Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE
COMPANY, INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.

VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not
a claim for damage sustained on a shipment of goods can be a
solidary, or joint and several, liability of the common carrier, the
arrastre operator and the customs broker; (b) whether the
payment of legal interest on an award for loss or damage is to
be computed from the time the complaint is filed or from the
date the decision appealed from is rendered; and (c) whether
the applicable rate of interest, referred to above, is twelve
percent (12%) or six percent (6%).

The findings of the court a quo, adopted by the Court of

Appeals, on the antecedent and undisputed facts that have led
to the controversy are hereunder reproduced:
This is an action against defendants shipping
company, arrastre operator and broker-forwarder
for damages sustained by a shipment while in
defendants' custody, filed by the insurersubrogee who paid the consignee the value of
such losses/damages.
On December 4, 1981, two fiber drums of
riboflavin were shipped from Yokohama, Japan for
delivery vessel "SS EASTERN COMET" owned by
defendant Eastern Shipping Lines under Bill of
Lading
No. YMA-8 (Exh. B). The shipment was insured
under plaintiff's Marine Insurance Policy No.
81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on
December 12, 1981, it was discharged unto the
custody of defendant Metro Port Service, Inc. The
latter excepted to one drum, said to be in bad
order, which damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage
Corporation received the shipment from
defendant Metro Port Service, Inc., one drum
opened and without seal (per "Request for Bad
Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied
Brokerage Corporation made deliveries of the

shipment to the consignee's warehouse. The

latter excepted to one drum which contained
spillages, while the rest of the contents was
adulterated/fake (per "Bad Order Waybill" No.
10649, Exh. E).
Plaintiff contended that due to the losses/damage
sustained by said drum, the consignee suffered
losses totaling P19,032.95, due to the fault and
negligence of defendants. Claims were presented
against defendants who failed and refused to pay
the same (Exhs. H, I, J, K, L).

Metroport averred that although subject shipment

was discharged unto its custody, portion of the
same was already in bad order (p. 11, Record);
Allied Brokerage alleged that plaintiff has no
cause of action against it, not having negligent or
at fault for the shipment was already in damage
and bad order condition when received by it, but
nonetheless, it still exercised extra ordinary care
and diligence in the handling/delivery of the
cargo to consignee in the same condition
shipment was received by it.
From the evidence the court found the following:

As a consequence of the losses sustained,

plaintiff was compelled to pay the consignee
P19,032.95 under the aforestated marine
insurance policy, so that it became subrogated to
all the rights of action of said consignee against
defendants (per "Form of Subrogation", "Release"
and Philbanking check, Exhs. M, N, and O). (pp.
85-86, Rollo.)
There were, to be sure, other factual issues that confronted
both courts. Here, the appellate court said:
Defendants filed their respective answers,
traversing the material allegations of the
complaint contending that: As for defendant
Eastern Shipping it alleged that the shipment was
discharged in good order from the vessel unto the
custody of Metro Port Service so that any
damage/losses incurred after the shipment was
incurred after the shipment was turned over to
the latter, is no longer its liability (p. 17, Record);

The issues are:

1. Whether or not the shipment
sustained losses/damages;
2. Whether or not these
losses/damages were sustained
while in the custody of defendants
(in whose respective custody, if
determinable);
3. Whether or not defendant(s)
should be held liable for the
losses/damages (see plaintiff's preTrial Brief, Records, p. 34; Allied's
pre-Trial Brief, adopting plaintiff's
Records, p. 38).
As to the first issue, there can be
no doubt that the shipment

sustained losses/damages. The two

drums were shipped in good order
and condition, as clearly shown by
the Bill of Lading and Commercial
Invoice which do not indicate any
damages drum that was shipped
(Exhs. B and C). But when on
December 12, 1981 the shipment
was delivered to defendant Metro
Port Service, Inc., it excepted to
one drum in bad order.
Correspondingly, as to the second
issue, it follows that the
losses/damages were sustained
while in the respective and/or
successive custody and possession
of defendants carrier (Eastern),
arrastre operator (Metro Port) and
broker (Allied Brokerage). This
becomes evident when the Marine
Cargo Survey Report (Exh. G), with
its "Additional Survey Notes", are
considered. In the latter notes, it is
stated that when the shipment was
"landed on vessel" to dock of Pier
# 15, South Harbor, Manila on
December 12, 1981, it was
observed that "one (1) fiber drum
(was) in damaged condition,
covered by the vessel's Agent's
Bad Order Tally Sheet No. 86427."
The report further states that when
defendant Allied Brokerage
withdrew the shipment from

defendant arrastre operator's

custody on January 7, 1982, one
drum was found opened without
seal, cello bag partly torn but
contents intact. Net unrecovered
spillages was
15 kgs. The report went on to state
that when the drums reached the
consignee, one drum was found
with adulterated/faked contents. It
is obvious, therefore, that these
losses/damages occurred before
the shipment reached the
consignee while under the
successive custodies of
defendants. Under Art. 1737 of the
New Civil Code, the common
carrier's duty to observe
extraordinary diligence in the
vigilance of goods remains in full
force and effect even if the goods
are temporarily unloaded and
stored in transit in the warehouse
of the carrier at the place of
destination, until the consignee has
been advised and has had
reasonable opportunity to remove
or dispose of the goods (Art. 1738,
NCC). Defendant Eastern
Shipping's own exhibit, the "TurnOver Survey of Bad Order Cargoes"
(Exhs. 3-Eastern) states that on
December 12, 1981 one drum was
found "open".

and thus held:

WHEREFORE, PREMISES
CONSIDERED, judgment is hereby
rendered:
A. Ordering defendants to pay plaintiff, jointly and
severally:

crossclaim of
defendant/crossclaimant Allied
Brokerage
Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.

1. The amount of P19,032.95, with

the present legal interest of
12% per annum from October 1,
1982, the date of filing of this
complaints, until fully paid (the
liability of defendant Eastern
Shipping, Inc. shall not exceed
US$500 per case or the CIF value
of the loss, whichever is lesser,
while the liability of defendant
Metro Port Service, Inc. shall be to
the extent of the actual invoice
value of each package, crate box or
container in no case to exceed
P5,000.00 each, pursuant to
Section 6.01 of the Management
Contract);
2. P3,000.00 as attorney's fees,
and
3. Costs.
B. Dismissing the
counterclaims and

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record.
We find that the conclusion drawn therefrom is
correct. As there is sufficient evidence that the
shipment sustained damage while in the
successive possession of appellants, and
therefore they are liable to the appellee, as
subrogee for the amount it paid to the consignee.
(pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the
court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common
carrier, attributes error and grave abuse of discretion on the
part of the appellate court when
I. IT HELD PETITIONER CARRIER JOINTLY AND
SEVERALLY LIABLE WITH THE ARRASTRE
OPERATOR AND CUSTOMS BROKER FOR THE
CLAIM OF PRIVATE RESPONDENT AS GRANTED IN
THE QUESTIONED DECISION;

II. IT HELD THAT THE GRANT OF INTEREST ON THE

CLAIM OF PRIVATE RESPONDENT SHOULD
COMMENCE FROM THE DATE OF THE FILING OF
THE COMPLAINT AT THE RATE OF TWELVE
PERCENT PER ANNUM INSTEAD OF FROM THE
DATE OF THE DECISION OF THE TRIAL COURT
AND ONLY AT THE RATE OF SIX PERCENT PER
ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions
raised by petitioner carrier are not all that novel. Indeed, we do
have a fairly good number of previous decisions this Court can
merely tack to.
The common carrier's duty to observe the requisite diligence in
the shipment of goods lasts from the time the articles are
surrendered to or unconditionally placed in the possession of,
and received by, the carrier for transportation until delivered to,
or until the lapse of a reasonable time for their acceptance by,
the person entitled to receive them (Arts. 1736-1738, Civil
Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs.
Dollar Steamship Lines, 52 Phil. 863). When the goods shipped
either are lost or arrive in damaged condition, a presumption
arises against the carrier of its failure to observe that diligence,
and there need not be an express finding of negligence to hold
it liable (Art. 1735, Civil Code; Philippine National Railways vs.
Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of
Appeals, 131 SCRA 365). There are, of course, exceptional cases
when such presumption of fault is not observed but these
cases, enumerated in Article 1734 1 of the Civil Code, are
exclusive, not one of which can be applied to this case.

The question of charging both the carrier and the arrastre

operator with the obligation of properly delivering the goods to
the consignee has, too, been passed upon by the Court.
In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA
455), we have explained, in holding the carrier and the arrastre
operator liable in solidum,thus:
The legal relationship between the consignee and
the arrastre operator is akin to that of a depositor
and warehouseman (Lua Kian v. Manila Railroad
Co., 19 SCRA 5 [1967]. The relationship between
the consignee and the common carrier is similar
to that of the consignee and the arrastre operator
(Northern Motors, Inc. v. Prince Line, et al., 107
Phil. 253 [1960]). Since it is the duty of the
ARRASTRE to take good care of the goods that
are in its custody and to deliver them in good
condition to the consignee, such responsibility
also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore
charged with the obligation to deliver the goods
in good condition to the consignee.
We do not, of course, imply by the above pronouncement that
the arrastre operator and the customs broker are themselves
always and necessarily liable solidarily with the carrier, or viceversa, nor that attendant facts in a given case may not vary the
rule. The instant petition has been brought solely by Eastern
Shipping Lines, which, being the carrier and not having been
able to rebut the presumption of fault, is, in any event, to be
held liable in this particular case. A factual finding of both the
court a quo and the appellate court, we take note, is that "there
is sufficient evidence that the shipment sustained damage while
in the successive possession of appellants" (the herein
petitioner among them). Accordingly, the liability imposed on

Eastern Shipping Lines, Inc., the sole petitioner in this case, is

inevitable regardless of whether there are others solidarily liable
with it.
It is over the issue of legal interest adjudged by the appellate
court that deserves more than just a passing remark.
Let us first see a chronological recitation of the major rulings of
this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a suit
for recovery of money arising out of short deliveries and
pilferage of goods. In this case, appellee Malayan Insurance (the
plaintiff in the lower court) averred in its complaint that the
total amount of its claim for the value of the undelivered goods
amounted to P3,947.20. This demand, however, was neither
established in its totality nor definitely ascertained. In the
stipulation of facts later entered into by the parties, in lieu of
proof, the amount of P1,447.51 was agreed upon. The trial court
rendered judgment ordering the appellants (defendants) Manila
Port Service and Manila Railroad Company to pay appellee
Malayan Insurance the sum of P1,447.51 with legal interest
thereon from the date the complaint was filed on 28 December
1962 until full payment thereof. The appellants then
assailed,inter alia, the award of legal interest. In sustaining the
appellants, this Court ruled:

But then upon the provisions of Article 2213 of

the Civil Code, interest "cannot be recovered
upon unliquidated claims or damages, except
when the demand can be established with
reasonable certainty." And as was held by this
Court in Rivera vs. Perez, 4 L-6998, February 29,
1956, if the suit were for damages, "unliquidated
and not known until definitely ascertained,
assessed and determined by the courts after
proof (Montilla c. Corporacion de P.P. Agustinos,
25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the
date of the decision." (Emphasis supplied)
The case of Reformina vs. Tomol, 5 rendered on 11 October
1985, was for "Recovery of Damages for Injury to Person and
Loss of Property." After trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in
favor of the plaintiffs and third party defendants
and against the defendants and third party
plaintiffs as follows:
Ordering defendants and third party plaintiffs
Shell and Michael, Incorporated to pay jointly and
severally the following persons:
xxx xxx xxx

Interest upon an obligation which calls for the

payment of money, absent a stipulation, is the
legal rate. Such interest normally is allowable
from the date of demand, judicial or extrajudicial.
The trial court opted for judicial demand as the
starting point.

(g) Plaintiffs Pacita F. Reformina and Francisco

Reformina the sum of P131,084.00 which is the
value of the boat F B Pacita III together with its
accessories, fishing gear and equipment minus
P80,000.00 which is the value of the insurance

recovered and the amount of P10,000.00 a month

as the estimated monthly loss suffered by them
as a result of the fire of May 6, 1969 up to the
time they are actually paid or already the total
sum of P370,000.00 as of June 4, 1972 with legal
interest from the filing of the complaint until
paid and to pay attorney's fees of P5,000.00 with
costs against defendants and third party
plaintiffs. (Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified
the amount of damages awarded but sustained the trial
court in adjudging legal interest from the filing of the
complaint until fully paid. When the appellate court's
decision became final, the case was remanded to the
lower court for execution, and this was when the trial
court issued its assailed resolution which applied the 6%
interest per annum prescribed in Article 2209 of the Civil
Code. In their petition for review on certiorari, the
petitioners contended that Central Bank Circular
No. 416, providing thus
By virtue of the authority granted to it under
Section 1 of Act 2655, as amended, Monetary
Board in its Resolution No. 1622 dated July 29,
1974, has prescribed that the rate of interest for
the loan, or forbearance of any money, goods, or
credits and the rate allowed in judgments, in the
absence of express contract as to such rate of
interest, shall be twelve (12%) percent per
annum. This Circular shall take effect
immediately. (Emphasis found in the text)
should have, instead, been applied. This Court 6 ruled:

The judgments spoken of and referred to are

judgments in litigations involving loans or
forbearance of any money, goods or credits. Any
other kind of monetary judgment which has
nothing to do with, nor involving loans or
forbearance of any money, goods or credits does
not fall within the coverage of the said law for it is
not within the ambit of the authority granted to
the Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein
sought to be executed is one rendered in an
Action for Damages for injury to persons and loss
of property and does not involve any loan, much
less forbearances of any money, goods or credits.
As correctly argued by the private respondents,
the law applicable to the said case is Article 2209
of the New Civil Code which reads
Art. 2209. If the obligation
consists in the payment of a sum of
money, and the debtor incurs in
delay, the indemnity for damages,
there being no stipulation to the
contrary, shall be the payment of
interest agreed upon, and in the
absence of stipulation, the legal
interest which is six percent per
annum.
The above rule was reiterated in Philippine Rabbit Bus Lines,
Inc., v. Cruz, 7 promulgated on 28 July 1986. The case was for

damages occasioned by an injury to person and loss of property.

The trial court awarded private respondent Pedro Manabat
actual and compensatory damages in the amount of P72,500.00
with legal interest thereon from the filing of the complaint until
fully paid. Relying on the Reformina v. Tomol case, this
Court 8 modified the interest award from 12% to 6% interest per
annum but sustained the time computation thereof, i.e., from
the filing of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an
action for the recovery of damages arising from the collapse of
a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of
the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68
with interest at the legal rate from November 29, 1968, the
date of the filing of the complaint until full payment . . . ." Save
from the modification of the amount granted by the lower court,
the Court of Appeals sustained the trial court's decision. When
taken to this Court for review, the case, on 03 October 1986,
was decided, thus:
WHEREFORE, the decision appealed from is
hereby MODIFIED and considering the special and
environmental circumstances of this case, we
deem it reasonable to render a decision imposing,
as We do hereby impose, upon the defendant and
the third-party defendants (with the exception of
Roman Ozaeta) a solidary (Art. 1723, Civil
Code, Supra.
p. 10) indemnity in favor of the Philippine Bar
Association of FIVE MILLION (P5,000,000.00)
Pesos to cover all damages (with the exception to
attorney's fees) occasioned by the loss of the
building (including interest charges and lost

rentals) and an additional ONE HUNDRED

THOUSAND (P100,000.00) Pesos as and for
attorney's fees, the total sum being payable upon
the finality of this decision. Upon failure to pay on
such finality, twelve (12%) per cent interest per
annum shall be imposed upon aforementioned
amounts from finality until paid. Solidary costs
against the defendant and third-party defendants
(Except Roman Ozaeta). (Emphasis supplied)
A motion for reconsideration was filed by United
Construction, contending that "the interest of twelve
(12%) per cent per annum imposed on the total amount
of the monetary award was in contravention of law." The
Court 10 ruled out the applicability of the Reformina and
Philippine Rabbit Bus Lines cases and, in its resolution of
15 April 1988, it explained:
There should be no dispute that the imposition of
12% interest pursuant to Central Bank Circular
No. 416 . . . is applicable only in the following: (1)
loans; (2) forbearance of any money, goods or
credit; and
(3) rate allowed in judgments (judgments spoken
of refer to judgments involving loans or
forbearance of any money, goods or credits.
(Philippine Rabbit Bus Lines Inc. v. Cruz, 143
SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139
SCRA 260 [1985]). It is true that in the instant
case, there is neither a loan or a forbearance, but
then no interest is actually imposed provided the
sums referred to in the judgment are paid upon
the finality of the judgment. It is delay in the
payment of such final judgment, that will cause
the imposition of the interest.

It will be noted that in the cases already adverted

to, the rate of interest is imposed on the total
sum, from the filing of the complaint until paid; in
other words, as part of the judgment for
damages. Clearly, they are not applicable to the
instant case. (Emphasis supplied.)
The subsequent case of American Express International, Inc.,
vs. Intermediate Appellate Court 11 was a petition for review
on certiorari from the decision, dated 27 February 1985, of the
then Intermediate Appellate Court reducing the amount of
moral and exemplary damages awarded by the trial court, to
P240,000.00 and P100,000.00, respectively, and its resolution,
dated 29 April 1985, restoring the amount of damages awarded
by the trial court, i.e., P2,000,000.00 as moral damages and
P400,000.00 as exemplary damages with interest thereon at
12% per annum from notice of judgment, plus costs of suit. In a
decision of 09 November 1988, this Court, while recognizing the
right of the private respondent to recover damages, held the
award, however, for moral damages by the trial court, later
sustained by the IAC, to be inconceivably large. The
Court 12 thus set aside the decision of the appellate court and
rendered a new one, "ordering the petitioner to pay private
respondent the sum of One Hundred Thousand (P100,000.00)
Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of
this decision until paid. (Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case
of Florendo v. Ruiz 13 which arose from a breach of employment
contract. For having been illegally dismissed, the petitioner was
awarded by the trial court moral and exemplary damages
without, however, providing any legal interest thereon. When
the decision was appealed to the Court of Appeals, the latter
held:

WHEREFORE, except as modified hereinabove the

decision of the CFI of Negros Oriental dated
October 31, 1972 is affirmed in all respects, with
the modification that defendants-appellants,
except defendant-appellant Merton Munn, are
ordered to pay, jointly and severally, the amounts
stated in the dispositive portion of the decision,
including the sum of P1,400.00 in concept of
compensatory damages, with interest at the legal
rate from the date of the filing of the complaint
until fully paid(Emphasis supplied.)
The petition for review to this Court was denied. The
records were thereupon transmitted to the trial court,
and an entry of judgment was made. The writ of
execution issued by the trial court directed that only
compensatory damages should earn interest at 6% per
annum from the date of the filing of the complaint.
Ascribing grave abuse of discretion on the part of the
trial judge, a petition for certiorari assailed the said
order. This Court said:
. . . , it is to be noted that the Court of Appeals
ordered the payment of interest "at the legal
rate"from the time of the filing of the
complaint. . . Said circular [Central Bank Circular
No. 416] does not apply to actions based on a
breach of employment contract like the case at
bar. (Emphasis supplied)
The Court reiterated that the 6% interest per annum on
the damages should be computed from the time the
complaint was filed until the amount is fully paid.

