers of the Auditor and which, if literally construed, would seem to make him absolute arbiter of all claims of any sort against all branches of the Government must be considered to be qualified as regards the contract rights of persons dealing with the city by the more specific provisions declaring how and by whom contracts can be made which will be binding on it. It was not intended that the Auditor should possess a general veto power over all city contracts, and his refusal to countersign the warrant referred to is of no moment in this action to enforce the legal liability of the city. Finally, exception is taken to the refusal of the trial court to require the Insular Auditor to be brought in as a party defendant. The course pursued by the court was in our opinion correct. The action is based exclusively upon the legal liability of the city, and no relief is sought against the Auditor. He was therefore not a necessary or even a proper party to the action. Of course if the claim had been based upon an obligation of the Insular Government, no action would have lain directly against the debtor, in the absence of its consent to be sued. In such case the plaintiffs' only remedy would have been by the writ of mandamusto compel the Auditor to countersign a warrant for the amount due. But the debtor in this case is a municipal corporation, which does not enjoy the State's immunity from suit, and the action can be maintained directly against it without the intervention of the Auditor. What has been said suffices to dispose of the contentions made in behalf of the defendant as appellant, and we accordingly pass to the errors assigned in behalf of the plaintiffs as appellants with respect to the matter of interest. The facts here pertinent are these: By the final deed of sale, dated February 21, 1922, the city undertook to pay the total purchase price of P250,000 in six installments. The first was in the amount of P41,666.70 payable on May 21, 1922. The other five were in the amount of P41,666.66 each, successively falling due on May 21, 1923, and on the same date in each succeeding year until all should be paid.

The following stipulation with respect to interest is found in clause III of this contract: Of the installments above stipulated, the first (which will fall due three months after the execution of this writing) shall draw no interest; but the five later installments shall draw interest at the rate of five per centum (5%) per annum, payable to the creditors upon the date when they shall respectively fall due. From this it will be seen that the agreement as to interest differs in case of the two installments here sued on; and the situation with respect to each will therefore be dealt with separately. As to the first installment, which was to fall due at three months, it was stipulated that it should bear no interest. The trial judge appears to have considered that this stipulation deprived the plaintiffs of the right to interest after default, and no interest whatever was allowed by him upon this installment. This was error. The stipulation that this installment should draw no interest was made in the expectation that the obligation would be paid upon the date stipulated. After default occurred the defendant became liable for interest as damages regardless of the absence of any express stipulation for interest and regardless of the statement that this installment should draw no interest. This statement in the contract was evidently intended merely to govern the rights of the parties with respect to interest for the three-month period between the making of the contract and the date when the installment was to become due. With respect to the plaintiffs' right to interest after default the situation is to be treated precisely as if nothing had been said about interest at all. As already stated, the first installment fell due on May 21, 1922, and extrajudicial demand for payment appears to have been made in a letter dated June 7, 1922, from the guardian of the plaintiffs addressed to the Mayor. Under the first paragraph of article 1100 of the Civil Code and under article 1108 of the same Code, interest should be allowed upon this installment at the rate of six per centum per annum. Under section 510 of the Code of Civil Procedure, the interest thus accruing must be consolidated with the principal as of the date of the judgment of the lower court; after which interest upon the whole shall be computed at the same rate. With respect to the second installment interest must be allowed at the contract rate of five per centum per annum from the date of the execution of the final deed of sale, or February 21, 1922; and under article 1109 of the Civil Code the interest that had accrued up to the date of the filing of the complaint (May 24, 1923) must be consolidated as of that date with the capital, after which the whole shall bear interest at the contract rate of five per centum per annum until paid. Where interest is contracted for at a given rate the contract obligation to pay interest is not merged in the judgment but remains in full force until the debt is paid. The circumstance that the rate here stipulated was less than the lawful rate does not alter the case. In connection with liability for interest it may be well to point out that section 510 of the Code of Civil Procedure

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is applicable only to debts and claims with respect to which no stipulation for interest has been made, and article 1109 of the Civil Code, providing for interest upon interest, is applicable only to obligations containing a stipulation for interest. Furthermore, it will be noted that, though section 510 of the Code of Civil Procedure provides that interest shall be added "until the date of the final judgment," this is not to be understood as inhibiting the collection of interest thereafter accruing until the judgment is paid. A demand established by judgment must be understood as bearing interest whether expressly so stated or not. Finally, it hardly needs be said, a municipal corporation does not enjoy immunity from liability for interest, when assessed as damages for the nonpayment of a debt, to the same extent as the general government. Our conclusion is that no error was committed by the trial court in giving judgment in favor of the plaintiffs upon both causes of action, but the amount awarded must be modified to conform to the rules above stated with respect to the computation of interest, with the result that the plaintiffs shall recover of the defendant, upon the first cause of action, the sum of P45,652.84, as of the date of January 11, 1924, with interest thereafter at the rate of six per centum per annum until the judgment shall be paid; and upon the second cause of action the sum of P44,283.04, as of the date of May 24, 1923, with interest thereafter at the rate of five per centum per annum until the judgment shall be paid. The plaintiffs will also recover costs of both instances. As thus modified, the judgment is affirmed. So ordered.

6. Reformina vs. Tomol Jr., No. L-59096, 139 SCRA 260 , October 11, 1985 G.R. No. L-59096 October 11, 1985 PACITA F. REFORMINA and HEIRS OF FRANCISCO REFORMINA, petitioners, vs. THE HONORABLE VALERIANO P. TOMOL, JR., as Judge of the Court of First Instance, Branch XI, CEBU CITY, SHELL REFINING COMPANY (PHILS.), INC., and MICHAEL, INCORPORATED, respondents. How much, by way of legal interest, should a judgment debtor pay the judgment creditor- is the issue raised by the REFORMINAS (herein petitioners) in this Petition for Review on certiorari of the Resolution of the Hon. respondent Judge Valeriano P. Tomol, Jr. of the then Court of First Instance of Cebu-Branch XI, issued in Civil Case No. R-11279, an action for Recovery of Damages for injury to Person and Loss of Property. The dispositive portion of the assailed Resolution reads as follows In light (sic) of the foregoing, the considered view here that by legal interest is meant six (6%) percent as provided for by Article 2209 of the Civil Code. Let a writ of execution be issued. 1 SO ORDERED.

Petitioners' motion for the reconsideration of the questioned Resolution having been denied, they now come before Us through the instant petition praying for the setting aside of the said Resolution and for a declaration that the judgment in their favor should bear legal interest at the rate of twelve (12%) percent per annum pursuant to Central Bank Circular No. 416 dated July 29, 1974. Hereunder are the pertinent antecedents: On June 7, 1972, judgment was rendered by the Court of First instance of Cebu in Civil Case No. R2 11279, the dispositive portion of which reads 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: (a) ... 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 Ill together with its accessories, fishing gear and equipment minus P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a month as the estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time they are actually paid or already the total sum of P370,000.00 as of June 4, 1972 with legal interest from the filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs against defendants and third party plaintiffs. On appeal to the then Court of Appeals, the trial court's judgment was modified to reads as follows WHEREFORE. the judgment appealed from is modified such that defendants-appellants Shell Refining Co. (Phils.), Inc. and Michael, Incorporated are hereby ordered to pay ... The two (2) defendants- appellants are also directed to pay P100,000.00 with legal interests from the filing of the complaint until paid as compensatory and moral damages and P41,000.00 compensation for the value of the lost boat with legal interest from the filing of the complaint until fully paid to Pacita F. Reformina and the heirs of Francisco Reformina. The liability of the two defendants for an the awards is solidary. xxx xxx xxx Except as modified above, the rest of the judgment appealed from is affirmed. The defendants-appellants shall pay costs in favor of the plaintiffs. Appellants Shell and Michael and third party defendant Anita L. Abellanosa shall shoulder their respective costs. 3 SO ORDERED. The said decision having become final on October 24, 1980, the case was remanded to the lower court for execution and this is where the controversy started. In the computation of the "legal interest" decreed in the judgment sought to be executed, petitioners claim that the "legal interest" should be at the rate of twelve (12%) percent per annum, invoking in support of their aforesaid

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submission, Central Bank of the Philippines Circular No. 416. Upon the other hand, private respondents insist that said legal interest should be at the rate of six (6%) percent per annum only, pursuant to and by authority of Article 2209 of the New Civil Code in relation to Articles 2210 and 2211 thereof. In support of their stand, petitioners contend that Central Bank Circular No. 416 which provides By virtue of the authority granted to it under Section 1 of Act 2655, as amended, otherwise known as the "Usury Law" the Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be twelve (12%) per cent per annum. This Circular shall take effect immediately. (Italics supplied) includes the judgment sought to be executed in this case, because it is covered by the phrase 2nd the rate allowed in judgments in the absence of express contract as to such rate of interest ... " in the aforequoted circular. The petition is devoid of merit. Consequently, its dismissal is in order. Central Bank Circular No. 416 which took effect on July 29, 1974 was issued and promulgated by the Monetary Board pursuant to the authority granted to the Central Bank by P.D. No. 116, which amended Act No. 2655, otherwise known as the Usury Law. The amendment from which said authority emanated reads as follows Section 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, That such changes shall not be made oftener than once every twelve months. In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for consumer loans or renewals thereof as well as such loans made by pawnshops, finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform. (Italics supplied) Acting pursuant to this grant of authority, the Monetary Board increased the rate of legal interest from that of six (6%) percent per annum originally allowed under Section I of Act No. 2655 to twelve (12%) percent per annum. It will be noted that Act No. 2655 deals with interest on (1) loans; (2) forbearances of any money, goods, or credits; and (3) rate allowed in judgments. The issue now iswhat kind of judgment is referred to under the said law. Petitioners maintain that it covers all kinds of monetary judgment. The contention is devoid of merit. 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. The Monetary Board may not tread on forbidden grounds. It cannot rewrite other laws. That function is vested solely with the legislative authority. It is axiomatic in legal hermeneutics that statutes should be construed as a whole and not as a series of disconnected articles and phrases. In the absence of a clear contrary intention, words and phrases in statutes should not be interpreted in isolation from one 4 another. A word or phrase in a statute is always used in association with other words or phrases and its meaning may thus be modified or restricted by the 5 latter. Another formidable argument against the tenability of petitioners' stand are the whereases of PD No. 116 which brought about the grant of authority to the Central Bank and which reads thus WHEREAS, the interest rate, together with other monetary and credit policy instruments, performs a vital role in mobilizing domestic savings and attracting capital resources into preferred areas of investments; WHEREAS, the monetary authorities have recognized the need to amend the present Usury. Law to allow for more flexible interest rate ceilings that would be more responsive to the requirements of changing economic conditions; WHEREAS, the availability of adequate capital resources is, among other factors, a decisive element in the achievement of the declared objective of accelerating the growth of the national economy. 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 provision remains untouched despite the grant of authority to the Central Bank by Act No. 2655, as amended. To make Central Bank Circular No. 416 applicable to any case other than those specifically provided for by the Usury Law will make the same of doubtful constitutionality since the Monetary Board will be exercising legislative functions which was beyond the intendment of P.D. No. 116. IN VIEW OF THE FOREGOING CONSIDERATIONS, and finding the instant petition to be without merit, the same is hereby DISMISSED with costs against petitioners. SO ORDERED. 7. G.R. LIAM vs. No. L-30771 May 28, 1984 LAW, plaintiff-appellee,

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OLYMPIC SAWMILL CO. CHI, defendants-appellants.

