Republic of the Philippines

SUPREME COURT
Manila

Comments by the respondent judge and the private respondents pray for the dismissal of the petition
but the Solicitor General has manifested that the People of the Philippines have no objection to the
grant of the reliefs prayed for, except the damages. We considered the comments as answers and
gave due course to the petition.

SECOND DIVISION
G.R. No. L-50550-52 October 31, 1979
CHEE KIONG YAM, AMPANG MAH, ANITA YAM JOSE Y.C. YAM AND RICHARD
YAM, petitioners,
vs.
HON. NABDAR J. MALIK, Municipal Judge of Jolo, Sulu (Branch I), THE PEOPLE OF THE
PHILIPPINES, ROSALINDA AMIN, TAN CHU KAO and LT. COL. AGOSTO SAJOR respondents.

Tomas P. Matic, Jr. for petitioners.

Jose E. Fernandez for private respondent.
Office of the Solicitor General for respondent the People of the Philippines.

ABAD SANTOS, J.:

This is a petition for certiorari, prohibition, and mandamus with preliminary injunction. Petitioners
alleged that respondent Municipal Judge Nabdar J. Malik of Jolo, Sulu, acted without jurisdiction, in
excess of jurisdiction and with grave abuse of discretion when:
(a) he held in the preliminary investigation of the charges of estafa filed by respondents Rosalinda
Amin, Tan Chu Kao and Augusto Sajor against petitioners that there was a prima facie case against
the latter;
(b) he issued warrants of arrest against petitioners after making the above determination; and

The position of the Solicitor General is well taken. We have to grant the petition in order to prevent
manifest injustice and the exercise of palpable excess of authority.
In Criminal Case No. M-111, respondent Rosalinda M. Amin charges petitioners Yam Chee Kiong and
Yam Yap Kieng with estafa through misappropriation of the amount of P50,000.00. But the complaint
states on its face that said petitioners received the amount from respondent Rosalinda M. Amin "as a
loan." Moreover, the complaint in Civil Case No. N-5, an independent action for the collection of the
same amount filed by respondent Rosalinda M. Amin with the Court of First Instance of Sulu on
September 11, 1975, likewise states that the P50,000.00 was a "simple business loan" which earned
interest and was originally demandable six (6) months from July 12, 1973. (Annex E of the petition.)
In Criminal Case No. M-183, respondent Tan Chu Kao charges petitioners Yam Chee Kiong, Jose Y.C.
Yam, Ampang Mah and Anita Yam, alias Yong Tay, with estafa through misappropriation of the
amount of P30,000.00. Likewise, the complaint states on its face that the P30,000.00 was "a simple
loan." So does the complaint in Civil Case No. N-8 filed by respondent Tan Chu Kao on April 6, 1976
with the Court of First Instance of Sulu for the collection of the same amount. (Annex D of the
petition.).
In Criminal Case No. M-208, respondent Augusto Sajor charges petitioners Jose Y.C. Yam, Anita Yam
alias Yong Tai Mah, Chee Kiong Yam and Richard Yam, with estafa through misappropriation of the
amount of P20,000.00. Unlike the complaints in the other two cases, the complaint in Criminal Case
No. M-208 does not state that the amount was received as loan. However, in a sworn statement
dated September 29, 1976, submitted to respondent judge to support the complaint, respondent
Augusto Sajor states that the amount was a "loan." (Annex G of the petition.).
We agree with the petitioners that the facts alleged in the three criminal complaints do not constitute
estafa through misappropriation.
Estafa through misappropriation is committed according to Article 315, paragraph 1, subparagraph
(b), of the Revised Penal Code as follows:

(c) he undertook to conduct trial on the merits of the charges which were docketed in his court as
Criminal Cases No. M-111, M-183 and M-208.

Art. 315. Swindling (Estafa). Any person who shall defraud another by any of
the means mentioned herein below shall be punished by:

Respondent judge is said to have acted without jurisdiction, in excess of jurisdiction and with grave
abuse of discretion because the facts recited in the complaints did not constitute the crime of estafa,
and assuming they did, they were not within the jurisdiction of the respondent judge.

xxx xxx xxx

In a resolution dated May 23, 1979, we required respondents to comment in the petition and issued
a temporary restraining order against the respondent judge from further proceeding with Criminal
Cases Nos. M-111, M-183 and M-208 or from enforcing the warrants of arrest he had issued in
connection with said cases.

xxx xxx xxx

1. With unfaithfulness or abuse of confidence namely:

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
totally 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
has the obligation to deliver or return the same money, goods or personal property that he received.
Petitioners had no such obligation to return the same money, i.e., the bills or coins, which they
received from private respondents. This is so because as clearly stated in criminal complaints, the
related civil complaints and the supporting sworn statements, the sums of money that petitioners
received were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.
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 loam ownership passes to the borrower.

commodatum wherein the borrower does not acquire ownership over the thing borrowed and has the
duty to return the same thing to the lender.
Under Sec. 87 of the Judiciary Act, the municipal court of a provincial capital, which the Municipal
Court of Jolo is, has jurisdiction over criminal cases where the penalty provided by law does not
exceed prision correccional or imprisonment for not more than six (6) years, or fine not exceeding
P6,000.00 or both, The amounts allegedly misappropriated by petitioners range from P20,000.00 to
P50,000.00. The penalty for misappropriation of this magnitude exceeds prision correccional or 6
year imprisonment. (Article 315, Revised Penal Code), Assuming then that the acts recited in the
complaints constitute the crime of estafa, the Municipal Court of Jolo has no jurisdiction to try them
on the merits. The alleged offenses are under the jurisdiction of the Court of First Instance.
Respondents People of the Philippines being the sovereign authority can not be sued for damages.
They are immune from such type of suit.
With respect to the other respondents, this Court is not the proper forum for the consideration of the
claim for damages against them.
WHEREFORE, the petition is hereby granted; the temporary restraining order previously issued is
hereby made permanent; the criminal complaints against petitioners are hereby declared null and
void; respondent judge is hereby ordered to dismiss said criminal cases and to recall the warrants of
arrest he had issued in connection therewith. Moreover, respondent judge is hereby rebuked for
manifest ignorance of elementary law. Let a copy of this decision be included in his personal life.
Costs against private respondents.
SO ORDERED.

Art. 1953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality.
It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted
to commodatum, the borrower acquires ownership of the money, goods or personal property
borrowed. Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code)
and his act will not be considered misappropriation thereof.
In U.S. vs. Ibaez, 19 Phil. 559, 560 (1911), this Court held that it is not estafa for a person to refuse
to nay his debt or to deny its existence.
We are of the opinion and so decide that when the relation is purely that of
debtor and creditor, the debtor can not be held liable for the crime of estafa,
under said article, by merely refusing to pay or by denying the indebtedness.
It appears that respondent judge failed to appreciate the distinction between the two types of loan,
mutuum and commodatum, when he performed the questioned acts, He mistook the transaction
between petitioners and respondents Rosalinda Amin, Tan Chu Kao and Augusto Sajor to be

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]

SECOND DIVISION

[G.R. No. 115324. February 19, 2003]

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

vs. HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.

Subsequently, private respondent learned that Sterela was no longer holding office in the
address previously given to him. Alarmed, he and his wife went to the Bank to verify if their money
was still intact. The bank manager referred them to Mr. Rufo Atienza, the assistant manager, who
informed them that part of the money in Savings Account No. 10-1567 had been withdrawn by
Doronilla, and that only P90,000.00 remained therein. He likewise told them that Mrs. Vives could
not withdraw said remaining amount because it had to answer for some postdated checks issued by
Doronilla. According to Atienza, after Mrs. Vives and Sanchez opened Savings Account No. 10-1567,
Doronilla opened Current Account No. 10-0320 for Sterela and authorized the Bank to debit Savings
Account No. 10-1567 for the amounts necessary to cover overdrawings in Current Account No. 100320. 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]

DECISION

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]

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.

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:

CALLEJO, SR., J.:

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

IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J.

Doronila, Estrella Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin Vives jointly
and severally
(a)
the amount of P200,000.00, representing the money deposited, with interest at the legal rate
from the filing of the complaint until the same is fully paid;
(b)

the sum of P50,000.00 for moral damages and a similar amount for exemplary damages;

(c)

the amount of P40,000.00 for attorneys fees; and

(d)

the costs of the suit.

SO ORDERED.[8]
Petitioner appealed the trial courts decision to the Court of Appeals. In its Decision dated June
25, 1991, the appellate court affirmed in toto the decision of the RTC.[9] It likewise denied with
finality petitioners motion for reconsideration in its Resolution dated May 5, 1994.[10]
On June 30, 1994, petitioner filed the present petition, arguing that
I.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION BETWEEN
THE DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN AND NOT
ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONERS BANK MANAGER,
MR. RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING PETITIONER (Sic.
Should be PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER SHOULD BE HELD
LIABLE UNDER THE PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF THE
REGIONAL TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS THE FINDINGS OF
THE REGIONAL TRIAL COURT WERE BASED ON A MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION IN
SALUDARES VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR ACTS
COMMITTED BY AN EMPLOYEE IS APPLICABLE;

V.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE LOWER
COURT THAT HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER
DEFENDANTS FOR THE AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS
ACCOUNT DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES,
P40,000.00 FOR ATTORNEYS FEES AND THE COSTS OF SUIT.[11]
Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto
on September 25, 1995. The Court then required private respondent to submit a rejoinder to the
reply. However, said rejoinder was filed only on April 21, 1997, due to petitioners delay in furnishing
private respondent with copy of the reply[12] and several substitutions of counsel on the part of
private respondent.[13] On January 17, 2001, the Court resolved to give due course to the petition and
required the parties to submit their respective memoranda.[14] Petitioner filed its memorandum on
April 16, 2001 while private respondent submitted his memorandum on March 22, 2001.
Petitioner contends that the transaction between private respondent and Doronilla is a simple
loan (mutuum) since all the elements of a mutuum are present: first, what was delivered by private
respondent to Doronilla was money, a consumable thing; and second, the transaction was onerous as
Doronilla was obliged to pay interest, as evidenced by the check issued by Doronilla in the amount
of P212,000.00, orP12,000 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 amutuum 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]

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.

He likewise asserts that the trial court did not err in finding that petitioner, Atienzas employer,
is liable for the return of his money. He insists that Atienza, petitioners assistant manager, connived
with Doronilla in defrauding private respondent since it was Atienza who facilitated the opening of
Sterelas current account three days after Mrs. Vives and Sanchez opened a savings account with
petitioner for said company, as well as the approval of the authority to debit Sterelas savings
account to cover any overdrawings in its current account.[23]

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]

There is no merit in the petition.

At the outset, it must be emphasized that only questions of law may be raised in a petition for
review filed with this Court. The Court has repeatedly held that it is not its function to analyze and
weigh all over again the evidence presented by the parties during trial.[24] The Courts jurisdiction is in
principle limited to reviewing errors of law that might have been committed by the Court of
Appeals.[25] Moreover, factual findings of courts, when adopted and confirmed by the Court of
Appeals, are final and conclusive on this Court unless these findings are not supported by the
evidence on record.[26] There is no showing of any misapprehension of facts on the part of the Court
of Appeals in the case at bar that would require this Court to review and overturn the factual findings
of that court, especially since the conclusions of fact of the Court of Appeals and the trial court are
not only consistent but are also amply supported by the evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction between
private respondent and Doronilla was a commodatum and not a mutuum. A circumspect examination
of the records reveals that the transaction between them was a commodatum. Article 1933 of the
Civil Code distinguishes between the two kinds of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not consumable so
that the latter may use the same for a certain time and return it, in which case the contract is called
a commodatum; or money or other consumable thing, upon the condition that the same amount of
the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable
thing, such as money, the contract would be a mutuum. However, there are some instances where
a commodatum may have for its object a consumable thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.

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 themutuum, did not convert the transaction from a commodatum into a mutuum because
such was not the intent of the parties and because the additional P12,000.00 corresponds to the
fruits of the lending of 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
a commodatum, has no bearing on the question of petitioners liability for the return of private
respondents money because the factual circumstances of the case clearly show that petitioner,
through its employee Mr. Atienza, was partly responsible for the loss of private respondents money
and is liable for its restitution.
Petitioners rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of
Sterela for Savings Account No. 10-1567 expressly states that
2.
Deposits and withdrawals must be made by the depositor personally or upon his written
authority duly authenticated, and neither a deposit nor a withdrawal will be permitted except
upon the production of the depositor savings bank book in which will be entered by the Bank
the amount deposited or withdrawn.[30]
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant
Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom even without presenting
the passbook (which Atienza very well knew was in the possession of Mrs. Vives), not just once, but
several times. Both the Court of Appeals and the trial court found that Atienza allowed said
withdrawals because he was party to Doronillas scheme of defrauding private respondent:
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.

vs.
BENITO GONZALEZ SY CHIAM, defendants-appellee.

Araneta and Zaragoza for appellants.

Eusebio Orense for appelle.
JOHNSON, J.:
PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL

The principal questions presented by this appeal are:

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

(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and agrees to pay a
certain amount per month as rent, may such rent render such a contract usurious when the amount
paid as rent, computed upon the purchase price, amounts to a higher rate of interest upon said
amount than that allowed by law?
Republic of the Philippines

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

SUPREME COURT
ANTECEDENT FACTS
Manila
EN BANC

Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon Rice Mills,
Inc., a piece or parcel of land with the camarin located thereon, situated in the municipality of Tarlac

August 12, 1927

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

G.R. No. 26085

SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants,

first installment of P2,000 was due on or before the 2d day of May, 1921; the second installment of
P8,000 was due on or before 31st day of May, 1921; the balance of P15,000 at 12 per cent interest

was due and payable on or about the 30th day of November, 1922. One of the conditions of that

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

contract of purchase was that on failure of the purchaser (plaintiffs and appellants) to pay the

judicialmente contra Vd. para reclamar la devolucion del camarin y los daos y perjuicios ocasionados

balance of said purchase price or any of the installments on the date agreed upon, the property

a la compaia por su incumplimiento al contrato.

bought would revert to the original owner.

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

Somos de Vd. atentos y S. S.

record shows upon the due dates. The balance of P15,000 due on said contract of purchase was paid
on or about the 1st day of December, 1922, in the manner which will be explained below. On the

SMITH, BELL & CO., LTD.

date when the balance of P15,000 with interest was paid, the vendor of said property had issued to
By (Sgd.) F. I. HIGHAM
the purchasers transfer certificate of title to said property, No. 528. Said transfer certificate of title
(No. 528) was transfer certificate of title from No. 40, which shows that said land was originally

Treasurer.

registered in the name of the vendor on the 7th day of November, 1913.
General Managers
PRESENT FACTS
LUZON RICE MILLS INC.
On the 7th day of November, 1922 the representative of the vendor of the property in question wrote
a letter to the appellant Potenciana Manio (Exhibit A, p. 50), notifying the latter that if the balance of
said indebtedness was not paid, an action would be brought for the purpose of recovering the
property, together with damages for non compliance with the condition of the contract of purchase.
The pertinent parts of said letter read as follows:

According to Exhibits B and D, which represent the account rendered by the vendor, there was due
and payable upon said contract of purchase on the 30th day of November, 1922, the sum
P16,965.09. Upon receiving the letter of the vendor of said property of November 7, 1922, the
purchasers, the appellants herein, realizing that they would be unable to pay the balance due, began
to make an effort to borrow money with which to pay the balance due, began to make an effort to
borrow money with which to pay the balance of their indebtedness on the purchase price of the
property involved. Finally an application was made to the defendant for a loan for the purpose of

satisfying their indebtedness to the vendor of said property. After some negotiations the defendants

denomina "Luzon Rice Mills Inc.," y que esta corporacion nos ha transferido en venta absoluta, se

agreed to loan the plaintiffs to loan the plaintiffs the sum of P17,500 upon condition that the plaintiffs

describe como sigue:

execute and deliver to him a pacto de retro of said property.

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

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

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

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

Co.; y por el S. con un camino. Partiendo de un punto marcado 1 en el plano, cuyo punto se halla al

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

N. 41 gds. 17' E.859.42 m. del mojon de localizacion No. 2 de la Oficina de Terrenos en Tarlac; y

drafting said contract of pacto de retro, making a total paid by the defendant to the plaintiffs and for

desde dicho punto 1 N. 81 gds. 31' O., 77 m. al punto 2; desde este punto N. 4 gds. 22' E.; 54.70 m.

the plaintiffs of P17,500 upon the execution and delivery of said contract. Said contracts was dated

al punto 3; desde este punto S. 86 gds. 17' E.; 69.25 m. al punto 4; desde este punto S. 2 gds. 42'

the 28th day of November, 1922, and is in the words and figures following:

E., 61.48 m. al punto de partida; midiendo una extension superficcial de cuatro mil doscientos diez y

Sepan todos por la presente:

seis metros cuadrados (4,216) mas o menos. Todos los puntos nombrados se hallan marcados en el

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

plano y sobre el terreno los puntos 1 y 2 estan determinados por mojones de P. L. S. de 20 x 20 x 70

residentes en el Municipio de Calumpit, Provincia de Bulacan, propietarios y transeuntes en esta

centimetros y los puntos 3 y 4 por mojones del P. L. S. B. L.: la orientacion seguida es la verdadera,

Ciudad de Manila, de una parte, y de otra, Benito Gonzalez Sy Chiam, mayor de edad, casado con

siendo la declinacion magnetica de 0 gds. 45' E. y la fecha de la medicion, 1. de febrero de 1913.

Maria Santiago, comerciante y vecinos de esta Ciudad de Manila.

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

MANIFESTAMOS Y HACEMOS CONSTAR:

dia 1. de diciembre de 1922, devolvemos al expresado Don Benito Gonzalez Sy Chiam el referido
precio de diecisiete mil quinientos pesos (P17,500) queda obligado dicho Sr. Benito Gonzalez y Chiam

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

a retrovendernos la finca arriba descrita; pero si transcurre dicho plazo de cinco aos sin ejercitar el

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

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

nuestra entera satisfaccion de Don Benito Gonzalez Sy Chiam, cedemos, vendemos y traspasamos a
favor de dicho Don Benito Gonzalez Sy Chiam, sus herederos y causahabientes, una finca que, segun

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

el Certificado de Transferencia de Titulo No. 40 expedido por el Registrador de Titulos de la Provincia

descrita, sujeto a condiciones siguientes:

de Tarlac a favor de "Luzon Rice Mills Company Limited" que al incorporarse se donomino y se

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

(Fdos.) MOISES M. BUHAIN

Chiam y en su domicilio, era de trescientos setenta y cinco pesos (P375) moneda filipina, cada mes.
(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy Chiam,

B. S. BANAAG

asi como tambien la prima del seguro contra incendios, si el conviniera al referido Sr. Benito Gonzalez
Sy Chiam asegurar dicha finca.
(c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos dara lugar a la
terminacion de este arrendamieno y a la perdida del derecho de retracto que nos hemos reservado,
como si naturalmente hubiera expirado el termino para ello, pudiendo en su virtud dicho Sr. Gonzalez
Sy Chiam tomar posesion de la finca y desahuciarnos de la misma.
Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta escritura en los precisos
terminos en que la dejan otorgada los conyuges Severino Tolentino y Potenciana Manio.

An examination of said contract of sale with reference to the first question above, shows clearly that
it is a pacto de retro and not a mortgage. There is no pretension on the part of the appellant that
said contract, standing alone, is a mortgage. The pertinent language of the contract is:
Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos contados desde el
dia 1. de diciembre de 1922, devolvemos al expresado Don Benito Gonzales Sy Chiam el referido
precio de diecisiete mil quinientos pesos (P17,500) queda obligado dicho Sr. Benito Gonzales Sy
Chiam a retrovendornos la finca arriba descrita; pero si transcurre dicho plazo de cinco (5) aos sin
ejercitar al derecho de retracto que nos hemos reservado, entonces quedara esta venta absoluta e

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

irrevocable.

en Manila, hoy a 28 de noviembre de 1922.

Language cannot be clearer. The purpose of the contract is expressed clearly in said quotation that
(Fdo.) SEVERINO TOLENTINO

there can certainly be not doubt as to the purpose of the plaintiff to sell the property in question,
reserving the right only to repurchase the same. The intention to sell with the right to repurchase

(Fda.) POTENCIANA MANIO

cannot be more clearly expressed.

(Fdo.) BENITO GONZALEZ SY CHIAM

It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the
absolute sale of the property, entered into a contract with the purchaser by virtue of which she

Firmado en presencia de:

became the "tenant" of the purchaser. That contract of rent appears in said quoted document above
as follows:

10

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

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

descrita, sujeto a condiciones siguientes:

not construe an instrument to one of sale with pacto de retro, with the stringent and onerous effect
which follows, unless the terms of the document and the surrounding circumstances require it.

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

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

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

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

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

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

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

ascertaining the true intention of the parties.

Sy Chiam asegurar dicha finca.

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

In the present case the plaintiffs allege in their complaint that the contract in question is apacto de

retro is an absolute sale of the property with the right to repurchase and not a mortgage; and,

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

second, that by virtue of the said contract the vendor became the tenant of the purchaser, under the

repurchase it. The terms of the contract quoted by the plaintiffs to the defendant was a "sale"

conditions mentioned in paragraph 3 of said contact quoted above.

with pacto de retro, and the plaintiffs have shown no circumstance whatever which would justify us

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

in construing said contract to be a mere "loan" with guaranty. In every case in which this court has

declare the same to be a mortgage and not a sale whenever the interpretation of such a contract

construed a contract to be a mortgage or a loan instead of a sale with pacto de retro, it has done so,

justifies that conclusion. There must be something, however, in the language of the contract or in the

either because the terms of such contract were incompatible or inconsistent with the theory that said

conduct of the parties which shows clearly and beyond doubt that they intended the contract to be a

contract was one of purchase and sale. (Olino vs. Medina, supra; Padilla vs. Linsangan, supra;

"mortgage" and not a pacto de retro. (International Banking Corporation vs. Martinez, 10 Phil., 252;

Manlagnit vs. Dy Puico, 34 Phil., 325; Rodriguez vs. Pamintuan and De Jesus, 37 Phil., 876.)

Padilla vs. Linsangan, 19 Phil., 65; Cumagun vs. Alingay,19 Phil., 415; Olino vs. Medina, 13 Phil., 379;

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

Manalo vs. Gueco, 42 Phil., 925; Velazquez vs.Teodoro, 46 Phil., 757; Villa vs. Santiago, 38 Phil.,

conveyance of the land was "pledged" instead of "sold". In the case of Manlagnit vs. Dy Puico, while

157.)

the vendor used to the terms "sale and transfer with the right to repurchase," yet in said contract he
described himself as a "debtor" the purchaser as a "creditor" and the contract as a "mortgage". In
the case of Rodriguez vs. Pamintuan and De Jesus the person who executed the instrument,

11

purporting on its face to be a deed of sale of certain parcels of land, had merely acted under a power

those with regard to which the interested parties agreed to contract. "The Supreme Court of the

of attorney from the owner of said land, "authorizing him to borrow money in such amount and upon

Philippine Islands held the parol evidence was admissible in that case to vary the terms of the

such terms and conditions as he might deem proper, and to secure payment of the loan by a

contract between the Government of the Philippine Islands and the Philippine Sugar Estates

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

Development Co. In the course of the opinion of the Supreme Court of the United States Mr. Justice

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

Brandeis, speaking for the court, said:

money he had obtained from the supposed vendee in making improvements thereon, which fact
justified the court in holding that the transaction was a mere loan and not a sale. In the case

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

of Cuyugan vs. Santos (39 Phil., 970), the purchaser accepted partial payments from the vendor, and

the language used therein did not fully or accurately express the agreement and intention of the

such acceptance of partial payments is absolutely incompatible with the idea of irrevocability of the

parties. The fact that interpretation or construction of a contract presents a question of law and that,

title of ownership of the purchaser at the expiration of the term stipulated in the original contract for

therefore, the mistake was one of law is not a bar to granting relief. . . . This court is always

the exercise of the right of repurchase."

disposed to accept the construction which the highest court of a territory or possession has placed

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

upon a local statute. But that disposition may not be yielded to where the lower court has clearly

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

erred. Here the construction adopted was rested upon a clearly erroneous assumption as to an

Islands vs. Philippine Sugar Estates Development Co., which case was appealed to the Supreme

established rule of equity. . . . The burden of proof resting upon the appellant cannot be satisfied by

Court of the United States and the contention of the Chief Justice in his dissenting opinion was

mere preponderance of the evidence. It is settled that relief by way of reformation will not be

affirmed and the decision of the Supreme Court of the Philippine Islands was reversed. (See decision

granted unless the proof of mutual mistake be of the clearest and most satisfactory character.

of the Supreme Court of the United States, June 3, 1918.)[[1]] The Chief Justice said in discussing that
question:
According to article 1282 of the Civil Code, in order to judge of the intention of the contracting
parties, consideration must chiefly be paid to those acts executed by said parties which are
contemporary with and subsequent to the contract. And according to article 1283, however general
the terms of a contract may be, they must not be held to include things and cases different from

The evidence introduced by the appellant in the present case does not meet with that stringent
requirement. There is not a word, a phrase, a sentence or a paragraph in the entire record, which
justifies this court in holding that the said contract of pacto de retro is a mortgage and not a sale
with the right to repurchase. Article 1281 of the Civil Code provides: "If the terms of a contract are
clear and leave no doubt as to the intention of the contracting parties, the literal sense of its

12

stipulations shall be followed." Article 1282 provides: "in order to judge as to the intention of the

vendee, situated in the district of Quiapo of this city, and the value of which shall be applied on

contracting parties, attention must be paid principally to their conduct at the time of making the

account of the price of this sale; fourth, the deponent acknowledges that he has received from the

contract and subsequently thereto."

vendor the purchase price of P4,000 already paid, and in legal tender currency of this country . . .;

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

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

from that very well reasoned decision of the late Chief Justice Arellano, one of the greatest jurists of

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

his time. He said, in discussing the question whether or not the contract, in the case of Lichauco vs.

as flood, tempest, etc., the properties hereinbefore enumerated should be destroyed, wholly or in

Berenguer (20 Phil., 12), was a pacto de retro or a mortgage:

part, it shall be incumbent upon the vendor to repair the damage thereto at his own expense and to

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

put them into a good state of cultivation, and should he fail to do so he binds himself to give to the

states that he is the proprietor in fee simple of two parcels of fallow unappropriated crown land

vendee other lands of the same area, quality and value.'

situated within the district of his pueblo. The first has an area of 73 quiones, 8 balitas and 8 loanes,

xxx

xxx

xxx

located in the sitio of Batasan, and its boundaries are, etc., etc. The second is in the sitio of
Panantaglay, barrio of Calumpang has as area of 73 hectares, 22 ares, and 6 centares, and is

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

bounded on the north, etc., etc."

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

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

those properties, and, consequently, that the ownership of the lands in questions could not have
been conveyed to Laochangco, inasmuch as it continued to be held by Berenguer, as well as their

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

possession, which he had not ceased to enjoy.

aforementioned Doa Cornelia Laochangco for P4,000 and upon the following conditions: First, the
sale stipulated shall be for the period of two years, counting from this date, within which time the

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

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

Berenguer, the text of which has been transcribed in this decision, is very clear. Berenguer's heirs

sold shall, during the term of the present contract, be held in lease by the undersigned who shall

may not go counter to the literal tenor of the obligation, the exact expression of the consent of the

pay, as rental therefor, the sum of 400 pesos per annum, or the equivalent in sugar at the option of

contracting contained in the instrument, Exhibit C. Not because the lands may have continued in

the vendor; third, all the fruits of the said lands shall be deposited in the sugar depository of the

possession of the vendor, not because the latter may have assumed the payment of the taxes on

13

such properties, nor yet because the same party may have bound himself to substitute by another

important interests often intervene, in the form of the price of the lease of the thing sold, which is

any one of the properties which might be destroyed, does the contract cease to be what it is, as set

stipulated as an additional covenant. (Manresa, Civil Code, p. 274.)

forth in detail in the public instrument. The vendor continued in the possession of the lands, not as

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

the owner thereof as before their sale, but as the lessee which he became after its consummation, by

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

virtue of a contract executed in his favor by the vendee in the deed itself, Exhibit C. Right of
ownership is not implied by the circumstance of the lessee's assuming the responsibility of the

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

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

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

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

that the amount of rent he pays, based upon the real value of the property, amounts to a usurious

his possession under lease, since that obligation came from him and he continues under another

rate of interest? When the vendor of property under a pacto de retro rents the property and agrees

character in its possessiona reason why he guarantees its integrity and obligates himself to return

to pay a rental value for the property during the period of his right to repurchase, he thereby

the thing even in a case of force majeure. Such liability, as a general rule, is foreign to contracts of

becomes a "tenant" and in all respects stands in the same relation with the purchaser as a tenant

lease and, if required, is exorbitant, but possible and lawful, if voluntarily agreed to and such

under any other contract of lease.

agreement does not on this account involve any sign of ownership, nor other meaning than the will

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

to impose upon oneself scrupulous diligence in the care of a thing belonging to another.

repurchase, or the sum of P375 per month, based upon the value of the property, amounted to

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

usury. Usury, generally speaking, may be defined as contracting for or receiving something in excess

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

of the amount allowed by law for the loan or forbearance of moneythe taking of more interest for

personal right stipulated between the vendee and the vendor, to the end that the latter may again

the use of money than the law allows. It seems that the taking of interest for the loan of money, at

acquire the ownership of the thing alienated.

least the taking of excessive interest has been regarded with abhorrence from the earliest times.

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

(Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the middle ages the people of England, and

is likewise true that in practice many cases occur where the consummation of apacto de retro sale

especially the English Church, entertained the opinion, then, current in Europe, that the taking of any

means the financial ruin of a person; it is also, unquestionable that inpacto de retro sales very

interest for the loan of money was a detestable vice, hateful to man and contrary to the laws of God.
(3 Coke's Institute, 150; Tayler on Usury, 44.)

14

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

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

shall find that there is scarcely any people, ancient or modern, that have not had usury laws. . . . The

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

Romans, through the greater part of their history, had the deepest abhorrence of usury. . . . It will be

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

deemed a little singular, that the same voice against usury should have been raised in the laws of

accordance with the terms of the contract. Under the contract of "loan," as used in said statute, the

China, in the Hindu institutes of Menu, in the Koran of Mahomet, and perhaps, we may say, in the

moment the contract is completed the money, goods or chattels given cease to be the property of

laws of all nations that we know of, whether Greek or Barbarian."

the former owner and becomes the property of the obligor to be used according to his own will,

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

unless the contract itself expressly provides for a special or specific use of the same. At all events,

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

the money, goods or chattels, the moment the contract is executed, cease to be the property of the

into a contract with the tenant for the payment of a specific amount of rent for the use and

former owner and becomes the absolute property of the obligor.

occupation of said property, even though the amount paid as "rent," based upon the value of the
property, might exceed the rate of interest allowed by law? That question has never been decided in

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

this jurisdiction. It is one of first impression. No cases have been found in this jurisdiction answering

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

that question. Act No. 2655 is "An Act fixing rates of interest upon 'loans' and declaring the effect of

the period of the contract. In a contract of "loan" the thing loaned becomes the property of the

receiving or taking usurious rates."

obligor. In a contract of "rent" the thing still remains the property of the lessor. He simply loses

It will be noted that said statute imposes a penalty upon a "loan" or forbearance of any money,

control of the same in a limited way during the period of the contract of "rent" or lease. In a contract

goods, chattels or credits, etc. The central idea of said statute is to prohibit a rate of interest on

of "rent" the relation between the contractors is that of landlord and tenant. In a contract of "loan" of

"loans." A contract of "loan," is very different contract from that of "rent". A "loan," as that term is

money, goods, chattels or credits, the relation between the parties is that of obligor and obligee.

used in the statute, signifies the giving of a sum of money, goods or credits to another, with a

"Rent" may be defined as the compensation either in money, provisions, chattels, or labor, received

promise to repay, but not a promise to return the same thing. To "loan," in general parlance, is to

by the owner of the soil from the occupant thereof. It is defined as the return or compensation for

deliver to another for temporary use, on condition that the thing or its equivalent be returned; or to

the possession of some corporeal inheritance, and is a profit issuing out of lands or tenements, in

deliver for temporary use on condition that an equivalent in kind shall be returned with a

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

compensation for its use. The word "loan," however, as used in the statute, has a technical meaning.

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

15

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

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

the former; whereas a contract of "loan", as that word is used in the statute, signifies the delivery of

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

money or other consumable things upon condition of returning an equivalent amount of the same

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

kind or quantity, in which cases it is called merely a "loan." In the case of a contract of "rent," under

different conditions and may or may not have any direct reference to the value of the property

the civil law, it is called a "commodatum."

rented. To hold that "usury" can be based upon the comparative actual rental value and the actual
value of the property, is to subject every landlord to an annoyance not contemplated by the law, and

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

would create a very great disturbance in every business or rural community. We cannot bring

that word is used in the statute, and a contract of "rent" even though those words are used in

ourselves to believe that the Legislature contemplated any such disturbance in the equilibrium of the

ordinary parlance as interchangeable terms.

business of the country.

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

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

use and occupation of the property may depend upon a thousand different conditions; as for

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

example, farm lands of exactly equal productive capacity and of the same physical value may have a

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

different rental value, depending upon location, prices of commodities, proximity to the market, etc.

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

Houses may have a different rental value due to location, conditions of business, general prosperity

which existed between the vendor and the vendee was that of landlord and tenant. That relation can

or depression, adaptability to particular purposes, even though they have exactly the same original

only be terminated by a repurchase of the property by the vendor in accordance with the terms of

cost. A store on the Escolta, in the center of business, constructed exactly like a store located outside

the said contract. The contract was one of rent. The contract was not a loan, as that word is used

of the business center, will have a much higher rental value than the other. Two places of business

in Act No. 2655.

located in different sections of the city may be constructed exactly on the same architectural plan and

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

yet one, due to particular location or adaptability to a particular business which the lessor desires to

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

conduct, may have a very much higher rental value than one not so located and not so well adapted

phrase, a sentence or paragraph, which in the slightest way indicates that the parties to the contract

to the particular business. A very cheap building on the carnival ground may rent for more money,

16

in question did not intend to sell the property in question absolutely, simply with the right to
repurchase. People who make their own beds must lie thereon.
What has been said above with reference to the right to modify contracts by parol evidence,
sufficiently answers the third questions presented above. The language of the contract is explicit,
clear, unambiguous and beyond question. It expresses the exact intention of the parties at the time it
was made. There is not a word, a phrase, a sentence or paragraph found in said contract which
needs explanation. The parties thereto entered into said contract with the full understanding of its
terms and should not now be permitted to change or modify it by parol evidence.

With reference to the improvements made upon said property by the plaintiffs during the life of the
contract, Exhibit C, there is hereby reserved to the plaintiffs the right to exercise in a separate action
the right guaranteed to them under article 361 of the Civil Code.
THIRD DIVISION
For all of the foregoing reasons, we are fully persuaded from the facts of the record, in relation with
the law applicable thereto, that the judgment appealed from should be and is hereby affirmed, with

[G.R. No. 114398. October 24, 1997]

costs. So ordered.
CARMEN LIWANAG, petitioner, vs. THE HON. COURT OF APPEALS and THE PEOPLE OF
THE PHILIPPINES, represented by the Solicitor General, respondents.
DECISION
ROMERO, J.:
Petitioner was charged with the crime of estafa before the Regional Trial Court (RTC), Branch
93, Quezon City, in an information which reads as follows:
That on or between the month of May 19, 1988 and August, 1988 in Quezon City, Philippines and
within the jurisdiction of this Honorable Court, the said accused, with intent of gain, with

17

unfaithfulness, and abuse of confidence, did then and there, willfully, unlawfully and feloniously
defraud one ISIDORA ROSALES, in the following manner, to wit: on the date and in the place
aforementioned, said accused received in trust from the offended party cash money amounting
to P536,650.00, Philippine Currency, with the express obligation involving the duty to act as
complainants agent in purchasing local cigarettes (Philip Morris and Marlboro cigarettes), to resell
them to several stores, to give her commission corresponding to 40% of the profits; and to return
the aforesaid amount of offended party, but said accused, far from complying her aforesaid
obligation, and once in possession thereof, misapplied, misappropriated and converted the same to
her personal use and benefit, despite repeated demands made upon her, accused failed and refused
and still fails and refuses to deliver and/or return the same to the damage and prejudice of the said
ISIDORA ROSALES, in the aforementioned amount and in such other amount as may be awarded
under the provision of the Civil Code.
CONTRARY TO LAW.
The antecedent facts are as follows:
Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went to the house of
complainant Isidora Rosales (Rosales) and asked her to join them in the business of buying and
selling cigarettes. Convinced of the feasibility of the venture, Rosales readily agreed. Under their
agreement, Rosales would give the money needed to buy the cigarettes while Liwanag and Tabligan
would act as her agents, with a corresponding 40% commission to her if the goods are sold;
otherwise the money would be returned to Rosales. Consequently, Rosales gave several cash
advances to Liwanag and Tabligan amounting toP633,650.00.
During the first two months, Liwanag and Tabligan made periodic visits to Rosales to report on
the progress of the transactions. The visits, however, suddenly stopped, and all efforts by Rosales to
obtain information regarding their business proved futile.

WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed with the
correction of the nomenclature of the penalty which should be: SIX (6) YEARS, EIGHT (8) MONTHS
and TWENTY ONE (21) DAYS of prision mayor, as minimum, to FOURTEEN (14) YEARS and EIGHT
(8) MONTHS of reclusion temporal, as maximum. In all other respects, the decision is AFFIRMED.
SO ORDERED.
Her motion for reconsideration having been denied in the resolution of March 16, 1994,
Liwanag filed the instant petition, submitting the following assignment of errors:
1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN AFFIRMING THE CONVICTION OF THE
ACCUSED-PETITIONER FOR THE CRIME OF ESTAFA, WHEN CLEARLY THE CONTRACT THAT EXIST
(sic) BETWEEN THE ACCUSED-PETITIONER AND COMPLAINANT IS EITHER THAT OF A SIMPLE
LOAN OR THAT OF A PARTNERSHIP OR JOINT VENTURE HENCE THE NON RETURN OF THE MONEY
OF THE COMPLAINANT IS PURELY CIVIL IN NATURE AND NOT CRIMINAL.
2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN NOT ACQUITTING THE ACCUSEDPETITIONER ON GROUNDS OF REASONABLE DOUBT BY APPLYING THE EQUIPOISE RULE.
Liwanag advances the theory that the intention of the parties was to enter into a contract of
partnership, wherein Rosales would contribute the funds while she would buy and sell the cigarettes,
and later divide the profits between them.[1] She also argues that the transaction can also be
interpreted as a simple loan, with Rosales lending to her the amount stated on an installment basis.[2]
The Court of Appeals correctly rejected these pretenses.

Alarmed by this development and believing that the amounts she advanced were being
misappropriated, Rosales filed a case of estafa against Liwanag.

While factual findings of the Court of Appeals are conclusive on the parties and not reviewable
by the Supreme Court, and carry more weight when these affirm the factual findings of the trial
court,[3] we deem it more expedient to resolve the instant petition on its merits.

After trial on the merits, the trial court rendered a decision dated January 9, 1991, finding
Liwanag guilty as charged. The dispositive portion of the decision reads thus:

Estafa is a crime committed by a person who defrauds another causing him to suffer damages,
by means of unfaithfulness or abuse of confidence, or of false pretenses of fraudulent acts.[4]

WHEREFORE, the Court holds, that the prosecution has established the guilt of the accused, beyond
reasonable doubt, and therefore, imposes upon the accused, Carmen Liwanag, an Indeterminate
Penalty of SIX (6) YEARS, EIGHT (8) MONTHS AND TWENTY ONE (21) DAYS OF PRISION
CORRECCIONAL TO FOURTEEN (14) YEARS AND EIGHT (8) MONTHS OF PRISION MAYOR AS
MAXIMUM, AND TO PAY THE COSTS.
The accused is likewise ordered to reimburse the private complainant the sum of P526,650.00,
without subsidiary imprisonment, in case of insolvency.
SO ORDERED.
Said decision was affirmed with modification by the Court of Appeals in a decision dated
November 29, 1993, the decretal portion of which reads:

From the foregoing, the elements of estafa are present, as follows: (1) that the accused
defrauded another by abuse of confidence or deceit; and (2) that damage or prejudice capable of
pecuniary estimation is caused to the offended party or third party,[5] and it is essential that there be
a fiduciary relation between them either in the form of a trust, commission or administration.[6]
The receipt signed by Liwanag states thus:
May 19, 1988

Quezon City

Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED TWENTY SIX THOUSAND AND SIX
HUNDRED FIFTY PESOS (P526,650.00) Philippine Currency, to purchase cigarrets (sic) (Philip &
Marlboro) to be sold to customers. In the event the said cigarrets (sic) are not sold, the proceeds of
the sale or the said products (shall) be returned to said Mrs. Isidora P. Rosales the said amount
of P526,650.00 or the said items on or before August 30, 1988.
(SGD & Thumbedmarked) (sic)

18

CARMEN LIWANAG
26 H. Kaliraya St.
Quezon City

Republic of the Philippines

SUPREME COURT
Manila

Signed in the presence of:

(Sgd) Illegible

EN BANC
(Sgd)

Doming Z. Baligad

The language of the receipt could not be any clearer. It indicates that the money delivered to
Liwanag was for a specific purpose, that is, for the purchase of cigarettes, and in the event the
cigarettes cannot be sold, the money must be returned to Rosales.
Thus, even assuming that a contract of partnership was indeed entered into by and between
the parties, we have ruled that when money or property have been received by a partner for a
specific purpose (such as that obtaining in the instant case) and he later misappropriated it, such
partner is guilty of estafa.[7]

G.R. No. L-24968 April 27, 1972

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.

Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.

Neither can the transaction be considered a loan, since in a contract of loan once the money is
received by the debtor, ownership over the same is transferred.[8] Being the owner, the borrower can
dispose of it for whatever purpose he may deem proper.

Jesus A. Avancea and Hilario G. Orsolino for defendant-appellant.

In the instant petition, however, it is evident that Liwanag could not dispose of the money as
she pleased because it was only delivered to her for a single purpose, namely, for the purchase of
cigarettes, and if this was not possible then to return the money to Rosales. Since in this case there
was no transfer of ownership of the money delivered, Liwanag is liable for conversion under Art. 315,
par. 1(b) of the Revised Penal Code.

MAKALINTAL, J.:p

WHEREFORE, in view of the foregoing, the appealed decision of the Court of Appeals dated
November 29, 1993, is AFFIRMED. Costs against petitioner.
SO ORDERED.

In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28,
1965 sentencing defendant Development Bank of the Philippines (DBP) to pay actual and
consequential damages to plaintiff Saura Import and Export Co., Inc. in the amount of P383,343.68,
plus interest at the legal rate from the date the complaint was filed and attorney's fees in the amount
of P5,000.00. The present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance
Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used
as follows: P250,000.00 for the construction of a factory building (for the manufacture of jute sacks);
P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and
P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by
Saura on the strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived
in Davao City in July 1953; and that to secure its release without first paying the draft, Saura, Inc.
executed a trust receipt in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00,
to be secured by a first mortgage on the factory building to be constructed, the land site thereof, and
the machinery and equipment to be installed. Among the other terms spelled out in the resolution
were the following:
1. That the proceeds of the loan shall be utilized exclusively for the following
purposes:

19

For construction of factory building P250,000.00

For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00
T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and
China Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to
availability of funds, and as the construction of the factory buildings progresses, to be certified to by
an appraiser of this Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however,
evidently having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC,
requesting a modification of the terms laid down by it, namely: that in lieu of having China Engineers,
Ltd. (which was willing to assume liability only to the extent of its stock subscription with Saura, Inc.)
sign as co-maker on the corresponding promissory notes, Saura, Inc. would put up a bond for
P123,500.00, an amount equivalent to such subscription; and that Maria S. Roca would be
substituted for Inocencia Arellano as one of the other co-makers, having acquired the latter's shares
in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the
members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the
aspects of this approved loan ... with special reference as to the advisability of financing this
particular project based on present conditions obtaining in the operations of jute mills, and to submit
his findings thereon at the next meeting of the Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as cosigner for the loan, and asked that the necessary documents be prepared in accordance with the
terms and conditions specified in Resolution No. 145. In connection with the reexamination of the
project to be financed with the loan applied for, as stated in Resolution No. 736, the parties named
their respective committees of engineers and technical men to meet with each other and undertake
the necessary studies, although in appointing its own committee Saura, Inc. made the observation
that the same "should not be taken as an acquiescence on (its) part to novate, or accept new
conditions to, the agreement already) entered into," referring to its acceptance of the terms and
conditions mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling,
representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of
mortgage, which was duly registered on the following April 17.

It appears, however, that despite the formal execution of the loan agreement the reexamination
contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June
10, 1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the
loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under
Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s.,
authorizing the re-examination of all the various aspects of the loan granted the Saura Import &
Export Co. under Resolution No. 145, c.s., for the purpose of financing the manufacture of jute sacks
in Davao, with special reference as to the advisability of financing this particular project based on
present conditions obtaining in the operation of jute mills, and after having heard Ramon E. Saura
and after extensive discussion on the subject the Board, upon recommendation of the Chairman,
RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED from P500,000 to
P300,000 and that releases up to P100,000 may be authorized as may be necessary from time to
time to place the factory in actual operation: PROVIDED that all terms and conditions of Resolution
No. 145, c.s., not inconsistent herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for
China Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the
loan and therefore considered the same as cancelled as far as it was concerned. A follow-up letter
dated July 2 requested RFC that the registration of the mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted.
The request was denied by RFC, which added in its letter-reply that it was "constrained to consider as
cancelled the loan of P300,000.00 ... in view of a notification ... from the China Engineers Ltd.,
expressing their desire to consider the loan insofar as they are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that
China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC
releases to us the P500,000.00 originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of
P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes
jointly with the borrower-corporation," but with the following proviso:
That in view of observations made of the shortage and high cost of imported raw
materials, the Department of Agriculture and Natural Resources shall certify to
the following:
1. That the raw materials needed by the borrower-corporation to carry out its
operation are available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide adequately
for the requirements of the factory."
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954,
wherein it was explained that the certification by the Department of Agriculture and Natural

20

Resources was required "as the intention of the original approval (of the loan) is to develop the
manufacture of sacks on the basis of locally available raw materials." This point is important, and
sheds light on the subsequent actuations of the parties. Saura, Inc. does not deny that the factory he
was building in Davao was for the manufacture of bags from local raw materials. The cover page of
its brochure (Exh. M) describes the project as a "Joint venture by and between the Mindanao
Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and operate
aKenaf mill plant, to manufacture copra and corn bags, runners, floor mattings, carpets, draperies;
out of 100% local raw materials, principal kenaf." The explanatory note on page 1 of the same
brochure states that, the venture "is the first serious attempt in this country to use 100% locally
grown raw materials notably kenaf which is presently grown commercially in theIsland of Mindanao
where the proposed jutemill is located ..."
This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first
place, and to require, in its Resolution No. 9083, a certification from the Department of Agriculture
and Natural Resources as to the availability of local raw materials to provide adequately for the
requirements of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of
January 21, 1955: (1) stating that according to a special study made by the Bureau of Forestry
"kenaf will not be available in sufficient quantity this year or probably even next year;" (2) requesting
"assurances (from RFC) that my company and associates will be able to bring in sufficient jute
materials as may be necessary for the full operation of the jute mill;" and (3) asking that releases of
the loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &

Dear Sirs:
This is with reference to your letter of January 21, 1955,
regarding the release of your loan under consideration of
P500,000. As stated in our letter of December 22, 1954, the
releases of the loan, if revived, are proposed to be made
from time to time, subject to availability of funds towards
the end that the sack factory shall be placed in actual
operating status. We shall be able to act on your request for
revised purpose and manner of releases upon re-appraisal of
the securities offered for the loan.
With respect to our requirement that the Department of
Agriculture and Natural Resources certify that the raw
materials needed are available in the immediate vicinity and
that there is prospect of increased production thereof to
provide adequately the requirements of the factory, we wish
to reiterate that the basis of the original approval is to
develop the manufacture of sacks on the basis of the locally
available raw materials. Your statement that you will have to
rely on the importation of jute and your request that we give
you assurance that your company will be able to bring in
sufficient jute materials as may be necessary for the
operation of your factory, would not be in line with our
principle in approving the loan.

Trust Company P250,000.00

(For immediate release)
b) For the purchase of materials and equipment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the opening of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.
On January 25, 1955 RFC sent to Saura, Inc. the following reply:

With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter
further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed
the corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of
Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a mortgage
contract, executed on August 6, 1954, over the same property in favor of the Prudential Bank and
Trust Co., under which contract Saura, Inc. had up to December 31 of the same year within which to
pay its obligation on the trust receipt heretofore mentioned. It appears further that for failure to pay
the said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request
of Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as
predecessor of the defendant DBP) to comply with its obligation to release the proceeds of the loan
applied for and approved, thereby preventing the plaintiff from completing or paying contractual
commitments it had entered into, in connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between
the parties and that the defendant was guilty of breach thereof. The defendant pleaded below, and
reiterates in this appeal: (1) that the plaintiff's cause of action had prescribed, or that its claim had
been waived or abandoned; (2) that there was no perfected contract; and (3) that assuming there
was, the plaintiff itself did not comply with the terms thereof.

21

We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the
Civil Code, which provides:
ART. 1954. An accepted promise to deliver something, by way of commodatum
or simple loan is binding upon the parties, but the commodatum or simple loan
itself shall not be perferted until the delivery of the object of the contract.

With this view we take of the case, we find it unnecessary to consider and resolve the other issues
raised in the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs
against the plaintiff-appellee.

There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of
P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was
executed and registered. But this fact alone falls short of resolving the basic claim that the defendant
failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that
the factory to be constructed would utilize locally grown raw materials, principally kenaf. There is no
serious dispute about this. It was in line with such assumption that when RFC, by Resolution No.
9083 approved on December 17, 1954, restored the loan to the original amount of P500,000.00. it
imposed two conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to
carry out its operation are available in the immediate vicinity; and (2) that there is prospect of
increased production thereof to provide adequately for the requirements of the factory." The
imposition of those conditions was by no means a deviation from the terms of the agreement, but
rather a step in its implementation. There was nothing in said conditions that contradicted the terms
laid down in RFC Resolution No. 145, passed on January 7, 1954, namely "that the proceeds of the
loan shall be utilizedexclusively for the following purposes: for construction of factory building
P250,000.00; for payment of the balance of purchase price of machinery and equipment
P240,900.00; for working capital P9,100.00." Evidently Saura, Inc. realized that it could not meet
the conditions required by RFC, and so wrote its letter of January 21, 1955, stating that local jute
"will not be able in sufficient quantity this year or probably next year," and asking that out of the loan
agreed upon the sum of P67,586.09 be released "for raw materials and labor." This was a deviation
from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying as
it did a diversion of part of the proceeds of the loan to purposes other than those agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been
going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in
no position to comply with RFC's conditions. So instead of doing so and insisting that the loan be
released as agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was done on June
15, 1955. The action thus taken by both parties was in the nature cf mutual desistance what
Manresa terms "mutuo disenso" 1 which is a mode of extinguishing obligations. It is a concept that
derives from the principle that since mutual agreement can create a contract, mutual disagreement
by the parties can cause its extinguishment. 2
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged
breach of contract by RFC, or even point out that the latter's stand was legally unjustified. Its request
for cancellation of the mortgage carried no reservation of whatever rights it believed it might have
against RFC for the latter's non-compliance. In 1962 it even applied with DBP for another loan to
finance a rice and corn project, which application was disapproved. It was only in 1964, nine years
after the loan agreement had been cancelled at its own request, that Saura, Inc. brought this action
for damages.All these circumstances demonstrate beyond doubt that the said agreement had been
extinguished by mutual desistance and that on the initiative of the plaintiff-appellee itself.

SECOND DIVISION
[G.R. No. L-1927. May 31, 1949.]
CRISTOBAL ROO, Petitioner, v. JOSE L. GOMEZ ET AL., Respondents.
Alfonso Farcon for Petitioner.

22

Capistrano & Azores for Respondents.

SYLLABUS
OBLIGATIONS AND CONTRACTS; VALIDITY OF AGREEMENT OF LOAN IN JAPANESE FIAT MONEY
MADE DURING ENEMY OCCUPATION; PAYMENT TO BE PAID ONE YEAR AFTER DATE WITH
CURRENCY THEN PREVAILING. R on October 5, 1944, received as a loan four thousand pesos in
Japanese fiat money from G and agreed to pay said debt one year after date in the currency then
prevailing by signing a promissory note of the following tenor: "For value received, I promise to pay
one year after date the sum of four thousand pesos (P4,000), to Jose L. Gomez. It is agreed that this
will not earn any interest and the payment will be made in currency that will be prevailing by the end
of the stipulated period of one year." On October 15, 1945, i. e. after the liberation R was sued for
the payment of the aforesaid debt. Held: R must pay 4,000 pesos in Philippine currency. He may not
discharge his debt by paying only the equivalent of the Japanese currency he had received in 1944.
The contract is the law between the parties.
DECISION
BENGZON, J.:
This petition to review a decision of the Court of Appeals was admitted mainly because it involves
one phase of the vital contemporary question: the repayment of loans given in Japanese fiat currency
during the last war of the Pacific.
On October 5, 1944, Cristobal Roo received as a loan four thousand pesos in Japanese fiat money
from Jose L. Gomez. He informed the latter that he would use the money to purchase a jitney; and
he agreed to pay that debt one year after date in the currency then prevailing. He signed a
promissory note of the following tenor:jgc:chanrobles.com.ph
"For value received, I promise to pay one year after date the sum of four thousand pesos (P4,000) to
Jose L. Gomez. It is agreed that this will not earn any interest and the payment will be made in
currency that will be prevailing by the end of the stipulated period of one year."cralaw virtua1aw
library
"In consideration of this generous loan, I renounce any right that may come to me by reason of any
postwar arrangement, of privilege that may come to me by legislation wherein this sum may be
devalued. I renounce flatly and absolutely any condition, term, right or privilege which in any way will
prejudice the right engendered by this agreement wherein Atty. Jose L. Gomez will receive by right
his money in the amount of P4,000. I affirm that the legal tender, currency or any medium of
exchange, or money in this sum of P4,000 will be paid by me to Jose L. Gomez one year after this
date, October 5, 1944."cralaw virtua1aw library
On October 15, 1945, i. e, after the liberation, Roo was sued for payment in the Laguna Court of
First Instance. His main defense was that his liability should not exceed the equivalent of 4,000 pesos
"mickey mouse" money and could not be 4,000 pesos Philippine currency, because the contract
would be void as contrary to law, public order and good morals.

After the corresponding hearing, the Honorable Felix Bautista Angelo, Judge, ordered the defendant
Roo to pay four thousand pesos in Philippine currency with legal interest from the presentation of
the complaint plus costs. On appeal the Court of Appeals in a decision written by Mr. Justice Jugo,
affirmed the judgment with costs. It declared that Roo being a mechanic who knew English was not
deceived into signing the promissory note and that the contents of the same had not been
misrepresented to him. It pronounced the contract valid and enforceable according to its terms and
conditions.
One basic principle of the law on contracts of the Civil Code is that "the contracting parties may
establish any pacts, clauses and conditions they may deem advisable, provided they are not contrary
to law, morals or public order." (Article 1255.) Another principle is that "obligations arising from
contract shall have the force of law between the contracting parties and must be performed in
accordance with their stipulations" (Article 1091).
Invoking the above proviso, Roo asserts this contract is contrary to the Usury Law, because on the
basis of calculations by Government experts he only received the equivalent of one hundred
Philippine pesos and now he is required to disgorge four thousand pesos or interest greatly in excess
of the lawful rates.
But he is not paying interest. Precisely the contract says that the money received "will not earn any
interest." Furthermore, he received four thousand pesos; and he is required to pay four thousand
pesos exactly. The increased intrinsic value and purchasing power of the current money is
consequence of an event (change of currency) which at the time of the contract neither party knew
would certainly happen within the period of one year. They both elected to subject their rights and
obligations to that contingency. If within one year another kind of currency became legal tender,
Gomez would probably get more for his money. If the same Japanese currency continued, he would
get less, the value of Japanese money being then on the downgrade.
Our legislation has a word for these contracts: aleatory. The Civil Code recognizes their validity (see
art. 1790 and Manresas comment thereon) on a par with insurance policies and life annuities.
The eventual gain of Gomez in this transaction is not interest within the meaning of Usury Laws.
Interest is some additional money to be paid in any event, which is not the case here, because
Gomez might have gotten less it the Japanese occupation had extended to the end of 1945 or if the
liberation forces had chosen to permit the circulation of the Japanese notes.
Moreover, Roo argues, the deal was immoral because talking advantage of his superior knowledge
of war developments Gomez imposed on him this onerous obligation. In the first place, the Court of
Appeals found that he voluntarily agreed to sign and signed the document without having been
misled as to its contents and "in so far as knowledge of war events was concerned" both parties were
on "equal footing." In the second place although on October 5, 1944 it was possible to surmise the
impending American invasion, the date of victory or liberation was anybodys guess. In the third
place there was the possibility that upon re-occupation the Philippine Government would not
invalidate the Japanese currency, which after all had been forced upon the people in exchange for
valuable goods and property. The odds were about even when Borio and Gomez played their
bargaining game. There was no overreaching, nor unfair advantage.
Again Roo alleges it is immoral and against public order for a man to obtain four thousand pesos in
return for an investment of forty pesos (his estimate of the value of the Japanese money he
borrowed). According to his line of reasoning it would be immoral for the homeowner to recover ten
thousand pesos (P10,000), when his house is burned, because he invested only about one hundred
pesos for the insurance policy. And when the holder of a sweepstakes ticket who paid only four pesos

23

luckily obtains the first prize of one hundred thousand pesos or over, the whole business is immoral
or against public order.
In this connection we should explain that this decision does not cover situations where borrowers of
Japanese fiat currency promised to repay "the same amount" or promised to return the same number
of pesos "in Philippines currency" or "in the currency prevailing after the war." There may be room
for argument when those litigations come up for adjudication. All we say here and now is that the
contract in question is legal and obligatory.
A minor point concerns the personality of the plaintiff, the wife of Jose L. Gomez. We opine with the
Court of Appeals that the matter may involve a defect in procedure which does not amount to
prejudicial error.
Republic of the Philippines

Wherefore the appealed judgment will be affirmed with costs. So ordered.

SUPREME COURT
Manila
EN BANC

September 9, 1949

G.R. No. L-1328

MARIANO NEPOMUCENO and AGUEDA G. DE NEPOMUCENO, plaintiffs-appellants,
vs.
EDILBERTO A. NARCISO and MAURA SUAREZ, defendants-appellees.

Higinio Gopez for appellants.

Fausto, Solima and Gotiangco for appellees.
OZAETA, J.:
On November 14, 1938, appellant Mariano Nepomuceno executed a mortgage in favor of the
appellees on a parcel of land situated in the municipality of Angeles, Province of Pampanga, to secure

24

the payment within the period of seven years from the date of the mortgage of the sum of P24,000

On July 21, 1944, the mortgagor Mariano Nepomuceno and his wife Agueda G. de Nepomuceno filed

together with interest thereon at the rate of 8 per cent per annum.

their complaint in this case against the mortgagees, which compplaint, as amended on September 7,
1944, alleged the execution of the contract of mortgage and its principal novation as above indicated,

On September 30, 1943, that is to say, more than two years before the maturity of said mortgage,

and

the parties executed a notarial document entitled "Partial Novation of Contract" whereby they
modified the terms of said mortgage as follows:

7. That as per Annex B, No. 4, it is provided that the mortgagor cannot redeem the property
mortgaged while the war goes on; and that notwithstanding the said provision the herein plaintiffs-

(1) From December 8, 1941, to January 1, 1944, the interest on the mortgage shall be at 6 per cent

mortgagors are now willing to pay the amount of the indebtedness together with the corresponding

per annum, unpaid interest also paying interest also paying interest at the same rate.

interest due thereon;

(2) From January 1, 1944, up to the end of the war, the mortgage debt shall likewise bear interest at

8. That on July 19, 1944, the mortgagors-plaintiffs went to the house of the mortgagees-defendants

6 per cent. Unpaid interest during this period shall however not bear any interest.

to tender payment of the balance of the mortgage debt with their corresponding interest, but said
spouses defendants refuse and still refuse to accept payment;

(3) At the end of the war the interest shall again become 8 per cent in accordance with the original
contract of mortgage.

9. That because of this refusal of the defendants to accept tender of payment on the mortgage
consideration, the plaintiffs suffered and still suffer damages in the amount of P5,000;

(4) While the war goes on, the mortgagor, his administrators or assigns, cannot redeem the property
mortgaged.

10. That the plaintiffs are now and have deposited with the Clerk of Court of First Instance of
Pampanga the amount of P22,356 for the payment of the mortgage debt and the interest due

(5) When the mortgage lapses on November 14, 1945, the mortgage may continue for another ten

thereon;

years if the mortgagor so chooses, but during this period he may pay only one half of the capital.
Wherefore, it is more respectfully prayed that this Honorable Court will issue an order in the following
tenor:

25

(a) Ordering the defendants to accept tender of payment from the plaintiffs;

ART. 1125. Obligation for the performance of which a day certain has been fixed shall be

(b) Ordering defendants to execute the corresponding deed of release of mortgage;

demandable only when the day arrives.

(c) Ordering defendants to pay damages in the amount of P5,000; and

(d) Ordering defendants to pay the amount of P3,000 as attorney's fee and the costs of suit and any

A day certain is understood to be one which must necessarily arrive, even though its date be

other remedy just and equitable in the premises.

unknown.

After the trial the court sustained the defense that the complaint had been prematurely presented
and dismissed it with costs.

Appellants contend that the stipulation in the contract of September 30, 1943, that "while the war
goes on the mortgagor, his administrators or assigns cannot redeem the property mortgaged," is
against public policy and therefore null and void. They cite and rely on article 1255 of the Civil Code,
which provides:

ART. 1255. The contracting parties may establish any pacts, clauses, and conditions they may
deem advisable, provided they are not contrary to law, morals, or public order.

Article 1127 says:

ART. 1127. Whenever a term for the performance of an obligation is fixed, it is presumed to have
been established for the benefit of the creditor and that of the debtor, unless from its tenor or from
other circumstances it should appear that the term was established for the benefit of one or the
other.

It will be noted that the original contract of mortgage provided for interest at 8 per cent per annum
and that the principal together with the interest was payable within the period of seven years from
November 14, 1938. But by mutual agreement of the parties that term was modified on September

They argue that "it would certainly be against public policy and a restraint on the freedom of

30, 1943, by reducing the interest to 6 per cent per annum from December 8, 1941, until the end of

commerce to compel a debtor not to release his property from a lien even if he wanted to by the

the war and by stipulating that the mortgagor shall not pay off the mortgage while the war went on.

payment of the indebtedness while the war goes on, which was undoubtedly of a very uncertain
duration."

We find nothing immoral or violative of public order in that stipulation. The mortgagees apparently
did not want to have their prewar credit paid with Japanese military notes, and the mortgagor

The first two paragraphs of article 1125 of the Civil Code provide:

voluntarily agreed not to do so in consideration of the reduction of the rate of interest.

26

It was a perfectly equitable and valid transaction, in conformity with the provision of the Civil Code
hereinabove quoted.

Appellants were bound by said contract and appellees were not obligated to receive the payment

EQUITABLE PCI BANK,*

AIMEE YU and BEJAN
LIONEL APAS,
Petitioners,
-versus-

before it was due. Hence the latter had reason not to accept the tender of payment made to them by
the former.

The judgment is affirmed, with costs against the appellants.

G.R. No. 171545

Present:
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.

NG SHEUNG NGOR** doing

business under the name
and style KEN MARKETING, Promulgated:
KEN APPLIANCE DIVISION,
INC. and BENJAMIN E. GO,
Respondents.
December 19, 2007
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - x
DECISION
CORONA, J.:

This petition for review on certiorari[1] seeks to set aside the decision[2] of the Court of Appeals
(CA) in CA-G.R. SP No. 83112 and its resolution[3] denying reconsideration.

On October 7, 2001, respondents Ng Sheung Ngor,[4] Ken Appliance Division, Inc. and
Benjamin E. Go filed an action for annulment and/or reformation of documents

and

contracts[5]against petitioner Equitable PCI Bank (Equitable) and its employees, Aimee Yu and Bejan
Lionel Apas, in the Regional Trial Court (RTC), Branch 16 of Cebu City.[6] They claimed that Equitable
induced them to avail of its peso and dollar credit facilities by offering low interest rates[7] so they

FIRST DIVISION

accepted Equitable's proposal and signed the bank's pre-printed promissory notes on various dates

27

B)

Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion

[p]esos as moral damages;

C)

Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion

[p]esos as exemplary damages;

D)

Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay

[respondents], jointly and severally, the sum of [t]wo [m]illion [p]esos
as moral and exemplary damages;

E)

Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and

severally, to pay [respondents'] attorney's fees in the sum
of P300,000; litigation expenses in the sum of P50,000 and the cost of
suit;

F)

Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay

[Equitable] the unpaid principal obligation for the peso loan as well as
the unpaid obligation for the dollar denominated loan;

G)

Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay

[Equitable] interest as follows:

beginning 1996. They, however, were unaware that the documents contained identical escalation
clauses granting Equitable authority to increase interest rates without their consent.

[8]

Equitable, in its answer, asserted that respondents knowingly accepted all the terms and
conditions contained in the promissory notes.[9] In fact, they continuously availed of and benefited
from Equitable's credit facilities for five years.[10]

After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone,
Equitable restructured respondents' loans amounting to US$228,200 and P1,000,000.[11] The trial

1)
court, however, invalidated the escalation clause contained therein because it violated the principle of

2)

mutuality of contracts.[12] Nevertheless, it took judicial notice of the steep depreciation of the peso
during

the

intervening

period[13] and

declared

the

existence

of

extraordinary

deflation.[14]Consequently, the RTC ordered the use of the 1996 dollar exchange rate in computing
respondents'

dollar-denominated

loans.[15] Lastly,

because

the

business

reputation

H)

12% per annum for the peso loans;

8% per annum for the dollar loans. The basis for the payment of
the dollar obligation is the conversion rate of P26.50 per dollar
availed of at the time of incurring of the obligation in accordance
with Article 1250 of the Civil Code of the Philippines;

Dismissing [Equitable's] counterclaim except the payment of the

aforestated unpaid principal loan obligations and interest.
SO ORDERED.[19]

of
Equitable and respondents filed their respective notices of appeal.[20]

respondents was (allegedly) severely damaged when Equitable froze their accounts,

[16]

the trial court

In the March 1, 2004 order of the RTC, both notices were denied due course because

awarded moral and exemplary damages to them.[17]

Equitable and respondents failed to submit proof that they paid their respective appeal fees.[21]
[18]

The dispositive portion of the February 5, 2004 RTC decision provided:

WHEREFORE, premises considered, judgment is hereby rendered:
A)

Ordering [Equitable] to reinstate and return

[respondents'] deposit placed on hold status;

the

amount

of

WHEREFORE, premises considered, the appeal interposed by

defendants from the Decision in the above-entitled case is DENIED due
course. As of February 27, 2004, the Decision dated February 5, 2004, is
considered final and executory in so far as [Equitable, Aimee Yu and
Bejan Lionel Apas] are concerned.[22] (emphasis supplied)

28

Equitable moved for the reconsideration of the March 1, 2004 order of the RTC[23] on the
ground that it did in fact pay the appeal fees. Respondents, on the other hand, prayed for the
issuance of a writ of execution.[24]

injunction was correspondingly issued.[34]

Notwithstanding the writ of injunction, the properties of Equitable previously levied upon were

On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for
reconsideration for lack of merit

On June 16, 2004, the CA granted Equitable's application for injunction. A writ of preliminary

[25]

sold in a public auction on July 1, 2004. Respondents were the highest bidders and certificates of sale
were issued to them.[35]

and ordered the issuance of a writ of execution in favor of

respondents.[26] According to the RTC, because respondents did not move for the reconsideration of

On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to cite the

the previous order (denying due course to the parties notices of appeal),[27] the February 5, 2004

sheriffs who conducted the sale in contempt for proceeding with the auction despite the injunction

decision became final and executory as to both parties and a writ of execution against Equitable was

order of the CA.[36]

in order.[28]

A writ of execution was thereafter issued[29] and three real properties of Equitable were levied
upon.[30]

On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004
order.[31] It, however, withdrew that petition on March 30, 2004[32] and instead filed a petition for
certiorari with an application for an injunction in the CA to enjoin the implementation and execution

On October 28, 2005, the CA dismissed the petition for certiorari.[37] It found Equitable guilty
of forum shopping because the bank filed its petition for certiorari in the CA several hours before
withdrawing its petition for relief in the RTC.[38] Moreover, Equitable failed to disclose, both in the
statement of material dates and certificate of non-forum shopping (attached to its petition for
certiorari in the CA), that it had a pending petition for relief in the RTC.[39]

Equitable moved for reconsideration[40] but it was denied.[41] Thus, this petition.

of the March 24, 2004 omnibus order.[33]

Equitable asserts that it was not guilty of forum shopping because the petition for relief was
withdrawn on the same day the petition for certiorari was filed.[42] It likewise avers that its petition

29

for certiorari was meritorious because the RTC committed grave abuse of discretion in issuing the

sought to correct the grave abuse of discretion amounting to lack of jurisdiction committed by the

March 24, 2004 omnibus order which was based on an erroneous assumption. The March 1, 2004

RTC.[48]

order denying its notice of appeal for non payment of appeal fees was erroneous because it had in
In a petition for relief, the judgment or final order is rendered by a court with competent
fact paid the required fees.

[43]

Thus, the RTC, by issuing its March 24, 2004 omnibus order,
jurisdiction. In a petition for certiorari, the order is rendered by a court without or in excess of its

effectively prevented Equitable from appealing the patently wrong February 5, 2004 decision.[44]

jurisdiction.

This petition is meritorious.

Moreover, Equitable substantially complied with the rule on non-forum shopping when it
moved to withdraw its petition for relief in the RTC on the same day (in fact just four hours and forty

EQUITABLE WAS NOT

GUILTY OF FORUM
SHOPPING

minutes after) it filed the petition for certiorari in the CA. Even if Equitable failed to disclose that it
had a pending petition for relief in the RTC, it rectified what was doubtlessly a careless oversight by

Forum shopping exists when two or more actions involving the same transactions, essential
withdrawing the petition for relief just a few hours after it filed its petition for certiorari in the CA a
facts and circumstances are filed and those actions raise identical issues, subject matter and causes
clear indication that it had no intention of maintaining the two actions at the same time.
of action.[45] The test is whether, in two or more pending cases, there is identity of parties, rights or
causes of actions and reliefs.[46]

Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not have
identical causes of action. The petition for relief from the denial of its notice of appeal was based on

THE TRIAL COURT

COMMITTED GRAVE
ABUSE
OF
DISCRETION
IN
ISSUING ITS MARCH
1,
2004
AND
MARCH 24, 2004
ORDERS

the RTCs judgment or final order preventing it from taking an appeal by fraud, accident, mistake or
Section 1, Rule 65 of the Rules of Court provides:
excusable negligence.

[47]

On the other hand, its petition for certiorari in the CA, a special civil action,

Section 1. Petition for Certiorari. When any tribunal, board or officer

exercising judicial or quasi-judicial function has acted without or in

30

excess of its or his jurisdiction, or with grave abuse of discretion

amounting to lack or excess of jurisdiction, and there is no appeal, nor
any plain, speedy or adequate remedy in the ordinary course of law, a
person aggrieved thereby may file a verified petition in the proper court, alleging
the facts with certainty and praying that judgment be rendered annulling or
modifying the proceedings of such tribunal, board or officer, and granting such
incidental reliefs as law and justice may require.
The petition shall be accompanied by a certified true copy of the
judgment, order or resolution subject thereof, copies of all pleadings and
documents relevant and pertinent thereto, and a sworn certificate of non-forum
shopping as provided in the third paragraph of Section 3, Rule 46.

Equitable's motion for reconsideration and granted respondents' motion for the issuance of a writ of
execution.[51]

The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to
prevent Equitable, et al. from appealing the February 5, 2004 decision. Not only that. The execution
of the decision was undertaken with indecent haste, effectively obviating or defeating Equitable's

There are two substantial requirements in a petition for certiorari. These are:
1.

2.

that the tribunal, board or officer exercising judicial or quasi-judicial

functions acted without or in excess of his or its jurisdiction or with
grave abuse of discretion amounting to lack or excess of jurisdiction;
and
that there is no appeal or any plain, speedy and adequate remedy in
the ordinary course of law.

right to avail of possible legal remedies. No matter how we look at it, the RTC committed grave
abuse of discretion in rendering those orders.

With regard to whether Equitable had a plain, speedy and adequate remedy in the ordinary
course of law, we hold that there was none. The RTC denied due course to its notice of appeal in the

For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner must
show that the public respondent patently and grossly abused his discretion and that abuse amounted

March 1, 2004 order. It affirmed that denial in the March 24, 2004 omnibus order. Hence, there was
no way Equitable could have possibly appealed the February 5, 2004 decision.[52]

to an evasion of positive duty or a virtual refusal to perform a duty enjoined by law or to act at all in

Although Equitable filed a petition for relief from the March 24, 2004 order, that petition was

contemplation of law, as where the power was exercised in an arbitrary and despotic manner by

not a plain, speedy and adequate remedy in the ordinary course of law.[53] A petition for relief under

reason of passion or hostility.[49]

Rule 38 is an equitable remedy allowed only in exceptional circumstances or where there is no other
available or adequate remedy.[54]

The March 1, 2004 order denied due course to the notices of appeal of both Equitable and
respondents. However, it declared that the February 5, 2004 decision was final and executory
only with respect to Equitable.[50] As expected, the March 24, 2004 omnibus order denied

Thus, we grant Equitable's petition for certiorari and consequently give due course to its
appeal.

31

A contract of adhesion is a contract whereby almost all of its provisions are drafted by one
EQUITABLE
RAISED
PURE QUESTIONS OF
LAW
IN
ITS
PETITION
FOR
REVIEW

party.[58] The participation of the other party is limited to affixing his signature or his adhesion to
the contract.[59] For this reason, contracts of adhesion are strictly construed against the party who
drafted it.[60]

The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.[55] There is a
It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are,
question of law when the doubt or controversy concerns the correct application of law or
on the contrary, as binding as ordinary contracts. A party is in reality free to accept or reject it. A
jurisprudence to a certain set of facts; or when the issue does not call for the probative value of the
contract of adhesion becomes void only when the dominant party takes advantage of the weakness
evidence presented, the truth or falsehood of facts being admitted.[56]
of the other party, completely depriving the latter of the opportunity to bargain on equal footing.[61]
Equitable does not assail the factual findings of the trial court. Its arguments essentially focus
That was not the case here. As the trial court noted, if the terms and conditions offered by
on the nullity of the RTCs February 5, 2004 decision. Equitable points out that that decision was
Equitable had been truly prejudicial to respondents, they would have walked out and negotiated with
patently erroneous, specially the exorbitant award of damages, as it was inconsistent with
another bank at the first available instance. But they did not. Instead, they continuously availed of
existing law and jurisprudence.[57]
Equitable's credit facilities for five long years.
THE PROMISSORY
NOTES WERE VALID
While the RTC categorically found that respondents had outstanding dollar- and peso-

The RTC upheld the validity of the promissory notes despite respondents assertion that
those documents were contracts of adhesion.

denominated loans with Equitable, it, however, failed to ascertain the total amount due (principal,
interest and penalties, if any) as of July 9, 2001. The trial court did not explain how it arrived at the
amounts

of

US$228,200

and P1,000,000.[62] In Metro

Manila

Transit

Corporation

v.

D.M.

Consunji,[63] we reiterated that this Court is not a trier of facts and it shall pass upon them only for

32

compelling reasons which unfortunately are not present in this case.[64] Hence, we ordered the partial
remand of the case for the sole purpose of determining the amount of actual damages.[65]

If subject promissory note is extended, the interest for subsequent extensions

shall be at such rate as shall be determined by the bank.[70]

Equitable dictated the interest rates if the term (or period for repayment) of the loan was
extended. Respondents had no choice but to accept them. This was a violation of Article 1308 of the
Civil Code. Furthermore, the assailed escalation clause did not contain the necessary provisions for

ESCALATION CLAUSE
VIOLATED
THE
PRINCIPLE
OF
MUTUALITY OF CO
NTRACTS

Escalation clauses are not void per se. However, one which grants the creditor an unbridled
right to adjust the interest independently and upwardly, completely depriving the debtor of the right
to assent to an important modification in the agreement is void. Clauses of that nature violate the
principle of mutuality of contracts.[66] Article 1308[67] of the Civil Code holds that a contract must bind
both contracting parties; its validity or compliance cannot be left to the will of one of them.[68]

For this reason, we have consistently held that a valid escalation clause provides:
1.

that the rate of interest will only be increased if the applicable

maximum rate of interest is increased by law or by the Monetary
Board; and

2.

that the stipulated rate of interest will be reduced if the applicable

maximum rate of interest is reduced by law or by the Monetary Board
(de-escalation clause).[69]

The RTC found that Equitable's promissory notes uniformly stated:

validity, that is, it neither provided that the rate of interest would be increased only if allowed by law
or the Monetary Board, nor allowed de-escalation. For these reasons, the escalation clause was void.

With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National

Bank[71] we held that, because the escalation clause was annulled, the principal amount of the loan
was subject to the original or stipulated rate of interest. Upon maturity, the amount due was subject
to legal interest at the rate of 12% per annum.[72]

Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their
dollar-denominated loans and 20% p.a. for their peso-denominated loans from January 10, 2001 to
July 9, 2001. Thereafter, Equitable was entitled to legal interest of 12% p.a. on all amounts due.
THERE
WAS
NO
EXTRAORDINARY DE
FLATION

Extraordinary inflation exists when there is an unusual decrease in the purchasing power of
currency (that is, beyond the common fluctuation in the value of currency) and such decrease could

33

not be reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of
the obligation. Extraordinary deflation, on the other hand, involves an inverse situation.[73]

THE AWARD OF MORAL

AND
EXEMPLARY
DAMAGES
LACKED
BASI
S

Moral damages are in the category of an award designed to compensate the claimant for

Article 1250 of the Civil Code provides:

Article 1250. In case an extraordinary inflation or deflation of the currency
stipulated should intervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is
an agreement to the contrary.

actual injury suffered, not to impose a penalty to the wrongdoer.[79] To be entitled to moral damages,
a claimant must prove:
1.

For extraordinary inflation (or deflation) to affect an obligation, the following requisites
must be proven:
1.
2.
3.

2.

that there was an official declaration of extraordinary inflation or

deflation from the Bangko Sentral ng Pilipinas (BSP);[74]
that the obligation was contractual in nature;

[75]

and

That he or she suffered besmirched reputation, or physical, mental

or psychological suffering sustained by the claimant;
That the defendant committed a wrongful act or omission;

3.

That the wrongful act or omission was the proximate cause of the
damages the claimant sustained;

4.

The case is predicated on any of the instances expressed or

envisioned by Article 2219[80] and 2220[81]. [82]

that the parties expressly agreed to consider the effects of the

extraordinary inflation or deflation.[76]
In culpa contractual or breach of contract, moral damages are recoverable only if the

Despite the devaluation of the peso, the BSP never declared a situation of extraordinary
inflation. Moreover, although the obligation in this instance arose out of a contract, the parties did
not agree to recognize the effects of extraordinary inflation (or deflation).[77] The RTC never

defendant acted fraudulently or in bad faith or in wanton disregard of his contractual

obligations.[83] The breach must be wanton, reckless, malicious or in bad faith, and oppressive or
abusive.[84]

mentioned that there was a such stipulation either in the promissory note or loan agreement.

The RTC found that respondents did not pay Equitable the interest due on February 9, 2001

Therefore, respondents should pay their dollar-denominated loans at the exchange rate fixed by the

(or any month thereafter prior to the maturity of the loan)[85] or the amount due (principal plus

BSP on the date of maturity.[78]

34

interest) due on July 9, 2001.[86] Consequently, Equitable applied respondents' deposits to their loans
upon maturity.

The October 28, 2005 decision and February 3, 2006 resolution of the Court of Appeals in CAG.R. SP No. 83112 are hereby REVERSED and SET ASIDE.

The relationship between a bank and its depositor is that of creditor and debtor.[87] For this

The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in Civil

reason, a bank has the right to set-off the deposits in its hands for the payment of a depositor's

Case No. CEB-26983 is hereby ANNULLED for being rendered with grave abuse of discretion

indebtedness.[88]

amounting to lack or excess of jurisdiction. All proceedings undertaken pursuant thereto are likewise
declared null and void.

Respondents indeed defaulted on their obligation. For this reason, Equitable had the option to
exercise its legal right to set-off or compensation. However, the RTC mistakenly (or, as it now

The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No.

appears, deliberately) concluded that Equitable acted fraudulently or in bad faith or in wanton

CEB-26983 is hereby SET ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee Yu and Bejan

disregard of its contractual obligations despite the absence of proof. The undeniable fact was that,

Lionel Apas is therefore given due course.

whatever damage respondents sustained was purely the consequence of their failure to pay

The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in Civil

their loans. There was therefore absolutely no basis for the award of moral damages to them.
Case No. CEB-26983 is accordingly SET ASIDE. New judgment is hereby entered:
Neither was there reason to award exemplary damages. Since respondents were not entitled
to moral damages, neither should they be awarded exemplary damages.

[89]

1.

ordering respondents Ng Sheung Ngor, doing business under the name and

And if respondents were

style of Ken Marketing, Ken Appliance Division, Inc. and Benjamin E. Go to pay

not entitled to moral and exemplary damages, neither could they be awarded attorney's fees and
petitioner Equitable PCI Bank the principal amount of their dollar- and pesolitigation expenses.[90]

denominated loans;

ACCORDINGLY, the petition is hereby GRANTED.

35

2.

ordering respondents Ng Sheung Ngor, doing business under the name and

SO ORDERED.

style of Ken Marketing, Ken Appliance Division, Inc. and Benjamin E. Go to pay
petitioner Equitable PCI Bank interest at:
a)

12.66% p.a. with respect to their dollar-denominated loans from

January 10, 2001 to July 9, 2001;

b)

20% p.a. with respect to their peso-denominated loans from

SECOND DIVISION

January 10, 2001 to July 9, 2001;[91]

c)

pursuant to our ruling in Eastern Shipping Lines v. Court of

[92]

Appeals,

the total amount due on July 9, 2001 shall earn legal

PAN PACIFIC SERVICE

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

interest at 12% p.a. from the time petitioner Equitable PCI Bank

G.R. No. 169975

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

- versus -

demanded payment, whether judicially or extra-judicially; and

d)

after this Decision becomes final and executory, the applicable rate
shall be 12%p.a. until full satisfaction;

3.