Quite recently, the Court had another occasion to rule on the

matter. National Power Corporation vs. Angas, 14decided on 08
May 1992, involved the expropriation of certain parcels of land.
After conducting a hearing on the complaints for eminent
domain, the trial court ordered the petitioner to pay the private
respondents certain sums of money as just compensation for
their lands so expropriated "with legal interest thereon . . . until
fully paid." Again, in applying the 6% legal interest per
annum under the Civil Code, the Court 15 declared:
. . . , (T)he transaction involved is clearly not a
loan or forbearance of money, goods or credits
but expropriation of certain parcels of land for a
public purpose, the payment of which is without
stipulation regarding interest, and the interest
adjudged by the trial court is in the nature of
indemnity for damages. The legal interest
required to be paid on the amount of just
compensation for the properties expropriated is
manifestly in the form of indemnity for damages
for the delay in the payment thereof. Therefore,
since the kind of interest involved in the joint
judgment of the lower court sought to be
enforced in this case is interest by way of
damages, and not by way of earnings from loans,
etc. Art. 2209 of the Civil Code shall apply.
Concededly, there have been seeming variances in the above
holdings. The cases can perhaps be classified into two groups
according to the similarity of the issues involved and the
corresponding rulings rendered by the court. The "first group"
would consist of the cases of Reformina v. Tomol (1985),
Philippine Rabbit Bus Lines v. Cruz(1986), Florendo
v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second

group" would be Malayan Insurance Company v.Manila Port

Service (1969), Nakpil and Sons v. Court of
Appeals (1988), and American Express International
v.Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of
either the 6% (under the Civil Code) or 12% (under the Central
Bank Circular) interest per annum. It is easily discernible in
these cases that there has been a consistent holding that the
Central Bank Circular imposing the 12% interest per
annum applies only to loans or forbearance 16 of money, goods
or credits, as well as to judgments involving such loan or
forbearance of money, goods or credits, and that the 6%
interest under the Civil Code governs when the transaction
involves the payment of indemnities in the concept of damage
arising from the breach or a delay in the performance of
obligations in general. Observe, too, that in these cases, a
common time frame in the computation of the 6% interest per
annum has been applied, i.e., from the time the complaint is
filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the
application of the 6% or 12% interest per annum, 17depending
on whether or not the amount involved is a loan or forbearance,
on the one hand, or one of indemnity for damage, on the other
hand. Unlike, however, the "first group" which remained
consistent in holding that the running of the legal interest
should be from the time of the filing of the complaint until fully
paid, the "second group" varied on the commencement of the
running of the legal interest.
Malayan held that the amount awarded should bear legal
interest from the date of the decision of the court a
quo,explaining that "if the suit were for damages, 'unliquidated
and not known until definitely ascertained, assessed and

determined by the courts after proof,' then, interest 'should be

from the date of the decision.'" American Express International
v. IAC, introduced a different time frame for reckoning the 6%
interest by ordering it to be "computed from the finality of (the)
decision until paid." The Nakpil and Sons case ruled that 12%
interest per annum should be imposed from the finality of the
decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual
circumstances may have called for different applications,
guided by the rule that the courts are vested with discretion,
depending on the equities of each case, on the award of
interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of
thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts 18 is breached,
the contravenor can be held liable for damages. 19 The
provisions under Title XVIII on "Damages" of the Civil Code
govern in determining the measure of recoverable damages. 20
II. With regard particularly to an award of interest in the concept
of actual and compensatory damages, the rate of interest, as
well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. 21 Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. 22 In
the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or

extrajudicial demand under and subject to the provisions of

Article 1169 23 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court 24 at the
rate of 6% per annum. 25 No interest, however, shall be
adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable
certainty. 26 Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a
forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed
decision is AFFIRMED with the MODIFICATION that the legal
interest to be paid is SIX PERCENT (6%) on the amount due
computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%)
interest, in lieu of SIX PERCENT (6%), shall be imposed on such
amount upon finality of this decision until the payment thereof.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
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.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the
Court of Appeals dated June 25, 1991 in CA-G.R. CV No. 11791
and of its Resolution2 dated May 5, 1994, denying the motion
for reconsideration of said decision filed by petitioner Producers
Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked
by his neighbor and friend Angeles Sanchez to help her friend
and townmate, Col. Arturo Doronilla, in incorporating his
business, the Sterela Marketing and Services ("Sterela" for
brevity). Specifically, Sanchez asked private respondent to
deposit in a bank a certain amount of money in the bank
account of Sterela for purposes of its incorporation. She assured
private respondent that he could withdraw his money from said
account within a months time. Private respondent asked

Sanchez to bring Doronilla to their house so that they could

discuss Sanchezs request.3
On May 9, 1979, private respondent, Sanchez, Doronilla and a
certain Estrella Dumagpi, Doronillas private secretary, met and
discussed the matter. Thereafter, relying on the assurances and
representations of Sanchez and Doronilla, private respondent
issued a check in the amount of Two Hundred Thousand Pesos
(P200,000.00) in favor of Sterela. Private respondent instructed
his wife, Mrs. Inocencia Vives, to accompany Doronilla and
Sanchez in opening a savings account in the name of Sterela in
the Buendia, Makati branch of Producers Bank of the
Philippines. However, only Sanchez, Mrs. Vives and Dumagpi
went to the bank to deposit the check. They had with them an
authorization letter from Doronilla authorizing Sanchez and her
companions, "in coordination with Mr. Rufo Atienza," to open an
account for Sterela Marketing Services in the amount
of P200,000.00. In opening the account, the authorized
signatories were Inocencia Vives and/or Angeles Sanchez. A
passbook for Savings Account No. 10-1567 was thereafter
issued to Mrs. Vives.4
Subsequently, private respondent learned that Sterela was no
longer holding office in the address previously given to him.
Alarmed, he and his wife went to the Bank to verify if their
money was still intact. The bank manager referred them to Mr.
Rufo Atienza, the assistant manager, who informed them that
part of the money in Savings Account No. 10-1567 had been
withdrawn by Doronilla, and that only P90,000.00 remained
therein. He likewise told them that Mrs. Vives could not
withdraw said remaining amount because it had to answer for
some postdated checks issued by Doronilla. According to
Atienza, after Mrs. Vives and Sanchez opened Savings Account
No. 10-1567, Doronilla opened Current Account No. 10-0320 for
Sterela and authorized the Bank to debit Savings Account No.

10-1567 for the amounts necessary to cover overdrawings in

Current Account No. 10-0320. In opening said current account,
Sterela, through Doronilla, obtained a loan of P175,000.00 from
the Bank. To cover payment thereof, Doronilla issued three
postdated checks, all of which were dishonored. Atienza also
said that Doronilla could assign or withdraw the money in
Savings Account No. 10-1567 because he was the sole
proprietor of Sterela.5
Private respondent tried to get in touch with Doronilla through
Sanchez. On June 29, 1979, he received a letter from Doronilla,
assuring him that his money was intact and would be returned
to him. On August 13, 1979, Doronilla issued a postdated check
for Two Hundred Twelve Thousand Pesos (P212,000.00) in favor
of private respondent. However, upon presentment thereof by
private respondent to the drawee bank, the check was
dishonored. Doronilla requested private respondent to present
the same check on September 15, 1979 but when the latter
presented the check, it was again dishonored.6
Private respondent referred the matter to a lawyer, who made a
written demand upon Doronilla for the return of his clients
money. Doronilla issued another check for P212,000.00 in
private respondents favor but the check was again dishonored
for insufficiency of funds.7
Private respondent instituted an action for recovery of sum of
money in the Regional Trial Court (RTC) in Pasig, Metro Manila
against Doronilla, Sanchez, Dumagpi and petitioner. The case
was docketed as Civil Case No. 44485. He also filed criminal
actions against Doronilla, Sanchez and Dumagpi in the RTC.
However, Sanchez passed away on March 16, 1985 while the
case was pending before the trial court. On October 3, 1995,
the RTC of Pasig, Branch 157, promulgated its Decision in Civil
Case No. 44485, the dispositive portion of which reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered

sentencing defendants Arturo J. Doronila, Estrella Dumagpi and
Producers Bank of the Philippines to pay plaintiff Franklin Vives
jointly and severally
(a) the amount of P200,000.00, representing the money
deposited, with interest at the legal rate from the filing
of the complaint until the same is fully paid;
(b) the sum of P50,000.00 for moral damages and a
similar amount for exemplary damages;
(c) 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 reply12 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, or P12,000 more than
what private respondent deposited in Sterelas bank
account.15 Moreover, the fact that private respondent sued his
good friend Sanchez for his failure to recover his money from
Doronilla shows that the transaction was not merely gratuitous
but "had a business angle" to it. Hence, petitioner argues that it
cannot be held liable for the return of private
respondents P200,000.00 because it is not privy to the
transaction between the latter and Doronilla.16
It argues further that petitioners Assistant Manager, Mr. Rufo
Atienza, could not be faulted for allowing Doronilla to withdraw
from the savings account of Sterela since the latter was the sole
proprietor of said company. Petitioner asserts that Doronillas
May 8, 1979 letter addressed to the bank, authorizing Mrs.
Vives and Sanchez to open a savings account for Sterela, did
not contain any authorization for these two to withdraw from

said account. Hence, the authority to withdraw therefrom

remained exclusively with Doronilla, who was the sole proprietor
of Sterela, and who alone had legal title to the savings
account.17 Petitioner points out that no evidence other than the
testimonies of private respondent and Mrs. Vives was presented
during trial to prove that private respondent deposited
his P200,000.00 in Sterelas account for purposes of its
incorporation.18 Hence, petitioner should not be held liable for
allowing Doronilla to withdraw from Sterelas savings
account.1a\^/phi1.net
Petitioner also asserts that the Court of Appeals erred in
affirming the trial courts decision since the findings of fact
therein were not accord with the evidence presented by
petitioner during trial to prove that the transaction between
private respondent and Doronilla was a mutuum, and that it
committed no wrong in allowing Doronilla to withdraw from
Sterelas savings account.19
Finally, petitioner claims that since there is no wrongful act or
omission on its part, it is not liable for the actual damages
suffered by private respondent, and neither may it be held
liable for moral and exemplary damages as well as attorneys
fees.20
Private respondent, on the other hand, argues that the
transaction between him and Doronilla is not a mutuum but an
accommodation,21 since he did not actually part with the
ownership of his P200,000.00 and in fact asked his wife to
deposit said amount in the account of Sterela so that a
certification can be issued to the effect that Sterela had
sufficient funds for purposes of its incorporation but at the same
time, he retained some degree of control over his money
through his wife who was made a signatory to the savings

account and in whose possession the savings account passbook

was given.22
He likewise asserts that the trial court did not err in finding that
petitioner, Atienzas employer, is liable for the return of his
money. He insists that Atienza, petitioners assistant manager,
connived with Doronilla in defrauding private respondent since
it was Atienza who facilitated the opening of Sterelas current
account three days after Mrs. Vives and Sanchez opened a
savings account with petitioner for said company, as well as the
approval of the authority to debit Sterelas savings account to
cover any overdrawings in its current account.23
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law
may be raised in a petition for review filed with this Court. The
Court has repeatedly held that it is not its function to analyze
and weigh all over again the evidence presented by the parties
during trial.24 The Courts jurisdiction is in principle limited to
reviewing errors of law that might have been committed by the
Court of Appeals.25 Moreover, factual findings of courts, when
adopted and confirmed by the Court of Appeals, are final and
conclusive on this Court unless these findings are not supported
by the evidence on record.26 There is no showing of any
misapprehension of facts on the part of the Court of Appeals in
the case at bar that would require this Court to review and
overturn the factual findings of that court, especially since the
conclusions of fact of the Court of Appeals and the trial court
are not only consistent but are also amply supported by the
evidence on record.
No error was committed by the Court of Appeals when it ruled
that the transaction between private respondent and Doronilla

was 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.
Thus, if consumable goods are loaned only for purposes of
exhibition, or when the intention of the parties is to lend
consumable goods and to have the very same goods returned

at the end of the period agreed upon, the loan is a

commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be
accorded primordial consideration in determining the actual
character of a contract.27 In case of doubt, the
contemporaneous and subsequent acts of the parties shall be
considered in such determination.28
As correctly pointed out by both the Court of Appeals and the
trial court, the evidence shows that private respondent agreed
to deposit his money in the savings account of Sterela
specifically for the purpose of making it appear "that said firm
had sufficient capitalization for incorporation, with the promise
that the amount shall be returned within thirty (30)
days."29 Private respondent merely "accommodated" Doronilla
by lending his money without consideration, as a favor to his
good friend Sanchez. It was however clear to the parties to the
transaction that the money would not be removed from
Sterelas savings account and would be returned to private
respondent after thirty (30) days.
Doronillas attempts to return to private respondent the amount
of P200,000.00 which the latter deposited in Sterelas account
together with an additional P12,000.00, allegedly representing
interest on the mutuum, did not convert the transaction from a
commodatum into a 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 the P200,000.00.
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:
XXX

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.1awphi1.nt
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.

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.

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

Clearly Atienza had committed wrongful acts that had resulted

to the loss subject of this case. x x x.31

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.

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
interests34 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 theP200,000.00 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.

FIRST DIVISION

[G.R. No. 146364. June 3, 2004]

COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and

EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:

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

The Antecedents
In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400
to a certain Pedro Perez for the rights over a 250-square meter
lot in Barrio Payatas, Quezon City. Pajuyo then constructed a
house made of light materials on the lot. Pajuyo and his family
lived in the house from 1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie
Guevarra (Guevarra) executed a Kasunduan or agreement.

Pajuyo, as owner of the house, allowed Guevarra to live in the

house for free provided Guevarra would maintain the
cleanliness and orderliness of the house. Guevarra promised
that he would voluntarily vacate the premises on Pajuyos
demand.
In September 1994, Pajuyo informed Guevarra of his need
of the house and demanded that Guevarra vacate the
house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the
Metropolitan Trial Court of Quezon City, Branch 31 (MTC).
In his Answer, Guevarra claimed that Pajuyo had no valid
title or right of possession over the lot where the house stands
because the lot is within the 150 hectares set aside by
Proclamation No. 137 for socialized housing. Guevarra pointed
out that from December 1985 to September 1994, Pajuyo did
not show up or communicate with him. Guevarra insisted that
neither he nor Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in
favor of Pajuyo. The dispositive portion of the MTC decision
reads:
WHEREFORE, premises considered, judgment is hereby
rendered for the plaintiff and against defendant, ordering the
latter to:
A) vacate the house and lot occupied by the defendant
or any other person or persons claiming any right
under him;
B) pay unto plaintiff the sum of THREE HUNDRED
PESOS
(P300.00)
monthly
as
reasonable
compensation for the use of the premises starting
from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of
attorneys fees; and

D) pay the cost of suit.

SO ORDERED.[7]

On 27 February 1997, the Court of Appeals ordered Pajuyo

to comment on Guevaras petition for review. On 11 April 1997,
Pajuyo filed his Comment.

Aggrieved, Guevarra appealed to the Regional Trial Court of

Quezon City, Branch 81 (RTC).

On 21 June 2000, the Court of Appeals issued its decision

reversing the RTC decision. The dispositive portion of the
decision reads:

On 11 November 1996, the RTC affirmed the MTC decision.

The dispositive portion of the RTC decision reads:
WHEREFORE, premises considered, the Court finds no reversible
error in the decision appealed from, being in accord with the law
and evidence presented, and the same is hereby affirmed en
toto.
SO ORDERED.[8]
Guevarra received the RTC decision on 29 November
1996. Guevarra had only until 14 December 1996 to file his
appeal with the Court of Appeals. Instead of filing his appeal
with the Court of Appeals, Guevarra filed with the Supreme
Court a Motion for Extension of Time to File Appeal by Certiorari
Based on Rule 42 (motion for extension). Guevarra theorized
that his appeal raised pure questions of law. The Receiving Clerk
of the Supreme Court received the motion for extension on 13
December 1996 or one day before the right to appeal expired.

WHEREFORE, premises considered, the assailed Decision of the

court a quo in Civil Case No. Q-96-26943
is REVERSED and SET ASIDE; and it is hereby declared that
the ejectment case filed against defendant-appellant is without
factual and legal basis.
SO ORDERED.[11]
Pajuyo filed a motion for reconsideration of the
decision. Pajuyo pointed out that the Court of Appeals should
have dismissed outright Guevarras petition for review because
it was filed out of time. Moreover, it was Guevarras counsel and
not Guevarra who signed the certification against forumshopping.
On 14 December 2000, the Court of Appeals issued a
resolution denying Pajuyos motion for reconsideration. The
dispositive portion of the resolution reads:

On 3 January 1997, Guevarra filed his petition for review

with the Supreme Court.

WHEREFORE, for lack of merit, the motion for reconsideration is

hereby DENIED. No costs.

On 8 January 1997, the First Division of the Supreme Court

issued a Resolution[9] referring the motion for extension to the
Court of Appeals which has concurrent jurisdiction over the
case. The case presented no special and important matter for
the Supreme Court to take cognizance of at the first instance.

SO ORDERED.[12]

On 28 January 1997, the Thirteenth Division of the Court of

Appeals issued a Resolution[10] granting the motion for extension
conditioned on the timeliness of the filing of the motion.

The Ruling of the MTC

The MTC ruled that the subject of the agreement between
Pajuyo and Guevarra is the house and not the lot. Pajuyo is the
owner of the house, and he allowed Guevarra to use the house

only by tolerance. Thus, Guevarras refusal to vacate the house

on Pajuyos demand made Guevarras continued possession of
the house illegal.

The Ruling of the RTC

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

The Ruling of the Court of Appeals

The Court of Appeals declared that Pajuyo and Guevarra are
squatters. Pajuyo and Guevarra illegally occupied the contested
lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights,
was also a squatter. Perez had no right or title over the lot
because it is public land. The assignment of rights between
Perez and Pajuyo, and the Kasunduan between Pajuyo and
Guevarra, did not have any legal effect. Pajuyo and Guevarra
are in pari delicto or in equal fault. The court will leave them
where they are.
The Court of Appeals reversed the MTC and RTC rulings,
which held that the Kasunduan between Pajuyo and Guevarra
created a legal tie akin to that of a landlord and tenant

relationship. The Court of Appeals ruled that the Kasunduan is

not a lease contract but a commodatum because the
agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to
claim the property, the appellate court held that Guevarra has a
better right over the property under Proclamation No.
137.President Corazon C. Aquino (President Aquino) issued
Proclamation No. 137 on 7 September 1987. At that time,
Guevarra was in physical possession of the property. Under
Article VI of the Code of Policies Beneficiary Selection and
Disposition of Homelots and Structures in the National Housing
Project (the Code), the actual occupant or caretaker of the lot
shall have first priority as beneficiary of the project. The Court
of Appeals concluded that Guevarra is first in the hierarchy of
priority.
In denying Pajuyos motion for reconsideration, the
appellate court debunked Pajuyos claim that Guevarra filed his
motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for
extension filed before the Supreme Court was stamped 13
December 1996 at 4:09 PM by the Supreme Courts Receiving
Clerk. The Court of Appeals concluded that the motion for
extension bore a date, contrary to Pajuyos claim that the motion
for extension was undated. Guevarra filed the motion for
extension on time on 13 December 1996 since he filed the
motion one day before the expiration of the reglementary
period on 14 December 1996. Thus, the motion for extension
properly complied with the condition imposed by the Court of
Appeals in its 28 January 1997 Resolution. The Court of Appeals
explained that the thirty-day extension to file the petition for
review was deemed granted because of such compliance.
The Court of Appeals rejected Pajuyos argument that the
appellate court should have dismissed the petition for review
because it was Guevarras counsel and not Guevarra who signed
the certification against forum-shopping. The Court of Appeals
pointed out that Pajuyo did not raise this issue in his Comment.
The Court of Appeals held that Pajuyo could not now seek the

dismissal of the case after he had extensively argued on the

merits of the case. This technicality, the appellate court opined,
was clearly an afterthought.

The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS
AUTHORITY AND DISCRETION TANTAMOUNT TO LACK OF
JURISDICTION:
1) in GRANTING, instead of denying, Private
Respondents Motion for an Extension of
thirty days to file petition for review at the
time when there was no more period to
extend as the decision of the Regional Trial
Court had already become final and
executory.
2) in giving due course, instead of dismissing,
private respondents Petition for Review
even though the certification against
forum-shopping was signed only by counsel
instead of by petitioner himself.
3) in ruling that the Kasunduan voluntarily
entered into by the parties was in fact a
commodatum, instead of a Contract of
Lease as found by the Metropolitan Trial
Court
and
in
holding
that
the
ejectment case filed against defendantappellant is without legal and factual basis.
4) in reversing and setting aside the Decision
of the Regional Trial Court in Civil Case No.
Q-96-26943 and in holding that the parties
are in pari delicto being both squatters,

therefore,
illegal
occupants
contested parcel of land.

of

the

5) in deciding the unlawful detainer case

based on the so-called Code of Policies of
the National Government Center Housing
Project instead of deciding the same under
the Kasunduan voluntarily executed by the
parties, the terms and conditions of which
are the laws between themselves.[13]

The Ruling of the Court

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

Procedural Issues
Pajuyo insists that the Court of Appeals should have
dismissed outright Guevarras petition for review because the
RTC decision had already become final and executory when the
appellate court acted on Guevarras motion for extension to file
the petition. Pajuyo points out that Guevarra had only one day
before the expiry of his period to appeal the RTC
decision.Instead of filing the petition for review with the Court of
Appeals, Guevarra filed with this Court an undated motion for
extension of 30 days to file a petition for review. This Court
merely referred the motion to the Court of Appeals. Pajuyo
believes that the filing of the motion for extension with this
Court did not toll the running of the period to perfect the
appeal. Hence, when the Court of Appeals received the motion,
the period to appeal had already expired.
We are not persuaded.

