[G.R. No. 146364. June 3, 2004] COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE GUEVARRA, respondents.

DECISION CARPIO, J.:

compensation for the use of the premises starting from the last demand; C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and D) pay the cost of suit. SO ORDERED.[7]

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

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

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

On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos motion for reconsideration. The dispositive portion of the resolution reads: WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs. SO ORDERED.[12]

Article VI of the Code of Policies Beneficiary Selection and Disposition of Homelots and Structures in the National Housing Project (the Code), the actual occupant or caretaker of the lot shall have first priority as beneficiary of the project. The Court of Appeals concluded that Guevarra is first in the hierarchy of priority. In denying Pajuyos motion for reconsideration, the appellate court debunked Pajuyos claim that Guevarra filed his motion for extension beyond the period to appeal.

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

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

The Court of Appeals pointed out that Guevarras motion for extension filed before the Supreme Court was stamped 13 December 1996 at 4:09 PM by the Supreme Courts Receiving Clerk. The Court of Appeals concluded that the motion for extension bore a date, contrary to Pajuyos claim that the motion for extension was undated. Guevarra filed the motion for extension on time on 13 December 1996 since he filed the motion one day before the expiration of the reglementary period on 14 December 1996. Thus, the motion for extension properly complied with the condition imposed by the Court of Appeals in its 28 January 1997 Resolution. The Court of Appeals explained that the thirty-day extension to file the petition for review was deemed granted because of such compliance. The Court of Appeals rejected Pajuyos argument that the appellate court should have dismissed the petition for review because it was Guevarras counsel and not Guevarra who signed the certification against forum-shopping. The Court of Appeals pointed out that Pajuyo did not raise this issue in his Comment. The Court of Appeals held that Pajuyo could not now seek the dismissal of the case after he had extensively argued on the merits of the case. This technicality, the appellate court opined, was clearly an afterthought.

The Issues Pajuyo raises the following issues for resolution:

The Ruling of the Court of Appeals The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra illegally occupied the contested lot which the government owned. Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right or title over the lot because it is public land. The assignment of rights between Perez and Pajuyo, and the Kasunduan between Pajuyo and Guevarra, did not have any legal effect. Pajuyo and Guevarra are in pari delicto or in equal fault. The court will leave them where they are. The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan between Pajuyo and Guevarra created a legal tie akin to that of a landlord and tenant relationship. The Court of Appeals ruled that the Kasunduan is not a lease contract but a commodatumbecause the agreement is not for a price certain. Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court held that Guevarra has a better right over the property under Proclamation No. 137. President Corazon C. Aquino (President Aquino) issued Proclamation No. 137 on 7 September 1987. At that time, Guevarra was in physical possession of the property. Under

WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND DISCRETION TANTAMOUNT TO LACK OF JURISDICTION: 1) in GRANTING, instead of denying, Private Respondents Motion for an Extension of thirty days to file petition for review at the time when there was no more period to extend as the decision of the Regional Trial Court had already become final and executory. 2) in giving due course, instead of dismissing, private respondents Petition for Review even though the certification against forumshopping was signed only by counsel instead of by petitioner himself. in ruling that the Kasunduan voluntarily entered into by the parties was in fact a commodatum, instead of a Contract of Lease as found by the Metropolitan Trial Court and in holding that the ejectment case filed

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against defendant-appellant is without legal and factual basis. 4) in reversing and setting aside the Decision of the Regional Trial Court in Civil Case No. Q-96-26943 and in holding that the parties are in pari delicto being both squatters, therefore, illegal occupants of the contested parcel of land. 5) in deciding the unlawful detainer case based on the so-called Code of Policies of the National Government Center Housing Project instead of deciding the same under the Kasunduan voluntarily executed by the parties, the terms and conditions of which are the laws between themselves.[13]

In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarras petition for review raised these questions: (1) Do ejectment cases pertain only to possession of a structure, and not the lot on which the structure stands? (2) Does a suit by a squatter against a fellow squatter constitute a valid case for ejectment? (3) Should a Presidential Proclamation governing the lot on which a squatters structure stands be considered in an ejectment suit filed by the owner of the structure? These questions call for the evaluation of the rights of the parties under the law on ejectment and the Presidential Proclamation. At first glance, the questions Guevarra raised appeared purely legal. However, some factual questions still have to be resolved because they have a bearing on the legal questions raised in the petition for review. These factual matters refer to the metes and bounds of the disputed property and the application of Guevarra as beneficiary of Proclamation No. 137. The Court of Appeals has the power to grant an extension of time to file a petition for review. In Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court,[18] we declared that the Court of Appeals could grant extension of time in appeals by petition for review. In Liboro v. Court of Appeals,[19] we clarified that the prohibition against granting an extension of time applies only in a case where ordinary appeal is perfected by a mere notice of appeal. The prohibition does not apply in a petition for review where the pleading needs verification. A petition for review, unlike an ordinary appeal, requires preparation and research to present a persuasive position.[20] The drafting of the petition for review entails more time and effort than filing a notice of appeal.[21] Hence, the Court of Appeals may allow an extension of time to file a petition for review. In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,[22] we held that Liboros clarification of Lacsamanais consistent with the Revised Internal Rules of the Court of Appeals and Supreme Court Circular No. 191. They all allow an extension of time for filing petitions for review with the Court of Appeals. The extension, however, should be limited to only fifteen days save in exceptionally meritorious cases where the Court of Appeals may grant a longer period. A judgment becomes final and executory by operation of law. Finality of judgment becomes a fact on the lapse of the reglementary period to appeal if no appeal is perfected.[23] The RTC decision could not have gained finality because the Court of Appeals granted the 30-day extension to Guevarra. The Court of Appeals did not commit grave abuse of discretion when it approved Guevarras motion for extension. The Court of Appeals gave due course to the motion for extension because it complied with the condition set by the appellate court in its resolution dated 28 January 1997. The resolution stated that the Court of Appeals would only give due course to the motion for extension if filed on time. The motion for extension met this condition. The material dates to consider in determining the timeliness of the filing of the motion for extension are (1) the date of receipt of the judgment or final order or resolution subject of the petition, and (2) the date of filing of the motion for extension.[24] It is the date of the filing of the motion or pleading, and not the date of execution, that determines the timeliness of the filing of that motion or pleading. Thus, even if the motion for extension bears no date, the date of filing stamped on it is the reckoning point for determining the timeliness of its filing.

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

Procedural Issues Pajuyo insists that the Court of Appeals should have dismissed outright Guevarras petition for review because the RTC decision had already become final and executory when the appellate court acted on Guevarras motion for extension to file the petition. Pajuyo points out that Guevarra had only one day before the expiry of his period to appeal the RTC decision. Instead of filing the petition for review with the Court of Appeals, Guevarra filed with this Court an undated motion for extension of 30 days to file a petition for review. This Court merely referred the motion to the Court of Appeals. Pajuyo believes that the filing of the motion for extension with this Court did not toll the running of the period to perfect the appeal. Hence, when the Court of Appeals received the motion, the period to appeal had already expired. We are not persuaded. Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable to the Court of Appeals by petition for review in cases involving questions of fact or mixed questions of fact and law.[14] Decisions of the regional trial courts involving pure questions of law are appealable directly to this Court by petition for review.[15] These modes of appeal are now embodied in Section 2, Rule 41 of the 1997 Rules of Civil Procedure. Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra thus filed his motion for extension to file petition for review before this Court on 14 December 1996. On 3 January 1997, Guevarra then filed his petition for review with this Court. A perusal of Guevarras petition for review gives the impression that the issues he raised were pure questions of law. There is a question of law when the doubt or difference is on what the law is on a certain state of facts.[16] There is a question of fact when the doubt or difference is on the truth or falsity of the facts alleged.[17]

Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed his motion for extension before this Court on 13 December 1996, the date stamped by this Courts Receiving Clerk on the motion for extension. Clearly, Guevarra filed the motion for extension exactly one day before the lapse of the reglementary period to appeal. Assuming that the Court of Appeals should have dismissed Guevarras appeal on technical grounds, Pajuyo did not ask the appellate court to deny the motion for extension and dismiss the petition for review at the earliest opportunity. Instead, Pajuyo vigorously discussed the merits of the case. It was only when the Court of Appeals ruled in Guevarras favor that Pajuyo raised the procedural issues against Guevarras petition for review. A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision on the merits, is estopped from attacking the jurisdiction of the court.[25] Estoppel sets in not because the judgment of the court is a valid and conclusive adjudication, but because the practice of attacking the courts jurisdiction after voluntarily submitting to it is against public policy.[26] In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarras failure to sign the certification against forum shopping. Instead, Pajuyo harped on Guevarras counsel signing the verification, claiming that the counsels verification is insufficient since it is based only on mere information. A partys failure to sign the certification against forum shopping is different from the partys failure to sign personally the verification. The certificate of non-forum shopping must be signed by the party, and not by counsel.[27] The certification of counsel renders the petition defective.[28] On the other hand, the requirement on verification of a pleading is a formal and not a jurisdictional requisite.[29] It is intended simply to secure an assurance that what are alleged in the pleading are true and correct and not the product of the imagination or a matter of speculation, and that the pleading is filed in good faith.[30] The party need not sign the verification. A partys representative, lawyer or any person who personally knows the truth of the facts alleged in the pleading may sign the verification.[31] We agree with the Court of Appeals that the issue on the certificate against forum shopping was merely an afterthought. Pajuyo did not call the Court of Appeals attention to this defect at the early stage of the proceedings. Pajuyo raised this procedural issue too late in the proceedings.

In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners of the contested property and that they are mere squatters. Will the defense that the parties to the ejectment case are not the owners of the disputed lot allow the courts to renounce their jurisdiction over the case? The Court of Appeals believed so and held that it would just leave the parties where they are since they are in pari delicto. We do not agree with the Court of Appeals. Ownership or the right to possess arising from ownership is not at issue in an action for recovery of possession. The parties cannot present evidence to prove ownership or right to legal possession except to prove the nature of the possession when necessary to resolve the issue of physical possession.[36] The same is true when the defendant asserts the absence of title over the property. The absence of title over the contested lot is not a ground for the courts to withhold relief from the parties in an ejectment case. The only question that the courts must resolve in ejectment proceedings is - who is entitled to the physical possession of the premises, that is, to the possession de facto and not to the possession de jure.[37] It does not even matter if a partys title to the property is questionable,[38] or when both parties intruded into public land and their applications to own the land have yet to be approved by the proper government agency.[39]Regardless of the actual condition of the title to the property, the party in peaceable quiet possession shall not be thrown out by a strong hand, violence or terror.[40] Neither is the unlawful withholding of property allowed. Courts will always uphold respect for prior possession. Thus, a party who can prove prior possession can recover such possession even against the owner himself.[41] Whatever may be the character of his possession, if he has in his favor prior possession in time, he has the security that entitles him to remain on the property until a person with a better right lawfully ejects him.[42] To repeat, the only issue that the court has to settle in an ejectment suit is the right to physical possession. In Pitargue v. Sorilla,[43] the government owned the land in dispute. The government did not authorize either the plaintiff or the defendant in the case of forcible entry case to occupy the land. The plaintiff had prior possession and had already introduced improvements on the public land. The plaintiff had a pending application for the land with the Bureau of Lands when the defendant ousted him from possession. The plaintiff filed the action of forcible entry against the defendant. The government was not a party in the case of forcible entry. The defendant questioned the jurisdiction of the courts to settle the issue of possession because while the application of the plaintiff was still pending, title remained with the government, and the Bureau of Public Lands had jurisdiction over the case. We disagreed with the defendant. We ruled that courts have jurisdiction to entertain ejectment suits even before the resolution of the application. The plaintiff, by priority of his application and of his entry, acquired prior physical possession over the public land applied for as against other private claimants. That prior physical possession enjoys legal protection against other private claimants because only a court can take away such physical possession in an ejectment case. While the Court did not brand the plaintiff and the defendant in Pitargue[44] as squatters, strictly speaking, their entry into the disputed land was illegal. Both the plaintiff and defendant entered the public land without the owners permission. Title to the land remained with the government because it had not awarded to anyone ownership of the contested

Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to Resolve the Issue of Possession Settled is the rule that the defendants claim of ownership of the disputed property will not divest the inferior court of its jurisdiction over the ejectment case.[32] Even if the pleadings raise the issue of ownership, the court may pass on such issue to determine only the question of possession, especially if the ownership is inseparably linked with the possession.[33] The adjudication on the issue of ownership is only provisional and will not bar an action between the same parties involving title to the land.[34] This doctrine is a necessary consequence of the nature of the two summary actions of ejectment, forcible entry and unlawful detainer, where the only issue for adjudication is the physical or material possession over the real property.[35]

public land. Both the plaintiff and the defendant were in effect squatting on government property. Yet, we upheld the courts jurisdiction to resolve the issue of possession even if the plaintiff and the defendant in the ejectment case did not have any title over the contested land. Courts must not abdicate their jurisdiction to resolve the issue of physical possession because of the public need to preserve the basic policy behind the summary actions of forcible entry and unlawful detainer. The underlying philosophy behind ejectment suits is to prevent breach of the peace and criminal disorder and to compel the party out of possession to respect and resort to the law alone to obtain what he claims is his.[45] The party deprived of possession must not take the law into his own hands.[46] Ejectment proceedings are summary in nature so the authorities can settle speedily actions to recover possession because of the overriding need to quell social disturbances.[47] We further explained in Pitargue the greater interest that is at stake in actions for recovery of possession. We made the following pronouncements in Pitargue: The question that is before this Court is: Are courts without jurisdiction to take cognizance of possessory actions involving these public lands before final award is made by the Lands Department, and before title is given any of the conflicting claimants? It is one of utmost importance, as there are public lands everywhere and there are thousands of settlers, especially in newly opened regions. It also involves a matter of policy, as it requires the determination of the respective authorities and functions of two coordinate branches of the Government in connection with public land conflicts. Our problem is made simple by the fact that under the Civil Code, either in the old, which was in force in this country before the American occupation, or in the new, we have a possessory action, the aim and purpose of which is the recovery of the physical possession of real property, irrespective of the question as to who has the title thereto. Under the Spanish Civil Code we had the accion interdictal, a summary proceeding which could be brought within one year from dispossession (Roman Catholic Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291); and as early as October 1, 1901, upon the enactment of the Code of Civil Procedure (Act No. 190 of the Philippine Commission) we implanted the common law action of forcible entry (section 80 of Act No. 190), the object of which has been stated by this Court to be to prevent breaches of the peace and criminal disorder which would ensue from the withdrawal of the remedy, and the reasonable hope such withdrawal would create that some advantage must accrue to those persons who, believing themselves entitled to the possession of property, resort to force to gain possession rather than to some appropriate action in the court to assert their claims. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So before the enactment of the first Public Land Act (Act No. 926) the action of forcible entry was already available in the courts of the country. So the question to be resolved is, Did the Legislature intend, when it vested the power and authority to alienate and dispose of the public lands in the Lands Department, to exclude the courts from entertaining the possessory action of forcible entry between rival claimants or occupants of any land before award thereof to any of the parties? Did Congress intend that the lands applied for, or all public lands for that matter, be removed from the jurisdiction of the judicial Branch of the Government, so that any troubles arising therefrom, or any breaches of the peace or disorders caused by rival claimants, could be inquired into only by the Lands Department to the exclusion of the courts? The answer to this question seems to us evident. The Lands

Department does not have the means to police public lands; neither does it have the means to prevent disorders arising therefrom, or contain breaches of the peace among settlers; or to pass promptly upon conflicts of possession. Then its power is clearly limited to disposition and alienation, and while it may decide conflicts of possession in order to make proper award, the settlement of conflicts of possession which is recognized in the court herein has another ultimate purpose, i.e., the protection of actual possessors and occupants with a view to the prevention of breaches of the peace. The power to dispose and alienate could not have been intended to include the power to prevent or settle disorders or breaches of the peace among rival settlers or claimants prior to the final award. As to this, therefore, the corresponding branches of the Government must continue to exercise power and jurisdiction within the limits of their respective functions. The vesting of the Lands Department with authority to administer, dispose, and alienate public lands, therefore, must not be understood as depriving the other branches of the Government of the exercise of the respective functions or powers thereon, such as the authority to stop disorders and quell breaches of the peace by the police, the authority on the part of the courts to take jurisdiction over possessory actions arising therefrom not involving, directly or indirectly, alienation and disposition. Our attention has been called to a principle enunciated in American courts to the effect that courts have no jurisdiction to determine the rights of claimants to public lands, and that until the disposition of the land has passed from the control of the Federal Government, the courts will not interfere with the administration of matters concerning the same. (50 C. J. 10931094.) We have no quarrel with this principle. The determination of the respective rights of rival claimants to public lands is different from the determination of who has the actual physical possession or occupation with a view to protecting the same and preventing disorder and breaches of the peace. A judgment of the court ordering restitution of the possession of a parcel of land to the actual occupant, who has been deprived thereof by another through the use of force or in any other illegal manner, can never be prejudicial interference with the disposition or alienation of public lands. On the other hand, if courts were deprived of jurisdiction of cases involving conflicts of possession, that threat of judicial action against breaches of the peace committed on public lands would be eliminated, and a state of lawlessness would probably be produced between applicants, occupants or squatters, where force or might, not right or justice, would rule. It must be borne in mind that the action that would be used to solve conflicts of possession between rivals or conflicting applicants or claimants would be no other than that of forcible entry. This action, both in England and the United States and in our jurisdiction, is a summary and expeditious remedy whereby one in peaceful and quiet possession may recover the possession of which he has been deprived by a stronger hand, by violence or terror; its ultimate object being to prevent breach of the peace and criminal disorder. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere possession as a fact, of physical possession, not a legal possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or right to possession is never in issue in an action of forcible entry; as a matter of fact, evidence thereof is expressly banned, except to prove the nature of the possession. (Second 4, Rule 72, Rules of Court.) With this nature of the action in mind, by no stretch of the imagination can conclusion be arrived at that the use of the remedy in the courts of justice would constitute an interference with the alienation, disposition, and control of public lands. To limit ourselves to the

case at bar can it be pretended at all that its result would in any way interfere with the manner of the alienation or disposition of the land contested? On the contrary, it would facilitate adjudication, for the question of priority of possession having been decided in a final manner by the courts, said question need no longer waste the time of the land officers making the adjudication or award. (Emphasis ours)

The Principle of Pari Delicto is not Applicable to Ejectment Cases The Court of Appeals erroneously applied the principle of pari delicto to this case. Articles 1411 and 1412 of the Civil Code [48] embody the principle of pari delicto. We explained the principle of pari delicto in these words: The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio and in pari delicto potior est conditio defedentis. The law will not aid either party to an illegal agreement. It leaves the parties where it finds them.[49] The application of the pari delicto principle is not absolute, as there are exceptions to its application. One of these exceptions is where the application of the pari delicto rule would violate well-established public policy.[50] In Drilon v. Gaurana,[51] we reiterated the basic policy behind the summary actions of forcible entry and unlawful detainer. We held that: It must be stated that the purpose of an action of forcible entry and detainer is that, regardless of the actual condition of the title to the property, the party in peaceable quiet possession shall not be turned out by strong hand, violence or terror. In affording this remedy of restitution the object of the statute is to prevent breaches of the peace and criminal disorder which would ensue from the withdrawal of the remedy, and the reasonable hope such withdrawal would create that some advantage must accrue to those persons who, believing themselves entitled to the possession of property, resort to force to gain possession rather than to some appropriate action in the courts to assert their claims. This is the philosophy at the foundation of all these actions of forcible entry and detainer which are designed to compel the party out of possession to respect and resort to the law alone to obtain what he claims is his.[52] Clearly, the application of the principle of pari delicto to a case of ejectment between squatters is fraught with danger. To shut out relief to squatters on the ground of pari delicto would openly invite mayhem and lawlessness. A squatter would oust another squatter from possession of the lot that the latter had illegally occupied, emboldened by the knowledge that the courts would leave them where they are. Nothing would then stand in the way of the ousted squatter from re-claiming his prior possession at all cost. Petty warfare over possession of properties is precisely what ejectment cases or actions for recovery of possession seek to prevent.[53]Even the owner who has title over the disputed property cannot take the law into his own hands to regain possession of his property. The owner must go to court.

Courts must resolve the issue of possession even if the parties to the ejectment suit are squatters. The determination of priority and superiority of possession is a serious and urgent matter that cannot be left to the squatters to decide. To do so would make squatters receive better treatment under the law. The law restrains property owners from taking the law into their own hands. However, the principle of pari delictoas applied by the Court of Appeals would give squatters free rein to dispossess fellow squatters or violently retake possession of properties usurped from them. Courts should not leave squatters to their own devices in cases involving recovery of possession.

Possession is the only Issue for Resolution in an Ejectment Case The case for review before the Court of Appeals was a simple case of ejectment. The Court of Appeals refused to rule on the issue of physical possession. Nevertheless, the appellate court held that the pivotal issue in this case is who between Pajuyo and Guevarra has the priority right as beneficiary of the contested land under Proclamation No. 137.[54] According to the Court of Appeals, Guevarra enjoys preferential right under Proclamation No. 137 because Article VI of the Code declares that the actual occupant or caretaker is the one qualified to apply for socialized housing. The ruling of the Court of Appeals has no factual and legal basis. First. Guevarra did not present evidence to show that the contested lot is part of a relocation site under Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the land that it declared open for disposition to bona fide residents. The records do not show that the contested lot is within the land specified by Proclamation No. 137. Guevarra had the burden to prove that the disputed lot is within the coverage of Proclamation No. 137. He failed to do so. Second. The Court of Appeals should not have given credence to Guevarras unsubstantiated claim that he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the survey the project administrator conducted, he and not Pajuyo appeared as the actual occupant of the lot. There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo allowed Guevarra to occupy the disputed property in 1985. President Aquino signed Proclamation No. 137 into law on 11 March 1986. Pajuyo made his earliest demand for Guevarra to vacate the property in September 1994. During the time that Guevarra temporarily held the property up to the time that Proclamation No. 137 allegedly segregated the disputed lot, Guevarra never applied as beneficiary of Proclamation No. 137. Even when Guevarra already knew that Pajuyo was reclaiming possession of the property, Guevarra did not take any step to comply with the requirements of Proclamation No. 137. Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and Guevarra has a pending application over the lot, courts should still assume jurisdiction and resolve the issue of possession. However, the jurisdiction of the courts would be limited to the issue of physical possession only.

In Pitargue,[55] we ruled that courts have jurisdiction over possessory actions involving public land to determine the issue of physical possession. The determination of the respective rights of rival claimants to public land is, however, distinct from the determination of who has the actual physical possession or who has a better right of physical possession.[56] The administrative disposition and alienation of public lands should be threshed out in the proper government agency.[57] The Court of Appeals determination of Pajuyo and Guevarras rights under Proclamation No. 137 was premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law. Courts should not preempt the decision of the administrative agency mandated by law to determine the qualifications of applicants for the acquisition of public lands. Instead, courts should expeditiously resolve the issue of physical possession in ejectment cases to prevent disorder and breaches of peace.[58]

property on demand. Guevarras refusal to comply with Pajuyos demand to vacate made Guevarras continued possession of the property unlawful. We do not subscribe to the Court of Appeals theory that the Kasunduan is one of commodatum. In a contract of commodatum, one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return it.[63] An essential feature of commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing belonging to another is for a certain period.[64] Thus, the bailor cannot demand the return of the thing loaned until after expiration of the period stipulated, or after accomplishment of the use for which the commodatum is constituted.[65] If the bailor should have urgent need of the thing, he may demand its return for temporary use.[66] If the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in which case the contractual relation is called a precarium.[67] Under the Civil Code, precarium is a kind of commodatum.[68] The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the property in good condition. The imposition of this obligation makes theKasunduan a contract different from a commodatum. The effects of the Kasunduan are also different from that of a commodatum. Case law on ejectment has treated relationship based on tolerance as one that is akin to a landlordtenant relationship where the withdrawal of permission would result in the termination of the lease.[69] The tenants withholding of the property would then be unlawful. This is settled jurisprudence. Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor. The obligation to deliver or to return the thing received attaches to contracts for safekeeping, or contracts of commission, administration and commodatum.[70] These contracts certainly involve the obligation to deliver or return the thing received.[71] Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land they illegally occupy. Guevarra insists that the contract is void. Guevarra should know that there must be honor even between squatters. Guevarra freely entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from it. The Kasunduan binds Guevarra. The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a right to physical possession of the contested property. The Kasunduan is the undeniable evidence of Guevarras recognition of Pajuyos better right of physical possession. Guevarra is clearly a possessor in bad faith. The absence of a contract would not yield a different result, as there would still be an implied promise to vacate. Guevarra contends that there is a pernicious evil that is sought to be avoided, and that is allowing an absentee squatter who (sic) makes (sic) a profit out of his illegal act.[72] Guevarra bases his argument on the preferential right given to the actual occupant or caretaker under Proclamation No. 137 on socialized housing. We are not convinced.