and

ELINO

LEE

This is an appeal by defendants from a Decision rendered by the then Court of First Instance of Bulacan. The appeal was originally taken to the then Court of Appeals, which endorsed it to this instance stating that the issue involved was one of law. It appears that on or about September 7, 1957, plaintiff loaned P10,000.00, without interest, to defendant partnership and defendant Elino Lee Chi, as the managing partner. The loan became ultimately due on January 31, 1960, but was not paid on that date, with the debtors asking for an extension of three months, or up to April 30, 1960. On March 17, 1960, the parties executed another loan document. Payment of the P10,000.00 was extended to April 30, 1960, but the obligation was increased by P6,000.00 as follows: That the sum of SIX THOUSAND PESOS (P6,000.00), Philippine currency shall form part of the principal obligation to answer for attorney's fees, legal interest, and other cost incident thereto to be paid unto the creditor and his successors in interest upon the termination of this agreement. Defendants again failed to pay their obligation by April 30, 1960 and, on September 23, 1960, plaintiff instituted this collection case. Defendants admitted the P10,000.00 principal obligation, but claimed that the additional P6,000.00 constituted usurious interest. Upon application of plaintiff, the Trial Court issued, on the same date of September 23, 1960, a writ of Attachment on real and personal properties of defendants located at Karanglan, Nueva Ecija. After the Writ of Attachment was implemented, proceedings before the Trial Court versed principally in regards to the attachment. On January 18, 1961, an Order was issued by the Trial Court stating that "after considering the manifestation of both counsel in Chambers, the Court hereby allows both parties to simultaneously submit a Motion for Summary Judgment. 1 The plaintiff filed his Motion for Summary Judgment on January 31, 1961, while defendants filed 2 theirs on February 2, 196l. On June 26, 1961, the Trial Court rendered decision ordering defendants to pay plaintiff "the amount of P10,000.00 plus the further sum of P6,000.00 by way of liquidated damages . . . with legal rate of interest on both amounts from April 30, 1960." It is from this judgment that defendants have appealed. We have decided to affirm. Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the P6,000.00 obligation, "it is presumed that it exists and is lawful, unless the debtor proves the contrary". No evidentiary hearing having been held, it has to be concluded that defendants had not proven that the P6,000.00 obligation was illegal. Confirming the Trial Court's finding, we view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as of March 17, 1960, representing loss of

interest income, attorney's fees and incidentals. The main thrust of defendants' appeal is the allegation in their Answer that the P6,000.00 constituted usurious interest. They insist the claim of usury should have been deemed admitted by plaintiff as it was "not denied 3 specifically and under oath". Section 9 of the Usury Law (Act 2655) provided: SEC. 9. The person or corporation sued shall file its answer in writing under oath to any complaint brought or filed against said person or corporation before a competent court to recover the money or other personal or real property, seeds or agricultural products, charged or received in violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of the facts contained in the latter. The foregoing provision envisages a complaint filed against an entity which has committed usury, for the recovery of the usurious interest paid. In that case, if the entity sued shall not file its answer under oath denying the allegation of usury, the defendant shall be deemed to have admitted the usury. The provision does not apply to a case, as in the present, where it is the defendant, not the plaintiff, who is alleging usury. Moreover, for sometime now, usury has been legally non-existent. Interest can now be charged as lender and 4 borrower may agree upon. The Rules of Court in regards to allegations of usury, procedural in nature, should be considered repealed with retroactive effect. Statutes regulating the procedure of the courts will be construed as applicable to actions pending and undetermined at the time of their passage. Procedural 5 laws are retrospective in that sense and to that extent. ... Section 24(d), Republic Act No. 876, known as the Arbitration Law, which took effect on 19 December 1953, and may be retroactively applied to the case at bar 6 because it is procedural in nature. ... WHEREFORE, the appealed judgment is hereby affirmed, without pronouncement as to costs. SO ORDERED.

8. Banco Filipino Savings & Mortgage Bank vs. Navarro, No. L-46591, 152 SCRA 346 , July 28, 1987 G.R. No. L-46591 July 28, 1987 BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner, vs. HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXI and FLORANTE DEL VALLE, respondents. This is a Petition to review on certiorari the Decision of respondent Court, the dispositive portion of which decrees: WHEREFORE, the Court finds that the enforcement of the escalation clause retroactively before the lapse of the 15-year period stated in the promissory note is contrary to Sec. 3 of Presidential Decree No. 116 and Sec. 109 of Republic Act No. 265, and hereby declares null and void the said escalation clause. The respondent

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Banco Filipino Savings and Mortgage Bank is hereby ordered to desist from enforcing the increased rate of interest on petitioner's loan. SO ORDERED. The facts are not in dispute: On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan secured by a real estate mortgage (the LOAN, for short) from petitioner BANCO 1 FILIPINO in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be amortized within fifteen (15) years at twelve (12%) per cent interest annually. Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was issued by the Central Bank. Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as follows: I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan. The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976, the pertinent portion of which reads: 3. The maximum rate of interest, including commissions, premiums, fees and other charges on loans with maturity of more than seven hundred thirty (730) days, by banking institutions, including thrift banks and rural banks, or by financial intermediaries authorized to engage in quasi-banking functions shall be nineteen percent (19%) per annum. xxx xxx xxx 7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall continue to be governed by the Usury Law, as amended." CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by Presidential Decree No. 116 (Amending Further Certain Sections of the Usury Law) promulgated on January 29, 1973, the applicable section of which provides: Sec. 2. The same Act is hereby amended by adding the following section immediately after section one thereof, which reads as follows: Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, that such changes shall not be made oftener than once every twelve months. The same grant of authority appears in P.D. No. 858, promulgated on December 31, 1975, except that the limitation on the frequency of changes was eliminated. On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum effective on March 1, 1976. On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a letter to the BORROWER as follows:

September 24, 1976 Mr. Florante del Valle 14 Palanca Street B.F. Homes, Paranaque Rizal Dear Mr. del Valle: This refers to your letter dated August 28, 1976 addressed to the Governor, Central Bank of the Philippines, seeking clarification and our official stand on Banco Filipino's recent decision to raise interest rates on lots bought on installment from 12% to 17% per annum. A verification made by our Examiner of the copy of your Promissory Note on file with Banco Filipino showed that the following escalation clause with your signature is stamped on the Promissory Note: I /We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan. In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 dated June 11, 1976, adopted the following guidelines to govern interest rate adjustments by banks and non-banks performing quasibanking functions on loans already existing as of January 3, 1976, in the light of Central Bank Circulars Nos. 492-498: l. Only banks and non-bank financial intermediaries performing quasi-banking functions may increase interest rates on loans already existings of January 2, 1976, provided that: a. The pertinent loan contracts/documents contain escalation clauses expressly authorizing lending bank or non-bank performing quasi-banking functions to increase the rate of interest stipulated in the contract, in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans; and b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January 2, 1976; and 2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date. The foregoing guidelines, however, shall not be understood as precluding affected parties from questioning before a competent court of justice the legality or validity of such escalation clauses. We trust the above guidelines would help you resolve your problems regarding additional interest charges of Banco Filipino. Very truly yours, (Sgd.) MERCEDES C. PAREDES Director Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief" with respondent Court, praying that the Escalation Clause be declared null and void and that BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest on the BORROWER's real estate loan.

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

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

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I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law increasing the lawful rates of interest that may be charged on this particular kind of loan. (Paragraphing and emphasis supplied) It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." " The Escalation Clause was dependent on an increase of rate made by "law" alone. CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of 6 law." (Italics supplied). "An administrative regulation adopted pursuant to law has the force and effect of 7 law." "That administrative rules and regulations have 8 the force of law can no longer be questioned. " The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulationis promulgated increasing the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law." The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the Monetary Board." To quote: Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board: Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. (Paragraphing and emphasis supplied). It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for

reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board." While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation clause in the Escalation Clause in question provides another reason why it should not be given effect because of its one-sidedness in favor of the lender. 2. The Escalation Clause specifically stipulated that the increase in interest rate was to be "on this particular kind of loan, " meaning one secured by registered real estate mortgage. Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals continue to be governed by the Usury Law, as amended." So do Circular No. 586 of the Central Bank, which superseded Circular No. 494, and Circular No. 705, which superseded Circular No. 586. The Usury Law, as amended by Acts Nos. 3291, 3998 and 4070, became effective on May 1, 1916. It provided for the maximum yearly interest of 12% for loans secured by a mortgage upon registered real estate (Section 2), and a maximum annual interest of 14% for loans covered by security other than mortgage upon registered real estate (Section 3). Significant is the separate treatment of registered real estate loans and other loans not secured by mortgage upon registered real estate. It appears clear in the Usury Law that the policy is to make interest rates for loans guaranteed by registered real estate lower than those for loans guaranteed by properties other than registered realty. On June 15, 1948, Congress approved Republic Act No. 265, creating the Central Bank, and establishing the Monetary Board. That law provides that "the Monetary Board may, within the limits prescribed in the Usury 9 law, fix the maximum rates of interest which banks may charge for different types of loans and for any other credit operations, ... " and that "any modification in the maximum interest rates permitted for the borrowing or lending operations of the banks shall apply only to future operations and not to those made prior to the date on which the modification becomes effective" (Section 109). On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The Decree gave authority to the Monetary Board "to prescribe maximum rates of interest for the loan or renewal thereof or the forbearance of any money goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions. In one 10 section, the Monetary Board could prescribe the maximum rate of interest for loans secured by mortgage upon registered real estate or by any document conveying such real estate or an interest therein and, in 11 another separate section, the Monetary Board was also granted authority to fix the maximum interest rate for loans secured by types of security other than registered real property. The two sections read: SEC. 3. Section two of the same Act is hereby amended to read as follows: SEC. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real

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or personal, or choses in action, a higher rate of interest or greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered or by any document conveying such real estate or an interest therein, than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal thereof or forbearance is granted: Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by the Monetary Board under this section may likewise apply to loans secured by other types of security as may be specified by the Monetary Board. SEC. 4. Section three of the same Act is hereby amended to read as follows: SEC. 3. No person or corporation shall directly or indirectly demand, take, receive, or agree to charge in money or other property, real or personal, a higher rate or greater sum or value for the loan or forbearance of money, goods, or credits, where such loan or forbearance is not secured as provided in Section two hereof, than fourteen per centum per annum or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted. Apparent then is that the separate treatment for the two classes of loans was maintained. Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to unlike Circular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1, 1979, which fix the effective rate of interest on loan transactions with maturities of more than 730 days to not exceeding 19% per annum (Circular No. 586) and not exceeding 21% per annum (Circular No. 705) "on both secured and unsecured loans as defined by the Usury Law, as amended." In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan was meant by the Monetary Board, the more equitable construction is to limit CIRCULAR No. 494 to loans guaranteed by securities other than mortgage upon registered realty. WHEREFORE, the Court rules that while an escalation clause like the one in question can ordinarily be held valid, nevertheless, petitioner Banco Filipino cannot rely thereon to raise the interest on the borrower's loan from 12% to 17% per annum because Circular No. 494 of the Monetary Board was not the "law" contemplated by the parties, nor should said Circular be held as applicable to loans secured by registered real estate in the absence of any such specific indication and in contravention of the policy behind the Usury Law. The judgment appealed from is, therefore, hereby affirmed in so far as it orders petitioner Banco Filipino to desist from enforcing the increased rate of interest on petitioner's loan. The Temporary Restraining Orders heretofore issued are hereby made permanent if the escalation clauses are Identical to the one herein and the loans involved

have applied the increased rate of interest authorized by Central Bank Circular No. 494. SO ORDERED. 9. G.R. No. 75223 March 14, 1990 PHILIPPINE NATIONAL BANK, petitioner vs. The HON. INTERMEDIATE APPELLATE COURT and SPOUSES FERMIN MAGLASANG and ANTONIA SEDIGO, respondents. This is a petition to review on certiorari the decision of the Intermediate Appellate Court, * now Court of Appeals, rendered in AC-G.R. CV No. 07678 modifying the decision of the Regional Trial Court of Ormoc City. The factual background of this case is as follows: The petitioner, a government banking institution, extended financial assistance to the private respondents in the form of loans, the total amount of which is P82,682.39 as embodied in the promissory notes that the latter have executed on various dates from February 5, 1976 to May 18, 1979, the payment of which to come from the proceeds of sugar sales of the private respondents. The promissory notes bore 12% interest per annum plus 1% interest as penalty charge in case of default in the payments. On January 16, 1969, the private respondents mortgaged several real estate properties in favor of the petitioner as security of their loans, which mortgage was amended on December 17, 1969, December 22, 1970 and February 12, 1975, as to the consideration thereof. When the price of sugar went down in 1977, the private respondents incurred deficits in the payment of their loans. On December 1, 1979, the Monetary Board of the Central Bank, by virtue of Presidential Decree No. 116, issued CB Circular No. 705 increasing the ceiling on the rate of interest on both secured and unsecured loans up to no more than 21% per annum. In view of this development, the PNB Board of Directors revised its lending interest rates on the medium and long-term loans effective June 1, 1980, per PNB board resolution dated May 26, 1980. When the private respondents defaulted in the payments of their loans, the petitioner demanded not only the settlement of their outstanding obligation but also the payment of the new interest rate of 21% per annum beginning June 1, 1980 per the PNB board resolution. For failure of the private respondents to settle their obligation, then in the amount of P84,743.34, the petitioner foreclosed the mortgage. Since the proceeds of the auction sale, P63,000.00 was not enough to satisfy private respondents' outstanding obligation, the petitioner filed an action for deficiency judgment with the Court of First Instance of Leyte against the private respondents. After due trial, the trial court ** rendered its judgment on February 20, 1985, in favor of the petitioner and against the private respondents, the dispositive portion of which reads as follows:

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WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of the plaintiff and against the defendants: 1. Ordering the defendants to pay the plaintiff the amount of P21,743.34; said amount shall earn interest at 21 % per annum and 3% penalty charge starting November 27, 1981, until the whole obligation is fully paid; 2. Ordering the defendants to pay the plaintiff attorney's fees in the amount equivalent to 10% of the total amount due as of November 28, 1981; 3. Ordering the defendants to pay the plaintiff the amount of P700.00 as litigation expenses; and ordering the defendants also to pay the costs of this action. SO ORDERED. (Records, p. 235). The private respondents appealed to the Intermediate Appellate Court, docketed as AC-G.R. CV No. 07678. On June 30, 1986, the appellate court affirmed the decision of the trial court with modification as follows: WHEREFORE, in view of the foregoing consideration, the appealed decision is hereby AFFIRMED with modification as follows: 1. Ordering the defendants to pay the plaintiff the amount of P12,551.16 which shall earn interest at 12% per annum and 1% penalty charge starting November 27, 1981 until fully paid; and 2. No other pronouncement as to attorney's fees and costs of suit. SO ORDERED. (Rollo, p. 28) Hence, this petition. In the resolution of September 14, 1987, the Court gave due course to the petition and required the parties to submit simultaneously their respective memoranda within thirty (30) days from notice (Rollo, p. 80). The main issue in this case is whether or not the revised rate of interest imposed on the loans of the private respondents is legal. The petitioner contends that in all the promissory notes executed by the private respondents, it is stipulated that the loans are to be paid together with the interest thereon at the rate of 12% per annum until paid, which interest rate the Bank may, at any time without notice, raise within the limits allowed by law, and also 1% per annum penalty charges by way of liquidated damages should the note be unpaid or is not renewed on due date. Likewise stipulated in the covering Real Estate Mortgage Contracts and the Amendment to Real Estate Mortgage of February 12, 1979 that "this account is also subject to the upward revision of interest rate as may be imposed by the mortgagee PNB." By these explicit contractual clauses, the private respondents fully agreed to an upward revision of interest rates on their accounts depending on the rule, regulation, or policy that the petitioner may adopt. At the time when said promissory notes and Amendment of Real Estate Mortgage were executed by private respondent Fermin Maglasang, Presidential Decree No. 116 (amending further certain sections of Act No. 2655, as amended, otherwise known as the "Usury Law") had long been promulgated on

January 29, 1973, and was already in full force and effect in the Philippines. Pursuant to Presidential Decree No. 116, the Monetary Board issued Central Bank Circular No. 705 on December 1, 1979, prescribing the maximum rate of interest on loan transactions with maturities of more than seven hundred thirty (730) days and shall not exceed twenty-one percent (21%) per annum. Hence, the upward revision of interest rate as stipulated in the Promissory Notes and Amendment of Real Estate Mortgage dated February 12, 1975, is in accordance with Presidential Decree No. 116 promulgated on January 29, 1973 and Central Bank Circular No. 705 issued on December 1, 1979, and the imposition of 21% rate of interest on the loan obligations of private respondents is within the limits prescribed by law. On the other hand, the private respondents maintain that the collection of service charge and liquidated damages in excess of the maximum 12% interest originally agreed, are illegal and void for being contrary to or prohibited under Section 2 of Act No. 2655, as amended by Act No. 4070. The private respondents also insist that the Court of Appeals committed mathematical error in computing the 12% interest due their deficiencies. According to them, their total deficiency is P45,427.02 and the total 12% interest of the said amount is P15,731.08, hence, their total liability is in the amount of P61,158.10. Since the proceeds of the sale of their mortgaged properties are P63,000.00, there is still a residue in the amount of P1,841.90 from the proceeds of the sale which is recoverable or collectible by them. The petition is without merit. In Insular Bank of Asia and America v. Spouses Salazar, (159 SCRA 133 [1988]), the Court ruled that the Escalation Clause is a valid provision in the loan agreement provided that (1) the increased rate imposed or charged does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of the law or regulation authorizing such an increase; and (3) the remaining maturities of the loans are more than 730 days as of the effectivity of the law or regulation authorizing such an increase. Likewise in Banco Filipino Savings and Mortgage Bank v. Navarro, (152 SCRA 346 [1987]), the Court said that for an Escalation Clause to be valid, it must include a deescalation clause. There can be an increase in interest if increased by law or by the Monetary Board; and in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board," as provided for in P.D. No. 1684, promulgated on March 17, 1980. There is no question that PNB board resolution dated May 26, 1980 contains such de-escalation clause, under paragraph 8 thereof, to wit: (8) To enable us to adjust interest rates in accordance with CB Circular letter of March 19, 1980, the covering

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promissory note for all short/medium/long terms loans shall include the following conditions: The Bank reserves the right to increase the interest rate within the limits allowed by law or by the Monetary Board, provided, that the interest rate agreed upon shall be reduced in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board: Provided, further, that the adjustment in the interest rate shall take effect on or after the effectivity of the increase or increase in the maximum rate of interest. (Exhibits, p. 77) Central Bank Circular No. 705, authorizing the increase from 12% to 21% was issued on December 1, 1979. The promissory notes executed by the private respondents show that they are all payable on demand but the records do not show when payment was demanded. Even granting that it was demanded on the effectivity of law, it is obvious that the period of 730 days has not yet elapsed at the date the mortgaged properties were sold at the public auction on November 27, 1981 (Certificate of Sheriff's Sale, Records of Exhibits, p. 84). Accordingly, as of December 1, 1979, the remaining maturity days of the loans were less than 730 days. Hence, the increased rate imposed or charged is not valid. The claim of private respondents that the respondent appellate court committed mathematical error in computing the 12% interest due their deficiencies is a factual issue. Absent the recognized exceptions, finding of facts of the Court of Appeals are conclusive on the parties and Supreme Court on the tenet that this Court decides appeals which only involve questions of law and that it is not the function of the Supreme Court to analyze and to weigh such evidence all over again, its jurisdiction being limited to reviewing errors of law that might have been committed by the lower court (Philippine National Bank v. Court of Appeals, 159 SCRA 433 [1988]). PREMISES CONSIDERED, the petition is hereby DENIED for lack of merit, and the assailed decision of the Court of Appeals is hereby AFFIRMED. SO ORDERED. 10. Philippine National Bank vs. Court of Appeals, G.R. No. 88880, 196 SCRA 536 , April 30, 1991 Philippine National Bank vs. Court of Appeals, G.R. No. 88880, 196 SCRA 536 , April 30, 1991 The Philippine National Bank (PNB) has appealed by certiorari from the decision promulgated on June 27, 1989 by the Court of Appeals in CA-G.R. CV No. 09791 entitled, AMBROSIO PADILLA, plaintiff-appellant versus PHILIPPINE NATIONAL BANK, defendantappellee, reversing the decision of the trial court which had dismissed the private respondents complaint to annul interest increases. (p. 32, Rollo.) The Court of Appeals rendered judgment: x x x declaring the questioned increases of interest as unreasonable, excessive and arbitrary and ordering the defendant-appellee [PNB] to refund to the plaintiff-

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

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increase of the interest rate of my mortgage loan be from 18% to 21% (p. 87, Rollo.) On July 4, 1984, private respondent paid PNB P360,000.00. On July 18, 1984, private respondent reiterated in writing his request that the increase in the rate of interest from 18% be fixed at 21% of 24%. (p. 87, Rollo.) On July 26, 1984, private respondent made an additional payment of P100,000. On August 10, 1984, PNB informed private respondent that we can not give due course to your request for preferential interest rate in view of the following reasons: Existing Loan Policies of the bank requires 32% for loan of more than one year; Our present cost of funds has substantially increased. (pp. 87-88, Rollo.) On August 17, 1984, private respondent further paid PNB P150,000.00. In a letter dated August 24, 1984 to PNB, private respondent announced that he would continue making further payments, and instead of a loan of more than one year, I shall pay the said loan before the lapse of one year or before July 4, 1985. x x x I reiterate my request that the increase of my rate of interest from 18% be fixed at 21% or 24%. (p. 88, Rollo.) On September 12, 1984, private respondent paid PNB P160,000.00. In letters dated September 12, 1984 and September 13, 1984, PNB informed private respondent that the interest rate on your outstanding line/loan is hereby adjusted from 32% p.a. to 41% p.a. (35% prime rate + 6%) effective September 6, 1984; and further explained why we can not grant your request for a lower rate of 21% or 24%. (pp. 88-89, Rollo.) In a letter dated September 24, 1984 to PNB, private respondent registered his protest against the increase of interest rate from 18% to 32% on July 4, 1984 and from 32% to 41% on September 6, 1984. On October 15, 1984, private respondent reiterated his request that the interest rate should not be increased from 18% to 32% and from 32% to 41%. He also attached (as payment) a check for P140,000.00. Like rubbing salt on the private respondents wound, the petitioner informed private respondent on October 29, 1984, that the interest rate on your outstanding line/loan is hereby adjusted from 41% p.a. to 48% p.a. (42% prime rate plus 6% spread) effective 25 October 1984. (p. 89, Rollo.) In November 1984, private respondent paid PNB P50,000.00 thus reducing his principal loan obligation to P300,000.00. On December 18, 1984, private respondent filed in the Regional Trial Court of Manila a complaint against PNB entitled, AMBROSIO PADILLA vs. PHILIPPINE NATIONAL BANK (Civil Case No. 84-28391), praying that judgment be rendered: a. Declaring that the unilateral increase of interest rates from 18% to 32%, then to 41% and again to 48% are illegal, not valid nor binding on plaintiff, and that an adjustment of his interest rate from 18% to 24% is reasonable, fair and just;

b. The interest rate on the P900,000.00 released on September 27, 1982 be counted from said date and not from July 4, 1984; c. The excess of interest payment collected by defendant bank by debiting plaintiffs current account be refunded to plaintiff or credited to his current account; d. Pending the determination of the merits of this case, a restraining order and/or a writ of preliminary injunction be issued (1) to restrain and/or enjoin defendant bank for [sic] collecting from plaintiff and/or debiting his current account with illegal and excessive increases of interest rates; and (2) to prevent defendant bank from declaring plaintiff in default for non-payment and from instituting any foreclosure proceeding, extrajudicial or judicial, of the valuable commercial property of plaintiff. (pp. 89-90, Rollo.) In its answer to the complaint, PNB denied that the increases in interest rates were illegal, unilateral excessive and arbitrary and recited the reasons justifying said increases. On March 31, 1985, the private respondent paid the P300,000-balance of his obligation to PNBN (Exh. 5). The trial court rendered judgment on April 14, 1986, dismissing the complaint because the increases of interest were properly made. The private respondent appealed to the Court of Appeals. On June 27, 1989, the Court of Appeals reversed the trial court, hence, PNBs recourse to this Court by a petition for review under Rule 45 of the Rules of Court. The assignments of error raised in PNBs petition for review can be resolved into a single legal issue of whether the bank, within the term of the loan which it granted to the private respondent, may unilaterally change or increase the interest rate stipulated therein at will and as often as it pleased. The answer to that question is no. In the first place, although Section 2, P.D. No. 116 of January 29, 1973, authorizes the Monetary Board to prescribe the maximum rate or rates of interest for loans or renewal thereof and to change such rate or rates whenever warranted by prevailing economic and social conditions, it expressly provides that such changes shall not be made oftener than once every twelve months. In this case, PNB, over the objection of the private respondent, and without authority from the Monetary Board, within a period of only four (4) months, increased the 18% interest rate on the private respondents loan obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984. Those increases were null and void, for if the Monetary Board itself was not authorized to make such changes oftener than once a year, even less so may a bank which is subordinate to the Board. Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor did agree in the Deed of Real Estate Mortgage (Exh. 5) that the interest rate may be increased during the life of the contract to such increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe (Exh. 5-e-