EQUITABLE PCI BANK (formerly THE

PHILIPPINE
COMMERCIAL
INTERNATIONAL BANK),
Respondent.

Promulgated:
March 18, 2010

all other claims and counterclaims are dismissed.

As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute the exact
amounts due on the respective dollar-denominated and peso-denominated loans, as of July 9, 2001,

X - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X
DECISION

of respondents Ng Sheung Ngor, doing business under the name and style of Ken Marketing, Ken
Appliance Division and Benjamin E. Go.

CARPIO, J.:

36

The Case
Pursuant to the contract, Pan Pacific commenced the mechanical works in the project site,
the PCIB Tower II extension building in Makati City. The project was completed in June 1992.
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

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]

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

PETITIONERSP1,516,015.07 WITH INTEREST AT THE LEGAL RATE OF 12% PER ANNUM STARTING
6 MAY 1994 UNTIL THE AMOUNT IS FULLY PAID.

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]

The Facts

Pan

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
forP20,688,800. Pan Pacific and respondent also agreed on nine change orders for P2,622,610.30.
Thus, the total consideration for the whole project was P23,311,410.30.[6] The Contract stipulated,
among others, that Pan Pacific shall be entitled to a price adjustment in case of increase in labor
costs and prices of materials under paragraphs 70.1[7] and 70.2[8] of the General Conditions for the
Construction of PCIB Tower II Extension (the escalation clause).[9]

Pacific

contended

that

with

this

recommendation,

respondent

was

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

37

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
andP414,942 as advance payments.[18]

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

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, the dispositive portion of which reads:
WHEREFORE, PREMISES CONSIDERED, JUDGMENT IS HEREBY
RENDERED IN FAVOR OF THE PLAINTIFFS AND AGAINST THE DEFENDANT
AS FOLLOWS:

1.

DEDUCTING THE AMOUNT OF P126,903.97 FROM THE BALANCE OF

THE ADJUSTED PRICE AND IN AWARDING ONLY 12% ANNUAL
INTEREST ON THE AMOUNT DUE, INSTEAD OF THE BANK LOAN RATE

DECLARING THE PROMISSORY NOTE

(EXHIBIT B) NULL AND VOID;

ORDERING THE DEFENDANT TO PAY THE PLAINTIFFS THE FOLLOWING AMOUNTS:

A. P1,389,111.10 REP
RESENTING
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;

OF 18% COMPOUNDED ANNUALLY BEGINNING SEPTEMBER 1992.

2. With respect to respondent, whether the RTC erred in declaring the promissory
note void and in awarding moral and exemplary damages and
attorneys fees in favor of petitioners and in dismissing its
counterclaim.

In its decision dated 30 June 2005, the CA modified the RTC decision, with respect to the
principal amount due to petitioners. The CA removed the deduction of P126,903.97 because it
represented the final payment on the basic contract price. Hence, the CA ordered respondent to
payP1,516,015.07 to petitioners, with interest at the legal rate of 12% per annum starting 6 May
1994.[20]

P100,000.00 REPRESENTING MORAL DAMAGES;

P50,000.00 REPRESENTING EXEMPLARY DAMAGES; AND
P50,000.00 AS AND FOR ATTORNEYS FEES.
2.
DISMISSING
DEFENDANTS
COUNTERCLAIM, FOR LACK OF MERIT;
AND
WITH COSTS AGAINST THE DEFENDANT.
SO ORDERED.[19]

On 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.

38

AGGRIEVED BY THE CAS DECISION, PETITIONERS ELEVATED THE CASE BEFORE THIS
COURT.

The Issue

To unilaterally increase the interest rate of the adjusted price would

beviolative of the principle of mutuality of contracts. Thus, the Court maintains
the legal rate of twelve percent per annum starting from the date of judicial
demand. Although the contract provides for the period when the
recommendation of the TCGI Engineers as to the price adjustment would be
binding on the parties, it was established, however, that part of the adjusted
price demanded by plaintiffs was already disbursed as early as 28 February 1992
by defendant bank to their suppliers and laborers for their account.[21]

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%

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

bank lending rate.

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
Ruling of the Court

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:

We grant the petition.

Agreement

2.5
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.

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)

39

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

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]

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

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 is estopped from contesting such fact.

However, the CA went beyond the intent of the parties by requiring respondent to give its
consent to the imposition of interest before petitioners can hold respondent liable for interest at the
current bank lending rate. This is erroneous. A review of Section 2.6 of the Agreement and Section
60.10 of the General Conditions shows that the consent of the respondent is not needed for the
imposition of interest at the current bank lending rate, which occurs upon any delay in payment.

parties. Thus, when the terms of an agreement have been reduced to writing, it is considered as
When the terms of a contract are clear and leave no doubt as to the intention of the

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]

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

The escalation clause of the contract provides:

duty is confined to the interpretation of the contract which the parties have made for themselves

CHANGES IN COST AND LEGISLATION

without regard to its wisdom or folly as the court cannot supply material stipulations or read into the

70.1 Increase or Decrease of Cost

contract words which it does not contain. It is only when the contract is vague and ambiguous that

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.

courts are permitted to resort to construction of its terms and determine the intention of the
parties.[32]

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

40

The escalation clause must be read in conjunction with Section 2.5 of the Agreement and

particular rate of penalty interest, payment of additional interest at a rate equal to the regular

Section 60.10 of the General Conditions which pertain to the time of payment. Once the parties agree

monetary interest becomes due and payable. Finally, if no regular interest had been agreed upon by

on the price adjustment after due consultation in compliance with the provisions of the escalation

the contracting parties, then the damages payable will consist of payment of legal interest which is

clause, the agreement is in effect an amendment to the original contract, and gives rise to the

6%, or in the case of loans or forbearances of money, 12% per annum.[34] It is only when the parties

liability of respondent to pay the adjusted costs. Under Section 60.10 of the General Conditions, the

to a contract have failed to fix the rate of interest or when such amount is unwarranted that the

respondent shall pay such liability to the petitioner within 28 days from issuance of the interim

Court will apply the 12% interest per annum on a loan or forbearance of money.[35]

certificate. Upon respondents failure to pay within the time provided (28 days), then it shall be liable
to pay the stipulated interest.

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%.

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

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

no interest shall be due unless it has been expressly stipulated in writing. Therefore, payment of
substantial proof that the bank lending rate at the time of default was 18% per annum. Absent any
monetary interest is allowed only if:
evidence of fraud, undue influence or any vice of consent exercised by petitioners against the
(1) there was an express stipulation for the payment of interest; and

respondent, the interest rate agreed upon is binding on them.[37]

(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]
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision and Resolution of
We agree with petitioners interpretation that in case of default, the consent of the
the

Court

of

Appeals

in

CA-G.R.

CV

No.

63966.

We ORDER respondent

to

pay

respondent is not needed in order to impose interest at the current bank lending rate.
petitionersP1,516,015.07 with interest at the bank lending rate of 18% per annum starting 6 May
1994 until the amount is fully paid.

Applicable Interest Rate

Under Article 2209 of the Civil Code, the appropriate measure for damages in case of delay

SO ORDERED.

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

41

as their Attorney-in-Fact,
Respondents.

Promulgated:

April 4, 2007
x--------------------------------------------------x
DECISION
CHICO-NAZARIO, J.:

This is a petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
Decision of the Court of Appeals,[1] dated 31 August 2005, reversing the Decision rendered by the
trial court on 13 December 1995. The Court of Appeals, in its assailed Decision, fixed the interest
rate

of

the

loan

between

the

parties

at

Spouses Zoilo and PrimitivaEspiritu (Spouses Espiritu)

12%

per

annum,

to reconvey the

subject

and

ordered

property

to

the
the

Spouses Landrito conditioned upon the payment of the loan.

Petitioners DULCE, BENLINDA, EDWIN, CYNTHIA, AND MIRIAM ANDREA, all surnamed
ESPIRITU, are the only children and legal heirs of the Spouses Zoilo and PrimitivaEspiritu, who both
died during the pendency of the case before the Honorable Court of Appeals.[2]
THIRD DIVISION
HEIRS OF ZOILO ESPIRITU AND PRIMITIVA
ESPIRITU,
Petitioners,

G.R. No. 169617

Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) are herein represented by
their son and attorney-in-fact, Zoilo Landrito.[3]

Present:

- versus -

SPOUSES MAXIMO LANDRITO AND PAZ

LANDRITO, Represented by ZOILO LANDRITO,

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
CHICO-NAZARIO, and
NACHURA, JJ.

On 5 September 1986, Spouses Landrito loaned from the Spouses Espiritu the amount
ofP350,000.00 payable in three months. To secure the loan, the Spouses Landrito executed a real
estate mortgage over a five hundred forty (540) square meter lot located in Alabang, Muntinlupa,
covered by Transfer Certificate of Title No. S-48948, in favor of the Spouses Espiritu. From

42

the P350,000.00 that the Landritos were supposed to receive, P17,500.00 was deducted as interest

The debt remained unpaid. As a consequence, the Spouses Espiritu foreclosed the

for the first month which was equivalent to five percent of the principal debt, and P7,500.00 was

mortgaged property on 31 October 1990. During the auction sale, the property was sold to the

further deducted as service fee. Thus, they actually received a net amount of P325,000.00. The

Spouses Espirituas the lone bidder. On 9 January 1991, the Sheriffs Certificate of Sale was

agreement, however, provided that the principal indebtedness earns interest at the legal rate.[4]

annotated on the title of the mortgaged property, giving the Spouses Landrito until 8 January 1992 to
redeem the property.

After

three

months,

when

the

debt

became

due

and

demandable,

[8]

the

Spouses Landrito were unable to pay the principal, and had not been able to make any interest

The Spouses Landrito failed to redeem the subject property although they alleged that they

payments other than the amount initially deducted from the proceeds of the loan. On 29 December

negotiated for the redemption of the property as early as 30 October 1991. While the negotiated

1986, the loan agreement was extended to 4 January 1987 through an Amendment of Real Estate

price for the land started at P1,595,392.79, it was allegedly increased by the Spouses Espiritu from

Mortgage. The loan was restructured in such a way that the unpaid interest became part of the

time to time. Spouses Landrito allegedly tendered two managers checks and some cash,

principal, thus increasing the principal to P385,000. The new loan agreement adopted all other terms

totalingP1,800,000.00 to the Spouses Espiritu on 13 January 1992, but the latter refused to accept

and conditions contained in first agreement.[5]

the same. They also alleged that the Spouses Espiritu increased the amount demanded to P2.5
Million and gave them until July 1992 to pay the said amount. However, upon inquiry, they found

Due to the continued inability of the Spouses Landritos to settle their obligations with the

out that on 24 June 1992, the Spouses Espiritu had already executed an Affidavit of Consolidation of

Spouses Espiritu, the loan agreement was renewed three more times. In all these subsequent

Ownership and registered the mortgaged property in their name, and that the Register of Deeds

renewals, the same terms and conditions found in the first agreement were retained. On 29 July

of Makati had already issued Transfer Certificate of Title No. 179802 in the name of the

1987, the principal was increased to P507,000.00 inclusive of running interest. On 11 March 1988, it

Spouses Espiritu. On 9 October 1992, the Spouses Landrito, represented by their son Zoilo Landrito,

was

filed

increased

to P647,000.00. And

on 21

October

1988,

the

principal

was

increased

an

action

for

annulment

orreconveyance of

title,

with

damages

against

the

to P874,125.00.[6] At the hearing before the trial court, Zoilo Espiritu testified that the increase in the

Spouses Espiritu before Branch 146 of the Regional Trial Court of Makati.[9] Among the allegations in

principal in each amendment of the loan agreement did not correspond to the amount delivered to

their Complaint, they stated that the SpousesEspiritu, as creditors and mortgagees, imposed interest

the SpousesLandrito. Rather, the increase in the principal had been due to unpaid interest and other

rates that are shocking to ones moral senses.[10]

charges.[7]
The trial court dismissed the complaint and upheld the validity of the foreclosure sale. The
trial court ordered in its Decision, dated 13 December 1995:[11]

43

WHEREFORE, all the foregoing premises considered, the herein

complaint is hereby dismissed forthwith.
Without pronouncements to costs.

FIXED to be applied as the interest of the loan; and (2) Conditioned upon the
payment
of
the
loan,
defendantsappellees spouses Zoilo and Primitiva Espiritu are
hereby
ordered
toreconvey Transfer Certificate of Title No. S-48948 to appellant
spouses Maximo and Paz Landrito.
The case is REMANDED to the Trial Court for the above determination.

The Spouses Landrito appealed to the Court of Appeals pursuant to Rule 41 of the 1997
Rules of Court. In its Decision dated 31 August 2005, the Court of Appeals reversed the trial courts
decision, decreeing that the five percent (5%) interest imposed by the Spouses Espiritu on the first
month and the varying interest rates imposed for the succeeding months contravened the provisions
of the Real Estate Mortgage contract which provided that interest at the legal rate, i.e., 12% per
annum, would be imposed. It also ruled that although the Usury Law had been rendered ineffective
by Central Bank Circular No. 905, which, in effect, removed the ceiling rates prescribed for interests,
thus, allowing parties to freely stipulate thereon, the courts may render void any stipulation of
interest rates which are found iniquitous or unconscionable. As a result, the Court of Appeals set the
interest rate of the loan at the legal rate, or 12% per annum.[12]

Furthermore, the Court of Appeals held that the action for reconveyance, filed by the

Hence, the present petition. The following issues were raised:[15]

I
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING AND SETTING
ASIDE THE DECISION OF THE TRIAL COURT AND ORDERING HEREIN
PETITIONERS TO RECONVEY TRANSFER CERTIFICATE OF TITLE NO. 18918 TO
HEREIN RESPONDENTS, WITHOUT ANY FACTUAL OR LEGAL BASIS THEREFOR.
II
THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT HEREIN
PETITIONERS UNILATERALLY IMPOSED ON HEREIN RESPONDENTS THE
ALLEGEDLY UNREASONABLE INTERESTS ON THE MORTGAGE LOANS.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT CONSIDERING THAT
HEREIN RESPONDENTS ATTORNEY-IN-FACT IS NOT ARMED WITH AUTHORITY
TO FILE AND PROSECUTE THIS CASE.

The petition is without merit.

SpousesLandrito, is still a proper remedy. Even if the Spouses Landrito failed to redeem the property
within the one-year redemption period provided by law, the action for reconveyance remained as a
remedy available to a landowner whose property was wrongfully registered in anothers name since
the subject property has not yet passed to an innocent purchaser for value.[13]

The Real Estate Mortgage executed between the parties specified that the principal
indebtedness shall earn interest at the legal rate. The agreement contained no other provision on
interest or any fees or charges incident to the debt. In at least three contracts, all designated as
Amendment of Real Estate Mortgage, the interest rate imposed was, likewise, unspecified. During

In the decretal portion of its Decision, the Court of Appeals ruled[14]:

WHEREFORE, the instant appeal is hereby GRANTED. The assailed

Decision datedDecember 13, 1995 of the Regional Trial Court of Makati, Branch
146 in Civil Case No. 92-2920 is hereby REVERSED and SET ASIDE, and a new
one is hereby entered as follows: (1) The legal rate of 12% per annum is hereby

his testimony, Zoilo Espiritu admitted that the increase in the principal in each of the Amendments of
the Real Estate Mortgage consists of interest and charges. The Spouses Espiritu alleged that the

44

parties had agreed on the interest and charges imposed in connection with the loan, hereunder

enumeration of the specific information required to be disclosed, among which are the interest and

enumerated:

other charges incident to the extension of credit. Section 6[17] of the same law imposes on anyone

1. P17,500.00 was the interest charged for the first month

and P7,500.00 was imposed as service fee.
2. P35,000.00 interest and charges, or the difference between
the P350,000.00 principal in the Real Estate Mortgage dated 5 September
1986 and the P385,000.00 principal in the Amendment of the Real Estate
Mortgage dated 29 December 1986.
3. P132,000.00 interest and charges, or the difference between
the P385,000.00 principal in the Amendment of the Real Estate Mortgage
dated 29 December 1986 and the P507,000.00 principal in the Amendment of
the Real Estate Mortgage dated 29 July 1987.
4. P140,000.00 interest and charges, or the difference between
the P507,000.00 principal in the Amendment of the Real Estate Mortgage
dated 29 July 1987 and the P647,000.00 principal in the Amendment of the Real
Estate Mortgage dated 11 March 1988.
5. P227,125.00 interest and charges, or the difference between
the P647,000.00 principal in the Amendment of the Real Estate Mortgage
dated 11 March 1988 and the P874,125 principal in the Amendment of the Real
Estate Mortgage dated 21 October 1988.

who willfully violates these provisions, sanctions which include civil liability, and a fine and/or
imprisonment.

Although any action seeking to impose either civil or criminal liability had already
prescribed, this Court frowns upon the underhanded manner in which the Spouses Espiritu imposed
interest and charges, in connection with the loan. This is aggravated by the fact that one of the
creditors, ZoiloEspiritu, a lawyer, is hardly in a position to plead ignorance of the requirements of the
law in connection with the transparency of credit transactions. In addition, the Civil Code clearly
provides that:

Article 1956. No interest shall be due unless it has been stipulated in writing.

The omission of the Spouses Espiritu in specifying in the contract the interest rate which was
The total interest and charges amounting to P559,125.00 on the original principal of P350,000

actually imposed, in contravention of the law, manifested bad faith.

was accumulated over only two years and one month. These charges are not found in any written
agreement between the parties. The records fail to show any computation on how much interest
was charged and what other fees were imposed. Not only did lack of transparency characterize the
aforementioned agreements, the interest rates and the service charge imposed, at an average of
6.39% per month, are excessive.

In several cases, this Court has been known to declare null and void stipulations on interest
and charges that were found excessive, iniquitous, and unconscionable. In the case of Medel v.

Court of Appeals,[18] the Court declared an interest rate of 5.5% per month on a P500,000.00 loan to
be excessive, iniquitous, unconscionable and exorbitant. Even if the parties themselves agreed on
the interest rate and stipulated the same in a written agreement, it nevertheless declared such

In enacting Republic Act No. 3765, known as the Truth in Lending Act, the State seeks to
protect its citizens from a lack of awareness of the true cost of credit by assuring the full disclosure of

stipulation as void and ordered the imposition of a 12% yearly interest rate. In Spouses Solangon v.

Salazar,[19]6% monthly interest on a P60,000.00 loan was likewise equitably reduced to a 1%

such costs. Section 4, in connection with Section 3(3)[16] of the said law, gives a detailed

45

monthly interest or 12% per annum. In Ruiz v. Court of Appeals,[20] the Court found a 3% monthly

1989,Zoilo Espiritu demanded from the Spouses Landrito the amount of P874,125.00 for the unpaid

interest imposed on four separate loans with a total of P1,050,000.00 to be excessive and reduced

loan. Since the debt due is limited to the principal of P350,000.00 with 12% per annum as legal

the interest to a 1% monthly interest or 12% per annum.

interest, the previous demand for payment of the amount of P874,125.00 cannot be considered as a
valid demand for payment. For an obligation to become due, there must be a valid demand.[27] Nor

In declaring void the stipulations authorizing excessive interest and charges, the Court

can the foreclosure proceedings be considered valid since the total amount of the indebtedness

declared that although the Usury Law was suspended by Central Bank Circular No. 905, s. 1982,

during the foreclosure proceedings was pegged at P874,125.00 which included interest and which

effective on 1 January 1983, and consequently parties are given a wide latitude to agree on any

this Court now nullifies for being excessive, iniquitous and exorbitant. If the foreclosure proceedings

interest rate, nothing in the said Circular grants lenders carte blanche authority to raise interest rates

were considered valid, this would result in an inequitable situation wherein the Spouses Landrito will

to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.[21]

have their land foreclosed for failure to pay an over-inflated loan only a small part of which they were
obligated to pay.

Stipulation authorizing iniquitous or unconscionable interests are contrary to morals, if not

against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from

Moreover, it is evident from the facts of the case that despite considerable effort on their

the beginning. They cannot be ratified nor the right to set up their illegality as a defense be

part, the Spouses Landrito failed to redeem the mortgaged property because they were unable to

waived.[22] The nullity of the stipulation on the usurious interest does not, however, affect the

raise the total amount, which was grossly inflated by the excessive interest imposed. Their attempt

lenders right to recover the principal of the loan.[23] Nor would it affect the terms of the real estate

to redeem the mortgaged property at the inflated amount of P1,595,392.79, as early as 30 October

mortgage. The right to foreclose the mortgage remains with the creditors, and said right can be

1991, is reflected in a letter, which creditor-mortgagee Zoilo Landrito acknowledged to have received

exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered

by affixing his signature herein.[28] They also attached in their Complaint copies of two checks in the

without the stipulation of the excessive interest. A legal interest of 12% per annum will be added in

amounts of P770,000.00 and P995,087.00, both dated 13 January 1992, which were allegedly

place of the excessive interest formerly imposed.

refused by the Spouses Espiritu.[29] Lastly, the Spouses Espiritu even attached in their exhibits a copy
of a handwritten letter, dated 27 January 1994, written by Paz Landrito, addressed to the

While the terms of the Real Estate Mortgage remain effective, the foreclosure proceedings

Spouses Espiritu, wherein the former offered to pay the latter the sum of P2,000,000.00.[30] In all

held on 31 Ocotber 1990 cannot be given effect. In the Notice of Sheriffs Sale[24] dated 5 October

these instances, the Spouses Landrito had tried, but failed, to pay an amount way over the

1990, and in the Certificate of Sale[25] dated 31 October 1990, the amount designated as mortgage

indebtedness they were supposed to pay i.e., P350,000.00 and 12% interest per annum. Thus, it

indebtedness amounted to P874,125.00. Likewise, in the demand letter[26] dated 12 December

46

is only proper that the Spouses Landrito be given the opportunity to repay the real amount of their
indebtedness.

Significantly, the records show that the property mortgaged was purchased by the
SpousesEspiritu and had not been transferred to an innocent purchaser for value. This means that

Since the Spouses Landrito, the debtors in this case, were not given an opportunity to

an action forreconveyance may still be availed of in this case.[33]

settle their debt, at the correct amount and without the iniquitous interest imposed, no foreclosure
proceedings may be instituted. A judgment ordering a foreclosure sale is conditioned upon a finding

Registration of property by one person in his or her name, whether by mistake or fraud,

on the correct amount of the unpaid obligation and the failure of the debtor to pay the said

the real owner being another person, impresses upon the title so acquired the character of a

amount.[31] In this case, it has not yet been shown that the Spouses Landrito had already failed to

constructive trust for the real owner, which would justify an action for reconveyance.[34] This is

pay the correct amount of the debt and, therefore, a foreclosure sale cannot be conducted in order to

based on Article 1465 of the Civil Code which states that:

answer for the unpaid debt. The foreclosure sale conducted upon their failure to pay P874,125 in
1990 should be nullified since the amount demanded as the outstanding loan was overstated;

Art. 1465. If property acquired through mistakes or fraud, the person obtaining
it is, by force of law, considered a trustee of an implied trust for benefit of the
person from whom the property comes.

consequently it has not been shown that the mortgagors the Spouses Landrito, have failed to pay
their outstanding obligation. Moreover, if the proceeds of the sale together with its reasonable rates
of interest were applied to the obligation, only a small part of its original loans would actually remain
outstanding, but because of the unconscionable interest rates, the larger part corresponded
to said excessive and iniquitous interest.

The action for reconveyance does not prescribe until after a period of ten years from the date
of the registration of the certificate of sale since the action would be based on implied trust.[35] Thus,
the action for reconveyance filed on 31 October 1992, more than one year after the Sheriffs
Certificate of Sale was registered on 9 January 1991, was filed within the prescription period.

As a result, the subsequent registration of the foreclosure sale cannot transfer any rights
over the mortgaged property to the Spouses Espiritu. The registration of the foreclosure sale, herein
declared invalid, cannot vest title over the mortgaged property. The Torrens system does not create
or vest title where one does not have a rightful claim over a real property. It only confirms and
records title already existing and vested. It does not permit one to enrich oneself at the expense of
another.[32] Thus, the decree of registration, even after the lapse of one (1) year, cannot attain the
status of indefeasibility.

It should, however, be reiterated that the provisions of the Real Estate Mortgage are not
annulled and the principal obligation stands. In addition, the interest is not completely removed;
rather, it is set by this Court at 12% per annum. Should the Spouses Landrito fail to pay the principal,
with its recomputed interest which runs from the time the loan agreement was entered into on 5
September 1986 until the present, there is nothing in this Decision which prevents the
SpousesEspiritu from foreclosing the mortgaged property.

47

Spouses Espiritu to reconvey the subject property to the Spouses Landrito conditioned upon the
The last issue raised by the petitioners is whether or not Zoilo Landrito was authorized to
file the action for reconveyance filed before the trial court or even to file the appeal from the

payment of the loan together with herein fixed rate of interest. Costs against the petitioners.

SO ORDERED.

judgment of the trial court, by virtue of the Special Power of Attorney dated 30 September
1992. They further noted that the trial court and the Court of Appeals failed to rule on this issue.[36]

The

Special

Power

of

Attorney[37] dated 30

September

1992 was

executed

by MaximoLandrito, Jr., with the conformity of Paz Landrito, in connection with the mortgaged
property. It authorized Zoilo Landrito:
Republic of the Philippines
SUPREME COURT
Manila

2. To make, sign, execute and deliver corresponding pertinent

contracts, documents, agreements and other writings of whatever nature or kind
and to sue or file legal action in any court of the Philippines, to collect,
ask demands, encash checks, and recover any and all sum of monies, proceeds,
interest and other due accruing, owning, payable or belonging to me as such
owner of the afore-mentioned property. (Emphasis provided.)

EN BANC
G.R. No. 189871

Zoilo Landritos authority to file the case is clearly set forth in the Special Power of

August 13, 2013

DARIO NACAR, PETITIONER,

vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.

Attorney. Furthermore, the records of the case unequivocally show that Zoilo Landrito filed
DECISION

the reconveyancecase with the full authority of his mother, Paz Landrito, who attended the hearings
of the case, filed in her behalf, without making any protest.[38] She even testified in the same case
on 30 August 1995. From the acts of Paz Landrito, there is no doubt that she had authorized her son
to file the action forreconveyance, in her behalf, before the trial court.

PERALTA, J.:
This is a petition for review on certiorari assailing the Decision1 dated September 23, 2008 of the
Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October 9, 2009 denying
petitioners motion for reconsideration.
The factual antecedents are undisputed.

IN

VIEW

OF

THE

FOREGOING,

the

instant

Petition

is DENIED. This

Court AFFIRMSthe assailed Decision of the Court of Appeals, promulgated on 31 August 2005, fixing

Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of the
National Labor Relations Commission (NLRC) against respondents Gallery Frames (GF) and/or Felipe
Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.

the interest rate of the loan between the parties at 12% per annum, and ordering the

48

On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found that he
was dismissed from employment without a valid or just cause. Thus, petitioner was awarded
backwages and separation pay in lieu of reinstatement in the amount of P158,919.92. The dispositive
portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of showing
that complainant was dismissed from employment for a just or valid cause. All the more, it is clear
from the records that complainant was never afforded due process before he was terminated. As
such, we are perforce constrained to grant complainants prayer for the payments of separation pay
in lieu of reinstatement to his former position, considering the strained relationship between the
parties, and his apparent reluctance to be reinstated, computed only up to promulgation of this
decision as follows:
SEPARATION PAY
Date Hired

August 1990

Rate

P198/day

Date of Decision

Aug. 18, 1998

Length of Service

8 yrs. & 1 month

To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eightysix pesos and 56/100 (P62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred
thirty-three and 36/100 (P95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.
SO ORDERED.4
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution5 dated
February 29, 2000. Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents
filed a motion for reconsideration, but it was denied.6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24, 2000,
the CA issued a Resolution dismissing the petition. Respondents filed a Motion for Reconsideration,
but it was likewise denied in a Resolution dated May 8, 2001.7
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no
reversible error on the part of the CA, this Court denied the petition in the Resolution dated April 17,
2002.8

P198.00 x 26 days x 8 months = P41,184.00

An Entry of Judgment was later issued certifying that the resolution became final and executory on
May 27, 2002.9 The case was, thereafter, referred back to the Labor Arbiter. A pre-execution
conference was consequently scheduled, but respondents failed to appear.10

BACKWAGES
Date Dismissed

January 24, 1997

Rate per day

P196.00

Date of Decisions

Aug. 18, 1998

On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages
be computed from the date of his dismissal on January 24, 1997 up to the finality of the Resolution
of the Supreme Court on May 27, 2002.11 Upon recomputation, the Computation and Examination
Unit of the NLRC arrived at an updated amount in the sum of P471,320.31.12

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

P196.00/day x 12.36 mos.

= P62,986.56

b) 2/6/98 to 8/18/98 = 6.4 months

Prevailing Rate per day

= P62,986.00

P198.00 x 26 days x 6.4 mos.

= P32,947.20
TOTAL

= P95.933.76

xxxx
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of
constructive dismissal and are therefore, ordered:

On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the Sheriff to
collect from respondents the total amount of P471,320.31. Respondents filed a Motion to Quash Writ
of Execution, arguing, among other things, that since the Labor Arbiter awarded separation pay
of P62,986.56 and limited backwages ofP95,933.36, no more recomputation is required to be made
of the said awards. They claimed that after the decision becomes final and executory, the same
cannot be altered or amended anymore.14 On January 13, 2003, the Labor Arbiter issued an
Order15 denying the motion. Thus, an Alias Writ of Execution16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution17 granting
the appeal in favor of the respondents and ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be
final and executory. Consequently, another pre-execution conference was held, but respondents
failed to appear on time. Meanwhile, petitioner moved that an Alias Writ of Execution be issued to
enforce the earlier recomputed judgment award in the sum of P471,320.31.18

49

The records of the case were again forwarded to the Computation and Examination Unit for
recomputation, where the judgment award of petitioner was reassessed to be in the total amount of
only P147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original
amount as determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the final
computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment
award that was due to petitioner in the amount of P147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary
award to include the appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to the amount
ofP11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be
enforced considering that it was the one that became final and executory. However, the Labor Arbiter
reasoned that since the decision states that the separation pay and backwages are computed only up
to the promulgation of the said decision, it is the amount of P158,919.92 that should be executed.
Thus, since petitioner already receivedP147,560.19, he is only entitled to the balance of P11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its
Resolution22 dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was
likewise denied in the Resolution23dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined that since
petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already
became final and executory, a belated correction thereof is no longer allowed. The CA stated that
there is nothing left to be done except to enforce the said judgment. Consequently, it can no longer
be modified in any respect, except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution
2009.

25

dated October 9,

Petitioner argues that notwithstanding the fact that there was a computation of backwages in the
Labor Arbiters decision, the same is not final until reinstatement is made or until finality of the
decision, in case of an award of separation pay. Petitioner maintains that considering that the
October 15, 1998 decision of the Labor Arbiter did not become final and executory until the April 17,
2002 Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of Entries on May
27, 2002, the reckoning point for the computation of the backwages and separation pay should be on
May 27, 2002 and not when the decision of the Labor Arbiter was rendered on October 15, 1998.
Further, petitioner posits that he is also entitled to the payment of interest from the finality of the
decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were
awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more recomputation
is required to be made of said awards. Respondents insist that since the decision clearly stated that
the separation pay and backwages are "computed only up to [the] promulgation of this decision,"
and considering that petitioner no longer appealed the decision, petitioner is only entitled to the
award as computed by the Labor Arbiter in the total amount ofP158,919.92. Respondents added that
it was only during the execution proceedings that the petitioner questioned the award, long after the
decision had become final and executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to petitioner at this point of the proceedings would
substantially vary the decision of the Labor Arbiter as it violates the rule on immutability of
judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of
Appeals (Sixth Division),27 wherein the issue submitted to the Court for resolution was the propriety
of the computation of the awards made, and whether this violated the principle of immutability of
judgment. Like in the present case, it was a distinct feature of the judgment of the Labor Arbiter in
the above-cited case that the decision already provided for the computation of the payable
separation pay and backwages due and did not further order the computation of the monetary
awards up to the time of the finality of the judgment. Also in Session Delights, the dismissed
employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the labor
arbiter's original computation of the awards made, pegged as of the time the decision was rendered
and confirmed with modification by a final CA decision, is legally proper. The question is posed, given
that the petitioner did not immediately pay the awards stated in the original labor arbiter's decision; it
delayed payment because it continued with the litigation until final judgment at the CA level.

Hence, the petition assigning the lone error:

I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED
GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN UPHOLDING THE
QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005
ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION OF THE OCTOBER 15,
1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE
BODY OF THE SAME DECISION.26

A source of misunderstanding in implementing the final decision in this case proceeds from the way
the original labor arbiter framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed with
finality. This is the finding of the illegality of the dismissal and the awards of separation pay in lieu of
reinstatement, backwages, attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the labor
arbiter made shows that it was time-bound as can be seen from the figures used in the computation.

50

This part, being merely a computation of what the first part of the decision established and declared,
can, by its nature, be re-computed. This is the part, too, that the petitioner now posits should no
longer be re-computed because the computation is already in the labor arbiter's decision that the CA
had affirmed. The public and private respondents, on the other hand, posit that a re-computation is
necessary because the relief in an illegal dismissal decision goes all the way up to reinstatement if
reinstatement is to be made, or up to the finality of the decision, if separation pay is to be given in
lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken
place, also made a computation of the award, is understandable in light of Section 3, Rule VIII of the
then NLRC Rules of Procedure which requires that a computation be made. This Section in part
states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as
practicable, shall embody in any such decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor arbiter's
decision. As we noted above, this implication is apparent from the terms of the computation itself,
and no question would have arisen had the parties terminated the case and implemented the
decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding
of illegality as well as on all the consequent awards made. Hence, the petitioner appealed the case to
the NLRC which, in turn, affirmed the labor arbiter's decision. By law, the NLRC decision is final,
reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a
timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC exceeded its authority
in affirming the payment of 13th month pay and indemnity, lapsed to finality and was subsequently
returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the
original labor arbiter's decision, the implementing labor arbiter ordered the award re-computed; he
apparently read the figures originally ordered to be paid to be the computation due had the case
been terminated and implemented at the labor arbiter's level. Thus, the labor arbiter re-computed
the award to include the separation pay and the backwages due up to the finality of the CA decision
that fully terminated the case on the merits. Unfortunately, the labor arbiter's approved computation
went beyond the finality of the CA decision (July 29, 2003) and included as well the payment for
awards the final CA decision had deleted - specifically, the proportionate 13th month pay and the
indemnity awards. Hence, the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially
considered the labor arbiter's original decision in accordance with its basic component parts as we
discussed above. To reiterate, the first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the awards or monetary consequences of the
illegal dismissal, computed as of the time of the labor arbiter's original decision.28

Consequently, from the above disquisitions, under the terms of the decision which is sought to be
executed by the petitioner, no essential change is made by a recomputation as this step is a
necessary consequence that flows from the nature of the illegality of dismissal declared by the Labor
Arbiter in that decision.29 A recomputation (or an original computation, if no previous computation
has been made) is a part of the law specifically, Article 279 of the Labor Code and the established
jurisprudence on this provision that is read into the decision. By the nature of an illegal dismissal
case, the reliefs continue to add up until full satisfaction, as expressed under Article 279 of the Labor
Code. The recomputation of the consequences of illegal dismissal upon execution of the decision
does not constitute an alteration or amendment of the final decision being implemented. The illegal
dismissal ruling stands; only the computation of monetary consequences of this dismissal is affected,
and this is not a violation of the principle of immutability of final judgments.30
That the amount respondents shall now pay has greatly increased is a consequence that it cannot
avoid as it is the risk that it ran when it continued to seek recourses against the Labor Arbiter's
decision. Article 279 provides for the consequences of illegal dismissal in no uncertain terms, qualified
only by jurisprudence in its interpretation of when separation pay in lieu of reinstatement is allowed.
When that happens, the finality of the illegal dismissal decision becomes the reckoning point instead
of the reinstatement that the law decrees. In allowing separation pay, the final decision effectively
declares that the employment relationship ended so that separation pay and backwages are to be
computed up to that point.31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v.
Court of Appeals,32 the Court laid down the guidelines regarding the manner of computing legal
interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e.,
a loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court
at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date the judgment of the
court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,

51

shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.33

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines42 are accordingly modified to embody BSP-MB Circular No. 799, as follows:

Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No.
796 dated May 16, 2013, approved the amendment of Section 234 of Circular No. 905, Series of 1982
and, accordingly, issued Circular No. 799,35 Series of 2013, effective July 1, 2013, the pertinent
portion of which reads:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts
or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in determining the measure of
recoverable damages.1wphi1

The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions
governing the rate of interest in the absence of stipulation in loan contracts, thereby amending
Section 2 of Circular No. 905, Series of 1982:

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:

Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be
six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks and
Sections 4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank Financial
Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance of any money, goods or
credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum - as
reflected in the case of Eastern Shipping Lines40 and Subsection X305.1 of the Manual of Regulations
for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank
Financial Institutions, before its amendment by BSP-MB Circular No. 799 - but will now be six percent
(6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new rate could only
be applied prospectively and not retroactively. Consequently, the twelve percent (12%) per annum
legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent
(6%) per annum shall be the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v.
Bangko Sentral Monetary Board,41 this Court affirmed the authority of the BSP-MB to set interest
rates and to issue and enforce Circulars when it ruled that "the BSP-MB may prescribe the maximum
rate or rates of interest for all loans or renewals thereof or the forbearance of any money, goods or
credits, including those for loans of low priority such as consumer loans, as well as such loans made
by pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to July 1,
2013, said judgments shall not be disturbed and shall continue to be implemented applying the rate
of interest fixed therein.1awp++i1

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals
in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED and SET ASIDE.
Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24,
1997 up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became
final and executory;

52

(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one
month pay per year of service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed
from May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013
until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits
awarded and due to petitioner in accordance with this Decision.
SO ORDERED.

This is an action for foreclosure of mortgage. The only question raised in this appeal is: Is defendantappellee bound to pay the stipulated interest only up to the date of maturity as fixed in the
promissory note, or up to the date payment is effected? This question is, in our opinion controlled by
the express stipulation of the parties.
Paragraph 4 of the mortgage deed recites:
Que en consideracion a dicha suma aun por pagar de DOS MIL CUATROCIENTOS PESOS
(P2,4000.00), moneda filipina, que el Sr. Hepti Solas se compromete a pagar al Sr. Jardenil
en o antes del dia treintaiuno (31) de marzo de mil novecientos treintaicuarto (1934), con
los intereses de dicha suma al tipo de doce por ciento (12%) anual a partir desde fecha
hasta el dia de su vencimiento o sea treintaiuno (31) de marzo de mil novecientos
treintaicuatro (1934), por la presente, el Sr. Hepti Solas cede y traspasa, por via de
primera hipoteca, a favor del Sr. Jardenil, sus herederos y causahabientes, la parcela de
terreno descrita en el parrafo primero (1.) de esta escritura.
Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date of maturity, or
until March 31, 1934. As the contract is silent as to whether after that date, in the event of nonpayment, the debtor would continue to pay interest, we cannot in law, indulge in any presumption as
to such interest; otherwise, we would be imposing upon the debtor an obligation that the parties
have not chosen to agree upon. Article 1755 of the Civil Code provides that "interest shall be due
only when it has been expressly stipulated." (Emphasis supplied.)

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-47878

July 24, 1942

GIL JARDENIL, plaintiff-appellant,

vs.
HEFTI SOLAS (alias HEPTI SOLAS, JEPTI SOLAS), defendant-appellee.

Eleuterio J. Gustilo for appellant.

Jose C. Robles for appellee.
MORAN, J.:

A writing must be interpreted according to the legal meaning of its language (section 286, Act No.
190, now section 58, Rule 123), and only when the wording of the written instrument appears to be
contrary to the evident intention of the parties that such intention must prevail. (Article 1281, Civil
Code.) There is nothing in the mortgage deed to show that the terms employed by the parties
thereto are at war with their evident intent. On the contrary the act of the mortgage of granting to
the mortgagor on the same date of execution of the deed of mortgage, an extension of one year
from the date of maturity within which to make payment, without making any mention of any interest
which the mortgagor should pay during the additional period (see Exhibit B attached to the
complaint), indicates that the true intention of the parties was that no interest should be paid during
the period of grace. What reason the parties may have therefor, we need not here seek to explore.
Neither has either of the parties shown that, by mutual mistake, the deed of mortgage fails to
express their agreement, for if such mistake existed, plaintiff would have undoubtedly adduced
evidence to establish it and asked that the deed be reformed accordingly, under the parcel-evidence
rule.
We hold therefore, that as the contract is clear and unmistakable and the terms employed therein
have not been shown to belie or otherwise fail to express the true intention of the parties and that
the deed has not been assailed on the ground of mutual mistake which would require its reformation,
same should be given its full force and effect. When a party sues on a written contract and no
attempt is made to show any vice therein, he cannot be allowed to lay any claim more than what its
clear stipulations accord. His omission, to which the law attaches a definite warning as an in the
instant case, cannot by the courts be arbitrarily supplied by what their own notions of justice or
equity may dictate.

53

Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of P2, 400
from November 8, 1932 to March 31, 1934. And it being a fact that extra judicial demands have been
made which we may assume to have been so made on the expiration of the year of grace, he shall
be entitled to legal interest upon the principal and the accrued interest from April 1, 1935, until full
payment.