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

Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the property without paying any rent. There is also no proof that Pajuyo is a professional squatter who rents out usurped properties to other squatters. Moreover, it is for the proper government agency to decide who between Pajuyo and Guevarra qualifies for socialized housing. The only issue that we are addressing is physical possession. Prior possession is not always a condition sine qua non in ejectment.[73] This is one of the distinctions between forcible entry and unlawful detainer.[74] In forcible entry, the plaintiff is deprived of physical possession of his land or building by means of force, intimidation, threat, strategy or stealth. Thus, he must allege and prove prior possession.[75] But in unlawful detainer, the defendant unlawfully withholds possession after the expiration or termination of his right to possess under any contract, express or implied. In such a case, prior physical possession is not required.[76] Pajuyos withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarras transient right to possess the property ended as well. Moreover, it was Pajuyo who was in actual possession of the property because Guevarra had to seek Pajuyos permission to temporarily hold the property and Guevarra had to follow the conditions set by Pajuyo in the Kasunduan. Control over the property still rested with Pajuyo and this is evidence of actual possession. Pajuyos absence did not affect his actual possession of the disputed property. Possession in the eyes of the law does not mean that a man has to have his feet on every square meter of the ground before he is deemed in possession.[77] One may acquire possession not only by physical occupation, but also by the fact that a thing is subject to the action of ones will.[78] Actual or physical occupation is not always necessary.[79]

Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on the property until a person who has title or a better right lawfully ejects him. Guevarra is certainly not that person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from introducing evidence and presenting arguments before the proper administrative agency to establish any right to which they may be entitled under the law.[81] In no way should our ruling in this case be interpreted to condone squatting. The ruling on the issue of physical possession does not affect title to the property nor constitute a binding and conclusive adjudication on the merits on the issue of ownership.[82] The owner can still go to court to recover lawfully the property from the person who holds the property without legal title. Our ruling here does not diminish the power of government agencies, including local governments, to condemn, abate, remove or demolish illegal or unauthorized structures in accordance with existing laws.

Attorneys Fees and Rentals The MTC and RTC failed to justify the award of P3,000 attorneys fees to Pajuyo. Attorneys fees as part of damages are awarded only in the instances enumerated in Article 2208 of the Civil Code.[83] Thus, the award of attorneys fees is the exception rather than the rule.[84]Attorneys fees are not awarded every time a party prevails in a suit because of the policy that no premium should be placed on the right to litigate.[85] We therefore delete the attorneys fees awarded to Pajuyo. We sustain the P300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra did not dispute this factual finding of the two courts. We find the amount reasonable compensation to Pajuyo. The P300 monthly rental is counted from the last demand to vacate, which was on 16 February 1995. WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated 14 December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The Decision dated 11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil Case No. Q-96-26943, affirming the Decision dated 15 December 1995 of the Metropolitan Trial Court of Quezon City, Branch 31 in Civil Case No. 12432, is REINSTATED with MODIFICATION. The award of attorneys fees is deleted. No costs. SO ORDERED.

Ruling on Possession Does not Bind Title to the Land in Dispute We are aware of our pronouncement in cases where we declared that squatters and intruders who clandestinely enter into titled government property cannot, by such act, acquire any legal right to said property.[80] We made this declaration because the person who had title or who had the right to legal possession over the disputed property was a party in the ejectment suit and that party instituted the case against squatters or usurpers. In this case, the owner of the land, which is the government, is not a party to the ejectment case. This case is between squatters. Had the government participated in this case, the courts could have evicted the contending squatters, Pajuyo and Guevarra. Since the party that has title or a better right over the property is not impleaded in this case, we cannot evict on our own the parties. Such a ruling would discourage squatters from seeking the aid of the courts in settling the issue of physical possession. Stripping both the plaintiff and the defendant of possession just because they are squatters would have the same dangerous implications as the application of the principle ofpari delicto. Squatters would then rather settle the issue of physical possession among themselves than seek relief from the courts if the plaintiff and defendant in the ejectment case would both stand to lose possession of the disputed property. This would subvert the policy underlying actions for recovery of possession.

[G.R. No. 115324. February 19, 2003] PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK), petitioner, vs. HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents. DECISION CALLEJO, SR., J.: This is a petition for review on certiorari of the Decision[1] of the Court of Appeals dated June 25, 1991 in CA-G.R. CV No. 11791 and of its Resolution[2] dated May 5, 1994, denying the motion for reconsideration of said decision filed by petitioner Producers Bank of the Philippines. Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela Marketing and Services (Sterela for brevity). Specifically, Sanchez asked private respondent to deposit in a bank a certain amount of money in the bank account of Sterela for purposes of its incorporation. She assured private respondent that he could withdraw his money from said account within a months time. Private respondent asked Sanchez to bring Doronilla to their house so that they could discuss Sanchezs request.[3] On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronillas private secretary, met and discussed the matter. Thereafter, relying on the assurances and representations of Sanchez and Doronilla, private respondent issued a check in the amount of Two Hundred Thousand Pesos (P200,000.00) in favor of Sterela. Private respondent instructed his wife, Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account in the name of Sterela in the Buendia, Makati branch of Producers Bank of the Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went to the bank to deposit the check. They had with them an authorization letter from Doronilla authorizing Sanchez and her companions, in coordination with Mr. Rufo Atienza, to open an account for Sterela Marketing Services in the amount of P200,000.00. In opening the account, the authorized signatories were Inocencia Vives and/or Angeles Sanchez. A passbook for Savings Account No. 10-1567 was thereafter issued to Mrs. Vives.[4] Subsequently, private respondent learned that Sterela was no longer holding office in the address previously given to him. Alarmed, he and his wife went to the Bank to verify if their money was still intact. The bank manager referred them to Mr. Rufo Atienza, the assistant manager, who informed them that part of the money in Savings Account No. 10-1567 had been withdrawn by Doronilla, and that only P90,000.00 remained therein. He likewise told them that Mrs. Vives could not withdraw said remaining amount because it had to answer for some postdated checks issued by Doronilla. According to Atienza, after Mrs. Vives and Sanchez opened Savings Account No. 10-1567, Doronilla opened Current Account No. 10-0320 for Sterela and authorized the Bank to debit Savings Account No. 101567 for the amounts necessary to cover overdrawings in Current Account No. 10-0320. In opening said current account, Sterela, through Doronilla, obtained a loan of P175,000.00 from the Bank. To cover payment thereof, Doronilla issued three postdated checks, all of which were dishonored. Atienza also said that Doronilla could assign or withdraw the money in Savings Account No. 10-1567 because he was the sole proprietor of Sterela.[5]

Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he received a letter from Doronilla, assuring him that his money was intact and would be returned to him. On August 13, 1979, Doronilla issued a postdated check for Two Hundred Twelve Thousand Pesos (P212,000.00) in favor of private respondent. However, upon presentment thereof by private respondent to the drawee bank, the check was dishonored. Doronilla requested private respondent to present the same check on September 15, 1979 but when the latter presented the check, it was again dishonored.[6] Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the return of his clients money. Doronilla issued another check for P212,000.00 in private respondents favor but the check was again dishonored for insufficiency of funds.[7] Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was docketed as Civil Case No. 44485. He also filed criminal actions against Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez passed away on March 16, 1985 while the case was pending before the trial court. On October 3, 1995, the RTC of Pasig, Branch 157, promulgated its Decision in Civil Case No. 44485, the dispositive portion of which reads: IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J. Doronila, Estrella Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin Vives jointly and severally (a) the amount of P200,000.00, representing the money deposited, with interest at the legal rate from the filing of the complaint until the same is fully paid; (b) the sum of P50,000.00 for moral damages and a similar amount for exemplary damages; (c) (d) the amount of P40,000.00 for attorneys fees; and the costs of the suit.

SO ORDERED.[8] Petitioner appealed the trial courts decision to the Court of Appeals. In its Decision dated June 25, 1991, the appellate court affirmed in toto the decision of the RTC.[9] It likewise denied with finality petitioners motion for reconsideration in its Resolution dated May 5, 1994.[10] On June 30, 1994, petitioner filed the present petition, arguing that I. THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION BETWEEN THE DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN AND NOT ACCOMMODATION; II. THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONERS BANK MANAGER, MR. RUFO ATIENZA,

CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should be PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER SHOULD BE HELD LIABLE UNDER THE PRINCIPLE OF NATURAL JUSTICE; III. THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF THE REGIONAL TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS THE FINDINGS OF THE REGIONAL TRIAL COURT WERE BASED ON A MISAPPREHENSION OF FACTS; IV. THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION IN SALUDARES VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR ACTS COMMITTED BY AN EMPLOYEE IS APPLICABLE; V. THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE LOWER COURT THAT HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER DEFENDANTS FOR THE AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS ACCOUNT DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00 FOR ATTORNEYS FEES AND THE COSTS OF SUIT.[11] Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto on September 25, 1995. The Court then required private respondent to submit a rejoinder to the reply. However, said rejoinder was filed only on April 21, 1997, due to petitioners delay in furnishing private respondent with copy of the reply[12] and several substitutions of counsel on the part of private respondent.[13] On January 17, 2001, the Court resolved to give due course to the petition and required the parties to submit their respective memoranda.[14] Petitioner filed its memorandum on April 16, 2001 while private respondent submitted his memorandum on March 22, 2001. Petitioner contends that the transaction between private respondent and Doronilla is a simple loan (mutuum) since all the elements of amutuum are present: first, what was delivered by private respondent to Doronilla was money, a consumable thing; and second, the transaction was onerous as Doronilla was obliged to pay interest, as evidenced by the check issued by Doronilla in the amount of P212,000.00, or P12,000 more than what private respondent deposited in Sterelas bank account.[15] Moreover, the fact that private respondent sued his good friend Sanchez for his failure to recover his money from Doronilla shows that the transaction was not merely gratuitous but had a business angle to it. Hence, petitioner argues that it cannot be held liable for the return of private respondents P200,000.00 because it is not privy to the transaction between the latter and Doronilla.[16] It argues further that petitioners Assistant Manager, Mr. Rufo Atienza, could not be faulted for allowing Doronilla to withdraw from the savings account of Sterela since the latter was the sole proprietor of said company. Petitioner asserts that Doronillas May 8, 1979 letter addressed to the bank, authorizing Mrs. Vives and Sanchez to open a savings account for Sterela, did not contain any authorization for these two to withdraw from

said account. Hence, the authority to withdraw therefrom remained exclusively with Doronilla, who was the sole proprietor of Sterela, and who alone had legal title to the savings account.[17] Petitioner points out that no evidence other than the testimonies of private respondent and Mrs. Vives was presented during trial to prove that private respondent deposited his P200,000.00 in Sterelas account for purposes of its incorporation.[18] Hence, petitioner should not be held liable for allowing Doronilla to withdraw from Sterelas savings account. Petitioner also asserts that the Court of Appeals erred in affirming the trial courts decision since the findings of fact therein were not accord with the evidence presented by petitioner during trial to prove that the transaction between private respondent and Doronilla was a mutuum, and that it committed no wrong in allowing Doronilla to withdraw from Sterelas savings account.[19] Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable for the actual damages suffered by private respondent, and neither may it be held liable for moral and exemplary damages as well as attorneys fees.[20] Private respondent, on the other hand, argues that the transaction between him and Doronilla is not a mutuum but an accommodation,[21]since he did not actually part with the ownership of his P200,000.00 and in fact asked his wife to deposit said amount in the account of Sterela so that a certification can be issued to the effect that Sterela had sufficient funds for purposes of its incorporation but at the same time, he retained some degree of control over his money through his wife who was made a signatory to the savings account and in whose possession the savings account passbook was given.[22] He likewise asserts that the trial court did not err in finding that petitioner, Atienzas employer, is liable for the return of his money. He insists that Atienza, petitioners assistant manager, connived with Doronilla in defrauding private respondent since it was Atienza who facilitated the opening of Sterelas current account three days after Mrs. Vives and Sanchez opened a savings account with petitioner for said company, as well as the approval of the authority to debit Sterelas savings account to cove r any overdrawings in its current account.[23] There is no merit in the petition. At the outset, it must be emphasized that only questions of law may be raised in a petition for review filed with this Court. The Court has repeatedly held that it is not its function to analyze and weigh all over again the evidence presented by the parties during trial.[24] The Courts jurisdiction is in principle limited to reviewing errors of law that might have been committed by the Court of Appeals.[25] Moreover, factual findings of courts, when adopted and confirmed by the Court of Appeals, are final and conclusive on this Court unless these findings are not supported by the evidence on record.[26] There is no showing of any misapprehension of facts on the part of the Court of Appeals in the case at bar that would require this Court to review and overturn the factual findings of that court, especially since the conclusions of fact of the Court of Appeals and the trial court are not only consistent but are also amply supported by the evidence on record. No error was committed by the Court of Appeals when it ruled that the transaction between private respondent and Doronilla was acommodatum and not a mutuum. A circumspect examination of the records reveals that the transaction between them was a commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise:

By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as money, the contract would be amutuum. However, there are some instances where a commodatum may have for its object a consumable thing. Article 1936 of the Civil Code provides: Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is a commodatum and not a mutuum. The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual character of a contract.[27] In case of doubt, the contemporaneous and subsequent acts of the parties shall be considered in such determination.[28] As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private respondent agreed to deposit his money in the savings account of Sterela specifically for the purpose of making it appear that said firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned within thirty (30) days.[29] Private respondent merely accommodated Doronilla by lending his money without consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the transaction that the money would not be removed from Sterelas savings account and would be returned to private respondent after thirty (30) days. Doronillas attempts to return to private respondent the amount of P200,000.00 which the latter deposited in Sterelas account together with an additional P12,000.00, allegedly representing interest on the mutuum, did not convert the transaction from a commodatum into a mutuumbecause such was not the intent of the parties and because the additional P12,000.00 corresponds to the fruits of the lending of theP200,000.00. Article 1935 of the Civil Code expressly states that [t]he bailee in commodatum acquires the use of the thing loaned but not its fruits. Hence, it was only proper for Doronilla to remit to private respondent the interest accruing to the latters money deposited with petitioner. Neither does the Court agree with petitioners contention that it is not solidarily liable for the return of private respondents money because it was not privy to the transaction

between Doronilla and private respondent. The nature of said transaction, that is, whether it is a mutuum or acommodatum, has no bearing on the question of petitioners liability for the return of private respondents money because the factual circumstances of the case clearly show that petitioner, through its employee Mr. Atienza, was partly responsible for the loss of private respondents money and is liable for its restitution. Petitioners rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of Sterela for Savings Account No. 10-1567 expressly states that 2. Deposits and withdrawals must be made by the depositor personally or upon his written authority duly authenticated, and neither a deposit nor a withdrawal will be permitted except upon the production of the depositor savings bank book in which will be entered by the Bank the amount deposited or withdrawn.[30] Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom even without presenting the passbook (which Atienza very well knew was in the possession of Mrs. Vives), not just once, but several times. Both the Court of Appeals and the trial court found that Atienza allowed said withdrawals because he was party to Doronillas scheme of defrauding private respondent: X X X

But the scheme could not have been executed successfully without the knowledge, help and cooperation of Rufo Atienza, assistant manager and cashier of the Makati (Buendia) branch of the defendant bank. Indeed, the evidence indicates that Atienza had not only facilitated the commission of the fraud but he likewise helped in devising the means by which it can be done in such manner as to make it appear that the transaction was in accordance with banking procedure. To begin with, the deposit was made in defendants Buendia branch precisely because Atienza was a key officer therein. The records show that plaintiff had suggested that the P200,000.00 be deposited in his bank, the Manila Banking Corporation, but Doronilla and Dumagpi insisted that it must be in defendants branch in Makati for it will be easier for them to get a certification. In fact before he was introduced to plaintiff, Doronilla had already prepared a letter addressed to the Buendia branch manager authorizing Angeles B. Sanchez and company to open a savings account for Sterela in the amount of P200,000.00, as per coordination with Mr. Rufo Atienza, Assistant Manager of the Bank x x x (Exh. 1). This is a clear manifestation that the other defendants had been in consultation with Atienza from the inception of the scheme. Significantly, there were testimonies and admission that Atienza is the brother-in-law of a certain Romeo Mirasol, a friend and business associate of Doronilla. Then there is the matter of the ownership of the fund. Because of the coordination between Doronilla and Atienza, the latter knew before hand that the money deposited did not belong to Doronilla nor to Sterela. Aside from such foreknowledge, he was explicitly told by Inocencia Vives that the money belonged to her and her husband and the deposit was merely to accommodate Doronilla. Atienza even declared that the money came from Mrs. Vives.

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

the act complained of was committed.[32] Case law in the United States of America has it that a corporation that entrusts a general duty to its employee is responsible to the injured party for damages flowing from the employees wrongful act done in the course of his general authority, even though in doing such act, the employee may have failed in its duty to the employer and disobeyed the latters instructions.[33] There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not deny that Atienza was acting within the scope of his authority as Assistant Branch Manager when he assisted Doronilla in withdrawing funds from Sterelas Savings Account No. 10-1567, in which account private respondents money was deposited, and in transferring the money withdrawn to Sterelas Current Account with petitioner. Atienzas acts of helping Doronilla, a customer of the petitioner, were obviously done in furtherance of petitioners interests[34] even though in the process, Atienza violated some of petitioners rules such as those stipulated in its savings account passbook.[35] It was established that the transfer of funds from Sterelas savings account to its current account could not have been accomplished by Doronilla without the invaluable assistance of Atienza, and that it was their connivance which was the cause of private respondents loss. The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil Code, petitioner is liable for private respondents loss and is solidarily liable with Doronilla and Dumagpi for the return of the P200,000.00 since it is clear that petitioner failed to prove that it exercised due diligence to prevent the unauthorized withdrawals from Sterelas savings account, and that it was not negligent in the selection and supervision of Atienza. Accordingly, no error was committed by the appellate court in the award of actual, moral and exemplary damages, attorneys fees and costs of suit to private respondent. WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of Appeals are AFFIRMED. SO ORDERED.

G.R. No. L-8321

October 14, 1913

ALEJANDRA MINA, ET AL., plaintiffs-appellants, vs. RUPERTA PASCUAL, ET AL., defendants-appellees.

So, the warehouse, together with the lot on which it stands, was sold to Cu Joco, the other defendant in this case, for the price mentioned. The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the court decided it by holding that this land belonged to the owner of the warehouse which had been built thereon thirty years before. The plaintiffs appealed and this court reversed the judgment of the lower court and held that the appellants were the owners of the lot in question. 1 When the judgment became final and executory, a writ of execution issued and the plaintiffs were given possession of the lot; but soon thereafter the trial court annulled this possession for the reason that it affected Cu Joco, who had not been a party to the suit in which that writ was served. It was then that the plaintiffs commenced the present action for the purpose of having the sale of the said lot declared null and void and of no force and effect. An agreement was had ad to the facts, the ninth paragraph of which is as follows: 9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the Supreme Court which found for them by holding that they are the owners of the lot in question, although there existed and still exists a commodatum by virtue of which the guardianship (meaning the defendants) had and has the use, and the plaintiffs the ownership, of the property, with no finding concerning the decree of the lower court that ordered the sale. The obvious purport of the cause "although there existed and still exists a commodatum," etc., appears to be that it is a part of the decision of the Supreme Court and that, while finding the plaintiffs to be the owners of the lot, we recognized in principle the existence of a commodatum under which the defendants held the lot. Nothing could be more inexact. Possibly, also, the meaning of that clause is that, notwithstanding the finding made by the Supreme Court that the plaintiffs were the owners, these former and the defendants agree that there existed, and still exists, a commodatum, etc. But such an agreement would not affect the truth of the contents of the decision of this court, and the opinions held by the litigants in regard to this point could have no bearing whatever on the present decision. Nor did the decree of the lower court that ordered the sale have the least influence in our previous decision to require our making any finding in regard thereto, for, with or without that decree, the Supreme Court had to decide the ownership of the lot consistently with its titles and not in accordance with the judicial acts or proceedings had prior to the setting up of the issue in respect to the ownership of the property that was the subject of the judicial decree. What is essentially pertinent to the case is the fact that the defendant agree that the plaintiffs have the ownership, and they themselves only the use, of the said lot.

ARELLANO, C.J.: Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired during his lifetime, on March 12, 1874, a lot in the center of the town of Laoag, the capital of the Province of Ilocos Norte, the property having been awarded to him through its purchase at a public auction held by the alcalde mayor of that province. The lot has a frontage of 120 meters and a depth of 15. Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of the said lot, embracing 14 meters of its frontage by 11 meters of its depth. Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandro Mina, et al., were recognized without discussion as his heirs. Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta Pascual were recognized likes without discussion, though it is not said how, and consequently are entitled to the said building, or rather, as Ruperta Pascual herself stated, to only six-sevenths of one-half of it, the other half belonging, as it appears, to the plaintiffs themselves, and the remaining one-seventh of the first one-half to the children of one of the plaintiffs, Elena de Villanueva. The fact is that the plaintiffs and the defendants are virtually, to all appearance, the owners of the warehouse; while the plaintiffs are undoubtedly, the owners of the part of the lot occupied by that building, as well as of the remainder thereof. This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the guardian of her minor children, the herein defendants, petitioned the Curt of First Instance of Ilocos Norte for authorization to sell "the six-sevenths of the one-half of the warehouse, of 14 by 11 meters, together with its lot." The plaintiffs that is Alejandra Mina, et al. opposed the petition of Ruperta Pascual for the reason that the latter had included therein the lot occupied by the warehouse, which they claimed was their exclusive property. All this action was taken in a special proceeding in re guardianship. The plaintiffs did more than oppose Pascual's petition; they requested the court, through motion, to decide the question of the ownership of the lot before it pass upon the petition for the sale of the warehouse. But the court before determining the matter of the ownership of the lot occupied by the warehouse, ordered the sale of this building, saying: While the trial continues with respect to the ownership of the lot, the court orders the sale at public auction of the said warehouse and of the lot on which it is built, with the present boundaries of the land and condition of the building, at a price of not less than P2,890 Philippine currency . . . .

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 sixsevenths 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.

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. TORRES, J.: On the 1st of September, 1906, Felix de los Santos brought suit against Agustina Jarra, the administratrix of the estate of Magdaleno Jimenea, alleging that in the latter part of 1901 Jimenea borrowed and obtained from the plaintiff ten first-class carabaos, to be used at the animal-power mill of his hacienda during the season of 1901-2, without recompense or remuneration whatever for the use thereof, under the sole condition that they should be returned to the owner as soon as the work at the mill was terminated; that Magdaleno Jimenea, however, did not return the carabaos, notwithstanding the fact that the plaintiff claimed their return after the work at the mill was finished; that Magdaleno Jimenea died on the 28th of October, 1904, and the defendant herein was appointed by the Court of First Instance of Occidental Negros administratrix of his estate and she took over the administration of the same and is still performing her duties as such administratrix; that the plaintiff presented his claim to the commissioners of the estate of Jimenea, within the legal term, for the return of the said ten carabaos, but the said commissioners rejected his claim as appears in their report; therefore, the plaintiff prayed that judgment be entered against the defendant as administratrix of the estate of the deceased, ordering her to return the ten firstclass 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 sonin-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 lastmentioned 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.