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1) or within the limits allowed by law (Promissory Notes, Exhs. 2, 3, and 4), no law was ever passed in July to November 1984 increasing the interest rates on loans or renewals thereof to 32%, 41% and 48% (per annum), and no documents were executed and delivered by the debtor to effectuate the increases. The Court of Appeals observed. x x x We focus Our attention first of all on the agreement between the parties as embodied in the following instruments, to wit: (1) Exhibit 1Credit Agreement dated July 1, 1982; (2) Exhibit 2 Promissory Note dated July 5, 1982; (3) Exhibit 3 Promissory Note dated January 3, 1983; (4) Exhibit 4 Promissory Note, dated December 13, 1983; and (5) Exhibit 5Real Estate Mortgage contract dated July 1, 1982. Exhibit 1 states in its portion marked Exhibit 1-g-1: 9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations of the Central Bank and the current and general policies of the Bank and those which the Bank may adopt in the future, which may have relation to or in any way affect the Line, which rules, regulations and policies are incorporated herein by reference as if set forth herein in full. Promptly upon receipt of a written request from the Bank, the Borrowers shall execute and deliver such documents and instruments, in form and substance satisfactory to the Bank, in order to effectuate or otherwise comply with such rules, regulations and policies. Exhibits 2, 3, and 4 in their portions respectively marked Exhibits 2-B, 3-B, and 4-B uniformly authorize the defendant bank to increase the stipualted interest rte of 18% per annum within the limits allowed by law at any time depending on whatever policy it may adopt in the future: Provided, that, the interest rate on this note shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. Exhibit 5 in its portion marked Exhibit 5-e-1 stipulates: (k) INCREASE OF INTEREST RATE The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject during the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors. Clearly, then, the agreement between the parties authorized the defendant bank to increase the interest rate beyond the original rate of 18% per annum but within the limits allowed by law or within the rate allowed by law, it being declared the obligation of the plaintiff as borrower to execute and deliver the corresponding documents and instruments to effectuate the increase. (pp. 11-12, Rollo.) In Banco Filipino Savings and Mortgage Bank vs. Navarro, 15 SCRA 346 (1987), this Court disauthorized the bank from raising the interest rate on the borrowers loan from 12% to 17% despite an escalation clause in

the loan agreement signed by the debtors authorizing Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan. (italics supplied.) In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494 dated July 1, 1976 (72 O.G. No. 3, p. 676-J) which provided that the maximum rate of interest, including commissions premiums, fees and other charges on loans with a maturity of more than 730 days by banking institution x x x shall be 19%. This Court disallowed the increase for the simple reason that said Circular No. 494, although it has the effect of law is not a law. Speaking through Mme. Justice Ameurfina M. Herrera, this Court held: It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board. (p. 111, Rollo.) In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB Circular No. 40-7984 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution and circulars are neither laws nor resolutions of the Monetary Board. CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates x x x increases in interest rates are not subject to any ceiling prescribed by the Usury Law. but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116 which limits such changes to once every twelve months. Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private respondents loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code: ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement

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with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker partys (the debtor) participation being reduced to the alternative to take it or leave it (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. PNBs successive increases of the interest rate on the private respondents loan, over the latters protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms may be amended only by an instrument in writing signed by the party to be bound as burdened by such amendment. The increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that no interest shall be due unless it has been expressly stipulated in writing. The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24% per annum, hence, he is not bound to pay a higher rate than that. That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as found by the Court of Appeals, is indisputable. WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-G.R. CV No. 09791, the Court resolved to deny the petition for review for lack of merit, with costs against the petitioner. SO ORDERED.

11. Philippine National Bank vs. Court of Appeals and Fernandez, G.R. No. 107569, 238 SCRA 20, November 08, 1994 G.R. No. 107569 November 8, 1994 PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS, REMEDIOS JAYMEFERNANDEZ and AMADO FERNANDEZ,respondents. Petitioner bank seeks the review of the decision, dated 1 October 15, 1992, of the Court of Appeals in CA G.R. CV No. 27195, the dispositive portion of which reads as follows: WHEREFORE, the judgment appealed from is hereby SET ASIDE and a new one is entered ordering defendant-appellee PNB to re-apply the interest rate of 12% per annum to plaintiffs-appellants' (referring to herein private respondents) indebtedness and to accordingly take the appropriate charges from plaintiffsappellants' (private respondents') payment of P81,000.00 made on December 26, 1985. Any balance on the indebtedness should, likewise, be charged interest at the rate of 12% per annum. SO ORDERED. The parties do not dispute the facts as laid down by respondent court in its impugned decision, viz.: On April 7, 1982, (private respondents) as owners of a NACIDA-registered enterprise, obtained a loan under the

Cottage Industry Guaranty Loan Fund (CIGLF) from the Philippine National Bank (PNB) in the amount of Fifty Thousand (P50,000.00) Pesos, as evidenced by a Credit Agreement. Under the Promissory Note covering the loan, the loan was to be amortized over a period of three (3) years to end on March 29, 1985, at twelve (12%) percent interest annually. To secure the loan, (private respondents) executed a Real Estate Mortgage over a 1.5542-hectare parcel of unregistered agricultural land located at Cambang-ug, Toledo City, which was appraised by the PNB at P1,062.52 and given a loan value of P531.26 by the Bank. In addition, (private respondents) executed a Chattel Mortgage over a thermo plastic-forming machine, which had an appraisal value of P8,800 and a loan value of P4,400.00. The Credit Agreement provided inter alia, that (a) The BANK reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future; Provided, that the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in the maximum interest rate. The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without notice, beyond the stipulated rate of 12% but only "within the limits allowed by law." The Real Estate Mortgage contract likewise provided that (k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been advanced by the MORTGAGE, in accordance with the provision hereof, shall be subject during the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors. On February 17, 1983, (private respondents) were granted an additional NACIDA loan of Fifty Thousand (P50,000.00) Pesos by the PNB, for which (private respondents) executed another Promissory Note, which was to mature on April 1, 1985. Other than the date of maturity, the second promissory note contained the same terms and stipulations as the previous note. The parties likewise executed a new Credit Agreement, changing the amount of the loan from P50,000.00 to P100,000.00, but otherwise preserving the stipulations contained in the original agreement. As additional security for the loan, (private respondents) constituted another real estate mortgage over 2 parcels of registered land, with a combined area of 311 square meters, located at Guadalupe, Cebu City. The land, upon which several buildings are standing, was appraised by the PNB to have a value of P40,000.00 and a loan value of P28,000.00.

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In a letter dated August 1, 1984, the PNB informed (private respondents) "that the interest rate of your CIGLF loan account with us is now 25% per annum plus a penalty of 6% per annumon past dues." The PNB further increased this interest rate to 30% on October 15, 1984; and to 42% on October 25, 1984. The records show that as of December 1985, (private respondents) had an outstanding principal account of P81,000.00 of which P18,523.14 was credited to the principal, P57,488.89 to the interest, and the rest to penalty and other charges. Thus, as of said date, the unpaid principal obligation of (private respondent) amounted to P62,830.32. Thereafter, (private respondents) exerted efforts to get the PNB to re-adopt the 12% interest and to condone the present interest and penalties due; but to no 2 avail. (Citations omitted.) On December 15, 1987, private respondents filed a suit for specific performance against petitioner PNB and the NACIDA. It was docketed as Civil Case No. CEB-5610, and raffled to the Regional Trial Court, 7th Judicial 3 Region, Cebu City, Br. 7. Private respondents prayed the trial court to order: 1. The PNB and NACIDA to issue in (private respondents') favor, a release of mortgage; 2. The PNB to pay pecuniary consequential damages for the destruction of (private respondents') enterprise; 3. The PNB to pay moral and exemplary damages as well as the costs of suit; and 4. Granting (private respondents') such other relief as 4 may be found just and equitable in the premises. On February 26, 1990, the trial court dismissed private respondents' complaint in Civil Case No. CEB-5610. On October 15, 1992, the Court of Appeals reversed the dismissal with respect to petitioner bank, and disallowed the increases in interest rates. Petitioner bank now contends that "respondent Court of Appeals committed grave error when it ruled (1) that the increase in interest rates are unauthorized; (2) that the Credit Agreement and the Promissory Notes are not the law between the parties; (3) that CB Circular No. 773 and CB Circular No. 905 are not applicable; and (4) that private respondents are not estopped from questioning the 5 increase of rate interest made by petitioner." The petition is bereft of merit. In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause contained in their credit agreement which provides, as follows: The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future and provided, that, the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in maximum interest rate.

This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further amended Act No. 2655 ("The Usury Law"), as amended, thus: Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows: Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board; Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Providedfurther, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. Section 1 of P.D. No. 1684 also empowered the Central Bank's Monetary Board to prescribe the maximum rates of interest for loans and certain forbearances. Pursuant to such authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which provides: Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries) is hereby amended to read as follows: Sec. 1303. Interest and Other Charges. The rate of interest, including commissions, premiums, fees and other charges, on any loan, or forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended. P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law and circular did not authorize either party to unilaterally raise the interest rate without the other's consent. It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his act has no more efficacy than if it had been done under duress or by a person of 6 unsound mind. Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must bemutually agreed upon, otherwise, it is bereft of any binding effect.

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We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from private respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held . . . The unilateral action of the PNB in increasing the interest rate on the private respondent's loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code: Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. In order that obligations arising from contracts may have the force or law between the parties, there must be mutualitybetween the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void . . . . Hence, even assuming that the . . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it" . . . . Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. (Citation omitted.) Private respondents are not also estopped from assailing the unilateral increases in interest rate made by petitioner bank. No one receiving a proposal to change a contract to which he is a party, is obliged to answer the proposal, and his silence per se cannot be construed as 7 an acceptance. In the case at bench, the circumstances do not show that private respondents implicitly agreed to the proposed increases in interest rate which by any standard were too sudden and too stiff. IN VIEW THEREOF, the instant petition is DENIED for lack of merit, and the decision of the Court of Appeals in CA-G.R. CV No. 27195, dated October 15, 1992, is AFFIRMED. Costs against petitioner. SO ORDERED. 12. Florendo vs. Court of Appeals, G.R. No. 101771, 265 SCRA 678, December 17, 1996 G.R. No. 101771 December 17, 1996 SPOUSES MARIANO and GILDA FLORENDO, petitioners, vs. COURT OF APPEALS and LAND BANK OF THE PHILIPPINES, respondents.