PRISMA CONSTRUCTION & DEVELOPMENT

CORPORATION and ROGELIO S. PANTALEON,
Petitioners,

G.R. No. 160545

Present:
Thus modified judgment is affirmed, with costs against appellant.

versus

NACHURA, J.,

BRION, Acting Chairperson,

DEL CASTILLO,
ABAD, and
PEREZ, JJ.

ARTHUR F. MENCHAVEZ ,
Respondent.

Promulgated:

March 9, 2010

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

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

54

Resolution[3] dated October 22, 2003 of the Former Ninth Division of the Court of Appeals ( CA) in CA-

Total

G.R. CV No. 69627. The assailed CA Decision affirmed the Decision of the Regional Trial Court ( RTC),

P1,240,000.00

To secure the payment of the loan, Pantaleon issued a promissory note[7] that states:

Branch 73, Antipolo City in Civil Case No. 97-4552 that held the petitioners liable for payment
of P3,526,117.00 to respondent Arthur F. Menchavez (respondent), but modified the interest rate

I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE

from 4% per month to 12% per annum, computed from the filing of the complaint to full

MILLION TWO HUNDRED FORTY THOUSAND PESOS (P1,240,000), Philippine

payment. The assailed CA Resolution denied the petitioners Motion for Reconsideration.

Currency, from Mr. Arthur F. Menchavez, representing a six-month loan payable

according to the following schedule:

January 8, 1994 . P40,000.00

FACTUAL BACKGROUND

February 8, 1994 ... P40,000.00

March 8, 1994 ... P40,000.00
The facts of the case, gathered from the records, are briefly summarized below.

April 8, 1994 . P40,000.00

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

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

a P1,000,000.00[4] loan

from

the

respondent,

with

monthly

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

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

and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed the

February 8, 1994 ... P40,000.00

promissory note in his personal capacity,[9] and as duly authorized by the Board of Directors of

March 8, 1994 ... P40,000.00

PRISMA.[10] The petitioners failed to completely pay the loan within the stipulated six (6)-month

April 8, 1994 . P40,000.00

period.

May 8, 1994 .. P40,000.00

June 8, 1994 P1,040,000.00[6]

55

From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to
the respondent:

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%

September 8, 1994 P320,000.00

orP40,000.00 per month, or a total of P240,000.00 for a 6-month period. It noted that the petitioners

October 8, 1995.P600,000.00

made several payments amounting to P1,228,772.00, but they were still indebted to the respondent

November 8, 1995.....P158,772.00

forP3,526,117.00 as of February 11,[15] 1999 after considering the 4% monthly interest. The RTC

January 4, 1997 P30,000.00

[11]

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

As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00. However, the

11, 1999 until fully paid.[16]

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

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.

interest, P30,000.00 in attorneys fees, P1,000.00 per court appearance and costs of suit.[13]

THE CA RULING
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 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

THE RTC RULING

12% per annum. The CA affirmed the RTCs finding that PRISMA was a mere instrumentality of

56

Pantaleon that justified the piercing of the veil of corporate fiction. Thus, the CA modified the RTC

THE CASE FOR THE RESPONDENT

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]

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

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

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 PETITION
THE ISSUE
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

The core issue boils down to whether the parties agreed to the 4% monthly interest on the

loan or forbearance of money, but merely an authorization for Pantaleon to perform certain acts,

loan. If so, does the rate of interest apply to the 6-month payment period only or until full payment

including the power to enter into a contract of loan. The expressed mandate of Article 1956 of the

of the loan?

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

OUR RULING

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.

We find the petition meritorious.

Interest due should be
stipulated
otherwise,

in

writing;

12%

per

annum

57

Article 1956 of the Civil Code specifically mandates that no interest shall be due unless it has
Obligations arising from contracts have the force of law between the contracting parties and

been expressly stipulated in writing. Under this provision, the payment of interest in loans or

should be complied with in good faith.[20] When the terms of a contract are clear and leave no doubt

forbearance of money is allowed only if: (1) there was an express stipulation for the payment of

as to the intention of the contracting parties, the literal meaning of its stipulations governs.[21] In such

interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence

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

of the two conditions is required for the payment of interest at a stipulated rate. Thus, we held in Tan

the parties; a court's duty is confined to the interpretation of the contract the parties made for

v. Valdehueza[24] and Ching v. Nicdao[25] that collection of interest without any stipulation in writing is

themselves without regard to its wisdom or folly, as the court cannot supply material stipulations or

prohibited by law.

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.

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

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

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

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.

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)

58

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

Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon v.

Corporation v. Court of Appeals,[30] Sps. Catungal v. Hao,[31] Yong v. Tiu,[32] and Sps. Barrera v. Sps.

Salazar[35] of 6% per month or 72% per annum interest on a P60,000.00 loan; in Ruiz v. Court of

Lorenzo.[33] Thus, the RTC and the CA misappreciated the facts of the case; they erred in finding that

Appeals,[36] of 3% per month or 36% per annum interest on a P3,000,000.00 loan; in Imperial v.

the parties agreed to a 4% interest, compounded by the application of this interest beyond the

Jaucian,[37] of 16% per month or 192% per annum interest on a P320,000.00 loan; in Arrofo v.

promissory notes six (6)-month period. The facts show that the parties agreed to the payment of

Quio,[38] of 7% interest per month or 84% per annum interest on a P15,000.00 loan; in Bulos, Jr. v.

a specific sum of money of P40,000.00 per month for six months, not to a 4% rate of interest

Yasuma,[39] of 4% per month or 48% per annum interest on a P2,500,000.00 loan; and in Chua v.

payable within a six (6)-month period.

Timan,[40] of 7% and 5% per month for loans totalling P964,000.00. We note that in all these cases,

Medel v. Court of Appeals

not applicable

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

payment of any extra amount except a specific sum of P40,000.00 per month on the principal of
a loan payable within six months. Additionally, no issue on the excessiveness of the stipulated
amount ofP40,000.00 per month was ever put in issue by the petitioners;[41] they only assailed the

In Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5% per

application of a 4% interest rate, since it was not agreed upon.

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

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,

void.

59

morals, public order or public policy.[42] The payment of the specific sum of money of P40,000.00

We cannot apply the doctrine of estoppel in the present case since the facts and

per month was voluntarily agreed upon by the petitioners and the respondent. There is nothing from

circumstances, as established by the record, negate its application. Under the promissory

the records and, in fact, there is no allegation showing that petitioners were victims of fraud when

note,[44] what the petitioners agreed to was the payment of a specific sum of P40,000.00 per

they entered into the agreement with the respondent.

month for six months not a 4% rate of interest per month for six (6) months on a loan

Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00 per

whose principal isP1,000,000.00, for the total amount of P1,240,000.00. Thus, no reason

month for a period of six (6) months, or from December 8, 1993 to June 8, 1994, for a total principal

exists to place the petitioners in estoppel, barring them from raising their present defenses against a

and interest amount of P1,240,000.00. Thereafter, interest at the rate of 12% per annum shall apply.

4% per month interest after the six-month period of the agreement. The board resolution,[45] on the

The amounts already paid by the petitioners during the pendency of the suit, amounting

other hand, simply authorizes Pantaleon to contract for a loan with a monthly interest of not more

to P1,228,772.00 as of February 12, 1999,[43] should be deducted from the total amount due,

than 4%. This resolution merely embodies the extent of Pantaleons authority to contract and does

computed as indicated above. We remand the case to the trial court for the actual computation of the

not create any right or obligation except as between Pantaleon and the board. Again, no cause exists

total amount due.

to place the petitioners in estoppel.

Doctrine of Estoppel not applicable

Piercing the corporate veil unfounded

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

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

amount under the promissory note and the board resolution.

The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a)
We disagree with the respondents contention.

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

60

inalter 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

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 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.

SO ORDERED.

[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 theDecision
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 sixmonth 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

61

Before Us is a Petition[1] for Review on Certiorari under Rule 45 of the Rules of Court
seeking to set aside the Decision,[2] dated 16 December 2005, and Resolution,[3] dated 19 June 2006
THIRD DIVISION

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.

SEBASTIAN SIGA-AN,
Petitioner,

G.R. No. 173227

Present:
The facts gathered from the records are as follows:

-versus

YNARES-SANTIAGO,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,

ALICIA VILLANUEVA,
Respondent.

NACHURA, and
LEONARDO-DE CASTRO,* JJ.

On 30 March 1998, respondent Alicia Villanueva filed a complaint[5] for sum of money
against petitioner Sebastian Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch 255,
docketed as Civil Case No. LP-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

Promulgated:

1996.

January 20, 2009

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
DECISION
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]
CHICO-NAZARIO, J.:

62

On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial

Respondent prayed that the RTC render judgment ordering petitioner to pay respondent

payment of the loan. On 31 October 1993, she issued another check in the amount of P200,000.00

(1)P660,000.00 plus legal interest from the time of demand; (2) P300,000.00 as moral damages;

to petitioner as payment of the remaining balance of the loan. Petitioner told her that since she paid

(3)P50,000.00 as exemplary damages; and (4) an amount equivalent to 25% of P660,000.00 as

a total amount of P700,000.00 for the P540,000.00 worth of loan, the excess amount of P160,000.00

attorneys fees.[9]

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

In his answer[10] to the complaint, petitioner denied that he offered a loan to

transactions with the PNO if she would not comply with his demand. As all her transactions with the

respondent. He averred that in 1992, respondent approached and asked him if he could grant her a

PNO were subject to the approval of petitioner as comptroller of the PNO, and fearing that petitioner

loan, as she needed money to finance her business venture with the PNO. At first, he was reluctant

might block or unduly influence the payment of her vouchers in the PNO, she conceded. Thus, she

to deal with respondent, because the latter had a spotty record as a supplier of the PNO. However,

paid additional amounts in cash and checks as interests for the loan. She asked petitioner for receipt

since respondent was an acquaintance of his officemate, he agreed to grant her a loan. Respondent

for the payments but petitioner told her that it was not necessary as there was mutual trust and

paid the loan in full.[11]

confidence between them. According to her computation, the total amount she paid to petitioner for
the loan and interest accumulated to P1,200,000.00.[7]

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

Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the

requested him to restructure the payment of the loan because she could not give full payment on the

loan despite absence of agreement to that effect. Her lawyer told her that petitioner could not validly

due date. He acceded to her request. Thereafter, respondent pleaded for another restructuring of

collect interest on the loan because there was no agreement between her and petitioner regarding

the payment of the loan. This time he rejected her plea. Thus, respondent proposed to execute a

payment of interest. Since she paid petitioner a total amount of P1,200,000.00 for the P540,000.00

promissory note wherein she would acknowledge her obligation to him, inclusive of interest, and that

worth of loan, and upon being advised by her lawyer that she made overpayment to petitioner, she

she would issue several postdated checks to guarantee the payment of her obligation. Upon his

sent a demand letter to petitioner asking for the return of the excess amount of P660,000.00.

approval of respondents request for restructuring of the loan, respondent executed a promissory

Petitioner, despite receipt of the demand letter, ignored her claim for reimbursement.[8]

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

63

also issued to him six postdated checks amounting to P1,240,000.00 as guarantee of compliance with

amount ofP660,000.00 through mistake, petitioner should return the said amount to respondent

her obligation. Subsequently, he presented the six checks for encashment but only one check was

pursuant to the principle of solutio indebiti.[13]

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

The RTC also ruled that petitioner should pay moral damages for the sleepless nights and

respondent. The cases were assigned to the Metropolitan Trial Court of Makati City, Branch 65

wounded feelings experienced by respondent. Further, petitioner should pay exemplary damages by

(MeTC).[12]

way of example or correction for the public good, plus attorneys fees and costs of suit.

Petitioner insisted that there was no overpayment because respondent admitted in the

The dispositive portion of the RTC Decision reads:

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

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]

amount to the former. It ratiocinated that respondents obligation was only to pay the loaned
amount ofP540,000.00, 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

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]

64

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:

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

I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST
WAS DUE TO PETITIONER;

amounting toP540,000.00, there was, nonetheless, no verbal or written agreement for her to pay
interest on the loan.[22]

II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE
OF SOLUTIO INDEBITI.[17]

Petitioner presented a handwritten promissory note dated 12 September 1994 [23] wherein
respondent purportedly admitted owing petitioner capital and interest. Respondent, however,

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]

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

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

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.

writing is prohibited by law.[21]

65

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

Petitioners reliance on respondents alleged admission in the Batas Pambansa Blg. 22

of interest was duly admitted by respondent in her testimony in the Batas Pambansa Blg. 22 cases he

cases that they had agreed on the payment of interest at the rate of 7% deserves scant

filed against respondent; that despite such judicial admission by respondent, the RTC and the Court

consideration. In the said case, respondent merely testified that after paying the total amount of

of Appeals, citing Article 1956 of the Civil Code, still held that no interest was due him since the

loan, petitioner ordered her to pay interest.[28] Respondent did not categorically declare in the same

agreement on interest was not reduced in writing; that the application of Article 1956 of the Civil

case that she and respondent made an express stipulation in writing as regards payment of interest

Code should not be absolute, and an exception to the application of such provision should be made

at the rate of 7%. As earlier discussed, monetary interest is due only if there was

when the borrower admits that a specific rate of interest was agreed upon as in the present case;

an express stipulation in writing for the payment of interest.

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]

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

We have carefully examined the RTC Decision and found that the RTC did not make a

interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the

ruling therein that petitioner and respondent agreed on the payment of interest at the rate of 7% for

payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that interest

the loan. The RTC clearly stated that although petitioner and respondent entered into a valid oral

due shall earn legal interest from the time it is judicially demanded, although the obligation may be

contract of loan amounting to P540,000.00, they, nonetheless, never intended the payment of

silent on this point.

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,

All the same, the interest under these two instances may be imposed only as a penalty or

we consider this as merely an inadvertence because, as earlier elucidated, both the RTC and the

damages for breach of contractual obligations. It cannot be charged as a compensation for the use

Court of Appeals ruled that petitioner is not entitled to the payment of interest on the loan. The rule

or forbearance of money. In other words, the two instances apply only to compensatory interest and

is that factual findings of the trial court deserve great weight and respect especially when affirmed by

not to monetary interest.[29] The case at bar involves petitioners claim for monetary interest.

the appellate court.[27] We found no compelling reason to disturb the ruling of both courts.

66

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.

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

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

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.

excess amount paid by respondent as interest.[30]

We shall now determine the propriety of the monetary award and damages imposed by the
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has

RTC and the Court of Appeals.

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

Records show that respondent received a loan amounting to P540,000.00 from

provides that if something is received when there is no right to demand it, and it was unduly

petitioner.[34] Respondent issued two checks with a total worth of P700,000.00 in favor of petitioner

delivered through mistake, the obligation to return it arises. In such a case, a creditor-debtor

as payment of the loan.[35] These checks were subsequently encashed by petitioner.[36] Obviously,

relationship is created under a quasi-contract whereby the payor becomes the creditor who then has

there was an excess of P160,000.00 in the payment for the loan. Petitioner claims that the excess

the right to demand the return of payment made by mistake, and the person who has no right to

of P160,000.00 serves as interest on the loan to which he was entitled. Aside from issuing the said

receive such payment becomes obligated to return the same. The quasi-contract of solutio

two checks, respondent also paid cash in the total amount of P175,000.00 to petitioner as

indebiti harks back to the ancient principle that no one shall enrich himself unjustly at the expense of

interest.[37] Although no receipts reflecting the same were presented because petitioner refused to

another.[31] The principle ofsolutio indebiti applies where (1) a payment is made when there exists

issue such to respondent, petitioner, nonetheless, admitted in his Reply-Affidavit[38] in the Batas

no binding relation between the payor, who has no duty to pay, and the person who received the

Pambansa Blg. 22 cases that respondent paid him a total amount of P175,000.00 cash in addition to

payment; and (2) the payment is made through mistake, and not through liberality or some other

the two checks. Section 26 Rule 130 of the Rules of Evidence provides that the declaration of a party

cause.[32] We have held that the principle of solutio indebiti applies in case of erroneous payment of

as to a relevant fact may be given in evidence against him. Aside from the amounts of P160,000.00

undue interest.[33]

and P175,000.00 paid as interest, no other proof of additional payment as interest was presented by

67

respondent. Since we have previously found that petitioner is not entitled to payment of interest and

assessment of damages is left to the discretion of the court according to the circumstances of each

that the principle of solutio indebiti applies to the instant case, petitioner should return to respondent

case. This discretion is limited by the principle that the amount awarded should not be palpably

the excess amount ofP160,000.00 and P175,000.00 or the total amount of P335,000.00. Accordingly,

excessive as to indicate that it was the result of prejudice or corruption on the part of the trial

the reimbursable amount to respondent fixed by the RTC and the Court of Appeals should be reduced

court.[40] To our mind, the amount ofP150,000.00 as moral damages is fair, reasonable, and

fromP660,000.00 to P335,000.00.

proportionate to the injury suffered by respondent.

As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti,

22 against respondent. In the said cases, the MeTC found respondent guilty of violating Batas

exemplary damages may be imposed if the defendant acted in an oppressive manner. Petitioner

Pambansa Blg. 22 for issuing five dishonored checks to petitioner. Nonetheless, respondents

acted oppressively when he pestered respondent to pay interest and threatened to block her

conviction therein does not affect our ruling in the instant case. The two checks, subject matter of

transactions with the PNO if she would not pay interest. This forced respondent to pay interest

this case, totalingP700,000.00 which respondent claimed as payment of the P540,000.00 worth of

despite lack of agreement thereto. Thus, the award of exemplary damages is appropriate. The

loan, were not among the five checks found to be dishonored or bounced in the five criminal cases.

amount of P50,000.00 imposed as exemplary damages by the RTC and the Court is fitting so as to

Further, the MeTC found that respondent made an overpayment of the loan by reason of the interest

deter petitioner and other lenders from committing similar and other serious wrongdoings.[41]

which the latter paid to petitioner.[39]

Jurisprudence instructs that in awarding attorneys fees, the trial court must state the
Article 2217 of the Civil Code provides that moral damages may be recovered if the party

factual, legal or equitable justification for awarding the same.[42] In the case under consideration, the

underwent physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,

RTC stated in its Decision that the award of attorneys fees equivalent to 25% of the amount paid as

wounded feelings, moral shock, social humiliation and similar injury. Respondent testified that she

interest by respondent to petitioner is reasonable and moderate considering the extent of work

experienced sleepless nights and wounded feelings when petitioner refused to return the amount

rendered by respondents lawyer in the instant case and the fact that it dragged on for several

paid as interest despite her repeated demands. Hence, the award of moral damages is

years.[43] Further, respondent testified that she agreed to compensate her lawyer handling the

justified. However, its corresponding amount of P300,000.00, as fixed by the RTC and the Court of

instant case such amount.[44] The award, therefore, of attorneys fees and its amount equivalent to

Appeals, is exorbitant and should be equitably reduced. Article 2216 of the Civil Code instructs that

25% of the amount paid as interest by respondent to petitioner is proper.

68

THOUSAND PESOS (P335,000.00); (2) the amount of P300,000.00 imposed as moral damages is
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the

reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an interest of 6% per

amount refundable to respondent computed from 3 March 1998 until its full payment. This is

annum is imposed on the P335,000.00, on the damages awarded and on the attorneys fees to be

erroneous.

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

We held in Eastern Shipping Lines, Inc. v. Court of Appeals,[45] that when an obligation,

to its satisfaction. Costs against petitioner.

not constituting a loan or forbearance of money is breached, an interest on the amount of damages
SO ORDERED.
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
ofP660,000.00 as refundable amount of interest is reduced to THREE HUNDRED THIRTY FIVE

69

(b) Expenses for the legal services [inclusive of retainer fees] of the law firm
Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984
and 1985.5
(c) Expense for security services of El Tigre Security & Investigation Agency for
the months of April and May 1986.6
(2) The alleged understatement of ICCs interest income on the three promissory notes due
from Realty Investment, Inc.

Republic of the Philippines

SUPREME COURT
Manila

The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was
allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed
P244,890.00 deduction for security services.7

THIRD DIVISION
G.R. No. 172231

On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995,
however, it received a final notice before seizure demanding payment of the amounts stated in the
said notices. Hence, it brought the case to the CTA which held that the petition is premature because
the final notice of assessment cannot be considered as a final decision appealable to the tax court.
This was reversed by the Court of Appeals holding that a demand letter of the BIR reiterating the
payment of deficiency tax, amounts to a final decision on the protested assessment and may
therefore be questioned before the CTA. This conclusion was sustained by this Court on July 1, 2001,
in G.R. No. 135210.8 The case was thus remanded to the CTA for further proceedings.

February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
ISABELA CULTURAL CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision1 of the
Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2 of the Court of
Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside the Assessment Notices for
deficiency income tax and expanded withholding tax issued by the Bureau of Internal Revenue (BIR)
against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR
Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of P333,196.86,
and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the
amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIRs disallowance of ICCs claimed expense deductions for professional and
security services billed to and paid by ICC in 1986, to wit:
3

(a) Expenses for the auditing services of SGV & Co., for the year ending
December 31, 1985;4

On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment
notices issued against ICC. It held that the claimed deductions for professional and security services
were properly claimed by ICC in 1986 because it was only in the said year when the bills demanding
payment were sent to ICC. Hence, even if some of these professional services were rendered to ICC
in 1984 or 1985, it could not declare the same as deduction for the said years as the amount thereof
could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the subject promissory notes. It
found that it was the BIR which made an overstatement of said income when it compounded the
interest income receivable by ICC from the promissory notes of Realty Investment, Inc., despite the
absence of a stipulation in the contract providing for a compounded interest; nor of a circumstance,
like delay in payment or breach of contract, that would justify the application of compounded
interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed
deduction for security services as shown by the various payment orders and confirmation receipts it
presented as evidence. The dispositive portion of the CTAs Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for deficiency
income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for
deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest,
both for the taxable year 1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED.9

70

Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,10 holding that although the professional services (legal and auditing services) were rendered
to ICC in 1984 and 1985, the cost of the services was not yet determinable at that time, hence, it
could be considered as deductible expenses only in 1986 when ICC received the billing statements for
said services. It further ruled that ICC did not understate its interest income from the promissory
notes of Realty Investment, Inc., and that ICC properly withheld and remitted taxes on the payments
for security services for the taxable year 1986.

For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of
income and expense is permitted when the all-events test has been met. This test requires: (1) fixing
of a right to income or liability to pay; and (2) the availability of the reasonable accurate
determination of such income or liability.

Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending
that since ICC is using the accrual method of accounting, the expenses for the professional services
that accrued in 1984 and 1985, should have been declared as deductions from income during the
said years and the failure of ICC to do so bars it from claiming said expenses as deduction for the
taxable year 1986. As to the alleged deficiency interest income and failure to withhold expanded
withholding tax assessment, petitioner invoked the presumption that the assessment notices issued
by the BIR are valid.

The all-events test requires the right to income or liability be fixed, and the amount of such income
or liability be determined with reasonable accuracy. However, the test does not demand that the
amount of income or liability be known absolutely, only that a taxpayer has at his disposal the
information necessary to compute the amount with reasonable accuracy. The all-events test is
satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied
where a computation may be unknown, but is not as much as unknowable, within the taxable
year. The amount of liability does not have to be determined exactly; it must be
determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy"
implies something less than an exact or completely accurate amount.[15]

The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the
expenses for professional and security services from ICCs gross income; and (2) held that ICC did
not understate its interest income from the promissory notes of Realty Investment, Inc; and that ICC
withheld the required 1% withholding tax from the deductions for security services.

The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable
year.[16] Accrual method of accounting presents largely a question of fact; such that the taxpayer
bears the burden of proof of establishing the accrual of an item of income or deduction.17

The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are: (a) the expense must be ordinary
and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been
paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by
receipts, records or other pertinent papers.11

Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an
exemption must be able to justify the same by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist upon vague implications. And since
a deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be
strictly construed.18

The requisite that it must have been paid or incurred during the taxable year is further qualified by
Section 45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction
provided for in this Title shall be taken for the taxable year in which paid or accrued or paid or
incurred, dependent upon the method of accounting upon the basis of which the net income is
computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and how to report
income and deductions.12 In the instant case, the accounting method used by ICC is the accrual
method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when they
are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer
who is authorized to deduct certain expenses and other allowable deductions for the current year but
failed to do so cannot deduct the same for the next year.13
The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them,
in opposition to actual receipt or payment, which characterizes the cash method of accounting.
Amounts of income accrue where the right to receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment.14

In the instant case, the expenses for professional fees consist of expenses for legal and auditing
services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the
law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the
expenses of said firm in connection with ICCs tax problems for the year 1984. As testified by the
Treasurer of ICC, the firm has been its counsel since the 1960s.19 From the nature of the claimed
deductions and the span of time during which the firm was retained, ICC can be expected to have
reasonably known the retainer fees charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the expense during the taxable year when
they could have been claimed as deductions cannot thus be attributed solely to the delayed billing of
these liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the
amount of their obligation to the firm, especially so that it is using the accrual method of accounting.
For another, it could have reasonably determined the amount of legal and retainer fees owing to its
familiarity with the rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that the taxpayer
bears the burden of establishing the accrual of an expense or income. However, ICC failed to
discharge this burden. As to when the firms performance of its services in connection with the 1984
tax problems were completed, or whether ICC exercised reasonable diligence to inquire about the
amount of its liability, or whether it does or does not possess the information necessary to compute
the amount of said liability with reasonable accuracy, are questions of fact which ICC never
established. It simply relied on the defense of delayed billing by the firm and the company, which

71

under the circumstances, is not sufficient to exempt it from being charged with knowledge of the
reasonable amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for
the year 1985 cannot be validly claimed as expense deductions in 1986. This is so because ICC failed
to present evidence showing that even with only "reasonable accuracy," as the standard to ascertain
its liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said
company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense deductions for the
professional services were allowable deductions for the taxable year 1986. Hence, per Revenue Audit
Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income for the said
year and were therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were incurred by ICC
in 198620and could therefore be properly claimed as deductions for the said year.
Anent the purported understatement of interest income from the promissory notes of Realty
Investment, Inc., we sustain the findings of the CTA and the Court of Appeals that no such
understatement exists and that only simple interest computation and not a compounded one should
have been applied by the BIR. There is indeed no stipulation between the latter and ICC on the
application of compounded interest.21 Under Article 1959 of the Civil Code, unless there is a
stipulation to the contrary, interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions for security services and remitted the same to the BIR is
supported by payment order and confirmation receipts.22 Hence, the Assessment Notice for deficiency
expanded withholding tax was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency
income tax should be cancelled and set aside but only insofar as the claimed deductions of ICC for
security services. Said Assessment is valid as to the BIRs disallowance of ICCs expenses for
professional services. The Court of Appeals cancellation of Assessment Notice No. FAS-1-86-90000681 in the amount of P4,897.79 for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the Court of
Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that Assessment Notice No.
FAS-1-86-90-000680, which disallowed the expense deduction of Isabela Cultural Corporation for
professional and security services, is declared valid only insofar as the expenses for the professional
fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson,
are concerned. The decision is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporations liability under
Assessment Notice No. FAS-1-86-90-000680.
SO ORDERED.

SPOUSES DAVID B. CARPO

and RECHILDA S. CARPO,

G.R. Nos. 150773 &

153599

72

Petitioners,
The

second,

docketed

as

G.R.

No.

153599,

seeks

to

annul

the

Court

of

Present:
Appeals Decision[3] dated 30 April 2002 in CA-G.R. SP No. 57297. The Court of Appeals Third
Division annulled and set aside the orders of Judge Corazon A. Tordilla to suspend the sheriffs
- versus -

PUNO, J.,

enforcement of the writ of possession.

Chairman,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
ELEANOR CHUA and
ELMA DY NG,

TINGA, and
CHICO-NAZARIO, JJ.

The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they borrowed
from Eleanor Chua and Elma Dy Ng (respondents) the amount of One Hundred Seventy-Five
Thousand Pesos (P175,000.00), payable within six (6) months with an interest rate of six percent
(6%) per month. To secure the payment of the loan, petitioners mortgaged their residential house
and lot situated at San Francisco, Magarao, Camarines Sur, which lot is covered by Transfer

Respondents.

Certificate of Title (TCT) No. 23180. Petitioners failed to pay the loan upon demand. Consequently,
the real estate mortgage was extrajudicially foreclosed and the mortgaged property sold at a public
DECISION

auction on 8 July 1996. The house and lot was awarded to respondents, who were the only bidders,
for the amount of Three Hundred Sixty-Seven Thousand Four Hundred Fifty-Seven Pesos and Eighty

TINGA, J.:

Centavos (P367,457.80).

Upon failure of petitioners to exercise their right of redemption, a certificate of sale was
Before this Court are two consolidated petitions for review. The first, docketed as G.R. No.
150773, assails the Decision[1] of the Regional Trial Court (RTC), Branch 26 of Naga City dated 26

issued on 5 September 1997 by Sheriff Rolando A. Borja. TCT No. 23180 was cancelled and in its
stead, TCT No. 29338 was issued in the name of respondents.

October 2001 in Civil Case No. 99-4376. RTC Judge Filemon B. Montenegro dismissed the

Despite the issuance of the TCT, petitioners continued to occupy the said house and lot,

complaint[2] for annulment of real estate mortgage and consequent foreclosure proceedings filed by

prompting respondents to file a petition for writ of possession with the RTC docketed as Special

the spouses David B. Carpo and Rechilda S. Carpo (petitioners).

Proceedings (SP) No. 98-1665.

On 23 March 1999, RTC Judge Ernesto A. Miguel issued

an Order[4] for the issuance of a writ of possession.

73

On 23 July 1999, petitioners filed a complaint for annulment of real estate mortgage and

In G.R. No. 150773, petitioners claim that following the Courts ruling inMedel v. Court of

the consequent foreclosure proceedings, docketed as Civil Case No. 99-4376 of the RTC. Petitioners

Appeals[6] the rate of interest stipulated in the principal loan agreement is clearly null and void.

consigned the amount of Two Hundred Fifty-Seven Thousand One Hundred Ninety-Seven Pesos and

Consequently, they also argue that the nullity of the agreed interest rate affects the validity of the

Twenty-Six Centavos (P257,197.26) with the RTC.

real estate mortgage. Notably, while petitioners were silent in their petition on the issues of
prescription and laches on which the RTC grounded the dismissal of the complaint, they belatedly
raised the matters in their Memorandum. Nonetheless, these points warrant brief comment.

Meanwhile, in SP No. 98-1665, a temporary restraining order was issued upon motion on 3
August 1999, enjoining the enforcement of the writ of possession. In an Order[5] dated 6 January

On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not commit any
grave abuse of discretion when it issued the orders dated 3 August 1999 and 6 January 2000, and

2000, the RTC suspended the enforcement of the writ of possession pending the final disposition of
Civil Case No. 99-4376. Against this Order, respondents filed a petition for certiorari and mandamus

that these orders could not have been the proper subjects of a petition for certiorari and
mandamus. More accurately, the justiciable issues before us are whether the Court of Appeals could

before the Court of Appeals, docketed as CA-G.R. SP No. 57297.

properly entertain the petition for certiorari from the timeliness aspect, and whether the appellate
During the pendency of the case before the Court of Appeals, RTC Judge Filemon B.

court correctly concluded that the writ of possession could no longer be stayed.

Montenegro dismissed the complaint in Civil Case No. 99-4376 on the ground that it was filed out of
We first resolve the petition in G.R. No. 150773.
time and barred by laches. The RTC proceeded from the premise that the complaint was one for
annulment of a voidable contract and thus barred by the four-year prescriptive period. Hence, the

Petitioners contend that the agreed rate of interest of 6% per month or 72% per annum is

first petition for review now under consideration was filed with this Court, assailing the dismissal of

so excessive, iniquitous, unconscionable and exorbitant that it should have been declared null and

the complaint.

void. Instead of dismissing their complaint, they aver that the lower court should have declared
them liable to respondents for the original amount of the loan plus 12% interest per annum and 1%

The second petition for review was filed with the Court after the Court of Appeals on 30
monthly penalty charge as liquidated damages,[7] in view of the ruling in Medel v. Court of Appeals.[8]
April 2002 annulled and set aside the RTC orders in SP No. 98-1665 on the ground that it was the
ministerial duty of the lower court to issue the writ of possession when title over the mortgaged
property had been consolidated in the mortgagee.

This Court ordered the consolidation of the two cases, on motion of petitioners.

In Medel, the Court found that the interest stipulated at 5.5% per month or 66% per
annum was so iniquitous or unconscionable as to render the stipulation void.
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

74

against the law. The stipulation is void. The Court shall reduce equitably
liquidated damages, whether intended as an indemnity or a penalty if they are
iniquitous or unconscionable.[9]

annulment of a real estate mortgage,[15] as it was a case for annulment of the loan contract itself.

In a long line of cases, this Court has invalidated similar stipulations on interest rates for

the invalidity of the principal obligation.

The question thus sensibly arises whether the invalidity of the stipulation on interest carries with it

being excessive, iniquitous, unconscionable and exorbitant. InSolangon v. Salazar,[10] we annulled

the stipulation of 6% per month or 72% per annum interest on a P60,000.00 loan. In Imperial v.

Jaucian,[11] we reduced the interest rate from 16% to 1.167% per month or 14% per annum. In Ruiz
v. Court of Appeals,[12] we equitably reduced the agreed 3% per month or 36% per annum interest to
1% per month or 12% per annum interest. The 10% and 8% interest rates per month on
[13]

a P1,000,000.00 loan were reduced to 12% per annum inCuaton v. Salud.

The question is crucial to the present petition even if the subject thereof is not the
annulment of the loan contract but that of the mortgage contract. The consideration of the mortgage
contract is the same as that of the principal contract from which it receives life, and without which it
cannot exist as an independent contract. Being a mere accessory contract, the validity of the
mortgage contract would depend on the validity of the loan secured by it.[16]

Recently, this Court,

in Arrofo v. Quino,[14] reduced the 7% interest per month on a P15,000.00 loan amounting to 84%
interest per annum to 18% per annum.

Notably in Medel, the Court did not invalidate the entire loan obligation despite the inequitability
of the stipulated interest, but instead reduced the rate of interest to the more reasonable rate of
12% per annum. The same remedial approach to the wrongful interest rates involved was employed
or affirmed by the Court in Solangon, Imperial, Ruiz, Cuaton, and Arrofo.

There is no need to unsettle the principle affirmed in Medel and like cases. From that
perspective, it is apparent that the stipulated interest in the subject loan is excessive, iniquitous,
unconscionable and exorbitant. Pursuant to the freedom of contract principle embodied in Article

The Courts ultimate affirmation in the cases cited of the validity of the principal loan obligation

1306 of the Civil Code, contracting parties may establish such stipulations, clauses, terms and

side by side with the invalidation of the interest rates thereupon is congruent with the rule that a

conditions as they may deem convenient, provided they are not contrary to law, morals, good

usurious loan transaction is not a complete nullity but defective only with respect to the agreed

customs, public order, or public policy. In the ordinary course, the codal provision may be invoked to

interest.

annul the excessive stipulated interest.

In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the
standards set in the above-cited cases, this stipulation is similarly invalid. However, the RTC refused

We are aware that the Court of Appeals, on certain occasions, had ruled that a usurious loan is
wholly null and void both as to the loan and as to the usurious interest. [17] However, this Court
adopted the contrary rule,as comprehensively discussed in Briones v. Cammayo:[18]

to apply the principle cited and employed inMedel on the ground that Medel did not pertain to the

75

In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared
that, in any event, the debtor in a usurious contract of loan should pay the creditor
the amount which he justly owes him, citing in support of this ruling its previous
decisions in Go Chioco, Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and Delgado
vs. Duque Valgona, 44 Phil. 739.

Appealing directly to Us, defendants raise two questions

of law: (1) In a loan with usurious interest, may the creditor
recover the principal of the loan? (2) Should attorney's fees be
awarded in plaintiff's favor?"

....
Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We also held
that the standing jurisprudence of this Court on the question under consideration was
clearly to the effect that the Usury Law, by its letter and spirit, did not deprive the
lender of his right to recover from the borrower the money actually loaned to and
enjoyed by the latter. This Court went further to say that the Usury Law did not
provide for the forfeiture of the capital in favor of the debtor in usurious contracts,
and that while the forfeiture might appear to be convenient as a drastic measure to
eradicate the evil of usury, the legal question involved should not be resolved on the
basis of convenience.
Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919
and Pascua vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter
We expressly held that when a contract is found to be tainted with usury "the only
right of the respondent (creditor) . . . was merely to collect the amount of the loan,
plus interest due thereon."
The view has been expressed, however, that the ruling thus consistently
adhered to should now be abandoned because Article 1957 of the new Civil Code a
subsequent law provides that contracts and stipulations, under any cloak or device
whatever, intended to circumvent the laws against usury, shall be void, and that in
such cases "the borrower may recover in accordance with the laws on usury." From
this the conclusion is drawn that the whole contract is void and that, therefore, the
creditor has no right to recover not even his capital.
The meaning and scope of our ruling in the cases mentioned heretofore is
clearly stated, and the view referred to in the preceding paragraph is adequately
answered, in Angel Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April 24, 1968).
On the question of whether a creditor in a usurious contract may or may not recover
the principal of the loan, and, in the affirmative, whether or not he may also recover
interest thereon at the legal rate, We said the following:

. . . .

Great reliance is made by appellants on Art. 1411 of the

New Civil Code . . . .

Since, according to the appellants, a usurious loan is void due to

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

We do not agree with such reasoning. Article 1411 of

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

. . . [a]ppellants fail to consider that a contract of

loan with usurious interest consists of principal and
accessory stipulations; the principal one is to pay the
debt; the accessory stipulation is to pay interest thereon.

76

And said two stipulations are divisible in the

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

The Courts wholehearted affirmation of the rule that the principal obligation subsists despite
the nullity of the stipulated interest is evinced by its subsequent rulings, cited above, in all of which
the main obligation was upheld and the offending interest rate merely corrected. Hence, it is clear

The question therefore to resolve is whether the

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

In simple loan with stipulation of usurious

interest, the prestation of the debtor to pay the principal
debt, which is the cause of the contract (Article 1350, Civil
Code), is not illegal. The illegality lies only as to the
prestation to pay the stipulated interest; hence, being
separable, the latter only should be deemed void, since it
is the only one that is illegal.

....

and settled that the principal loan obligation still stands and remains valid. By the same token, since
the mortgage contract derives its vitality from the validity of the principal obligation, the invalid
stipulation on interest rate is similarly insufficient to render void the ancillary mortgage contract.

It should be noted that had the Court declared the loan and mortgage agreements void for
being contrary to public policy, no prescriptive period could have run.[20] Such benefit is obviously not
available to petitioners.

Yet the RTC pronounced that the complaint was barred by the four-year prescriptive period
provided in Article 1391 of the Civil Code, which governs voidable contracts. This conclusion was

The principal debt remaining without stipulation for

payment of interest can thus be recovered by judicial action. And
in case of such demand, and the debtor incurs in delay, the debt
earns interest from the date of the demand (in this case from the
filing of the complaint). Such interest is not due to stipulation, for
there was none, the same being void. Rather, it is due to the
general provision of law that in obligations to pay money, where
the debtor incurs in delay, he has to pay interest by way of
damages (Art. 2209, Civil Code). The court a quo therefore, did
not err in ordering defendants to pay the principal debt with
interest thereon at the legal rate, from the date of filing of the
complaint."[19]

derived from the allegation in the complaint that the consent of petitioners was vitiated through
undue influence. While the RTC correctly acknowledged the rule of prescription for voidable
contracts, it erred in applying the rule in this case. We are hard put to conclude in this case that
there was any undue influence in the first place.

There is ultimately no showing that petitioners consent to the loan and mortgage
agreements was vitiated by undue influence. The financial condition of petitioners may have

77

motivated them to contract with respondents, but undue influence cannot be attributed to
respondents simply because they had lent money. Article 1391, in relation to Article 1390 of the
Civil Code, grants the aggrieved party the right to obtain the annulment of contract on account of
factors which vitiate consent. Article 1337 defines the concept of undue influence, as follows:

There is undue influence when a person takes improper advantage of

his power over the will of another, depriving the latter of a reasonable freedom of
choice. The following circumstances shall be considered: the confidential, family,
spiritual and other relations between the parties or the fact that the person
alleged to have been unduly influenced was suffering from mental weakness, or
was ignorant or in financial distress.

In all these proceedings starting from the foreclosure, followed by the

issuance of a provisional certificate of sale; then the definite certificate of sale;
then the issuance of TCT No. 29338 in favor of the defendants and finally the
petition for the issuance of the writ of possession in favor of the defendants, there
is no showing that plaintiffs questioned the validity of these proceedings. It was
only after the issuance of the writ of possession in favor of the defendants, that
plaintiffs allegedly tendered to the defendants the amount of P260,000.00 which
the defendants refused. In all these proceedings, why did plaintiffs sleep on their
rights?[22]

Clearly then, with the absence of undue influence, petitioners have no cause of action. Even
assuming undue influence vitiated their consent to the loan contract, their action would already be
barred by prescription when they filed it. Moreover, petitioners had clearly slept on their rights as

While petitioners were allegedly financially distressed, it must be proven that there is
deprivation of their free agency. In other words, for undue influence to be present, the influence

they failed to timely assail the validity of the mortgage agreement. The denial of the petition in G.R.
No. 150773 is warranted.

exerted must have so overpowered or subjugated the mind of a contracting party as to destroy his
free agency, making him express the will of another rather than his own.[21] The alleged lingering
financial woes of petitionersper se cannot be equated with the presence of undue influence.