G.R. No. L-17474

October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. JOSE V. BAGTAS, defendant, FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V. Bagtas, petitioner-appellant.

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

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

. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus the breeding fees in the amount of P626.17 with interest on both sums of (at) the legal rate from the filing of this complaint and costs. On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18 October and issued on

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event; The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the

bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had each an appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability. The appellant's contention that the demand or prayer by the appellee for the return of the bull or the payment of its value being a money claim should be presented or filed in the intestate proceedings of the defendant who died on 23 October 1951, is not altogether without merit. However, the claim that his civil personality having ceased to exist the trial court lost jurisdiction over the case against him, is untenable, because section 17 of Rule 3 of the Rules of Court provides that After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal representative of the deceased to appear and to be substituted for the deceased, within a period of thirty (30) days, or within such time as may be granted. ... and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule 3 which provides that Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court promptly of such death . . . and to give the name and residence of the executory administrator, guardian, or other legal representative of the deceased . . . . The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had been issue letters of administration of the estate of the late Jose Bagtas and that "all persons having claims for monopoly against the deceased Jose V. Bagtas, arising from contract express or implied, whether the same be due, not due, or contingent, for funeral expenses and expenses of the last sickness of the said decedent, and judgment for monopoly against him, to file said claims with the Clerk of this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the date of the first publication of this order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the said deceased," is not a notice to the court and the appellee who were to be notified of the defendant's death in accordance with the above-quoted rule, and there was no reason for such failure to notify, because the attorney who appeared for the defendant was the same who represented the administratrix in the special proceedings instituted for the administration and settlement of his estate. The appellee or its attorney or representative could not be expected to know of the death of the defendant or of the administration proceedings of his estate instituted in another court that if the attorney for the deceased defendant did not notify the plaintiff or its attorney of such death as required by the rule. As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is only liable for the sum of P859.63, the value of the bull which has not been returned to the appellee, because it was killed while in the custody of the administratrix of his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959 to the motion filed on 7 January 1959 by the appellant for the quashing of the writ of execution.

Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the probate court for payment by the appellant, the administratrix appointed by the court. ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs.

G.R. No. 80294-95 September 21, 1988 CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner, vs. COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.

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

... The documents and records presented reveal that the whole controversy started when the defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed with the Court of First Instance of Baguio Benguet on September 5, 1962 an application for registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of the Catholic Church building, convents, high school building, school gymnasium, school dormitories, social hall, stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto. After trial on the merits, the land registration court promulgated its Decision, dated November 17, 1965, confirming the registrable title of VICAR to Lots 1, 2, 3, and 4. The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607) appealed the decision of the land registration court to the then Court of Appeals, docketed as CA-G.R. No. 38830-R. The Court of Appeals rendered its decision, dated May 9, 1977, reversing the decision of the land registration court and dismissing the VICAR's application as to Lots 2 and 3, the lots claimed by the two sets of oppositors in the land registration case (and two sets of plaintiffs in the two cases now at bar), the first lot being presently occupied by the convent and the second by the women's dormitory and the sister's convent.

On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court of Appeals to order the registration of Lot 3 in the names of the Heirs of Egmidio Octaviano, and on May 17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed their motion for reconsideration praying that both Lots 2 and 3 be ordered registered in the names of the Heirs of Juan Valdez and Pacita Valdez. On August 12,1977, the Court of Appeals denied the motion for reconsideration filed by the Heirs of Juan Valdez on the ground that there was "no sufficient merit to justify reconsideration one way or the other ...," and likewise denied that of the Heirs of Egmidio Octaviano. Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the decision of the Court of Appeals dismissing his (its) application for registration of Lots 2 and 3, docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic of the Mountain Province vs. Court of Appeals and Heirs of Egmidio Octaviano.' From the denial by the Court of Appeals of their motion for reconsideration the Heirs of Juan Valdez and Pacita Valdez, on September 8, 1977, filed with the Supreme Court a petition for review, docketed as G.R. No. L46872, entitled, Heirs of Juan Valdez and Pacita Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio Octaviano and Annable O. Valdez. On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of VICAR on the one hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for lack of merit. Upon the finality of both Supreme Court resolutions in G.R. No.

L-46832 and G.R. No. L46872, the Heirs of Octaviano filed with the then Court of First Instance of Baguio, Branch II, a Motion For Execution of Judgment praying that the Heirs of Octaviano be placed in possession of Lot 3. The Court, presided over by Hon. Salvador J. Valdez, on December 7, 1978, denied the motion on the ground that the Court of Appeals decision in CA-G.R. No. 38870 did not grant the Heirs of Octaviano any affirmative relief. On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petitioner for certiorari and mandamus, docketed as CAG.R. No. 08890-R, entitled Heirs of Egmidio Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its decision dated May 16, 1979, the Court of Appeals dismissed the petition. It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed Civil Case No. 3607 (419) on July 24, 1979, for recovery of possession of Lot 3; and the Heirs of Juan Valdez filed Civil Case No. 3655 (429) on September 24, 1979, likewise for recovery of possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.). In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano presented one (1) witness, Fructuoso Valdez, who testified on the alleged ownership of the land in question (Lot 3) by their predecessorin-interest, Egmidio Octaviano (Exh. C ); his written demand (Exh. BB-4 ) to defendant Vicar for the return of the land to them; and the reasonable rentals for the use of the land at P10,000.00 per month. On the other hand, defendant Vicar presented the Register of Deeds for the Province of Benguet, Atty. Nicanor Sison, who testified that the land in question is not covered by any title in the name of Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed with the testimony of Mons.William Brasseur when the plaintiffs admitted that the witness if called to the witness stand, would testify that defendant Vicar has been in possession of Lot

3, for seventy-five (75) years continuously and peacefully and has constructed permanent structures thereon. In Civil Case No. 3655, the parties admitting that the material facts are not in dispute, submitted the case on the sole issue of whether or not the decisions of the Court of Appeals and the Supreme Court touching on the ownership of Lot 2, which in effect declared the plaintiffs the owners of the land constitute res judicata. In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up the defense of ownership and/or long and continuous possession of the two lots in question since this is barred by prior judgment of the Court of Appeals in CA-G.R. No. 038830R under the principle of res judicata. Plaintiffs contend that the question of possession and ownership have already been determined by the Court of Appeals (Exh. C, Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme Court (Exh. 1, Minute Resolution of the Supreme Court). On his part, defendant Vicar maintains that the principle of res judicata would not prevent them from litigating the issues of long possession and ownership because the dispositive portion of the prior judgment in CA-G.R. No. 038830-R merely dismissed their application for registration and titling of lots 2 and 3. Defendant Vicar contends that only the dispositive portion of the decision, and not its body, is the controlling pronouncement of the Court of Appeals. 2 The alleged errors committed by respondent Court of Appeals according to petitioner are as follows: 1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA; 2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED; 3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND OCTAVIANO; 4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER; 5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND THE PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906; 6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE IS A PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL

CODE FOR ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS; 7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830 WAS AFFIRMED BY THE SUPREME COURT; 8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951; 9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE; 10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3 The petition is bereft of merit. Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149, when it clearly held that it was in agreement with the findings of the trial court that the Decision of the Court of Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership of Lots 2 and 3, declared that the said Court of Appeals Decision CA-G.R. No. 38830-R) did not positively declare private respondents as owners of the land, neither was it declared that they were not owners of the land, but it held that the predecessors of private respondents were possessors of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower in commodatum up to 1951, when it repudiated the trust by declaring the properties in its name for taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept of owner only for eleven years. Ordinary acquisitive prescription requires possession for ten years, but always with just title. Extraordinary acquisitive prescription requires 30 years. 4 On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We see no error in respondent appellate court's ruling that said findings are res judicata between the parties. They can no longer be altered by presentation of evidence because those issues were resolved with finality a long time ago. To ignore the principle of res judicata would be to open the door to endless litigations by continuous determination of issues without end. An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R. No. 38830-R, shows that it reversed the trial court's Decision 6 finding petitioner to be entitled to register the lands in question under its ownership, on its evaluation of evidence and conclusion of facts. The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for ordinary acquisitive prescription because of the absence of just title. The appellate court did not believe the findings of the trial court that Lot 2 was acquired from Juan

Valdez by purchase and Lot 3 was acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no documentary evidence to support the same and the alleged purchases were never mentioned in the application for registration. By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both Valdez and Octaviano had Free Patent Application for those lots since 1906. The predecessors of private respondents, not petitioner Vicar, were in possession of the questioned lots since 1906. There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not Lots 2 and 3, because the buildings standing thereon were only constructed after liberation in 1945. Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in 1951. The improvements oil Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was appointed only in 1947, the church was constructed only in 1951 and the new convent only 2 years before the trial in 1963. When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only in 1962. Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title. The Court of Appeals found that the predecessors-in-interest and private respondents were possessors under claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee in commodatum; and that the adverse claim and repudiation of trust came only in 1951. We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-R. Its findings of fact have become incontestible. This Court declined to review said decision, thereby in effect, affirming it. It has become final and executory a long time ago. Respondent appellate court did not commit any reversible error, much less grave abuse of discretion, when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is governing, under the principle of res judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CA-G.R. No. 05149. The facts as supported by evidence established in that decision may no longer be altered. WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals is AFFIRMED, with costs against petitioner. SO ORDERED.

G.R. No. L-46240

November 3, 1939

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

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

[G.R. No. 133632. February 15, 2002] BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and ALS MANAGEMENT & DEVELOPMENT CORPORATION, respondents. DECISION QUISUMBING, J.: This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals and its resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the judgment of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against private respondents ALS Management and Development Corporation and Antonio K. Litonjua,[1] consolidated with (b) Civil Case No. 52093, for damages with prayer for the issuance of a writ of preliminary injunction by the private respondents against said petitioner. The trial court had held that private respondents were not in default in the payment of their monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in bad faith. It awarded private respondents the amount of P300,000 for moral damages, P50,000 for exemplary damages, and P50,000 for attorneys fees and expenses for litigation. It likewise dismissed the foreclosure suit for being premature. The facts are as follows: Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a house on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to secure the loan. Sometime in 1980, Roa sold the house and lot to private respondents ALS and Antonio Litonjua forP850,000. They paid P350,000 in cash and assumed the P500,000 balance of Roas indebtedness with AIDC. The latter, however, was not willing to extend the old interest rate to private respondents and proposed to grant them a new loan of P500,000 to be applied to Roas debt and secured by the same property, at an interest rate of 20% per annum and service fee of 1% per annum on the outstanding principal balance payable within ten years in equal monthly amortization of P9,996.58 and penalty interest at the rate of 21% per annum per day from the date the amortization became due and payable. Consequently, in March 1981, private respondents executed a mortgage deed containing the above stipulations with the provision that payment of the monthly amortization shall commence on May 1, 1981. On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC the sum of P190,601.35. This reduced Roas principal balance to P457,204.90 which, in turn, was liquidated when BPIIC applied thereto the proceeds of private respondents loan of P500,000. On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be what was left of their loan after full payment of Roas loan. In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to Four Hundred Seventy Five Thousand Five

Hundred Eighty Five and 31/100 Pesos (P475,585.31). A notice of sheriffs sale was published on August 13, 1984. On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged, among others, that they were not in arrears in their payment, but in fact made an overpayment as of June 30, 1984. They maintained that they should not be made to pay amortization before the actual release of the P500,000 loan in August and September 1982. Further, out of the P500,000 loan, only the total amount ofP464,351.77 was released to private respondents. Hence, applying the effects of legal compensation, the balance of P35,648.23 should be applied to the initial monthly amortization for the loan. On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093, thus: WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development Corporation and Antonio K. Litonjua and against BPI Investment Corporation, holding that the amount of loan granted by BPI to ALS and Litonjua was only in the principal sum of P464,351.77, with interest at 20% plus service charge of 1% per annum, payable on equal monthly and successive amortizations at P9,283.83 for ten (10) years or one hundred twenty (120) months. The amortization schedule attached as Annex A to the Deed of Mortgage is correspondingly reformed as aforestated. The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their publication in a newspaper of general circulation as defaulting debtors, and therefore orders BPI to pay ALS and Litonjua the following sums: a) P300,000.00 for and as moral damages; b) P50,000.00 as and for exemplary damages; c) P50,000.00 as and for attorneys fees and expenses of litigation. The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature. Costs against BPI. SO ORDERED.[2] Both parties appealed to the Court of Appeals. However, private respondents appeal was dismissed for non-payment of docket fees. On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion reads: WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto. SO ORDERED.[3] In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery of the object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only on September 13, 1982, the date when BPIIC released the purported balance of the P500,000 loan after deducting therefrom the value of Roas indebtedness. Thus,

payment of the monthly amortization should commence only a month after the said date, as can be inferred from the stipulations in the contract. This, despite the express agreement of the parties that payment shall commence on May 1, 1981. From October 1982 to June 1984, the total amortization due was only P194,960.43. Evidence showed that private respondents had an overpayment, because as of June 1984, they already paid a total amount of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the mortgage and cause the publication in newspapers concerning private respondents delinquency in the payment of their loan. This fact constituted sufficient ground for moral damages in favor of private respondents. The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition, where BPIIC submits for resolution the following issues: I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT OF THE RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122. II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY DAMAGES AND ATTORNEYS FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED TO THE RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120 SCRA 707. On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a simple loan is perfected upon the delivery of the object of the contract, the loan contract in this case was perfected only on September 13, 1982. Petitioner claims that a contract of loan is a consensual contract, and a loan contract is perfected at the time the contract of mortgage is executed conformably with our ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In the present case, the loan contract was perfected on March 31, 1981, the date when the mortgage deed was executed, hence, the amortization and interests on the loan should be computed from said date. Petitioner also argues that while the documents showed that the loan was released only on August 1982, the loan was actually released onMarch 31, 1981, when BPIIC issued a cancellation of mortgage of Frank Roas loan. This finds support in the registration on March 31, 1981 of the Deed of Absolute Sale executed by Roa in favor of ALS, transferring the title of the property to ALS, and ALS executing the Mortgage Deed in favor of BPIIC. Moreover, petitioner claims, the delay in the release of the loan should be attributed to private respondents. As BPIIC only agreed to extend a P500,000 loan, private respondents were required to reduce Frank Roas loan below said amount. According to petitioner, private respondents were only able to do so in August 1982. In their comment, private respondents assert that based on Article 1934 of the Civil Code,[4] a simple loan is perfected upon the delivery of the object of the contract, hence a real contract. In this case, even though the loan contract was signed on March 31, 1981, it was perfected only on September 13, 1982, when the full loan was released to private respondents. They submit that petitioner misread Bonnevie. To give meaning to Article 1934, according to private respondents, Bonnevie must be construed to mean that the contract to extend the loan was perfected on March 31, 1981 but the contract of loan itself was only perfected upon the delivery of the full loan to private respondents onSeptember 13, 1982.

Private respondents further maintain that even granting, arguendo, that the loan contract was perfected on March 31, 1981, and their payment did not start a month thereafter, still no default took place. According to private respondents, a perfected loan agreement imposes reciprocal obligations, where the obligation or promise of each party is the consideration of the other party. In this case, the consideration for BPIIC in entering into the loan contract is the promise of private respondents to pay the monthly amortization. For the latter, it is the promise of BPIIC to deliver the money. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Therefore, private respondents conclude, they did not incur in delay when they did not commence paying the monthly amortization on May 1, 1981, as it was only on September 13, 1982 when petitioner fully complied with its obligation under the loan contract. We agree with private respondents. A loan contract is not a consensual contract but a real contract. It is perfected only upon the delivery of the object of the contract.[5] Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected consensual contract falls under the first clause of Article 1934, Civil Code. It is an accepted promise to deliver something by way of simple loan. In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445, petitioner applied for a loan of P500,000 with respondent bank. The latter approved the application through a board resolution. Thereafter, the corresponding mortgage was executed and registered. However, because of acts attributable to petitioner, the loan was not released. Later, petitioner instituted an action for damages. We recognized in this case, a perfected consensual contract which under normal circumstances could have made the bank liable for not releasing the loan. However, since the fault was attributable to petitioner therein, the court did not award it damages. A perfected consensual contract, as shown above, can give rise to an action for damages. However, said contract does not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection and which gives rise to obligations only on the part of the borrower.[6] In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, was perfected only on September 13, 1982, the date of the second release of the loan. Following the intentions of the parties on the commencement of the monthly amortization, as found by the Court of Appeals, private respondents obligation to pay commenced only on October 13, 1982, a month after the perfection of the contract.[7] We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein the obligation or promise of each party is the consideration for that of the other.[8] As averred by private respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after the supposed release of the loan. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him.[9] Only when a party has performed his part of the contract can he demand that the other party also fulfills his own obligation and if the latter fails, default sets in. Consequently, petitioner could only demand for the payment of the monthly amortization after September 13, 1982 for it was only then when it complied with its obligation under the loan contract. Therefore, in

computing the amount due as of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13, 1982 and not May 1, 1981. Other points raised by petitioner in connection with the first issue, such as the date of actual release of the loan and whether private respondents were the cause of the delay in the release of the loan, are factual. Since petitioner has not shown that the instant case is one of the exceptions to the basic rule that only questions of law can be raised in a petition for review under Rule 45 of the Rules of Court,[10] factual matters need not tarry us now. On these points we are bound by the findings of the appellate and trial courts. On the second issue, petitioner claims that it should not be held liable for moral and exemplary damages for it did not act maliciously when it initiated the foreclosure proceedings. It merely exercised its right under the mortgage contract because private respondents were irregular in their monthly amortization. It invoked our ruling in Social Security System vs. Court of Appeals, 120 SCRA 707, where we said: Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of Appeals the negligence of the appellant is not so gross as to warrant moral and temperate damages, except that, said Court reduced those damages by only P5,000.00 instead of eliminating them. Neither can we agree with the findings of both the Trial Court and respondent Court that the SSS had acted maliciously or in bad faith. The SSS was of the belief that it was acting in the legitimate exercise of its right under the mortgage contract in the face of irregular payments made by private respondents and placed reliance on the automatic acceleration clause in the contract. The filing alone of the foreclosure application should not be a ground for an award of moral damages in the same way that a clearly unfounded civil action is not among the grounds for moral damages. Private respondents counter that BPIIC was guilty of bad faith and should be liable for said damages because it insisted on the payment of amortization on the loan even before it was released. Further, it did not make the corresponding deduction in the monthly amortization to conform to the actual amount of loan released, and it immediately initiated foreclosure proceedings when private respondents failed to make timely payment. But as admitted by private respondents themselves, they were irregular in their payment of monthly amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in bad faith. Consequently, we should rule out the award of moral and exemplary damages.[11] However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of mortgage, without checking and correspondingly adjusting its records on the amount actually released to private respondents and the date when it was released. Such negligence resulted in damage to private respondents, for which an award of nominal damages should be given in recognition of their rights which were violated by BPIIC.[12] For this purpose, the amount of P25,000 is sufficient. Lastly, as in SSS where we awarded attorneys fees because private respondents were compelled to litigate, we sustain the award ofP50,000 in favor of private respondents as attorn eys fees. WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of

damages. The award of moral and exemplary damages in favor of private respondents is DELETED, but the award to them of attorneys fees in the amount of P50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private respondentsP25,000 as nominal damages. Costs against petitioner. SO ORDERED.

[G.R. No. 123643. October 30, 1996] PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS and DR. ERLINDA G. IBARROLA,respondents. RESOLUTION FRANCISCO, J.: As payments for the purchase of medicines, the Province of Isabela issued several checks drawn against its accounts with petitioner Philippine National Bank (PNB) in favor of the seller, Lyndon Pharmaceuticals Laboratories, a business operated by private respondent Ibarrola. The checks were delivered to the sellers agents[1] who turned them over to Ibarrola, except 23 checks amounting to P98,691.90, which the agents appropriated after negotiating them with PNB. For her failure to receive the full payment for the medicines, Ibarrola filed on November 6, 1974 before the Regional Trial Court (RTC) an action for a sum of money and damages, docketed as Civil Case 4226-P,[2] against theProvince of Isabela, its Treasurer, the two agents and PNB. In its decision dated September 29, 1987, the trial court ordered all the defendants in said civil case, except the treasurer who died in the meantime, to jointly and solidarily pay Ibarrola several amounts, among which is: (1) P98,691.90 with interest thereon at the legal rate from the date of the filing of the complaint until the entire amount is fully paid;[3] (Italics supplied.) PNBs appeal to the Court of Appeals (CA)[4] and later to the Supreme Court[5] were denied and dismissed, respectively. All the three courts, however, did not specify whether the legal rate of interest referred to in the judgment is 6% or 12%. The judgment in Civil Case 4226-P became final and executory on November 26, 1993. At the execution stage, the sheriff computed the interest mentioned in the judgment at the rate of 12% which PNB opposed insisting that the rate should only be 6%. Ibarrola sought clarification from the same RTC which promulgated the decision. On August 4, 1994 said court issued an order clarifying that the rate is 12%. PNBs direct appeal to this court from that order was referred to the CA which affirmed the RTC order. Hence, this petition for review under Rule 45 where two legal issues are raised: (1) whether in an action for damages, the legal rate of interest is 6% as provided by Article 2209[6] of the New Civil Code or 12% as provided by CB Circular 416 series of 1974,[7] and (2) whether such rate shall be computed from the filing of the complaint until fully paid? The issues are not new. In the case of Eastern Shipping Lines, Inc. v. CA,[8] this Court had provided a rule of thumb for future guidance,"[9] to wit: When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at thediscretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the

judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.[10] (Italics ours.) The case at bench does not involve a loan. Forbearance of money or judgment involving a loan or forbearance of money as it arose from a contract of sale whereby Ibarrola did not receive full payment for her merchandise. When an obligation arises from a contract of purchase and sale and not from a contract of loan or mutuum, the applicable rate is 6% per annum as provided in Article 2209 of the NCC and not the rate of 12% per annum as provided in (CB) Cir. No. 416.[11] Indeed, PNBs liability is based only on the RTCs judgment where it was held solidarily liable with the other defendants due to its negligence when it failed to assure itself if the Provincial Treasurer was properly authorized by Ibarrola to make endorsements of said checks.[12] The rate of 12% interest referred to in Cir. 416 applies only to: [L]oan or forbearance of money, or to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is adjudged. Any other monetary judgment which does not involve or which has nothing to do with loans or forbearance of any money, goods or credit does not fall within its coverage for such imposition is not within the ambit of the authority granted to the Central Bank. When an obligation not constituting a loan or forbearance of money is breached then an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum in accordance with Art. 2209 of the Civil Code. Indeed, the monetary judgment in favor of private respondent does not involve a loan or forbearance of money, hence the proper imposable rate of interest is six (6%) per cent.[13] (Italics ours.) Applying the aforequoted rule, therefore , the proper rate of interest referred to in the judgment under execution is only 6%. This interest according to Eastern Shipping shall be computed from the time of the filing of the complaint considering that the amount adjudged (P98,691.90) can be established with reasonable certainty. Said amount being merely the uncollected balance of the purchase price covered by the 23 checks encashed and appropriated by Ibarrolas agents. However, once the judgment becomes final and executory, the "interim period from the finality of judgment awarding a monetary claim and until payment thereof, is deemed to be equivalent to a forbearance of credit.[14] Thus, in accordance with the pronouncement in Eastern Shipping the rate of 12% p.a. should be imposed, and to be computed from the time the judgment became final and executory until fully satisfied. The actual base for the computation of this 12% interest after the judgment in this damage suit became final shall be the amount adjudged (P98,691.90). ACCORDINGLY, the appealed decision is REVERSED. The rate of interest shall be 6% p.a. computed from the time of the filing of the complaint until its full payment before finality of judgment. Thereafter, if the amount adjudged remains unpaid, the interest rate shall be 12% p.a. computed from the time the judgment became final and executory on November 26, 1993 until fully satisfied. SO ORDERED.