May a bank unilaterally raise the interest rate on a housing loan granted an employee, by reason of the voluntary resignation of the borrower? Such is the query raised in the petition for review on certiorari now before us, which assails the Decision promulgated on June 19, 1991 by respondent Court of 1 Appeals in CA-G.R. CV No. 24956, upholding the validity and enforceability of the escalation by private respondent Land Bank of the Philippines of the applicable interest rate on the housing loan taken out by petitioner-spouses. The Antecedent Facts Petitioners filed an action for Injunction with Damages docketed as Civil Case No. 86-38146 before the Regional Trial Court of Manila, Branch XXII against respondent bank. Both parties, after entering into a joint stipulation of facts, submitted the case for decision on the basis of said stipulation and memoranda. The 2 stipulation reads in part: 1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent Bank) from May 17, 1976 until August 16, 1984 when she voluntarily resigned. However, before her resignation, she applied for a housing loan of P148,000.00, payable within 25 years from (respondent bank's) Provident Fund on July 20, 1983; 2. That (petitioners) and (respondent bank), through the latter's duly authorized representative, executed the Housing Loan Agreement, . . .; 3. That, together with the Housing Loan Agreement, (petitioners) and (respondent bank), through the latter's authorized representative, also executed a Real Estate Mortgage and Promissory Note, . . .; 4. That the loan . . . was actually given to (petitioner) Gilda Florendo, . . ., in her capacity as employee of (respondent bank); 5. That on March 19, 1985, (respondent bank) increased the interest rate on (petitioner's) loan from 9% per annum to 17%, the said increase to take effect on March 19, 1985; 6. That the details of the increase are embodied in (Landbank's) ManCom Resolution No. 85-08 dated March 19, 1985, . . . , and in a PF (Provident Fund) Memorandum Circular (No. 85-08, Series of 1985), . . .; 7. That (respondent bank) first informed (petitioners) of the said increase in a letter dated June 7, 1985, . . . . Enclosed with the letter are a copy of the PF Memo Circular . . . and a Statement of Account as of May 31, 1985, . . .; 8. That (petitioners) protested the increase in a letter dated June 11, 1985 to which (respondent bank) replied through a letter dated July 1, 1985, . . . Enclosed with the letter is a Memorandum dated June 26, 1985 of (respondent bank's) legal counsel, A.B. F. Gaviola, Jr., . . .; 9. That thereafter, (respondent bank) kept on demanding that (petitioner) pay the increased interest or the new monthly installments based on the increased interest rate, but Plaintiff just as vehemently maintained that the

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said increase is unlawful and unjustifiable. Because of (respondent bank's) repeated demands, (petitioners) were forced to file the instant suit for Injunction and Damages; 10. That, just the same, despite (respondent bank's) demands that (petitioners) pay the increased interest or increased monthly installments, they (petitioners) have faithfully paid and discharged their loan obligations, more particularly the monthly payment of the original stipulated installment of P1,248.72. Disregarding (respondent bank's) repeated demand for increased interest and monthly installment, (petitioners) are presently up-to-date in the payments of their obligations under the original contracts (Housing Loan Agreement, Promissory Note and Real Estate Mortgage) with (respondent bank); xxx xxx xxx The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage referred to above as the basis for the escalation are: a. Section I-F of Article VI of the Housing Loan 3 Agreement, which provides that, for as long as the loan or any portion thereof or any sum that may be due and payable under the said loan agreement remains outstanding, the borrower shall f) Comply with all the rules and regulations of the program imposed by the LENDER and to comply with all the rules and regulations that the Central Bank of the Philippines has imposed or will impose in connection with the financing programs for bank officers and employees in the form of fringe benefits. 4 b. Paragraph (f) of the Real Estate Mortgage which states: The rate of interest charged on the obligation secured by this mortgage. . ., shall be subject, during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee may prescribe for its debtors and subject to the condition that the increase/decrease shall only take effect on the date of effectivity of said increase/decrease and shall only apply to the remaining balance of the loan. c. and ManCom (Management Committee) Resolution No. 85-08, together with PF (Provident Fund) Memorandum Circular No. 85-08, which escalated the interest rates on outstanding housing loans of bank employees who voluntarily "secede" (resign) from the Bank; the range of rates varied depending upon the number of years service rendered by the employees concerned. The rates were made applicable to those who had previously resigned from the bank as well as those who would be resigning in the future. The trial court ruled in favor of respondent bank, and held that the bank was vested with authority to increase the interest rate (and the corresponding monthly amortizations) pursuant to said escalation provisions in the housing loan agreement and the mortgage contract. 5 The dispositive portion of the said decision reads:

WHEREFORE, judgment is hereby rendered denying the instant suit for injunction and declaring that the rate of interest on the loan agreement in question shall be 17% per annum and the monthly amortization on said loan properly raised to P2,064.75 a month, upon the finality of this judgment. xxx xxx xxx Petitioners promptly appealed, arguing that, inter alia, the increased rate of interest is onerous and was imposed unilaterally, without the consent of the borrower-spouses. Respondent bank likewise appealed and contested the propriety of having the increased interest rate apply only upon the finality of the judgment and not from March 19, 1985. The respondent Court subsequently affirmed with 6 modification the decision of the trial court, holding that: . . . Among the salient provisions of the mortgage is paragraph (f) which provides that the interest rate shall be subject, during the term of the loan, to such increases/decreases as may be allowed under the prevailing rules and/or circulars of the Central Bank and as the Provident Fund of the Bank may prescribe for its borrowers. In other words, the spouses agreed to the escalation of the interest rate on their original loan. Such an agreement is a contractual one and the spouses are bound by it. Escalation clauses have been ruled to be valid stipulations in contracts in order to maintain fiscal stability and to retain the value of money in long term contracts (Insular Bank of Asia and America vs. Spouses Epifania Salazar and Ricardo Salazar, 159 SCRA 133). One of the conditions for the validity of an escalation clause such as the one which refers to an increase rate is that the contract should also contain a proviso for a decrease when circumstances so warrant it. Paragraph (f) referred to above contains such provision. A contract is binding on the parties no matter that a provision thereof later proves onerous and which on hindsight, a party feels he should not have agreed to in the first place. 7 and disposed as follows: WHEREFORE, the dispositive part of the decision is MODIFIED in the sense that the interest of 17% on the balance of the loan of the spouses shall be computed starting July 1, 1985. Dissatisfied, the petitioners had recourse to this Court. The Issues Petitioners ascribe to respondent Court "a grave and patent error" in not nullifying the respondent bank's unilateral increase of the interest rate and monthly amortizations of the loan 1. . . . (simply because of) a bare and unqualified stipulation that the interest rate may be increased; 2. . . . on the ground that the increase has no basis in the contracts between the parties; 3. . . . on the ground that the increase violates Section 7A of the Usury Law; 4. . . . on the ground that the increase and the contractual provision that (respondent bank) relies upon for the increase are contrary to morals, good customs, 8 public order and public policy.

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The key issue may be simply presented as follows: Did the respondent bank have a valid and legal basis to impose an increased interest rate on the petitioners' housing loan? The Court's Ruling Basis for Increased Interest Rate Petitioners argue that the HLA provision covers only administrative and other matters, and does not include interest rates per se, since Article VI of the agreement deals with insurance on and upkeep of the mortgaged property. As for the stipulation in the mortgage deed, they claim that it is vague because it does not state if the "prevailing" CB rules and regulations referred to therein are those prevailing at the time of the execution of these contracts or at the time of the increase or decrease of the interest rate. They insist that the bank's authority to escalate interest rates has not been shown to be "crystal-clear as a matter of fact" and established beyond doubt. The contracts being "contracts of adhesion," any vagueness in their provisions should be interpreted in favor of petitioners. We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it does not make any reference to increases or decreases in the interest rate on loans. However, paragraph (f) of the mortgage contract is clearly and indubitably an escalation provision, and therefore, the parties were and are bound by the said stipulation that "(t)he rate of interest charged on the obligation secured by this mortgage . . ., shall be subject, during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee (respondent bank) may prescribe for its 9 debtors . . . ." Contrary to petitioners' allegation, there is no vagueness in the aforequoted proviso; even their own arguments (below) indicate that this provision is quite clear to them. In Banco Filipino Savings & Mortgage Bank 10 vs. Navarro, this Court in essence ruled that in general there is nothing inherently wrong with escalation 11 clauses. In IBAA vs. Spouses Salazar, the Court reiterated the rule that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. Application of the Escalation to Petitioners Petitioners however insist that while ManCom Resolution No. 85-08 authorized a rate increase for resigned employees, it could not apply as to petitioner-employee because nowhere in the loan agreement or mortgage contract is it provided that petitionerwife's resignation will be a ground for the adjustment of interest rates, which is the very bedrock of and the raison d'etre specified in said ManCom Resolution. They additionally contend that the escalation is violative of Section 7-A of the Usury Law (Act No. 2655, as amended) which requires a law or MB act fixing an increased maximum rate of interest, and that escalation upon the will of the respondent bank is contrary to the

principle of mutuality of contracts, perPhilippine National 12 Bank vs. Court of Appeals. What is actually central to the disposition of this case is not really the validity of the escalation clause but the retroactive enforcement of the ManCom Resolution as against petitioner-employee. In the case at bar, petitioners have put forth a telling argument that there is in fact no Central Bank rule, regulation or other issuance which would have triggered an application of the escalation clause as to her factual situation. 13 In Banco Filipino, this Court, speaking through Mme. Justice Ameurfina M. Herrera, disallowed the bank from increasing the interest rate on the subject loan from 12% to 17% despite an escalation clause in the loan agreement authorizing the bank to "correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan". In said case, the bank had relied upon a Central Bank circular as authority to up its rates. The Court ruled that CB Circular No. 494, although it has the effect of law, is not a law, but an administrative regulation. 14 In PNB vs. Court of Appeals, this Court disallowed the increases in interest rate imposed by the petitioner-bank therein, on the ground, among others, that said bank relied merely on its own Board Resolution (No. 681), PNB Circular No. 40-79-84, and PNB Circular No. 40129-84, which were neither laws nor resolutions of the Monetary Board. In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest rate ceiling prescribed under or pursuant to the Usury Law, as amended, was promulgated in 1982. These and other relevant CB issuances had already come into existence prior to the perfection of the housing loan agreement and mortgage contract, and thus it may be said that these regulations had been taken into consideration by the contracting parties when they first entered into their loan contract. In light of the CB issuances in force at that time, respondent bank was fully aware that it could have imposed an interest rate higher than 9% per annum rate for the housing loans of its employees, but it did not. In the subject loan, the respondent bank knowingly agreed that the interest rate on petitioners' loan shall remain at 9% p.a. unless a CB issuance is passed authorizing an increase (or decrease) in the rate on such employee loans and the Provident Fund Board of Trustees acts accordingly. Thus, as far as the parties were concerned, all other onerous factors, such as employee resignations, which could have been used to trigger an application of the escalation clause were considered barred or waived. If the intention were otherwise, they especially respondent bank should have included such factors in their loan agreement.

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ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board, cannot be used as basis for the escalation in lieu of CB issuances, since paragraph (f) of the mortgage contract very categorically specifies that any interest rate increase be in accordance with "prevailing rules, regulations and circulars of the Central Bank . . . as the Provident Fund Board . . . may prescribe." The Banco Filipino and PNB doctrines are applicable four-square in this case. As a matter of fact, the said escalation clause further provides that the increased interest rate "shall only take effect on the date of effectivity of (the) increase/decrease" authorized by the CB rule, regulation or circular. Without such CB issuance, any proposed increased rate will never become effective. We have already mentioned (and now reiterate our holding in several 15 cases ) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Thus, petitioners' contention that the escalation clause is violative of the said law is bereft of any merit. On the other hand, it will not be amiss to point out that the unilateral determination and imposition of increased interest rates by the herein respondent bank is obviously violative of the principle of mutuality of contractsordained in Article 1308 of the Civil Code. As this Court held 16 in PNB: In order that obligations arising from contracts may have the force of law between the parties, there must be mutualitybetween the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the . . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a former bank employee was very knowledgeable concerning respondent bank's lending rates and procedures, and therefore, petitioners were "on an equal footing" with respondent bank as far as the subject loan contract was concerned. That may have been true insofar as entering into the original loan agreement and mortgage contract was concerned. However, that does not hold true when it comes to the determination and imposition of escalated rates of interest as unilaterally provided in the ManCom