Decisions of the regional trial courts in the exercise of their

appellate jurisdiction are appealable to the Court of Appeals by
petition for review in cases involving questions of fact or mixed
questions of fact and law.[14] Decisions of the regional trial
courts involving pure questions of law are appealable directly to
this Court by petition for review.[15] These modes of appeal are
now embodied in Section 2, Rule 41 of the 1997 Rules of Civil
Procedure.
Guevarra believed that his appeal of the RTC decision
involved only questions of law. Guevarra thus filed his motion
for extension to file petition for review before this Court on 14
December 1996. On 3 January 1997, Guevarra then filed his
petition for review with this Court. A perusal of Guevarras
petition for review gives the impression that the issues he
raised were pure questions of law. There is a question of law
when the doubt or difference is on what the law is on a certain
state of facts.[16] There is a question of fact when the doubt or
difference is on the truth or falsity of the facts alleged.[17]
In his petition for review before this Court, Guevarra no
longer disputed the facts. Guevarras petition for review raised
these questions: (1) Do ejectment cases pertain only to
possession of a structure, and not the lot on which the structure
stands? (2) Does a suit by a squatter against a fellow squatter
constitute a valid case for ejectment? (3) Should a Presidential
Proclamation governing the lot on which a squatters structure
stands be considered in an ejectment suit filed by the owner of
the structure?
These questions call for the evaluation of the rights of the
parties under the law on ejectment and the Presidential
Proclamation. At first glance, the questions Guevarra raised
appeared purely legal. However, some factual questions still
have to be resolved because they have a bearing on the legal
questions raised in the petition for review. These factual
matters refer to the metes and bounds of the disputed property
and the application of Guevarra as beneficiary of Proclamation
No. 137.

The Court of Appeals has the power to grant an extension

of time to file a petition for review. In Lacsamana v. Second
Special Cases Division of the Intermediate Appellate
Court,[18] we declared that the Court of Appeals could grant
extension of time in appeals by petition for review. In Liboro v.
Court of Appeals,[19] we clarified that the prohibition against
granting an extension of time applies only in a case where
ordinary appeal is perfected by a mere notice of appeal. The
prohibition does not apply in a petition for review where the
pleading needs verification. A petition for review, unlike an
ordinary appeal, requires preparation and research to present a
persuasive position.[20] The drafting of the petition for review
entails more time and effort than filing a notice of appeal.
[21]
Hence, the Court of Appeals may allow an extension of time
to file a petition for review.
In the more recent case of Commissioner of Internal
Revenue v. Court of Appeals,[22] we held that Liboros
clarification of Lacsamana is consistent with the Revised
Internal Rules of the Court of Appeals and Supreme Court
Circular No. 1-91. They all allow an extension of time for filing
petitions for review with the Court of Appeals. The extension,
however, should be limited to only fifteen days save in
exceptionally meritorious cases where the Court of Appeals may
grant a longer period.
A judgment becomes final and executory by operation of
law. Finality of judgment becomes a fact on the lapse of the
reglementary period to appeal if no appeal is perfected. [23] The
RTC decision could not have gained finality because the Court of
Appeals granted the 30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of
discretion when it approved Guevarras motion for extension.
The Court of Appeals gave due course to the motion for
extension because it complied with the condition set by the
appellate court in its resolution dated 28 January 1997. The
resolution stated that the Court of Appeals would only give due
course to the motion for extension if filed on time. The motion
for extension met this condition.

The material dates to consider in determining the

timeliness of the filing of the motion for extension are (1) the
date of receipt of the judgment or final order or resolution
subject of the petition, and (2) the date of filing of the motion
for extension.[24] It is the date of the filing of the motion or
pleading, and not the date of execution, that determines the
timeliness of the filing of that motion or pleading. Thus, even if
the motion for extension bears no date, the date of filing
stamped on it is the reckoning point for determining the
timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal
from the RTC decision. Guevarra filed his motion for extension
before this Court on 13 December 1996, the date stamped by
this Courts Receiving Clerk on the motion for extension. Clearly,
Guevarra filed the motion for extension exactly one day before
the lapse of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed
Guevarras appeal on technical grounds, Pajuyo did not ask the
appellate court to deny the motion for extension and dismiss
the petition for review at the earliest opportunity. Instead,
Pajuyo vigorously discussed the merits of the case. It was only
when the Court of Appeals ruled in Guevarras favor that Pajuyo
raised the procedural issues against Guevarras petition for
review.
A party who, after voluntarily submitting a dispute for
resolution, receives an adverse decision on the merits, is
estopped from attacking the jurisdiction of the court. [25] Estoppel
sets in not because the judgment of the court is a valid and
conclusive adjudication, but because the practice of attacking
the courts jurisdiction after voluntarily submitting to it is against
public policy.[26]
In his Comment before the Court of Appeals, Pajuyo also
failed to discuss Guevarras failure to sign the certification
against forum shopping. Instead, Pajuyo harped on Guevarras
counsel signing the verification, claiming that the counsels
verification is insufficient since it is based only on mere
information.

A partys failure to sign the certification against forum

shopping is different from the partys failure to sign personally
the verification. The certificate of non-forum shopping must be
signed by the party, and not by counsel. [27] The certification of
counsel renders the petition defective.[28]
On the other hand, the requirement on verification of a
pleading is a formal and not a jurisdictional requisite. [29] It is
intended simply to secure an assurance that what are alleged in
the pleading are true and correct and not the product of the
imagination or a matter of speculation, and that the pleading is
filed in good faith.[30] The party need not sign the verification. A
partys representative, lawyer or any person who personally
knows the truth of the facts alleged in the pleading may sign
the verification.[31]
We agree with the Court of Appeals that the issue on the
certificate against forum shopping was merely an afterthought.
Pajuyo did not call the Court of Appeals attention to this defect
at the early stage of the proceedings. Pajuyo raised this
procedural issue too late in the proceedings.

Absence of Title over the Disputed Property will not

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

In this case, what Guevarra raised before the courts was

that he and Pajuyo are not the owners of the contested property
and that they are mere squatters. Will the defense that the
parties to the ejectment case are not the owners of the
disputed lot allow the courts to renounce their jurisdiction over
the case? The Court of Appeals believed so and held that it
would just leave the parties where they are since they are
in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is
not at issue in an action for recovery of possession. The parties
cannot present evidence to prove ownership or right to legal
possession except to prove the nature of the possession when
necessary to resolve the issue of physical possession. [36] The
same is true when the defendant asserts the absence of title
over the property. The absence of title over the contested lot is
not a ground for the courts to withhold relief from the parties in
an ejectment case.
The only question that the courts must resolve in ejectment
proceedings is - who is entitled to the physical possession of the
premises, that is, to the possession de facto and not to the
possession de jure.[37] It does not even matter if a partys title to
the property is questionable,[38] or when both parties intruded
into public land and their applications to own the land have yet
to be approved by the proper government agency. [39] Regardless
of the actual condition of the title to the property, the party in
peaceable quiet possession shall not be thrown out by a strong
hand, violence or terror.[40] Neither is the unlawful withholding of
property allowed. Courts will always uphold respect for prior
possession.
Thus, a party who can prove prior possession can recover
such possession even against the owner himself. [41] Whatever
may be the character of his possession, if he has in his favor
prior possession in time, he has the security that entitles him to
remain on the property until a person with a better right
lawfully ejects him.[42] To repeat, the only issue that the court

has to settle in an ejectment suit is the right to physical

possession.
In Pitargue v. Sorilla,[43] the government owned the land
in dispute. The government did not authorize either the plaintiff
or the defendant in the case of forcible entry case to occupy the
land. The plaintiff had prior possession and had already
introduced improvements on the public land. The plaintiff had a
pending application for the land with the Bureau of Lands when
the defendant ousted him from possession. The plaintiff filed
the action of forcible entry against the defendant. The
government was not a party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to
settle the issue of possession because while the application of
the plaintiff was still pending, title remained with the
government, and the Bureau of Public Lands had jurisdiction
over the case. We disagreed with the defendant. We ruled that
courts have jurisdiction to entertain ejectment suits even before
the resolution of the application. The plaintiff, by priority of his
application and of his entry, acquired prior physical possession
over the public land applied for as against other private
claimants. That prior physical possession enjoys legal protection
against other private claimants because only a court can take
away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the
defendant in Pitargue[44] as squatters, strictly speaking, their
entry into the disputed land was illegal. Both the plaintiff and
defendant entered the public land without the owners
permission. Title to the land remained with the government
because it had not awarded to anyone ownership of the
contested public land. Both the plaintiff and the defendant were
in effect squatting on government property. Yet, we upheld the
courts jurisdiction to resolve the issue of possession even if the
plaintiff and the defendant in the ejectment case did not have
any title over the contested land.
Courts must not abdicate their jurisdiction to resolve the
issue of physical possession because of the public need to
preserve the basic policy behind the summary actions of

forcible entry and unlawful detainer. The underlying philosophy

behind ejectment suits is to prevent breach of the peace and
criminal disorder and to compel the party out of possession to
respect and resort to the law alone to obtain what he claims is
his.[45] The party deprived of possession must not take the law
into his own hands. [46] Ejectment proceedings are summary in
nature so the authorities can settle speedily actions to recover
possession because of the overriding need to quell social
disturbances.[47]
We further explained in Pitargue the greater interest that
is at stake in actions for recovery of possession. We made the
following pronouncements in Pitargue:
The question that is before this Court is: Are courts without
jurisdiction to take cognizance of possessory actions involving
these public lands before final award is made by the Lands
Department, and before title is given any of the conflicting
claimants? It is one of utmost importance, as there are public
lands everywhere and there are thousands of settlers,
especially in newly opened regions. It also involves a matter of
policy, as it requires the determination of the respective
authorities and functions of two coordinate branches of the
Government in connection with public land conflicts.
Our problem is made simple by the fact that under the Civil
Code, either in the old, which was in force in this country before
the American occupation, or in the new, we have a possessory
action, the aim and purpose of which is the recovery of the
physical possession of real property, irrespective of the question
as to who has the title thereto. Under the Spanish Civil Code we
had the accion interdictal, a summary proceeding which could
be brought within one year from dispossession (Roman Catholic
Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291); and as early as
October 1, 1901, upon the enactment of the Code of Civil
Procedure (Act No. 190 of the Philippine Commission) we
implanted the common law action of forcible entry (section 80
of Act No. 190), the object of which has been stated by this
Court to be to prevent breaches of the peace and criminal
disorder which would ensue from the withdrawal of the

remedy, and the reasonable hope such withdrawal would

create that some advantage must accrue to those
persons who, believing themselves entitled to the
possession of property, resort to force to gain
possession rather than to some appropriate action in
the court to assert their claims. (Supia and Batioco vs.
Quintero and Ayala, 59 Phil. 312, 314.) So before the enactment
of the first Public Land Act (Act No. 926) the action of forcible
entry was already available in the courts of the country. So the
question to be resolved is, Did the Legislature intend, when it
vested the power and authority to alienate and dispose of the
public lands in the Lands Department, to exclude the courts
from entertaining the possessory action of forcible entry
between rival claimants or occupants of any land before award
thereof to any of the parties? Did Congress intend that the lands
applied for, or all public lands for that matter, be removed from
the jurisdiction of the judicial Branch of the Government, so that
any troubles arising therefrom, or any breaches of the peace or
disorders caused by rival claimants, could be inquired into only
by the Lands Department to the exclusion of the courts? The
answer to this question seems to us evident. The Lands
Department does not have the means to police public lands;
neither does it have the means to prevent disorders arising
therefrom, or contain breaches of the peace among settlers; or
to pass promptly upon conflicts of possession. Then its power
is clearly limited to disposition and alienation, and while
it may decide conflicts of possession in order to make
proper award, the settlement of conflicts of possession
which is recognized in the court herein has another
ultimate purpose, i.e., the protection of actual
possessors and occupants with a view to the prevention
of breaches of the peace. The power to dispose and
alienate could not have been intended to include the
power to prevent or settle disorders or breaches of the
peace among rival settlers or claimants prior to the final
award. As to this, therefore, the corresponding branches of the
Government must continue to exercise power and jurisdiction
within the limits of their respective functions. The vesting of
the Lands Department with authority to administer,
dispose, and alienate public lands, therefore, must not

be understood as depriving the other branches of the

Government of the exercise of the respective functions
or powers thereon, such as the authority to stop
disorders and quell breaches of the peace by the police,
the authority on the part of the courts to take
jurisdiction over possessory actions arising therefrom
not involving, directly or indirectly, alienation and
disposition.
Our attention has been called to a principle enunciated in
American courts to the effect that courts have no jurisdiction to
determine the rights of claimants to public lands, and that until
the disposition of the land has passed from the control of the
Federal Government, the courts will not interfere with the
administration of matters concerning the same. (50 C. J. 10931094.) We have no quarrel with this principle. The
determination of the respective rights of rival claimants to
public lands is different from the determination of who has the
actual physical possession or occupation with a view to
protecting the same and preventing disorder and breaches of
the peace. A judgment of the court ordering restitution of the
possession of a parcel of land to the actual occupant, who has
been deprived thereof by another through the use of force or in
any other illegal manner, can never be prejudicial interference
with the disposition or alienation of public lands. On the other
hand, if courts were deprived of jurisdiction of cases
involving conflicts of possession, that threat of judicial
action against breaches of the peace committed on
public lands would be eliminated, and a state of
lawlessness would probably be produced between
applicants, occupants or squatters, where force or
might, not right or justice, would rule.
It must be borne in mind that the action that would be used to
solve conflicts of possession between rivals or conflicting
applicants or claimants would be no other than that of forcible
entry. This action, both in England and the United States and in
our jurisdiction, is a summary and expeditious remedy whereby
one in peaceful and quiet possession may recover the

possession of which he has been deprived by a stronger hand,

by violence or terror; its ultimate object being to prevent breach
of the peace and criminal disorder. (Supia and Batioco vs.
Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy
is mere possession as a fact, of physical possession, not a legal
possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or
right to possession is never in issue in an action of forcible
entry; as a matter of fact, evidence thereof is expressly banned,
except to prove the nature of the possession. (Second 4, Rule
72, Rules of Court.) With this nature of the action in mind, by no
stretch of the imagination can conclusion be arrived at that the
use of the remedy in the courts of justice would constitute an
interference with the alienation, disposition, and control of
public lands. To limit ourselves to the case at bar can it be
pretended at all that its result would in any way interfere with
the manner of the alienation or disposition of the land
contested? On the contrary, it would facilitate adjudication, for
the question of priority of possession having been decided in a
final manner by the courts, said question need no longer waste
the time of the land officers making the adjudication or
award. (Emphasis ours)

The Principle of Pari Delicto is not Applicable to

Ejectment Cases
The Court of Appeals erroneously applied the principle
of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code [48] embody the
principle of pari delicto. We explained the principle of pari
delicto in these words:
The rule of pari delicto is expressed in the maxims ex dolo malo
non eritur actio and in pari delicto potior est conditio defedentis.
The law will not aid either party to an illegal agreement. It
leaves the parties where it finds them.[49]

The application of the pari delicto principle is not absolute,

as there are exceptions to its application. One of these
exceptions is where the application of the pari delicto rule
would violate well-established public policy.[50]
In Drilon v. Gaurana,[51] we reiterated the basic policy
behind the summary actions of forcible entry and unlawful
detainer. We held that:
It must be stated that the purpose of an action of forcible entry
and detainer is that, regardless of the actual condition of the
title to the property, the party in peaceable quiet possession
shall not be turned out by strong hand, violence or terror. In
affording this remedy of restitution the object of the statute is
to prevent breaches of the peace and criminal disorder which
would ensue from the withdrawal of the remedy, and the
reasonable hope such withdrawal would create that some
advantage must accrue to those persons who, believing
themselves entitled to the possession of property, resort to
force to gain possession rather than to some appropriate action
in the courts to assert their claims. This is the philosophy at the
foundation of all these actions of forcible entry and detainer
which are designed to compel the party out of possession to
respect and resort to the law alone to obtain what he claims is
his.[52]
Clearly, the application of the principle of pari delicto to a
case of ejectment between squatters is fraught with danger. To
shut out relief to squatters on the ground of pari delicto would
openly invite mayhem and lawlessness. A squatter would oust
another squatter from possession of the lot that the latter had
illegally occupied, emboldened by the knowledge that the
courts would leave them where they are. Nothing would then
stand in the way of the ousted squatter from re-claiming his
prior possession at all cost.
Petty warfare over possession of properties is precisely
what ejectment cases or actions for recovery of possession seek
to prevent.[53] Even the owner who has title over the disputed

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

Possession is the only Issue for Resolution in an

Ejectment Case
The case for review before the Court of Appeals was a
simple case of ejectment. The Court of Appeals refused to rule
on the issue of physical possession. Nevertheless, the appellate
court held that the pivotal issue in this case is who between
Pajuyo and Guevarra has the priority right as beneficiary of the
contested land under Proclamation No. 137. [54] According to the
Court of Appeals, Guevarra enjoys preferential right under
Proclamation No. 137 because Article VI of the Code declares
that the actual occupant or caretaker is the one qualified to
apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal
basis.
First. Guevarra did not present evidence to show that the
contested lot is part of a relocation site under Proclamation No.
137. Proclamation No. 137 laid down the metes and bounds of
the land that it declared open for disposition to bona
fide residents.

The records do not show that the contested lot is within the
land specified by Proclamation No. 137. Guevarra had the
burden to prove that the disputed lot is within the coverage of
Proclamation No. 137. He failed to do so.
Second. The Court of Appeals should not have given
credence to Guevarras unsubstantiated claim that he is the
beneficiary of Proclamation No. 137. Guevarra merely alleged
that in the survey the project administrator conducted, he and
not Pajuyo appeared as the actual occupant of the lot.
There is no proof that Guevarra actually availed of the
benefits of Proclamation No. 137. Pajuyo allowed Guevarra to
occupy the disputed property in 1985. President Aquino signed
Proclamation No. 137 into law on 11 March 1986. Pajuyo made
his earliest demand for Guevarra to vacate the property in
September 1994.
During the time that Guevarra temporarily held the
property up to the time that Proclamation No. 137 allegedly
segregated the disputed lot, Guevarra never applied as
beneficiary of Proclamation No. 137. Even when Guevarra
already knew that Pajuyo was reclaiming possession of the
property, Guevarra did not take any step to comply with the
requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the
coverage of Proclamation No. 137 and Guevarra has a pending
application over the lot, courts should still assume jurisdiction
and resolve the issue of possession. However, the jurisdiction of
the courts would be limited to the issue of physical possession
only.
In Pitargue,[55] we ruled that courts have jurisdiction over
possessory actions involving public land to determine the issue
of physical possession. The determination of the respective
rights of rival claimants to public land is, however, distinct from
the determination of who has the actual physical possession or
who has a better right of physical possession. [56] The
administrative disposition and alienation of public lands should
be threshed out in the proper government agency. [57]

The Court of Appeals determination of Pajuyo and

Guevarras
rights
under
Proclamation
No.
137
was
premature. Pajuyo and Guevarra were at most merely potential
beneficiaries of the law. Courts should not preempt the decision
of the administrative agency mandated by law to determine the
qualifications of applicants for the acquisition of public
lands. Instead, courts should expeditiously resolve the issue of
physical possession in ejectment cases to prevent disorder and
breaches of peace.[58]

Pajuyo is Entitled to Physical Possession of the Disputed

Property
Guevarra does not dispute Pajuyos prior possession of the
lot and ownership of the house built on it. Guevarra expressly
admitted
the
existence
and
due
execution
of
the Kasunduan.The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo.
Payatas, Quezon City, ay nagbibigay pahintulot kay G. Eddie
Guevarra, na pansamantalang manirahan sa nasabing bahay at
lote ng walang bayad. Kaugnay nito, kailangang panatilihin nila
ang kalinisan at kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay
kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to
reside in the house and lot free of rent, but Guevarra was under
obligation to maintain the premises in good condition. Guevarra
promised to vacate the premises on Pajuyos demand but
Guevarra broke his promise and refused to heed Pajuyos
demand to vacate.
These facts make out a case for unlawful detainer. Unlawful
detainer involves the withholding by a person from another of
the possession of real property to which the latter is entitled

after the expiration or termination of the formers right to hold

possession under a contract, express or implied.[59]
Where the plaintiff allows the defendant to use his property
by tolerance without any contract, the defendant is necessarily
bound by an implied promise that he will vacate on demand,
failing which, an action for unlawful detainer will lie. [60] The
defendants refusal to comply with the demand makes his
continued possession of the property unlawful.[61] The status of
the defendant in such a case is similar to that of a lessee or
tenant whose term of lease has expired but whose occupancy
continues by tolerance of the owner.[62]
This principle should apply with greater force in cases
where a contract embodies the permission or tolerance to use
the property. The Kasunduan expressly articulated Pajuyos
forbearance. Pajuyo did not require Guevarra to pay any rent
but only to maintain the house and lot in good
condition. Guevarra expressly vowed in the Kasunduan that he
would vacate the property on demand. Guevarras refusal to
comply with Pajuyos demand to vacate made Guevarras
continued possession of the property unlawful.
We do not subscribe to the Court of Appeals theory that
the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers to
another something not consumable so that the latter may use
the same for a certain time and return it. [63] An essential feature
of commodatum is that it is gratuitous. Another feature
of commodatum is that the use of the thing belonging to
another is for a certain period.[64] Thus, the bailor cannot
demand the return of the thing loaned until after expiration of
the period stipulated, or after accomplishment of the use for
which the commodatum is constituted.[65] If the bailor should
have urgent need of the thing, he may demand its return for
temporary use.[66] If the use of the thing is merely tolerated by
the bailor, he can demand the return of the thing at will, in
which case the contractual relation is called a precarium.
[67]
Under the Civil Code, precarium is a kind of commodatum.[68]

The Kasunduan reveals that the accommodation accorded

by Pajuyo to Guevarra was not essentially gratuitous. While
the Kasunduan did not require Guevarra to pay rent, it obligated
him to maintain the property in good condition. The imposition
of this obligation makes the Kasunduan a contract different
from a commodatum. The effects of the Kasunduan are also
different from that of a commodatum. Case law on ejectment
has treated relationship based on tolerance as one that is akin
to a landlord-tenant relationship where the withdrawal of
permission would result in the termination of the lease. [69] The
tenants withholding of the property would then be
unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and
Guevarra is one of commodatum, Guevarra as bailee would still
have the duty to turn over possession of the property to Pajuyo,
the bailor. The obligation to deliver or to return the thing
received attaches to contracts for safekeeping, or contracts of
commission,
administration
and commodatum.[70] These
contracts certainly involve the obligation to deliver or return the
thing received.[71]
Guevarra turned his back on the Kasunduan on the sole
ground that like him, Pajuyo is also a squatter. Squatters,
Guevarra pointed out, cannot enter into a contract involving the
land they illegally occupy. Guevarra insists that the contract is
void.
Guevarra should know that there must be honor even
between
squatters. Guevarra
freely
entered
into
the Kasunduan. Guevarra
cannot
now
impugn
the Kasunduan after
he
had
benefited
from
it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who
between Pajuyo and Guevarra has a right to physical possession
of the contested property. The Kasunduan is the undeniable
evidence of Guevarras recognition of Pajuyos better right of
physical possession. Guevarra is clearly a possessor in bad
faith. The absence of a contract would not yield a different
result, as there would still be an implied promise to vacate.