We now resolve the petition in G.R. No. 153599.

The RTC had likewise concluded that petitioners were barred by laches from assailing the

Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January 2000 could

validity of the real estate mortgage. We wholeheartedly agree. If indeed petitioners unwillingly gave

no longer be questioned in a special civil action for certiorari and mandamus as the reglementary

their consent to the agreement, they should have raised this issue as early as in the foreclosure

period for such action had already elapsed.

proceedings. It was only when the writ of possession was issued did petitioners challenge the
stipulations in the loan contract in their action for annulment of mortgage. Evidently, petitioners
slept on their rights. The Court of Appeals succinctly made the following observations:

78

It must be noted that the Order dated 3 August 1999 suspending the enforcement of the writ of

substantial proceedings to be further had by the issuing court in order to put the controversy to

possession had a period of effectivity of only twenty (20) days from 3 August 1999, or until 23

rest.[24] The injunctive relief granted by the order is definitely final, but merely provisional, its

August

the

effectivity hinging on the ultimate outcome of the then pending action for annulment of real estate

said Order became functus officio. Thus, there is really no sense in assailing the validity of this Order,

mortgage. Indeed, an interlocutory order hardly puts to a close, or disposes of, a case or a disputed

mooted as it was. For the same reason, the validity of the order need not have been assailed by

issue leaving nothing else to be done by the court in respect thereto, as is characteristic of a final

respondents in their special civil action before the Court of Appeals.

order.

1999.

Thus,

upon

the

expiration

of

the

twenty

(20)-day

period,

On the other hand, the Order dated 6 January 2000 is in the nature of a writ of injunction
whose period of efficacy is indefinite. It may be properly assailed by way of the special civil action for
certiorari, as it is interlocutory in nature.

Since the 6 January 2000 Order is not a final order, but rather interlocutory in nature, we
cannot agree with petitioners who insist that it may be assailed only through an appeal perfected
within fifteen (15) days from receipt thereof by respondents. It is axiomatic that an interlocutory
order cannot be challenged by an appeal,

As a rule, the special civil action for certiorari under Rule 65 must be filed not later than sixty
(60) days from notice of the judgment or order.

[23]

Petitioners argue that the 3 August

1999 Order could no longer be assailed by respondents in a special civil action for certiorari before

but is susceptible to review only through the special civil action of certiorari.[25] The sixty (60)-day
reglementary period for special civil actions under Rule 65 applies, and respondents petition was filed
with the Court of Appeals well within the period.

the Court of Appeals, as the petition was filed beyond sixty (60) days following respondents receipt
of the Order. Considering that the 3 August 1999 Order had become functus officio in the first place,
this argument deserves scant consideration.

Accordingly, no error can be attributed to the Court of Appeals in granting the petition for
certiorari and mandamus. As pointed out by respondents, the remedy of mandamus lies to compel

Petitioners further claim that the 6 January 2000 Order could not have likewise been the
subject of a special civil action for certiorari, as it is according to them a final order, as opposed to an

the performance of a ministerial duty.

The issuance of a writ of possession to a purchaser in an

extrajudicial foreclosure is merely a ministerial function.[26]

interlocutory order. That the 6 January 2000Order is interlocutory in nature should be beyond doubt.
An order is interlocutory if its effects would only be provisional in character and would still leave

79

SECOND DIVISION
Thus, we also affirm the Court of Appeals ruling to set aside the RTC orders enjoining the
enforcement of the writ of possession.[27] The purchaser in a foreclosure sale is entitled as a matter
of right to a writ of possession, regardless of whether or not there is a pending suit for annulment of
the mortgage or the foreclosure proceedings. An injunction to prohibit the issuance or enforcement
of the writ is entirely out of place.[28]

G.R. No. L-52482 February 23, 1990

SENTINEL INSURANCE CO., INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, HON. FLORELIANA CASTRO-BARTOLOME,
Presiding Judge, Court of First Instance of Rizal, Seventh Judicial District, Branch XV,
THE PROVINCIAL SHERIFF OF RIZAL, and ROSE INDUSTRIES, INC., respondents.

Jesus I. Santos Law Office for petitioner.

One final note. The issue on the validity of the stipulated interest rates, regrettably for

Quasha, Asperilla, Ancheta, Valmonte, Pea & Marcos for private respondent.

petitioners, was not raised at the earliest possible opportunity. It should be pointed out though that
since an excessive stipulated interest rate may be void for being contrary to public policy, an action

REGALADO, J.:

to annul said interest rate does not prescribe. Such indeed is the remedy; it is not the action for
annulment of the ancillary real estate mortgage. Despite the nullity of the stipulated interest rate,
the principal loan obligation subsists, and along with it the mortgage that serves as collateral security

Before us is a petition seeking the amendment and modification of the dispositive portion of
respondent court's decision in CA-G.R. No. SP-09331, 1 allegedly to make it conform with the
findings, arguments and observations embodied in said decision which relief was denied by
respondent court in its resolution, dated January 15, 1980, 2 rejecting petitioner's ex parte motion
filed for that purpose. 3

for it.
While not involving the main issues in the case threshed out in the court a quo, the judgment in
which had already become final and executory, the factual backdrop of the present petition is
summarized by respondent court as follows:
WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against petitioners.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

Petitioner Sentinel Insurance Co., Inc., was the surety in a contract of suretyship
entered into on November 15, 1974 with Nemesio Azcueta, Sr., who is doing
business under the name and style of 'Malayan Trading as reflected in SICO
Bond No. G(16)00278 where both of them bound themselves, 'jointly and
severally, to fully and religiously guarantee the compliance with the terms and
stipulations of the credit line granted by private respondent Rose Industries, Inc.,
in favor of Nemesio Azcueta, Sr., in the amount of P180,00.00.' Between
November 23 to December 23, 1974, Azcueta made various purchases of tires,
batteries and tire tubes from the private respondent but failed to pay therefor,
prompting the latter to demand payment but because Azcueta failed to settle his
accounts, the case was referred to the Insurance Commissioner who invited the
attention of the petitioner on the matter and the latter cancelled the Suretyship
Agreement on May 13, 1975 with due notice to the private respondent.
Meanwhile, private respondent filed with the respondent court of Makati a
complaint for collection of sum of money against herein petitioner and Azcueta,
docketed as Civil Case No. 21248 alleging the foregoing antecedents and praying
that said defendants be ordered to pay jointly and severally unto the plaintiff.

80

a) The amount of P198,602.41 as its principal obligation,

including interest and damage dues as of April 29, 1975;
b) To pay interest at 14% per annum and damage dues at

the rate of 2% every 45 days commencing from April 30,

1975 up to the time the full amount is fully paid:
xxx xxx xxx

After petitioner filed its answer with counterclaim, the case, upon agreement of
the parties, was submitted for summary judgment and on December 29, 1975,
respondent court rendered its decision with the following dispositive portion:
xxx xxx xxx

That there was a mistake in the dispositive portion of the decision cannot be
denied considering that in the complaint filed against the petitioner, the prayer
as specifically stated in paragraph (b) was to 'order the latter, to pay interest at
14% per annum and damage dues at the rate of 2% every 45 days commencing
from April 30, 1975 up to the time the amount is fully paid.' But this
notwithstanding the respondent court in its questioned decision decreed the
petitioner to pay the interest on the principal obligation at the rate of 14% per
annum and 2% every 45 days commencing from April 30, 1975 until the amount
is fully paid,' so that, as petitioner correctly observes, it would appear that on top
of the 14% per annum on the principal obligation, another 2% interest every 45
days commencing from April 30, 1975 until the amount is fully paid has been
imposed against him (petitioner). In other words, 365 days in one year divided
by 45 days equals 8-1/9 which, multiplied by 2% as ordered by respondentjudge would amount to a little more than 16%. Adding 16% per annum to the
14% interest imposed on the principal obligation would be 30% which is
veritably usurious and this cannot be countenanced, much less sanctioned by
any court of justice.

a) To pay interest on the principal obligation at the rate of

14% per annum at the rate of 2% every 45

days commencing from April 30, 1975 until the amount is
fully paid.

The decision having become final and executory, the prevailing party moved for
its execution which respondent judge granted and pursuant thereto, a notice of
attachment and levy was served by respondent Provincial Sheriff upon the
petitioner. On the same day, however, the latter filed a motion for 'clarification of
the judgment as to its real and true import because on its face, it would appear
that aside from the 14% interest imposed on the principal obligation, an
additional 2% every 45 days corresponding to the additional penalty has been
imposed against the petitioner which imposition would be usurious and could not
have been the intention of respondent Judge.' But the move did nor prosper
because oil May 22, 1971, the judge denied the motion on the theory that the
judgment, having become final and executory, it can no longer be amended or
corrected. 4
Contending that the order was issued with grave abuse of discretion, petitioner went to respondent
court on a petition for certiorari and mandamus to compel the court below to clarify its decision,
particularly Paragraph l(a) of the dispositive portion thereof.
Respondent court granted tile petition in its decision dated December 3, 1979, the disquisition and
dispositive portion whereof read:
While it is an elementary rule of procedure that after a decision, order or ruling
has become final, the court loses its jurisdiction orderover the same and can no
longer be subjected to any modification or alteration, it is likewise well-settled
that courts are empowered even after such finality, to correct clerical errors or
mistakes in the decisions (Potenciano vs. CA, L-11569, 55 O.G. 2895). A clerical
error is one that is visible to the eyes or obvious to the understanding (Black vs.
Republic, 104 Phil. 849).

We agree with this observation and what is more, it is likewise a settled rule that
although a court may grant any relief allowed by law, such prerogative is
delimited by the cardinal principle that it cannot grant anything more than what
is prayed for, for certainly, the relief to be dispensed cannot rise above its
source. (Potenciano vs. CA, supra.)
WHEREFORE, the writ of certiorari is hereby granted and the respondent judge is
ordered to clarify its judgment complained of in the following manner:
xxx xxx xxx
a) to pay interest at 14% per annum on the principal
obligation and damage dues at the rate of 2% every 45 days
commencing from April 30, 1975 up to the time the full
amount is fully paid; 5
xxx xxx xxx
As earlier stated, petitioner filed an ex parte motion seeking to amend the above-quoted decretal
portion which respondent court denied, hence the petition at bar.
The amendment sought, ostensibly in order that the dispositive portion of said decision would
conform with the body thereof, is the sole issue for resolution by the Court. Petitioner itself cites
authorities in support of its contention that it is entitled to a correct and clear expression of a
judgment to avoid substantial injustice. 6 In amplification of its plaint, petitioner further asseverates
that respondent court should not have made an award for "damage dues" at such late stage of the
proceeding since said dues were not the subject of the award made by the trial court. 7
We disagree with petitioner.

81

To clarify an ambiguity or correct a clerical error in the judgment, the court may resort to the
pleadings filed by the parties, the findings of fact and the conclusions of law expressed in the text or
body of the decision. 8

damage dues every 45 days from 30 April 1975 until the amount is fully paid,
under the judgment. No question was ever raised as regards same.
xxx xxx xxx

Indeed, this was what respondent court did in resolving the original petition. It examined the
complaint filed against the petitioner and noted that the prayer as stated in Paragraph (b) thereof
was to "order defendant to pay interest at 14 per centum and damage dues at the rate of 2% every
45 days commencing from April 30, 1975 up to the time the full amount is fully paid." 9

5. The very face of Annex 'D' shows that the '2%' damage dues being
questioned by the present counsel of petitioner had been mentioned no less than
TEN (10) TIMES and was clearly and distinctly defined by petitioner and included
in the computation of its obligation to herein petitioner as '2% penalty for every
45 days.'

Insofar as the findings and the dispositive portion set forth in respondent court's decision are
concerned, there is really no inconsistency as wittingly or unwittingly asserted by petitioner.

xxx xxx xxx

The findings made by respondent court did not actually nullify the judgment of the trial court. More
specifically, the statement that the imposition of 2% interest every 45 days commencing from April
30, 1975 on top of the 14% per annum (as would be the impression from a superficial reading of the
dispositive portion of the trial court's decision) would be usurious is a sound observation. It should,
however, be stressed that such observation was on the theoretical assumption that the rate of 2% is
being imposed as interest, not as damage dues which was the intendment of the trial court.
Certainly, the damage dues in this case do not include and are not included in the computation of
interest as the two are of different categories and are distinct claims which may be demanded
separately, in the same manner that commissions, fines and penalties are excluded in the
computation of interest where the loan or forbearance is not secured in whole or in part by real
estate or an interest therein. 10
While interest forms part of the consideration of the contract itself, damage dues (penalties, and so
forth) are usually made payable only in case of default or non-performance of the contract. 11 Also,
although interest is subject to the provisions of the Usury Law, 12 there is no policy or provision in
such law preventing the enforcement of damage dues although the effect may be to increase the
sum payable beyond the prescribed ceiling rates.
Petitioner's assertion that respondent court acted without authority in appending the award of
damage dues to the judgment of the trial court should be rejected. As correctly pointed out by
private respondent, the opening sentence of Paragraph l(a) of the dispositive portion of the lower
court's decision explicitly ordered petitioner to pay private respondent the amount of P198,602.41 as
principal obligation including interest and damage dues, which is a clear and unequivocal indication of
the lower court's intent to award both interest and damage dues. 13

Petitioner's pretense that it was not the intent of the court to award the damage
dues of 2% every 45 days commencing 30 April 1975 is belied by the fact (and
this is admitted by petitioner) that upon agreement of the parties, the case
before the lower court was submitted for summary judgment; in other words,
the case was submitted upon the facts as appear in the pleadings with no other
evidence presented and a fact that appears clearly in the pleadings is that the
defendants in the case before the lower court were under contract to pay private
respondent, among others, the damage dues of 2% every 45 days commencing
on 30 April 1975 until the obligation is fully paid; .... 15
Respondent court demonstrably did not err in ordering the clarification of the decision of the trial
court by amending the questioned part of its dispositive portion to include therein the phrase damage
dues to modify the stated rate of 2%, and thereby obviate any misconception that it is being imposed
as interest.
ACCORDINGLY, certiorari is hereby DENIED and the decision of respondent Court of Appeals is
hereby AFFIRMED.
SO ORDERED.

Significantly, it bears mention that on several occasions before petitioner moved for a clarificatory
judgment, it offered to settle its account with private respondent without assailing the imposition of
the aforementioned damage dues. 14 As ramified by private respondent:
2. ... the then counsel of record for the petitioner, Atty. Porfirio Bautista, and
Atty. Teodulfo L. Reyes, petitioner's Assistant Vice- President for Operations, had
a conference with the undersigned attorneys as to how petitioner will settle its
account to avoid execution. During the conference, both parties arrived at almost
the same computation and the amount due from petitioner, which includes 2%

82

GOPOCO GROCERY (GOPOCO), ET AL., claimants-appellants,

vs.
PACIFIC COAST BISCUIT CO., ET AL., oppositors-appellees.

A.M. Zarate for appellants Gopoco Grocery et al.

Laurel, Del Rosario and Sabido for appellant Tiong-Chui Gion.
Ross, Lawrence and Selph for appellees Pacific Coast Biscuit Co. et al.
Eusebio Orense and Carmelino G. Alvendia for appellees Chinese Grocers Asso. et al.
Marcelo Nubla for appellees Ang Cheng Lian et al.
DIAZ, J.:
On petition of the Bank Commissioner who alleged to have found, after an investigation, that the
Mercantile Bank of China could not continue operating as such without running the risk of suffering
losses and prejudice its depositors and customers; and that with the requisite approval of the
corresponding authorities, he had taken charge of all the assets thereof; the Court of First Instance
of Manila declared the said bank in liquidation; approved all the acts theretofore executed by the
commissioner; prohibited the officers and agents of the bank from interfering with said commissioner
in the possession of the assets thereof, its documents, deed, vouchers, books of account, papers,
Republic of the Philippines
SUPREME COURT
Manila
EN BANC

memorandum, notes, bond, bonds and accounts, obligations or securities and its real and personal
properties; required its creditors and all those who had any claim against it, to present the same in
writing before the commissioner within ninety days; and ordered the publication, as was in fact done,
of the order containing all these provisions, for the two consecutive weeks in two news-papers of
general circulation in the City of Manila, at the expenses of the aforesaid bank. After these

March 31, 1938

publications, and within the period of ninety days, the following creditors, among others, presented
their presented their claims:

G.R. Nos. 43697 and 442200

In re Liquidation of the Mercantile Bank of China.

Tiong Chui Gion, Gopoco Grocery, Tan Locko, Woo & Lo & Co., Sy Guan Huat and La Bella Tondea.

83

I. The claim of Tiong Chui Gion is for the sum of P10,285.27. He alleged that he deposited said sum in the bank under liquidation on current
account.

II. The claim of Gopoco Grocery (Gopoco) is for the sum of P4,932.48 plus P460. It described its claim as follows:

Balance due on open account subject to check

P4,927.95

Interest on c/a

4,53

7,624.20

IV. The claim of Woo & Lo & Co. is for the sum of P6,972.88 and is set out in its written claim appearing in

Balance due on open subject to check L-845

P6,961.01

Interest on checking a/c

11.37

4,932.48
6,972.83

V. The claim of Sy Guan Huat is for the sum of P6,232.88 and the described it as follows:
Surety deposit

460.00
Balance due on open account subject to check L-718

P6,224.34

Interest on checking a/c

8.54

III. The claim of Tan Locko is for the sum of P7,624.20, and he describes it in turn as follows:

Balance due on open account subject to check L-759

P7,610.44

Savings account No. 156 (foreign) with Mercantile Bank of China

L-1611 Amoy $15,000,00 Interest on said Savings Account No.
156

8.22

Interest on checking a/c

10.54

6,232.88

VI. The claim of La Bella Tondea is for the sum of P1,912.79, also described as follows:

84

Balance due on open account subject to check

P1910.59

Woo & Lo & Co. had a deposit of P6,972.88, but it was indebted in the sum of $3,464.84, the amount
also of certain drafts accepted by it; (e) the claimants Sy Guan Huat and Sy Kia had a deposit of

Interest on account

2.20

P6,232.88, but they owed the sum of $3,107.37, for two drafts accepted by them and already due;
and (f) the claimant La Bella Tondea had, in turn, a deposit of P1,912.79, but it was, in turn,
indebted in the sum of $565.40 including interest and other expenses, the amount of two drafts
drawn upon and accepted by it.

1,912.79

The lower court approved all the recommendations of The commissioner and referee as to claims of
the six appellants as follows; (1) To approve the claim of Tiong Chui Gion (P10,285.27) but only as
an ordinary credit, minus the amount of the draft for P664.77; (2) to approve the claim of Gopoco

To better resolve not only these claims but also the many others which were presented against the

Grocery (Gopoco) but also as an ordinary credit only (P5,387.95 according to the referee), minus its

bank, the lower court, on July 15, 1932, appointed Fulgencio Borromeo as commissioner and referee

obligation amounting to $2,334.80 or P4,669.60; (3) to approve the claim of Tan Locko but as an

to receive the evidence which the interested parties may desire to present; and the commissioner

ordinary credit only (P7,610.44 according to the referee), deducting therefrom his obligation

and referee thus named, after qualifying for the office and receiving the evidence presented to him,

amounting to $1,378.90 or P2,757.80; to approve the claim of Woo & Lo & Co. but only as an

resolved the aforesaid six claims by recommending that the same be considered as an ordinary credit

ordinary credit (P6,961.01 according to the referee). after deducting its obligation to the bank,

only, and not as a preferred credit as the interested parties wanted, because they were at the same

amounting to $3,464.84 or P6,929.68; (5) to approve the claim of Sy Guan Huat but only as an

time debtors of the bank.

ordinary credit (P6,224.34 according to the referee), after deducting his obligation amounting to
$3,107.37) or P6,214.74; and, finally, (6) to approve the claim of la Bella Tondea but also as an

The evidence adduced and the very admissions of the said interested parties in fact show that (a) the
claimant Tiong Chui Gion, while he was a creditor of the Mercantile Bank of China in the sum of
P10,285.27 which he deposited on current account, was also a debtor not only in the sum of P633.76
but also in the sum of P664.77, the amount of a draft which he accepted, plus interest thereon and

ordinary credit only (1,917.50 according to the referee), after deducting it obligation amounting to
$565.40 or P1,130.80; but he expressly refused to authorize the payment of the interest by reason of
impossibility upon the ground set out in the decision. Not agreeable to the decision of the lower
court, each of the interested parties appealed therefrom and thereafter filed their respective briefs.

the protest fees paid therefor; (b) the claimant Gopoco Grocery (Gopoco) had a current account in
the bank in the sum of P5,392.48, but it is indebted to it, in Turn, in the sum of $2,334.80, the

Tiong Chui Gion argues in his brief filed in case in G. R. No. 442200, that the lower court erred:

amount of certain drafts which it had accepted; (c) the claimant Tan Locko had a deposit of
P7,624.20, but he owed $1,378.90, the amount of a draft which he also accepted; (d) the claimant

85

1. In holding that his deposit of P10,285.27 in the Mercantile Bank of China, constitutes an ordinary

country, are preferred credits; and in not holding that the deposits made by each of them enjoy

credit only and not a preferred credit.

preference over said drafts and checks, and

2. In holding as preferred credits the drafts and checks issued by the bank under liquidation in

4. In denying their motion for a new trial base on the proposition that the appealed decision is not in

payment of the drafts remitted to it for collection from merchants residing in the country, by foreign

accordance with law and is contrary to the evidence adduced at the trial.

entities or banks; and in not holding that the deposits on current account in said bank should enjoy
preference over said drafts and checks; and

The questions raised by the appellant in case G. R. No. 44200 and by appellants in case G.R. 43697
being identical in nature, we believe it practical and proper to resolve said questions jointly in one

3. In holding that the amount of P633.76 (which should be understood as P664.77), which the

decision. Before proceeding, however, it is convenient to note that the commissioner and referee,

claimant owes to the bank under liquidation, be deducted from his current account deposit therein,

classifying the various claims presented against the bank, placed under one group those partaking of

amounting to P10,285.27, upon the distribution of the assets of the bank among its various creditors,

the same nature, the classification having resulted in six groups.

instead of holding that, after deducting the aforesaid sum of P633.76 (should be P664.77) from his
aforesaid deposit, there be turned over to him the balance together with the dividends or shares then

In the first group he included all the claims for current account, savings and fixed deposits.

corresponding to him, on the basis of said amount.

In the second group he included the claims for checks or drafts sold by the bank under liquidation
The other five claimants, that is, Gopoco Grocery Tan Locko, Woo & Lo & Co., Sy Guan Huat and La

and not paid by the agents or banks in whose favor they had been issued.

Bella Tondea, in turn argue in the brief they jointly filed in case G. R. No. 43697, that the lower
court erred:

In the third group he included the claims checks or drafts issued by the bank under liquidation in
payment or reimbursement of the drafts or goods remitted to it for collection, from resident

1. In not first deducting from their respective deposits in the bank under liquidation, whose payment

merchants and entitles, by foreign banks and entities.

they claim, their respective obligation thereto.

In the fourth group he included the claims for drafts or securities to be collected from resident
2. In not holding that their claims constitute a preferred credit.

merchants and entities to be collected from resident merchants and entities which were pending
collection on the date payments were suspended.

3. In holding that the drafts and checks issued by the bank under liquidation in payment of the drafts
remitted to it by foreign entitles and banks for collection from the certain merchant residing in the

86

In the fifth group he included the claims of certain depositors or creditors of the bank who were at

convertible into simple commercial loans because, in cases of such deposits, the bank has made use

the same time debtors thereof; and he considered of this class the claims of the appellants in these

thereof in the ordinary course of its transactions as an institution engaged in the banking business,

two cases, and

not because it so wishes, but precisely because of the authority deemed to have been granted to it
by the appellants to enable them to collect the interest which they had been and they are now

In the sixth group he included the other claims different in nature from the of the aforesaid five

collecting, and by virtue further of the authority granted to it by section 125 of the Corporation Law

claims.

(Act No. 1459), as amended by Acts Nos. 2003 and 3610 and section 9 of the Banking Law (Act No.
3154), without considering of course the provisions of article 1768 of the Civil Code. Wherefore, it is

I. Now, then, should the appellants' deposits on current account in the bank now under liquidation be
considered preferred credits, and not otherwise, or should they be considered ordinary credits only?
The appellants contend that they are preferred credits only? The appellants contend that they are
preferred credits because they are deposits in contemplation of law, and as such should be returned
with the corresponding interest thereon. In support thereof they cite Manresa (11 Manresa, Civil
Code, page 663), and what has been insinuated in the case of Rogers vs. Smith, Bell & Co. (10 Phil.,
319), citing the said commentator who maintains that, notwithstanding the provisions of articles 1767

held that the deposits on current account of the appellants in the bank under liquidation, with the
right on their right on their part to collect interest, have not created and could not create a juridical
relation between them except that of creditors and debtor, they being the creditors and the bank the
debtor.
What has so far been said resolves adversely the contention of the appellants, the question raised in
the first and second assigned errors Tiong Chui Gion in case G. R. No. 44200, and the appellants'
second and third assigned errors in case G. R. No. 43697.

and 1768 and others of the aforesaid Code, from which it is inferred that the so-called irregular
deposits no longer exist, the fact is that said deposits still exist. And they contend and argue that

II. As to the third and first errors attributed to lower court by Tiong Chui Gion in his case, and by the

what they had in the bank should be considered as of this character. But it happens that they

other appellants in theirs, respectively, it should be stated that the question of set-off raised by them

themselves admit that the bank owes them interest which should have been paid to them before it

cannot be resolved a like question in the said case, G. R. No. 43682, entitled "In reLiquidation of

was declared in a state of liquidation. This fact undoubtedly destroys the character which they

Mercantile Bank of China. Tan Tiong Tick, claimant." It is proper that set-offs be made, inasmuch as

nullifies their contention that the same be considered as irregular deposits, because the payment of

the appellants and the bank being reciprocally debtors and creditors, the same is only just and

interest only takes place in the case of loans. On the other hand, as we stated with respect to the

according to law (art. 1195, Civil Code), particularly as none of the appellants falls within the

claim of Tan Tiong Tick (In re Liquidation of Mercantile Bank of China, G.R. No. 43682), the

exceptions mentioned in section 58 of the Insolvency Law (Act No. 1956), reading:

provisions of the Code of Commerce, and not those of the Civil Code, are applicable to cases of the

SEC. 58. In all cases of mutual debts and mutual credits between the parties, the account between

nature of those at bar, which have to do with parties who are both merchants. (Articles 303 and 309,

them shall be stated, and one debt set off against the other, and the balance only shall be allowed

Code of Commerce.) We there said, and it is not amiss to repeat now, that the so-called current

and paid. But no set-off or counterclaim shall be allowed of a claim in its nature not provable against

account and savings deposits have lost their character of deposits, properly so-called and are

87

the estate: Provided, That no set-off on counterclaim shall be allowed in favor of any debtor to the

concurrence of debts, with respect to said bank and the appellants. (Arts. 1195 and 1196 of the Civil

insolvent of a claim purchased by or transferred to such debtor within thirty days immediately

Code; 8 Manresa, 4th ed., p. 361.)

preceding the filing, or after the filing of the petition by or against the insolvent.

III. With respect to the fourth assigned error of the appellants in case G. R. No. 43697, we hold, in

It has been said with much basis by Morse, in his work on Bank and Banking (6th ed., vol. 1, pages

view of the considerations set out in resolving the other assignments of errors, that the lower court

776 and 784) that:

properly denied the motion for new trial of said appellants.

The rules of law as to the right of set-off between the bank and its depositors are not different from

In view of the foregoing, we modify the appealed judgments by holding that the deposits claimed by

those applicable to other parties. (Page 776.)

the appellants, and declared by the lower court to be ordinary credits are for the following amounts:
P10,285.27 of Tiong Chui Gion; P5,387.95 of Gopoco Grocery (Gopoco); P7,610.44 of Tan Locko;

Where the bank itself stops payment and becomes insolvent, the customer may avail himself in set-

P6961.01 of Woo & Lo & Co.; P6,224.34 of Sy Guan Huat; and P1,917.50 of La Bella Tondea, plus

off against his indebtedness to the bank of any indebtedness of the bank to himself, as, for example,

their corresponding interest up to December 4, 1931; that their obligations to the bank under

the balance due him on his deposit account. (Page 784.)

liquidation which should be set off against said deposits, are respectively for the following amounts:
P664.77 of Tiong Chui Gion; P4,669.60 of Gopoco Grocery (Gopoco); P2,757.80 of Tan Locko;

But if set-offs are proper in these cases, when and how should they be made, considering that the
appellants ask for the payment of interest? Are they by any chance entitled to interest? If they are,
when and until what time should they be paid the same?

P6,929.68 of Woo & Lo & Co.; P6,214.74 of Sy Huat; and P1,130.80 of La Bella Todea; and we
order that the set-offs in question be made in the manner stated in this decision, that is, as of the
date already indicated, December 4, 1931. In all other respects, we affirm the aforesaid judgments,
without special pronouncement as to costs. So ordered.

The question of whether they are entitled to interest should be resolved in the same way that we
resolved the case of the claimant Tan Tiong Tick in the said case, G. R. No. 43682. The
circumstances in these two cases are certainly the same as those in the said case with reference to
the said question. The Mercantile Bank of China owes to each of the appellants the interest claimed
by them, corresponding to the year ending December 4, 1931, the date it was declared in a state of
liquidation, but not which the appellants claim should be earned by their deposits after said date and
until the full amounts thereof are paid to them. And with respect to the question of set-off, this
should be deemed made, of course, as of the date when the Mercantile Bank of China was declared
in a state of liquidation, that is, on December 4, 1931, for then there was already a reciprocal

88

On December 9, 1969 the Board involved to seek the court's assistant and supervision in the
liquidation of the ban The resolution implemented only on January 25, 1972, when his Central Bank
of the Philippines filed the corresponding petition for assistance and supervision in the Court of First
Instance of Manila (Civil Case No. 86005 assigned to Branch XIII).
Prior to the institution of the liquidation proceeding but after the declaration of insolvency, or,
specifically, sometime in March, 1971, the spouses Job Elizes and Marcela P. Elizes filed a complaint
in the Court of First Instance of Manila against the Fidelity Savings Bank for the recovery of the sum
of P50, 584 as the balance of their time deposits (Civil Case No. 82520 assigned to Branch I).
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. L-38427 March 12, 1975

CENTRAL BANK OF THE PHILIPPINES as Liquidator of the FIDELITY SAVINGS
BANK, petitioner,
vs.
HONORABLE JUDGE JESUS P. MORFE, as Presiding Judge of Branch XIII, Court of First
Instance of Manila, Spouses AUGUSTO and ADELAIDA PADILLA and Spouses MARCELA
and JOB ELIZES,respondents.

In the judgment rendered in that case on December 13, 1972 the Fidelity Savings Bank was ordered
to pay the Elizes spouses the sum of P50,584 plus accumulated interest.
In another case, assigned to Branch XXX of the Court of First Instance of Manila, the spouses
Augusta A. Padilla and Adelaida Padilla secured on April 14, 1972 a judgment against the Fidelity
Savings Bank for the sums of P80,000 as the balance of their time deposits, plus interests, P70,000
as moral and exemplary damages and P9,600 as attorney's fees (Civil Case No. 84200 where the
action was filed on September 6, 1971).
In its orders of August 20, 1973 and February 25, 1974, the lower court (Branch XIII having
cognizance of the liquidation proceeding), upon motions of the Elizes and Padilla spouses and over
the opposition of the Central Bank, directed the latter as liquidator, to pay their time deposits
as preferred judgments, evidenced by final judgments, within the meaning of article 2244(14)(b) of
the Civil Code, if there are enough funds in the liquidator's custody in excess of the credits more
preferred under section 30 of the Central Bank Law in relation to articles 2244 and 2251 of the Civil
Code.

Juan C. Nabong, Jr. for respondent Spouses Augusto and Adelaida Padilla.

From the said order, the Central Bank appealed to this Court by certiorari. It contends that the final
judgments secured by the Elizes and Padilla spouses do not enjoy any preference because (a) they
were rendered after the Fidelity Savings Bank was declared insolvent and (b) under the charter of the
Central Bank and the General Banking Law, no final judgment can be validly obtained against an
insolvent bank.

Albert R. Palacio for respondent spouses Marcela and Job Elizes.

Republic Act No. 265 provides:t.hqw

F.E. Evangelista and Agapito S. Fajardo for petitioner.

AQUINO, J.:+.wph!1
This case involves the question of whether a final judgment for the payment of a time deposit in a
savings bank which judgment was obtained after the bank was declared insolvent, is a preferred
claim against the bank. The question arises under the following facts:
On February 18,1969 the Monetary Board found the Fidelity Savings Bank to be insolvent. The Board
directed the Superintendent of Banks to take charge of its assets, forbade it to do business and
instructed the Central Bank Legal Counsel to take legal actions (Resolution No. 350).

SEC. 29. Proceeding upon insolvency.Whenever upon examination by the

Superintendent or his examiners or agents into the condition of any banking
institution, it shall be disclosed that the condition of the same is one of
insolvency, or that its continuance in business would involve probable loss to its
depositors or creditors, it shall be the duty of the Superintendent forthwith, in
writing to inform the Monetary Board of the facts, and the Board, upon finding
the statements of the Superintendent to be true, shall forthwith forbid the
institution to do business in the Philippines and shall take charge of its assets
and proceeds according to law.
The Monetary Board shall thereupon determine within thirty days whether the
institution may be reorganized or otherwise placed in such a condition so that it
may be permitted to resume business with safety to its creditors and shall

89

prescribe the conditions under which such resumption of business shall take
place. In such case the expenses and fees in the administration of the institution
shall be determined by the Board and shall be paid to the Central Bank out of the
assets of such banking institution.

(14) Credits which, without special privilege, appear in (a) a public instrument;
or (b) in a final judgment, if they have been the subject of litigation. These
credits shall have preference among themselves in the order of priority of the
dates of the instruments and of the judgments, respectively. (1924a)

At any time within ten days after the Monetary Board has taken charge of the
assets of any banking institution, such institution may apply to the Court of First
Instance for an order requiring the Monetary Board to show cause why it should
not be enjoined from continuing such charge of its assets, and the court may
direct the Board to refrain from further proceedings and to surrender charge of
its assets.

ART. 2251. Those credits which do not enjoy any preference with respect to
specific property, and those which enjoy preference, as to the amount not paid,
shall be satisfied according to the following rules:

If the Monetary Board shall determine that the banking institution cannot resume
business with safety to its creditors, it shall, by the Office of the Solicitor General,
file a petition in the Court of First Instance reciting the proceedings which have
been taken and praying the assistance and supervision of the court in the
liquidation of the affairs of the same. The Superintendent shall thereafter, upon
order of the Monetary Board and under the supervision of the court and with all
convenient speed, convert the assets of the banking institution to money.
SEC. 30. Distribution of assets.In case of liquidation of a banking institution,
after payment of the costs of the proceedings, including reasonable expenses
and fees of the Central Bank to be allowed by the court, the Central Bank shall
pay the debts of such institution, under the order of the court, in accordance
with their legal priority.
The General Banking Act, Republic Act No. 337, provides:t.hqw
SEC. 85. Any director or officer of any banking institution who receives or
permits or causes to be received in said bank any deposit, or who pays out or
permits or causes to be paid out any funds of said bank, or who transfers or
permits or causes to be transferred any securities or property of said bank, after
said bank becomes insolvent, shall be punished by fine of not less than one
thousand nor more than ten thousand pesos and by imprisonment for not less
than two nor more than ten years.
The Civil Code provides:t.hqw
ART. 2237. Insolvency shall be governed by special laws insofar as they are not
inconsistent with this Code. (n)
ART. 2244. With reference to other property, real and personal, of the debtor,
the following claims or credits shall be preferred in the order named:
xxx xxx xxx

(1) In the order established in article 2244;

(2) Common credits referred to in article 2245 shall be paid pro rata regardless
of dates. (1929a)
The trial court or, to be exact, the liquidation court noted that there is no provision in the charter of
the Central Bank in the General Banking Law (Republic Acts Nos. 265 and 337, respectively) which
suspends or abates civil actions against an insolvent bank pending in courts other than the liquidation
court. It reasoned out that, because such actions are not suspended, judgments against insolvent
banks could be considered as preferred credits under article 2244(14)(b) of the Civil Code. It further
noted that, in contrast with the Central Act, section 18 of the Insolvency Law provides that upon the
issuance by the court of an order declaring a person insolvent "all civil proceedings against the said
insolvent shall be stayed."
The liquidation court directed the Central Bank to honor the writs of execution issued by Branches I
and XXX for the enforcement of the judgments obtained by the Elizes and Padilla spouses. It
suggested that, after satisfaction of the judgment the Central Bank, as liquidator, should include said
judgments in the list of preferred credits contained in the "Project of Distribution" "with the notation
"already paid" "
On the other hand, the Central Bank argues that after the Monetary Board has declared that a bank
is insolvent and has ordered it to cease operations, the Board becomes the trustee of its assets "for
the equal benefit of all the creditors, including the depositors". The Central Bank cites the ruling that
"the assets of an insolvent banking institution are held in trust for the equal benefit of all creditors,
and after its insolvency, one cannot obtain an advantage or a preference over another by an
attachment, execution or otherwise" (Rohr vs. Stanton Trust & Savings Bank, 76 Mont. 248, 245 Pac.
947).
The stand of the Central Bank is that all depositors and creditors of the insolvent bank should file
their actions with the liquidation court. In support of that view it cites the provision that the
Insolvency Law does not apply to banks (last sentence, sec. 52 of Act No. 1956).
It also invokes the provision penalizing a director officer of a bank who disburses, or allows
disbursement, of the funds of the bank after it becomes insolvent (Sec. 85, General Banking Act,
Republic Act No. 337). It cites the ruling that "a creditor of an insolvent state bank in the hands of a
liquidator who recovered a judgment against it is not entitled to a preference for (by) the mere fact
that he is a judgment creditor" (Thomas H. Briggs & Sons, Inc. vs. Allen, 207 N. Carolina 10, 175 S.
E. 838, Braver Liquidation of Financial Institutions, p. 922).

90

It should be noted that fixed, savings, and current deposits of money in banks and similar institutions
are not true deposits. They are considered simple loans and, as such, are not preferred credits (Art.
1980, Civil Code; In re Liquidation of Mercantile Bank of China: Tan Tiong Tick vs. American
Apothecaries Co., 65 Phil. 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association, 65 Phil. 375;
Fletcher American National Bank vs. Ang Cheng Lian, 65 Phil. 385; Pacific Commercial Co. vs.
American Apothecaries Co., 65 Phil. 429; Gopoco Grocery vs. Pacific Coast Biscuit Co., 65 Phil. 443).
The aforequoted section 29 of the Central Bank's charter explicitly provides that when a bank is
found to be insolvent, the Monetary Board shall forbid it to do business and shall take charge of its
assets. The Board in its Resolution No. 350 dated February 18,1969 banned the Fidelity Savings Bank
from doing business. It took charge of the bank's assets. Evidently, one purpose in prohibiting the
insolvent bank from doing business is to prevent some depositors from having an undue or
fraudulent preference over other creditors and depositors.
That purpose would be nullified if, as in this case, after the bank is declared insolvent, suits by some
depositors could be maintained and judgments would be rendered for the payment of their deposits
and then such judgments would be considered preferred credits under article 2244 (14) (b) of the
Civil Code.
We are of the opinion that such judgments cannot be considered preferred and that article
2244(14)(b) does not apply to judgments for the payment of the deposits in an insolvent savings
bank which were obtained after the declaration of insolvency.
A contrary rule or practice would be productive of injustice, mischief and confusion. To recognize
such judgments as entitled to priority would mean that depositors in insolvent banks, after learning
that the bank is insolvent as shown by the fact that it can no longer pay withdrawals or that it has
closed its doors or has been enjoined by the Monetary Board from doing business, would rush to the
courts to secure judgments for the payment of their deposits.
In such an eventuality, the courts would be swamped with suits of that character. Some of the
judgments would be default judgments. Depositors armed with such judgments would pester the
liquidation court with claims for preference on the basis of article 2244(14)(b). Less alert depositors
would be prejudiced. That inequitable situation could not have been contemplated by the framers of
section 29.
The Rohr case (supra) supplies some illumination on the disposition of the instant case. It appears in
that case that the Stanton Trust & Savings Bank of Great Falls closed its doors to business on July 9,
1923. On November 7,1924 the bank (then already under liquidation) issued to William Rohr a
certificate stating that he was entitled to claim from the bank $1,191.72 and that he was entitled to
dividends thereon. Later, Rohr sued the bank for the payment of his claim. The bank demurred to the
complaint. The trial court sustained the demurrer. Rohr appealed. In affirming the order sustaining
the demurrer, the Supreme Court of Montana said:t.hqw
The general principle of equity that the assets of an insolvent are to he
distributed ratably among general creditors applies with full force to the
distribution of the assets of a bank. A general depositor of a bank is merely a
general creditor, and, as such, is not entitled to any preference or priority over
other general creditors.