Resolution, where she had no voice at all in its preparation and application. To allay fears that respondent bank will inordinately be prejudiced by being stuck with this "sweetheart loan" at patently concessionary interest rates, which according to respondent bank is the "sweetest deal" anyone could obtain and is an act of generosity considering that in 1985 lending rates in the banking industry were peaking 1 well over 30% p.a., 7 we need only point out that the bank had the option to impose in its loan contracts the condition that resignation of an employee-borrower would be a ground for escalation. The fact is it did not. Hence, it must live with such omission. And it would be totally unfair to now impose said condition, not to mention that it would violate the principle of mutuality of consent in contracts. It goes without saying that such escalation ground can be included in future contracts not to agreements already validly entered into. Let it be clear that this Court understands respondent bank's position that the concessional interest rate was really intended as a means to remunerate its employees and thus an escalation due to resignation would have been a valid stipulation. But no such stipulation was in fact made, and thus the escalation provision could not be legally applied and enforced as against herein petitioners. WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS ASIDE the challenged Decision of the Court of Appeals. The interest rate on the subject housing loan remains at nine (9) percent per annum and the monthly amortization at P1,248.72. SO ORDERED. III. Deposit Definition Bank of the Phil. Islands vs. Intermediate Appellate Court, 164 SCRA 630, No. L-66826, August 19, 1988 G.R. No. L-66826 August 19, 1988 BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents. The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust Company of the Philippines [hereafter referred to as "COMTRUST."] In 1980, the Bank of the Philippine Islands (hereafter referred to as BPI absorbed COMTRUST through a corporate merger, and was substituted as party to the case. Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instance of Rizal Caloocan City a complaint against COMTRUST alleging four causes of action. Except for the third cause of action, the CFI ruled in favor of Zshornack. The bank appealed to the Intermediate Appellate Court which

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

When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an explanation from the bank. In answer, COMTRUST claimed that the peso value of the withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy, on October 27, 1975 when he (Ernesto) encashed with COMTRUST a cashier's check for P8,450.00 issued by the Manila Banking Corporation payable to Ernesto. Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both the trial court and the Appellate Court on the first cause of action. Petitioner must be held liable for the unauthorized withdrawal of US$1,000.00 from private respondent's dollar account. In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the bank has adopted inconsistent theories. First, it still maintains that the peso value of the amount withdrawn was given to Atty. Ernesto Zshornack, Jr. when the latter encashed the Manilabank Cashier's Check. At the same time, the bank claims that the withdrawal was made pursuant to an agreement where Zshornack allegedly authorized the bank to withdraw from his dollar savings account such amount which, when converted to pesos, would be needed to fund his peso current account. If indeed the peso equivalent of the amount withdrawn from the dollar account was credited to the peso current account, why did the bank still have to pay Ernesto? At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank has not shown how the transaction involving the cashier's check is related to the transaction involving the dollar draft in favor of Dizon financed by the withdrawal from Rizaldy's dollar account. The two transactions appear entirely independent of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality distinct and separate from Rizaldy Zshornack. Payment made to Ernesto cannot be considered payment to Rizaldy. As to the second explanation, even if we assume that there was such an agreement, the evidence do not show that the withdrawal was made pursuant to it. Instead, the record reveals that the amount withdrawn was used to finance a dollar draft in favor of Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There is no proof whatsoever that peso Current Account No. 210-465-29 was ever credited with the peso equivalent of the US$1,000.00 withdrawn on October 27, 1975 from Dollar Savings Account No. 25-4109. 2. As for the second cause of action, the complaint filed with the trial court alleged that on December 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash (popularly known as greenbacks) for safekeeping, and that the agreement was embodied in a document, a copy of which was attached to and made part of the complaint. The document reads: Makati Cable Address: Philippines "COMTRUST" COMMERCIAL BANK AND TRUST COMPANY of the Philippines Quezon City Branch

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December 8, 1975 MR. RIZALDY T. ZSHORNACK &/OR MRS SHIRLEY E. ZSHORNACK Sir/Madam: We acknowledged (sic) having received from you today the sum of US DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for safekeeping. Received by: (Sgd.) VIRGILIO V. GARCIA It was also alleged in the complaint that despite demands, the bank refused to return the money. In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current account at prevailing conversion rates. It must be emphasized that COMTRUST did not deny specifically under oath the authenticity and due execution of the above instrument. During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US $3,000 for safekeeping. When he requested the return of the money on May 10, 1976, COMTRUST explained that the sum was disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to P14,920.00 were deposited to Zshornack's current account per deposit slip accomplished by Garcia; the remaining US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00 were deposited to his current account per deposit slip also accomplished by Garcia. Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at prevailing conversion rates, BPI now posits another ground to defeat private respondent's claim. It now argues that the contract embodied in the document is the contract of depositum (as defined in Article 1962, New Civil Code), which banks do not enter into. The bank alleges that Garcia exceeded his powers when he entered into the transaction. Hence, it is claimed, the bank cannot be liable under the contract, and the obligation is purely personal to Garcia. Before we go into the nature of the contract entered into, an important point which arises on the pleadings, must be considered. The second cause of action is based on a document purporting to be signed by COMTRUST, a copy of which document was attached to the complaint. In short, the second cause of action was based on an actionable document. It was therefore incumbent upon the bank to specifically deny under oath the due execution of the document, as prescribed under Rule 8, Section 8, if it desired: (1) to question the authority of Garcia to bind the corporation; and (2) to deny its capacity to enter into such contract. [See, E.B. Merchant v. International Banking Corporation, 6 Phil. 314 (1906).] No sworn answer denying the due execution of the document in question, or questioning the authority of Garcia to bind the bank, or denying the bank's capacity to enter into the contract, was ever filed. Hence, the bank is deemed to have admitted not only Garcia's authority, but also the bank's power, to enter into the contract in question.

In the past, this Court had occasion to explain the reason behind this procedural requirement. The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated. In dealing with corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is found acting for a corporation with the external indicia of authority, any person, not having notice of want of authority, may usually rely upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted ... Whether a particular officer actually possesses the authority which he assumes to exercise is frequently known to very few, and the proof of it usually is not readily accessible to the stranger who deals with the corporation on the faith of the ostensible authority exercised by some of the corporate officers. It is therefore reasonable, in a case where an officer of a corporation has made a contract in its name, that the corporation should be required, if it denies his authority, to state such defense in its answer. By this means the plaintiff is apprised of the fact that the agent's authority is contested; and he is given an opportunity to adduce evidence showing either that the authority existed or that the contract was ratified and approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634, 645- 646 (1918).] Petitioner's argument must also be rejected for another reason. The practical effect of absolving a corporation from liability every time an officer enters into a contract which is beyond corporate powers, even without the proper allegation or proof that the corporation has not authorized nor ratified the officer's act, is to cast corporations in so perfect a mold that transgressions and wrongs by such artificial beings become impossible [Bissell v. Michigan Southern and N.I.R. Cos 22 N.Y 258 (1860).] "To say that a corporation has no right to do unauthorized acts is only to put forth a very plain truism but to say that such bodies have no power or capacity to err is to impute to them an excellence which does not belong to any created existence with which we are acquainted. The distinction between power and right is no more to be lost sight of in respect to artificial than in respect to natural persons." [Ibid.] Having determined that Garcia's act of entering into the contract binds the corporation, we now determine the correct nature of the contract, and its legal consequences, including its enforceability. The document which embodies the contract states that the US$3,000.00 was received by the bank for safekeeping. The subsequent acts of the parties also show that the intent of the parties was really for the bank to safely keep the dollars and to return it to Zshornack at a later time, Thus, Zshornack demanded the return of the money on May 10, 1976, or over five months later.

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The above arrangement is that contract defined under Article 1962, New Civil Code, which reads: Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange Transactions, promulgated on December 9, 1949, which was in force at the time the parties entered into the transaction involved in this case. The circular provides: xxx xxx xxx 2. Transactions in the assets described below and all dealings in them of whatever nature, including, where applicable their exportation and importation, shall NOT be effected, except with respect to deposit accounts included in sub-paragraphs (b) and (c) of this paragraph, when such deposit accounts are owned by and in the name of, banks. (a) Any and all assets, provided they are held through, in, or with banks or banking institutions located in the Philippines, including money, checks, drafts, bullions bank drafts, deposit accounts (demand, time and savings), all debts, indebtedness or obligations, financial brokers and investment houses, notes, debentures, stocks, bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in the nature of security, expressed in foreign currencies, or if payable abroad, irrespective of the currency in which they are expressed, and belonging to any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation residing or located within the Philippines; (b) Any and all assets of the kinds included and/or described in subparagraph (a) above, whether or not held through, in, or with banks or banking institutions, and existent within the Philippines, which belong to any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation not residing or located within the Philippines; (c) Any and all assets existent within the Philippines including money, checks, drafts, bullions, bank drafts, all debts, indebtedness or obligations, financial securities commonly dealt in by bankers, brokers and investment houses, notes, debentures, stock, bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in the nature of security expressed in foreign currencies, or if payable abroad, irrespective of the currency in which they are expressed, and belonging to any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation residing or located within the Philippines. xxx xxx xxx 4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those authorized to deal in foreign exchange. All receipts of foreign exchange by

any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation shall be sold to the authorized agents of the Central Bank by the recipients within one business day following the receipt of such foreign exchange. Any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation, residing or located within the Philippines, who acquires on and after the date of this Circular foreign exchange shall not, unless licensed by the Central Bank, dispose of such foreign exchange in whole or in part, nor receive less than its full value, nor delay taking ownership thereof except as such delay is customary; Provided, further, That within one day upon taking ownership, or receiving payment, of foreign exchange the aforementioned persons and entities shall sell such foreign exchange to designated agents of the Central Bank. xxx xxx xxx 8. Strict observance of the provisions of this Circular is enjoined; and any person, firm or corporation, foreign or domestic, who being bound to the observance thereof, or of such other rules, regulations or directives as may hereafter be issued in implementation of this Circular, shall fail or refuse to comply with, or abide by, or shall violate the same, shall be subject to the penal sanctions provided in the Central Bank Act. xxx xxx xxx Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations on Foreign Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippine residents only. Section 6 provides: SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporation shall be sold to authorized agents of the Central Bank by the recipients within one business day following the receipt of such foreign exchange. Any resident person, firm, company or corporation residing or located within the Philippines, who acquires foreign exchange shall not, unless authorized by the Central Bank, dispose of such foreign exchange in whole or in part, nor receive less than its full value, nor delay taking ownership thereof except as such delay is customary; Provided, That, within one business day upon taking ownership or receiving payment of foreign exchange the aforementioned persons and entities shall sell such foreign exchange to the authorized agents of the Central Bank. As earlier stated, the document and the subsequent acts of the parties show that they intended the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine resident. The parties did not intended to sell the US dollars to the Central Bank within one business day from receipt. Otherwise, the contract of depositum would never have been entered into at all. Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day from receipt, is a transaction which is not authorized by

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CB Circular No. 20, it must be considered as one which falls under the general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action against the other. "When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no cause of action against each other. . ." [Art. 1411, New Civil Code.] The only remedy is one on behalf of the State to prosecute the parties for violating the law. We thus rule that Zshornack cannot recover under the second cause of action. 3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of litigation expenses and attorney's fees to be reasonable. The award is sustained. WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to the dollar savings account of private respondent the amount of US$1,000.00 as of October 27, 1975 to earn interest at the rate fixed by the bank for dollar savings deposits. Petitioner is further ordered to pay private respondent the amount of P8,000.00 as damages. The other causes of action of private respondent are ordered dismissed. SO ORDERED.