Guevarra contends that there is a pernicious evil that is

sought to be avoided, and that is allowing an absentee squatter
who (sic) makes (sic) a profit out of his illegal act. [72] Guevarra
bases his argument on the preferential right given to the actual
occupant or caretaker under Proclamation No. 137 on socialized
housing.

the fact that a thing is subject to the action of ones will. [78]Actual
or physical occupation is not always necessary.[79]

Ruling on Possession Does not Bind Title to the Land in

Dispute

We are not convinced.

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

We are aware of our pronouncement in cases where we

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

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

Attorneys Fees and Rentals

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

Decision dated 11 November 1996 of the Regional Trial Court of

Quezon City, Branch 81 in Civil Case No. Q-96-26943, affirming
the Decision dated 15 December 1995 of the Metropolitan Trial
Court of Quezon City, Branch 31 in Civil Case No. 12432, is
REINSTATED with MODIFICATION. The award of attorneys fees is
deleted. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 123498

On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc.

(Tevesteco) opened a savings and current account with BPI-FB.
Soon thereafter, or on August 25, 1989, First Metro Investment
Corporation (FMIC) also opened a time deposit account with the
same branch of BPI-FB with a deposit of P100,000,000.00, to
mature one year thence.

November 23, 2007

BPI FAMILY BANK, Petitioner,

vs.
AMADO FRANCO and COURT OF APPEALS, Respondents.
DECISION
NACHURA, J.:
Banks are exhorted to treat the accounts of their depositors
with meticulous care and utmost fidelity. We reiterate this
exhortation in the case at bench.
Before us is a Petition for Review on Certiorari seeking the
reversal of the Court of Appeals (CA) Decision1 in CA-G.R. CV No.
43424 which affirmed with modification the judgment2 of the
Regional Trial Court, Branch 55, Manila (Manila RTC), in Civil
Case No. 90-53295.
This case has its genesis in an ostensible fraud perpetrated on
the petitioner BPI Family Bank (BPI-FB) allegedly by respondent
Amado Franco (Franco) in conspiracy with other
individuals,3 some of whom opened and maintained separate
accounts with BPI-FB, San Francisco del Monte (SFDM) branch,
in a series of transactions.

Subsequently, on August 31, 1989, Franco opened three

accounts, namely, a current,4 savings,5 and time deposit,6 with
BPI-FB. The current and savings accounts were respectively
funded with an initial deposit ofP500,000.00 each, while the
time deposit account had P1,000,000.00 with a maturity date of
August 31, 1990. The total amount of P2,000,000.00 used to
open these accounts is traceable to a check issued by
Tevesteco allegedly in consideration of Francos introduction of
Eladio Teves,7 who was looking for a conduit bank to facilitate
Tevestecos business transactions, to Jaime Sebastian, who was
then BPI-FB SFDMs Branch Manager. In turn, the funding for
the P2,000,000.00 check was part of the P80,000,000.00
debited by BPI-FB from FMICs time deposit account and
credited to Tevestecos current account pursuant to an Authority
to Debit purportedly signed by FMICs officers.
It appears, however, that the signatures of FMICs officers on
the Authority to Debit were forged.8 On September 4, 1989,
Antonio Ong,9 upon being shown the Authority to Debit,
personally declared his signature therein to be a forgery.
Unfortunately, Tevesteco had already effected several
withdrawals from its current account (to which had been
credited the P80,000,000.00 covered by the forged Authority to
Debit) amounting to P37,455,410.54, including
the P2,000,000.00 paid to Franco.
On September 8, 1989, impelled by the need to protect its
interests in light of FMICs forgery claim, BPI-FB, thru its Senior

Vice-President, Severino Coronacion, instructed Jesus

Arangorin10 to debit Francos savings and current accounts for
the amounts remaining therein.11 However, Francos time
deposit account could not be debited due to the capacity
limitations of BPI-FBs computer.12
In the meantime, two checks13 drawn by Franco against his BPIFB current account were dishonored upon presentment for
payment, and stamped with a notation "account under
garnishment." Apparently, Francos current account was
garnished by virtue of an Order of Attachment issued by the
Regional Trial Court of Makati (Makati RTC) in Civil Case No. 894996 (Makati Case), which had been filed by BPI-FB against
Franco et al.,14 to recover the P37,455,410.54 representing
Tevestecos total withdrawals from its account.
Notably, the dishonored checks were issued by Franco and
presented for payment at BPI-FB prior to Francos receipt of
notice that his accounts were under garnishment.15 In fact, at
the time the Notice of Garnishment dated September 27, 1989
was served on BPI-FB, Franco had yet to be impleaded in the
Makati case where the writ of attachment was issued.
It was only on May 15, 1990, through the service of a copy of
the Second Amended Complaint in Civil Case No. 89-4996, that
Franco was impleaded in the Makati case.16 Immediately, upon
receipt of such copy, Franco filed a Motion to Discharge
Attachment which the Makati RTC granted on May 16, 1990. The
Order Lifting the Order of Attachment was served on BPI-FB on
even date, with Franco demanding the release to him of the
funds in his savings and current accounts. Jesus Arangorin, BPIFBs new manager, could not forthwith comply with the demand
as the funds, as previously stated, had already been debited
because of FMICs forgery claim. As such, BPI-FBs computer at

the SFDM Branch indicated that the current account record was
"not on file."
With respect to Francos savings account, it appears that Franco
agreed to an arrangement, as a favor to Sebastian,
whereby P400,000.00 from his savings account was temporarily
transferred to Domingo Quiaoits savings account, subject to its
immediate return upon issuance of a certificate of deposit which
Quiaoit needed in connection with his visa application at the
Taiwan Embassy. As part of the arrangement, Sebastian
retained custody of Quiaoits savings account passbook to
ensure that no withdrawal would be effected therefrom, and to
preserve Francos deposits.
On May 17, 1990, Franco pre-terminated his time deposit
account. BPI-FB deducted the amount of P63,189.00 from the
remaining balance of the time deposit account representing
advance interest paid to him.
These transactions spawned a number of cases, some of which
we had already resolved.
FMIC filed a complaint against BPI-FB for the recovery of the
amount of P80,000,000.00 debited from its account.17 The case
eventually reached this Court, and in BPI Family Savings Bank,
Inc. v. First Metro Investment Corporation,18 we upheld the
finding of the courts below that BPI-FB failed to exercise the
degree of diligence required by the nature of its obligation to
treat the accounts of its depositors with meticulous care. Thus,
BPI-FB was found liable to FMIC for the debited amount in its
time deposit. It was ordered to pay P65,332,321.99 plus interest
at 17% per annum from August 29, 1989 until fully restored. In
turn, the 17% shall itself earn interest at 12% from October 4,
1989 until fully paid.

In a related case, Edgardo Buenaventura, Myrna Lizardo and

Yolanda Tica (Buenaventura, et al.),19 recipients of
a P500,000.00 check proceeding from the P80,000,000.00
mistakenly credited to Tevesteco, likewise filed suit.
Buenaventura et al., as in the case of Franco, were also
prevented from effecting withdrawals20 from their current
account with BPI-FB, Bonifacio Market, Edsa, Caloocan City
Branch. Likewise, when the case was elevated to this Court
docketed as BPI Family Bank v. Buenaventura,21 we ruled that
BPI-FB had no right to freeze Buenaventura, et al.s accounts
and adjudged BPI-FB liable therefor, in addition to damages.
Meanwhile, BPI-FB filed separate civil and criminal cases against
those believed to be the perpetrators of the multi-million peso
scam.22 In the criminal case, Franco, along with the other
accused, except for Manuel Bienvenida who was still at large,
were acquitted of the crime of Estafa as defined and penalized
under Article 351, par. 2(a) of the Revised Penal
Code.23 However, the civil case24 remains under litigation and
the respective rights and liabilities of the parties have yet to be
adjudicated.
Consequently, in light of BPI-FBs refusal to heed Francos
demands to unfreeze his accounts and release his deposits
therein, the latter filed on June 4, 1990 with the Manila RTC the
subject suit. In his complaint, Franco prayed for the following
reliefs: (1) the interest on the remaining balance25 of his current
account which was eventually released to him on October 31,
1991; (2) the balance26 on his savings account, plus interest
thereon; (3) the advance interest27 paid to him which had been
deducted when he pre-terminated his time deposit account; and
(4) the payment of actual, moral and exemplary damages, as
well as attorneys fees.

BPI-FB traversed this complaint, insisting that it was correct in

freezing the accounts of Franco and refusing to release his
deposits, claiming that it had a better right to the amounts
which consisted of part of the money allegedly fraudulently
withdrawn from it by Tevesteco and ending up in Francos
accounts. BPI-FB asseverated that the claimed consideration
of P2,000,000.00 for the introduction facilitated by Franco
between George Daantos and Eladio Teves, on the one hand,
and Jaime Sebastian, on the other, spoke volumes of Francos
participation in the fraudulent transaction.
On August 4, 1993, the Manila RTC rendered judgment, the
dispositive portion of which reads as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby
rendered in favor of [Franco] and against [BPI-FB], ordering the
latter to pay to the former the following sums:
1. P76,500.00 representing the legal rate of interest on
the amount of P450,000.00 from May 18, 1990 to
October 31, 1991;
2. P498,973.23 representing the balance on [Francos]
savings account as of May 18, 1990, together with the
interest thereon in accordance with the banks
guidelines on the payment therefor;
3. P30,000.00 by way of attorneys fees; and
4. P10,000.00 as nominal damages.
The counterclaim of the defendant is DISMISSED for lack of
factual and legal anchor.

Costs against [BPI-FB].

The petition is partly meritorious.

SO ORDERED.28

We are in full accord with the common ruling of the lower courts
that BPI-FB cannot unilaterally freeze Francos accounts and
preclude him from withdrawing his deposits. However, contrary
to the appellate courts ruling, we hold that Franco is not
entitled to unearned interest on the time deposit as well as to
moral and exemplary damages.

Unsatisfied with the decision, both parties filed their respective

appeals before the CA. Franco confined his appeal to the Manila
RTCs denial of his claim for moral and exemplary damages, and
the diminutive award of attorneys fees. In affirming with
modification the lower courts decision, the appellate court
decreed, to wit:
WHEREFORE, foregoing considered, the appealed decision is
hereby AFFIRMED with modification ordering [BPI-FB] to pay
[Franco] P63,189.00 representing the interest deducted from
the time deposit of plaintiff-appellant.P200,000.00 as moral
damages and P100,000.00 as exemplary damages, deleting the
award of nominal damages (in view of the award of moral and
exemplary damages) and increasing the award of attorneys
fees from P30,000.00 to P75,000.00.
Cost against [BPI-FB].
SO ORDERED.29
In this recourse, BPI-FB ascribes error to the CA when it ruled
that: (1) Franco had a better right to the deposits in the subject
accounts which are part of the proceeds of a forged Authority to
Debit; (2) Franco is entitled to interest on his current account;
(3) Franco can recover the P400,000.00 deposit in Quiaoits
savings account; (4) the dishonor of Francos checks was not
legally in order; (5) BPI-FB is liable for interest on Francos time
deposit, and for moral and exemplary damages; and (6) BPIFBs counter-claim has no factual and legal anchor.

First. On the issue of who has a better right to the deposits in

Francos accounts, BPI-FB urges us that the legal consequence
of FMICs forgery claim is that the money transferred by BPI-FB
to Tevesteco is its own, and considering that it was able to
recover possession of the same when the money was
redeposited by Franco, it had the right to set up its ownership
thereon and freeze Francos accounts.
BPI-FB contends that its position is not unlike that of an owner
of personal property who regains possession after it is stolen,
and to illustrate this point, BPI-FB gives the following example:
where Xs television set is stolen by Y who thereafter sells it to
Z, and where Z unwittingly entrusts possession of the TV set to
X, the latter would have the right to keep possession of the
property and preclude Z from recovering possession thereof. To
bolster its position, BPI-FB cites Article 559 of the Civil Code,
which provides:
Article 559. The possession of movable property acquired in
good faith is equivalent to a title. Nevertheless, one who has
lost any movable or has been unlawfully deprived thereof, may
recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has
been unlawfully deprived, has acquired it in good faith at a

public sale, the owner cannot obtain its return without

reimbursing the price paid therefor.

the general course of banking business, even if of traceable

origin, is no exception.

BPI-FBs argument is unsound. To begin with, the movable

property mentioned in Article 559 of the Civil Code pertains to a
specific or determinate thing.30 A determinate or specific thing
is one that is individualized and can be identified or
distinguished from others of the same kind.31

Thus, inasmuch as what is involved is not a specific or

determinate personal property, BPI-FBs illustrative example,
ostensibly based on Article 559, is inapplicable to the instant
case.

In this case, the deposit in Francos accounts consists of money

which, albeit characterized as a movable, is generic and
fungible.32 The quality of being fungible depends upon the
possibility of the property, because of its nature or the will of
the parties, being substituted by others of the same kind, not
having a distinct individuality.33
Significantly, while Article 559 permits an owner who has lost or
has been unlawfully deprived of a movable to recover the exact
same thing from the current possessor, BPI-FB simply claims
ownership of the equivalent amount of money, i.e., the value
thereof, which it had mistakenly debited from FMICs account
and credited to Tevestecos, and subsequently traced to
Francos account. In fact, this is what BPI-FB did in filing the
Makati Case against Franco, et al. It staked its claim on the
money itself which passed from one account to another,
commencing with the forged Authority to Debit.
It bears emphasizing that money bears no earmarks of peculiar
ownership,34 and this characteristic is all the more manifest in
the instant case which involves money in a banking transaction
gone awry. Its primary function is to pass from hand to hand as
a medium of exchange, without other evidence of its
title.35 Money, which had passed through various transactions in

There is no doubt that BPI-FB owns the deposited monies in the

accounts of Franco, but not as a legal consequence of its
unauthorized transfer of FMICs deposits to Tevestecos account.
BPI-FB conveniently forgets that the deposit of money in banks
is governed by the Civil Code provisions on simple loan or
mutuum.36 As there is a debtor-creditor relationship between a
bank and its depositor, BPI-FB ultimately acquired ownership of
Francos deposits, but such ownership is coupled with a
corresponding obligation to pay him an equal amount on
demand.37 Although BPI-FB owns the deposits in Francos
accounts, it cannot prevent him from demanding payment of
BPI-FBs obligation by drawing checks against his current
account, or asking for the release of the funds in his savings
account. Thus, when Franco issued checks drawn against his
current account, he had every right as creditor to expect that
those checks would be honored by BPI-FB as debtor.
More importantly, BPI-FB does not have a unilateral right to
freeze the accounts of Franco based on its mere suspicion that
the funds therein were proceeds of the multi-million peso scam
Franco was allegedly involved in. To grant BPI-FB, or any bank
for that matter, the right to take whatever action it pleases on
deposits which it supposes are derived from shady transactions,
would open the floodgates of public distrust in the banking
industry.

Our pronouncement in Simex International (Manila), Inc. v.

Court of Appeals38 continues to resonate, thus:

care, always having in mind the fiduciary nature of their

relationship. x x x.

The banking system is an indispensable institution in the

modern world and plays a vital role in the economic life of every
civilized nation. Whether as mere passive entities for the
safekeeping and saving of money or as active instruments of
business and commerce, banks have become an ubiquitous
presence among the people, who have come to regard them
with respect and even gratitude and, most of all, confidence.
Thus, even the humble wage-earner has not hesitated to
entrust his lifes savings to the bank of his choice, knowing that
they will be safe in its custody and will even earn some interest
for him. The ordinary person, with equal faith, usually maintains
a modest checking account for security and convenience in the
settling of his monthly bills and the payment of ordinary
expenses. x x x.

Ineluctably, BPI-FB, as the trustee in the fiduciary relationship,

is duty bound to know the signatures of its customers. Having
failed to detect the forgery in the Authority to Debit and in the
process inadvertently facilitate the FMIC-Tevesteco transfer, BPIFB cannot now shift liability thereon to Franco and the other
payees of checks issued by Tevesteco, or prevent withdrawals
from their respective accounts without the appropriate court
writ or a favorable final judgment.

In every case, the depositor expects the bank to treat his

account with the utmost fidelity, whether such account consists
only of a few hundred pesos or of millions. The bank must
record every single transaction accurately, down to the last
centavo, and as promptly as possible. This has to be done if the
account is to reflect at any given time the amount of money the
depositor can dispose of as he sees fit, confident that the bank
will deliver it as and to whomever directs. A blunder on the part
of the bank, such as the dishonor of the check without good
reason, can cause the depositor not a little embarrassment if
not also financial loss and perhaps even civil and criminal
litigation.
The point is that as a business affected with public interest and
because of the nature of its functions, the bank is under
obligation to treat the accounts of its depositors with meticulous

Further, it boggles the mind why BPI-FB, even without delving

into the authenticity of the signature in the Authority to Debit,
effected the transfer of P80,000,000.00 from FMICs to
Tevestecos account, when FMICs account was a time deposit
and it had already paid advance interest to FMIC. Considering
that there is as yet no indubitable evidence establishing
Francos participation in the forgery, he remains an innocent
party. As between him and BPI-FB, the latter, which made
possible the present predicament, must bear the resulting loss
or inconvenience.
Second. With respect to its liability for interest on Francos
current account, BPI-FB argues that its non-compliance with the
Makati RTCs Order Lifting the Order of Attachment and the
legal consequences thereof, is a matter that ought to be taken
up in that court.
The argument is tenuous. We agree with the succinct holding of
the appellate court in this respect. The Manila RTCs order to
pay interests on Francos current account arose from BPI-FBs
unjustified refusal to comply with its obligation to pay Franco
pursuant to their contract of mutuum. In other words, from the

time BPI-FB refused Francos demand for the release of the

deposits in his current account, specifically, from May 17, 1990,
interest at the rate of 12% began to accrue thereon. 39

Third. As to the award to Franco of the deposits in Quiaoits

account, we find no reason to depart from the factual findings of
both the Manila RTC and the CA.

Section 5. Amendment to conform to or authorize presentation

of evidence. When issues not raised by the pleadings are tried
with the express or implied consent of the parties, they shall be
treated in all respects as if they had been raised in the
pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to
raise these issues may be made upon motion of any party at
any time, even after judgment; but failure to amend does not
affect the result of the trial of these issues. If evidence is
objected to at the trial on the ground that it is now within the
issues made by the pleadings, the court may allow the
pleadings to be amended and shall do so with liberality if the
presentation of the merits of the action and the ends of
substantial justice will be subserved thereby. The court may
grant a continuance to enable the amendment to be made.
(Emphasis supplied)

Noteworthy is the fact that Quiaoit himself testified that the

deposits in his account are actually owned by Franco who
simply accommodated Jaime Sebastians request to temporarily
transfer P400,000.00 from Francos savings account to Quiaoits
account.40 His testimony cannot be characterized as hearsay as
the records reveal that he had personal knowledge of the
arrangement made between Franco, Sebastian and himself. 41

In all, BPI-FBs argument that this case is not the right forum for
Franco to recover the P400,000.00 begs the issue. To reiterate,
Quiaoit, testifying during the trial, unequivocally disclaimed
ownership of the funds in his account, and pointed to Franco as
the actual owner thereof. Clearly, Francos action for the
recovery of his deposits appropriately covers the deposits in
Quiaoits account.