G.R. No. 97873 August 12, 1993 PILIPINAS BANK, petitioner, vs. THE HONORABLE COURT OF APPEALS, and LILIA R. ECHAUS, respondents.

4) P100,000.00 exemplary and nominal damages to vindicate plaintiff's violated rights; 5) Attorney's fees equivalent to 15% of the total award in favor of the plaintiff; 6) Costs of suit (Rollo, p. 78). On March 22, 1985, petitioner appealed the decision of the trial court to the Court of Appeals, which docketed the appeal as CAG.R. No. 06017. On the same day, private respondent filed a motion for Immediate Execution Pending Appeal. The trial court granted the motion for execution pending appeal in an Order dated April 3, 1985. Petitioner challenged the Order dated April 3, 1985 before the Court of Appeals in CA-G.R. No. SP No. 05909. On October 30, 1986, the Court of Appeals modified the Order dated April 3, 1985, by limiting the execution pending appeal against petitioner to P5,517.707.00 and deferring the execution of the award for moral, exemplary and nominal damages to await the final judgment of the main case in CA-G.R. No. 06017. On June 17, 1987, the Supreme Court in G.R. No. L-76506 affirmed the Order dated October 30, 1986 of the Court of Appeals. On July 1, 1988, the trial court granted the new motion for execution pending appeal filed by private respondent pursuant to the Resolution of the Supreme Court dated June 17, 1987, upon the filing of the required bond. Petitioner complied with the writ of execution pending appeal by issuing two manager's checks in the total amount of P5,517,707.00 (one for P4,965,936.30 payable to private respondent and another for P551,770.70 payable to the Clerk of Court, RTC, Antipolo, Rizal). The check payable to private respondent was encashed on July 15, 1988. On June 28, 1990, the Court of Appeals rendered a decision in CAG.R. No. CV-06017, which modified the judgment of the trial court as follows: 1. The defendant-appellant Pilipinas Bank, formerly known as Filipinas Manufacturers Bank is ordered to pay the plaintiff-appellee the following: (a) The sum of Two Million Three Hundred Thousand (2,300,000,00) Pesos, representing the total amount assigned by Greatland to her, with interest at the legal rate starting July 24, 1981, date when demand was first made (Exh. "F" and "G"); (b) The sum of One Hundred Thousand (P100,000.00) Pesos in moral damages, to assuage moral sufferings and embarrassment of plaintiffappellee as a consequence

QUIASON, J.: This is a petition for certiorari under Rule 45 of the Revised Rules of Court to review the Resolution of the Court of Appeals in CAG.R. CV No. 06017 promulgated on March 14, 1991. The Resolution was rendered in response to private respondent's motion for clarification of the decision of the Court of Appeals in CA-G.R. No. 06017. The matters sought to be clarified arose in the course of the execution of the decision of the Regional Trial Court, Branch 71, Antipolo, Rizal in Civil Case No. 239-A, as modified by the decision of the Court of Appeals in CA-G.R. CV No. 06017. In Civil Case No. 239-A, private respondent filed a complaint against petitioner and its president, Constantino Bautista, for collection of a sum of money. The complaint alleged: (1) that petitioner and Greatland Realty Corporation (Greatland) executed a "Dacion en Pago," wherein Greatland conveyed to petitioner several parcels of land in consideration of the sum of P7,776,335.69; (2) that Greatland assigned P2,300,000.00 out of the total consideration of the Dacion en Pago, in favor of private respondent; and (3) that notwithstanding her demand for payment, petitioner in bad faith, refused and failed to pay the said amount assigned to her. Petitioner, while admitting the execution of the Dacion en Pago, claimed: (1) that its former president had no authority to enter into such agreement; (2) that it never ratified the same; and (3) that assuming arguendo that the agreement was binding, the conditions stipulated therein were never fulfilled. Dismissing petitioner's defense as unmeritorious, the trial court ruled in favor of private respondent. The trial court ordered petitioner and its co-defendant, jointly and severally, to pay private respondent as follows: 1) P2,300,000.00 the total amount assigned by Greatland in her favor out of the P2,300,000.00 liability of defendant Pilipinas to Greatland plus legal interest from the dates of assignments until fully paid; 2) P3,217,707.00 representing the total actual damages suffered by the plaintiff plus legal interest until fully paid; 3) P1,000,000.00 in moral damages to partially assuage the extreme moral sufferings of plaintiff inflicted upon her person considering the bad faith on the part of the defendants and their failure to act with justice, and to give what is lawfully due her and observe honesty and good faith;

of appellant-bank's unwarranted acts; (c) The sum of Twenty Five Thousand (P25,000.00) Pesos, as exemplary damages to serve as an example or correction for the public good; (d) The sum equivalent to ten (10) percent of the principal claim awarded, representing attorney's fees; and 2. Constantino Bautista is absolved of personal liability (Rollo, pp. 31-32). Petitioner filed a motion for extension of time to file a Petition for Review on Certiorari with the Supreme Court, which however was withdrawn on July 23,1990. Private respondent, on her part, filed a motion for reconsideration of the decision of the Court of Appeals in CA-G.R. No. 06017, which likewise was withdrawn on August 13, 1990. Hence, the decision of the Court of Appeals rendered in CA-G.R. No. 06017 became final and executory. On September 4, 1990, petitioner filed a motion in the trial court praying that private respondent and Standard Insurance Co. (which furnished the bond required in the advance execution of the decision of the trial court) to refund to her the excess payment of P1,898,623.67 with interests at 6% (Rollo, pp. 83-84). It must be recalled that while private respondent was able to collect P5,517,707.00 from petitioner pursuant to the writ of advance execution allowed in CA-G.R. No. SP No. 05909, the final judgment in the main case (CA-G.R. No. 06017) awarded to private respondent damages in the total amount of only P2,655,000.00 (P2,300,000.00 representing the amount assigned by Greatland to private respondent, P100,000.00 as moral damages; P25,000.00 as exemplary damages and attorney's fees equivalent to 10% of the P2,300,000.00), together "with interest on the amount of P2,300,000.00 at the legal rate starting July 24, 1981, date when demand was first made (Exh. "F" and "G")." Private respondent opposed the motion of petitioner with respect to the rate of interest to be charged on the amount of P2,300,000.00. According to private respondent, the legal interest on the principal amount of P2,300,000.00 due her should be 12% per annum pursuant to CB Circular No. 416 and not 6% per annum as computed by petitioner. On October 12, 1990, the trial court, while ordering the refund to petitioner of the excess payment, fixed the interest rate due on the amount of P2,300.000.00 at 12% per annum as proposed by private respondent, instead of 6% per annum as proposed by petitioner. On October 16, 1990, petitioner moved to reconsider the Order dated October 12, 1990 of the trail court, which however could not be acted upon because on October 23, 1990, private respondent filed a Motion for Clarification with the Court of

Appeals in CA-G.R. CV No. 06017, regarding the following matters: a) The "legal rate" of interest on the principal award of P2,300,000.00 from July 24, 1981 (as per decision) up to July 14, 1988 (date of actual payment made by defendant-appellant to plaintiff-appellee per execution pending appeal); b) The imposition of such "legal rate" of interest on the accrued interest' from July 24, 1981 up to July 14, 1988; c) The amount of the costs of suit will include premium on surety bond; d) The discharged of the surety bond whether total or partial, depending on the computation of the interest; e) The award of attorney's fees equivalent to 10% of the principal award, whether this should totally go to plaintiff-appellee's former counsel or to be shared on the basis of quantum meruit with the undersigned counsel; and f) Aside from this final award of 10% attorney's fees chargeable against defendantappellant, whether or not former counsel of plaintiff-appellee can still collect from her the balance of 15% out of the 25% attorney's fees under Exh. "N" (Rollo, p.32). In its Resolution promulgated on March 14, 1991, the Court of Appeals clarified that: a) The legal rate of interest on the principal award of P2,300,000.00 should be 12% per annum in accordance with Circular No. 416 dated July 29, 1974 of the Central Bank. b) The computation of compounding interest annually has no basis, therefore, not allowed in the instant case; c) The payment of premium on the bond in the sum of P259,813.50 as cost, being without legal and factual basis, is denied; d) The surety bond posted by plaintiffappellee may be released after satisfaction of the decision; and e) Payment/distribution of attorney's fees may/shall be litigated in a separate proceeding if the parties cannot settle their differences amicably. SO ORDERED (Rollo, p. 35-36). In this appeal, petitioner claims that the Court of Appeals erred:

(1) In ruling that the legal rate of interest on the amount of P2,300,000.00 adjudged to be paid by petitioner to private respondent is 12% per annum. (2) In not holding that the refund to which petitioner is entitled should earn interest at the rate of 12% per annum. (3) In not holding that the surety bond should only be released after actual refund (Rollo, p. 18). The Court of Appeals was of the theory that the action in Civil Case No. 239-A filed by private respondent against petitioner "involves forbearance of money, as the principal award to plaintiff-appellee (private respondent) in the amount of P2,300.000.00 was the overdue debt of defendant-appellant to her since July 1981. The case is, in effect, a simple collection of the money due to plaintiff-appellee, as the unpaid creditor from the defendant bank, the debtor" (Resolution, p.3; Rollo, p. 33). Applying Central Bank Circular No. 416, the Court of Appeals held that the applicable rate of interest is 12% per annum. Petitioner argues that the applicable law is Article 2209 of the Civil Code, not the Central Bank Circular No. 416. Said Article 2209 provides: Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. Presidential Decree No. 116 authorized the Monetary Board to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits and amended the Usury Law (Act No. 2655) for that purpose. As amended, the Usury Law now provides: Sec. The rate of interest for the loan or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be six per centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in accordance with the authority hereby granted. Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to charge such rate or rates whenever warranted by prevailing economic and social conditions: Provided, That such changes shall not be made oftener that once every twelve months. In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for consumer loans or

renewals thereof as well as such loans made by pawnshops, finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform. Acting on the authority vested on it by the Usury Law, as amended by P.D. No. 116, the Monetary Board of Central Bank issued Central Bank Circular No. 416, which provides: By virtue of the authority granted to it under Section 1 of Act 2655, as amended, otherwise known as the "Usury Law" the Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be twelve (12%) per cent per annum. This Circular shall take effect immediately. (italics supplied) Note that Circular No. 416, fixing the rate of interest at 12% per annum, deals with (1) loans; (2) forbearance of any money, goods or credit; and (3) judgments. In Reformina v. Tomol, Jr., 139 SCRA 260 [1985], the Court held that the judgments spoken of and referred to in Circular No. 416 are "judgments in litigation involving loans or forbearance of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with nor involving loans or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not, within the ambit of the authority granted to the Central Bank." Reformina was affirmed in Philippines Virginia Tobacco Administration v. Tensuan, 188 SCRA 628 [1990], which emphasized that the "judgments" contemplated in Circular No. 417 "are judgments involving said loans or forbearance only and not in judgments in litigation that have nothing to do with loans . . . ." We held that Circular No. 416 does not apply to judgments involving damages (Reformina v. Tomol, Jr., supra; Philippine Virginia Tobacco Administration v. Tensuan, supra) and compensation in expropriation proceedings (National Power Corporation v. Angas, 208 SCRA 542 [1992]). We also held that payment of unliquidated cash advances to an employee by his employer (Villarica v. Court of Appeals, 123 SCRA 259 [1983]) and the return of money paid by a buyer of a leasehold right but which contract was voided due to the fault of the seller (Buisier v. Court of Appeals, 154 SCRA 438 [1987]). What then is the nature of the judgment ordering petitioner to pay private respondent the amount of P2,300,000.00? The said amount was a portion of the P7,776,335.69 which petitioner was obligated to pay Greatland as consideration for the sale of several parcels of land by Greatland to petitioner. The amount of P2,300,000.00 was assigned by Greatland in favor of private respondent. The said obligation therefore arose from a contract of purchase and sale and not from a contract of loan or mutuum. Hence, what is applicable is the rate of 6% per annum as provided in Article 2209 of the Civil Code of the Philippines

and not the rate of 12% per annum as provided in Circular No. 416. Petitioner next contends that, consistent with its thesis that Circular No. 416 applies only to judgments involving the payment of loans or forbearance of money, goods and credit, the Court of Appeals should have ordered private respondent to pay interest at the rate of 12% on the overpayment collected by her pursuant to the advance execution of the judgment. Again, we sustain petitioner's contention as correct. Private respondent was paid in advance the amount of P5,517,707.00 by petitioner to the order for the execution pending appeal of the judgment of the trial court. On appeal, the Court of Appeals reduced the total damages to P3,619,083.33, leaving a balance of P1,898,623.67 to be refunded by private respondent to petitioner. In an execution pending appeal, funds are advanced by the losing party to the prevailing party with the implied obligation of the latter to repay former, in case the appellate court cancels or reduces the monetary award. Under Section 5 of Rule 39 of the Revised Rules of Court where "the judgment executed is reversed totally or partially on appeal, the trial court, on motion, after the case is remanded to it, may issue such orders of restitution, as equity and justice may warrant under the circumstances." It was to guarantee the restitution contemplated by Section 5 of Rule 39 of the Revised Rules of Court that private respondent was required by the trial court to post a bond before the writ of advance execution was issued. In the case before us, the excess amount ordered to refunded by private respondent falls within the ruling inViloria and Buiser that Circular No. 416 applies to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is subsequently adjudged. Finally, petitioner questions as vague the ruling of the Court of Appeals that the surety bond given to secure the advance execution may be discharged "upon the finality and satisfaction of the decision." We believe that this ruling of the Court of Appeals is clear enough in ordering that the surety bond shall be released only after private respondent has fully refunded the overpayment to petitioner. WHEREFORE, the petition is GRANTED. The Resolution of the Court of Appeals appealed from is MODIFIED in that (1) the amount of P2,300,000.00 adjudged to be paid by petitioner to private respondent shall earn interest of 6% per annum and (2) the amount of P1,898,623.67 to be refunded by private respondent to petitioner shall earn interest of 12% per annum. Costs against private respondent. SO ORDERED.

PAN PACIFIC SERVICE CONTRACTORS, INC. and RICARDO F. DEL ROSARIO, Petitioners, n, versu s-

G.R. No. 169975 Present: CARPIO, J., Chairperso BRION, DEL CASTILLO, ABAD, and PEREZ, JJ.

building in Makati City. The project was completed in June 1992. Respondent accepted the project on 9 July 1992.[10] In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance with the escalation clause, Pan Pacific claimed a price adjustment of P5,165,945.52. Respondents appointed project engineer, TCGI Engineers, asked for a reduction in the price adjustment. To show goodwill, Pan Pacific reduced the price adjustment to P4,858,548.67.[11] On 28 April 1992, TCGI Engineers recommended to respondent that the price adjustment should be pegged at P3,730,957.07. TCGI Engineers based their evaluation of the price adjustment on the following factors: 1. Labor Indices of the Department of Labor and Employment. 2. PRICE INDEX OF THE NATIONAL STATISTICS OFFICE. PD 1594 AND ITS IMPLEMENTING RULES AND REGULATIONS AS AMENDED, 15 MARCH 1991. SHIPPING DOCUMENTS SUBMITTED BY PPSCI. SUB-CLAUSE 70.1 OF THE GENERAL CONDITIONS OF THE CONTRACT DOCUMENTS.[12]

EQUITABLE PCI BANK (formerly THE PHILIPPINE COMMERCIAL INTERNATIONAL BANK), Respondent.

Promulgated: March 18, 2010

X - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X DECISION CARPIO, J.: The Case

Pan Pacific contended that with this recommendation, respondent was already estopped from disclaiming liability of at least P3,730,957.07 in accordance with the escalation clause.[13] Due to the extraordinary increases in the costs of labor and materials, Pan Pacifics operational capital was becoming inadequate for the project. However, respondent withheld the payment of the price adjustment under the escalation clause despite Pan Pacifics repeated demands.[14] Instead, respondent offered Pan Pacific a loan of P1.8 million. Against its will and on the strength of respondents promise that the price adjustment would be released soon, Pan Pacific, through Del Rosario, was constrained to execute a promissory note in the amount of P1.8 million as a requirement for the loan. Pan Pacific also posted a surety bond. TheP1.8 million was released directly to laborers and suppliers and not a single centavo was given to Pan Pacific.[15] Pan Pacific made several demands for payment on the price adjustment but respondent merely kept on promising to release the same. Meanwhile, the P1.8 million loan matured and respondent demanded payment plus interest and penalty. Pan Pacific refused to pay the loan. Pan Pacific insisted that it would not have incurred the loan if respondent released the price adjustment on time. Pan Pacific alleged that the promissory note did not express the true agreement of the parties. Pan Pacific maintained that the P1.8 million was to be considered as an advance payment on the price adjustment. Therefore, there was really no consideration for the promissory note; hence, it is null and void from the beginning.[16] Respondent stood firm that it would not release any amount of the price adjustment to Pan Pacific but it would offset the price adjustment with Pan Pacifics outstanding balance of P3,226,186.01, representing the loan, interests, penalties and collection charges.[17] Pan Pacific refused the offsetting but agreed to receive the reduced amount of P3,730,957.07 as recommended by the TCGI Engineers for the purpose of extrajudicial settlement, less P1.8 million and P414,942 as advance payments.[18]

PAN PACIFIC SERVICE CONTRACTORS, INC. AND RICARDO F. DEL ROSARIO (PETITIONERS) FILED THIS PETITION FOR REVIEW[1] ASSAILING THE COURT OF APPEALS (CA) DECISION[2] DATED 30 JUNE 2005 IN CA-G.R. CV NO. 63966 AS WELL AS THE RESOLUTION[3] DATED 5 OCTOBER 2005 DENYING THE MOTION FOR RECONSIDERATION. IN THE ASSAILED DECISION, THE CA MODIFIED THE 12 APRIL 1999 DECISION[4] OF THE REGIONAL TRIAL COURT OF MAKATI CITY, BRANCH 59 (RTC) BY ORDERING EQUITABLE PCI BANK[5] (RESPONDENT) TO PAY PETITIONERS P1,516,015.07 WITH INTEREST AT THE LEGAL RATE OF 12% PER ANNUM STARTING 6 MAY 1994 UNTIL THE AMOUNT IS FULLY PAID. The Facts Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting mechanical works on airconditioning system. On 24 November 1989, Pan Pacific, through its President, Ricardo F. Del Rosario (Del Rosario), entered into a contract of mechanical works (Contract) with respondent for P20,688,800. Pan Pacific and respondent also agreed on nine change orders forP2,622,610.30. Thus, the total consideration for the whole project was P23,311,410.30.[6] The Contract stipulated, among others, that Pan Pacific shall be entitled to a price adjustment in case of increase in labor costs and prices of materials under paragraphs 70.1[7] and 70.2[8] of the General Conditions for the Construction of PCIB Tower II Extension (the escalation clause).[9] Pursuant to the contract, Pan Pacific commenced the mechanical works in the project site, the PCIB Tower II extension

On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the promissory note, sum of money, and damages against the respondent with the RTC of Makati City, Branch 59. On 12 April 1999, the RTC rendered its decision, thedispositive portion of which reads: WHEREFORE, PREMISES CONSIDERED, JUDGMENT IS HEREBY RENDERED IN FAVOR OF THE PLAINTIFFS AND AGAINST THE DEFENDANT AS FOLLOWS: 1. DECLARING THE PROMISSORY NOTE (EXHIBIT B) NULL AND VOID; ORDERING THE DEFENDANT TO PAY THE PLAINTIFFS THE FOLLOWING AMOUNTS: A. P1,389,111.10 RE PRESENTING UNPAID BALANCE OF THE ADJUSTMENT PRICE, WITH INTEREST THEREON AT THE LEGAL RATE OF TWELVE (12%) PERCENT PER ANNUM STARTING MAY 6, 1994, THE DATE WHEN THE COMPLAINT WAS FILED, UNTIL THE AMOUNT IS FULLY PAID; P100,000.00 REPRESENTING MORAL DAMAGES; P50,000.00 REPRESENTING EXEMPLARY DAMAGES; AND P50,000.00 AS AND FOR ATTORNEYS FEES. 2. DISMISSING DEFENDANTS COUNTERCLAIM, FOR LACK OF MERIT; AND WITH COSTS AGAINST THE DEFENDANT. SO ORDERED.[19]

fees in favor of petitioners and in dismissing its counterclaim. In its decision dated 30 June 2005, the CA modified the RTC decision, with respect to the principal amount due to petitioners. The CA removed the deduction of P126,903.97 because it represented the final payment on the basic contract price. Hence, the CA ordered respondent to pay P1,516,015.07 to petitioners, with interest at the legal rate of 12% per annum starting 6 May 1994.[20] On 26 July 2005, petitioners filed a Motion for Partial Reconsideration seeking a reconsideration of the CAs Decision imposing the legal rate of 12%. Petitioners claimed that the interest rate applicable should be the 18% bank lending rate. Respondent likewise filed a Motion for Reconsideration of the CAs decision. In a Resolution dated 5 October 2005, the CA denied both motions. AGGRIEVED BY THE CAS DECISION, ELEVATED THE CASE BEFORE THIS COURT. The Issue PETITIONERS

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

Ruling of the Court We grant the petition. This Court notes that respondent did not appeal the decision of the CA. Hence, there is no longer any issue as to the principal amount of the unpaid balance on the price adjustment, which the CA correctly computed at P1,516,015.07. The only remaining issue is the interest rate applicable for respondents delay in the payment of the balance of the price adjustment. The CA denied petitioners claim for the application of the bank lending rate of 18% compounded annually reasoning, to wit: Anent the 18% interest rate compounded annually, while it is true that the contract provides for an interest at the current bank lending rate in case of delay in payment by the Owner, and the promissory note charged an interest of 18%, the said proviso does not authorize plaintiffs to unilaterally raise the interest rate without the other partys consent. Unlike their request for price adjustment on the basic contract price, plaintiffs never informed nor sought the approval of defendant for the imposition of 18% interest on the adjusted price. To unilaterally increase the interest rate of the adjusted price would be violative of the principle of mutuality of contracts. Thus, the Court maintains the legal rate of twelve percent per annum starting from the date of

On 23 May 1999, petitioners partially appealed the RTC Decision to the CA. On 26 May 1999, respondent appealed the entire RTC Decision for being contrary to law and evidence. In sum, the appeals of the parties with the CA are as follows: 1. WITH RESPECT TO THE PETITIONERS, WHETHER THE RTC ERRED IN DEDUCTING THE AMOUNT OFP126,903.97 FROM THE BALANCE OF THE ADJUSTED PRICE AND IN AWARDING ONLY 12% ANNUAL INTEREST ON THE AMOUNT DUE, INSTEAD OF THE BANK LOAN RATE OF 18% COMPOUNDED ANNUALLY BEGINNING SEPTEMBER 1992.