Kinds of deposit

Nature/characteristics

Bank of the Philippine Islands vs. Court of Appeals, 232 SCRA 302 , G.R. No. 104612 May 10, 1994 G.R. No. 104612 May 10, 1994 BANK OF THE PHILIPPINE ISLANDS (successor-ininterest of COMMERCIAL AND TRUST CO.), petitioner, vs. HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D. LIM,respondents. The petitioner urges us to review and set aside the 1 amended Decision of 6 March 1992 of respondent Court of Appeals in CA- G.R. CV No. 25739 which modified the Decision of 15 November 1990 of Branch 19 of the Regional Trial Court (RTC) of Manila in Civil Case No. 87-42967, entitled Bank of the Philippine Islands (successor-in-interest of Commercial Bank and Trust Company) versus Eastern Plywood Corporation and Benigno D. Lim. The Court of Appeals had affirmed the dismissal of the complaint but had granted the defendants' counterclaim for P331,261.44 which

represents the outstanding balance of their account with the plaintiff. As culled from the records and the pleadings of the parties, the following facts were duly established: Private respondents Eastern Plywood Corporation (Eastern) and Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint bank account ("and/or" account) with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of the Philippine Islands (BPI). Sometime in March 1975, a joint checking account ("and" account) with Lim in the amount of P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim. Various amounts were later deposited or withdrawn from the joint account of Velasco and Lim. The money therein was placed in the money market. Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for himself and as 2 President and General Manager of Eastern, one-half of this amount was provisionally released and transferred 3 to one of the bank accounts of Eastern with CBTC. Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as "Additional Working Capital," evidenced by the "Disclosure Statement on Loan/Credit Transaction" (Disclosure Statement) signed by CBTC through its branch manager, Ceferino Jimenez, and Eastern, through Lim, as its President and General 4 Manager. The loan was payable on demand with interest at 14%per annum. For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00 payable on demand to the order of CBTC with interest at 14% per 5 annum. The note was signed by Lim both in his own capacity and as President and General Manager of Eastern. No reference to any security for the loan appears on the note. In the Disclosure Statement, the box with the printed word "UNSECURED" was marked with "X" meaning unsecured, while the line with the words "this loan is wholly/partly secured by" is followed by the typewritten words "Hold-Out on a 1:1 on C/A No. 2310-001-42," which refers to the joint account of Velasco and Lim with a balance of P331,261.44. In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement," also dated 18 6 August 1978, wherein it was stated that "as security for the Loan [Lim and Eastern] have offered [CBTC] and the latter accepts a holdout on said [Current Account No. 2310-011-42 in the joint names of Lim and Velasco] to the full extent of their alleged interests therein as these may appear as a result of final and definitive judicial action or a settlement between and among the 7 contesting parties thereto." Paragraph 02 of the Agreement provides as follows: Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their alleged interests in the Account Balance shall have been established with finality, ample and sufficient power as shall be necessary

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to retain said Account Balance and enable Comtrust to apply the Account Balance for the purpose of liquidating the Loan in respect of principal and/or accrued interest. And paragraph 05 thereof reads: The acceptance of this holdout shall not impair the right of Comtrust to declare the loan payable on demand at any time, nor shall the existence hereof and the nonresolution of the dispute between the contending parties in respect of entitlement to the Account Balance, preclude Comtrust from instituting an action for recovery against Eastply and/or Mr. Lim in the event the Loan is declared due and payable and Eastply and/or Mr. Lim shall default in payment of all obligations and liabilities thereunder. In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the RTC of Pasig, entitled "In re Intestate Estate of Mariano Velasco," and docketed as Sp. Proc. No. 8959. In the said case, the whole balance of P331,261.44 in the aforesaid joint account of Velasco and Lim was being claimed as part of Velasco's estate. On 9 September 1986, the intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit under the joint account of Lim and Velasco and authorized the heirs to divide among 8 themselves the amount withdrawn. 9 Sometime in 1980, CBTC was merged with BPI. On 2 December 1987, BPI filed with the RTC of Manila a complaint against Lim and Eastern demanding payment of the promissory note for P73,000.00. The complaint was docketed as Civil Case No. 87- 42967 and was raffled to Branch 19 of the said court, then presided over by Judge Wenceslao M. Polo. Defendants Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the disputed account subject of the Holdout Agreement and the interests thereon after deducting the amount due on the promissory note. After due proceedings, the trial court rendered its decision on 15 November 1990 dismissing the complaint because BPI failed to make out its case. Furthermore, it ruled that "the promissory note in question is subject to the 'hold10 out' agreement," and that based on this agreement, "it was the duty of plaintiff Bank [BPI] to debit the account of the defendants under the promissory note to set off the loan even though the same has no fixed 11 maturity." As to the defendants' counterclaim, the trial court, recognizing the fact that the entire amount in question had been withdrawn by Velasco's heirs pursuant to the order of the intestate court in Sp. Proc. No. 8959, denied it because the "said claim cannot be awarded without disturbing the resolution" of the 12 intestate court. Both parties appealed from the said decision to the Court of Appeals. Their appeal was docketed as CAG.R. CV No. 25739. On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the trial court. It, however, failed to rule on the defendants' (private respondents') partial appeal from the trial court's denial of their counterclaim. Upon their motion for

reconsideration, the Court of Appeals promulgated on 6 13 March 1992 an Amended Decision wherein it ruled that the settlement of Velasco's estate had nothing to do with the claim of the defendants for the return of the balance of their account with CBTC/BPI as they were not privy to that case, and that the defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI should have protected the defendants' interest in Sp. Proc. No. 8959 when the said account was claimed by Velasco's estate. It then ordered BPI "to pay defendants the amount of P331,261.44 representing the outstanding 14 balance in the bank account of defendants." On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement in question was subject to a suspensive condition stated therein,viz., that the "P331,261.44 shall become a security for respondent Lim's promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to that amount are established as a result of a final and definitive judicial action or a settlement between and among the 15 contesting parties thereto." Hence, BPI asserts, the Court of Appeals erred in affirming the trial court's decision dismissing the complaint on the ground that it was the duty of CBTC to debit the account of the defendants to set off the amount of P73,000.00 covered by the promissory note. Private respondents Eastern and Lim dispute the "suspensive condition" argument of the petitioner. They interpret the findings of both the trial and appellate courts that the money deposited in the joint account of Velasco and Lim came from Eastern and Lim's own account as a finding that the money deposited in the joint account of Lim and Velasco "rightfully belong[ed] to Eastern Plywood Corporation and/or Benigno Lim." And because the latter are the rightful owners of the money in question, the suspensive condition does not find any application in this case and the bank had the duty to set off this deposit with the loan. They add that the ruling of the lower court that they own the disputed amount is the final and definitive judicial action required by the Holdout Agreement; hence, the petitioner can only hold the amount of P73,000.00 representing the security required 16 for the note and must return the rest. The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a Rejoinder thereto. We gave due course to the petition and required the parties to submit simultaneously their memoranda. The key issues in this case are whether BPI can demand payment of the loan of P73,000.00 despite the existence of the Holdout Agreement and whether BPI is still liable to the private respondents on the account subject of the Holdout Agreement after its withdrawal by the heirs of Velasco. The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note is an unconditional promise to pay the said amount, and as stated by the respondent Court of Appeals, "[t]here is no question that the promissory note is a negotiable 17 instrument." It further correctly ruled that BPI was not a holder in due course because the note was not

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indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement could have operated as a valid transfer to make BPI a holder in due course. It acquired the note from CBTC by the contract of merger or sale between the two banks. BPI, therefore, took the note subject to the Holdout Agreement. We disagree, however, with the Court of Appeals in its interpretation of the Holdout Agreement. It is clear from paragraph 02 thereof that CBTC, or BPI as its successor-in-interest, had every right to demand that Eastern and Lim settle their liability under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and Velasco's joint account to the payment of the note. What the agreement conferred on CBTC was a power, not a duty. Generally, a bank is 18 under no duty or obligation to make the application. To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank has the option to 19 exercise. Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, CBTC was not in any way precluded from demanding payment from Eastern and from instituting an action to recover payment of the loan. What it provides is an alternative, not an exclusive, method of enforcing its claim on the note. When it demanded payment of the debt directly from Eastern and Lim, BPI had opted not to exercise its right to apply part of the deposit subject of the Holdout Agreement to the payment of the promissory note for P73,000.00. Its suit for the enforcement of the note was then in order and it was error for the trial court to dismiss it on the theory that it was set off by an equivalent portion in C/A No. 2310-001-42 which BPI should have debited. The Court of Appeals also erred in affirming such dismissal. The "suspensive condition" theory of the petitioner is, therefore, untenable. The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for 20 the return of the P331,261.44 was equivalent to a demand that they be allowed to withdraw their deposit with the bank. Article 1980 of the Civil Code expressly provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." 21 In Serrano vs. Central Bank of the Philippines, we held that bank deposits are in the nature of irregular deposits; they are really loans because they earn interest. The relationship then between a depositor and a bank is one of creditor and debtor. The deposit under the questioned account was an ordinary bank deposit; hence, it was 22 payable on demand of the depositor. The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the account. The petitioner should not have allowed such withdrawal

because it had admitted in the Holdout Agreement the questioned ownership of the money deposited in the account. As early as 12 May 1979, CBTC was notified by the Corporate Secretary of Eastern that the deposit in the joint account of Velasco and Lim was being claimed by them and that one-half was being claimed by the 23 heirs of Velasco. Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to withdraw the account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial compulsion to do so. The authorization given to the heirs of Velasco cannot be construed as a final determination or adjudication that the account belonged to Velasco. We have ruled that when the ownership of a particular property is disputed, the determination by a probate court of whether that property is included in the estate of a deceased is merely provisional in character and 24 cannot be the subject of execution. Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto, had no right to pay to persons other than those in whose favor the obligation was constituted or whose right or authority to receive payment is indisputable. The payment of the money deposited with BPI that will extinguish its obligation to the creditor-depositor is payment to the person of the creditor or to one 25 authorized by him or by the law to receive it. Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a third 26 person. The payment then by BPI to the heirs of Velasco, even if done in good faith, did not extinguish its obligation to the true depositor, Eastern. In the light of the above findings, the dismissal of the petitioner's complaint is reversed and set aside. The award on the counterclaim is sustained subject to a modification of the interest. WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in CA-G.R. CV No. 25735 is hereby MODIFIED. As modified: (1) Private respondents are ordered to pay the petitioner the promissory note for P73,000.00 with interest at: (a) 14% per annum on the principal, computed from 18 August 1978 until payment; (b) 12% per annum on the interest which had accrued up to the date of the filing of the complaint, computed from that date until payment pursuant to Article 2212 of the Civil Code. (2) The award of P331,264.44 in favor of the private respondents shall bear interest at the rate of 12% per annum computed from the filing of the counterclaim. No pronouncement as to costs. SO ORDERED.

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Serrano vs. Central Bank of the Philippines, 96 SCRA 96 , No. L-30511, February 14, 1980 G.R. No. L-30511 February 14, 1980 MANUEL M. SERRANO, petitioner, vs. CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA; EMERITO M. RAMOS, SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA RAMOS DELA RAMA, HORACIO DELA RAMA, ANTONIO B. RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO LEDESMA, VICTORIA RAMOS TANJUATCO, and TEOFILO TANJUATCO, respondents. Petition for mandamus and prohibition, with preliminary injunction, that seeks the establishment of joint and solidary liability to the amount of Three Hundred Fifty Thousand Pesos, with interest, against respondent Central Bank of the Philippines and Overseas Bank of Manila and its stockholders, on the alleged failure of the Overseas Bank of Manila to return the time deposits made by petitioner and assigned to him, on the ground that respondent Central Bank failed in its duty to exercise strict supervision over respondent Overseas Bank of Manila to protect depositors and the general 1 public. Petitioner also prays that both respondent banks be ordered to execute the proper and necessary documents to constitute all properties fisted in Annex "7" of the Answer of respondent Central Bank of the Philippines in G.R. No. L-29352, entitled "Emerita M. Ramos, et al vs. Central Bank of the Philippines," into a trust fund in favor of petitioner and all other depositors of respondent Overseas Bank of Manila. It is also prayed that the respondents be prohibited permanently from honoring, implementing, or doing any act predicated upon the validity or efficacy of the deeds of mortgage, assignment. and/or conveyance or transfer of whatever nature of the properties listed in Annex "7" of the Answer 2 of respondent Central Bank in G.R. No. 29352. A sought for ex-parte preliminary injunction against both respondent banks was not given by this Court. Undisputed pertinent facts are: On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year with 6% interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with 3 the respondent Overseas Bank of Manila. Concepcion Maneja also made a time deposit, for one year with 6% interest, on March 6, 1967, of Two Hundred Thousand Pesos (P200,000.00) with the same 4 respondent Overseas Bank of Manila. On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and conveyed to petitioner Manuel M. Serrano, her time deposit of P200,000.00 with respondent Overseas Bank of 5 Manila. Notwithstanding series of demands for encashment of the aforementioned time deposits from the respondent Overseas Bank of Manila, dating from December 6, 1967 up to March 4, 1968, not a single one of the time