BPI-FB makes capital of Francos belated allegation relative to

this particular arrangement. It insists that the transaction with
Quiaoit was not specifically alleged in Francos complaint before
the Manila RTC. However, it appears that BPI-FB had impliedly
consented to the trial of this issue given its extensive crossexamination of Quiaoit.

Fourth. Notwithstanding all the foregoing, BPI-FB continues to

insist that the dishonor of Francos checks respectively dated
September 11 and 18, 1989 was legally in order in view of the
Makati RTCs supplemental writ of attachment issued on
September 14, 1989. It posits that as the party that applied for
the writ of attachment before the Makati RTC, it need not be
served with the Notice of Garnishment before it could place
Francos accounts under garnishment.

Undeniably, the Makati RTC is vested with the authority to

determine the legal consequences of BPI-FBs non-compliance
with the Order Lifting the Order of Attachment. However, such
authority does not preclude the Manila RTC from ruling on BPIFBs liability to Franco for payment of interest based on its
continued and unjustified refusal to perform a contractual
obligation upon demand. After all, this was the core issue raised
by Franco in his complaint before the Manila RTC.

Section 5, Rule 10 of the Rules of Court provides:

The argument is specious. In this argument, we perceive BPIFBs clever but transparent ploy to circumvent Section 4,42 Rule
13 of the Rules of Court. It should be noted that the strict
requirement on service of court papers upon the parties
affected is designed to comply with the elementary requisites of
due process. Franco was entitled, as a matter of right, to notice,
if the requirements of due process are to be observed. Yet, he
received a copy of the Notice of Garnishment only on
September 27, 1989, several days after the two checks he
issued were dishonored by BPI-FB on September 20 and 21,
1989. Verily, it was premature for BPI-FB to freeze Francos
accounts without even awaiting service of the Makati RTCs
Notice of Garnishment on Franco.
Additionally, it should be remembered that the enforcement of a
writ of attachment cannot be made without including in the
main suit the owner of the property attached by virtue thereof.
Section 5, Rule 13 of the Rules of Court specifically provides
that "no levy or attachment pursuant to the writ issued x x x
shall be enforced unless it is preceded, or contemporaneously
accompanied, by service of summons, together with a copy of
the complaint, the application for attachment, on the defendant
within the Philippines."
Franco was impleaded as party-defendant only on May 15,
1990. The Makati RTC had yet to acquire jurisdiction over the
person of Franco when BPI-FB garnished his
accounts.43 Effectively, therefore, the Makati RTC had no
authority yet to bind the deposits of Franco through the writ of
attachment, and consequently, there was no legal basis for BPIFB to dishonor the checks issued by Franco.
Fifth. Anent the CAs finding that BPI-FB was in bad faith and as
such liable for the advance interest it deducted from Francos
time deposit account, and for moral as well as exemplary

damages, we find it proper to reinstate the ruling of the trial

court, and allow only the recovery of nominal damages in the
amount of P10,000.00. However, we retain the CAs award
of P75,000.00 as attorneys fees.
In granting Francos prayer for interest on his time deposit
account and for moral and exemplary damages, the CA
attributed bad faith to BPI-FB because it (1) completely
disregarded its obligation to Franco; (2) misleadingly claimed
that Francos deposits were under garnishment; (3)
misrepresented that Francos current account was not on file;
and (4) refused to return the P400,000.00 despite the fact that
the ostensible owner, Quiaoit, wanted the amount returned to
Franco.
In this regard, we are guided by Article 2201 of the Civil Code
which provides:
Article 2201. In contracts and quasi-contracts, the damages for
which the obligor who acted in good faith is liable shall be those
that are the natural and probable consequences of the breach
of the obligation, and which the parties have foreseen or could
have reasonable foreseen at the time the obligation was
constituted.
In case of fraud, bad faith, malice or wanton attitude, the
obligor shall be responsible for all damages which may be
reasonably attributed to the non-performance of the obligation.
(Emphasis supplied.)
We find, as the trial court did, that BPI-FB acted out of the
impetus of self-protection and not out of malevolence or ill will.
BPI-FB was not in the corrupt state of mind contemplated in
Article 2201 and should not be held liable for all damages now

being imputed to it for its breach of obligation. For the same

reason, it is not liable for the unearned interest on the time
deposit.

Franco could not point to, or identify any particular

circumstance in Article 2219 of the Civil Code,50 upon which to
base his claim for moral damages.1wphi1

Bad faith does not simply connote bad judgment or negligence;

it imports a dishonest purpose or some moral obliquity and
conscious doing of wrong; it partakes of the nature of
fraud.44 We have held that it is a breach of a known duty
through some motive of interest or ill will.45 In the instant case,
we cannot attribute to BPI-FB fraud or even a motive of selfenrichment. As the trial court found, there was no denial
whatsoever by BPI-FB of the existence of the accounts. The
computer-generated document which indicated that the current
account was "not on file" resulted from the prior debit by BPI-FB
of the deposits. The remedy of freezing the account, or the
garnishment, or even the outright refusal to honor any
transaction thereon was resorted to solely for the purpose of
holding on to the funds as a security for its intended court
action,46 and with no other goal but to ensure the integrity of
the accounts.

Thus, not having acted in bad faith, BPI-FB cannot be held liable
for moral damages under Article 2220 of the Civil Code for
breach of contract.51

We have had occasion to hold that in the absence of fraud or

bad faith,47 moral damages cannot be awarded; and that the
adverse result of an action does not per se make the action
wrongful, or the party liable for it. One may err, but error alone
is not a ground for granting such damages.48

Attorneys fees may be awarded when a party is compelled to

litigate or incur expenses to protect his interest,54or when the
court deems it just and equitable.55 In the case at bench, BPI-FB
refused to unfreeze the deposits of Franco despite the Makati
RTCs Order Lifting the Order of Attachment and Quiaoits
unwavering assertion that the P400,000.00 was part of Francos
savings account. This refusal constrained Franco to incur
expenses and litigate for almost two (2) decades in order to
protect his interests and recover his deposits. Therefore, this
Court deems it just and equitable to grant Franco P75,000.00 as
attorneys fees. The award is reasonable in view of the
complexity of the issues and the time it has taken for this case
to be resolved.56

An award of moral damages contemplates the existence of the

following requisites: (1) there must be an injury clearly
sustained by the claimant, whether physical, mental or
psychological; (2) there must be a culpable act or omission
factually established; (3) the wrongful act or omission of the
defendant is the proximate cause of the injury sustained by the
claimant; and (4) the award for damages is predicated on any of
the cases stated in Article 2219 of the Civil Code.49

We also deny the claim for exemplary damages. Franco should

show that he is entitled to moral, temperate, or compensatory
damages before the court may even consider the question of
whether exemplary damages should be awarded to him.52 As
there is no basis for the award of moral damages, neither can
exemplary damages be granted.
While it is a sound policy not to set a premium on the right to
litigate,53 we, however, find that Franco is entitled to reasonable
attorneys fees for having been compelled to go to court in
order to assert his right. Thus, we affirm the CAs grant
of P75,000.00 as attorneys fees.

Sixth. As for the dismissal of BPI-FBs counter-claim, we uphold

the Manila RTCs ruling, as affirmed by the CA, that BPI-FB is not
entitled to recover P3,800,000.00 as actual damages. BPI-FBs
alleged loss of profit as a result of Francos suit is, as already
pointed out, of its own making. Accordingly, the denial of its
counter-claim is in order.
WHEREFORE, the petition is PARTIALLY GRANTED. The Court of
Appeals Decision dated November 29, 1995 is AFFIRMED with
the MODIFICATION that the award of unearned interest on the
time deposit and of moral and exemplary damages is DELETED.
No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. Nos. 173654-765

The cases were docketed as Criminal Cases No. 05-3054 to 053165.

The allegations in the Informations1 filed before the RTC were
uniform and pro-forma, except for the amounts, date and time
of commission, to wit:

August 28, 2008

INFORMATION

PEOPLE OF THE PHILIPPINES, petitioner,

vs.
TERESITA PUIG and ROMEO PORRAS, respondents.
DECISION
CHICO-NAZARIO, J.:
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 of
the Orders dated 30 January 2006 and 9 June 2006 of the
Regional Trial Court (RTC) of the 6th Judicial Region, Branch 68,
Dumangas, Iloilo, dismissing the 112 cases of Qualified Theft
filed 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:
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.

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 and Bookkeeper 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.
After perusing the Informations in these cases, the trial court
did not find the existence of probable cause that would have
necessitated the issuance of a warrant of arrest based on the
following grounds:
(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."
It added that allowing the 112 cases for Qualified Theft filed
against the respondents to push through 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.
A Motion for Reconsideration2 was filed on 17 April 2006, by the
petitioner.
On 9 June 2006, an Order3 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 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 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.
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.
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.
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.
In determining the existence of probable cause to issue a
warrant of arrest, the RTC judge found the allegations in the
Information inadequate. He ruled that the Information failed to
state facts constituting the qualifying circumstance of grave
abuse of confidence and the element of taking 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.

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 constitutive of the elements of the offense charged.
This, therefore, makes the issue of sufficiency of the allegations
in the Informations the focal point of discussion.
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.)
Theft, as defined in Article 308 of the Revised Penal Code,
requires the physical taking of anothers property without
violence or intimidation against persons or force upon things.
The elements of the crime under this Article are:
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.

well as its qualifying and aggravating circumstances and

for the court to pronounce judgment.

To fall under the crime of Qualified Theft, the following elements

must concur:

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

1. Taking of personal property;

2. That the said property belongs to another;

The portion of the Information relevant to this discussion reads:

3. That the said taking be done with intent to gain;
A]bove-named [respondents], conspiring, confederating, and helping one another, with grave

4. That it be done without the owners consent;

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.

5. That it be accomplished without the use of violence or

intimidation against persons, nor of force upon things;
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:
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

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 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.
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
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 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.
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
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.
The judgment of conviction elaborated thus:
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
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
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 accused herein is even
more precise, as this is exactly the requirement of the law in
qualifying the 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.
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 Umezawa13 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.
On the alleged wrong mode of appeal by petitioner, suffice it to
state that the rule is well-settled that in appeals by certiorari
under Rule 45 of the Rules of Court, only errors of law may be
raised,14 and herein petitioner certainly raised a question of law.
As an aside, even if we go beyond the allegations of the
Informations in these cases, a closer 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 evaluating the resolution of the
prosecutor and its supporting evidence. Soliven v.
Makasiar,15 as reiterated inAllado 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 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 respondents, conversely, it is also
equally imperative upon the judge to proceed with the case
upon a showing that there is a prima facie case against the
respondents.

WHEREFORE, premises considered, the Petition for Review

on Certiorari is hereby GRANTED. The Orders dated 30 January
2006 and 9 June 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 PORRAS. The RTC
Judge of Branch 68, in Dumangas, Iloilo, is directed to proceed
with the trial of Criminal Cases No. 05-3054 to 05-3165,
inclusive, with reasonable dispatch. No pronouncement as to
costs.
SO ORDERED.

Republic of the Philippines

Supreme Court
Baguio City
FIRST DIVISION
HERMOJINA ESTORES,

G.R. No. 175139

Petitioner,
Present:

- versus -

SPOUSES ARTURO and

LAURA SUPANGAN,
Respondents.

2000 until its full payment before finality of the

judgment.If the adjudged principal and the interest
(or any part thereof) remain unpaid thereafter, the
interest rate shall be adjusted to twelve percent
(12%) per annum, computed from the time the
judgment becomes final and executory until it is fully
satisfied. The award of attorneys fees is hereby
reduced
to P100,000.00. Costs
against
the
defendants-appellants.

SO ORDERED.[3]
Also assailed is the August 31, 2006 Resolution[4] denying the
CORONA, C.J., Chairperson,
motion for reconsideration.
LEONARDO-DE CASTRO,
Factual Antecedents
BERSAMIN,
DEL CASTILLO, and On October 3, 1993, petitioner Hermojina Estores and respondentVILLARAMA, JR., JJ. spouses Arturo and Laura Supangan entered into a Conditional Deed
of Sale[5] whereby petitioner offered to sell, and respondent-spouses
offered to buy, a parcel of land covered by Transfer Certificate of Title
Promulgated:
No. TCT No. 98720 located at Naic, Cavite for the sum of P4.7
million. The parties likewise stipulated, among others, to wit:
April 18, 2012

x------------------------------------------------------------------x
DECISION
DEL CASTILLO, J.:
The only issue posed before us is the propriety of the
imposition of interest and attorneys fees.
Assailed in this Petition for Review[1] filed under Rule 45 of the Rules
of Court is the May 12, 2006 Decision[2] of the Court of Appeals (CA)
in CA-G.R. CV No. 83123, the dispositive portion of which reads:
WHEREFORE, the appealed decision is
MODIFIED. The rate of interest shall be six percent
(6%) per annum, computed from September 27,

xxxx
1. Vendor will secure approved clearance from DAR
requirements of which are (sic):
a) Letter request
b) Title
c) Tax Declaration
d) Affidavit
of
Aggregate
Landholding
Vendor/Vendee
e) Certification from the Provl. Assessors as to
Landholdings of Vendor/Vendee
f) Affidavit of Non-Tenancy
g) Deed of Absolute Sale
xxxx

4. Vendee shall be informed as to the status of DAR

clearance within 10 days upon signing of the
documents.
xxxx
6. Regarding the house located within the perimeter
of the subject [lot] owned by spouses [Magbago],
said house shall be moved outside the perimeter
of this subject property to the 300 sq. m. area
allocated for [it]. Vendor hereby accepts the
responsibility of seeing to it that such agreement
is carried out before full payment of the sale is
made by vendee.
7. If and after the vendor has completed all necessary
documents for registration of the title and the
vendee fails to complete payment as per
agreement, a forfeiture fee of 25% or
downpayment, shall be applied.However, if the
vendor fails to complete necessary documents
within thirty days without any sufficient reason, or
without informing the vendee of its status,
vendee has the right to demand return of full
amount of down payment.
xxxx
9. As to the boundaries and partition of the lots
(15,018 sq. m. and 300 sq. m.) Vendee shall be
informed immediately of its approval by the LRC.
10. The vendor assures the vendee of a peaceful
transfer of ownership.
xxxx

of respondent-spouses, petitioner still failed to comply with her

obligation as expressly provided in paragraphs 4, 6, 7, 9 and 10 of
the contract. Hence, in a letter[7] dated September 27, 2000,
respondent-spouses demanded the return of the amount of P3.5
million within 15 days from receipt of the letter. In reply,[8] petitioner
acknowledged receipt of the P3.5 million and promised to return the
same within 120 days. Respondent-spouses were amenable to the
proposal provided an interest of 12% compounded annually shall be
imposed on the P3.5 million.[9] When petitioner still failed to return
the amount despite demand, respondent-spouses were constrained
to file a Complaint[10] for sum of money before the Regional Trial Court
(RTC) of Malabon against herein petitioner as well as Roberto U. Arias
(Arias) who allegedly acted as petitioners agent. The case was
docketed as Civil Case No. 3201-MN and raffled off to Branch 170. In
their complaint, respondent-spouses prayed that petitioner and Arias
be ordered to:
1.

Pay
the
principal
amount
of P3,500,000.00 plus interest of 12%
compounded annually starting October 1,
1993
or
an
estimated
amount
of P8,558,591.65;

2.

Pay
damages:

following

items

of

a)

Moral damages in the amount

of P100,000.00;

b)

Actual damages in the amount

of P100,000.00;

c)

Exemplary damages in the

amount of P100,000.00;

d)

[Attorneys] fee in the amount

of P50,000.00
plus
20%
of
recoverable
amount
from
the
[petitioner].

[6]

After almost seven years from the time of the execution of

the contract and notwithstanding payment of P3.5 million on the part

the

e)

[C]ost of suit.[11]

In their Answer with Counterclaim,[12] petitioner and Arias

averred that they are willing to return the principal amount of P3.5
million but without any interest as the same was not agreed upon. In
their Pre-Trial Brief,[13] they reiterated that the only remaining issue
between the parties is the imposition of interest. They argued that
since the Conditional Deed of Sale provided only for the return of the
downpayment in case of breach, they cannot be held liable to pay
legal interest as well.[14]
In its Pre-Trial Order[15] dated June 29, 2001, the RTC noted
that the parties agreed that the principal amount of 3.5 million pesos
should be returned to the [respondent-spouses] by the [petitioner]
and the issue remaining [is] whether x x x [respondent-spouses] are
entitled to legal interest thereon, damages and attorneys fees.[16]
Trial ensued thereafter. After the presentation of the
respondent-spouses evidence, the trial court set the presentation of
Arias and petitioners evidence on September 3, 2003. [17]However,
despite several postponements, petitioner and Arias failed to appear
hence they were deemed to have waived the presentation of their
evidence. Consequently, the case was deemed submitted for
decision.[18]
Ruling of the Regional Trial Court
On May 7, 2004, the RTC rendered its Decision[19] finding respondentspouses entitled to interest but only at the rate of 6% per annum and
not 12% as prayed by them.[20] It also found respondent-spouses
entitled to attorneys fees as they were compelled to litigate to
protect their interest.[21]
The dispositive portion of the RTC Decision reads:
WHEREFORE, premises considered, judgment
is hereby rendered in favor of the [respondentspouses] and ordering the [petitioner and Roberto
Arias] to jointly and severally:

1.
Pay [respondent-spouses] the
principal amount of Three Million Five Hundred
Thousand pesos (P3,500,000.00) with an interest of
6% compounded annually starting October 1, 1993
and attorneys fee in the amount of Fifty Thousand
pesos (P50,000.00) plus 20% of the recoverable
amount from the defendants and cost of the suit.
The Compulsory Counter Claim is hereby
dismissed for lack of factual evidence.
SO ORDERED.[22]
Ruling of the Court of Appeals
Aggrieved, petitioner and Arias filed their notice of appeal.[23] The CA
noted that the only issue submitted for its resolution is whether it is
proper to impose interest for an obligation that does not involve a
loan or forbearance of money in the absence of stipulation of the
parties.[24]
On May 12, 2006, the CA rendered the assailed Decision
affirming the ruling of the RTC finding the imposition of 6% interest
proper.[25] However, the same shall start to run only from September
27, 2000 when respondent-spouses formally demanded the return of
their money and not from October 1993 when the contract was
executed as held by the RTC. The CA also modified the RTCs ruling as
regards the liability of Arias. It held that Arias could not be held
solidarily liable with petitioner because he merely acted as agent of
the latter. Moreover, there was no showing that he expressly bound
himself to be personally liable or that he exceeded the limits of his
authority. More importantly, there was even no showing that Arias
was authorized to act as agent of petitioner.[26] Anent the award of
attorneys fees, the CA found the award by the trial court (P50,000.00
plus 20% of the recoverable amount) excessive[27] and thus reduced
the same to P100,000.00.[28]
The dispositive portion of the CA Decision reads:

WHEREFORE, the appealed decision is MODIFIED. The

rate of interest shall be six percent (6%) per annum,
computed from September 27, 2000 until its full
payment before finality of the judgment. If the
adjudged principal and the interest (or any part
thereof) remain[s] unpaid thereafter, the interest rate
shall be adjusted to twelve percent (12%) per annum,
computed from the time the judgment becomes final
and executory until it is fully satisfied. The award of
attorneys
fees
is
hereby
reduced
to P100,000.00. Costs against the [petitioner].

documents. As regards the attorneys fees, they claim that they are
entitled to the same because they were forced to litigate when
petitioner unjustly withheld the amount. Besides, the amount
awarded by the CA is even smaller compared to the filing fees they
paid.

SO ORDERED.[29]

We sustain the ruling of both the RTC and the CA that it is

proper to impose interest notwithstanding the absence of stipulation
in the contract. Article 2210 of the Civil Code expressly provides that
[i]nterest may, in the discretion of the court, be allowed upon
damages awarded for breach of contract. In this case, there is no
question that petitioner is legally obligated to return the P3.5 million
because of her failure to fulfill the obligation under the Conditional
Deed of Sale, despite demand. She has in fact admitted that the
conditions were not fulfilled and that she was willing to return the full
amount of P3.5 million but has not actually done so. Petitioner
enjoyed the use of the money from the time it was given to
her[30] until now. Thus, she is already in default of her obligation from
the date of demand, i.e., on September 27, 2000.