2. With respect to respondent, whether the RTC erred in declaring the promissory note void and in awarding moral and exemplary damages and attorneys

judicial demand. Although the contract provides for the period when the recommendation of the TCGI Engineers as to the price adjustment would be binding on the parties, it was established, however, that part of the adjusted price demanded by plaintiffs was already disbursed as early as 28 February 1992 by defendant bank to their suppliers and laborers for their account.[21]

In this appeal, petitioners allege that the contract between the parties consists of two parts, the Agreement[22] and the General Conditions,[23] both of which provide for interest at the bank lending rate on any unpaid amount due under the contract. Petitioners further claim that there is nothing in the contract which requires the consent of the respondent to be given in order that petitioners can charge the bank lending rate.[24] Specifically, petitioners invoke Section 2.5 of the Agreement and Section 60.10 of the General Conditions as follows: Agreement 2.5 IF ANY PAYMENT IS DELAYED, THE CONTRACTOR MAY CHARGE INTEREST THEREON AT THE CURRENT BANK LENDING RATES, WITHOUT PREJUDICE TO OWNERS RECOURSE TO ANY OTHER REMEDY AVAILABLE UNDER EXISTING LAW.[25] GENERAL CONDITIONS 60.10 TIME FOR PAYMENT THE AMOUNT DUE TO THE CONTRACTOR UNDER ANY INTERIM CERTIFICATE ISSUED BY THE ENGINEER PURSUANT TO THIS CLAUSE, OR TO ANY TERM OF THE CONTRACT, SHALL, SUBJECT TO CLAUSE 47, BE PAID BY THE OWNER TO THE CONTRACTOR WITHIN 28 DAYS AFTER SUCH INTERIM CERTIFICATE HAS BEEN DELIVERED TO THE OWNER, OR, IN THE CASE OF THE FINAL CERTIFICATE REFERRED TO IN SUB-CLAUSE 60.8, WITHIN 56 DAYS, AFTER SUCH FINAL CERTIFICATE HAS BEEN DELIVERED TO THE OWNER. IN THE EVENT OF THE FAILURE OF THE OWNER TO MAKE PAYMENT WITHIN THE TIMES STATED, THE OWNER SHALL PAY TO THE CONTRACTOR INTEREST AT THE RATE BASED ON BANKING LOAN RATES PREVAILING AT THE TIME OF THE SIGNING OF THE CONTRACT UPON ALL SUMS UNPAID FROM THE DATE BY WHICH THE SAME SHOULD HAVE BEEN PAID. THE PROVISIONS OF THIS SUB-CLAUSE ARE WITHOUT PREJUDICE TO THE CONTRACTORS ENTITLEMENT UNDER CLAUSE 69.[26] (EMPHASIS SUPPLIED) Petitioners thus submit that it is automatically entitled to the bank lending rate of interest from the time an amount is determined to be due thereto, which respondent should have paid. Therefore, as petitioners have already proven their entitlement to the price adjustment, it necessarily follows that the bank lending interest rate of 18% shall be applied.[27] On the other hand, respondent insists that under the provisions of 70.1 and 70.2 of the General Conditions, it is stipulated that

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

In this case, the CA already settled that petitioners consulted respondent on the imposition of the price adjustment, and held respondent liable for the balance of P1,516,015.07. Respondent did not appeal from the decision of the CA; hence, respondent isestopped from contesting such fact. However, the CA went beyond the intent of the parties by requiring respondent to give its consent to the imposition of interest before petitioners can hold respondent liable for interest at the current bank lending rate. This is erroneous. A review of Section 2.6 of the Agreement and Section 60.10 of the General Conditions shows that the consent of the respondent is not

needed for the imposition of interest at the current bank lending rate, which occurs upon any delay in payment. When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulations governs. In these cases, courts have no authority to alter a contract by construction or to make a new contract for the parties. The Courts duty is confined to the interpretation of the contract which the parties have made for themselves without regard to its wisdom or folly as the court cannot supply material stipulations or read into the contract words which it does not contain. It is only when the contract is vague and ambiguous that courts are permitted to resort to construction of its terms and determine the intention of the parties.[32] The escalation clause must be read in conjunction with Section 2.5 of the Agreement and Section 60.10 of the General Conditions which pertain to the time of payment. Once the parties agree on the price adjustment after due consultation in compliance with the provisions of the escalation clause, the agreement is in effect an amendment to the original contract, and gives rise to the liability of respondent to pay the adjusted costs. Under Section 60.10 of the General Conditions, the respondent shall pay such liability to the petitioner within 28 days from issuance of the interim certificate. Upon respondents failure to pay within the time provided (28 days), then it shall be liable to pay the stipulated interest. This is the logical interpretation of the agreement of the parties on the imposition of interest. To provide a contrary interpretation, as one requiring a separate consent for the imposition of the stipulated interest, would render the intentions of the parties nugatory. Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest shall be due unless it has been expressly stipulated in writing. Therefore, payment of monetary interest is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of monetary interest.[33] We agree with petitioners interpretation that in case of default, the consent of the respondent is not needed in order to impose interest at the current bank lending rate.

The written agreement entered into between petitioners and respondent provides for an interest at the current bank lending rate in case of delay in payment and the promissory note charged an interest of 18%. To prove petitioners entitlement to the 18% bank lending rate of interest, petitioners presented the promissory note[36] prepared by respondent bank itself. This promissory note, although declared void by the lower courts because it did not express the real intention of the parties, is substantial proof that the bank lending rate at the time of default was 18% per annum. Absent any evidence of fraud, undue influence or any vice of consent exercised by petitioners against the respondent, the interest rate agreed upon is binding on them.[37] WHEREFORE, we GRANT the petition. We SET ASIDE the Decision and Resolution of the Court of Appeals in CAG.R. CV No. 63966. We ORDER respondent to pay petitioners P1,516,015.07 with interest at the bank lending rate of 18% per annum starting 6 May 1994 until the amount is fully paid. SO ORDERED.

Applicable Interest Rate Under Article 2209 of the Civil Code, the appropriate measure for damages in case of delay in discharging an obligation consisting of the payment of a sum of money is the payment of penalty interest at the rate agreed upon in the contract of the parties. In the absence of a stipulation of a particular rate of penalty interest, payment of additional interest at a rate equal to the regular monetary interest becomes due and payable. Finally, if no regular interest had been agreed upon by the contracting parties, then the damages payable will consist of payment of legal interest which is 6%, or in the case of loans or forbearances of money, 12% per annum.[34] It is only when the parties to a contract have failed to fix the rate of interest or when such amount is unwarranted that the Court will apply the 12% interest per annum on a loan or forbearance of money.[35]

[G.R. No. 116285. October 19, 2001] ANTONIO TAN, petitioner, vs. COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES,respondents. DECISION DE LEON, JR., J.: Before us is a petition for review of the Decision[1] dated August 31, 1993 and Resolution[2] dated July 13, 1994 of the Court of Appeals affirming the Decision[3] dated May 8, 1991 of the Regional Trial Court (RTC) of Manila, Branch 27. The facts are as follows: On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount of Two Million Pesos (P2,000,000.00), or in the total principal amount of Four Million Pesos (P4,000,000.00) from respondent Cultural Center of the Philippines (CCP, for brevity) evidenced by two (2) promissory notes with maturity dates on May 14, 1979 and July 6, 1979, respectively. Petitioner defaulted but after a few partial payments he had the loans restructured by respondent CCP, and petitioner accordingly executed a promissory note (Exhibit A) on August 31, 1979 in the amount of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One Pesos and ThirtyTwo Centavos (P3,411,421.32) payable in five (5) installments. Petitioner Tan failed to pay any installment on the said restructured loan of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the last installment falling due on December 31, 1980. In a letter dated January 26, 1982, petitioner requested and proposed to respondent CCP a mode of paying the restructured loan, i.e., (a) twenty percent (20%) of the principal amount of the loan upon the respondent giving its conformity to his proposal; and (b) the balance on the principal obligation payable in thirty-six (36) equal monthly installments until fully paid. On October 20, 1983, petitioner again sent a letter to respondent CCP requesting for a moratorium on his loan obligation until the following year allegedly due to a substantial deduction in the volume of his business and on account of the peso devaluation. No favorable response was made to said letters. Instead, respondent CCP, through counsel, wrote a letter dated May 30, 1984 to the petitioner demanding full payment, within ten (10) days from receipt of said letter, of the petitioners restructured loan which as of April 30, 1984 amounted to Six Million Eighty-Eight Thousand Seven Hundred Thirty-Five Pesos and Three Centavos (P6,088,735.03). On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money, docketed as Civil Case No. 84-26363, against the petitioner after the latter failed to settle his said restructured loan obligation. The petitioner interposed the defense that he merely accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan from respondent CCP. Petitioner claimed that he has not been able to locate Wilson Lucmen. While the case was pending in the trial court, the petitioner filed a Manifestation wherein he proposed to settle his indebtedness to respondent CCP by proposing to make a down payment of One Hundred Forty Thousand Pesos (P140,000.00) and to issue twelve (12) checks every beginning of the year to cover installment payments for one year, and every year thereafter until the balance is fully paid. However, respondent CCP did not agree to the petitioners proposals and so the trial of the case ensued.

On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, ordering defendant to pay plaintiff, the amount of P7,996,314.67, representing defendants outstanding account as of August 28, 1986, with the corresponding stipulated interest and charges thereof, until fully paid, plus attorneys fees in an amount equivalent to 25% of said outstanding account, plus P50,000.00, as exemplary damages, plus costs. Defendants counterclaims are ordered dismissed, for lack of merit. SO ORDERED.[4] The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to the petitioners contention that the loan was merely for the accommodation of Wilson Lucmen for the reason that the defense propounded was not credible in itself. Second, assuming, arguendo, that the petitioner did not personally benefit from the said loan, he should have filed a third party complaint against Wilson Lucmen, the alleged accommodated party but he did not. Third, for three (3) times the petitioner offered to settle his loan obligation with respondent CCP. Fourth, petitioner may not avoid his liability to pay his obligation under the promissory note (Exh. A) which he must comply with in good faith pursuant to Article 1159 of the New Civil Code. Fifth, petitioner is estopped from denying his liability or loan obligation to the private respondent. The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged interest, surcharges, attorneys fees and exemplary damages against the petitioner. In his appeal, the petitioner asked for the reduction of the penalties and charges on his loan obligation. He abandoned his alleged defense in the trial court that he merely accommodated his friend, Wilson Lucmen, in obtaining the loan, and instead admitted the validity of the same. On August 31, 1993, the appellate court rendered a decision, the dispositive portion of which reads: WHEREFORE, with the foregoing modification, the judgment appealed from is hereby AFFIRMED. SO ORDERED.[5] In affirming the decision of the trial court imposing surcharges and interest, the appellate court held that: We are unable to accept appellants (petitioners) claim for modification on the basis of alleged partial or irregular performance, there being none. Appellants offer or tender of payment cannot be deemed as a partial or irregular performance of the contract, not a single centavo appears to have been paid by the defendant. However, the appellate court modified the decision of the trial court by deleting the award for exemplary damages and reducing the amount of awarded attorneys fees to five percent (5%), by ratiocinating as follows: Given the circumstances of the case, plus the fact that plaintiff was represented by a government lawyer, We believe the award of 25% as attorneys fees and P500,000.00 as exemplary damages

is out of proportion to the actual damage caused by the nonperformance of the contract and is excessive, unconscionable and iniquitous. In a Resolution dated July 13, 1994, the appellate court denied the petitioners motion for reconsideration of the said decision. Hence, this petition anchored on the following assigned errors: I THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR TO THE DECISION OF THE TRIAL COURT WHICH COMPOUNDED INTEREST ON SURCHARGES. II THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF INTEREST FOR THE PERIOD OF TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST PETITIONER IN APPLYING FOR RELIEF OF LIABILITY THROUGH THE COMMISSION ON AUDIT AND THE OFFICE OF THE PRESIDENT. III THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEYS FEES AND IN REDUCING PENALTIES. Significantly, the petitioner does not question his liability for his restructured loan under the promissory note marked Exhibit A. The first question to be resolved in the case at bar is whether there are contractual and legal bases for the imposition of the penalty, interest on the penalty and attorneys fees. The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorneys fees and in not reducing the penalties considering that the petitioner, contrary to the appellate courts findings, has allegedly made partial payments on the loan. And if penalty is to be awarded, the petitioner is asking for the non-imposition of interest on the surcharges inasmuch as the compounding of interest on surcharges is not provided in the promissory note marked Exhibit A. The petitioner takes exception to the computation of the private respondent whereby the interest, surcharge and the principal were added together and that on the total sum interest was imposed. Petitioner also claims that there is no basis in law for the charging of interest on the surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition of interest on surcharges. We find no merit in the petitioners contention. Article 1226 of the New Civil Code provides that: In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

In the case at bar, the promissory note (Exhibit A) expressly provides for the imposition of both interest and penalties in case of default on the part of the petitioner in the payment of the subject restructured loan. The pertinent[6] portion of the promissory note (Exhibit A) imposing interest and penalties provides that: For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE PHILIPPINES at its office in Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED + PESOS (P3,411,421.32) Philippine Currency, xxx. xxx xxx xxx

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

The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the monetary interest on the note and is allowed under Article 1956 of the New Civil Code.[7] On the other hand, the stipulated two percent (2%) per month penalty is in the form of penalty charge which is separate and distinct from the monetary interest on the principal of the loan. Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of Appeals,[8] this Court has ruled that the New Civil Code permits an agreement upon a penalty apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty does not include the monetary interest, and as such the two are different and distinct from each other and may be demanded separately. Quoting Equitable Banking Corp. v. Liwanag,[9] the GSIS case went on to state that such a stipulation about payment of an additional interest rate partakes of the nature of a penalty clause which is sanctioned by law, more particularly under Article 2209 of the New Civil Code which provides that: If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated penalty charge. The penalty charge is also called penalty or compensatory interest. Having clarified the same, the next issue to be resolved is whether interest may accrue on the penalty or

compensatory interest without violating the provisions of Article 1959 of the New Civil Code, which provides that: Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest. According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the reason that the law only allows imposition of interest on monetary interest but not the charging of interest on penalty. He claims that since there is no law that allows imposition of interest on penalties, the penalties should not earn interest. But as we have already explained, penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the penalty or compensatory interest is sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code considering that: First, there is an express stipulation in the promissory note (Exhibit A) permitting the compounding of interest. The fifth paragraph of the said promissory note provides that: Any interest which may be due if not paid shall be added to the total amount when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law.[10] Therefore, any penalty interest not paid, when due, shall earn the legal interest of twelve percent (12%) per annum,[11] in the absence of express stipulation on the specific rate of interest, as in the case at bar. Second, Article 2212 of the New Civil Code provides that Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. In the instant case, interest likewise began to run on the penalty interest upon the filing of the complaint in court by respondent CCP on August 29, 1984. Hence, the courts a quo did not err in ruling that the petitioner is bound to pay the interest on the total amount of the principal, the monetary interest and the penalty interest. The petitioner seeks the elimination of the compounded interest imposed on the total amount based allegedly on the case of National Power Corporation v. National Merchandising Corporation,[12] wherein we ruled that the imposition of interest on the damages from the filing of the complaint is unjust where the litigation was prolonged for twenty-five (25) years through no fault of the defendant. However, the ruling in the said National Power Corporation (NPC) case is not applicable to the case at bar inasmuch as our ruling on the issue of interest in that NPC case was based on equitable considerations and on the fact that the said case lasted for twenty-five (25) years through no fault of the defendant. In the case at bar, however, equity cannot be considered inasmuch as there is a contractual stipulation in the promissory note whereby the petitioner expressly agreed to the compounding of interest in case of failure on his part to pay the loan at maturity. Inasmuch as the said stipulation on the compounding of interest has the force of law between the parties and does not appear to be inequitable or unjust, the said written stipulation should be respected. The private respondents Statement of Account (marked Exhibits C to C-2)[13] shows the following breakdown of the petitioners indebtedness as of August 28, 1986: Principal Interest P2,838,454.68 P 576,167.89

Surcharge

P4,581,692.10 P7,996,314.67

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

Dear Mr. Tan: xxx xxx xxx

With reference to your appeal for condonation of interest and surcharge, we wish to inform you that the center will assist you in applying for relief of liability through the Commission on Audit and Office of the President xxx. While your application is being processed and awaiting approval, the center will be accepting your proposed payment scheme with the downpayment of P160,000.00 and monthly remittances of P60,000.00 xxx. xxx xxx xxx

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

G.R. No. 173227

January 20, 2009

SEBASTIAN SIGA-AN, Petitioner, vs. ALICIA VILLANUEVA, Respondent. DECISION CHICO-NAZARIO, J.: Before Us is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court seeking to set aside the Decision,2 dated 16 December 2005, and Resolution,3 dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No. 71814, which affirmed in toto the Decision,4 dated 26 January 2001, of the Las Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068. The facts gathered from the records are as follows: On 30 March 1998, respondent Alicia Villanueva filed a complaint5 for sum of money against petitioner Sebastian Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-98-0068. Respondent alleged that she was a businesswoman engaged in supplying office materials and equipments to the Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig City, while petitioner was a military officer and comptroller of the PNO from 1991 to 1996. Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered to loan her the amount of P540,000.00. Since she needed capital for her business transactions with the PNO, she accepted petitioners proposal. The loan agreement was not reduced in writing. Also, there was no stipulation as to the payment of interest for the loan.6 On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial payment of the loan. On 31 October 1993, she issued another check in the amount of P200,000.00 to petitioner as payment of the remaining balance of the loan. Petitioner told her that since she paid a total amount of P700,000.00 for theP540,000.00 worth of loan, the excess amount of P160,000.00 would be applied as interest for the loan. Not satisfied with the amount applied as interest, petitioner pestered her to pay additional interest. Petitioner threatened to block or disapprove her transactions with the PNO if she would not comply with his demand. As all her transactions with the PNO were subject to the approval of petitioner as comptroller of the PNO, and fearing that petitioner might block or unduly influence the payment of her vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash and checks as interests for the loan. She asked petitioner for receipt for the payments but petitioner told her that it was not necessary as there was mutual trust and confidence between them. According to her computation, the total amount she paid to petitioner for the loan and interest accumulated toP1,200,000.00.7 Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan despite absence of agreement to that effect. Her lawyer told her that petitioner could not validly collect interest on the loan because there was no agreement between her and petitioner regarding payment of interest. Since she paid petitioner a total amount of P1,200,000.00 for the P540,000.00 worth of loan, and upon being advised by her lawyer that she made overpayment to petitioner, she sent a demand letter to petitioner asking for the

return of the excess amount of P660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim for reimbursement.8 Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1) P660,000.00 plus legal interest from the time of demand; (2) P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4) an amount equivalent to 25% of P660,000.00 as attorneys fees.9 In his answer10 to the complaint, petitioner denied that he offered a loan to respondent. He averred that in 1992, respondent approached and asked him if he could grant her a loan, as she needed money to finance her business venture with the PNO. At first, he was reluctant to deal with respondent, because the latter had a spotty record as a supplier of the PNO. However, since respondent was an acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the loan in full.11 Subsequently, respondent again asked him to give her a loan. As respondent had been able to pay the previous loan in full, he agreed to grant her another loan. Later, respondent requested him to restructure the payment of the loan because she could not give full payment on the due date. He acceded to her request. Thereafter, respondent pleaded for another restructuring of the payment of the loan. This time he rejected her plea. Thus, respondent proposed to execute a promissory note wherein she would acknowledge her obligation to him, inclusive of interest, and that she would issue several postdated checks to guarantee the payment of her obligation. Upon his approval of respondents request for restructuring of the loan, respondent executed a promissory note dated 12 September 1994 wherein she admitted having borrowed an amount of P1,240,000.00, inclusive of interest, from petitioner and that she would pay said amount in March 1995. Respondent also issued to him six postdated checks amounting to P1,240,000.00 as guarantee of compliance with her obligation. Subsequently, he presented the six checks for encashment but only one check was honored. He demanded that respondent settle her obligation, but the latter failed to do so. Hence, he filed criminal cases for Violation of the Bouncing Checks Law (Batas Pambansa Blg. 22) against respondent. The cases were assigned to the Metropolitan Trial Court of Makati City, Branch 65 (MeTC).12 Petitioner insisted that there was no overpayment because respondent admitted in the latters promissory note that her monetary obligation as of 12 September 1994 amounted to P1,240,000.00 inclusive of interests. He argued that respondent was already estopped from complaining that she should not have paid any interest, because she was given several times to settle her obligation but failed to do so. He maintained that to rule in favor of respondent is tantamount to concluding that the loan was given interest-free. Based on the foregoing averments, he asked the RTC to dismiss respondents complaint. After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an overpayment of her loan obligation to petitioner and that the latter should refund the excess amount to the former. It ratiocinated that respondents obligation was only to pay the loaned amount of P540,000.00, and that the alleged interests due should not be included in the computation of respondents total monetary debt because there was no agreement between them regarding payment of interest. It concluded that since respondent made an excess payment to petitioner in the amount of P660,000.00 through mistake,

petitioner should return the said amount to respondent pursuant to the principle of solutio indebiti.13 The RTC also ruled that petitioner should pay moral damages for the sleepless nights and wounded feelings experienced by respondent. Further, petitioner should pay exemplary damages by way of example or correction for the public good, plus attorneys fees and costs of suit. The dispositive portion of the RTC Decision reads: WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and jurisprudence on the matter, judgment is hereby rendered in favor of the plaintiff and against the defendant as follows: (1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal interest of 12% per annum computed from 3 March 1998 until the amount is paid in full; (2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral damages; (3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary damages; (4) Ordering defendant to pay plaintiff the amount equivalent to 25% of P660,000.00 as attorneys fees; and (5) Ordering defendant to pay the costs of suit.14 Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court promulgated its Decision affirming in toto the RTC Decision, thus: WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed decision [is] AFFIRMED in toto.15 Petitioner filed a motion for reconsideration of the appellate courts decision but this was denied.16 Hence, petitioner lodged the instant petition before us assigning the following errors: I. THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE TO PETITIONER; II. THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.17 Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as monetary interest. Interest may also be imposed by law or by courts as penalty or indemnity for damages. This is called compensatory interest.18 The right to interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is demanded.19