deposit certificates was honored by respondent 6 Overseas Bank of Manila. Respondent Central Bank admits that it is charged with the duty of administering the banking system of the Republic and it exercises supervision over all doing business in the Philippines, but denies the petitioner's allegation that the Central Bank has the duty to exercise a most rigid and stringent supervision of banks, implying that respondent Central Bank has to watch every move or activity of all banks, including respondent Overseas Bank of Manila. Respondent Central Bank claims that as of March 12, 1965, the Overseas Bank of Manila, while operating, was only on a limited degree of banking operations since the Monetary Board decided in its Resolution No. 322, dated March 12, 1965, to prohibit the Overseas Bank of Manila from making new loans and investments in view of its chronic reserve deficiencies against its deposit liabilities. This limited operation of respondent Overseas Bank of Manila 7 continued up to 1968. Respondent Central Bank also denied that it is guarantor of the permanent solvency of any banking institution as claimed by petitioner. It claims that neither the law nor sound banking supervision requires respondent Central Bank to advertise or represent to the public any remedial measures it may impose upon chronic delinquent banks as such action may inevitably result to panic or bank "runs". In the years 1966-1967, there were no findings to declare the respondent Overseas Bank of Manila as 8 insolvent. Respondent Central Bank likewise denied that a constructive trust was created in favor of petitioner and his predecessor in interest Concepcion Maneja when their time deposits were made in 1966 and 1967 with the respondent Overseas Bank of Manila as during that time the latter was not an insolvent bank and its operation as a banking institution was being salvaged by the 9 respondent Central Bank. Respondent Central Bank avers no knowledge of petitioner's claim that the properties given by respondent Overseas Bank of Manila as additional collaterals to respondent Central Bank of the Philippines for the former's overdrafts and emergency loans were acquired through the use of depositors' money, including that of 10 the petitioner and Concepcion Maneja. In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the Philippines," a case was filed by the petitioner Ramos, wherein respondent Overseas Bank of Manila sought to prevent respondent Central Bank from closing, declaring the former insolvent, and liquidating its assets. Petitioner Manuel Serrano in this case, filed on September 6, 1968, a motion to intervene in G.R. No. L-29352, on the ground that Serrano had a real and legal interest as depositor of the Overseas Bank of Manila in the matter in litigation in that case. Respondent Central Bank in G.R. No. L-29352 opposed petitioner Manuel Serrano's motion to intervene in that case, on the ground that his claim as depositor of the Overseas Bank of Manila should properly be ventilated in the Court of First Instance, and if this Court were to

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allow Serrano to intervene as depositor in G.R. No. L29352, thousands of other depositors would follow and thus cause an avalanche of cases in this Court. In the resolution dated October 4, 1968, this Court denied Serrano's, motion to intervene. The contents of said motion to intervene are substantially the same as those 11 of the present petition. This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became final and executory on March 3, 1972, favorable to the respondent Overseas Bank of Manila, with the dispositive portion to wit: WHEREFORE, the writs prayed for in the petition are hereby granted and respondent Central Bank's resolution Nos. 1263, 1290 and 1333 (that prohibit the Overseas Bank of Manila to participate in clearing, direct the suspension of its operation, and ordering the liquidation of said bank) are hereby annulled and set aside; and said respondent Central Bank of the Philippines is directed to comply with its obligations under the Voting Trust Agreement, and to desist from taking action in violation therefor. Costs against 12 respondent Central Bank of the Philippines. Because of the above decision, petitioner in this case filed a motion for judgment in this case, praying for a decision on the merits, adjudging respondent Central Bank jointly and severally liable with respondent Overseas Bank of Manila to the petitioner for the P350,000 time deposit made with the latter bank, with all interests due therein; and declaring all assets assigned or mortgaged by the respondents Overseas Bank of Manila and the Ramos groups in favor of the Central Bank as trust funds for the benefit of petitioner and other 13 depositors. By the very nature of the claims and causes of action against respondents, they in reality are recovery of time deposits plus interest from respondent Overseas Bank of Manila, and recovery of damages against respondent Central Bank for its alleged failure to strictly supervise the acts of the other respondent Bank and protect the interests of its depositors by virtue of the constructive trust created when respondent Central Bank required the other respondent to increase its collaterals for its overdrafts said emergency loans, said collaterals allegedly acquired through the use of depositors money. These claims shoud be ventilated in the Court of First Instance of proper jurisdiction as We already pointed out when this Court denied petitioner's motion to intervene in G.R. No. L-29352. Claims of these nature are not proper in actions for mandamus and prohibition as there is no shown clear abuse of discretion by the Central Bank in its exercise of supervision over the other respondent Overseas Bank of Manila, and if there was, petitioner here is not the proper party to raise that question, but rather the Overseas Bank of Manila, as it did in G.R. No. L-29352. Neither is there anything to prohibit in this case, since the questioned acts of the respondent Central Bank (the acts of dissolving and liquidating the Overseas Bank of Manila), which petitioner here intends to use as his basis for claims of damages against

respondent Central Bank, had been accomplished a long time ago. Furthermore, both parties overlooked one fundamental principle in the nature of bank deposits when the petitioner claimed that there should be created a constructive trust in his favor when the respondent Overseas Bank of Manila increased its collaterals in favor of respondent Central Bank for the former's overdrafts and emergency loans, since these collaterals were acquired by the use of depositors' money. Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the 14 law on loans. Current and savings deposit are loans to a bank because it can use the same. The petitioner here in making time deposits that earn interests with respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of he respondent Bank to honor the time deposit is failure to pay s obligation as a debtor and not a breach of trust arising from depositary's failure to return the subject matter of the deposit WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner. SO ORDERED.

Lua Kian vs. Manila Railroad Co., et al., 19 SCRA 5, No. L-23033, January 05, 1967 G.R. No. L-23033 January 5, 1967 LUA KIAN, plaintiff and appellee, vs. MANILA RAILROAD COMPANY and MANILA PORT SERVICE, defendants and appellants. The present suit was filed by Lua Kian against the Manila Railroad Co. and Manila Port Service for the recovery of the invoice value of imported evaporated "Carnation" milk alleged to have been undelivered. The following stipulation of facts was made: 1. They admit each other's legal personality, and that during the time material to this action, defendant Manila Port Service as a subsidiary of defendant Manila Railroad Company operated the arrastre service at the Port of Manila under and pursuant to the Management Contract entered into by and between the Bureau of Customs and defendant Manila Port Service on February 29, 1956; 2. On December 31, 1959, plaintiff Lua Kian imported 2,000 cases of Carnation Milk from the Carnation Company of San Francisco, California, and shipped on Board SS "GOLDEN BEAR" per Bill of Lading No. 17; 3. Out of the aforesaid shipment of 2,000 cases of Carnation Milk per Bill of Lading No. 17, only 1,829 cases marked `LUA KIAN 1458' were discharged from the vessel SS `GOLDEN BEAR' and received by

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defendant Manila Port Service per pertinent tally sheets issued by the said carrying vessel, on January 24, 1960; 4. Discharged from the same vessel on the same date unto the custody of defendant Manila Port Service were 3,171 cases of Carnation Milk marked "CEBU UNITED 4860-PH-MANILA" consigned to Cebu United Enterprises, per Bill of Lading No. 18, and on this shipment, Cebu United Enterprises has a pending claim for short-delivery against defendant Manila Port Service; 5. Defendant Manila Port Service delivered to the plaintiff thru its broker, Ildefonso Tionloc, Inc. 1,913 cases of Carnation Milk marked "LUA KIAN 1458" per pertinent gate passes and broker's delivery receipts; 6. A provisional claim was filed by the consignee's broker for and in behalf of the plaintiff on January 19, 1960, with defendant Manila Port Service; 7. The invoice value of the 87 cases of Carnation Milk claimed by the plaintiff to have been short-delivered by defendant Manila Port Service is P1,183.11 while the invoice value of the 87 cases of Carnation Milk claimed by the defendant Manila Port Service to have been overdelivered by it to plaintiff is P1,130.65; 8. The 1,913 cases of Carnation mentioned in paragraph 5 hereof were taken by the broker at Pier 13, Shed 3, sometime in February, 1960, where at the time, there were stored therein, aside from the shipment involved herein, 1000 cases of Carnation Milk bearing the same marks and also consigned to plaintiff Lua Kian but had been discharged from SS `STEEL ADVOCATE' and covered by Bill of Lading No. 11; 9. Of the shipment of 1000 cases of Carnation Milk which also came from the Carnation Company, San Francisco, California, U.S.A. and bearing the same marks as the shipment herein but had been discharged from S/S "STEEL ADVOCATE" and covered by Bill of Lading No. 11, Lua Kian as consignee thereof filed a claim for short-delivery against defendant Manila Port Service, and said defendant Manila Port Service paid Lua Kian plaintiff herein, P750.00 in settlement of its claim; 10. They reserve the right to submit documentary evidence; 11. They submit the matter of attorney's fees and costs to the sound discretion of the Court. On these facts and documentary evidence subsequently presented, the Court of First Instance of Manila ruled that 1,829 cases marked Lua Kian (171 cases lessthan the 2,000 cases indicated in the bill of lading and 3,171 cases marked "Cebu United" (171 cases over the 3,000 cases in the bill of lading were discharged to the Manila Port Service. Considering that Lua Kian and Cebu United Enterprises were the only consignees of the shipment of 5,000 cases of "Carnation" milk, it found that of the 3,171 cases marked "Cebu United", 171 should have been delivered to Lua Kian. Inasmuch as the defendant Manila Port Service actually delivered 1,913 1 cases to plaintiff, which is only 87 cases short of 2,000 cases as per bill of lading the former was ordered to pay Lua Kian the sum of P1,183.11 representing such

shortage of 87 cases, with legal interest from the date of the suit, plus P500 as attorney's fees. Defendants appealed to Us and contend that they should not be made to answer for the undelivered cases of milk, insisting that Manila Port Service was bound to deliver only 1,829 cases to Lua Kian and that it had there before in fact over-delivered to the latter. The bill of lading in favor of Cebu United Enterprises indicated that only 3,000 cases were due to said consignee, although 3,171 cases were marked in its favor. Accordingly, the excess 171 cases marked "Cebu United" placed the defendant arrastre operator in a dilemma, for should it deliver them to Lua Kian the goods could be claimed by the consignee Cebu United Enterprises whose markings they bore, and should it deliver according to markings, to Cebu United Enterprises, it might be sued by the consignee, Lua Kian whose bill of lading indicated that it should receive 171 cases more. The dilemma itself, however, offered the solution. The legal relationship between an arrastre operator and the consignee is akin to that of a depositor 2 and warehouseman. As custodian of the goods discharged from the vessel, it was defendant arrastre operator's duty, like that of any ordinary depositary, to take good care of the goods and to turn them over to the 3 party entitled to their possession. Under this particular set of circumstances, said defendant should have withheld delivery because of the discrepancy between the bill of lading and the markings and conducted its own investigation, not unlike that under Section 18 of the Warehouse Receipts Law, or called upon the parties, to interplead, such as in a case under Section 17 of the same law, in order to determine the rightful owner of the goods. It is true that Section 12 of the Management Contract exempts the arrastre operator from responsibility for misdelivery or non-delivery due to improper or insufficient marking. We cannot however excuse the aforestated defendant from liability in this case before Us now because the bill of lading showed that only 3,000 cases were consigned to Cebu United Enterprises. The fact that the excess of 171 cases were marked for Cebu United Enterprises and that the consignment to Lua Kian was 171 cases less than the 2,000 in the bill of lading, should have been sufficient reason for the defendant Manila Port Service to withhold the goods pending determination of their rightful ownership. We therefore find the defendants liable, without prejudice to their taking whatever proper legal steps they may consider worthwhile to recover the excess delivered to Cebu United Enterprises. With respect to the attorney's fees awarded below, this Court notices that the same is about 50 per cent of the litigated amount of P1,183.11. We therefore deem it reasonable to decrease the attorney's fees to P300.00. Wherefore, with the aforesaid reservation, and with the modification that the attorney's fee is reduced to P300.00, the judgment appealed from is affirmed, with costs against appellants. So ordered.

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