Petitioner moved for reconsideration which was denied in the August

31, 2006 Resolution of the CA.
Hence, this petition raising the sole issue of whether the imposition of
interest and attorneys fees is proper.
Petitioners Arguments
Petitioner insists that she is not bound to pay interest on the P3.5
million because the Conditional Deed of Sale only provided for the
return of the downpayment in case of failure to comply with her
obligations. Petitioner also argues that the award of attorneys fees in
favor of the respondent-spouses is unwarranted because it cannot be
said that the latter won over the former since the CA even sustained
her contention that the imposition of 12% interest compounded
annually is totally uncalled for.
Respondent-spouses Arguments
Respondent-spouses aver that it is only fair that interest be imposed
on the amount they paid considering that petitioner failed to return
the amount upon demand and had been using the P3.5 million for
her benefit. Moreover, it is undisputed that petitioner failed to
perform her obligations to relocate the house outside the perimeter
of the subject property and to complete the necessary

Our Ruling
The petition lacks merit.
Interest may be may be imposed even in the absence of the
stipulation the in the contract.

The interest at the rate of 12% is applicable in the instant

case.

Anent the interest rate, the general rule is that the applicable rate of
interest shall be computed in accordance with the stipulation of the
parties.[31] Absent any stipulation, the applicable rate of interest shall
be 12% per annum when the obligation arises out of a loan or a
forbearance of money, goods or credits. In other cases, it shall be six
percent (6%).[32] In this case, the parties did not stipulate as to the
applicable rate of interest. The only question remaining therefore is
whether the 6% as provided under Article 2209 of the Civil Code, or
12% under Central Bank Circular No. 416, is due.

The contract involved in this case is admittedly not a loan but

a Conditional Deed of Sale. However, the contract provides that the
seller (petitioner) must return the payment made by the buyer
(respondent-spouses) if the conditions are not fulfilled. There is no
question that they have in fact, not been fulfilled as the seller
(petitioner) has admitted this. Notwithstanding demand by the buyer
(respondent-spouses), the seller (petitioner) has failed to return the
money and
should be considered in default from the time that demand was
made on September 27, 2000.

for the use of their money, absent any stipulation, should be the
same rate of legal interest applicable to a loan since the use or
deprivation of funds is similar to a loan.
Petitioners unwarranted withholding of the money which
rightfully pertains to respondent-spouses amounts to forbearance of
money which can be considered as an involuntary loan.Thus, the
applicable rate of interest is 12% per annum. In Eastern Shipping
Lines, Inc. v. Court of Appeals,[35]cited in Crismina Garments, Inc. v.
Court of Appeals,[36] the Court suggested the following guidelines:
I.

When an obligation, regardless of

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

II.

With regard particularly to an

award of interest in the concept of
actual and compensatory damages,
the rate of interest, as well as the
accrual thereof, is imposed, as
follows:

Even if the transaction involved a Conditional Deed of Sale,

can the stipulation governing the return of the money be considered
as a forbearance of money which required payment of interest at the
rate of 12%? We believe so.
In Crismina Garments, Inc. v. Court of Appeals,[33] forbearance
was defined as a contractual obligation of lender or creditor to refrain
during a given period of time, from requiring the borrower or debtor
to repay a loan or debt then due and payable. This definition
describes a loan where a debtor is given a period within which to pay
a loan or debt. In such case, forbearance of money, goods or credits
will have no distinct definition from a loan. We believe however, that
the phrase forbearance of money, goods or credits is meant to have
a separate meaning from a loan, otherwise there would have been
no need to add that phrase as a loan is already sufficiently defined in
the Civil Code.[34] Forbearance of money, goods or credits should
therefore refer to arrangements other than loan agreements, where a
person acquiesces to the temporary use of his money, goods or
credits pending happening of certain events or fulfillment of certain
conditions. In this case, the respondent-spouses parted with their
money even before the conditions were fulfilled. They have therefore
allowed or granted forbearance to the seller (petitioner) to use their
money pending fulfillment of the conditions. They were deprived of
the use of their money for the period pending fulfillment of the
conditions and when those conditions were breached, they are
entitled not only to the return of the principal amount paid, but also
to compensation for the use of their money. And the compensation

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.

3.

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 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.[37]
Eastern Shipping Lines, Inc. v. Court of Appeals [38]and its
predecessor case, Reformina v. Tongol[39] both involved torts cases
and hence, there was no forbearance of money, goods, or
credits. Further, the amount claimed (i.e., damages) could not be
established with reasonable certainty at the time the claim was
made. Hence, we arrived at a different ruling in those cases.
Since the date of demand which is September 27, 2000 was
satisfactorily established during trial, then the interest rate of 12%
should be reckoned from said date of demand until the principal
amount and the interest thereon is fully satisfied.
The award of attorneys fees is warranted.

Under Article 2208 of the Civil Code, attorneys fees may be

recovered:
xxxx
(2) When the defendants act or omission has
compelled the plaintiff to litigate with third
persons or to incur expenses to protect his
interest;
xxxx
(11)

In any other case where the court deems it

just and equitable that attorneys fees and
expenses of litigation should be recovered.

In all cases, the attorneys fees and expenses of

litigation must be reasonable.

Considering the circumstances of the instant case, we find

respondent-spouses entitled to recover attorneys fees. There is no
doubt that they were forced to litigate to protect their interest, i.e., to
recover their money. However, we find the amount of P50,000.00
more appropriate in line with the policy enunciated in Article 2208 of
the Civil Code that the award of attorneys fees must always be
reasonable.
WHEREFORE, the Petition for Review is DENIED. The May
12, 2006 Decision of the Court of Appeals in CA-G.R. CV No. 83123
is AFFIRMED with MODIFICATIONS that the rate of interest shall
be twelve percent (12%) per annum, computed from September 27,
2000 until fully satisfied. The award of attorneys fees is further
reduced to P50,000.00.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 189871

August 13, 2013

DARIO NACAR, PETITIONER,

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

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

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 Resolution 2 dated
October 9, 2009 denying petitioners motion for
reconsideration.

Length of Service

8 yrs. & 1 month

Date Dismissed

January 24, 1997

The factual antecedents are undisputed.

Rate per day

P196.00

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.

Date of Decisions

Aug. 18, 1998

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:

Prevailing Rate per day

= P62,986.00

P198.00 x 26 days x 6.4 mos.

= P32,947.20

DECISION
PERALTA, J.:

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

BACKWAGES

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

TOTAL

= P95.933.76

xxxx
WHEREFORE, premises considered, judgment is hereby
rendered finding respondents guilty of constructive dismissal
and are therefore, ordered:
To pay jointly and severally the complainant the amount of
sixty-two thousand nine hundred eighty-six 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
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
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
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
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 Resolution25 dated October 9, 2009.
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
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.
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. 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 recomputed; 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 recomputation 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

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.

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:

3. When the judgment of the court awarding a sum of

money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.33

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,

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:
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:
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

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:
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
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:
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.

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.

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.

SO ORDERED.

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;
(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.

THIRD DIVISION
SEBASTIAN SIGA-AN,
Petitioner,

G.R. No. 173227

Present:

that she was a businesswoman engaged in supplying office

materials and equipments to the Philippine Navy Office (PNO)
located at Fort Bonifacio, Taguig City, while petitioner was a
military officer and comptroller of the PNO from 1991 to 1996.

Respondent claimed that sometime in 1992, petitioner

approached her inside the PNO and offered to loan her the
YNARES-SANTIAGO,
amount of P540,000.00. Since she needed capital for her
Chairperson,
business transactions with the PNO, she accepted petitioners
AUSTRIA-MARTINEZ,
proposal. The loan agreement was not reduced in writing. Also,
-versus
CHICO-NAZARIO,
there was no stipulation as to the payment of interest for the
NACHURA, and
loan.[6]
LEONARDO-DE CASTRO,*
On 31 August 1993, respondent issued a check
worth P500,000.00 to petitioner as partial payment of the
Promulgated:
loan. On 31 October 1993, she issued another check in the
ALICIA VILLANUEVA,
amount of P200,000.00 to petitioner as payment of the
Respondent.
January 20, 2009
remaining balance of the loan. Petitioner told her that since she
x---------------------------------------------paid a total amount of P700,000.00 for the P540,000.00 worth
- - - -x
of loan, the excess amount of P160,000.00 would be applied as
interest for the loan. Not satisfied with the amount applied as
interest,
petitioner
pestered
her
to
pay
additional
DECISION
interest. Petitioner threatened to block or disapprove her
transactions with the PNO if she would not comply with his
CHICO-NAZARIO, J.:
demand. As all her transactions with the PNO were subject to
the approval of petitioner as comptroller of the PNO, and fearing
Before Us is a Petition[1] for Review on Certiorari under
that petitioner might block or unduly influence the payment of
Rule 45 of the Rules of Court seeking to set aside the Decision,
her vouchers in the PNO, she conceded. Thus, she paid
[2]
dated 16 December 2005, and Resolution, [3]dated 19 June
additional amounts in cash and checks as interests for the
2006 of the Court of Appeals in CA-G.R. CV No. 71814, which
loan. She asked petitioner for receipt for the payments but
affirmed in toto the Decision,[4] dated 26 January 2001, of the
petitioner told her that it was not necessary as there was
Las Pinas City Regional Trial Court, Branch 255, in Civil Case No.
mutual trust and confidence between them. According to her
LP-98-0068.
computation, the total amount she paid to petitioner for the
loan and interest accumulated to P1,200,000.00.[7]
The facts gathered from the records are as follows:
Thereafter, respondent consulted a lawyer regarding the
On 30 March 1998, respondent Alicia Villanueva filed a
propriety of paying interest on the loan despite absence of
complaint[5] for sum of money against petitioner Sebastian Sigaagreement to that effect. Her lawyer told her that petitioner
an before the Las Pinas City Regional Trial Court (RTC), Branch
could not validly collect interest on the loan because there was
255, docketed as Civil Case No. LP-98-0068. Respondent alleged
no agreement between her and petitioner regarding payment of

interest. Since
she
paid
petitioner
a
total
amount
of P1,200,000.00 for the P540,000.00 worth of loan, and upon
being advised by her lawyer that she made overpayment to
petitioner, she sent a demand letter to petitioner asking for the
return of the excess amount of P660,000.00. Petitioner, despite
receipt of the demand letter, ignored her claim for
reimbursement.[8]
Respondent prayed that the RTC render judgment
ordering petitioner to pay respondent (1) P660,000.00 plus legal
interest from the time of demand; (2) P300,000.00 as moral
damages; (3) P50,000.00 as exemplary damages; and (4) an
amount equivalent to 25% of P660,000.00 as attorneys fees.[9]
In his answer[10] to the complaint, petitioner denied that
he offered a loan to respondent. He averred that in 1992,
respondent approached and asked him if he could grant her a
loan, as she needed money to finance her business venture with
the PNO. At first, he was reluctant to deal with respondent,
because the latter had a spotty record as a supplier of the PNO.
However, since respondent was an acquaintance of his
officemate, he agreed to grant her a loan. Respondent paid the
loan in full.[11]
Subsequently, respondent again asked him to give her a
loan. As respondent had been able to pay the previous loan in
full, he agreed to grant her another loan. Later, respondent
requested him to restructure the payment of the loan because
she could not give full payment on the due date. He acceded to
her request. Thereafter, respondent pleaded for another
restructuring of the payment of the loan. This time he rejected
her plea. Thus, respondent proposed to execute a promissory
note wherein she would acknowledge her obligation to him,
inclusive of interest, and that she would issue several postdated
checks to guarantee the payment of her obligation. Upon his
approval of respondents request for restructuring of the loan,
respondent executed a promissory note dated 12 September
1994 wherein she admitted having borrowed an amount
ofP1,240,000.00, inclusive of interest, from petitioner and that
she would pay said amount in March 1995. Respondent also

issued to him six postdated checks amounting toP1,240,000.00

as guarantee of compliance with her obligation. Subsequently,
he presented the six checks for encashment but only one check
was honored. He demanded that respondent settle her
obligation, but the latter failed to do so. Hence, he filed criminal
cases for Violation of the Bouncing Checks Law (Batas
Pambansa Blg. 22) against respondent. The cases were
assigned to the Metropolitan Trial Court of Makati City, Branch
65 (MeTC).[12]
Petitioner insisted that there was no overpayment
because respondent admitted in the latters promissory note
that her monetary obligation as of 12 September 1994
amounted to P1,240,000.00 inclusive of interests. He argued
that respondent was already estopped from complaining that
she should not have paid any interest, because she was given
several times to settle her obligation but failed to do so. He
maintained that to rule in favor of respondent is tantamount to
concluding that the loan was given interest-free.Based on the
foregoing averments, he asked the RTC to dismiss respondents
complaint.
After trial, the RTC rendered a Decision on 26 January
2001 holding that respondent made an overpayment of her loan
obligation to petitioner and that the latter should refund the
excess amount to the former. It ratiocinated that respondents
obligation was only to pay the loaned amount of P540,000.00,
and that the alleged interests due should not be included in the
computation of respondents total monetary debt because there
was no agreement between them regarding payment of
interest. It concluded that since respondent made an excess
payment to petitioner in the amount of P660,000.00 through
mistake, petitioner should return the said amount to respondent
pursuant to the principle of solutio indebiti.[13]
The RTC also ruled that petitioner should pay moral
damages for the sleepless nights and wounded feelings
experienced by respondent. Further, petitioner should pay
exemplary damages by way of example or correction for the
public good, plus attorneys fees and costs of suit.

I.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing
evidence and in the light of the provisions of law
and jurisprudence on the matter, judgment is
hereby rendered in favor of the plaintiff and
against the defendant as follows:
(1)
Ordering defendant to pay
plaintiff the amount of P660,000.00 plus legal
interest of 12% per annum computed from 3
March 1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the
amount of P300,000.00 as moral damages;
(3) Ordering defendant to pay plaintiff the
amount of P50,000.00 as exemplary damages;
(4) Ordering defendant to pay plaintiff the
amount equivalent to 25% of P660,000.00 as
attorneys fees; and
suit.[14]

(5) Ordering defendant to pay the costs of

Petitioner appealed to the Court of Appeals. On 16

December 2005, the appellate court promulgated its Decision
affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered,
the instant appeal is hereby DENIED and the
assailed decision [is] AFFIRMED in toto.[15]
Petitioner filed a motion for reconsideration of the
appellate courts decision but this was denied. [16] Hence,
petitioner lodged the instant petition before us assigning the
following errors:

THE RTC AND THE COURT OF APPEALS ERRED IN

RULING THAT NO INTEREST WAS DUE TO
PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN
APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.[17]
Interest is a compensation fixed by the parties for the
use or forbearance of money. This is referred to as monetary
interest. Interest may also be imposed by law or by courts as
penalty or indemnity for damages. This is called compensatory
interest.[18] The right to interest arises only by virtue of a
contract or by virtue of damages for delay or failure to pay the
principal loan on which interest is demanded.[19]
Article 1956 of the Civil Code, which refers to monetary
interest,[20] specifically mandates that no interest shall be due
unless it has been expressly stipulated in writing.As can be
gleaned from the foregoing provision, payment of monetary
interest is allowed only if: (1) there was an express stipulation
for the payment of interest; and (2) the agreement for the
payment of interest was reduced in writing. The concurrence of
the two conditions is required for the payment of monetary
interest. Thus, we have held that collection of interest without
any stipulation therefor in writing is prohibited by law.[21]
It appears that petitioner and respondent did not agree
on the payment of interest for the loan. Neither was there
convincing proof of written agreement between the two
regarding the payment of interest. Respondent testified that
although she accepted petitioners offer of loan amounting
to P540,000.00, there was, nonetheless, no verbal or written
agreement for her to pay interest on the loan.[22]

Petitioner presented a handwritten promissory note

dated 12 September 1994[23] wherein respondent purportedly
admitted owing petitioner capital and interest.Respondent,
however, explained that it was petitioner who made a
promissory note and she was told to copy it in her own
handwriting; that all her transactions with the PNO were subject
to the approval of petitioner as comptroller of the PNO; that
petitioner threatened to disapprove her transactions with the
PNO if she would not pay interest; that being unaware of the
law on interest and fearing that petitioner would make good of
his threats if she would not obey his instruction to copy the
promissory note, she copied the promissory note in her own
handwriting; and that such was the same promissory note
presented by petitioner as alleged proof of their written
agreement on interest.[24] Petitioner did not rebut the foregoing
testimony. It is evident that respondent did not really consent to
the payment of interest for the loan and that she was merely
tricked and coerced by petitioner to pay interest. Hence, it
cannot be gainfully said that such promissory note pertains to
an express stipulation of interest or written agreement of
interest on the loan between petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and
the Court of Appeals found that he and respondent agreed on
the payment of 7% rate of interest on the loan; that the agreed
7% rate of interest was duly admitted by respondent in her
testimony in the Batas Pambansa Blg. 22 cases he filed against
respondent; that despite such judicial admission by respondent,
the RTC and the Court of Appeals, citing Article 1956 of the Civil
Code, still held that no interest was due him since the
agreement on interest was not reduced in writing; that the
application of Article 1956 of the Civil Code should not be
absolute, and an exception to the application of such provision
should be made when the borrower admits that a specific rate
of interest was agreed upon as in the present case; and that it
would be unfair to allow respondent to pay only the loan when
the latter very well knew and even admitted in the Batas
Pambansa Blg. 22 cases that there was an agreed 7% rate of
interest on the loan.[25]

We have carefully examined the RTC Decision and found

that the RTC did not make a ruling therein that petitioner and
respondent agreed on the payment of interest at the rate of 7%
for the loan. The RTC clearly stated that although petitioner and
respondent entered into a valid oral contract of loan amounting
to P540,000.00, they, nonetheless, never intended the payment
of interest thereon.[26] While the Court of Appeals mentioned in
its Decision that it concurred in the RTCs ruling that petitioner
and respondent agreed on a certain rate of interest as regards
the loan, we consider this as merely an inadvertence because,
as earlier elucidated, both the RTC and the Court of Appeals
ruled that petitioner is not entitled to the payment of interest on
the loan. The rule is that factual findings of the trial court
deserve great weight and respect especially when affirmed by
the appellate court.[27] We found no compelling reason to disturb
the ruling of both courts.
Petitioners reliance on respondents alleged admission in
the Batas Pambansa Blg. 22 cases that they had agreed on the
payment of interest at the rate of 7% deserves scant
consideration. In the said case, respondent merely testified that
after paying the total amount of loan, petitioner ordered her to
pay interest.[28] Respondent did not categorically declare in the
same
case
that
she
and
respondent
made
an express stipulation in writing as regards payment of interest
at the rate of 7%. As earlier discussed, monetary interest is due
only if there was an express stipulation in writing for the
payment of interest.
There are instances in which an interest may be imposed
even in the absence of express stipulation, verbal or written,
regarding payment of interest. Article 2209 of the Civil Code
states that if the obligation consists in the payment of a sum of
money, and the debtor incurs delay, a legal interest of 12% per
annum may be imposed as indemnity for damages if no
stipulation on the payment of interest was agreed
upon. Likewise, Article 2212 of the Civil Code provides that
interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent on this point.