Article 1956 of the Civil Code, which refers to monetary interest,20 specifically mandates that no interest shall be due unless it has been expressly stipulated in writing. As can be gleaned from the foregoing provision, payment of monetary interest is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of monetary interest. Thus, we have held that collection of interest without any stipulation therefor in writing is prohibited by law.21 It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither was there convincing proof of written agreement between the two regarding the payment of interest. Respondent testified that although she accepted petitioners offer of loan amounting to P540,000.00, there was, nonetheless, no verbal or written agreement for her to pay interest on the loan.22 Petitioner presented a handwritten promissory note dated 12 September 199423 wherein respondent purportedly admitted owing petitioner "capital and interest." Respondent, however, explained that it was petitioner who made a promissory note and she was told to copy it in her own handwriting; that all her transactions with the PNO were subject to the approval of petitioner as comptroller of the PNO; that petitioner threatened to disapprove her transactions with the PNO if she would not pay interest; that being unaware of the law on interest and fearing that petitioner would make good of his threats if she would not obey his instruction to copy the promissory note, she copied the promissory note in her own handwriting; and that such was the same promissory note presented by petitioner as alleged proof of their written agreement on interest.24 Petitioner did not rebut the foregoing testimony. It is evident that respondent did not really consent to the payment of interest for the loan and that she was merely tricked and coerced by petitioner to pay interest. Hence, it cannot be gainfully said that such promissory note pertains to an express stipulation of interest or written agreement of interest on the loan between petitioner and respondent. Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and respondent agreed on the payment of 7% rate of interest on the loan; that the agreed 7% rate of interest was duly admitted by respondent in her testimony in the Batas Pambansa Blg. 22 cases he filed against respondent; that despite such judicial admission by respondent, the RTC and the Court of Appeals, citing Article 1956 of the Civil Code, still held that no interest was due him since the agreement on interest was not reduced in writing; that the application of Article 1956 of the Civil Code should not be absolute, and an exception to the application of such provision should be made when the borrower admits that a specific rate of interest was agreed upon as in the present case; and that it would be unfair to allow respondent to pay only the loan when the latter very well knew and even admitted in the Batas Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on the loan.25 We have carefully examined the RTC Decision and found that the RTC did not make a ruling therein that petitioner and respondent agreed on the payment of interest at the rate of 7% for the loan. The RTC clearly stated that although petitioner and respondent entered into a valid oral contract of loan amounting to P540,000.00, they, nonetheless, never intended the payment of interest thereon.26 While the Court of Appeals mentioned in its Decision that it concurred in the RTCs ruling that petitioner and

respondent agreed on a certain rate of interest as regards the loan, we consider this as merely an inadvertence because, as earlier elucidated, both the RTC and the Court of Appeals ruled that petitioner is not entitled to the payment of interest on the loan. The rule is that factual findings of the trial court deserve great weight and respect especially when affirmed by the appellate court.27 We found no compelling reason to disturb the ruling of both courts. Petitioners reliance on respondents alleged admission in the Batas Pambansa Blg. 22 cases that they had agreed on the payment of interest at the rate of 7% deserves scant consideration. In the said case, respondent merely testified that after paying the total amount of loan, petitioner ordered her to pay interest.28 Respondent did not categorically declare in the same case that she and respondent made an express stipulation in writing as regards payment of interest at the rate of 7%. As earlier discussed, monetary interest is due only if there was anexpress stipulation in writing for the payment of interest. There are instances in which an interest may be imposed even in the absence of express stipulation, verbal or written, regarding payment of interest. Article 2209 of the Civil Code states that if the obligation consists in the payment of a sum of money, and the debtor incurs delay, a legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent on this point. All the same, the interest under these two instances may be imposed only as a penalty or damages for breach of contractual obligations. It cannot be charged as a compensation for the use or forbearance of money. In other words, the two instances apply only to compensatory interest and not to monetary interest.29 The case at bar involves petitioners claim for monetary interest. Further, said compensatory interest is not chargeable in the instant case because it was not duly proven that respondent defaulted in paying the loan. Also, as earlier found, no interest was due on the loan because there was no written agreement as regards payment of interest. Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not apply to the instant case. Thus, he cannot be compelled to return the alleged excess amount paid by respondent as interest.30 Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be applied. Article 2154 of the Civil Code explains the principle of solutio indebiti. Said provision provides that if something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. In such a case, a creditor-debtor relationship is created under a quasi-contract whereby the payor becomes the creditor who then has the right to demand the return of payment made by mistake, and the person who has no right to receive such payment becomes obligated to return the same. The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself unjustly at the expense of another.31 The principle of solutio indebitiapplies where (1) a payment is made when there exists no binding relation between the payor, who

has no duty to pay, and the person who received the payment; and (2) the payment is made through mistake, and not through liberality or some other cause.32 We have held that the principle of solutio indebiti applies in case of erroneous payment of undue interest.33 It was duly established that respondent paid interest to petitioner. Respondent was under no duty to make such payment because there was no express stipulation in writing to that effect. There was no binding relation between petitioner and respondent as regards the payment of interest. The payment was clearly a mistake. Since petitioner received something when there was no right to demand it, he has an obligation to return it. We shall now determine the propriety of the monetary award and damages imposed by the RTC and the Court of Appeals. Records show that respondent received a loan amounting to P540,000.00 from petitioner.34 Respondent issued two checks with a total worth of P700,000.00 in favor of petitioner as payment of the loan.35 These checks were subsequently encashed by petitioner.36 Obviously, there was an excess of P160,000.00 in the payment for the loan. Petitioner claims that the excess of P160,000.00 serves as interest on the loan to which he was entitled. Aside from issuing the said two checks, respondent also paid cash in the total amount of P175,000.00 to petitioner as interest.37 Although no receipts reflecting the same were presented because petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in his ReplyAffidavit38 in the Batas Pambansa Blg. 22 cases that respondent paid him a total amount of P175,000.00 cash in addition to the two checks. Section 26 Rule 130 of the Rules of Evidence provides that the declaration of a party as to a relevant fact may be given in evidence against him. Aside from the amounts of P160,000.00 and P175,000.00 paid as interest, no other proof of additional payment as interest was presented by respondent. Since we have previously found that petitioner is not entitled to payment of interest and that the principle of solutio indebiti applies to the instant case, petitioner should return to respondent the excess amount of P160,000.00 and P175,000.00 or the total amount of P335,000.00. Accordingly, the reimbursable amount to respondent fixed by the RTC and the Court of Appeals should be reduced fromP660,000.00 to P335,000.00. As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22 against respondent. In the said cases, the MeTC found respondent guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored checks to petitioner. Nonetheless, respondents conviction therein does not affect our ruling in the instant case. The two checks, subject matter of this case, totaling P700,000.00 which respondent claimed as payment of the P540,000.00 worth of loan, were not among the five checks found to be dishonored or bounced in the five criminal cases. Further, the MeTC found that respondent made an overpayment of the loan by reason of the interest which the latter paid to petitioner.39 Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury. Respondent testified that she experienced sleepless nights and wounded feelings when petitioner refused to return the amount paid as interest despite her repeated demands. Hence, the award of moral damages is justified. However, its corresponding amount

of P300,000.00, as fixed by the RTC and the Court of Appeals, is exorbitant and should be equitably reduced. Article 2216 of the Civil Code instructs that assessment of damages is left to the discretion of the court according to the circumstances of each case. This discretion is limited by the principle that the amount awarded should not be palpably excessive as to indicate that it was the result of prejudice or corruption on the part of the trial court.40 To our mind, the amount of P150,000.00 as moral damages is fair, reasonable, and proportionate to the injury suffered by respondent. Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary damages may be imposed if the defendant acted in an oppressive manner. Petitioner acted oppressively when he pestered respondent to pay interest and threatened to block her transactions with the PNO if she would not pay interest. This forced respondent to pay interest despite lack of agreement thereto. Thus, the award of exemplary damages is appropriate. The amount of P50,000.00 imposed as exemplary damages by the RTC and the Court is fitting so as to deter petitioner and other lenders from committing similar and other serious wrongdoings.41 Jurisprudence instructs that in awarding attorneys fees, the trial court must state the factual, legal or equitable justification for awarding the same.42 In the case under consideration, the RTC stated in its Decision that the award of attorneys fees equivalent to 25% of the amount paid as interest by respondent to petitioner is reasonable and moderate considering the extent of work rendered by respondents lawyer in the instant case and the fact that it dragged on for several years.43 Further, respondent testified that she agreed to compensate her lawyer handling the instant case such amount.44 The award, therefore, of attorneys fees and its amount equivalent to 25% of the amount paid as interest by respondent to petitioner is proper. Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount refundable to respondent computed from 3 March 1998 until its full payment. This is erroneous. We held in Eastern Shipping Lines, Inc. v. Court of Appeals,45 that when an obligation, not constituting a loan or forbearance of money is breached, an interest on the amount of damages awarded may be imposed at the rate of 6% per annum. We further declared that when the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether it is a loan/forbearance of money or not, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed equivalent to a forbearance of credit. In the present case, petitioners obligation arose from a quasi contract of solutio indebiti and not from a loan or forbearance of money. Thus, an interest of 6% per annum should be imposed on the amount to be refunded as well as on the damages awarded and on the attorneys fees, to be computed from the time of the extra-judicial demand on 3 March 1998,46 up to the finality of this Decision. In addition, the interest shall become 12% per annum from the finality of this Decision up to its satisfaction. WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16 December 2005, is hereby AFFIRMED with the following MODIFICATIONS: (1) the amount of P660,000.00 as refundable amount of interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND PESOS (P335,000.00); (2) the amount ofP300,000.00 imposed as moral damages is reduced to ONE

HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an interest of 6% per annum is imposed on the P335,000.00, on the damages awarded and on the attorneys fees to be computed from the time of the extra-judicial demand on 3 March 1998 up to the finality of this Decision; and (4) an interest of 12% per annum is also imposed from the finality of this Decision up to its satisfaction. Costs against petitioner. SO ORDERED.

G.R. No. 84719 January 25, 1991 YONG CHAN KIM, petitioner, vs. PEOPLE OF THE PHILIPPINES, HON. EDGAR D. GUSTILO, Presiding Judge, RTC, 6th Judicial Region, Branch 28 Iloilo City and Court of Appeals (13th Division) respondents.

In September 1983, two (2) complaints for Estafa were filed against the petitioner before the Municipal Circuit Trial Court at Guimbal, Iloilo, docketed as Criminal Case Nos. 628 and 631. After trial in Criminal Case No. 628, the Municipal Circuit Trial Court rendered a decision, the dispositive part of which reads as follows: IN VIEW OF THE FOREGOING CONSIDERATIONS, the court finds the accused, Yong Chan Kim, guilty beyond reasonable doubt for the crime of Estafa penalized under paragraph l(b) of Article 315, Revised Penal Code. Records disclose there is no aggravating circumstance proven by the prosecution. Neither there is any mitigating circumstance proven by the accused. Considering the amount subject of the present complaint, the imposable penalty should be in the medium period ofarresto mayor in its maximum period to prision correccional in its minimum period in accordance with Article 315, No. 3, Revised Penal Code. Consonantly, the Court hereby sentences the accused to suffer an imprisonment ranging from four (4) months as the minimum to one (1) year and six (6) months as the maximum in accordance with the Indeterminate Sentence Law and to reimburse the amount of P1,230.00 to SEAFDEC. The surety bond of the accused shall remain valid until final judgment in accordance herewith. Costs against the accused. 5 Criminal Case No. 631 was subsequently dismissed for failure to prosecute. Petitioner appealed from the decision of the Municipal Circuit Trial Court in Criminal Case No. 628. On 30 July 1987, the Regional Trial Court in Iloilo City in Criminal Case No. 20958 affirmed in toto the trial court's decision. 6 The decision of the Regional Trial Court was received by petitioner on 10 August 1987. On 11 August 1987, petitioner, thru counsel, filed a notice of appeal with the Regional Trial Court which ordered the elevation of the records of the case to the then Intermediate Appellate Court on the following day, 12 August 1987. The records of the case were received by the Intermediate Appellate Court on 8 October 1987, and the appeal was docketed as CA-G.R. No. 05035. On 30 October 1987, petitioner filed with the appellate court a petition for review. As earlier stated, on 29 April 1988, the Court of Appeals dismissed the petition for having been filed out of time. Petitioner's motion for reconsideration was denied for lack of merit. Hence, the present recourse. On 19 October 1988, the Court resolved to require the respondents to comment on the petition for review. The Solicitor

PADILLA, J.:p This petition seeks the review on certiorari of the following: 1. The decision dated 3 September 1986 of the 15th Municipal Circuit Trial Court (Guimbal-Igbaras-Tigbauan-Tubungan) in Guimbal, Iloilo, in Criminal Case No. 628, 1 and the affirming decision of the Regional Trial Court, Branch XXVIII, Iloilo City, in Criminal Case No. 20958, promulgated on 30 July 1987; 2 2. The decision of the Court of Appeals, dated 29 April 1988, 3 dismissing petitioner's appeal/petition for review for having been filed out of time, and the resolution, dated 19 August 1988, denying petitioner's motion for reconsideration. 4 The antecedent facts are as follows: Petitioner Yong Chan Kim was employed as a Researcher at the Aquaculture Department of the Southeast Asian Fisheries Development Center (SEAFDEC) with head station at Tigbauan, Province of Iloilo. As Head of the Economics Unit of the Research Division, he conducted prawn surveys which required him to travel to various selected provinces in the country where there are potentials for prawn culture. On 15 June 1982, petitioner was issued Travel Order No. 2222 which covered his travels to different places in Luzon from 16 June to 21 July 1982, a period of thirty five (35) days. Under this travel order, he received P6,438.00 as cash advance to defray his travel expenses. Within the same period, petitioner was issued another travel order, T.O. 2268, requiring him to travel from the Head Station at Tigbauan, Iloilo to Roxas City from 30 June to 4 July 1982, a period of five (5) days. For this travel order, petitioner received a cash advance of P495.00. On 14 January 1983, petitioner presented both travel orders for liquidation, submitting Travel Expense Reports to the Accounting Section. When the Travel Expense Reports were audited, it was discovered that there was an overlap of four (4) days (30 June to 3 July 1982) in the two (2) travel orders for which petitioner collected per diems twice. In sum, the total amount in the form of per diems and allowances charged and collected by petitioner under Travel Order No. 2222, when he did not actually and physically travel as represented by his liquidation papers, was P1,230.00. Petitioner was required to comment on the internal auditor's report regarding the alleged anomalous claim for per diems. In his reply, petitioner denied the alleged anomaly, claiming that he made make-up trips to compensate for the trips he failed to undertake under T.O. 2222 because he was recalled to the head office and given another assignment.

General filed his Comment on 20 January 1989, after several grants of extensions of time to file the same. In his Comment, the Solicitor General prayed for the dismissal of the instant petition on the ground that, as provided for under Section 22, Batas Pambansa 129, Section 22 of the Interim Rules and Guidelines, and Section 3, Rule 123 of the 1985 Rules of Criminal Procedure, the petitioner should have filed a petition for review with the then Intermediate Appellate Court instead of a notice of appeal with the Regional Trial Court, in perfecting his appeal from the RTC to the Intermediate Appellate Court, since the RTC judge was rendered in the exercise of its appellate jurisdiction over municipal trial courts. The failure of petitioner to file the proper petition rendered the decision of the Regional Trial Court final and executory, according to the Solicitor General. Petitioner's counsel submitted a Reply (erroneously termed Comment) 7 wherein she contended that the peculiar circumstances of a case, such as this, should be considered in order that the principle barring a petitioner's right of review can be made flexible in the interest of justice and equity. In our Resolution of 29 May 1989, we resolved to deny the petition for failure of petitioner to sufficiently show that the Court of Appeals had committed any reversible error in its questioned judgment which had dismissed petitioner's petition for review for having been filed out of time. 8 Petitioner filed a motion for reconsideration maintaining that his petition for review did not limit itself to the issue upon which the appellate court's decision of 29 April 1988 was based, but rather it delved into the substance and merits of the case. 9 On 10 August 1990, we resolved to set aside our resolution dismissing this case and gave due course to the petition. In the said resolution, we stated: In several cases decided by this Court, it had set aside technicalities in the Rules in order to give way to justice and equity. In the present case, we note that the petitioner, in filing his Notice of Appeal the very next day after receiving the decision of the court a quo lost no time in showing his intention to appeal, although the procedure taken was not correct. The Court can overlook the wrong pleading filed, if strict compliance with the rules would mean sacrificing justice to technicality. The imminence of a person being deprived unjustly of his liberty due to procedural lapse of counsel is a strong and compelling reason to warrant suspension of the Rules. Hence, we shall consider the petition for review filed in the Court of Appeals as a Supplement to the Notice of Appeal. As the Court declared in a recent decision, '. . . there is nothing sacred about the procedure of pleadings. This Court may go beyond the pleadings when the interest of justice so warrants. It has the prerogative to suspend its rules for the same purpose. . . . Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts. [Alonzo v. Villamor, et al., 16 Phil. 315]

Conscience cannot rest in allowing a man to go straight to jail, closing the door to his every entreaty for a full opportunity to be heard, even as he has made a prima facie showing of a meritorious cause, simply because he had chosen an appeal route, to be sure, recognized by law but made inapplicable to his case, under altered rules of procedure. While the Court of Appeals can not be faulted and, in fact, it has to be lauded for correctly applying the rules of procedure in appeals to the Court of Appeals from decisions of the RTC rendered in the exercise of its appellate jurisdiction, yet, this Court, as the ultimate bulwark of human rights and individual liberty, will not allow substantial justice to be sacrified at the altar of procedural rigor. 10 In the same resolution, the parties were required to file their respective memoranda, and in compliance with said resolution, petitioner filed his memorandum on 25 October 1989, while private respondent SEAFDEC filed its required memorandum on 10 April 1990. On the other hand, the Solicitor General filed on 13 March 1990 a Recommendation for Acquittal in lieu of the required memorandum. Two (2) issues are raised by petitioner to wit: I. WHETHER OR NOT THE DECISION (sic) OF THE MUNICIPAL CIRCUIT TRIAL COURT (GUIMBAL, ILOILO) AND THE REGIONAL TRIAL COURT, BRANCH 28 (ILOILO CITY) ARE SUPPORTED BY THE FACTS AND EVIDENCE OR CONTRARY TO LAW AND THAT THE TWO COURTS A QUO HAVE ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION OR HAVE ACTED WITHOUT OR IN EXCESS OF JURISDICTION. II. WHETHER OR NOT THE DECISION OF THE HONORABLE COURT OF APPEALS IS CONTRARY TO LAW, ESTABLISHED JURISPRUDENCE, EQUITY AND DUE PROCESS. The second issue has been resolved in our Resolution dated 10 August 1990, when we granted petitioner's second motion for reconsideration. We shall now proceed to the first issue. We find merit in the petition. It is undisputed that petitioner received a cash advance from private respondent SEAFDEC to defray his travel expenses under T.O. 2222. It is likewise admitted that within the period covered by T.O. 2222, petitioner was recalled to the head station in Iloilo and given another assignment which was covered by T.O. 2268. The dispute arose when petitioner allegedly failed to return P1,230.00 out of the cash advance which he received under T.O. 2222. For the alleged failure of petitioner to return the amount of P1,230.00, he was charged with the crime of Estafa under Article 315, par. 1(b) of the Revised Penal Code, which reads as follows: Art. 315. Swindling (Estafa). Any person who shall defraud another by any of the means mentioned herein below shall be punished by:

xxx xxx xxx 1. With unfaithfulness or abuse of confidence, namely: (a) xxx xxx xxx (b) By misappropriating or converting, to the prejudice of another, money, goods, or any other personal property received by the offender in trust or on commission, or for administration, or under any other obligation involving the duty to make delivery of; or to return, the same, even though such obligation be fatally or partially guaranteed by a bond; or by denying having received such money, goods, or other property. In order that a person can be convicted under the abovequoted provision, it must be proven that he had the obligation to deliver or return the same money, good or personal property that he had received. 11 Was petitioner under obligation to return the same money (cash advance) which he had received? We belive not. Executive Order No. 10, dated 12 February 1980 provides as follows: B. Cash Advance for Travel xxx xxx xxx 4. All cash advances must be liquidated within 30 days after date of projected return of the person. Otherwise, corresponding salary deduction shall be made immediately following the expiration day. Liquidation simply means the settling of an indebtedness. An employee, such as herein petitioner, who liquidates a cash advance is in fact paying back his debt in the form of a loan of money advanced to him by his employer, asper diems and allowances. Similarly, as stated in the assailed decision of the lower court, "if the amount of the cash advance he received is less than the amount he spent for actual travel . . . he has the right to demand reimbursement from his employer the amount he spent coming from his personal funds. 12 In other words, the money advanced by either party is actually a loan to the other. Hence, petitioner was under no legal obligation to return the same cash or money, i.e., the bills or coins, which he received from the private respondent. 13 Article 1933 and Article 1953 of the Civil Code define the nature of a simple loan. Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. The ruling of the trial judge that ownership of the cash advanced to the petitioner by private respondent was not transferred to the latter is erroneous. Ownership of the money was transferred to the petitioner. Even the prosecution witness, Virgilio Hierro, testified thus: Q When you gave cash advance to the accused in this Travel Order No. 2222 subject to liquidation, who owns the funds, accused or SEAFDEC? How do you consider the funds in the possession of the accused at the time when there is an actual transfer of cash? . . . A The one drawing cash advance already owns the money but subject to liquidation. If he will not liquidate, be is obliged to return the amount. Q xxx xxx xxx So why do you treat the itinerary of travel temporary when in fact as of that time the accused owned already the cash advance. You said the cash advance given to the accused is his own money. In other words, at the time you departed with the money it belongs already to the accused? A Yes, but subject for liquidation. He will be only entitled for that credence if he liquidates. Q If other words, it is a transfer of ownership subject to a suspensive condition that he liquidates the amount of cash advance upon return to station and completion of the travel?

A Yes, sir. (pp. 26-28, tsn, May 8, 1985). 14 Since ownership of the money (cash advance) was transferred to petitioner, no fiduciary relationship was created. Absent this fiduciary relationship between petitioner and private respondent, which is an essential element of the crime of estafa by misappropriation or conversion, petitioner could not have committed estafa. 15 Additionally, it has been the policy of private respondent that all cash advances not liquidated are to be deducted correspondingly from the salary of the employee concerned. The evidence shows that the corresponding salary deduction was made in the case of petitioner vis-a-vis the cash advance in question. WHEREFORE, the decision dated 3 September 1986 of the 15th Municipal Circuit Trial Court in Guimbal, Iloilo in Criminal Case No. 628, finding petitioner guilty of estafa under Article 315, par. 1 (b) of the Revised Penal Code and the affirming decision of the Regional Trial Court, Branch XXVIII, Iloilo City, in Criminal Case No. 20958, promulgated on 30 July 1987 are both hereby SET ASIDE. Petitioner is ACQUITTED of criminal charge filed against him. SO ORDERED.

SPOUSES ANTONIO and LOLITA TAN, Petitioners,

G.R. No. 160892 Present: PANGANIBAN, J., Chairman, SANDOVAL-GUTIERREZ,* CORONA, CARPIO MORALES, and GARCIA, JJ. Promulgated:

- versus -

By their Answer,[9] petitioners, denying having gone to Malita and having obtained a loan from respondent, alleged that the check was issued by respondent in Davao City on February 6, 1992 in exchange for equivalent cash; they never received from respondent any demand for payment, be it verbal or written, respecting the alleged loan; since the alleged loan was one with a period payable in six months, it should have been expressly stipulated upon in writing by the parties but it was not, hence, the essential requisite for the validity and enforceability of a loan is wanting; and the check is inadmissible to prove the existence of a loan forP250,000.00. By way of Compulsory Counterclaim, petitioners prayed for the award of damages and litigation expenses and attorneys fees.[10] Crediting defendants-petitioners version, Branch 19 of the RTC, Digos, Davao del Sur, by Decision[11] of July 24, 1996, dismissed the Complaint and granted the Counterclaim, disposing as follows: WHEREFORE, premises considered, judgment is hereby rendered as follows: 1. 2. Ordering the dismissal of the complaint; On the counterclaim ordering the plaintiff Carmelito Villapaz to pay to defendants spouses Antonio and Lolita Tan: a. b. c. P100,000.00 as moral damages; P50,000.00 as exemplary damages; P30,000.00 as attorneys fees; and

CARMELITO VILLAPAZ, espondent.