The assets of a bank in process of liquidation are held in trust for the equal
benefit of all creditors, and one cannot be permitted to obtain an advantage or
preference over another by an attachment, execution or otherwise. A disputed
claim of a creditor may be adjudicated, but those whose claims are recognized
and admitted may not successfully maintain action thereon. So to permit would
defeat the very purpose of the liquidation of a bank whether being voluntarily
accomplished or through the intervention of a receiver.
xxx xxx xxx
The available assets of such a bank are held in trust, and so conserved that each
depositor or other creditor shall receive payment or dividend according to the
amount of his debt, and that none of equal class shall receive any advantage or
preference over another.
And with respect to a national bank under voluntary liquidation, the court noted in the Rohr case that
the assets of such a bank "become a trust fund, to be administered for the benefit of all creditors pro
rata and, while the bank retains its corporate existence, and may be sued, the effect of a judgment
obtained against it by a creditor is only to fix the amount of debt. He can acquire no lien which will
give him any preference or advantage over other general creditors. (245 Pac. 249). *
Considering that the deposits in question, in their inception, were not preferred credits, it does not
seem logical and just that they should be raised to the category of preferred credits simply because
the depositors, taking advantage of the long interval between the declaration of insolvency and the
filing of the petition for judicial assistance and supervision, were able to secure judgments for the
payment of their time deposits.
The judicial declaration that the said deposits were payable to the depositors, as indisputably they
were due, could not have given the Elizes and Padilla spouses a priority over the other depositors
whose deposits were likewise indisputably due and owing from the insolvent bank but who did not
want to incur litigation expenses in securing a judgment for the payment of the deposits.
The circumstance that the Fidelity Savings Bank, having stopped operations since February 19, 1969,
was forbidden to do business (and that ban would include the payment of time deposits) implies that
suits for the payment of such deposits were prohibited. What was directly prohibited should not be
encompassed indirectly. (See Maurello vs. Broadway Bank & Trust Co. of Paterson 176 Atl. 391, 114
N.J.L. 167).
It is noteworthy that in the trial court's order of October 3, 1972, which contains the Bank Liquidation
Rules and Regulations, it indicated in step III the procedure for processing the claims against the
insolvent bank. In Step IV, the court directed the Central Bank, as liquidator, to submit a Project of
Distribution which should include "a list of the preferred credits to be paid in full in the order of
priorities established in Articles 2241, 2242, 2243, 2246 and 2247" of the Civil Code (note that article
2244 was not mentioned). There is no cogent reason why the Elizes and Padilla spouses should not
adhere to the procedure outlined in the said rules and regulations.
WHEREFORE, the lower court's orders of August 20, 1973 and February 25, 1974 are reversed and
set aside. No costs.

91

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-30511 February 14, 1980
MANUEL M. SERRANO, petitioner,
vs.
CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA; EMERITO M.
RAMOS, SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA RAMOS DELA RAMA,
HORACIO DELA RAMA, ANTONIO B. RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO
LEDESMA, VICTORIA RAMOS TANJUATCO, and TEOFILO TANJUATCO, respondents.

Rene Diokno for petitioner.

F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of the Philippines.
Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for respondent Overseas Bank of
Manila.
Josefina G. Salonga for all other respondents.

CONCEPCION, JR., J.:

Petition for mandamus and prohibition, with preliminary injunction, that seeks the establishment of
joint and solidary liability to the amount of Three Hundred Fifty Thousand Pesos, with interest,
against respondent Central Bank of the Philippines and Overseas Bank of Manila and its stockholders,
on the alleged failure of the Overseas Bank of Manila to return the time deposits made by petitioner
and assigned to him, on the ground that respondent Central Bank failed in its duty to exercise strict
supervision over respondent Overseas Bank of Manila to protect depositors and the general
public. 1 Petitioner also prays that both respondent banks be ordered to execute the proper and
necessary documents to constitute all properties fisted in Annex "7" of the Answer of respondent
Central Bank of the Philippines in G.R. No. L-29352, entitled "Emerita M. Ramos, et al vs. Central
Bank of the Philippines," into a trust fund in favor of petitioner and all other depositors of respondent
Overseas Bank of Manila. It is also prayed that the respondents be prohibited permanently from
honoring, implementing, or doing any act predicated upon the validity or efficacy of the deeds of
mortgage, assignment. and/or conveyance or transfer of whatever nature of the properties listed in
Annex "7" of the Answer of respondent Central Bank in G.R. No. 29352. 2
A sought for ex-parte preliminary injunction against both respondent banks was not given by this
Court.

92

Undisputed pertinent facts are:

On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year with 6%
interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the respondent Overseas Bank of
Manila. 3 Concepcion Maneja also made a time deposit, for one year with 6-% interest, on March 6,
1967, of Two Hundred Thousand Pesos (P200,000.00) with the same respondent Overseas Bank of
Manila. 4
On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and conveyed to
petitioner Manuel M. Serrano, her time deposit of P200,000.00 with respondent Overseas Bank of
Manila. 5
Notwithstanding series of demands for encashment of the aforementioned time deposits from the
respondent Overseas Bank of Manila, dating from December 6, 1967 up to March 4, 1968, not a
single one of the time deposit certificates was honored by respondent Overseas Bank of Manila. 6
Respondent Central Bank admits that it is charged with the duty of administering the banking system
of the Republic and it exercises supervision over all doing business in the Philippines, but denies the
petitioner's allegation that the Central Bank has the duty to exercise a most rigid and stringent
supervision of banks, implying that respondent Central Bank has to watch every move or activity of
all banks, including respondent Overseas Bank of Manila. Respondent Central Bank claims that as of
March 12, 1965, the Overseas Bank of Manila, while operating, was only on a limited degree of
banking operations since the Monetary Board decided in its Resolution No. 322, dated March 12,
1965, to prohibit the Overseas Bank of Manila from making new loans and investments in view of its
chronic reserve deficiencies against its deposit liabilities. This limited operation of respondent
Overseas Bank of Manila continued up to 1968. 7
Respondent Central Bank also denied that it is guarantor of the permanent solvency of any banking
institution as claimed by petitioner. It claims that neither the law nor sound banking supervision
requires respondent Central Bank to advertise or represent to the public any remedial measures it
may impose upon chronic delinquent banks as such action may inevitably result to panic or bank
"runs". In the years 1966-1967, there were no findings to declare the respondent Overseas Bank of
Manila as insolvent. 8
Respondent Central Bank likewise denied that a constructive trust was created in favor of petitioner
and his predecessor in interest Concepcion Maneja when their time deposits were made in 1966 and
1967 with the respondent Overseas Bank of Manila as during that time the latter was not an insolvent
bank and its operation as a banking institution was being salvaged by the respondent Central Bank. 9
Respondent Central Bank avers no knowledge of petitioner's claim that the properties given by
respondent Overseas Bank of Manila as additional collaterals to respondent Central Bank of the
Philippines for the former's overdrafts and emergency loans were acquired through the use of
depositors' money, including that of the petitioner and Concepcion Maneja. 10
In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the Philippines," a case
was filed by the petitioner Ramos, wherein respondent Overseas Bank of Manila sought to prevent
respondent Central Bank from closing, declaring the former insolvent, and liquidating its assets.
Petitioner Manuel Serrano in this case, filed on September 6, 1968, a motion to intervene in G.R. No.

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

93

the former's overdrafts and emergency loans, since these collaterals were acquired by the use of
depositors' money.

filed a motion to lift restraining order which was denied in the resolution of this Court dated May 18,
1983.

Bank deposits are in the nature of irregular deposits. They are really loans because they earn
interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and
are to be covered by the law on loans. 14 Current and savings deposit are loans to a bank because it
can use the same. The petitioner here in making time deposits that earn interests with respondent
Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The
respondent Bank was in turn a debtor of petitioner. Failure of he respondent Bank to honor the time
deposit is failure to pay s obligation as a debtor and not a breach of trust arising from depositary's
failure to return the subject matter of the deposit

As can be gleaned from the above, the instant petition seeks to prohibit public respondents from
proceeding with the preliminary investigation of I.S. No. 81-31938, in which petitioners were charged
by private respondent Clement David, with estafa and violation of Central Bank Circular No. 364 and
related regulations regarding foreign exchange transactions principally, on the ground of lack of
jurisdiction in that the allegations of the charged, as well as the testimony of private respondent's
principal witness and the evidence through said witness, showed that petitioners' obligation is civil in
nature.

WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner.
SO ORDERED.

For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor General in its
Comment dated June 28,1982, as follows:t.hqw
On December 23,1981, private respondent David filed I.S. No. 81-31938 in the
Office of the City Fiscal of Manila, which case was assigned to respondent Lota
for preliminary investigation (Petition, p. 8).

Republic of the Philippines

SUPREME COURT
Manila

In I.S. No. 81-31938, David charged petitioners (together with one Robert
Marshall and the following directors of the Nation Savings and Loan Association,
Inc., namely Homero Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr.,
Perfecto Manalac, Jaime V. Paz, Paulino B. Dionisio, and one John Doe) with
estafa and violation of Central Bank Circular No. 364 and related Central Bank
regulations on foreign exchange transactions, allegedly committed as follows
(Petition, Annex "A"):t.hqw

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

MAKASIAR, Actg. C.J.:+.wph!1

This is a petition for prohibition and injunction with a prayer for the immediate issuance of restraining
order and/or writ of preliminary injunction filed by petitioners on March 26, 1982.
On March 31, 1982, by virtue of a court resolution issued by this Court on the same date, a
temporary restraining order was duly issued ordering the respondents, their officers, agents,
representatives and/or person or persons acting upon their (respondents') orders or in their place or
stead to refrain from proceeding with the preliminary investigation in Case No. 8131938 of the Office
of the City Fiscal of Manila (pp. 47-48, rec.). On January 24, 1983, private respondent Clement David

"From March 20, 1979 to March, 1981, David invested with

the Nation Savings and Loan Association, (hereinafter called
NSLA) the sum of P1,145,546.20 on nine deposits,
P13,531.94 on savings account deposits (jointly with his
sister, Denise Kuhne), US$10,000.00 on time deposit,
US$15,000.00 under a receipt and guarantee of payment
and US$50,000.00 under a receipt dated June 8, 1980 (au
jointly with Denise Kuhne), that David was induced into
making the aforestated investments by Robert Marshall an
Australian national who was allegedly a close associate of
petitioner Guingona Jr., then NSLA President, petitioner
Martin, then NSLA Executive Vice-President of NSLA and
petitioner Santos, then NSLA General Manager; that on
March 21, 1981 N LA was placed under receivership by the
Central Bank, so that David filed claims therewith for his
investments and those of his sister; that on July 22, 1981
David received a report from the Central Bank that only
P305,821.92 of those investments were entered in the
records of NSLA; that, therefore, the respondents in I.S. No.
81-31938 misappropriated the balance of the investments,
at the same time violating Central Bank Circular No. 364 and
related Central Bank regulations on foreign exchange
transactions; that after demands, petitioner Guingona Jr.

94

paid only P200,000.00, thereby reducing the amounts

misappropriated to P959,078.14 and US$75,000.00."
Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B')
in which they stated the following.t.hqw
"That Martin became President of NSLA in March 1978 (after
the resignation of Guingona, Jr.) and served as such until
October 30, 1980, while Santos was General Manager up to
November 1980; that because NSLA was urgently in need of
funds and at David's insistence, his investments were
treated as special- accounts with interest above the legal
rate, an recorded in separate confidential documents only a
portion of which were to be reported because he did not
want the Australian government to tax his total earnings
(nor) to know his total investments; that all transactions
with David were recorded except the sum of US$15,000.00
which was a personal loan of Santos; that David's check for
US$50,000.00 was cleared through Guingona, Jr.'s dollar
account because NSLA did not have one, that a draft of
US$30,000.00 was placed in the name of one Paz Roces
because of a pending transaction with her; that the
Philippine Deposit Insurance Corporation had already
reimbursed David within the legal limits; that majority of the
stockholders of NSLA had filed Special Proceedings No. 821695 in the Court of First Instance to contest its (NSLA's)
closure; that after NSLA was placed under receivership,
Martin executed a promissory note in David's favor and
caused the transfer to him of a nine and on behalf (9 1/2)
carat diamond ring with a net value of P510,000.00; and,
that the liabilities of NSLA to David were civil in nature."
Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the
following:t.hqw
"That he had no hand whatsoever in the transactions
between David and NSLA since he (Guingona Jr.) had
resigned as NSLA president in March 1978, or prior to those
transactions; that he assumed a portion o; the liabilities of
NSLA to David because of the latter's insistence that he
placed his investments with NSLA because of his faith in
Guingona, Jr.; that in a Promissory Note dated June 17,
1981 (Petition, Annex "D") he (Guingona, Jr.) bound himself
to pay David the sums of P668.307.01 and US$37,500.00 in
stated installments; that he (Guingona, Jr.) secured payment
of those amounts with second mortgages over two (2)
parcels of land under a deed of Second Real Estate
Mortgage (Petition, Annex "E") in which it was provided that
the mortgage over one (1) parcel shall be cancelled upon
payment of one-half of the obligation to David; that he

(Guingona, Jr.) paid P200,000.00 and tendered another

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

95

US$75,000.00 (p. 80, rec.). This promissory note was based on the statement of account as of June
30, 1981 prepared by the private respondent (p. 81, rec.). The amount of indebtedness assumed
appears to be bigger than the original claim because of the added interest and the inclusion of other
deposits of private respondent's sister in the amount of P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said
indebtedness, and petitioner Guingona executed another promissory note antedated to June 17, 1981
whereby he personally acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and
US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25, rec.). The aforesaid
promissory notes were executed as a result of deposits made by Clement David and Denise Kuhne
with the Nation Savings and Loan Association.
Furthermore, the various pleadings and documents filed by private respondent David, before this
Court indisputably show that he has indeed invested his money on time and savings deposits with the
Nation Savings and Loan Association.
It must be pointed out that when private respondent David invested his money on nine. and savings
deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan
or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides
that:t.hqw
Article 1980. Fixed, savings, and current deposits of-money in banks and similar
institutions shall be governed by the provisions concerning simple loan.
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We
said:t.hqw
It should be noted that fixed, savings, and current deposits of money in banks
and similar institutions are hat true deposits. are considered simple loans and, as
such, are not preferred credits (Art. 1980 Civil Code; In re Liquidation of
Mercantile Batik of China Tan Tiong Tick vs. American Apothecaries Co., 66 Phil
414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association 65 Phil. 375;
Fletcher American National Bank vs. Ang Chong UM 66 PWL 385; Pacific
Commercial Co. vs. American Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs.
Pacific Coast Biscuit CO.,65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA
102 [1980]) that:t.hqw
Bank deposits are in the nature of irregular deposits. They are really 'loans
because they earn interest. All kinds of bank deposits, whether fixed, savings, or
current are to be treated as loans and are to be covered by the law on loans
(Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil. 519). Current and
saving deposits, are loans to a bank because it can use the same. The petitioner
here in making time deposits that earn interests will respondent Overseas Bank
of Manila was in reality a creditor of the respondent Bank and not a depositor.
The respondent Bank was in turn a debtor of petitioner. Failure of the

respondent Bank to honor the time deposit is failure to pay its obligation as a

debtor and not a breach of trust arising from a depositary's failure to return the
subject matter of the deposit (Emphasis supplied).
Hence, the relationship between the private respondent and the Nation Savings and Loan Association
is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted
to the Bank upon the perfection of the contract and it can make use of the amount deposited for its
banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has
the obligation to return the amount deposited, it has, however, no obligation to return or deliver
the same money that was deposited. And, the failure of the Bank to return the amount deposited will
not constitute estafa through misappropriation punishable under Article 315, par. l(b) of the Revised
Penal Code, but it will only give rise to civil liability over which the public respondents have nojurisdiction.
WE have already laid down the rule that:t.hqw
In order that a person can be convicted under the above-quoted provision, it
must be proven that he has the obligation to deliver or return the some money,
goods or personal property that he receivedPetitioners had no such obligation to
return the same money, i.e., the bills or coins, which they received from private
respondents. This is so because as clearly as stated in criminal complaints, the
related civil complaints and the supporting sworn statements, the sums of money
that petitioners received were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil
Code.t.hqw
"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 he paid
in which case the contract is simply called a loan or mutuum.
"Commodatum is essentially gratuitous.
"Simple loan may be gratuitous or with a stipulation to pay
interest.
"In commodatum the bailor retains the ownership of
the thing loaned while in simple loan, ownership passes to

the borrower.

"Art. 1953. A person who receives a loan of money or any

other fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same
kind and quality."

96

It can be readily noted from the above-quoted provisions that in simple loan
(mutuum), as contrasted to commodatum the borrower acquires ownership of
the money, goods or personal property borrowed Being the owner, the borrower
can dispose of the thing borrowed (Article 248, Civil Code) and his act will not be
considered misappropriation thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979];
Emphasis supplied).

But even granting that the failure of the bank to pay the time and savings deposits of private
respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal
Code, nevertheless any incipient criminal liability was deemed avoided, because when the aforesaid
bank was placed under receivership by the Central Bank, petitioners Guingona and Martin assumed
the obligation of the bank to private respondent David, thereby resulting in the novation of the
original contractual obligation arising from deposit into a contract of loan and converting the original
trust relation between the bank and private respondent David into an ordinary debtor-creditor
relation between the petitioners and private respondent. Consequently, the failure of the bank or
petitioners Guingona and Martin to pay the deposits of private respondent would not constitute a
breach of trust but would merely be a failure to pay the obligation as a debtor.
Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent
the rise of criminal liability as long as it occurs prior to the filing of the criminal information in court.
Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held that:t.hqw
As pointed out in People vs. Nery, novation prior to the filing of the criminal
information as in the case at bar may convert the relation between the
parties into an ordinary creditor-debtor relation, and place the complainant in
estoppel to insist on the original transaction or "cast doubt on the true nature"
thereof.
Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581 [1983] ), this
Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring that:t.hqw
The novation theory may perhaps apply prior to the filling of the criminal
information in court by the state prosecutors because up to that time the original
trust relation may be converted by the parties into an ordinary creditor-debtor
situation, thereby placing the complainant in estoppel to insist on the original
trust. But after the justice authorities have taken cognizance of the crime and
instituted action in court, the offended party may no longer divest the
prosecution of its power to exact the criminal liability, as distinguished from the
civil. The crime being an offense against the state, only the latter can renounce it
(People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs.
Montanes, 8 Phil. 620).
It may be observed in this regard that novation is not one of the means
recognized by the Penal Code whereby criminal liability can be extinguished;
hence, the role of novation may only be to either prevent the rise of criminal
habihty or to cast doubt on the true nature of the original basic transaction,
whether or not it was such that its breach would not give rise to penal
responsibility, as when money loaned is made to appear as a deposit, or other

similar disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581; U.S. vs.
Villareal, 27 Phil. 481).
In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory
note on June 17, 1981 assuming the obligation of the bank to private respondent David; while the
criminal complaint for estafa was filed on December 23, 1981 with the Office of the City Fiscal.
Hence, it is clear that novation occurred long before the filing of the criminal complaint with the
Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability would be avoided but there will still be a
civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of Central Bank Circular No. 364
and other related regulations regarding foreign exchange transactions by accepting foreign currency
deposit in the amount of US$75,000.00 without authority from the Central Bank. They contend
however, that the US dollars intended by respondent David for deposit were all converted into
Philippine currency before acceptance and deposit into Nation Savings and Loan Association.
Petitioners' contention is worthy of behelf for the following reasons:
1. It appears from the records that when respondent David was about to make a deposit of bank
draft issued in his name in the amount of US$50,000.00 with the Nation Savings and Loan
Association, the same had to be cleared first and converted into Philippine currency. Accordingly, the
bank draft was endorsed by respondent David to petitioner Guingona, who in turn deposited it to his
dollar account with the Security Bank and Trust Company. Petitioner Guingona merely
accommodated the request of the Nation Savings and loan Association in order to clear the bank
draft through his dollar account because the bank did not have a dollar account. Immediately after
the bank draft was cleared, petitioner Guingona authorized Nation Savings and Loan Association to
withdraw the same in order to be utilized by the bank for its operations.
2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they
were accepted and deposited in Nation Savings and Loan Association, because the bank is presumed
to have followed the ordinary course of the business which is to accept deposits in Philippine
currency only, and that the transaction was regular and fair, in the absence of a clear and convincing
evidence to the contrary (see paragraphs p and q,Sec. 5, Rule 131, Rules of Court).
3. Respondent David has not denied the aforesaid contention of herein petitioners despite the fact
that it was raised. in petitioners' reply filed on May 7, 1982 to private respondent's comment and in
the July 27, 1982 reply to public respondents' comment and reiterated in petitioners' memorandum
filed on October 30, 1982, thereby adding more support to the conclusion that the US$75,000.00
were really converted into Philippine currency before they were accepted and deposited into Nation
Savings and Loan Association. Considering that this might adversely affect his case, respondent David
should have promptly denied petitioners' allegation.
In conclusion, considering that the liability of the petitioners is purely civil in nature and that there is
no clear showing that they engaged in foreign exchange transactions, We hold that the public
respondents acted without jurisdiction when they investigated the charges against the petitioners.
Consequently, public respondents should be restrained from further proceeding with the criminal case

97

for to allow the case to continue, even if the petitioners could have appealed to the Ministry of
Justice, would work great injustice to petitioners and would render meaningless the proper
administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition and
injunction, this court has recognized the resort to the extraordinary writs of prohibition and injunction
in extreme cases, thus:t.hqw

WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY RESTRAINING ORDER

PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS AGAINST THE PRIVATE RESPONDENT.
SO ORDERED.1wph1.t

On the issue of whether a writ of injunction can restrain the proceedings in

Criminal Case No. 3140, the general rule is that "ordinarily, criminal prosecution
may not be blocked by court prohibition or injunction." Exceptions, however, are
allowed in the following instances:t.hqw
"1. for the orderly administration of justice;
"2. to prevent the use of the strong arm of the law in an
oppressive and vindictive manner;
"3. to avoid multiplicity of actions;
"4. to afford adequate protection to constitutional rights;
"5. in proper cases, because the statute relied upon is
unconstitutional or was held invalid" ( Primicias vs.
Municipality of Urdaneta, Pangasinan, 93 SCRA 462, 469-470
[1979]; citing Ramos vs. Torres, 25 SCRA 557 [1968]; and
Hernandez vs. Albano, 19 SCRA 95, 96 [1967]).
Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We held
that:t.hqw
The writs of certiorari and prohibition, as extraordinary legal remedies, are in the
ultimate analysis, intended to annul void proceedings; to prevent the unlawful
and oppressive exercise of legal authority and to provide for a fair and orderly
administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We
took cognizance of a petition for certiorari and prohibition although the accused
in the case could have appealed in due time from the order complained of, our
action in the premises being based on the public welfare policy the advancement
of public policy. In Dimayuga vs. Fajardo, 43 Phil. 304, We also admitted a
petition to restrain the prosecution of certain chiropractors although, if convicted,
they could have appealed. We gave due course to their petition for the orderly
administration of justice and to avoid possible oppression by the strong arm of
the law. And inArevalo vs. Nepomuceno, 63 Phil. 627, the petition for certiorari
challenging the trial court's action admitting an amended information was
sustained despite the availability of appeal at the proper time.

THIRD DIVISION
PEOPLE OF THE PHILIPPINES,
Petitioners,

- versus -

G.R. No. 173654-765

Present:
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
REYES, and
DE CASTRO,* JJ.

98

TERESITA PUIG and ROMEO PORRAS,

Respondent.

That on or about the 1st day of August, 2002, in the Municipality of

Pototan, Province of Iloilo, Philippines, and within the jurisdiction of this
Honorable Court, above-named [respondents], conspiring, confederating, and
helping
one
another, with
grave
abuse
of
confidence, being
the Cashier andBookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo,
without the knowledge and/or consent of the management of the Bank and with
intent of gain, did then and there willfully, unlawfully and feloniously take, steal
and carry away the sum of FIFTEEN THOUSAND PESOS (P15,000.00), Philippine
Currency, to the damage and prejudice of the said bank in the aforesaid amount.

Promulgated:

August 28, 2008

x---------------------------- -----------------------x
DECISION
CHICO-NAZARIO, J.:

After perusing the Informations in these cases, the trial court did not find the existence of
This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner
People of the Philippines, represented by the Office of the Solicitor General, praying for the reversal

probable cause that would have necessitated the issuance of a warrant of arrest based on the
following grounds:

of the Orders dated 30 January 2006 and 9 June 2006 of the Regional Trial Court (RTC) of the
6thJudicial Region, Branch 68, Dumangas, Iloilo, dismissing the 112 cases of Qualified Theft filed

(1)

the element of taking without the consent of the owners was

missing on the ground that it is the depositors-clients, and not the Bank, which
filed the complaint in these cases, who are the owners of the money allegedly
taken by respondents and hence, are the real parties-in-interest; and

(2)

the Informations are bereft of the phrase alleging dependence,

guardianship or vigilance between the respondents and the offended
party that would have created a high degree of confidence between
them which the respondents could have abused.

against respondents Teresita Puig and Romeo Porras, and denying petitioners Motion for
Reconsideration, in Criminal Cases No. 05-3054 to 05-3165.

The following are the factual antecedents:

It added that allowing the 112 cases for Qualified Theft filed against the respondents to push through
On 7 November 2005, the Iloilo Provincial Prosecutors Office filed before Branch 68 of the
RTC in Dumangas, Iloilo, 112 cases of Qualified Theft against respondents Teresita Puig (Puig) and
Romeo Porras (Porras) who were the Cashier and Bookkeeper, respectively, of private complainant
Rural Bank of Pototan, Inc. The cases were docketed as Criminal Cases No. 05-3054 to 05-3165.

would be violative of the right of the respondents under Section 14(2), Article III of the 1987
Constitution which states that in all criminal prosecutions, the accused shall enjoy the right to be
informed of the nature and cause of the accusation against him. Following Section 6, Rule 112 of the
Revised Rules of Criminal Procedure, the RTC dismissed the cases on 30 January 2006 and refused to
issue a warrant of arrest against Puig and Porras.

The allegations in the Informations

[1]

filed before the RTC were uniform and pro-forma,

except for the amounts, date and time of commission, to wit:

A Motion for Reconsideration[2] was filed on 17 April 2006, by the petitioner.

INFORMATION

99

On 9 June 2006, an Order[3] denying petitioners Motion for Reconsideration was issued by the
RTC, finding as follows:

Accordingly, the prosecutions Motion for Reconsideration should be, as

it hereby, DENIED. The Order dated January 30, 2006 STANDS in all respects.

Petitioner also insists that the Informations sufficiently allege all the elements of the crime of
qualified theft, citing that a perusal of the Informations will show that they specifically allege that the
respondents were the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., respectively, and
that they took various amounts of money with grave abuse of confidence, and without the knowledge
and consent of the bank, to the damage and prejudice of the bank.

Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45,
raising the sole legal issue of:

WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT

SUFFICIENTLY ALLEGE THE ELEMENT OF TAKING WITHOUT THE CONSENT OF
THE OWNER, AND THE QUALIFYING CIRCUMSTANCE OF GRAVE ABUSE OF
CONFIDENCE.

Petitioner prays that judgment be rendered annulling and setting aside the Orders dated 30
January 2006 and 9 June 2006 issued by the trial court, and that it be directed to proceed with
Criminal Cases No. 05-3054 to 05-3165.

Petitioner explains that under Article 1980 of the New Civil Code, fixed, savings, and current

Parenthetically, respondents raise procedural issues. They challenge the petition on the
ground that a Petition for Review on Certiorari via Rule 45 is the wrong mode of appeal because a
finding of probable cause for the issuance of a warrant of arrest presupposes evaluation of facts and
circumstances, which is not proper under said Rule.

Respondents further claim that the Department of Justice (DOJ), through the Secretary of
Justice, is the principal party to file a Petition for Review on Certiorari, considering that the incident
was indorsed by the DOJ.

We find merit in the petition.

deposits of money in banks and similar institutions shall be governed by the provisions concerning
simple loans. Corollary thereto, Article 1953 of the same Code provides that 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. Thus, it posits that the depositors who
place their money with the bank are considered creditors of the bank. The bank acquires ownership
of the money deposited by its clients, making the money taken by respondents as belonging to the
bank.

The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the
Informations and, therefore, because of this defect, there is no basis for the existence of probable
cause which will justify the issuance of the warrant of arrest. Petitioner assails the dismissal
contending that the Informations for Qualified Theft sufficiently state facts which constitute (a) the
qualifying circumstance of grave abuse of confidence; and (b) the element of taking, with intent to

gain and without the consent of the owner, which is the Bank.

100

In determining the existence of probable cause to issue a warrant of arrest, the RTC judge

Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of

found the allegations in the Information inadequate. He ruled that the Information failed to state

anothers property without violence or intimidation against persons or force upon things. The

facts constituting the qualifying circumstance of grave abuse of confidence and the element of taking

elements of the crime under this Article are:

without the consent of the owner, since the owner of the money is not the Bank, but the depositors
therein. He also cites People v. Koc Song,[4] in which this Court held:

There must be allegation in the information and proof of a relation, by reason of

dependence, guardianship or vigilance, between the respondents and the
offended party that has created a high degree of confidence between them,
which the respondents abused.

1.

Intent to gain;

2.

Unlawful taking;

3.

Personal property belonging to another;

4.

Absence of violence or intimidation against persons or force upon things.

To fall under the crime of Qualified Theft, the following elements must concur:

At this point, it needs stressing that the RTC Judge based his conclusion that there was no probable
cause simply on the insufficiency of the allegations in the Informations concerning the facts

1.

Taking of personal property;

constitutive of the elements of the offense charged. This, therefore, makes the issue of sufficiency of

2.

That the said property belongs to another;

3.

That the said taking be done with intent to gain;

4.

That it be done without the owners consent;

the allegations in the Informations the focal point of discussion.

5.
That it be accomplished without the use of violence or intimidation against
persons, nor of force upon things;

Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is
committed as follows, viz:
ART. 310. Qualified Theft. The crime of theft shall be punished by
the penalties next higher by two degrees than those respectively specified in the
next preceding article, if committed by a domestic servant, or with grave
abuse of confidence, or if the property stolen is motor vehicle, mail matter or
large cattle or consists of coconuts taken from the premises of a plantation, fish
taken from a fishpond or fishery or if property is taken on the occasion of fire,
earthquake, typhoon, volcanic eruption, or any other calamity, vehicular accident
or civil disturbance. (Emphasis supplied.)

6.

That it be done with grave abuse of confidence.

On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires, inter

alia, that the information must state the acts or omissions complained of as constitutive of the
offense.

On the manner of how the Information should be worded, Section 9, Rule 110 of the Rules of
Court, is enlightening:

101

Section 9. Cause of the accusation. The acts or omissions complained of

as constituting the offense and the qualifying and aggravating circumstances
must be stated in ordinary and concise language and not necessarily in the
language used in the statute but in terms sufficient to enable a person of
common understanding to know what offense is being charged as well as its
qualifying and aggravating circumstances and for the court to pronounce
judgment.

Article 1980. Fixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning loan.

In a long line of cases involving Qualified Theft, this Court has firmly established the nature of
possession by the Bank of the money deposits therein, and the duties being performed by its

It is evident that the Information need not use the exact language of the statute in alleging
the acts or omissions complained of as constituting the offense. The test is whether it enables a
person of common understanding to know the charge against him, and the court to render judgment
properly.[5]

employees who have custody of the money or have come into possession of it. The Court has
consistently considered the allegations in the Information that such employees acted with grave
abuse of confidence, to the damage and prejudice of the Bank, without particularly referring to it as
owner of the money deposits, as sufficient to make out a case of Qualified Theft. For a graphic
illustration, we cite Roque v. People,[6] where the accused teller was convicted for Qualified Theft

The portion of the Information relevant to this discussion reads:

[A]bove-named [respondents], conspiring, confederating, and helping one

another, with grave abuse of confidence, being the Cashier and
Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the
knowledge and/or consent of the management of the Bank x x x.

It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who
come into possession of the monies deposited therein enjoy the confidence reposed in them by their
employer. Banks, on the other hand, where monies are deposited, are considered the owners
thereof. This is very clear not only from the express provisions of the law, but from established
jurisprudence. The relationship between banks and depositors has been held to be that of creditor

based on this Information:

That on or about the 16th day of November, 1989, in the municipality

of Floridablanca, province of Pampanga, Philippines and within the jurisdiction of
his Honorable Court, the above-named accused ASUNCION GALANG ROQUE,
being then employed as teller of the Basa Air Base Savings and Loan
Association Inc. (BABSLA) with office address at Basa Air Base, Floridablanca,
Pampanga, and as such was authorized and reposed with the responsibility to
receive and collect capital contributions from its member/contributors of said
corporation, and having collected and received in her capacity as teller of the
BABSLA the sum of TEN THOUSAND PESOS (P10,000.00), said accused, with
intent of gain, with grave abuse of confidence and without the
knowledge and consent of said corporation, did then and there willfully,
unlawfully and feloniously take, steal and carry away the amount of P10,000.00,
Philippine currency, by making it appear that a certain depositor by the name of
Antonio Salazar withdrew from his Savings Account No. 1359, when in truth and
in fact said Antonio Salazar did not withdr[a]w the said amount of P10,000.00 to
the damage and prejudice of BABSLA in the total amount of P10,000.00,
Philippine currency.

and debtor. Articles 1953 and 1980 of the New Civil Code, as appropriately pointed out by petitioner,
provide as follows:

Article 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.

In convicting the therein appellant, the Court held that:

[S]ince the teller occupies a position of confidence, and the bank places money
in the tellers possession due to the confidence reposed on the teller, the felony
of qualified theft would be committed.[7]

102

Also in People v. Sison,[8] the Branch Operations Officer was convicted of the crime of
Qualified Theft based on the Information as herein cited:

That in or about and during the period compressed between January 24,
1992 and February 13, 1992, both dates inclusive, in the City of Manila,
Philippines, the said accused did then and there wilfully, unlawfully and
feloniously, with intent of gain and without the knowledge and consent of the
owner thereof, take, steal and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different denominations
belonging to the PHILIPPINE COMMERCIAL INTERNATIONAL BANK (PCIBank for
brevity), Luneta Branch, Manila represented by its Branch Manager, HELEN U.
FARGAS, to the damage and prejudice of the said owner in the aforesaid amount
of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted with
grave abuse of confidence and unfaithfulness, he being the Branch Operation
Officer of the said complainant and as such he had free access to the place
where the said amount of money was kept.

Conspicuously, in all of the foregoing cases, where the Informations merely alleged the
positions of the respondents; that the crime was committed with grave abuse of confidence, with
intent to gain and without the knowledge and consent of the Bank, without necessarily stating the
phrase being assiduously insisted upon by respondents, of a relation by reason of dependence,

guardianship or vigilance, between the respondents and the offended party that has
created a high degree of confidence between them, which respondents abused,[12] and
without employing the word owner in lieu of the Bank were considered to have satisfied the test
of sufficiency of allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of the Bank in
this case, there is even no reason to quibble on the allegation in the Informations that they acted
with grave abuse of confidence. In fact, the Information which alleged grave abuse of confidence by

The judgment of conviction elaborated thus:

accused herein is even more precise, as this is exactly the requirement of the law in qualifying the
The crime perpetuated by appellant against his employer, the Philippine
Commercial and Industrial Bank (PCIB), is Qualified Theft. Appellant could not
have committed the crime had he not been holding the position of Luneta Branch
Operation Officer which gave him not only sole access to the bank vault xxx. The
management of the PCIB reposed its trust and confidence in the appellant as its
Luneta Branch Operation Officer, and it was this trust and confidence which he
exploited to enrich himself to the damage and prejudice of PCIB x x x.[9]

crime of Theft.
In summary, the Bank acquires ownership of the money deposited by its clients; and the
employees of the Bank, who are entrusted with the possession of money of the Bank due to the
confidence reposed in them, occupy positions of confidence. The Informations, therefore, sufficiently
allege all the essential elements constituting the crime of Qualified Theft.

From another end, People v. Locson,

[10]

in addition to People v. Sison, described the

nature of possession by the Bank. The money in this case was in the possession of the defendant as
receiving teller of the bank, and the possession of the defendant was the possession of the
Bank. The Court held therein that when the defendant, with grave abuse of confidence, removed the
money and appropriated it to his own use without the consent of the Bank, there was taking as
contemplated in the crime of Qualified Theft.[11]

On the theory of the defense that the DOJ is the principal party who may file the instant
petition, the ruling in Mobilia Products, Inc. v. Hajime Umezawa[13] is instructive. The Court thus
enunciated:

In a criminal case in which the offended party is the State, the interest
of the private complainant or the offended party is limited to the civil liability
arising therefrom. Hence, if a criminal case is dismissed by the trial court or if
there is an acquittal, a reconsideration of the order of dismissal or acquittal may
be undertaken, whenever legally feasible, insofar as the criminal aspect thereof
is concerned and may be made only by the public prosecutor; or in the case of
an appeal, by the State only, through the OSG. x x x.

103

PORRAS. The RTC Judge of Branch 68, in Dumangas, Iloilo, is directed to proceed with the trial of
On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is wellsettled that in appeals by certiorari under Rule 45 of the Rules of Court, only errors of law may be

Criminal Cases No. 05-3054 to 05-3165, inclusive, with reasonable dispatch. No pronouncement as
to costs.

raised,[14] and herein petitioner certainly raised a question of law.

SO ORDERED.
As an aside, even if we go beyond the allegations of the Informations in these cases, a closer

Republic of the Philippines

SUPREME COURT
Manila

look at the records of the preliminary investigation conducted will show that, indeed, probable cause
exists for the indictment of herein respondents. Pursuant to Section 6, Rule 112 of the Rules of
Court, the judge shall issue a warrant of arrest only upon a finding of probable cause after personally

EN BANC
G.R. No. L-7593

March 27, 1913

evaluating the resolution of the prosecutor and its supporting evidence. Soliven v. Makasiar,[15] as
reiterated in Allado v. Driokno,[16] explained that probable cause for the issuance of a warrant of
arrest is the existence of such facts and circumstances that would lead a reasonably discreet and
prudent person to believe that an offense has been committed by the person sought to be
arrested.[17] The records reasonably indicate that the respondents may have, indeed, committed the
offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or the judge, as

THE UNITED STATES, plaintiff-appellee,

vs.
JOSE M. IGPUARA, defendant-appellant.

W. A. Kincaid, Thos. L. Hartigan, and Jose Robles Lahesa for appellant.

Office of the Solicitor-General Harvey for appellee.
ARELLANO, C.J.:
The defendant therein is charged with the crime of estafa, for having swindled Juana Montilla and
Eugenio Veraguth out of P2,498 Philippine currency, which he had take on deposit from the former to
be at the latter's disposal. The document setting forth the obligation reads:

the case may be, to relieve the respondents from the pain of going through a trial once it is
ascertained that no probable cause exists to form a sufficient belief as to the guilt of the

We hold at the disposal of Eugenio Veraguth the sum of two thousand four hundred and ninety-eight
pesos (P2,498), the balance from Juana Montilla's sugar. Iloilo, June 26, 1911, Jose Igpuara, for
Ramirez and Co.

respondents, conversely, it is also equally imperative upon the judge to proceed with the case upon a
showing that there is aprima facie case against the respondents.
WHEREFORE,
herebyGRANTED. The

premises

considered,

Orders dated 30

January

the

Petition

2006 and 9

for
June

Review

on Certiorari is

2006 of

the

RTC

dismissing Criminal Cases No. 05-3054 to 05-3165 are REVERSED and SET ASIDE. Let the
corresponding Warrants of Arrest issue against herein respondents TERESITA PUIG and ROMEO

The Court of First Instance of Iloilo sentenced the defendant to two years of presidio correccional, to
pay Juana Montilla P2,498 Philippine currency, and in case of insolvency to subsidiary imprisonment
at P2.50 per day, not to exceed one-third of the principal penalty, and the costs.
The defendant appealed, alleging as errors: (1) Holding that the document executed by him was a
certificate of deposit; (2) holding the existence of a deposit, without precedent transfer or delivery of
the P2,498; and (3) classifying the facts in the case as the crime of estafa.
A deposit is constituted from the time a person receives a thing belonging to another with
the obligation of keeping and returning it. (Art. 1758, Civil Code.)

104

That the defendant received P2,498 is a fact proven. The defendant drew up a document declaring
that they remained in his possession, which he could not have said had he not received them. They
remained in his possession, surely in no other sense than to take care of them, for they remained has
no other purpose. They remained in the defendant's possession at the disposal of Veraguth; but on
August 23 of the same year Veraguth demanded for him through a notarial instrument restitution of
them, and to date he has not restored them.
The appellant says: "Juana Montilla's agent voluntarily accepted the sum of P2,498 in an instrument
payable on demand, and as no attempt was made to cash it until August 23, 1911, he could indorse
and negotiate it like any other commercial instrument. There is no doubt that if Veraguth accepted
the receipt for P2,498 it was because at that time he agreed with the defendant to consider the
operation of sale on commission closed, leaving the collection of said sum until later, which sum
remained as a loan payable upon presentation of the receipt." (Brief, 3 and 4.)
Then, after averring the true facts: (1) that a sales commission was precedent; (2) that this
commission was settled with a balance of P2,498 in favor of the principal, Juana Montilla; and (3)
that this balance remained in the possession of the defendant, who drew up an instrument payable
on demand, he has drawn two conclusions, both erroneous: One, that the instrument drawn up in
the form of a deposit certificate could be indorsed or negotiated like any other commercial
instrument; and the other, that the sum of P2,498 remained in defendant's possession as a loan.
It is erroneous to assert that the certificate of deposit in question is negotiable like any other
commercial instrument: First, because every commercial instrument is not negotiable; and second,
because only instruments payable to order are negotiable. Hence, this instrument not being to order
but to bearer, it is not negotiable.
It is also erroneous to assert that sum of money set forth in said certificate is, according to it, in the
defendant's possession as a loan. In a loan the lender transmits to the borrower the use of the thing
lent, while in a deposit the use of the thing is not transmitted, but merely possession for its custody
or safe-keeping.
In order that the depositary may use or dispose oft he things deposited, the depositor's consent is
required, and then:
The rights and obligations of the depositary and of the depositor shall cease, and the rules
and provisions applicable to commercial loans, commission, or contract which took the
place of the deposit shall be observed. (Art. 309, Code of Commerce.)
The defendant has shown no authorization whatsoever or the consent of the depositary for using or
disposing of the P2,498, which the certificate acknowledges, or any contract entered into with the
depositor to convert the deposit into a loan, commission, or other contract.
That demand was not made for restitution of the sum deposited, which could have been claimed on
the same or the next day after the certificate was signed, does not operate against the depositor, or
signify anything except the intention not to press it. Failure to claim at once or delay for sometime in
demanding restitution of the things deposited, which was immediately due, does not imply such
permission to use the thing deposited as would convert the deposit into a loan.