All the same, the interest under these two instances may
be imposed only as a penalty or damages for breach of
contractual obligations. It cannot be charged as a compensation
for the use or forbearance of money. In other words, the two
instances apply only to compensatory interest and not to
monetary interest.[29] The case at bar involves petitioners claim
for monetary interest.
Further, said compensatory interest is not chargeable in
the instant case because it was not duly proven that respondent
defaulted in paying the loan. Also, as earlier found, no interest
was due on the loan because there was no written agreement
as regards payment of interest.
Apropos the second assigned error, petitioner argues
that the principle of solutio indebiti does not apply to the instant
case. Thus, he cannot be compelled to return the alleged excess
amount paid by respondent as interest.[30]
Under Article 1960 of the Civil Code, if the borrower of
loan pays interest when there has been no stipulation therefor,
the provisions of the Civil Code concerning solutioindebiti shall
be applied. Article 2154 of the Civil Code explains the principle
of solutio indebiti. Said provision provides that if something is
received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises. In
such a case, a creditor-debtor relationship is created under a
quasi-contract whereby the payor becomes the creditor who
then has the right to demand the return of payment made by
mistake, and the person who has no right to receive such
payment becomes obligated to return the same. The quasicontract of solutio indebiti harks back to the ancient principle
that no one shall enrich himself unjustly at the expense of
another.[31] The principle of solutio indebiti applies where (1) a
payment is made when there exists no binding relation between
the payor, who has no duty to pay, and the person who
received the payment; and (2) the payment is made through
mistake, and not through liberality or some other cause. [32] We
have held that the principle of solutio indebiti applies in case of
erroneous payment of undue interest.[33]

It was duly established that respondent paid interest to

petitioner. Respondent was under no duty to make such
payment because there was no express stipulation in writing to
that effect. There was no binding relation between petitioner
and respondent as regards the payment of interest. The
payment was clearly a mistake. Since petitioner received
something when there was no right to demand it, he has an
obligation to return it.
We shall now determine the propriety of the monetary
award and damages imposed by the RTC and the Court of
Appeals.
Records show that respondent received a loan
amounting to P540,000.00 from petitioner.[34] Respondent issued
two checks with a total worth of P700,000.00 in favor of
petitioner as payment of the loan. [35] These checks were
subsequently encashed by petitioner.[36] Obviously, there was an
excess of P160,000.00 in the payment for the loan.Petitioner
claims that the excess of P160,000.00 serves as interest on the
loan to which he was entitled. Aside from issuing the said two
checks, respondent also paid cash in the total amount
of P175,000.00 to petitioner as interest.[37] Although no receipts
reflecting the same were presented because petitioner refused
to issue such to respondent, petitioner, nonetheless, admitted
in his Reply-Affidavit[38] in the Batas Pambansa Blg. 22 cases
that respondent paid him a total amount of P175,000.00 cash in
addition to the two checks. Section 26 Rule 130 of the Rules of
Evidence provides that the declaration of a party as to a
relevant fact may be given in evidence against him. Aside from
the amounts of P160,000.00 and P175,000.00 paid as interest,
no other proof of additional payment as interest was presented
by respondent. Since we have previously found that petitioner is
not entitled to payment of interest and that the principle
of solutio indebiti applies to the instant case, petitioner should
return to respondent the excess amount ofP160,000.00
and P175,000.00 or the total amount of P335,000.00.
Accordingly, the reimbursable amount to respondent fixed by

the RTC and the Court of Appeals

from P660,000.00 to P335,000.00.

should be

reduced

As earlier stated, petitioner filed five (5) criminal cases

for violation of Batas Pambansa Blg. 22 against respondent. In
the said cases, the MeTC found respondent guilty of violating
Batas Pambansa Blg. 22 for issuing five dishonored checks to
petitioner. Nonetheless, respondents conviction therein does
not affect our ruling in the instant case. The two checks, subject
matter of this case, totaling P700,000.00 which respondent
claimed as payment of the P540,000.00 worth of loan, were not
among the five checks found to be dishonored or bounced in
the five criminal cases. Further, the MeTC found that respondent
made an overpayment of the loan by reason of the interest
which the latter paid to petitioner.[39]
Article 2217 of the Civil Code provides that moral
damages may be recovered if the party underwent physical
suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation
and similar injury. Respondent testified that she experienced
sleepless nights and wounded feelings when petitioner refused
to return the amount paid as interest despite her repeated
demands. Hence,
the
award
of
moral
damages
is
justified. However, its corresponding amount of P300,000.00, as
fixed by the RTC and the Court of Appeals, is exorbitant and
should be equitably reduced. Article 2216 of the Civil Code
instructs that assessment of damages is left to the discretion of
the court according to the circumstances of each case. This
discretion is limited by the principle that the amount awarded
should not be palpably excessive as to indicate that it was the
result of prejudice or corruption on the part of the trial court.
[40]
To our mind, the amount of P150,000.00 as moral damages
is fair, reasonable, and proportionate to the injury suffered by
respondent.
Article 2232 of the Civil Code states that in a quasicontract, such as solutio indebiti, exemplary damages may be
imposed if the defendant acted in an oppressive
manner.Petitioner acted oppressively when he pestered

respondent to pay interest and threatened to block her

transactions with the PNO if she would not pay interest. This
forced respondent to pay interest despite lack of agreement
thereto. Thus,
the
award
of
exemplary
damages
is
appropriate. The amount of P50,000.00 imposed as exemplary
damages by the RTC and the Court is fitting so as to deter
petitioner and other lenders from committing similar and other
serious wrongdoings.[41]
Jurisprudence instructs that in awarding attorneys fees,
the trial court must state the factual, legal or equitable
justification for awarding the same.[42] In the case under
consideration, the RTC stated in its Decision that the award of
attorneys fees equivalent to 25% of the amount paid as interest
by respondent to petitioner is reasonable and moderate
considering the extent of work rendered by respondents lawyer
in the instant case and the fact that it dragged on for several
years.[43] Further, respondent testified that she agreed to
compensate her lawyer handling the instant case such amount.
[44]
The award, therefore, of attorneys fees and its amount
equivalent to 25% of the amount paid as interest by respondent
to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12%
rate of legal interest on the amount refundable to respondent
computed from 3 March 1998 until its full payment. This is
erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of
Appeals,[45] that when an obligation, not constituting a loan or
forbearance of money is breached, an interest on the amount of
damages awarded may be imposed at the rate of 6% per
annum. We further declared that when the judgment of the
court awarding a sum of money becomes final and executory,
the rate of legal interest, whether it is a loan/forbearance of
money or not, shall be 12% per annum from such finality until
its satisfaction, this interim period being deemed equivalent to
a forbearance of credit.

In the present case, petitioners obligation arose from a

quasi-contract of solutio indebiti and not from a loan or
forbearance of money. Thus, an interest of 6% per annum
should be imposed on the amount to be refunded as well as on
the damages awarded and on the attorneys fees, to be
computed from the time of the extra-judicial demand on 3
March 1998,[46] up to the finality of this Decision. In addition, the
interest shall become 12% per annum from the finality of this
Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in
CA-G.R. CV No. 71814, dated 16 December 2005, is
hereby AFFIRMED with the followingMODIFICATIONS: (1) the
amount of P660,000.00 as refundable amount of interest is
reduced to THREE HUNDRED THIRTY FIVE THOUSAND PESOS
(P335,000.00); (2) the amount of P300,000.00 imposed as
moral damages is reduced to ONE HUNDRED FIFTY THOUSAND
PESOS (P150,000.00); (3) an interest of 6% per annum is
imposed on the P335,000.00, on the damages awarded and on
the attorneys fees to be computed from the time of the extrajudicial demand on 3 March 1998 up to the finality of this
Decision; and (4) an interest of 12% per annum is also imposed
from the finality of this Decision up to its satisfaction. Costs
against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 155223

April 4, 2007

BOBIE ROSE V. FRIAS, represented by her Attorney-infact, MARIE F. FUJITA, Petitioner,

vs.
FLORA SAN DIEGO-SISON, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Bobie
Rose V. Frias represented by her Attorney-in-fact, Marie Regine
F. Fujita (petitioner) seeking to annul the Decision1 dated June
18, 2002 and the Resolution2 dated September 11, 2002 of the
Court of Appeals (CA) in CA-G.R. CV No. 52839.
Petitioner is the owner of a house and lot located at No. 589
Batangas East, Ayala Alabang, Muntinlupa, Metro Manila, which
she acquired from Island Masters Realty and Development
Corporation (IMRDC) by virtue of a Deed of Sale dated Nov. 16,
1990.3 The property is covered by TCT No. 168173 of the
Register of Deeds of Makati in the name of IMRDC.4
On December 7, 1990, petitioner, as the FIRST PARTY, and Dra.
Flora San Diego-Sison (respondent), as the SECOND PARTY,
entered into a Memorandum of Agreement5 over the property
with the following terms:

NOW, THEREFORE, for and in consideration of the sum of THREE

MILLION PESOS (P3,000,000.00) receipt of which is hereby
acknowledged by the FIRST PARTY from the SECOND PARTY, the
parties have agreed as follows:
1. That the SECOND PARTY has a period of Six (6)
months from the date of the execution of this contract
within which to notify the FIRST PARTY of her intention to
purchase the aforementioned parcel of land together
within (sic) the improvements thereon at the price of SIX
MILLION FOUR HUNDRED THOUSAND PESOS
(P6,400,000.00). Upon notice to the FIRST PARTY of the
SECOND PARTYs intention to purchase the same, the
latter has a period of another six months within which to
pay the remaining balance of P3.4 million.
2. That prior to the six months period given to the
SECOND PARTY within which to decide whether or not to
purchase the above-mentioned property, the FIRST
PARTY may still offer the said property to other persons
who may be interested to buy the same provided that
the amount of P3,000,000.00 given to the FIRST PARTY
BY THE SECOND PARTY shall be paid to the latter
including interest based on prevailing compounded bank
interest plus the amount of the sale in excess
of P7,000,000.00 should the property be sold at a price
more than P7 million.
3. That in case the FIRST PARTY has no other buyer
within the first six months from the execution of this
contract, no interest shall be charged by the SECOND
PARTY on the P3 million however, in the event that on
the sixth month the SECOND PARTY would decide not to
purchase the aforementioned property, the FIRST PARTY
has a period of another six months within which to pay

the sum of P3 million pesos provided that the said

amount shall earn compounded bank interest for the last
six months only. Under this circumstance, the amount of
P3 million given by the SECOND PARTY shall be treated
as [a] loan and the property shall be considered as the
security for the mortgage which can be enforced in
accordance with law.
x x x x.6
Petitioner received from respondent two million pesos in cash
and one million pesos in a post-dated check dated February 28,
1990, instead of 1991, which rendered said check
stale.7 Petitioner then gave respondent TCT No. 168173 in the
name of IMRDC and the Deed of Absolute Sale over the property
between petitioner and IMRDC.
Respondent decided not to purchase the property and notified
petitioner through a letter8 dated March 20, 1991, which
petitioner received only on June 11, 1991,9 reminding petitioner
of their agreement that the amount of two million pesos which
petitioner received from respondent should be considered as a
loan payable within six months. Petitioner subsequently failed
to pay respondent the amount of two million pesos.
On April 1, 1993, respondent filed with the Regional Trial Court
(RTC) of Manila, a complaint10 for sum of money with
preliminary attachment against petitioner. The case was
docketed as Civil Case No. 93-65367 and raffled to Branch 30.
Respondent alleged the foregoing facts and in addition thereto
averred that petitioner tried to deprive her of the security for
the loan by making a false report11 of the loss of her owners
copy of TCT No. 168173 to the Tagig Police Station on June 3,
1991, executing an affidavit of loss and by filing a petition12 for

the issuance of a new owners duplicate copy of said title with

the RTC of Makati, Branch 142; that the petition was granted in
an Order13 dated August 31, 1991; that said Order was
subsequently set aside in an Order dated April 10, 1992 14 where
the RTC Makati granted respondents petition for relief from
judgment due to the fact that respondent is in possession of the
owners duplicate copy of TCT No. 168173, and ordered the
provincial public prosecutor to conduct an investigation of
petitioner for perjury and false testimony. Respondent prayed
for the ex-parte issuance of a writ of preliminary attachment
and payment of two million pesos with interest at 36% per
annum from December 7, 1991, P100,000.00 moral, corrective
and exemplary damages and P200,000.00 for attorneys fees.
In an Order dated April 6, 1993, the Executive Judge of the RTC
of Manila issued a writ of preliminary attachment upon the filing
of a bond in the amount of two million pesos.15
Petitioner filed an Amended Answer16 alleging that the
Memorandum of Agreement was conceived and arranged by her
lawyer, Atty. Carmelita Lozada, who is also respondents lawyer;
that she was asked to sign the agreement without being given
the chance to read the same; that the title to the property and
the Deed of Sale between her and the IMRDC were entrusted to
Atty. Lozada for safekeeping and were never turned over to
respondent as there was no consummated sale yet; that out of
the two million pesos cash paid, Atty. Lozada took the one
million pesos which has not been returned, thus petitioner had
filed a civil case against her; that she was never informed of
respondents decision not to purchase the property within the
six month period fixed in the agreement; that when she
demanded the return of TCT No. 168173 and the Deed of Sale
between her and the IMRDC from Atty. Lozada, the latter gave
her these documents in a brown envelope on May 5, 1991
which her secretary placed in her attache case; that the

envelope together with her other personal things were lost

when her car was forcibly opened the following day; that she
sought the help of Atty. Lozada who advised her to secure a
police report, to execute an affidavit of loss and to get the
services of another lawyer to file a petition for the issuance of
an owners duplicate copy; that the petition for the issuance of
a new owners duplicate copy was filed on her behalf without
her knowledge and neither did she sign the petition nor testify
in court as falsely claimed for she was abroad; that she was a
victim of the manipulations of Atty. Lozada and respondent as
shown by the filing of criminal charges for perjury and false
testimony against her; that no interest could be due as there
was no valid mortgage over the property as the principal
obligation is vitiated with fraud and deception. She prayed for
the dismissal of the complaint, counter-claim for damages and
attorneys fees.
Trial on the merits ensued. On January 31, 1996, the RTC issued
a decision,17 the dispositive portion of which reads:
WHEREFORE, judgment is hereby RENDERED:
1) Ordering defendant to pay plaintiff the sum of P2
Million plus interest thereon at the rate of thirty two
(32%) per cent per annum beginning December 7, 1991
until fully paid.
2) Ordering defendant to pay plaintiff the sum
of P70,000.00 representing premiums paid by plaintiff on
the attachment bond with legal interest thereon counted
from the date of this decision until fully paid.

3) Ordering defendant to pay plaintiff the sum

of P100,000.00 by way of moral, corrective and
exemplary damages.
4) Ordering defendant to pay plaintiff attorneys fees
of P100,000.00 plus cost of litigation.18
The RTC found that petitioner was under obligation to pay
respondent the amount of two million pesos with compounded
interest pursuant to their Memorandum of Agreement; that the
fraudulent scheme employed by petitioner to deprive
respondent of her only security to her loaned money when
petitioner executed an affidavit of loss and instituted a petition
for the issuance of an owners duplicate title knowing the same
was in respondents possession, entitled respondent to moral
damages; and that petitioners bare denial cannot be accorded
credence because her testimony and that of her witness did not
appear to be credible.
The RTC further found that petitioner admitted that she
received from respondent the two million pesos in cash but the
fact that petitioner gave the one million pesos to Atty. Lozada
was without respondents knowledge thus it is not binding on
respondent; that respondent had also proven that in 1993, she
initially paid the sum ofP30,000.00 as premium for the issuance
of the attachment bond, P20,000.00 for its renewal in 1994,
andP20,000.00 for the renewal in 1995, thus plaintiff should be
reimbursed considering that she was compelled to go to court
and ask for a writ of preliminary attachment to protect her
rights under the agreement.
Petitioner filed her appeal with the CA. In a Decision dated June
18, 2002, the CA affirmed the RTC decision with modification,
the dispositive portion of which reads:

WHEREFORE, premises considered, the decision appealed from

is MODIFIED in the sense that the rate of interest is reduced
from 32% to 25% per annum, effective June 7, 1991 until fully
paid.19
The CA found that: petitioner gave the one million pesos to Atty.
Lozada partly as her commission and partly as a loan;
respondent did not replace the mistakenly dated check of one
million pesos because she had decided not to buy the property
and petitioner knew of her decision as early as April 1991; the
award of moral damages was warranted since even granting
petitioner had no hand in the filing of the petition for the
issuance of an owners copy, she executed an affidavit of loss of
TCT No. 168173 when she knew all along that said title was in
respondents possession; petitioners claim that she thought the
title was lost when the brown envelope given to her by Atty.
Lozada was stolen from her car was hollow; that such deceitful
conduct caused respondent serious anxiety and emotional
distress.
The CA concluded that there was no basis for petitioner to say
that the interest should be charged for six months only and no
more; that a loan always bears interest otherwise it is not a
loan; that interest should commence on June 7, 199120 with
compounded bank interest prevailing at the time the two million
was considered as a loan which was in June 1991; that the bank
interest rate for loans secured by a real estate mortgage in
1991 ranged from 25% to 32% per annum as certified to by
Prudential Bank,21 that in fairness to petitioner, the rate to be
charged should be 25% only.
Petitioners motion for reconsideration was denied by the CA in
a Resolution dated September 11, 2002.

Hence the instant Petition for Review on Certiorari filed by

petitioner raising the following issues:
(A) WHETHER OR NOT THE COMPOUNDED BANK
INTEREST SHOULD BE LIMITED TO SIX (6) MONTHS AS
CONTAINED IN THE MEMORANDUM OF AGREEMENT.
(B) WHETHER OR NOT THE RESPONDENT IS ENTITLED TO
MORAL DAMAGES.
(C) WHETHER OR NOT THE GRANT OF CORRECTIVE AND
EXEMPLARY DAMAGES AND ATTORNEYS FEES IS PROPER
EVEN IF NOT MENTIONED IN THE TEXT OF THE
DECISION.22
Petitioner contends that the interest, whether at 32% per
annum awarded by the trial court or at 25% per annum as
modified by the CA which should run from June 7, 1991 until
fully paid, is contrary to the parties Memorandum of
Agreement; that the agreement provides that if respondent
would decide not to purchase the property, petitioner has the
period of another six months to pay the loan with compounded
bank interest for the last six months only; that the CAs ruling
that a loan always bears interest otherwise it is not a loan is
contrary to Art. 1956 of the New Civil Code which provides that
no interest shall be due unless it has been expressly stipulated
in writing.
We are not persuaded.

While the CAs conclusion, that a loan always bears interest

otherwise it is not a loan, is flawed since a simple loan may be
gratuitous or with a stipulation to pay interest,23 we find no error
committed by the CA in awarding a 25% interest per annum on
the two-million peso loan even beyond the second six months
stipulated period.
The Memorandum of Agreement executed between the
petitioner and respondent on December 7, 1990 is the law
between the parties. In resolving an issue based upon a
contract, we must first examine the contract itself, especially
the provisions thereof which are relevant to the
controversy.24 The general rule is that if the terms of an
agreement are clear and leave no doubt as to the intention of
the contracting parties, the literal meaning of its stipulations
shall prevail.25 It is further required that the various stipulations
of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them
taken jointly.26
In this case, the phrase "for the last six months only" should be
taken in the context of the entire agreement. We agree with and
adopt the CAs interpretation of the phrase in this wise:
Their agreement speaks of two (2) periods of six months each.
The first six-month period was given to plaintiff-appellee
(respondent) to make up her mind whether or not to purchase
defendant-appellants (petitioner's) property. The second sixmonth period was given to defendant-appellant to pay the P2
million loan in the event that plaintiff-appellee decided not to
buy the subject property in which case interest will be charged
"for the last six months only", referring to the second six-month
period. This means that no interest will be charged for the first
six-month period while appellee was making up her mind
whether to buy the property, but only for the second period of

six months after appellee had decided not to buy the property.
This is the meaning of the phrase "for the last six months only".
Certainly, there is nothing in their agreement that suggests that
interest will be charged for six months only even if it takes
defendant-appellant an eternity to pay the loan.27
The agreement that the amount given shall bear compounded
bank interest for the last six months only, i.e., referring to the
second six-month period, does not mean that interest will no
longer be charged after the second six-month period since such
stipulation was made on the logical and reasonable expectation
that such amount would be paid within the date stipulated.
Considering that petitioner failed to pay the amount given
which under the Memorandum of Agreement shall be
considered as a loan, the monetary interest for the last six
months continued to accrue until actual payment of the loaned
amount.
The payment of regular interest constitutes the price or cost of
the use of money and thus, until the principal sum due is
returned to the creditor, regular interest continues to accrue
since the debtor continues to use such principal amount.28 It has
been held that for a debtor to continue in possession of the
principal of the loan and to continue to use the same after
maturity of the loan without payment of the monetary interest,
would constitute unjust enrichment on the part of the debtor at
the expense of the creditor.29
Petitioner and respondent stipulated that the loaned amount
shall earn compounded bank interests, and per the certification
issued by Prudential Bank, the interest rate for loans in 1991
ranged from 25% to 32% per annum. The CA reduced the
interest rate to 25% instead of the 32% awarded by the trial
court which petitioner no longer assailed.1awphi1.nt

In Bautista v. Pilar Development Corp.,30 we upheld the validity

of a 21% per annum interest on a P142,326.43 loan. In Garcia v.
Court of Appeals,31 we sustained the agreement of the parties to
a 24% per annum interest on an P8,649,250.00 loan. Thus, the
interest rate of 25% per annum awarded by the CA to a P2
million loan is fair and reasonable.
Petitioner next claims that moral damages were awarded on the
erroneous finding that she used a fraudulent scheme to deprive
respondent of her security for the loan; that such finding is
baseless since petitioner was acquitted in the case for perjury
and false testimony filed by respondent against her.
We are not persuaded.
Article 31 of the Civil Code provides that when the civil action is
based on an obligation not arising from the act or omission
complained of as a felony, such civil action may proceed
independently of the criminal proceedings and regardless of the
result of the latter.32
While petitioner was acquitted in the false testimony and
perjury cases filed by respondent against her, those actions are
entirely distinct from the collection of sum of money with
damages filed by respondent against petitioner.
We agree with the findings of the trial court and the CA that
petitioners act of trying to deprive respondent of the security of
her loan by executing an affidavit of loss of the title and
instituting a petition for the issuance of a new owners duplicate
copy of TCT No. 168173 entitles respondent to moral
damages.1a\^/phi1.net Moral damages may be awarded
in culpa contractual or breach of contract cases when the
defendant acted fraudulently or in bad faith. Bad faith does not

simply connote bad judgment or negligence; it imports a

dishonest purpose or some moral obliquity and conscious doing
of wrong. It partakes of the nature of fraud.33
The Memorandum of Agreement provides that in the event that
respondent opts not to buy the property, the money given by
respondent to petitioner shall be treated as a loan and the
property shall be considered as the security for the mortgage. It
was testified to by respondent that after they executed the
agreement on December 7, 1990, petitioner gave her the
owners copy of the title to the property, the Deed of Sale
between petitioner and IMRDC, the certificate of occupancy,
and the certificate of the Secretary of the IMRDC who signed
the Deed of Sale.34 However, notwithstanding that all those
documents were in respondents possession, petitioner
executed an affidavit of loss that the owners copy of the title
and the Deed of Sale were lost.
Although petitioner testified that her execution of the affidavit
of loss was due to the fact that she was of the belief that since
she had demanded from Atty. Lozada the return of the title, she
thought that the brown envelope with markings which Atty.
Lozada gave her on May 5, 1991 already contained the title and
the Deed of Sale as those documents were in the same brown
envelope which she gave to Atty. Lozada prior to the transaction
with respondent.35 Such statement remained a bare statement.
It was not proven at all since Atty. Lozada had not taken the
stand to corroborate her claim. In fact, even petitioners own
witness, Benilda Ynfante (Ynfante), was not able to establish
petitioner's claim that the title was returned by Atty. Lozada in
view of Ynfante's testimony that after the brown envelope was
given to petitioner, the latter passed it on to her and she placed
it in petitioners attach case36 and did not bother to look at the
envelope.37