November 22, 2005

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DECISION

CARPIO MORALES, J.: From the January 25, 2001 decision[1] of the Court of Appeals reversing that of the Regional Trial Court (RTC) of Digos, Davao del Sur[2] which dismissed the complaint filed by herein respondent Carmelito Villapaz against herein petitioners-spouses Antonio Tony and Lolita Tan, the present Petition for Review on Certiorari[3] was lodged. On February 6, 1992, respondent issued a Philippine Bank of Communications (PBCom) crossed check[4] in the amount ofP250,000.00, payable to the order of petitioner Tony Tan. On even date, the check was deposited at the drawee bank, PBCom Davao City branch at Monteverde Avenue, to the account of petitioner Antonio Tan also at said bank. The Malita, Davao del Sur Police, by letter of June 22, issued an invitation-request to petitioner Antonio Tan at his address at Malatibas Plaza, Lolitas Rendezvous, Bonifacio St., Davao City inviting him to appear before the Deputy Chief of Police Office on June 27, 1994 at 9:00 oclock in the morning in connection with the request of [herein respondent] Carmelito Villapaz, for conference of vital importance. 1994,[5] The invitation-request was received by petitioner Antonio Tan on June 22, 1994[6] but on the advice of his lawyer,[7] he did not show up at the Malita, Davao del Sur Police Office. On November 7, respondent filed before the Digos, Davao del Sur RTC a Complaint for sum of money against petitioners-spouses, alleging that, inter alia, on February 6, 1992, petitioners-spouses repaired to his place of business at Malita, Davao and obtained a loan of P250,000.00, hence, his issuance of the February 6, 1992 PBCom crossed check which loan was to be settled interest-free in six (6) months; on the maturity date of the loan or on August 6, 1992, petitioner Antonio Tan failed to settle the same, and despite repeated demands, petitioners never did, drawing him to file the complaint thru his counsel to whom he agreed to pay 30% of the loan as attorneys fees on a contingent basis and P1,000.00 per appearance fee; and on account of the willful refusal of petitioners to honor their obligation, he suffered moral damages in the amount of P50,000.00, among other things. 1994,[8]

3. pay the costs. original)[12]

Plaintiff Carmelito Villapaz to

SO ORDERED. (Underscoring in the

Respondent appealed to the Court of Appeals which, by Decision[13] of January 25, 2001, credited his version and accordingly reversed the trial courts decision in this wise: Briefly stated, the lower Court gave four reasons for ruling out a loan, namely: (a) the defense of defendants-appellees that they did not go to plaintiff-appellants place on February 6, 1992, date the check was given to them; (b) defendantsappellees could not have borrowed money on that date because from January to March, 1992, they had an average daily deposit of P700,000 and on February 6, 1992, they hadP1,211,400.64 in the bank, hence, they had surely no reason nor logic to borrow money from plaintiffappellant; (c) the alleged loan was not

reduced in writing and (d) the check could not be a competent evidence of loan. A: The four-fold reasoning cannot be sustained. They are faulty and do not accord either with law or ordinary conduct of men. For one thing, the first two given reasons partake more of alibi and speculation, hence, deserve scant consideration. For another, the last two miss the applicable provisions of law. The existence of a contract of loan cannot be denied merely because it is not reduced in writing. Surely, there can be a verbal loan. Contracts are binding between the parties, whether oral or written. The law is explicit that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present. A loan (simple loan or mutuum) exists when a person receives a loan of money or any other fungible thing and acquires the ownership thereof. He is bound to pay to the creditor the equal amount of the same kind and quality. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, maybe in keeping with good faith, usage and law. The lower Court misplaced its reliance on Article 1358 of the Civil Code providing that to be enforceable, contracts where the amount involved exceed five hundred pesos, must appear in writing. Such requirement, it has been held, is only for convenience, not for validity. It bears emphasis that at the time plaintiff-appellant delivered the crossedcheck to defendants-appellees, plaintiffappellant had no account whatsoever with them. Defendants-appellees contention that they did not obtain any loan but merely exchanged the latters check for cash is not borne by any evidence. Notably, plaintiff-appellant and defendant-appellee Antonio Tan are compadres, one of them being a godfather to the others son. There is no established enmity between them such that plaintiffappellant would be motivated to institute an unfounded action in court. Plaintiffappellants sole purpose was to be paid back the loan he extended to defendantsappellees. Thus, a pertinent portion of his testimony on cross-examination discloses: ATTY. TAN (On Cross Examination): Q: Now, aside from this check that you issued, did you let the

defendant sign a cash voucher? I did not require him any cash voucher or any written document because as I said we are close friends and I trusted him so I issued a check in his name Tony Tan. You said that the spouses Tan were in need of money on February 6, 1992. Why did you have to issue a cross-check? I issued a cross-check in order to be sure that he received the money from me so that he could not deny that he did not receive. (TSN of Villapaz dtd 7/25/95, p. 21)

Q:

A:

Apart from their self-serving testimonies, there is no evidence or proof that defendants-appellees actually delivered to plaintiff-appellant the cash amount of P250,000.00 in exchange for the check. Defendant-appellee Tan testified that he records his transactions if it involves a huge cash amount. But surprisingly in this case, he did not follow his usual practice. ATTY. Q: CARPENTERO (On Examination): Cross-

x x x you have noticed Carmelito Villapaz to have trusted and have full confidence in you during your business relationship, correct? A: All people have trust and confidence but whenever there is a transaction, it should be covered a (sic) proof. You mean you are a fellow who adheres that every transaction should be recorded? Yes, if the transaction involves a big amount, But in this case of Carmelito Villapaz you noticed personally that he has trust and confidence in your person, correct? The truth is, if ever we have a transaction which involves P1,000.00 or P2,000.00, we need no document at all as proof, but because it is a big amount, it needs

Q:

A: Q:

A:

documents. (TSN of Tan dtd 5/9/96, pp. 12-13. Plaintiff-appellant has a checking account with PBCom Bank. This is located within walking distance (300 meters) from defendants-appellees store. If plaintiffappellant was in dire need of money, he could have personally withdrawn said money from his own account, since it was sufficiently funded. Defendantappellee Antonio Tan himself testified that plaintiff-appellants check was sufficiently funded. It is well-nigh unlikely that the wife who was supposed to have delivered the money on such a short notice, produced, prepared and counted the money at home from Obrero, Davao City, then delivered it to plaintiff-appellant who was in the Golden Harvest Store at Sta Ana Avenue, Davao City. In contrast, PBCom Bank where plaintiff-appellant has his account is in the same vicinity of the store of Golden Harvest. Certainly, by way of exception to the general rule, the erroneous inferences in the factual finding of the trial Court cannot bind the appellate courts. The trial Court placed much emphasis on the daily and time deposit accounts of defendants-appellees. It is immaterial whether or not one is financially capable. A pauper may borrow money for survival; a prince may incur a loan for expansion.[14] (Emphasis supplied; underscoring in the original)

II. The Honorable Court likewise erred in reasoning that the trial court placed much emphasis on the daily and time deposits of herein petitioners to determine their financial capability. III. The Honorable Court failed to consider the wanton, reckless manner of respondent in attempting to enforce an obligation that does not even exist, thus justifying the award for moral and exemplary damages, as well as attorneys fees and costs of suit.[16] (Underscoring supplied) Petitioners maintain that they did not secure a loan from respondent, insisting that they encashed in Davao City respondents February 6, 1992 crossed check; in the ordinary course of business, prudence dictates that a contract of loan must be in writing as in fact the New Civil Code provides that to be enforceable contracts where the amount involved exceed[s] P500.00 must appear in writing even a private one, hence, respondents self-serving claim does not suffice to prove the existence of a loan; respondents allegation that no memorandum in writing of the transaction was executed because he and they are kumpadres does not inspire belief for respondent, being a businessman himself, was with more reason expected to be more prudent; and the mere encashment of the check is not a contractual transaction such as a sale or a loan which ordinarily requires a receipt and that explains why they did not issue a receipt when they encashed the check of respondent. Petitioners add that they could not have gone to Malita on February 6, 1992, as claimed by respondent, to obtain the alleged loan represented by the check because February 6, 1992 was the opening for business in Davao City of Golden Harvest of which petitioner Antonio Tan is treasurer and in-charge of the bodega, during which opening guests and well-wishers including respondent were entertained. Petitioners furthermore maintain that they were financially stable on February 6, 1992 as shown by the entries of their bank passbook,[17] hence, there was no reason for them to go to a distant place like Malita to borrow money. The petition fails. By petitioner Antonio Tans account, respondent arrived at the Golden Harvest place of business at Davao City on February 6, 1992 at about 10:30 in the morning[18] and left before noon of the same day; respondent, however, returned to Golden Harvest shortly before 3:00 oclock in the afternoon of the same day upon which he informed him (petitioner Antonio Tan) that he needed to bring cash to Malita in the amount of P250,000.00 but time was running out and . . . he was so busy that was why he requested [him] to accommodate (sic) the said amount at 3:00 p.m.[19]

Thus, the Court of Appeals disposed: WHEREFORE, the appealed judgment is hereby REVERSED and SET ASIDE. Defendants-appellees are ordered to pay plaintiff-appellant the sum of P250,000.00 with 12% interest per annum from judicial demand or filing of the complaint in Court until fully paid.[15]

Hence, the present appeal by petitioners anchored on the following grounds: I. The Honorable Court of Appeals erred in concluding that the transaction in dispute was a contract of loan and not a mere matter of check encashment as found by the trial court.

Still by petitioner Antonio Tans account, he thereupon inquire by telephone from his wife who was at their house whether she had P250,000.00 cash and as his wife replied she had, he asked her to bring the cash, as she did, to the Golden Harvest where she gave the amount of P250,000.00 to him (petitioner Antonio Tan); in the meantime, as respondent had left for a while but not before leaving the check, he (petitioner Antonio Tan) kept the P250,000.00 cash and gave the check to his wife who had it deposited on thesame afternoon to his account at PBCom Monteverde branch after he received clearance from the bank manager, who knows him (petitioner Antonio Tan) very well, that respondents account at same branch of the bank was funded and the check could be deposited and credited to his (petitioner Antonio Tans) account that same afternoon; and when later that same afternoon respondent returned to the Golden Harvest, he turned over to him the P250,000.00 cash. Petitioner Antonio Tans foregoing tale hardly inspires credence. For it is contrary to common experience. If indeed respondent, who came all the way from Malita to Davao City, arriving at petitioner Antonio Tans workplace at Golden Harvest at 10:30 in the morning, needed cash of P250,000.00, and the drawee bank PBCom Davao City, Monteverde branch where respondent maintained a current account could even be reached by foot from the Golden Harvest in just a few minutes (albeit by petitioner Antonio Tans own information respondent brought his truck with him),[20] it being about 300 meters away,[21] respondent could just have gone there and drew cash from his current account via over the counter transaction. After all, his account had sufficient funds. In other words, he did not have to encash his check from petitioners. Even assuming that, as claimed by petitioner Antonio Tan, at the time respondent needed to have his check encashed, it was already close to 3:00 oclock in the afternoon, why could not have PBCom Monteverde branch also accommodated him and allow him to encash his check that same time when he, like petitioners, was also a client-depositor and the bank was still open for business? Petitioners version was thus correctly denied credit by the appellate court. That apart from the check no written proof of the grant of the loan was executed was credibly explained by respondent when he declared that petitioners son being his godson, he , out of trust and respect, believed that the crossed check sufficed to prove their transaction. As for petitioners reliance on Art. 1358[22] of the Civil Code, the same is misplaced for the requirement that contracts where the amount involved exceeds P500.00 must appear in writing is only for convenience.[23] At all events, a check, the entries of which are no doubt in writing, could prove a loan transaction.[24] That petitioner Antonio Tan had, on February 6, 1992, an outstanding balance of more than P950,000.00 in his account at PBCom Monteverde branch where he was later to deposit respondents check did not rule out petitioners securing a loan. It is pure naivete to believe that if a businessman has such an outstanding balance in his bank account, he would have no need to borrow a lesser amount. In fine, as petitioners side of the case is incredible as it is inconsistent with the principles by which men similarly situated are governed, whereas respondents claim that the proceeds of

the check, which were admittedly received by petitioners, represented a loan[25] extended to petitioner Antonio Tan is credible, the preponderance of evidence inclines on respondent. WHEREFORE, the present petition is DENIED. Costs against petitioners. SO ORDERED.

G.R. No. 97412 July 12, 1994 EASTERN SHIPPING LINES, INC., petitioner, vs. HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.

consignee suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L). As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee against defendants (per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O). (pp. 85-86, Rollo.) There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said: Defendants filed their respective answers, traversing the material allegations of the complaint contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged in good order from the vessel unto the custody of Metro Port Service so that any damage/losses incurred after the shipment was incurred after the shipment was turned over to the latter, is no longer its liability (p. 17, Record); Metroport averred that although subject shipment was discharged unto its custody, portion of the same was already in bad order (p. 11, Record); Allied Brokerage alleged that plaintiff has no cause of action against it, not having negligent or at fault for the shipment was already in damage and bad order condition when received by it, but nonetheless, it still exercised extra ordinary care and diligence in the handling/delivery of the cargo to consignee in the same condition shipment was received by it. From the evidence the court found the following: The issues are: 1. Whether or not the shipment sustained losses/damages; 2. Whether or not these losses/damages were sustained while in the custody of defendants (in whose respective custody, if determinable); 3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's pre-Trial Brief, Records, p. 34; Allied's preTrial Brief, adopting plaintiff's Records, p. 38).

VITUG, J.: The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker; (b) whether the payment of legal interest on an award for loss or damage is to be computed from the time the complaint is filed or from the date the decision appealed from is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent (12%) or six percent (6%). The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts that have led to the controversy are hereunder reproduced: This is an action against defendants shipping company, arrastre operator and brokerforwarder for damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who paid the consignee the value of such losses/damages. On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of Lading No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No. 81/01177 for P36,382,466.38. Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which damage was unknown to plaintiff. On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey." Exh. D). On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E). Plaintiff contended that due to the losses/damage sustained by said drum, the

As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two drums were shipped in good order and condition, as clearly shown by the Bill of Lading and Commercial Invoice which do not indicate any damages drum that was shipped (Exhs. B and C). But when on December 12, 1981 the shipment was delivered to defendant Metro Port Service, Inc., it excepted to one drum in bad order. Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in the respective and/or successive custody and possession of defendants carrier (Eastern), arrastre operator (Metro Port) and broker (Allied Brokerage). This becomes evident when the Marine Cargo Survey Report (Exh. G), with its "Additional Survey Notes", are considered. In the latter notes, it is stated that when the shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila on December 12, 1981, it was observed that "one (1) fiber drum (was) in damaged condition, covered by the vessel's Agent's Bad Order Tally Sheet No. 86427." The report further states that when defendant Allied Brokerage withdrew the shipment from defendant arrastre operator's custody on January 7, 1982, one drum was found opened without seal, cello bag partly torn but contents intact. Net unrecovered spillages was 15 kgs. The report went on to state that when the drums reached the consignee, one drum was found with adulterated/faked contents. It is obvious, therefore, that these losses/damages occurred before the shipment reached the consignee while under the successive custodies of defendants. Under Art.

1737 of the New Civil Code, the common carrier's duty to observe extraordinary diligence in the vigilance of goods remains in full force and effect even if the goods are temporarily unloaded and stored in transit in the warehouse of the carrier at the place of destination, until the consignee has been advised and has had reasonable opportunity to remove or dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad Order Cargoes" (Exhs. 3Eastern) states that on December 12, 1981 one drum was found "open". and thus held: WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered: A. Ordering defendants to pay plaintiff, jointly and severally: 1. The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982, the date of filing of this complaints, until fully paid (the liability of defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss, whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall be to the extent of the actual invoice value of each package, crate box or container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract); 2. P3,000.00 as attorney's fees, and 3. Costs. B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage Corporation.

SO ORDERED. (p. 207, Record). Dissatisfied, defendant's recourse to US. The appeal is devoid of merit. After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is correct. As there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 87-89, Rollo.) The Court of Appeals thus affirmed in toto the judgment of the court a quo. In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of discretion on the part of the appellate court when I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION; II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED. The petition is, in part, granted. In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack to. The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articles are surrendered to or unconditionally placed in the possession of, and received by, the carrier for transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when such presumption of fault is not observed but these cases, enumerated

in Article 1734 1 of the Civil Code, are exclusive, not one of which can be applied to this case. The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and the arrastre operator liable in solidum,thus: The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between the consignee and the common carrier is similar to that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and to deliver them in good condition to the consignee, such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in good condition to the consignee. We do not, of course, imply by the above pronouncement that the arrastre operator and the customs broker are themselves always and necessarily liable solidarily with the carrier, or viceversa, nor that attendant facts in a given case may not vary the rule. The instant petition has been brought solely by Eastern Shipping Lines, which, being the carrier and not having been able to rebut the presumption of fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a quo and the appellate court, we take note, is that "there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants" (the herein petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is inevitable regardless of whether there are others solidarily liable with it. It is over the issue of legal interest adjudged by the appellate court that deserves more than just a passing remark. Let us first see a chronological recitation of the major rulings of this Court: The early case of Malayan Insurance Co., Inc., vs. Manila Port Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries and pilferage of goods . In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint that the total amount of its claim for the value of the undelivered goods amounted to P3,947.20. This demand, however, was neither established in its totality nor definitely ascertained. In the stipulation of facts later entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the complaint was filed on 28 December 1962 until full payment thereof. The appellants then assailed, inter alia, the award of legal interest. In sustaining the appellants, this Court ruled:

Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial. The trial court opted for judicial demand as the starting point. But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty." And as was held by this Court in Rivera vs. Perez, 4 L-6998, February 29, 1956, if the suit were for damages, "unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof (Montilla c.Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman, 38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied) The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of Damages for Injury to Person and Loss of Property." After trial, the lower court decreed: WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants and against the defendants and third party plaintiffs as follows: Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and severally the following persons: xxx xxx xxx (g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the value of the boat F B Pacita III together with its accessories, fishing gear and equipment minus P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a month as the estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time they are actually paid or already the total sum of P370,000.00 as of June 4, 1972 with legal interest from the filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs against defendants and third party plaintiffs. (Emphasis supplied.) On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained the trial court in adjudging legal interest from the filing of the complaint until fully paid. When the appellate court's decision became final, the case was remanded to the lower court for execution, and this was when the trial court issued its assailed resolution which applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their petition for review on certiorari, the petitioners contended that Central Bank Circular No. 416, providing thus

By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be twelve (12%) percent per annum. This Circular shall take effect immediately. (Emphasis found in the text) should have, instead, been applied. This Court 6 ruled: The judgments spoken of and referred to are judgments in litigations involving loans or forbearance of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with, nor involving loans or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not within the ambit of the authority granted to the Central Bank. xxx xxx xxx Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for Damages for injury to persons and loss of property and does not involve any loan, much less forbearances of any money, goods or credits. As correctly argued by the private respondents, the law applicable to the said case is Article 2209 of the New Civil Code which reads Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which is six percent per annum. The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July 1986. The case was for damages occasioned by an injury to person and loss of property. The trial court awarded private respondent Pedro Manabat actual and compensatory damages in the amount of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on the Reformina v. Tomol case, this Court 8modified the interest award from 12% to 6% interest per annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully paid. In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages arising from the collapse of a building, ordered, inter alia, the "defendant United Construction Co., Inc. (one of the petitioners) . . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date of the filing of the

complaint until full payment . . . ." Save from the modification of the amount granted by the lower court, the Court of Appeals sustained the trial court's decision. When taken to this Court for review, the case, on 03 October 1986, was decided, thus: WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental circumstances of this case, we deem it reasonable to render a decision imposing, as We do hereby impose, upon the defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra. p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception to attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum shall be imposed upon aforementioned amounts from finality until paid. Solidary costs against the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis supplied) A motion for reconsideration was filed by United Construction, contending that "the interest of twelve (12%) per cent per annum imposed on the total amount of the monetary award was in contravention of law." The Court 10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained: There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit; and (3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is neither a loan or a forbearance, but then no interest is actually imposed provided the sums referred to in the judgment are paid upon the finality of the judgment. It is delay in the payment of such final judgment, that will cause the imposition of the interest. It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum, from the filing of the complaint until paid; in other words, as part of the judgment for damages. Clearly, they are not applicable to the instant case. (Emphasis supplied.) The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court 11 was a petition for review

on certiorari from the decision, dated 27 February 1985, of the then Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the right of the private respondent to recover damages, held the award, however, for moral damages by the trial court, later sustained by the IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court and rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied) Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from a breach of employment contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral and exemplary damages without, however, providing any legal interest thereon. When the decision was appealed to the Court of Appeals, the latter held: WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except defendantappellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in the dispositive portion of the decision, including the sum of P1,400.00 in concept of compensatory damages, with interest at the legal rate from the date of the filing of the complaint until fully paid(Emphasis supplied.) The petition for review to this Court was denied. The records were thereupon transmitted to the trial court, and an entry of judgment was made. The writ of execution issued by the trial court directed that only compensatory damages should earn interest at 6% per annum from the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition for certiorari assailed the said order. This Court said: . . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate" from the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416] does not apply to actions based on a breach of employment contract like the case at bar. (Emphasis supplied) The Court reiterated that the 6% interest per annum on the damages should be computed from the time the complaint was filed until the amount is fully paid. Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs. Angas, 14decided on 08 May 1992, involved the expropriation of certain parcels of land. After conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to pay the private

respondents certain sums of money as just compensation for their lands so expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest per annum under the Civil Code, the Court 15 declared: . . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but expropriation of certain parcels of land for a public purpose, the payment of which is without stipulation regarding interest, and the interest adjudged by the trial court is in the nature of indemnity for damages. The legal interest required to be paid on the amount of just compensation for the properties expropriated is manifestly in the form of indemnity for damages for the delay in the payment thereof. Therefore, since the kind of interest involved in the joint judgment of the lower court sought to be enforced in this case is interest by way of damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil Code shall apply. Concededly, there have been seeming variances in the above holdings. The cases can perhaps be classified into two groups according to the similarity of the issues involved and the corresponding rulings rendered by the court. The "first group" would consist of the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz(1986), Florendo v. Ruiz (1989) and National Power Corporation v. Angas (1992). In the "second group" would be Malayan Insurance Company v.Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American Express International v.Intermediate Appellate Court (1988). In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases that there has been a consistent holding that the Central Bank Circular imposing the 12% interest per annum applies only to loans or forbearance 16 of money, goods or credits, as well as to judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general. Observe, too, that in these cases, a common time frame in the computation of the 6% interest per annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid. The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per annum, 17depending on whether or not the amount involved is a loan or forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group" which remained consistent in holding that the running of the legal interest should be from the time of the filing of the complaint until fully paid, the "second group" varied on the commencement of the running of the legal interest. Malayan held that the amount awarded should bear legal interest from the date of the decision of the court a quo,explaining that "if the suit were for damages, 'unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the date of the decision.'" American Express International v. IAC, introduced a

different time frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision until paid ." The Nakpil and Sons case ruled that 12% interest per annum should be imposed from the finality of the decision until the judgment amount is paid. The ostensible discord is not difficult to explain. The factual circumstances may have called for different applications, guided by the rule that the courts are vested with discretion, depending on the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest the following rules of thumb for future guidance. I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 20 II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. 22 In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 23 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court 24 at the rate of 6% per annum. 25 No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. 26 Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment thereof. SO ORDERED.

PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and ROGELIO S. PANTALEON, Petitioners,

G.R. No. 160545 Present:

*NACHURA,

Arthur F. Menchavez, representing a sixmonth loan payable according to the following schedule: January 8, 1994 . P40,000. 00 February 8, 1994 ... P40,000.0 0 March 8, 1994 ... P40,000 .00 April 8, 1994 . P40,00 0.00 May 8, 1994 .. P40,00 0.00 June 8, 1994 P1,040,0 00.00 The checks corresponding to the above amounts are hereby acknowledged.[8] and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed the promissory note in his personal capacity,[9] and as duly authorized by the Board of Directors of PRISMA.[10] The petitioners failed to completely pay the loan within the stipulated six (6)-month period. From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to the respondent: September 8, 1994 P320,000.00 October 8, 1995.P600,000.00 November 8, 1995.....P158,772.00 January 4, 1997 P30,000.00[11] As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00. However, the respondent found that the petitioners still had an outstanding balance of P1,364,151.00 as of January 4, 1997, to which it applied a 4% monthly interest.[12] Thus, on August 28, 1997, the respondent filed a complaint for sum of money with the RTC to enforce the unpaid balance, plus 4% monthly interest, P30,000.00 in attorneys fees, P1,000.00 per court appearance and costs of suit.[13] In their Answer dated October 6, 1998, the petitioners admitted the loan of P1,240,000.00, but denied the stipulation on the 4% monthly interest, arguing that the interest was not provided in the promissory note. Pantaleon also denied that he made himself personally liable and that he made representations that the loan would be repaid within six (6) months.[14] THE RTC RULING The RTC rendered a Decision on October 27, 2000 finding that the respondent issued a check for P1,000,000.00 in favor of the petitioners for a loan that would earn an interest of 4% or P40,000.00 per month, or a total of P240,000.00 for a 6-month period. It noted that the petitioners made several payments amounting to P1,228,772.00, but they were still indebted to the

versus -

J., BRION, Acting Chairperson, DEL CASTILLO, ABAD, and PEREZ, JJ.

ARTHUR F. MENCHAVEZ , Respondent.