Article 408 of the Code of Commerce of 1829, previous to the one now in force, provided:
The depositary of an amount of money cannot use the amount, and if he makes use of it,
he shall be responsible for all damages that may accrue and shall respond to the depositor
for the legal interest on the amount.
Whereupon the commentators say:
In this case the deposit becomes in fact a loan, as a just punishment imposed upon him
who abuses the sacred nature of a deposit and as a means of preventing the desire of gain
from leading him into speculations that may be disastrous to the depositor, who is much
better secured while the deposit exists when he only has a personal action for recovery.
According to article 548, No. 5, of the Penal Code, those who to the prejudice of another
appropriate or abstract for their own use money, goods, or other personal property which
they may have received as a deposit, on commission, or for administration, or for any other
purpose which produces the obligation of delivering it or returning it, and deny having
received it, shall suffer the penalty of the preceding article," which punishes such act as
the crime of estafa. The corresponding article of the Penal Code of the Philippines in 535,
No. 5.
In a decision of an appeal, September 28, 1895, the principle was laid down that: "Since he commits
the crime ofestafa under article 548 of the Penal Code of Spain who to another's detriment
appropriates to himself or abstracts money or goods received on commission for delivery, the court
rightly applied this article to the appellant, who, to the manifest detriment of the owner or owners of
the securities, since he has not restored them, willfully and wrongfully disposed of them by
appropriating them to himself or at least diverting them from the purpose to which he was charged
to devote them."
It is unquestionable that in no sense did the P2,498 which he willfully and wrongfully disposed of to
the detriments of his principal, Juana Montilla, and of the depositor, Eugenio Veraguth, belong to the
defendant.
Likewise erroneous is the construction apparently attempted to be given to two decisions of this
Supreme Court (U. S. vs. Dominguez, 2 Phil. Rep., 580, and U. S. vs. Morales and Morco, 15 Phil.
Rep., 236) as implying that what constitutes estafa is not the disposal of money deposited, but denial
of having received same. In the first of said cases there was no evidence that the defendant had
appropriated the grain deposited in his possession.
On the contrary, it is entirely probable that, after the departure of the defendant from
Libmanan on September 20, 1898, two days after the uprising of the civil guard in Nueva
Caceres, the rice was seized by the revolutionalists and appropriated to their own uses.
In this connection it was held that failure to return the thing deposited was not sufficient, but that it
was necessary to prove that the depositary had appropriated it to himself or diverted the deposit to
his own or another's benefit. He was accused or refusing to restore, and it was held that the code
does not penalize refusal to restore but denial of having received. So much for the crime of omission;

105

now with reference to the crime of commission, it was not held in that decision that appropriation or
diversion of the thing deposited would not constitute the crime of estafa.
In the second of said decisions, the accused "kept none of the proceeds of the sales. Those, such as
they were, he turned over to the owner;" and there being no proof of the appropriation, the agent
could not be found guilty of the crime of estafa.
Being in accord and the merits of the case, the judgment appealed from is affirmed, with costs.

Bank of the Phil. Islands vs. Intermediate Appellate Court, 164 SCRA 630, No. L-66826,
August 19, 1988
G.R. No. L-66826 August 19, 1988
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.

Pacis & Reyes Law Office for petitioner.

Ernesto T. Zshornack, Jr. for private respondent.

CORTES, J.:
The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust
Company of the Philippines [hereafter referred to as "COMTRUST."] In 1980, the Bank of the
Philippine Islands (hereafter referred to as BPI absorbed COMTRUST through a corporate merger,
and was substituted as party to the case.
Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instance of
Rizal Caloocan City a complaint against COMTRUST alleging four causes of action. Except for the

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

106

account. If indeed the peso equivalent of the amount withdrawn from the dollar account was credited
to the peso current account, why did the bank still have to pay Ernesto?
At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank
has not shown how the transaction involving the cashier's check is related to the transaction
involving the dollar draft in favor of Dizon financed by the withdrawal from Rizaldy's dollar account.
The two transactions appear entirely independent of each other. Moreover, Ernesto Zshornack, Jr.,
possesses a personality distinct and separate from Rizaldy Zshornack. Payment made to Ernesto
cannot be considered payment to Rizaldy.
As to the second explanation, even if we assume that there was such an agreement, the evidence do
not show that the withdrawal was made pursuant to it. Instead, the record reveals that the amount
withdrawn was used to finance a dollar draft in favor of Leovigilda D. Dizon, and not to fund the
current account of the Zshornacks. There is no proof whatsoever that peso Current Account No. 210465-29 was ever credited with the peso equivalent of the US$1,000.00 withdrawn on October 27,
1975 from Dollar Savings Account No. 25-4109.
2. As for the second cause of action, the complaint filed with the trial court alleged that on December
8, 1975, Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash(popularly known as
greenbacks) for safekeeping, and that the agreement was embodied in a document, a copy of which
was attached to and made part of the complaint. The document reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
December 8, 1975
MR. RIZALDY T. ZSHORNACK
&/OR MRS SHIRLEY E. ZSHORNACK
Sir/Madam:
We acknowledged (sic) having received from you today the sum of US DOLLARS: THREE THOUSAND
ONLY (US$3,000.00) for safekeeping.
Received by:
(Sgd.) VIRGILIO V. GARCIA
It was also alleged in the complaint that despite demands, the bank refused to return the money.
In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current
account at prevailing conversion rates.
It must be emphasized that COMTRUST did not deny specifically under oath the authenticity and due
execution of the above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US
$3,000 for safekeeping. When he requested the return of the money on May 10, 1976, COMTRUST
explained that the sum was disposed of in this manner: US$2,000.00 was sold on December 29, 1975
and the peso proceeds amounting to P14,920.00 were deposited to Zshornack's current account per
deposit slip accomplished by Garcia; the remaining US$1,000.00 was sold on February 3, 1976 and
the peso proceeds amounting to P8,350.00 were deposited to his current account per deposit slip
also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at
prevailing conversion rates, BPI now posits another ground to defeat private respondent's claim. It
now argues that the contract embodied in the document is the contract of depositum (as defined in
Article 1962, New Civil Code), which banks do not enter into. The bank alleges that Garcia exceeded
his powers when he entered into the transaction. Hence, it is claimed, the bank cannot be liable
under the contract, and the obligation is purely personal to Garcia.
Before we go into the nature of the contract entered into, an important point which arises on the
pleadings, must be considered.

The second cause of action is based on a document purporting to be signed by COMTRUST, a copy of
which document was attached to the complaint. In short, the second cause of action was based on
an actionable document. It was therefore incumbent upon the bank to specifically deny under oath
the due execution of the document, as prescribed under Rule 8, Section 8, if it desired: (1) to
question the authority of Garcia to bind the corporation; and (2) to deny its capacity to enter into
such contract. [See, E.B. Merchant v. International Banking Corporation, 6 Phil. 314 (1906).] No
sworn answer denying the due execution of the document in question, or questioning the authority of
Garcia to bind the bank, or denying the bank's capacity to enter into the contract, was ever filed.
Hence, the bank is deemed to have admitted not only Garcia's authority, but also the bank's power,
to enter into the contract in question.
In the past, this Court had occasion to explain the reason behind this procedural requirement.
The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated.
In dealing with corporations the public at large is bound to rely to a large extent upon outward
appearances. If a man is found acting for a corporation with the external indicia of authority, any
person, not having notice of want of authority, may usually rely upon those appearances; and if it be
found that the directors had permitted the agent to exercise that authority and thereby held him out
as a person competent to bind the corporation, or had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the
actual authority may never have been granted
... Whether a particular officer actually possesses the authority which he assumes to exercise is
frequently known to very few, and the proof of it usually is not readily accessible to the stranger who
deals with the corporation on the faith of the ostensible authority exercised by some of the corporate
officers. It is therefore reasonable, in a case where an officer of a corporation has made a contract in
its name, that the corporation should be required, if it denies his authority, to state such defense in
its answer. By this means the plaintiff is apprised of the fact that the agent's authority is contested;
and he is given an opportunity to adduce evidence showing either that the authority existed or that
the contract was ratified and approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634, 645646 (1918).]
Petitioner's argument must also be rejected for another reason. The practical effect of absolving a
corporation from liability every time an officer enters into a contract which is beyond corporate
powers, even without the proper allegation or proof that the corporation has not authorized nor
ratified the officer's act, is to cast corporations in so perfect a mold that transgressions and wrongs
by such artificial beings become impossible [Bissell v. Michigan Southern and N.I.R. Cos 22 N.Y 258
(1860).] "To say that a corporation has no right to do unauthorized acts is only to put forth a very
plain truism but to say that such bodies have no power or capacity to err is to impute to them an
excellence which does not belong to any created existence with which we are acquainted. The
distinction between power and right is no more to be lost sight of in respect to artificial than in
respect to natural persons." [Ibid.]
Having determined that Garcia's act of entering into the contract binds the corporation, we now
determine the correct nature of the contract, and its legal consequences, including its enforceability.
The document which embodies the contract states that the US$3,000.00 was received by the bank
for safekeeping. The subsequent acts of the parties also show that the intent of the parties was really
for the bank to safely keep the dollars and to return it to Zshornack at a later time, Thus, Zshornack
demanded the return of the money on May 10, 1976, or over five months later.
The above arrangement is that contract defined under Article 1962, New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another,
with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing
delivered is not the principal purpose of the contract, there is no deposit but some other contract.
Note that the object of the contract between Zshornack and COMTRUST was foreign exchange.
Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign
Exchange Transactions, promulgated on December 9, 1949, which was in force at the time the
parties entered into the transaction involved in this case. The circular provides:

107

xxx xxx xxx

2. Transactions in the assets described below and all dealings in them of whatever nature, including,
where applicable their exportation and importation,shall NOT be effected, except with respect to
deposit accounts included in sub-paragraphs (b) and (c) of this paragraph, when such deposit
accounts are owned by and in the name of, banks.
(a) Any and all assets, provided they are held through, in, or with banks or banking institutions
located in the Philippines, including money, checks, drafts, bullions bank drafts, deposit accounts
(demand, time and savings), all debts, indebtedness or obligations, financial brokers and investment
houses, notes, debentures, stocks, bonds, coupons, bank acceptances, mortgages, pledges, liens or
other rights in the nature of security, expressed in foreign currencies, or if payable abroad,
irrespective of the currency in which they are expressed, and belonging to any person, firm,
partnership, association, branch office, agency, company or other unincorporated body or corporation
residing or located within the Philippines;
(b) Any and all assets of the kinds included and/or described in subparagraph (a) above, whether or
not held through, in, or with banks or banking institutions, and existent within the Philippines, which
belong to any person, firm, partnership, association, branch office, agency, company or other
unincorporated body or corporation not residing or located within the Philippines;
(c) Any and all assets existent within the Philippines including money, checks, drafts, bullions, bank
drafts, all debts, indebtedness or obligations, financial securities commonly dealt in by bankers,
brokers and investment houses, notes, debentures, stock, bonds, coupons, bank acceptances,
mortgages, pledges, liens or other rights in the nature of security expressed in foreign currencies, or
if payable abroad, irrespective of the currency in which they are expressed, and belonging to any
person, firm, partnership, association, branch office, agency, company or other unincorporated body
or corporation residing or located within the Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those authorized to
deal in foreign exchange. All receipts of foreign exchange by any person, firm, partnership,
association, branch office, agency, company or other unincorporated body or corporation shall be
sold to the authorized agents of the Central Bank by the recipients within one business day following
the receipt of such foreign exchange. Any person, firm, partnership, association, branch office,
agency, company or other unincorporated body or corporation, residing or located within the
Philippines, who acquires on and after the date of this Circular foreign exchange shall not, unless
licensed by the Central Bank, dispose of such foreign exchange in whole or in part, nor receive less
than its full value, nor delay taking ownership thereof except as such delay is customary; Provided,
further, That within one day upon taking ownership, or receiving payment, of foreign exchange the
aforementioned persons and entities shall sell such foreign exchange to designated agents of the
Central Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined; and any person, firm or corporation,
foreign or domestic, who being bound to the observance thereof, or of such other rules, regulations
or directives as may hereafter be issued in implementation of this Circular, shall fail or refuse to
comply with, or abide by, or shall violate the same, shall be subject to the penal sanctions provided in

value, nor delay taking ownership thereof except as such delay is customary; Provided, That, within
one business day upon taking ownership or receiving payment of foreign exchange the
aforementioned persons and entities shall sell such foreign exchange to the authorized agents of the
Central Bank.
As earlier stated, the document and the subsequent acts of the parties show that they intended the
bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint
that he is a Philippine resident. The parties did not intended to sell the US dollars to the Central Bank
within one business day from receipt. Otherwise, the contract of depositum would never have been
entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one
business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be
considered as one which falls under the general class of prohibited transactions. Hence, pursuant to
Article 5 of the Civil Code, it is void, having been executed against the provisions of a
mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action
against the other. "When the nullity proceeds from the illegality of the cause or object of the
contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have
no cause of action against each other. . ." [Art. 1411, New Civil Code.] The only remedy is one on
behalf of the State to prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the second cause of action.
3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of litigation
expenses and attorney's fees to be reasonable. The award is sustained.
WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to the
dollar savings account of private respondent the amount of US$1,000.00 as of October 27, 1975 to
earn interest at the rate fixed by the bank for dollar savings deposits. Petitioner is further ordered to
pay private respondent the amount of P8,000.00 as damages. The other causes of action of private
respondent are ordered dismissed.
SO ORDERED.

the Central Bank Act.

xxx xxx xxx

Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations on
Foreign Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippine residents
only. Section 6 provides:
SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporation shall be
sold to authorized agents of the Central Bank by the recipients within one business day following the
receipt of such foreign exchange. Any resident person, firm, company or corporation residing or
located within the Philippines, who acquires foreign exchange shall not, unless authorized by the
Central Bank, dispose of such foreign exchange in whole or in part, nor receive less than its full

108

On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula
Pugao entered into an agreement whereby the former purchased from the latter two (2) parcels of
land for a consideration of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while
the balance was covered by three (3) postdated checks. Among the terms and conditions of the
agreement embodied in a Memorandum of True and Actual Agreement of Sale of Land were that the
titles to the lots shall be transferred to the petitioner upon full payment of the purchase price and
that the owner's copies of the certificates of titles thereto, Transfer Certificates of Title (TCT) Nos.
284655 and 292434, shall be deposited in a safety deposit box of any bank. The same could be
withdrawn only upon the joint signatures of a representative of the petitioner and the Pugaos upon
full payment of the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented
Safety Deposit Box No. 1448 of private respondent Security Bank and Trust Company, a domestic
banking corporation hereinafter referred to as the respondent Bank. For this purpose, both signed a
contract of lease (Exhibit "2") which contains, inter alia, the following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither
the possession nor control of the same.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 90027 March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.

Dolorfino & Dominguez Law Offices for petitioner.

Danilo B. Banares for private respondent.

DAVIDE, JR., J.:

Is the contractual relation between a commercial bank and another party in a contract of rent of a
safety deposit box with respect to its contents placed by the latter one of bailor and bailee or one of
lessor and lessee?
This is the crux of the present controversy.

14. The bank has no interest whatsoever in said contents, except herein
expressly provided, and it assumes absolutely no liability in connection
therewith. 1
After the execution of the contract, two (2) renter's keys were given to the renters one to Aguirre
(for the petitioner) and the other to the Pugaos. A guard key remained in the possession of the
respondent Bank. The safety deposit box has two (2) keyholes, one for the guard key and the other
for the renter's key, and can be opened only with the use of both keys. Petitioner claims that the
certificates of title were placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a
price of P225.00 per square meter which, as petitioner alleged in its complaint, translates to a profit
of P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded
the execution of a deed of sale which necessarily entailed the production of the certificates of title. In
view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the respondent Bank on 4
October 1979 to open the safety deposit box and get the certificates of title. However, when opened
in the presence of the Bank's representative, the box yielded no such certificates. Because of the
delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as
a consequence thereof, the petitioner allegedly failed to realize the expected profit of P280,500.00.
Hence, the latter filed on 1 September 1980 a complaint 2 for damages against the respondent Bank
with the Court of First Instance (now Regional Trial Court) of Pasig, Metro Manila which docketed the
same as Civil Case No. 38382.
In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of action
because of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the
items or articles contained in the box could not give rise to an action against it. It then interposed a
counterclaim for exemplary damages as well as attorney's fees in the amount of P20,000.00.
Petitioner subsequently filed an answer to the counterclaim. 4
In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of
Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner on 8 December 1986, the
dispositive portion of which reads:

109

WHEREFORE, premises considered, judgment is hereby rendered dismissing

plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to
pay defendant the amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's
fees.
With costs against plaintiff. 6
The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of
the contract of lease, the Bank has no liability for the loss of the certificates of title. The court
declared that the said provisions are binding on the parties.
Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse decision to
the respondent Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner
urged the respondent Court to reverse the challenged decision because the trial court erred in (a)
absolving the respondent Bank from liability from the loss, (b) not declaring as null and void, for
being contrary to law, public order and public policy, the provisions in the contract for lease of the
safety deposit box absolving the Bank from any liability for loss, (c) not concluding that in this
jurisdiction, as well as under American jurisprudence, the liability of the Bank is settled and (d)
awarding attorney's fees to the Bank and denying the petitioner's prayer for nominal and exemplary
damages and attorney's fees. 8
In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision
principally on the theory that the contract (Exhibit "2") executed by the petitioner and respondent
Bank is in the nature of a contract of lease by virtue of which the petitioner and its co-renter were
given control over the safety deposit box and its contents while the Bank retained no right to open
the said box because it had neither the possession nor control over it and its contents. As such, the
contract is governed by Article 1643 of the Civil Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself to give to
another the enjoyment or use of a thing for a price certain, and for a period
which may be definite or indefinite. However, no lease for more than ninety-nine
years shall be valid.
It invoked Tolentino vs. Gonzales 11 which held that the owner of the property loses his
control over the property leased during the period of the contract and Article 1975 of
the Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or instruments
which earn interest shall be bound to collect the latter when it becomes due, and
to take such steps as may be necessary in order that the securities may preserve
their value and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit
boxes.

and then concluded that "[c]learly, the defendant-appellee is not under any duty to
maintain the contents of the box. The stipulation absolving the defendant-appellee from
liability is in accordance with the nature of the contract of lease and cannot be regarded as
contrary to law, public order and public policy." 12 The appellate court was quick to add,
however, that under the contract of lease of the safety deposit box, respondent Bank is not
completely free from liability as it may still be made answerable in case unauthorized
persons enter into the vault area or when the rented box is forced open. Thus, as expressly
provided for in stipulation number 8 of the contract in question:
8. The Bank shall use due diligence that no unauthorized person shall be
admitted to any rented safe and beyond this, the Bank will not be responsible for
the contents of any safe rented from it. 13
Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28
August 1989, 15petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to
review and set aside the respondent Court's ruling. Petitioner avers that both the respondent Court
and the trial court (a) did not properly and legally apply the correct law in this case, (b) acted with
grave abuse of discretion or in excess of jurisdiction amounting to lack thereof and (c) set a
precedent that is contrary to, or is a departure from precedents adhered to and affirmed by decisions
of this Court and precepts in American jurisprudence adopted in the Philippines. It reiterates the
arguments it had raised in its motion to reconsider the trial court's decision, the brief submitted to
the respondent Court and the motion to reconsider the latter's decision. In a nutshell, petitioner
maintains that regardless of nomenclature, the contract for the rent of the safety deposit box (Exhibit
"2") is actually a contract of deposit governed by Title XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the
certificates of title pursuant to Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely and to return it,
when required, to the depositor, or to his heirs and successors, or to the person
who may have been designated in the contract. His responsibility, with regard to
the safekeeping and the loss of the thing, shall be governed by the provisions of
Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in determining
the degree of care that the depositary must observe.
Petitioner then quotes a passage from American Jurisprudence
expound on the prevailing rule in the United States, to wit:

17

which is supposed to

The prevailing rule appears to be that where a safe-deposit company leases a

safe-deposit box or safe and the lessee takes possession of the box or safe and
places therein his securities or other valuables, the relation of bailee and bail or
is created between the parties to the transaction as to such securities or other
valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it shall
know, the character or description of the property which is deposited in such
safe-deposit box or safe does not change that relation. That access to the
contents of the safe-deposit box can be had only by the use of a key retained by
the lessee ( whether it is the sole key or one to be used in connection with one

110

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

contents of the box is that of a bail or and bailee, the bailment being for hire and mutual
benefit. 21 This is just the prevailing view because:
There is, however, some support for the view that the relationship in question
might be more properly characterized as that of landlord and tenant, or lessor
and lessee. It has also been suggested that it should be characterized as that of
licensor and licensee. The relation between a bank, safe-deposit company, or
storage company, and the renter of a safe-deposit box therein, is often described
as contractual, express or implied, oral or written, in whole or in part. But there
is apparently no jurisdiction in which any rule other than that applicable to
bailments governs questions of the liability and rights of the parties in respect of
loss of the contents of safe-deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is
clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of
the General Banking Act23 pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in this
Act, banking institutions other than building and loan associations may perform
the following services:
(a) Receive in custody funds, documents, and valuable
objects, and rent safety deposit boxes for the safeguarding
of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and
(c) of this section asdepositories or as agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the parameters of a contract of deposit, i.e., the
receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out
of the safety deposit boxes is not independent from, but related to or in conjunction with, this
principal function. A contract of deposit may be entered into orally or in writing 25 and, pursuant to
Article 1306 of the Civil Code, the parties thereto may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order or public policy. The depositary's responsibility for the safekeeping of the
objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the
depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay
or contravention of the tenor of the agreement. 26 In the absence of any stipulation prescribing the
degree of diligence required, that of a good father of a family is to be observed. 27 Hence, any
stipulation exempting the depositary from any liability arising from the loss of the thing deposited on
account of fraud, negligence or delay would be void for being contrary to law and public policy. In
the instant case, petitioner maintains that conditions 13 and 14 of the questioned contract of lease of
the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it has neither
the possession nor control of the same.

111

14. The bank has no interest whatsoever in said contents, except herein
expressly provided, and it assumes absolutely no liability in connection
therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in agreement with
this proposition for indeed, said provisions are inconsistent with the respondent Bank's
responsibility as a depositary under Section 72(a) of the General Banking Act. Both exempt
the latter from any liability except as contemplated in condition 8 thereof which limits its
duty to exercise reasonable diligence only with respect to who shall be admitted to any
rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person shall be
admitted to any rented safe and beyond this, the Bank will not be responsible for
the contents of any safe rented from it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice
of the Bank. It is not correct to assert that the Bank has neither the possession nor control
of the contents of the box since in fact, the safety deposit box itself is located in its
premises and is under its absolute control; moreover, the respondent Bank keeps the
guard key to the said box. As stated earlier, renters cannot open their respective boxes
unless the Bank cooperates by presenting and using this guard key. Clearly then, to the
extent above stated, the foregoing conditions in the contract in question are void and
ineffective. It has been said:

contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each
should have one (1) renter's key, it was obvious that either of them could ask the Bank for access to
the safety deposit box and, with the use of such key and the Bank's own guard key, could open the
said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its
part had been established, the trial court erred in condemning the petitioner to pay the respondent
Bank attorney's fees. To this extent, the Decision (dispositive portion) of public respondent Court of
Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees
from the 4 July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As
modified, and subject to the pronouncement We made above on the nature of the relationship
between the parties in a contract of lease of safety deposit boxes, the dispositive portion of the said
Decision is hereby AFFIRMED and the instant Petition for Review is otherwise DENIED for lack of
merit.
No pronouncement as to costs.
SO ORDERED.

With respect to property deposited in a safe-deposit box by a customer of a safedeposit company, the parties, since the relation is a contractual one, may by
special contract define their respective duties or provide for increasing or limiting
the liability of the deposit company, provided such contract is not in violation of
law or public policy. It must clearly appear that there actually was such a special
contract, however, in order to vary the ordinary obligations implied by law from
the relationship of the parties; liability of the deposit company will not be
enlarged or restricted by words of doubtful meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by
its own fraud or negligence or that of its agents or servants, and if a provision of
the contract may be construed as an attempt to do so, it will be held ineffective
for the purpose. Although it has been held that the lessor of a safe-deposit box
cannot limit its liability for loss of the contents thereof through its own
negligence, the view has been taken that such a lessor may limits its liability to
some extent by agreement or stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition
should be dismissed, but on grounds quite different from those relied upon by the Court of Appeals.
In the instant case, the respondent Bank's exoneration cannot, contrary to the holding of the Court of
Appeals, be based on or proceed from a characterization of the impugned contract as a contract of
lease, but rather on the fact that no competent proof was presented to show that respondent Bank
was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates
of title were withdrawable from the safety deposit box only upon both parties' joint signatures, and
that no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud
or negligence of the respondent Bank. This in turn flows from this Court's determination that the

112

severally, on the 20th of January, 1898. Jaro, 26th of May, 1897. Signed Jose Lim. Signed:
Ceferino Domingo Lim.
That, when the obligation became due, the defendants begged the plaintiff for an extension of time
for the payment thereof, building themselves to pay interest at the rate of 15 per cent on the amount
of their indebtedness, to which the plaintiff acceded; that on the 15th of May, 1902, the debtors paid
on account of interest due the sum of P1,000 pesos, with the exception of either capital or interest,
had thereby been subjected to loss and damages.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 4015

August 24, 1908

ANGEL JAVELLANA, plaintiff-appellee,

vs.
JOSE LIM, ET AL., defendants-appellants.

R. Zaldarriaga for appellants.

B. Montinola for appellee.
TORRES, J.:
The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th of October, 1906, with the
Court of First Instance of Iloilo, praying that the defendants, Jose Lim and Ceferino Domingo Lim, he
sentenced to jointly and severally pay the sum of P2,686.58, with interest thereon at the rate of 15
per cent per annum from the 20th of January, 1898, until full payment should be made, deducting
from the amount of interest due the sum of P1,102.16, and to pay the costs of the proceedings.
Authority from the court having been previously obtained, the complaint was amended on the 10th of
January, 1907; it was then alleged, on the 26th of May, 1897, the defendants executed and
subscribed a document in favor of the plaintiff reading as follows:
We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six
hundred and eighty-six cents of pesos fuertes, which we will return to the said gentleman, jointly and

A demurrer to the original complaint was overruled, and on the 4th of January, 1907, the defendants
answered the original complaint before its amendment, setting forth that they acknowledged the
facts stated in Nos. 1 and 2 of the complaint; that they admitted the statements of the plaintiff
relative to the payment of 1,102.16 pesos made on the 15th of November, 1902, not, however, as
payment of interest on the amount stated in the foregoing document, but on account of the principal,
and denied that there had been any agreement as to an extension of the time for payment and the
payment of interest at the rate of 15 per cent per annum as alleged in paragraph 3 of the complaint,
and also denied all the other statements contained therein.
As a counterclaim, the defendants alleged that they had paid to the plaintiff sums which, together
with the P1,102.16 acknowledged in the complaint, aggregated the total sum of P5,602.16, and that,
deducting therefrom the total sum of P2,686.58 stated in the document transcribed in the complaint,
the plaintiff still owed the defendants P2,915.58; therefore, they asked that judgment be entered
absolving them, and sentencing the plaintiff to pay them the sum of P2,915.58 with the costs.
Evidence was adduced by both parties and, upon their exhibits, together with an account book
having been made of record, the court below rendered judgment on the 15th of January, 1907, in
favor of the plaintiff for the recovery of the sum of P5,714.44 and costs.
The defendants excepted to the above decision and moved for a new trial. This motion was overruled
and was also excepted to by them; the bill of exceptions presented by the appellants having been
approved, the same was in due course submitted to this court.
The document of indebtedness inserted in the complaint states that the plaintiff left on deposit with
the defendants a given sum of money which they were jointly and severally obliged to return on a
certain date fixed in the document; but that, nevertheless, when the document appearing as Exhibits
2, written in the Visayan dialect and followed by a translation into Spanish was executed, it was
acknowledged, at the date thereof, the 15th of November, 1902, that the amount deposited had not
yet been returned to the creditor, whereby he was subjected to losses and damages amounting to
830 pesos since the 20th of January, 1898, when the return was again stipulated with the further
agreement that the amount deposited should bear interest at the rate of 15 per cent per annum,
from the aforesaid date of January 20, and that the 1,000 pesos paid to the depositor on the 15th of
May, 1900, according to the receipt issued by him to the debtors, would be included, and that the
said rate of interest would obtain until the debtors on the 20th of May, 1897, it is called a deposit
consisted, and they could have accomplished the return agreed upon by the delivery of a sum equal
to the one received by them. For this reason it must be understood that the debtors were lawfully
authorized to make use of the amount deposited, which they have done, as subsequent shown when
asking for an extension of the time for the return thereof, inasmuch as, acknowledging that they
have subjected the letter, their creditor, to losses and damages for not complying with what had
been stipulated, and being conscious that they had used, for their own profit and gain, the money

113

that they received apparently as a deposit, they engaged to pay interest to the creditor from the date
named until the time when the refund should be made. Such conduct on the part of the debtors is
unquestionable evidence that the transaction entered into between the interested parties was not a
deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that
The depository can not make use of the thing deposited without the express permission of
the depositor.
Otherwise he shall be liable for losses and damages.

with good reason, that they should produce the receipts which he may have issued, and which he did
issue whenever they paid him any money on account. The plaintiffs allegation that the two amounts
of 400 and 1,200 pesos, referred to in documents marked "C" and "D" offered in evidence by the
defendants, had been received from Ceferino Domingo Lim on account of other debts of his, has not
been contradicted, and the fact that in the original complaint the sum of 1,102.16 pesos, was
expressed in lieu of 1,000 pesos, the only payment made on account of interest on the amount
deposited according to documents No. 2 and letter "B" above referred to, was due to a mistake.
Moreover, for the reason above set forth it may, as a matter of course, be inferred that there was no
renewal of the contract deposited converted into a loan, because, as has already been stated, the
defendants received said amount by virtue of real loan contract under the name of a deposit, since
the so-called bailees were forthwith authorized to dispose of the amount deposited. This they have
done, as has been clearly shown.

Article 1768 also provides that

When the depository has permission to make use of the thing deposited, the contract loses
the character of a deposit and becomes a loan or bailment.
The permission shall not be presumed, and its existence must be proven.
When on one of the latter days of January, 1898, Jose Lim went to the office of the creditor asking
for an extension of one year, in view of the fact the money was scare, and because neither himself
nor the other defendant were able to return the amount deposited, for which reason he agreed to
pay interest at the rate of 15 per cent per annum, it was because, as a matter of fact, he did not
have in his possession the amount deposited, he having made use of the same in his business and
for his own profit; and the creditor, by granting them the extension, evidently confirmed the express
permission previously given to use and dispose of the amount stated as having bee deposited, which,
in accordance with the loan, to all intents and purposes gratuitously, until the 20th of January, 1898,
and from that dated with interest at 15 per cent per annum until its full payment, deducting from the
total amount of interest the sum of 1,000 pesos, in accordance with the provisions of article 1173 of
the Civil Code.
Notwithstanding that it does not appear that Jose Lim signed the document (Exhibit 2) executed in
the presence of three witnesses on the 15th of November, 1902, by Ceferino Domingo Lim on behalf
of himself and the former, nevertheless, the said document has not been contested as false, either
by a criminal or by a civil proceeding, nor has any doubt been cast upon the authenticity of the
signatures of the witnesses who attested the execution of the same; and from the evidence in the
case one is sufficiently convinced that the said Jose Lim was perfectly aware of and authorized his
joint codebtor to liquidate the interest, to pay the sum of 1,000 pesos, on account thereof, and to
execute the aforesaid document No. 2. A true ratification of the original document of deposit was
thus made, and not the least proof is shown in the record that Jose Lim had ever paid the whole or
any part of the capital stated in the original document, Exhibit 1.
If the amount, together with interest claimed in the complaint, less 1,000 pesos appears as fully
established, such is not the case with the defendant's counterclaim for P5,602.16, because the
existence and certainty of said indebtedness imputed to the plaintiff has not been proven, and the
defendants, who call themselves creditors for the said amount have not proven in a satisfactory
manner that the plaintiff had received partial payments on account of the same; the latter alleges

The original joint obligation contracted by the defendant debtor still exists, and it has not been shown
or proven in the proceedings that the creditor had released Joe Lim from complying with his
obligation in order that he should not be sued for or sentenced to pay the amount of capital and
interest together with his codebtor, Ceferino Domingo Lim, because the record offers satisfactory
evidence against the pretension of Jose Lim, and it further appears that document No. 2 was
executed by the other debtor, Ceferino Domingo Lim, for himself and on behalf of Jose Lim; and it
has also been proven that Jose Lim, being fully aware that his debt had not yet been settled, took
steps to secure an extension of the time for payment, and consented to pay interest in return for the
concession requested from the creditor.
In view of the foregoing, and adopting the findings in the judgment appealed from, it is our opinion
that the same should be and is hereby affirmed with the costs of this instance against the appellant,
provided that the interest agreed upon shall be paid until the complete liquidation of the debt. So
ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

114

G.R. No. L-43191

November 13, 1935

PAULINO GULLAS, plaintiff-appellant,

vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.

Gullas, Lopez, Tuao and Leuterio for plaintiff-appellant.

Jose Delgado for defendant-appellant.

MALCOLM, J.:
Both parties to this case appealed from a judgment of the Court of First Instance of Cebu, which
sentenced the defendant to return to the account of the plaintiff the sum of P5098, with legal interest
and costs, the plaintiff to secure damages in the amount of P10,000 more or less, and the defendant
to be absolved totally from the amended complaint. As it is conceded that the plaintiff has already
received the sum represented by the United States treasury, warrant, which is in question, the appeal
will thus determine the amount, if any, which should be paid to the plaintiff by the defendant.
The parties to the case are Paulino Gullas and the Philippine National Bank. The first named is a
member of the Philippine Bar, resident in the City of Cebu. The second named is a banking
corporation with a branch in the same city. Attorney Gullas has had a current account with the bank.
It appears from the record that on August 2, 1933, the Treasurer of the United States for the United
States Veterans Bureau issued a Warrant in the amount of $361, payable to the order of Francisco
Sabectoria Bacos. Paulino Gullas and Pedro Lopez signed as endorsers of this check. Thereupon it
was cashed by the Philippine National Bank. Subsequently the treasury warrant was dishonored by
the Insular Treasurer.
At that time the outstanding balance of Attorney Gullas on the books of the bank was P509. Against
this balance he had issued certain cheeks which could not be paid when the money was sequestered
by the On August 20, 1933, Attorney Gullas left his residence for Manila.
The bank on learning of the dishonor of the treasury warrant sent notices by mail to Mr. Gullas which
could not be delivered to him at that time because he was in Manila. In the bank's letter of August
21, 1933, addressed to Messrs. Paulino Gulla and Pedro Lopez, they were informed that the United
States Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos for $361 or P722, the
payment for which had been received has been returned by our Manila office with the notation that
the payment of his check has been stopped by the Insular Treasurer. "In view of this therefore we
have applied the outstanding balances of your current accounts with us to the part payment of the
foregoing check", namely, Mr. Paulino Gullas P509. On the return of Attorney Gullas to Cebu on
August 31, 1933, notice of dishonor was received and the unpaid balance of the United States
Treasury warrant was immediately paid by him.
As a consequence of these happenings, two occurrences transpired which inconvenienced Attorney
Gullas. In the first place, as above indicated, checks including one for his insurance were not paid

because of the lack of funds standing to his credit in the bank. In the second place, periodicals in the
vicinity gave prominence to the news to the great mortification of Gullas.lawphil.net
A variety of incidental questions have been suggested on the record which it can be taken for
granted as having been adversely disposed of in this opinion. The main issues are two, namely, (1)
as to the right of Philippine National Bank, and to apply a deposit to the debt of depositor to the bank
and (2) as to the amount damages, if any, which should be awarded Gullas.
The Civil Code contains provisions regarding compensation (set off) and deposit. (Articles 1195 et
seq., 1758 et seq. The portions of Philippine law provide that compensation shall take place when
two persons are reciprocally creditor and debtor of each other (Civil Code, article 1195). In his
connection, it has been held that the relation existing between a depositor and a bank is that of
creditor and debtor. (Fulton Iron Works Co. vs. China Banking Corporation [1933], 59 Phil., 59.)
The Negotiable Instruments Law contains provisions establishing the liability of a general indorser
and giving the procedure for a notice of dishonor. The general indorser of negotiable instrument
engages that if he be dishonored and the, necessary proceedings of dishonor be duly taken, he will
pay the amount thereof to the holder. (Negotiable Instruments Law, sec. 66.) In this connection, it
has been held a long line of authorities that notice of dishonor is in order to charge all indorser and
that the right of action against him does not accrue until the notice is given. (Asia Banking
Corporation vs. Javier [1923] 44 Phil., 777; 5 Uniform Laws Annotated.)
As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any
indebtedness to it on the part of a depositor. In Louisiana, however, a civil law jurisdiction, the rule is
denied, and it is held that a bank has no right, without an order from or special assent of the
depositor to retain out of his deposit an amount sufficient to meet his indebtedness. The basis of the
Louisiana doctrine is the theory of confidential contracts arising from irregular deposits, e. g., the
deposit of money with a banker. With freedom of selection and after full preference to the minority
rule as more in harmony with modern banking practice. (1 Morse on Banks and Banking, 5th ed., sec.
324; Garrison vs. Union Trust Company [1905], 111 A.S.R., 407; Louisiana Civil Code Annotated,
arts. 2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L. Ann., 604; 8 Manresa, Comentarios al
Codigo Civil Espaol, 4th ed., 359 et seq., 11 Manresa pp. 694 et seq.)
Starting, therefore, from the premise that the Philippine National Bank had with respect to the
deposit of Gullas a right of set off, we next consider if that remedy was enforced properly. The fact
we believe is undeniable that prior to the mailing of notice of dishonor, and without waiting for any
action by Gullas, the bank made use of the money standing in his account to make good for the
treasury warrant. At this point recall that Gullas was merely an indorser and had issued in good faith.
As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a
third party, it has been held that he has a right of action against the bank for its refusal to pay such a
check in the absence of notice to him that the bank has applied the funds so deposited in
extinguishment of past due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann.
Cas., 203.) The decision cited represents the minority doctrine, for on principle it would seem that
notice is not necessary to a maker because the right is based on the doctrine that the relationship is
that of creditor and debtor. However this may be, as to an indorser the situation is different, and
notice should actually have been given him in order that he might protect his interests.

115

We accordingly are of the opinion that the action of the bank was prejudicial to Gullas. But to follow
up that statement with others proving exact damages is not so easy. For instance, for alleged libelous
articles the bank would not be primarily liable. The same remark could be made relative to the loss of
business which Gullas claims but which could not be traced definitely to this occurrence. Also Gullas
having eventually been reimbursed lost little through the actual levy by the bank on his funds. On the
other hand, it was not agreeable for one to draw checks in all good faith, then, leave for Manila, and
on return find that those checks had not been cashed because of the action taken by the bank. That
caused a disturbance in Gullas' finances, especially with reference to his insurance, which was
injurious to him. All facts and circumstances considered, we are of the opinion that Gullas should be
awarded nominal damages because of the premature action of the bank against which Gullas had no
means of protection, and have finally determined that the amount should be P250.
Agreeable to the foregoing, the errors assigned by the parties will in the main be overruled, with the
result that the judgment of the trial court will be modified by sentencing the defendant to pay the
plaintiff the sum of P250, and the costs of both instances.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 156940

December 14, 2004

ASSOCIATED BANK (Now WESTMONT BANK), petitioner,

vs.
VICENTE HENRY TAN, respondent.