Promulgated: March 9, 2010

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

We resolve in this Decision the petition for review on certiorari[1] filed by petitioners Prisma Construction & Development Corporation (PRISMA) and Rogelio S. Pantaleon (Pantaleon) (collectively, petitioners) who seek to reverse and set aside the Decision[2] dated May 5, 2003 and the Resolution[3] dated October 22, 2003 of the Former Ninth Division of the Court of Appeals (CA) in CA-G.R. CV No. 69627. The assailed CA Decision affirmed the Decision of the Regional Trial Court (RTC), Branch 73, Antipolo City in Civil Case No. 974552 that held the petitioners liable for payment of P3,526,117.00 to respondent Arthur F. Menchavez (respondent), but modified the interest rate from 4% per month to 12% per annum, computed from the filing of the complaint to full payment. The assailed CA Resolution denied the petitioners Motion for Reconsideration. FACTUAL BACKGROUND The facts of the case, gathered from the records, are briefly summarized below. On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA, obtained a P1,000,000.00[4] loan from the respondent, with a monthly interest of P40,000.00 payable for six months, or a total obligation of P1,240,000.00 to be paid within six (6) months,[5] under the following schedule of payments: January 8, 1994 . P40,000.00 February 8, 1994 ... P40,000.00 March 8, 1994 ... P40,000.00 April 8, 1994 . P40,000.00 May 8, 1994 .. P40,000.00 June 8, 1994 P1,040,000.00[6] Total P1,240,000.00 To secure the payment of the loan, Pantaleon issued a promissory note[7] that states: I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO HUNDRED FORTY THOUSAND PESOS (P1,240,000), Philippine Currency, from Mr.

respondent forP3,526,117.00 as of February 11,[15] 1999 after considering the 4% monthly interest. The RTC observed that PRISMA was a one-man corporation of Pantaleon and used this circumstance to justify the piercing of the veil of corporate fiction. Thus, the RTC ordered the petitioners to jointly and severally pay the respondent the amount of P3,526,117.00 plus 4% per month interest from February 11, 1999 until fully paid.[16] The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of the Rules of Court, insisting that there was no express stipulation on the 4% monthly interest. THE CA RULING The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to a 4% monthly interest principally based on the board resolution that authorized Pantaleon to transact a loan with an approved interest of not more than 4% per month. The appellate court, however, noted that the interest of 4% per month, or 48% per annum, was unreasonable and should be reduced to 12% per annum. The CA affirmed the RTCs finding that PRISMA was a mere instrumentality of Pantaleon that justified the piercing of the veil of corporate fiction. Thus, the CA modified the RTC Decision by imposing a 12% per annum interest, computed from the filing of the complaint until finality of judgment, and thereafter, 12% from finality until fully paid.[17] After the CA's denial[18] of their motion for reconsideration,[19] the petitioners filed the present petition for review oncertiorari under Rule 45 of the Rules of Court. THE PETITION The petitioners submit that the CA mistakenly relied on their board resolution to conclude that the parties agreed to a 4% monthly interest because the board resolution was not an evidence of a loan or forbearance of money, but merely an authorization for Pantaleon to perform certain acts, including the power to enter into a contract of loan. The expressed mandate of Article 1956 of the Civil Code is that interest due should be stipulated in writing, and no such stipulation exists. Even assuming that the loan is subject to 4% monthly interest, the interest covers the six (6)-month period only and cannot be interpreted to apply beyond it. The petitioners also point out the glaring inconsistency in the CA Decision, which reduced the interest from 4% per month or 48% per annum to 12% per annum, but failed to consider that the amount of P3,526,117.00 that the RTC ordered them to pay includes the compounded 4% monthly interest. THE CASE FOR THE RESPONDENT The respondent counters that the CA correctly ruled that the loan is subject to a 4% monthly interest because the board resolution is attached to, and an integral part of, the promissory note based on which the petitioners obtained the loan. The respondent further contends that the petitioners are estopped from assailing the 4% monthly interest, since they agreed to pay the 4% monthly interest on the principal amount under the promissory note and the board resolution. THE ISSUE The core issue boils down to whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate of interest apply to the 6-month payment period only or until full payment of the loan?

OUR RULING We find the petition meritorious. Interest due should be stipulated in writing; otherwise, 12% per annum Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.[20] When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulations governs.[21] In such cases, courts have no authority to alter the contract by construction or to make a new contract for the parties; a court's duty is confined to the interpretation of the contract the parties made for themselves without regard to its wisdom or folly, as the court cannot supply material stipulations or read into the contract words the contract does not contain.[22] It is only when the contract is vague and ambiguous that courts are permitted to resort to the interpretation of its terms to determine the parties intent. In the present case, the respondent issued a check for P1,000,000.00.[23] In turn, Pantaleon, in his personal capacity and as authorized by the Board, executed the promissory note quoted above. Thus, the P1,000,000.00 loan shall be payable within six (6) months, or from January 8, 1994 up to June 8, 1994. During this period, the loan shall earn an interest of P40,000.00 per month, for a total obligation of P1,240,000.00 for the six-month period. We note that this agreed sum can be computed at 4% interest per month, but no such rate of interest was stipulated in the promissory note; rather a fixed sum equivalent to this rate was agreed upon. Article 1956 of the Civil Code specifically mandates that no interest shall be due unless it has been expressly stipulated in writing. Under this provision, the payment of interest in loans or forbearance of money is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of interest at a stipulated rate. Thus, we held in Tan v. Valdehueza[24] and Ching v. Nicdao[25] that collection of interest without any stipulation in writing is prohibited by law. Applying this provision, we find that the interest of P40,000.00 per month corresponds only to the six (6)-month period of the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the promissory note. Thereafter, the interest on the loan should be at the legal interest rate of 12% per annum, consistent with our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals:[26] When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. (Emphasis supplied)

We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61,[27] Sulit v. Court of Appeals,[28] Crismina Garments, Inc. v. Court of Appeals,[29] Eastern Assurance and Surety Corporation v. Court of Appeals,[30] Sps. Catungal v. Hao,[31] Yong v. Tiu,[32] and Sps. Barrera v. Sps. Lorenzo.[33] Thus, the RTC and the CA misappreciated the facts of the case; they erred in finding that the parties agreed to a 4% interest, compounded by the application of this interest beyond the promissory notes six (6) month period. The facts show that the parties agreed to the payment of a specific sum of money of P40,000.00 per month for six months, not to a 4% rate of interest payable within a six (6)month period. Medel v. Court of Appeals not applicable The CA misapplied Medel v. Court of Appeals[34] in finding that a 4% interest per month was unconscionable. In Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5% per month, a service charge of 2% per annum, and a penalty charge of 1% per month, plus attorneys fee equivalent to 25% of the amount due, until the loan is fully paid. Taken in conjunction with the stipulated service charge and penalty, we found the interest rate of 5.5% to be excessive, iniquitous, unconscionable, exorbitant and hence, contrary to morals, thereby rendering the stipulation null and void. Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon v. Salazar[35] of 6% per month or 72% per annum interest on a P60,000.00 loan; in Ruiz v. Court of Appeals,[36] of 3% per month or 36% per annum interest on aP3,000,000.00 loan; in Imperial v. Jaucian,[37] of 16% per month or 192% per annum interest on a P320,000.00 loan; in Arrofo v. Quio,[38] of 7% interest per month or 84% per annum interest on a P15,000.00 loan; in Bulos, Jr. v. Yasuma,[39] of 4% per month or 48% per annum interest on a P2,500,000.00 loan; and in Chua v. Timan,[40] of 7% and 5% per month for loans totallingP964,000.00. We note that in all these cases, the terms of the loans were open-ended; the stipulated interest rates were applied for an indefinite period. Medel finds no application in the present case where no other stipulation exists for the payment of any extra amount except aspecific sum of P40,000.00 per month on the principal of a loan payable within six months. Additionally, no issue on theexcessiveness of the stipulated amount of P40,000.00 per month was ever put in issue by the petitioners; [41] they only assailed the application of a 4% interest rate, since it was not agreed upon. It is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations, clauses, terms and conditions they have agreed to, which is the law between them, the only limitation being that these stipulations, clauses, terms and conditions are not contrary to law, morals, public order or public policy.[42] The payment of the specific sum of money of P40,000.00 per month was voluntarily agreed upon by the petitioners and the respondent. There is nothing from the records and, in fact, there is no allegation showing that petitioners were victims of fraud when they entered into the agreement with the respondent. Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00 per month for a period of six (6) months, or from December 8, 1993 to June 8, 1994, for a total principal and interest amount of P1,240,000.00. Thereafter, interest at the rate of 12% per annum shall apply. The amounts

already paid by the petitioners during the pendency of the suit, amounting toP1,228,772.00 as of February 12, 1999,[43] should be deducted from the total amount due, computed as indicated above. We remand the case to the trial court for the actual computation of the total amount due. Doctrine of Estoppel not applicable The respondent submits that the petitioners are estopped from disputing the 4% monthly interest beyond the six-month stipulated period, since they agreed to pay this interest on the principal amount under the promissory note and the board resolution. We disagree with the respondents contention. We cannot apply the doctrine of estoppel in the present case since the facts and circumstances, as established by the record, negate its application. Under the promissory note,[44] what the petitioners agreed to was the payment of a specific sum ofP40,000.00 per month for six months not a 4% rate of interest per month for six (6) months on a loan whose principal isP1,000,000.00, for the total amount of P1,240,000.00. Thus, no reason exists to place the petitioners in estoppel, barring them from raising their present defenses against a 4% per month interest after the six-month period of the agreement. The board resolution,[45] on the other hand, simply authorizes Pantaleon to contract for a loan with a monthly interest of not more than 4%. This resolution merely embodies the extent of Pantaleons authority to contract and does not create any right or obligation except as between Pantaleon and the board. Again, no cause exists to place the petitioners in estoppel. Piercing the corporate veil unfounded We find it unfounded and unwarranted for the lower courts to pierce the corporate veil of PRISMA. The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the separate and distinct corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.[46] In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities.[47] In the present case, we see no competent and convincing evidence of any wrongful, fraudulent or unlawful act on the part of PRISMA to justify piercing its corporate veil. While Pantaleon denied personal liability in his Answer, he made himself accountable in the promissory note in his personal capacity and as authorized by the Board Resolution of PRISMA.[48] With this statement of personal liability and in the absence of any representation on the part of PRISMA that the obligation is all its own because of its separate corporate identity, we see no occasion to consider piercing the corporate veil as material to the case.

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

SO ORDERED.

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

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

TERESITA DIO, petitioner, vs. SPOUSES VIRGILIO and LUZ ROCES JAPOR and MARTA[1] JAPOR,respondents. DECISION QUISUMBING, J.: For review on certiorari is the Decision,[2] dated February 22, 2002, of the Court of Appeals, in the consolidated cases CAG.R. CV No. 51521 and CA-G.R. SP No. 40457. The decretal portion read: WHEREFORE, premises considered, in CA-G.R. CV No. 51521, the decision of the trial court is AFFIRMED with MODIFICATION. Judgment is rendered as follows: 1. Declaring the Real Estate Mortgage to be valid; 2. Fixing the interest at 12% per annum and an additional 1% penalty charge per month such that plaintiffs-appellants contractual obligation under the deed of real estate mortgage would amount to P1,252,674.00; 3. Directing defendant-appellee Dio to give the surplus of P2,247,326.00 to plaintiffs-appellants; and 4. Affirming the dissolution of the writ of preliminary injunction previously issued by the trial court. No pronouncement as to costs. The Petition in CA-G.R. SP No. 40457 is DENIED for being moot and academic. SO ORDERED.[3] Equally assailed in this petition is the Resolution,[4] dated July 2, 2002, of the appellate court, denying Teresita Dios Motion for Partial Reconsideration of March 19, 2002 and the Spouses Japor and Marta Japors Motion for Reconsideration dated March 20, 2002. The antecedent facts are as follows: Herein respondents Spouses Virgilio Japor and Luz Roces Japor were the owners of an 845.5 square-meter residential lot including its improvements, situated in Barangay Ibabang Mayao, Lucena City, as shown by Transfer Certificate of Title (TCT) No. T39514. Adjacent to the Japors lot is another lot owned by respondent Marta Japor, which consisted of 325.5 square meters and titled under TCT No. T-15018. On August 23, 1982, the respondents obtained a loan of P90,000 from the Quezon Development Bank (QDB), and as security therefor, they mortgaged the lots covered by TCT Nos. T39514 and T-15018 to QDB, as evidenced by a Deed of Real Estate Mortgage duly executed by and between the respondents and QDB.

or the latters substituted heir or heirs, as the case may be; 3. Dissolving the writ of preliminary injunction previously issued by this Court; and 4. To pay the cost of this suit. SO ORDERED.[7] On January 17, 1996, respondents filed their notice of appeal. On April 26, 1996, they also filed a Petition for Temporary Restraining Order And/Or Mandatory Injunction in Aid of Appellate Jurisdiction with the Court of Appeals. On May 8, 1996, petitioner Dio as the sole bidder in an auction purchased the properties for P3,500,000. On May 9, 1996, the Court of Appeals denied respondents application for a temporary restraining order.[8] On October 9, 1996, the appellate court consolidated CAG.R. CV No. 51521 and CA-G.R. SP No. 40457. As stated at the outset, the appellate court affirmed the decision of the trial court with respect to the validity of the Deed of Real Estate Mortgage, but modified the interest and penalty rates for being unconscionable and exorbitant. Before us, petitioner assigns the following errors allegedly committed by the appellate court: I THE ALLEGED INIQUITY OF THE STIPULATED INTEREST AND PENALTY WAS NOT RAISED BEFORE THE TRIAL COURT NOR ASSIGNED AS AN ERROR IN RESPONDENTS APPEAL. II THE STIPULATED INTEREST AND PENALTY ARE NOT EXCESSIVE, INIQUITOUS, UNCONSCIONABLE, EXORBITANT AND CONTRARY TO MORAL[S]. III PAYMENT OF RESPONDENTS ENRICHMENT. THE SURPLUS WOULD RESULT OF P2,247,326.00 TO IN THEIR UNJUST

violated any law considering she is not engaged in the business of money-lending. Moreover, she claims she has suffered inconveniences and incurred expenses for some 13 years now as a result of respondents failure to pay her. Petitioner further points out that the 5% interest rate was proposed by the respondents and have only themselves to blame if the interests and penalties ballooned to its present amount due to their willful delay and default in payment. The appellate court thus erred, petitioner now insists, in applying Sps. Almeda v. Court of Appeals[11] and Medel v. Court of Appeals[12] to reduce the interest rate to 12% per annum and the penalty to 1% per month. Respondents admit they owe petitioner P350,000 and do not question any lawful interest on their loan but they maintain that the Deed of Real Estate Mortgage is null and void since it did not state the true intent of the parties, which limited the 5% interest rate to only two (2) months from the date of the loan and which did not provide for penalties and other charges in the event of default or delay. Respondents vehemently contend that they never consented to the said stipulations and hence, should not be bound by them. On the first issue, we are constrained to rule against the petitioners contentions. Central Bank Circular No. 905, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity. However, nothing in said Circular grants lenders carte blanche authority to impose interest rates which would result in the enslavement of their borrowers or to the hemorrhaging of their assets.[13] While a stipulated rate of interest may not technically and necessarily be usurious under Circular No. 905, usury now being legally nonexistent in our jurisdiction,[14] nonetheless, said rate may be equitably reduced should the same be found to be iniquitous, unconscionable, and exorbitant, and hence, contrary to morals (contra bonosmores), if not against the law.[15] What is iniquitous, unconscionable, and exorbitant shall depend upon the factual circumstances of each case. In the instant case, the Court of Appeals found that the 5% interest rate per month and 5% penalty rate per month for every month of default or delay is in reality interest rate at 120% per annum. This Court has held that a stipulated interest rate of 5.5% per month or 66% per annum is void for being iniquitous or unconscionable.[16] We have likewise ruled that an interest rate of 6% per month or 72% per annum is outrageous and inordinate.[17] Conformably to these precedent cases, a combined interest and penalty rate at 10% per month or 120% per annum, should be deemed iniquitous, unconscionable, and inordinate. Hence, we sustain the appellate court when it found the interest and penalty rates in the Deed of Real Estate Mortgage in the present case excessive, hence legally impermissible. Reduction is legally called for now in rates of interest and penalty stated in the mortgage contract. What then should the interest and penalty rates be?

IV RESPONDENTS APPEAL SHOULD HAVE BEEN DISMISSED DUE TO FORUM SHOPPING.[9] Simply stated, the issue is: Did the Court of Appeals err when it held that the stipulations on interest and penalty in the Deed of Real Estate Mortgage is contrary to morals, if not illegal? Corollarily, were respondents entitled to any surplus on the auction sale price? On the main issue, petitioner contends that The Usury Law[10] has been rendered ineffective by Central Bank Circular No. 905, series of 1982 and accordingly, usury has become legally non-existent in this jurisdiction, thus, interest rates may accordingly be pegged at such levels or rates as the lender and the borrower may agree upon. Petitioner avers she has not

The evidence shows that it was indeed the respondents who proposed the 5% interest rate per month for two (2) months. Having agreed to said rate, the parties are now estopped from claiming otherwise. For the succeeding period after the two months, however, the Court of Appeals correctly reduced the interest rate to 12% per annum and the penalty rate to 1% per month, in accordance with Article 2227[18] of the Civil Code. But were respondents entitled to the surplus of P2,247,326[19] as a result of the overpricing in the auction?

We note that the surplus was the result of the computation by the Court of Appeals of respondents outstanding liability based on a reduced interest rate of 12% per annum and the reduced penalty rate of 1% per month. The court a quo then proceeded to apply our ruling in Sulit v. Court of Appeals,[20] to the effect that in case of surplus in the purchase price, the mortgagee is liable for such surplus as actually comes into his hands, but where he sells on credit instead of cash, he must still account for the proceeds as if the price were paid in cash, for such surplus stands in the place of the land itself with respect to liens thereon or vested rights therein particularly those of the mortgagor or his assigns. In the instant case, however, there is no surplus to speak of. In adjusting the interest and penalty rates to equitable and conscionable levels, what the Court did was merely to reflect the true price of the land in the foreclosure sale. The amount of the petitioners bid merely represented the true amount of the mortgage debt. No surplus in the purchase price was thus created to which the respondents as the mortgagors have a vested right. WHEREFORE, the Decision dated February 22, 2002, of the Court of Appeals in the consolidated cases CA-G.R. CV No. 51521 and CA-G.R. SP No. 40457 is hereby AFFIRMED with MODIFICATION. The interest rate for the subject loan owing to QDB, or whoever is now the party mortgagee, is hereby fixed at five percent (5%) for the first two (2) months following the date of execution of the Deed of Real Estate Mortgage, and twelve percent (12%) for the succeeding period. The penalty rate thereafter shall be fixed at one percent (1%) per month. Petitioner Teresita Dio is declared free of any obligation to return to the respondents, the Spouses Virgilio Japor and Luz Roces Japor and Marta Japor, any surplus in the foreclosure sale price. There being no surplus, after the court below had applied our ruling in Sulit,[21] respondents could not legally claim any overprice from the petitioner, much less the amount of P2,247,326.00. SO ORDERED.

G.R. No. 170452

August 13, 2008

SALVADOR CHUA and VIOLETA CHUA, petitioners, vs. RODRIGO TIMAN, MA. LYNN TIMAN and LYDIA TIMAN, respondents. DECISION QUISUMBING, J.: Before us is a petition for review on certiorari assailing the Decision1 and Resolution2 dated March 9, 2005 and November 24, 2005, respectively, of the Court of Appeals in CA-G.R. CV No. 82865, which had affirmed the Decision3 dated May 14, 2004 of the Regional Trial Court (RTC) of Quezon City, Branch 86, in Civil Case No. Q-00-41276. The Court of Appeals reduced the stipulated original interest rates of 7% and 5% per month to only 1% per month or 12% per annum and ordered petitioners to refund the excess interest payments by respondents. The pertinent facts are as follows: In February and March 1999, petitioners Salvador and Violeta Chua granted respondents Rodrigo, Ma. Lynn and Lydia Timan the following loans: a) P100,000; b) P200,000; c) P150,000; d) P107,000; e)P200,000; and f) P107,000. These loans were evidenced by promissory notes with interest of 7% per month, which was later reduced to 5% per month. Rodrigo and Ma. Lynn issued five (5) postdated checks to secure the loans, except for the P150,000 loan which was secured by a postdated check issued by Lydia. Respondents paid the loans initially at 7% interest rate per month until September 1999 and then at 5% interest rate per month from October to December 1999. Sometime in March 2000, respondents offered to pay the principal amount of the loans through a Philippine National Bank managers check worthP764,000, but petitioners refused to accept the same insisting that the principal amount of the loans totalled P864,000. On May 3, 2000, respondents deposited P864,000 with the Clerk of Court of the RTC of Quezon City. Later, they filed a case for consignation and damages. Petitioners moved to dismiss the case, but the RTC denied the motion, as well as the subsequent motion for reconsideration. By virtue of an order of Partial Judgment4 dated October 16, 2002, the Clerk of Court of the RTC of Quezon City released the amount of P864,000 to petitioners. Trial on the validity of the stipulated interests on the subject loans, as well as on the issue of damages, then proceeded. On May 14, 2004, the RTC rendered a decision in favor of respondents. It ruled that the original stipulated interest rates of 7% and 5% per month were excessive. It further ordered petitioners to refund to respondents all interest payments in excess of the legal rate of 1% per month or 12% per annum. However, the RTC denied petitioners claim for damages. On appeal, the Court of Appeals affirmed the trial courts decision. The Court of Appeals declared illegal the stipulated interest rates of 7% and 5% per month for being excessive,

iniquitous, unconscionable and exorbitant. Accordingly, the Court of Appeals reduced the stipulated interest rates of 7% and 5% per month (equivalent to 84% and 60% per annum, respectively) to a fair and reasonable rate of 1% per month or 12% per annum. The Court of Appeals also ordered petitioners to refund to respondents all interest payments in excess of 12% per annum. Petitioners sought reconsideration, but it was denied. Hence, this petition raising the lone issue of: WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR OR ACTED NOT IN ACCORD WITH THE LAW AND JURISPRUDENCE WHEN IT AFFIRMED THE JUDGMENT OF THE REGIONAL TRIAL COURT ORDERING THE RETURN OF THE EXCESS INTEREST TO RESPONDENTS.5 Essentially, the main issue is: (1) Did the Court of Appeals err in ruling that the original stipulated interest rates of 7% and 5%, equivalent to 84% and 60% per annum, are unconscionable, and in ordering petitioners to refund to respondents all payments of interest in excess of 12% per annum? Petitioners aver that the stipulated interest of 5% monthly and higher cannot be considered unconscionable because these rates are not usurious by virtue of Central Bank (C.B.) Circular No. 905826 which had expressly removed the interest ceilings prescribed by the Usury Law. Petitioners add that respondents were in pari delicto since they agreed on the stipulated interest rates of 7% and 5% per month. They further aver they honestly believed that the interest rates they imposed on respondents loans were not usurious. Respondents, invoking Medel v. Court of Appeals,7 counter that the stipulated interest rates of 7% and 5% per month are iniquitous, unconscionable and exorbitant, thus, they are entitled to the return of the excessive interest paid. They also contend that petitioners cannot raise the defense of in pari delicto for the first time on appeal. They further contend that the defense of good faith is a factual issue which cannot be raised by petitioners in a petition for review under Rule 45 of the Rules of Civil Procedure. The petition is patently devoid of merit. The stipulated interest rates of 7% and 5% per month imposed on respondents loans must be equitably reduced to 1% per month or 12% per annum.8 We need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3%9 per month and higher10 are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against the law.11 While C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity,12 nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets.13 Petitioners cannot also raise the defenses of in pari delicto and good faith. The defense of in pari delictowas not raised in the RTC, hence, such an issue cannot be raised for the first time on appeal. Petitioners must have seasonably raised it in the

proceedings before the lower court, because questions raised on appeal are confined only within the issues framed by the parties.14 The defense of good faith must also fail because such an issue is a question of fact15 which may not be properly raised in a petition for review under Rule 45 of the Rules of Civil Procedure which allows only questions of law.16 As well set forth in Medel:17 We agree that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate "usurious" because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now "legally inexistent." In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61, the Court held that CB Circular No. 905 "did not repeal nor in any way amend the Usury Law but simply suspended the latters effectivity." Indeed, we have held that "a Central Bank Circular can not repeal a law. Only a law can repeal another law." In the recent case of Florendo vs. Court of Appeals, the Court reiterated the ruling that "by virtue of CB Circular 905, the Usury Law has been rendered ineffective." "Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon." Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not against the law. The stipulation is void. WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and Resolution dated March 9, 2005 and November 24, 2005, respectively, of the Court of Appeals in CAG.R. CV No. 82865 are hereby AFFIRMED. Costs against petitioners. SO ORDERED.