DECISION

PANGANIBAN, J.:
While banks are granted by law the right to debit the value of a dishonored check from a depositors
account, they must do so with the highest degree of care, so as not to prejudice the depositor
unduly.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the January 27, 2003
Decision2of the Court of Appeals (CA) in CA-GR CV No. 56292. The CA disposed as follows:

116

"WHEREFORE, premises considered, the Decision dated December 3, 1996, of the Regional
Trial Court of Cabanatuan City, Third Judicial Region, Branch 26, in Civil Case No. 892-AF is
hereby AFFIRMED. Costs against the [petitioner]."3
The Facts
The CA narrated the antecedents as follows:
"Vicente Henry Tan (hereafter TAN) is a businessman and a regular depositor-creditor of
the Associated Bank (hereinafter referred to as the BANK). Sometime in September 1990,
he deposited a postdated UCPB check with the said BANK in the amount of P101,000.00
issued to him by a certain Willy Cheng from Tarlac. The check was duly entered in his bank
record thereby making his balance in the amount of P297,000.00, as of October 1, 1990,
from his original deposit of P196,000.00. Allegedly, upon advice and instruction of the
BANK that the P101,000.00 check was already cleared and backed up by sufficient funds,
TAN, on the same date, withdrew the sum of P240,000.00, leaving a balance
of P57,793.45. A day after, TAN deposited the amount of P50,000.00 making his existing
balance in the amount of P107,793.45, because he has issued several checks to his
business partners, to wit:
CHECK NUMBERS

DATE

AMOUNT

Sept. 29, 1990

P9,000.00

b. 138804

Oct. 8, 1990

9,350.00

c. 138787

Sept. 30, 1990

6,360.00

d. 138847

Sept. 29, 1990

21,850.00

e. 167054

Sept. 29, 1990

4,093.40

f. 138792 `

a. 138814

Sept. 29, 1990

3,546.00

g. 138774

Oct. 2, 1990

6,600.00

h. 167072

Oct. 10, 1990

9,908.00

i. 168802

Oct. 10, 1990

3,650.00

"However, his suppliers and business partners went back to him alleging that the checks he
issued bounced for insufficiency of funds. Thereafter, TAN, thru his lawyer, informed the
BANK to take positive steps regarding the matter for he has adequate and sufficient funds
to pay the amount of the subject checks. Nonetheless, the BANK did not bother nor offer
any apology regarding the incident. Consequently, TAN, as plaintiff, filed a Complaint for
Damages on December 19, 1990, with the Regional Trial Court of Cabanatuan City, Third
Judicial Region, docketed as Civil Case No. 892-AF, against the BANK, as defendant.
"In his [C]omplaint, [respondent] maintained that he ha[d] sufficient funds to pay the
subject checks and alleged that his suppliers decreased in number for lack of trust. As he
has been in the business community for quite a time and has established a good record of
reputation and probity, plaintiff claimed that he suffered embarrassment, humiliation,
besmirched reputation, mental anxieties and sleepless nights because of the said
unfortunate incident. [Respondent] further averred that he continuously lost profits in the
amount of P250,000.00. [Respondent] therefore prayed for exemplary damages and that

[petitioner] be ordered to pay him the sum of P1,000,000.00 by way of moral

damages, P250,000.00 as lost profits,P50,000.00 as attorneys fees plus 25% of the
amount claimed including P1,000.00 per court appearance.
"Meanwhile, [petitioner] filed a Motion to Dismiss on February 7, 1991, but the same was
denied for lack of merit in an Order dated March 7, 1991. Thereafter, [petitioner] BANK on
March 20, 1991 filed its Answer denying, among others, the allegations of [respondent]
and alleged that no banking institution would give an assurance to any of its
client/depositor that the check deposited by him had already been cleared and backed up
by sufficient funds but it could only presume that the same has been honored by the
drawee bank in view of the lapse of time that ordinarily takes for a check to be cleared. For
its part, [petitioner] alleged that on October 2, 1990, it gave notice to the [respondent] as
to the return of his UCPB check deposit in the amount of P101,000.00, hence, on even
date, [respondent] deposited the amount ofP50,000.00 to cover the returned check.
"By way of affirmative defense, [petitioner] averred that [respondent] had no cause of
action against it and argued that it has all the right to debit the account of the
[respondent] by reason of the dishonor of the check deposited by the [respondent] which
was withdrawn by him prior to its clearing. [Petitioner] further averred that it has no
liability with respect to the clearing of deposited checks as the clearing is being undertaken
by the Central Bank and in accepting [the] check deposit, it merely obligates itself as
depositors collecting agent subject to actual payment by the drawee bank. [Petitioner]
therefore prayed that [respondent] be ordered to pay it the amount of P1,000,000.00 by
way of loss of goodwill, P7,000.00 as acceptance fee plus P500.00 per appearance and by
way of attorneys fees.
"Considering that Westmont Bank has taken over the management of the affairs/properties
of the BANK, [respondent] on October 10, 1996, filed an Amended Complaint reiterating
substantially his allegations in the original complaint, except that the name of the previous
defendant ASSOCIATED BANK is now WESTMONT BANK.
"Trial ensured and thereafter, the court rendered its Decision dated December 3, 1996 in favor of the
[respondent] and against the [petitioner], ordering the latter to pay the [respondent] the sum
of P100,000.00 by way of moral damages, P75,000.00 as exemplary damages, P25,000.00 as
attorneys fees, plus the costs of this suit. In making said ruling, it was shown that [respondent] was
not officially informed about the debiting of theP101,000.00 [from] his existing balance and that the
BANK merely allowed the [respondent] to use the fund prior to clearing merely for accommodation
because the BANK considered him as one of its valued clients. The trial court ruled that the bank
manager was negligent in handling the particular checking account of the [respondent] stating that
such lapses caused all the inconveniences to the [respondent]. The trial court also took into
consideration that [respondents] mother was originally maintaining with the x x x BANK [a] current
account as well as [a] time deposit, but [o]n one occasion, although his mother made a deposit, the
same was not credited in her favor but in the name of another."4
Petitioner appealed to the CA on the issues of whether it was within its rights, as collecting bank, to
debit the account of its client for a dishonored check; and whether it had informed respondent about
the dishonor prior to debiting his account.
Ruling of the Court of Appeals

117

Affirming the trial court, the CA ruled that the bank should not have authorized the withdrawal of the
value of the deposited check prior to its clearing. Having done so, contrary to its obligation to treat
respondents account with meticulous care, the bank violated its own policy. It thereby took upon
itself the obligation to officially inform respondent of the status of his account before unilaterally
debiting the amount of P101,000. Without such notice, it is estopped from blaming him for failing to
fund his account.
The CA opined that, had the P101,000 not been debited, respondent would have had sufficient funds
for the postdated checks he had issued. Thus, the supposed accommodation accorded by petitioner
to him is the proximate cause of his business woes and shame, for which it is liable for damages.
Because of the banks negligence, the CA awarded respondent moral damages of P100,000. It also
granted him exemplary damages of P75,000 and attorneys fees of P25,000.

A bank generally has a right of setoff over the deposits therein for the payment of any withdrawals
on the part of a depositor.8 The right of a collecting bank to debit a clients account for the value of a
dishonored check that has previously been credited has fairly been established by jurisprudence. To
begin with, Article 1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions concerning simple loan."
Hence, the relationship between banks and depositors has been held to be that of creditor and
debtor.9 Thus, legal compensation under Article 127810 of the Civil Code may take place "when all the
requisites mentioned in Article 1279 are present,"11 as follows:
"(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;

Hence this Petition.5

Issue
In its Memorandum, petitioner raises the sole issue of "whether or not the petitioner, which is acting
as a collecting bank, has the right to debit the account of its client for a check deposit which was
dishonored by the drawee bank."6

(3) That the two debts be due;

(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor."12

The Courts Ruling

Nonetheless, the real issue here is not so much the right of petitioner to debit respondents account
but, rather, the manner in which it exercised such right. The Court has held that even while the right
of setoff is conceded, separate is the question of whether that remedy has properly been exercised.13

The Petition has no merit.

Sole Issue:

Debit of Depositors Account

Petitioner-bank contends that its rights and obligations under the present set of facts were
misappreciated by the CA. It insists that its right to debit the amount of the dishonored check from
the account of respondent is clear and unmistakable. Even assuming that it did not give him notice
that the check had been dishonored, such right remains immediately enforceable.
In particular, petitioner argues that the check deposit slip accomplished by respondent on September
17, 1990, expressly stipulated that the bank was obligating itself merely as the depositors collecting
agent and -- until such time as actual payment would be made to it -- it was reserving the right to
charge against the depositors account any amount previously credited. Respondent was allowed to
withdraw the amount of the check prior to clearing, merely as an act of accommodation, it added.
At the outset, we stress that the trial courts factual findings that were affirmed by the CA are not
subject to review by this Court.7 As petitioner itself takes no issue with those findings, we need only
to determine the legal consequence, based on the established facts.

Right of Setoff

The liability of petitioner in this case ultimately revolves around the issue of whether it properly
exercised its right of setoff. The determination thereof hinges, in turn, on the banks role and
obligations, first, as respondents depositary bank; and second, as collecting agent for the check in
question.

Obligation as
Depositary Bank
In BPI v. Casa Montessori,14 the Court has emphasized that the banking business is impressed with
public interest. "Consequently, the highest degree of diligence is expected, and high standards of
integrity and performance are even required of it. By the nature of its functions, a bank is under
obligation to treat the accounts of its depositors with meticulous care."15
Also affirming this long standing doctrine, Philippine Bank of Commerce v. Court of Appeals16 has
held that "the degree of diligence required of banks is more than that of a good father of a family
where the fiduciary nature of their relationship with their depositors is concerned."17 Indeed, the
banking business is vested with the trust and confidence of the public; hence the "appropriate
standard of diligence must be very high, if not the highest, degree of diligence."18 The standard
applies, regardless of whether the account consists of only a few hundred pesos or of millions.19

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The fiduciary nature of banking, previously imposed by case law,20 is now enshrined in Republic Act
No. 8791 or the General Banking Law of 2000. Section 2 of the law specifically says that the State
recognizes the "fiduciary nature of banking that requires high standards of integrity and
performance."
Did petitioner treat respondents account with the highest degree of care? From all indications, it did
not.
It is undisputed -- nay, even admitted -- that purportedly as an act of accommodation to a valued
client, petitioner allowed the withdrawal of the face value of the deposited check prior to its clearing.
That act certainly disregarded the clearance requirement of the banking system. Such a practice is
unusual, because a check is not legal tender or money;21 and its value can properly be transferred to
a depositors account only after the check has been cleared by the drawee bank.22
Under ordinary banking practice, after receiving a check deposit, a bank either immediately credit the
amount to a depositors account; or infuse value to that account only after the drawee bank shall
have paid such amount.23Before the check shall have been cleared for deposit, the collecting bank
can only "assume" at its own risk -- as herein petitioner did -- that the check would be cleared and
paid out.
Reasonable business practice and prudence, moreover, dictated that petitioner should not have
authorized the withdrawal by respondent of P240,000 on October 1, 1990, as this amount was over
and above his outstanding cleared balance of P196,793.45.24 Hence, the lower courts correctly
appreciated the evidence in his favor.

Obligation as
Collecting Agent
Indeed, the bank deposit slip expressed this reservation:
"In receiving items on deposit, this Bank obligates itself only as the Depositors Collecting
agent, assuming no responsibility beyond carefulness in selecting correspondents, and until
such time as actual payments shall have come to its possession, this Bank reserves the
right to charge back to the Depositors account any amounts previously credited whether or
not the deposited item is returned. x x x."25
However, this reservation is not enough to insulate the bank from any liability. In the past, we have
expressed doubt about the binding force of such conditions unilaterally imposed by a bank without
the consent of the depositor.26 It is indeed arguable that "in signing the deposit slip, the depositor
does so only to identify himself and not to agree to the conditions set forth at the back of the deposit
slip."27
Further, by the express terms of the stipulation, petitioner took upon itself certain obligations as
respondents agent, consonant with the well-settled rule that the relationship between the payee or
holder of a commercial paper and the collecting bank is that of principal and agent.28 Under Article
190929 of the Civil Code, such bank could be held liable not only for fraud, but also for negligence.

As a general rule, a bank is liable for the wrongful or tortuous acts and declarations of its officers or
agents within the course and scope of their employment.30 Due to the very nature of their business,
banks are expected to exercise the highest degree of diligence in the selection and supervision of
their employees.31 Jurisprudence has established that the lack of diligence of a servant is imputed to
the negligence of the employer, when the negligent or wrongful act of the former proximately results
in an injury to a third person;32 in this case, the depositor.
The manager of the banks Cabanatuan branch, Consorcia Santiago, categorically admitted that she
and the employees under her control had breached bank policies. They admittedly breached those
policies when, without clearance from the drawee bank in Baguio, they allowed respondent to
withdraw on October 1, 1990, the amount of the check deposited. Santiago testified that respondent
"was not officially informed about the debiting of theP101,000 from his existing balance of P170,000
on October 2, 1990 x x x."33
Being the branch manager, Santiago clearly acted within the scope of her authority in authorizing the
withdrawal and the subsequent debiting without notice. Accordingly, what remains to be determined
is whether her actions proximately caused respondents injury. Proximate cause is that which -- in a
natural and continuous sequence, unbroken by any efficient intervening cause --produces the injury,
and without which the result would not have occurred.34
Let us go back to the facts as they unfolded. It is undeniable that the banks premature authorization
of the withdrawal by respondent on October 1, 1990, triggered -- in rapid succession and in a natural
sequence -- the debiting of his account, the fall of his account balance to insufficient levels, and the
subsequent dishonor of his own checks for lack of funds. The CA correctly noted thus:
"x x x [T]he depositor x x x withdrew his money upon the advice by [petitioner] that his
money was already cleared. Without such advice, [respondent] would not have withdrawn
the sum of P240,000.00. Therefore, it cannot be denied that it was [petitioners] fault
which allowed [respondent] to withdraw a huge sum which he believed was already his.
"To emphasize, it is beyond cavil that [respondent] had sufficient funds for the check. Had
the P101,000.00 not [been] debited, the subject checks would not have been dishonored.
Hence, we can say that [respondents] injury arose from the dishonor of his well-funded
checks. x x x."35
Aggravating matters, petitioner failed to show that it had immediately and duly informed respondent
of the debiting of his account. Nonetheless, it argues that the giving of notice was discernible from
his act of depositingP50,000 on October 2, 1990, to augment his account and allow the debiting. This
argument deserves short shrift.

First, notice was proper and ought to be expected. By the bank managers account, respondent was
considered a "valued client" whose checks had always been sufficiently funded from 1987 to
1990,36 until the October imbroglio. Thus, he deserved nothing less than an official notice of the
precarious condition of his account.

Second, under the provisions of the Negotiable Instruments Law regarding the liability of a general

indorser37 and the procedure for a notice of dishonor,38 it was incumbent on the bank to give proper
notice to respondent. InGullas v. National Bank,39 the Court emphasized:

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"x x x [A] general indorser of a negotiable instrument engages that if the instrument the
check in this case is dishonored and the necessary proceedings for its dishonor are duly
taken, he will pay the amount thereof to the holder (Sec. 66) It has been held by a long
line of authorities that notice of dishonor is necessary to charge an indorser and that the
right of action against him does not accrue until the notice is given.
"x x x. The fact we believe is undeniable that prior to the mailing of notice of dishonor, and
without waiting for any action by Gullas, the bank made use of the money standing in his
account to make good for the treasury warrant. At this point recall that Gullas was merely

an indorser and had issued checks in good faith. As to a depositor who has funds sufficient
to meet payment of a check drawn by him in favor of a third party, it has been held that he
has a right of action against the bank for its refusal to pay such a check in the absence of
notice to him that the bank has applied the funds so deposited in extinguishment of past
due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203.)
However this may be, as to an indorser the situation is different, and notice should actually
have been given him in order that he might protect his interests."40

Compaia Maritima vs. Court of Appeals, No. L-50900, 135 SCRA 593 , April 09, 1985
G.R. No. L-50900 April 9, 1985
COMPAIA MARITIMA, petitioner,
vs.
COURT OF APPEALS and PAN ORIENTAL SHIPPING CO., respondents.
G.R. No. L-51438 April 9, 1985

Third, regarding the deposit of P50,000 made by respondent on October 2, 1990, we fully subscribe
to the CAs observations that it was not unusual for a well-reputed businessman like him, who
"ordinarily takes note of the amount of money he takes and releases," to immediately deposit money
in his current account to answer for the postdated checks he had issued.41

Damages
Inasmuch as petitioner does not contest the basis for the award of damages and attorneys fees, we
will no longer address these matters.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.

REPUBLIC OF THE PHILIPPINES (BOARD OF LlQUIDATORS), petitioner,

vs.
COURT OF APPEALS and PAN ORIENTAL SHIPPING CO., respondents.
G.R. No. L-51463 April 9, 1985
PAN ORIENTAL SHIPPING CO., petitioner,
vs.
COURT OF APPEALS, COMPAIA MARITIMA and THE REPUBLIC OF THE PHILIPPINES (BOARD OF
LIQUIDATORS), respondents.
Quisumbing, Caparas, Tobias, Alcantara y Mosqueda for Pan Oriental Shipping Co. Rafael Dinglasan
for Compania Maritima.

MELENCIO-HERRERA, J.:
The above-entitled three (3) cases stemmed from the Decision of this Court, dated October 31, 1964,
entitled "Fernando A. Froilan vs. Pan-Oriental Shipping Co., et al. 1 and our four (4) subsequent
Resolutions of August 27, 1965, November 23, 1966, December 16, 1966, and January 5, 1967,
respectively.
The antecedental background is narrated in the aforestated Decision, the pertinent portions of which
read:

On March 7, 1947, Fernando A. Froilan purchased from the Shipping Administration a boat described
as MV/FS-197 for the sum of P200,000.00, with a down payment of P50,000.00. To secure payment
of the unpaid balance of the purchase price, a mortgage was constituted on the vessel in favor of the
Shipping Administration ....

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xxx xxx xxx

Th(e) contract was duly approved by the President of the Philippines.
Froilan appeared to have defaulted in spite of demands, not only in the payment of the first
installment on the unpaid balance of the purchase price and the interest thereon when they fell due,
but also failed in his express undertaking to pay the premiums on the insurance coverage of the
vessel obliging the Shipping Administration to advance such payment to the insurance company. ...
Subsequently, FROILAN appeared to have still incurred a series of defaults notwithstanding
reconsiderations granted, so much so that:
On February 21, 1949, the General Manager (of the Shipping Administration) directed its officers ...
to take immediate possession of the vessel and to suspend the unloading of all cargoes on the same
until the owners thereof made the corresponding arrangement with the Shipping Administration.
Pursuant to these instructions, the boat was, not only actually repossessed, but the title thereto was
registered again in the name of the Shipping Administration, thereby re-transferring the ownership
thereof to the government.
On February 22, 1949, Pan Oriental Shipping Co., hereinafter referred to as Pan Oriental, offered to
charter said vessel FS-197 for a monthly rent of P3,000.00. Because the government was then
spending for the guarding of the boat and subsistence of the crew members since repossession, the
Slopping Administration on April 1, 1949, accepted Pan Oriental's offer "in principle" subject to the
condition that the latter shag cause the repair of the vessel advancing the cost of labor and
drydocking thereof, and the Shipping Administration to furnish the necessary spare parts. In
accordance with this charter contract, the vessel was delivered to the possession of Pan Oriental.
In the meantime, or on February 22, 1949, Froilan tried to explain his failure to comply with the
obligations he assumed and asked that he be given another extension up to March 15, 1949 to file
the necessary bond. Then on March 8, Froilan offered to pay all his overdue accounts. However, as
he failed to fulfill even these offers made by him in these two communications, the Shipping
Administration denied his petition for reconsideration (of the rescission of the contract) on March 22,
1949. It should be noted that while his petition for reconsideration was denied on March 22, it does
not appear when he formally formulated his appeal. In the meantime, as already stated, the boat has
been repossessed by the Shipping Administration and the title thereto re-registered in the name of
the government, and delivered to the Pan Oriental in virtue of the charter agreement. On June 2,
1949, Froilan protested to the President against the charter of the vessel.
xxx xxx xxx
On June 4, 1949, the Shipping Administration and the Pan Oriental formalized the charter agreement
and signed a bareboat contract with option to purchase, containing the following pertinent
provisions:
III. CHARTER HIRE, TIME OF PAYMENT. The CHARTERER shall pay to the owner a monthly
charter hire of THREE THOUSAND (P3,000.00) PESOS from date of delivery of the vessel, payable in
advance on or before the 5th of every current month until the return of the vessel to OWNER or
purchase of the vessel by CHARTERER.
IV. RIGHT OF OPTION TO PURCHASE. The right of option to purchase the vessel at the price of
P150,000.00 plus the amount expended for its present repairs is hereby granted to the CHARTERER
within 120 days from the execution of this Contract, unless otherwise extended by the OWNER. This

right shall be deemed exercised only if, before the expiration of the said period, or its extension by
the OWNER, the CHARTERER completes the payment, including any amount paid as Charter hire, of
a total sum of not less than twenty-five percentum (25%) of said price of the vessel.
The period of option may be extended by the OWNER without in any way affecting the other
provisions, stipulations, and terms of this contract.
If, for any reason whatsoever, the CHARTERER fails to exercise its option to purchase within the
period stipulated, or within the extension thereof by the OWNER, its right of option to purchase shall
be deemed terminated, without prejudice to the continuance of the Charter Party provisions of this
contract. The right to dispose of the vessel or terminate the Charter Party at its discretion is reserved
to the OWNER.
XIII. TRANSFER OF OWNERSHIP OF THE VESSEL. After the CHARTERER has exercised his right of
option as provided in the preceding paragraph (XII), the vessel shall be deemed conditionally sold to
the purchaser, but the ownership thereof shag not be deemed transferred unless and until all the
price of the vessel, together with the interest thereon, and any other obligation due and payable to
the OWNER under this contract, have been fully paid by the CHARTERER.
xxx xxx xxx
XXI. APPROVAL OF THE PRESIDENT. This contract shall take effect only upon approval of His
Excellency, the President.
On September 6, 1949, the Cabinet revoked the cancellation of Froilan's contract of sale and restored
to him all his rights thereunder, on condition that he would give not less than P1,000.00 to settle
partially as overdue accounts and that reimbursement of the expenses incurred for the repair and
drydocking of the vessel performed by Pan Oriental was to be made in accordance with future
adjustment between him and the Shipping Administration (Exh. I). Later, pursuant to this
reservation, Froilan's request to the Executive Secretary that the Administration advance the payment
of the expenses incurred by Pan Oriental in the drydocking and repair of the vessel, was granted on
condition that Froilan assume to pay the same and file a bond to cover said undertaking (EXH. III).
On September 7, 1949, the formal bareboat charter with option to purchase filed on June 4, 1949, in
favor of the Pan Oriental was returned to the General Manager of the Shipping Administration
without action (not disapproval), only because of the Cabinet resolution of September 6, 1949
restoring Froilan to his rights under the conditions set forth therein, namely, the payment of
P10,000.00 to settle partially his overdue accounts and the filing of a bond to guarantee the
reimbursement of the expenses incurred by the Pan Oriental in the drydocking and repair of the
vessel But Froilan again failed to comply with these conditions. And so the Cabinet, considering
Froilan's consistent failure to comply with his obligations, including those imposed in the resolution of
September 6, 1949, resolved to reconsider said previous resolution restoring him to his previous
rights. And, in a letter dated December 3, 1949, the Executive Secretary authorized the
Administration to continue its charter contract with Pan Oriental in respect to FS-197 and enforce
whatever rights it may still have under the original contract with Froilan (Exh. 188).
xxx xxx xxx
On August 25, 1950, the Cabinet resolved once more to restore Froilan to his rights under the
original contract of sale, on condition that he shall pay the sum of P10,000.00 upon delivery of the
vessel to him, said amount to be credited to his outstanding accounts; that he shall continue paying
the remaining installments due, and that he shall assume the expenses incurred for the repair and

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drydocking of the vessel (Exh. 134). Pan Oriental protested to this restoration of Froilan's rights
under the contract of sale, for the reason that when the vessel was delivered to it, the Shipping
Administration had authority to dispose of the said property, Froilan having already relinquished
whatever rights he may have thereon. Froilan paid the required cash of P10,000.00, and as Pan
Oriental refused to surrender possession of the vessel, he filed an action for replevin in the Court of
First Instance of Manila (Civil Case No. 13196) to recover possession thereof and to have him
declared the rightful owner of said property.
Upon plaintiff's filing a bond of P400,000.00, the court ordered the seizure of the vessel from Pan
Oriental and its delivery to the plaintiff. Pan Oriental tried to question the validity of this order in a
petition for certiorari filed in this Court (G.R. No. L-4577), but the same was dismissed for lack of
merit by resolution of February 22, 1951. Defendant accordingly filed an answer, denying the
averments of the complaint.
The Republic of the Philippines, having been allowed to intervene in the proceeding, also prayed for
the possession of the vessel in order that the chattel mortgage constituted thereon may be
foreclosed. Defendant Pari Oriental resisted said intervention, claiming to have a better right to the
possession of the vessel by reason of a valid and subsisting contract in its favor, and of its right of
retention, in view of the expenses it had incurred for the repair of the said vessel. As counterclaim,
defendant demanded of the intervenor to comply with the latter's obligation to deliver the vessel
pursuant to the provisions of the charter contract.
xxx xxx xxx
Subsequently, Compaia Maritima, as purchaser of the vessel from Froilan, was allowed to intervene
in the proceedings (in the lower court), said intervenor taking common cause with the plaintiff
Froilan. In its answer to the complaint in intervention, defendant set-up a counterclaim for damages
in the sum of P50,000.00, alleging that plaintiff secured the Cabinet resolutions and the writ of
replevin, resulting in its deprivation of possession of the vessel, at the instigation and inducement of
Compania Maritima. This counterclaim was denied by both plaintiff and intervenor Maritima.
On September 28, 1956, the lower court rendered a decision upholding Froilan's (and Compaia
Maritima's) right to the ownership and possession of the FS-197.
xxx xxx xxx
It is not disputed that appellant Pan Oriental took possession of the vessel in question after it had
been repossessed by the Shipping Administration and title thereto reacquired by the government,
and operated the same from June 2, 1949 after it had repaired the vessel until it was dispossessed of
the property on February 3, 1951, in virtue of a bareboat charter contract entered into between said
company and the Shipping Administration. In the same agreement, appellant as charterer, was given
the option to purchase the vessel, which may be exercised upon payment of a certain amount within
a specified period. The President and Treasurer of the appellant company, tendered the stipulated
initial payment on January 16, l950. Appellant now contends that having exercised the option, the
subsequent Cabinet resolutions restoring Froilan's rights on the vessel, violated its existing rights over
the same property. To the contention of plaintiff Froffan that the charter contract never became
effective because it never received presidential approval as required therein, Pan Oriental answers
that the letter of the Executive Secretary dated December 3, 1949 (Exh. 118), authorizing the
Shipping Administration to continue its charter contract with appellant, satisfies such requirement (of
presidential approval). It is to be noted, however, that said letter was signed by the Executive
Secretary only and not under authority of the President. The same, therefore, cannot be considered
to have attached unto the charter contract the required consent of the Chief Executive for its validity.

xxx xxx xxx

(Emphasis supplied)
This Court then held:
In the circumstances of this case, therefore, the resulting situation is that neither Froilan nor the Pan
Oriental holds a valid contract over the vessel. However, since the intervenor Shipping
Administration, representing the government practically ratified its proposed contract with Froilan by
receiving the full consideration of the sale to the latter, for which reason the complaint in intervention
was dismissed as to Froilan, and since Pan Oriental has no capacity to question this actuation of the
Shipping Administration because it had no valid contract in its favor, the of the lower court
adjudicating the vessel to Froilan and its successor Maritima, must be sus Nevertheless, under the
already adverted to, Pan Oriental cannot be considered as in bad faith until after the institution of the
case. However, since it is not disputed that said made useful and necessary expenses on the vessel,
appellant is entitled to the refund of such expenses with the light to retain the vessel until he has
been reimbursed therefor (Art. 546, Civil Code). As it is by the concerted acts of defendants and
intervenor Republic of the Philippines that appellant was deprived of the possession of the vessel
over which appellant had a lien for his expenses, appellees Froilan, Compaia Maritima, and the
Republic of the Philippines are declared liable for the reimbursement to appellant of its legitimate
expenses, as allowed by law, with legal interest from the time of disbursement.
Modified in this manner, the decision appealed from is affirmed, without costs. Case is remanded to
the lower court for further proceedings in the matter of expenses. So ordered. (Emphasis supplied).
On August 27, 1965, this Court, in resolving a Motion for Reconsideration filed by FROILAN and
MARITIMA, ruled:
In G.R. No. L-11897 (Fernando A. Froilan vs. Pan Oriental Shipping Co.); before us are (1) a motion,
filed by appellant Pan Oriental to reconsider the ruling made in this case sustaining Froilan's right to
ownership and possession of the vessel FS-197, and holding that there was never a perfected
contract between said movant and the intervenor Republic of the Philippines; and (2) a motion by
plaintiff-appellee Fernando A. Froilan, and intervenor-appellee Compaia Maritima, for
reconsideration of the decision insofar as it declared said movants, together with intervenor Republic
of the Philippines, liable for reimbursement to appellant Pan Oriental of the latter's legitimate
necessary expenses made on the vessel in question.
1. .Appellant Pan Oriental's Motion must be denied.
It may be remembered that in the instant case, the alleged approval of the charter contract or
permission to proceed with said contract was given by the Executive Secretary in his own name and
not under the authority of the President.
xxx xxx xxx
2. Anent, appellant's motion, considering that the writ of replevin, by virtue of which appellant Pan
Oriental was divested of possession of the vessel FS-197, was issued by the lower court on February
8, 1951 at the instance of plaintiff Froilan and with the cooperation of intervenor Republic of the
Philippines, which accepted the payment tendered by him (Froilan) notwithstanding its previous
dealings with Pan Oriental; and whereas, the intervenor Compaia Maritima acquired the same
property only on December 1, 1951, it is clear that only plaintiff Froilan and the intervenor Republic

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of the Philippines may be held responsible for the deprivation of defendant of its right to the
retention of the property until fully reimbursed of the necessary expenditure made on the vessel. For
this reason, Froilan and the Republic of the Philippines are declared jointly and severally liable, not
only for reimbursement to Pan Oriental of the legitimate necessary expenses incurred on the vessel
but also for payment of legal interest thereon, computed from the date of the defendant's
dispossession of the property. However, as defendant was in actual possession of the vessel from
April 1, 1949 to February 7, 1951, it must be required to pay reasonable rental for the use thereof, at
the rate of P3,000.00 a month the same rate specified as rental in the imperfected charter
contract which shall be deductible from whatever may be due and owing the said party by way of
reimbursable necessary expenses and interest. This rental shall commence from the time defendant
Pan Oriental actually operated the vessel, which date shall be determined by the lower court.

WHEREFORE, in view of the foregoing consideration, the Court orders the intervenor Compaia
(plaintiff Fernando A. Froilan's successor-in-interest) and intervenor Republic of the Philippines (Board
of Liquidators) jointly and severally to pay defendant Pan Oriental Shipping Company the sum of
P6,937.72 a month from the time 'it was dispossessed on February 3, 1951' until it is paid its useful
and necessary expenses; the sum of P40,797.54 actual amount expended for the repairs and
improvements prior to the operation of the vessel on June 1, 1949 with legal interest from the time
of disbursement of said legitimate expenses. The Court also orders the intervenor Republic of the
Philippines to return the sum of P15,000.00 tendered by defendant Pan Oriental Shipping Company
as provided in the option with legal interest from January 16, 1950, the date it was paid by the latter.

Case is remanded to the court of origin for further proceedings on the matter of necessary expenses,
interest and rental, as directed in our decision and this resolution. (Emphasis supplied).

The amount of P6,937.72 ordered to be paid monthly represented the lower Court's computation of
damages of PAN ORIENTAL for deprivation of the right to retain the vessel. 3

On November 23, 1966, acting on a second Motion for Reconsideration filed by PAN ORIENTAL, this
Court resolved:

On appeal by REPUBLIC and MARITIMA to the then Court of Appeals, judgment was promulgated
decreeing.

In case G.R. No. L-11817, Fernando A, Froilan, et al., appellees, vs. Pan Oriental Shipping Company,
appellant, the latter filed a .second motion for reconsideration, alleging that the Resolution of this
Court of August 27, 1965 denying its motion for reconsideration of December 16, 1964 is not in
accordance with law; and that the modification of the judgment following the ex-parte motion for
reconsideration of appellee Froilan is contrary to due process.

WHEREFORE, in the light of the foregoing pronouncements, the judgment appealed from is hereby
MODIFIED as follows:

Considering that foregoing motion as well as the opposition thereto by plaintiff-appellee and
intervenor-appellee Compaia Maritima, the Court RESOLVED to amend the ruling in this case by
holding intervenor-appellee Compaia Maritima, because of its actual knowledge of the circumstances
surrounding the purchase by Froilan of the vessel in question from the Shipping Administrator, jointly
and severally liable with the other appellees, for reimbursement to appellant of the necessary
expenses incurred and expended by the latter on the said vessel, minus the amount of rentals due
from the appellant for the use thereof for the period it was actually operated by Pan Oriental. The
period of actual operation shall not include the time when the vessel was drydocked.
On December 16,1966, acting on PAN ORIENTAL's Motion for Reconsideration or Application for
Damages on account of the wrongful issuance of the Writ of Replevin, this Court issued a Resolution
as follows:
Before us again in Case G.R. No. 11897 (Fernando A. Froilan vs. Pan Oriental Shipping Co. et al) is a
motion for reconsideration or Application for damages filed by respondent Pan Oriental Shipping Co.,
allegedly on account of the wrongful issuance of the writ of replevin, pursuant to Rule 60, Section 10,
in relation to Rule 57, Section 20 of the Revised Rules of Court. Considering that by virtue of our
resolution dated August 27, 1965, this case has been ordered to be remanded to the Court of origin
for further proceedings on the matter of necessary expenses, interest and rentals, and since evidence
would have to be presented if the application for damages is allowed, the Court resolved, first, to
deny the present motion for reconsideration and, second, to refer the application to the trial court,
there to be heard and decided as prescribed by law and the Rules. (See last sentence, Section 20,
Rule 57).
Pursuant thereto, the case was remanded to the Court of First Instance of Manila, Branch VI (Civil
Case No. 13196). After the evidence of the parties was received and assessed by a Commissioner,
said Court issued an Order, dated June 4, 1975, the dispositive portion of which reads:

SO ORDERED. 2

Ordering intervenors-appellants Republic and Compaia Maritima, jointly and severally, to pay
appellee Pan Oriental Shipping Company the sum of P40,797.54 with legal interest from February 3,
1951 until fully paid but there shah be deducted therefrom the amount of P59,500.00 representing
the unpaid rentals due the Republic of the Philippines; and AFFIRMED in all other respects.
In other words, (a) the date from which interest is to be paid on the amount of P40,797.54 is from
February 3, 1951, the date of dispossession, and not from the time of disbursement and (b) the
unpaid rentals due the Republic are deductible from the amount of expenses payable to PANORIENTAL. It should be recalled that the deduction of rentals from the amount payable to PANORIENTAL by REPUBLIC was pursuant to this Court's Resolutions of August 27, 1965 and November
23, 1966, supra,
From the foregoing Decision, the parties filed their respective Petitions for Review now before us.
For clarity, the sums ordered to be paid by MARITIMA and the REPUBLIC, jointly and severally, to
PAN-ORIENTAL are: (a) the sum of P6,937.72 a month from February 3, 1951, the date of PANORIENTAL's dispossession, in the concept of damages for the deprivation of its right to retain the
vessel, it until it is paid its useful and necessary expenses"; 4 (b) the sum of P15,000.00,
representing PAN-ORIENTAL's deposit with REPUBLIC for the purchase of the vessel, "with legal
interest from January 16, 1950," the date PAN-ORIENTAL had paid the same; 5 and (c) the sum of
P40,797.54 representing the expenses for repairs incurred by PAN-ORIENTAL, "with legal interest
from February 3, 1951 until fully paid," minus the amount of P59,500.00 representing the unpaid
rentals due the REPUBLIC 6 The legal rate of interest is made payable only on the last two amounts
(b) and (c).
REPUBLIC attributes the following errors to the Appellate Court: (1) in not holding that compensation
by operation of law took place as between REPUBLIC and PAN-ORIENTAL as of the date of
dispossession; (2) in not holding that the obligation of the REPUBLIC to pay legal interest on the
amount of useful and necessary expenses from February 3, 1951 had become stale and ineffective;
(3) in affirming the Order of the Trial Court that MARITIMA and REPUBLIC, jointly and severally, pay
to PAN-ORIENTAL the sum of P6,937.72 a month from the time it was dispossessed of the vessel on

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February 3, 1951 until it is paid its useful and necessary expenses; and (4) in not holding that the
Trial Court had no jurisdiction to order the return of P15,000.00 to PAN-ORIENTAL. MARITIMA, for its
part, aside from assailing the sums it was ordered to pay PAN-ORIENTAL, jointly and severally, with
REPUBLIC, echoed the theory of compensation and added that the question of damages on account
of alleged wrongful replevin was not a proper subject of inquiry by the Trial Court when it determined
the matter of necessary expenses, interest and rentals.
REPUBLIC's Submissions
1) REPUBLIC maintains that compensation or set-off took place between it and PAN-ORIENTAL as of
February 3, 1951, the date the latter was dispossessed of the vessel For compensation to take place,
one of the elements necessary is that the debts be liquidated. 7 In this case, all the elements for
Compensation to take place were not present on the date of dispossession, or on February 3, 1951.
The amount expended for repairs and improvements had yet to be determined by the Trial Court
pursuant to the Decision of this Court promulgated on October 31, 1964. At the time of dispossession
also, PAN-ORIENTAL was still insisting on its right to purchase the vessel. The obligation of REPUBLIC
to reimburse PAN-ORIENTAL for expenses arose only after this Court had so ruled. Rentals for the
use of the vessel by PAN- ORIENTAL were neither due and demandable at the time of dispossession
but only after this Court had issued its Resolution of August 27, 1965.
More, the legal interest payable from February 3, 1951 on the sum of P40,797.54, representing
useful expenses incurred by PAN-ORIENTAL, is also still unliquidated 8 since interest does not stop
accruing "until the expenses are fully paid." 9 Thus, we find without basis REPUBLIC's allegation that
PAN- ORIENTAL's claim in the amount of P40,797.54 was extinguished by compensation since the
rentals payable by PAN-ORIENTAL amount to P59,500.00 while the expenses reach only P40,797.54.
Deducting the latter amount from the former, REPUBLIC claims that P18,702.46 would still be owing
by PAN-ORIENTAL to REPUBLIC. That argument loses sight of the fact that to the sum of P40,797.54
will still have to be added the legal rate of interest "from February 3, 1951 until fully paid."
But although compensation by operation of law cannot take place as between REPUBLIC and PANORIENTAL, by specific pronouncement of this Court in its Resolution of November 23, 1966, supra,
the rentals payable by PAN-ORIENTAL in the amount of P59,500.00 should be deducted from the
sum of useful expenses plus legal interest due, assuming that the latter amount would still be
greater. Otherwise, the corresponding adjustments can be made depending on the totality of the
respective amounts.
2) Since we are holding that the obligation of REPUBLIC to pay P40,797.54 to PAN-ORIENTAL was
not extinguished by compensation, the obligation of REPUBLIC to pay legal interest on said amount
has neither become stale as REPUBLIC contends. Of special note is the fact that payment of that
interest was the specific ruling of this Court in its Resolution of August 27, 1965, thus:

It should further be recalled that this Court, in acting on PAN- ORIENTAL's application for damages in
its Resolution of December 16, 1966, supra, did not deny the same but referred it instead to the Trial
Court "there to be heard and decided" since evidence would have to be presented. Moreover, this
Court found that PAN-ORIENTAL was "deprived of the possession of the vessel over which (it) had a
lien for these expenses" 10 and that FROILAN and REPUBLIC "may be held responsible for the
deprivation of defendant (PANORIENTAL) of its right to retention of the property until fully
reimbursed on the necessary expenditures made on the vessel. " 11
4) There return of Pl5,000.00 ordered by the Trial Court and affirmed by the Appellate Court was but
just and proper. As this Court found, that sum was tendered to REPUBLIC "which together with its
(PAN-ORIENTAL's) alleged expenses already made on the vessel, cover 25% of the cost of the
vessel, as provided in the option granted in the bareboat contract (Exhibit "C"). This amount was
accepted by the Administration as deposit ...." Since the purchase did not eventually materialize for
reasons attributable to REPUBLIC, it is but just that the deposit be returned. 12 It is futile to allege
that PAN-ORIENTAL did not plead for the return of that amount since its prayer included other reliefs
as may be just under the premises. Courts may issue such orders of restitution as justice and equity
may warrant.
MARITIMA's Position
We find no merit in MARITIMA's contention that the alleged damages on account of wrongful replevin
was barred by res judicata, and that the application for damages before the lower Court was but a
mere adoption of a different method of presenting claims already litigated. For the records show that
an application for damages for wrongful replevin was filed both before this Court and thereafter
before the Trial Court after this Tribunal specifically remanded the issue of those damages to the
Trial Court there to be heard and decided pursuant to Rule 60, Section 10 in relation to Rule 57,
Section 20. 13
The matter of legal compensation which MARITIMA has also raised has been previously discussed.
Parenthetically, PAN-ORIENTAL can no longer raise the alleged error of the Trial Court in computing
the necessary and useful expenses at only P40,797.54 when they should be P87,267.30, since it did
not appeal from that Court's Decision.
In a nutshell, we find that the appealed Decision of the Trial Court and of the then Court of Appeals
is in consonance with the Decision and Resolutions of this Court.
ACCORDINGLY, the judgment appealed from is hereby affirmed. No costs.
SO ORDERED.

... For this reason, Froilan and the REPUBLIC of the Philippines are declared jointly and severally
liable, not only for reimbursement to Pan Oriental, of the legitimate necessary expenses incurred on
the vessel, but also for payment of legal interest thereon, computed from the date of the defendant's
dispossession of the property ... .
3) The amount of P6,937.72 a month ordered to be paid by REPUBLIC and MARITIMA to PANORIENTAL until the latter is paid its useful and necessary expenses is likewise in order. That amount
represents the damages for the wrongful issuance of the Writ of Replevin and was computed as
follows: P4,132.77 for loss of income by PAN-ORIENTAL plus P2,804.95 as monthly depreciation of
the vessel in lieu of the charter hire.

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