It is clear therefrom that petitioners execution of the affidavit of

loss became the basis of the filing of the petition with the RTC
for the issuance of new owners duplicate copy of TCT No.
168173. Petitioners actuation would have deprived respondent
of the security for her loan were it not for respondents timely
filing of a petition for relief whereby the RTC set aside its
previous order granting the issuance of new title. Thus, the
award of moral damages is in order.
The entitlement to moral damages having been established, the
award of exemplary damages is proper.38Exemplary damages
may be imposed upon petitioner by way of example or
correction for the public good.39 The RTC awarded the amount
of P100,000.00 as moral and exemplary damages. While the
award of moral and exemplary damages in an aggregate
amount may not be the usual way of awarding said
damages,40 no error has been committed by CA. There is no
question that respondent is entitled to moral and exemplary
damages.
Petitioner argues that the CA erred in awarding attorneys fees
because the trial courts decision did not explain the findings of
facts and law to justify the award of attorneys fees as the same
was mentioned only in the dispositive portion of the RTC
decision.
We agree.
Article 220841 of the New Civil Code enumerates the instances
where such may be awarded and, in all cases, it must be
reasonable, just and equitable if the same were to be
granted.42 Attorney's fees as part of damages are not meant to
enrich the winning party at the expense of the losing litigant.
They are not awarded every time a party prevails in a suit

because of the policy that no premium should be placed on the

right to litigate.43 The award of attorney's fees is the exception
rather than the general rule. As such, it is necessary for the trial
court to make findings of facts and law that would bring the
case within the exception and justify the grant of such award.
The matter of attorney's fees cannot be mentioned only in the
dispositive portion of the decision.44 They must be clearly
explained and justified by the trial court in the body of its
decision. On appeal, the CA is precluded from supplementing
the bases for awarding attorneys fees when the trial court
failed to discuss in its Decision the reasons for awarding the
same. Consequently, the award of attorney's fees should be
deleted.
WHEREFORE, in view of all the foregoing, the Decision dated
June 18, 2002 and the Resolution dated September 11, 2002 of
the Court of Appeals in CA-G.R. CV No. 52839 are AFFIRMED
with MODIFICATION that the award of attorneys fees
is DELETED.
No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 187678

April 10, 2013

SPOUSES IGNACIO F. JUICO and ALICE P.

JUICO, Petitioners,
vs.
CHINA BANKING CORPORATION, Respondent.
DECISION
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari under Rule 45 of
the 1997 Rules of Civil Procedure, as amended, assailing the
February 20, 2009 Decision1 and April 27, 2009 Resolution2 of
the Court of Appeals (CA) in CA G.R. CV No. 80338. The CA
affirmed the April 14, 2003 Decision3 of the Regional Trial Court
(RTC) of Makati City, Branch 147.

When petitioners failed to pay the monthly amortizations due,

respondent demanded the full payment of the outstanding
balance with accrued monthly interests. On September 5, 2000,
petitioners received respondents last demand letter7 dated
August 29, 2000.
As of February 23, 2001, the amount due on the two promissory
notes totaled P19,201,776.63 representing the principal,
interests, penalties and attorneys fees. On the same day, the
mortgaged property was sold at public auction, with respondent
as highest bidder for the amount of P10,300,000.
On May 8, 2001, petitioners received8 a demand letter9 dated
May 2, 2001 from respondent for the payment ofP8,901,776.63,
the amount of deficiency after applying the proceeds of the
foreclosure sale to the mortgage debt. As its demand remained
unheeded, respondent filed a collection suit in the trial court. In
its Complaint,10respondent prayed that judgment be rendered
ordering the petitioners to pay jointly and severally:
(1)P8,901,776.63 representing the amount of deficiency, plus
interests at the legal rate, from February 23, 2001 until fully
paid; (2) an additional amount equivalent to 1/10 of 1% per day
of the total amount, until fully paid, as penalty; (3) an amount
equivalent to 10% of the foregoing amounts as attorneys fees;
and (4) expenses of litigation and costs of suit.

The factual antecedents:

Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained
a loan from China Banking Corporation (respondent) as
evidenced by two Promissory Notes both dated October 6, 1998
and numbered 507-001051-34and 507-001052-0,5 for the sums
of !!6,216,000 and P4, 139,000, respectively. The loan was
secured by a Real Estate Mortgage (REM) over petitioners
property located at 49 Greensville St., White Plains, Quezon City
covered by Transfer Certificate of Title (TCT) No. RT-103568
(167394) PR-412086 of the Register of Deeds of Quezon City.

In their Answer,11 petitioners admitted the existence of the debt

but interposed, by way of special and affirmative defense, that
the complaint states no cause of action considering that the
principal of the loan was already paid when the mortgaged
property was extrajudicially foreclosed and sold
for P10,300,000. Petitioners contended that should they be held
liable for any deficiency, it should be only for P55,000
representing the difference between the total outstanding
obligation of P10,355,000 and the bid price of P10,300,000.
Petitioners also argued that even assuming there is a cause of
action, such deficiency cannot be enforced by respondent
because it consists only of the penalty and/or compounded

interest on the accrued interest which is generally not favored

under the Civil Code. By way of counterclaim, petitioners
prayed that respondent be ordered to pay P100,000 in
attorneys fees and costs of suit.
At the trial, respondent presented Ms. Annabelle Cokai Yu, its
Senior Loans Assistant, as witness. She testified that she
handled the account of petitioners and assisted them in
processing their loan application. She called them monthly to
inform them of the prevailing rates to be used in computing
interest due on their loan. As of the date of the public auction,
petitioners outstanding balance was P19,201,776.6312 based on
the following statement of account which she prepared:
STATEMENT OF ACCOUNT
As of FEBRUARY 23, 2001
IGNACIO F. JUICO
PN# 507-0010520 due on 04-07-2004
1wphi1
Principal balance of PN#
5070010520. . . . . . . . . . . . . .

4,139,000.00

Interest on P4,139,000.00 fr. 04-Nov-99

04-Nov-2000 366 days @ 15.00%. . . . . . . . . .
.......

622,550.96

Interest on P4,139,000.00 fr. 04-Nov-2000

04-Dec-2000 30 days @ 24.50%. . . . . . . . . . .
.......

83,346.99

Interest on P4,139,000.00 fr. 04-Dec-2000

04-Jan-2001 31 days @
21.50%. . . . . . . . . . . . . . . . . . .

75,579.27

Interest on P4,139,000.00 fr. 04-Jan-2001

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . .
.......

68,548.64

Interest on P4,139,000.00 fr. 04-Feb-2001

23-Feb-2001 19 days @ 18.00%. . . . . . . . . . .
.......

38,781.86

Penalty charge @ 1/10 of 1% of the total

amount due
(P4,139,000.00 from 11-04-99 to 02-23-2001
@
1/10 of 1% per day). . . . . . . . . . . . . . . . .

1,974,303.00

Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
...

7,002,110.73

PN# 507-0010513 due on 04-07-2004

Principal balance of PN#
5070010513. . . . . . . . . . . . . .

6,216,000.00

Interest on P6,216,000.00 fr. 06-Oct-99

04-Nov-2000 395 days @ 15.00%. . . . . . . . . .
.......

1,009,035.62

Interest on P6,216,000.00 fr. 04-Nov-2000

04-Dec-2000 30 days @ 24.50%. . . . . . . . . . .
.......

125,171.51

Interest on P6,216,000.00 fr. 04-Dec-2000

04-Jan-2001 31 days @
21.50%. . . . . . . . . . . . . . . . . . .

113,505.86

Interest on P6,216,000.00 fr. 04-Jan-2001

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . .
.......

102,947.18

Interest on P6,216,000.00 fr. 04-Feb-2001

23-Feb-2001 19 days @ 18.00%. . . . . . . . . . .
.......

58,243.07

Penalty charge @ 1/10 of 1% of the total

amount due
(P6,216,000.00 from 10-06-99 to 02-23-2001
@
1/10 of 1% per day). . . . . . . . . . . . . . . . .

3,145,296.00

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
..

10,770,199.23

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
...

17,772,309.96

Less: A/P applied to balance of principal

Less: Accounts payable L & D (261,149.39)
Add: 10% Attorneys Fee

(55,000.00)
17,456,160.57
1,745,616.06

Total amount due

19,201,776.63

Less: Bid Price

10,300,000.00

TOTAL DEFICIENCY AMOUNT AS OF

FEB. 23, 2001

8,901,776.6
3

13

Petitioners thereafter received a demand letter14 dated May 2,

2001 from respondents counsel for the deficiency amount
of P8,901,776.63. Ms. Yu further testified that based on the
Statement of Account15 dated March 15, 2002 which she
prepared, the outstanding balance of petitioners
was P15,190,961.48.16
On cross-examination, Ms. Yu reiterated that the interest rate
changes every month based on the prevailing market rate and
she notified petitioners of the prevailing rate by calling them
monthly before their account becomes past due. When asked if
there was any written authority from petitioners for respondent
to increase the interest rate unilaterally, she answered that
petitioners signed a promissory note indicating that they agreed
to pay interest at the prevailing rate.17

Petitioner Ignacio F. Juico testified that prior to the release of the

loan, he was required to sign a blank promissory note and was
informed that the interest rate on the loan will be based on
prevailing market rates. Every month, respondent informs him
by telephone of the prevailing interest rate. At first, he was able
to pay his monthly amortizations but when he started to incur
delay in his payments due to the financial crisis, respondent
pressured him to pay in full, including charges and interests for
the delay. His property was eventually foreclosed and was sold
at public auction.18
On cross-examination, petitioner testified that he is a Doctor of
Medicine and also engaged in the business of distributing
medical supplies. He admitted having read the promissory
notes and that he is aware of his obligation under them before
he signed the same.19
In its decision, the RTC ruled in favor of respondent. The fallo of
the RTC decision reads:
WHEREFORE, premises considered, the Complaint is hereby
sustained, and Judgment is rendered ordering herein
defendants to pay jointly and severally to plaintiff, the following:
1. P8,901,776.63 representing the amount of the
deficiency owing to the plaintiff, plus interest thereon at
the legal rate after February 23, 2001;
2. An amount equivalent to 10% of the total amount due
as and for attorneys fees, there being stipulation
therefor in the promissory notes;
3. Costs of suit.
SO ORDERED.20
The trial court agreed with respondent that when the
mortgaged property was sold at public auction on February 23,

2001 for P10,300,000 there remained a balance

of P8,901,776.63 since before foreclosure, the total amount due
on the two promissory notes aggregated to P19,201,776.63
inclusive of principal, interests, penalties and attorneys fees. It
ruled that the amount realized at the auction sale was applied
to the interest, conformably with Article 1253 of the Civil Code
which provides that if the debt produces interest, payment of
the principal shall not be deemed to have been made until the
interests have been covered. This being the case, petitioners
principal obligation subsists but at a reduced amount
of P8,901,776.63.
The trial court further held that Ignacios claim that he signed
the promissory notes in blank cannot negate or mitigate his
liability since he admitted reading the promissory notes before
signing them. It also ruled that considering the substantial
amount involved, it is unbelievable that petitioners threw all
caution to the wind and simply signed the documents without
reading and understanding the contents thereof. It noted that
the promissory notes, including the terms and conditions, are
pro forma and what appears to have been left in blank were the
promissory note number, date of the instrument, due date,
amount of loan, and condition that interest will be at the
prevailing rates. All of these details, the trial court added, were
within the knowledge of the petitioners.
When the case was elevated to the CA, the latter affirmed the
trial courts decision. The CA recognized respondents right to
claim the deficiency from the debtor where the proceeds of the
sale in an extrajudicial foreclosure of mortgage are insufficient
to cover the amount of the debt. Also, it found as valid the
stipulation in the promissory notes that interest will be based on
the prevailing rate. It noted that the parties agreed on the
interest rate which was not unilaterally imposed by the bank
but was the rate offered daily by all commercial banks as
approved by the Monetary Board. Having signed the promissory
notes, the CA ruled that petitioners are bound by the
stipulations contained therein.

Petitioners are now before this Court raising the sole issue of
whether the interest rates imposed upon them by respondent
are valid. Petitioners contend that the interest rates imposed by
respondent are not valid as they were not by virtue of any law
or Bangko Sentral ng Pilipinas (BSP) regulation or any regulation
that was passed by an appropriate government entity. They
insist that the interest rates were unilaterally imposed by the
bank and thus violate the principle of mutuality of contracts.
They argue that the escalation clause in the promissory notes
does not give respondent the unbridled authority to increase
the interest rate unilaterally. Any change must be mutually
agreed upon.
Respondent, for its part, points out that petitioners failed to
show that their case falls under any of the exceptions wherein
findings of fact of the CA may be reviewed by this Court. It
contends that an inquiry as to whether the interest rates
imposed on the loans of petitioners were supported by
appropriate regulations from a government agency or the
Central Bank requires a reevaluation of the evidence on records.
Thus, the Court would in effect, be confronted with a factual and
not a legal issue.
The appeal is partly meritorious.
The principle of mutuality of contracts is expressed in Article
1308 of the Civil Code, which provides:
Article 1308. The contract must bind both contracting parties;
its validity or compliance cannot be left to the will of one of
them. Article 1956 of the Civil Code likewise ordains that "no
interest shall be due unless it has been expressly stipulated in
writing."
The binding effect of any agreement between parties to a
contract is premised on two settled principles: (1) that any
obligation arising from contract has the force of law between
the parties; and (2) that there must be mutuality between the
parties based on their essential equality. Any contract which

appears to be heavily weighed in favor of one of the parties so

as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left
solely to the will of one of the parties, is likewise, invalid. 21
Escalation clauses refer to stipulations allowing an increase in
the interest rate agreed upon by the contracting parties. This
Court has long recognized that there is nothing inherently
wrong with escalation clauses which are valid stipulations in
commercial contracts to maintain fiscal stability and to retain
the value of money in long term contracts.22 Hence, such
stipulations are not void per se.23
Nevertheless, an escalation clause "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. A
stipulation of such nature violates the principle of mutuality of
contracts.24 Thus, this Court has previously nullified the
unilateral determination and imposition by creditor banks of
increases in the rate of interest provided in loan contracts. 25
In Banco Filipino Savings & Mortgage Bank v. Navarro,26 the
escalation clause stated: "I/We hereby authorize Banco Filipino
to correspondingly increase the interest rate stipulated in this
contract without advance notice to me/us in the event a law
should be enacted increasing the lawful rates of interest that
may be charged on this particular kind of loan." While
escalation clauses in general are considered valid, we ruled that
Banco Filipino may not increase the interest on respondent
borrowers loan, pursuant to Circular No. 494 issued by the
Monetary Board on January 2, 1976, because said circular is not
a law although it has the force and effect of law and the
escalation clause has no provision for reduction of the
stipulated interest "in the event that the applicable maximum
rate of interest is reduced by law or by the Monetary Board"
(de-escalation clause).

Subsequently, in Insular Bank of Asia and America v. Spouses

Salazar27 we reiterated that escalation clauses are valid
stipulations but their enforceability are subject to certain
conditions. The increase of interest rate from 19% to 21% per
annum made by petitioner bank was disallowed because it did
not comply with the guidelines adopted by the Monetary Board
to govern interest rate adjustments by banks and non-banks
performing quasi-banking functions.
In the 1991 case of Philippine National Bank v. Court of
Appeals,28 the promissory notes authorized PNB to increase the
stipulated interest per annum "within the limits allowed by law
at any time depending on whatever policy PNB may adopt in
the future; Provided, that, the interest rate on this note shall be
correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary
Board." This Court declared the increases (from 18% to 32%,
then to 41% and then to 48%) unilaterally imposed by PNB to
be in violation of the principle of mutuality essential in
contracts.29
A similar ruling was made in a 1994 case30 also involving PNB
where the credit agreement provided that "PNB reserves the
right to increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may adopt in
the future: Provided, that the interest rate on this
accommodation shall be correspondingly decreased in the
event that the applicable maximum interest is reduced by law
or by the Monetary Board x x x".
Again, in 1996, the Court invalidated escalation clauses
authorizing PNB to raise the stipulated interest rate at any time
without notice, within the limits allowed by law. The Court
observed that there was no attempt made by PNB to secure the
conformity of respondent borrower to the successive increases
in the interest rate. The borrowers assent to the increases
cannot be implied from their lack of response to the letters sent
by PNB, informing them of the increases.31

In the more recent case of Philippine Savings Bank v.

Castillo,32 we sustained the CA in declaring as unreasonable the
following escalation clause: "The rate of interest and/or bank
charges herein stipulated, during the terms of this promissory
note, its extensions, renewals or other modifications, may be
increased, decreased or otherwise changed from time to time
within the rate of interest and charges allowed under present or
future law(s) and/or government regulation(s) as the PSBank
may prescribe for its debtors." Clearly, the increase or decrease
of interest rates under such clause hinges solely on the
discretion of petitioner as it does not require the conformity of
the maker before a new interest rate could be enforced. We also
said that respondents assent to the modifications in the
interest rates cannot be implied from their lack of response to
the memos sent by petitioner, informing them of the
amendments, nor from the letters requesting for reduction of
the rates. Thus:
the validity of the escalation clause did not give petitioner
the unbridled right to unilaterally adjust interest rates. The
adjustment should have still been subjected to the mutual
agreement of the contracting parties. In light of the absence of
consent on the part of respondents to the modifications in the
interest rates, the adjusted rates cannot bind them
notwithstanding the inclusion of a de-escalation clause in the
loan agreement.33

It is now settled that an escalation clause is void where the

creditor unilaterally determines and imposes an increase in the
stipulated rate of interest without the express conformity of the
debtor. Such unbridled right given to creditors to adjust the
interest independently and upwardly would completely take
away from the debtors the right to assent to an important
modification in their agreement and would also negate the
element of mutuality in their contracts.34 While a ceiling on
interest rates under the Usury Law was already lifted under
Central Bank Circular No. 905, nothing therein "grants lenders
carte blanche authority to raise interest rates to levels which
will either enslave their borrowers or lead to a hemorrhaging of
their assets."35
The two promissory notes signed by petitioners provide:
I/We hereby authorize the CHINA BANKING CORPORATION to
increase or decrease as the case may be, the interest
rate/service charge presently stipulated in this note without any
advance notice to me/us in the event a law or Central Bank
regulation is passed or promulgated by the Central Bank of the
Philippines or appropriate government entities, increasing or
decreasing such interest rate or service charge.36
Such escalation clause is similar to that involved in the case of
Floirendo, Jr. v. Metropolitan Bank and Trust Company37 where
this Court ruled:
The provision in the promissory note authorizing respondent
bank to increase, decrease or otherwise change from time to
time the rate of interest and/or bank charges "without advance
notice" to petitioner, "in the event of change in the interest rate
prescribed by law or the Monetary Board of the Central Bank of
the Philippines," does not give respondent bank unrestrained
freedom to charge any rate other than that which was agreed
upon. Here, the monthly upward/downward adjustment of
interest rate is left to the will of respondent bank alone. It
violates the essence of mutuality of the contract.38

More recently in Solidbank Corporation v. Permanent Homes,

Incorporated,39 we upheld as valid an escalation clause which
required a written notice to and conformity by the borrower to
the increased interest rate. Thus:
The Usury Law had been rendered legally ineffective by
Resolution No. 224 dated 3 December 1982 of the Monetary
Board of the Central Bank, and later by Central Bank Circular
No. 905 which took effect on 1 January 1983. These circulars
removed the ceiling on interest rates for secured and unsecured
loans regardless of maturity. The effect of these circulars is to
allow the parties to agree on any interest that may be charged
on a loan. The virtual repeal of the Usury Law is within the
range of judicial notice which courts are bound to take into
account. Although interest rates are no longer subject to a
ceiling, the lender still does not have an unbridled license to
impose increased interest rates. The lender and the borrower
should agree on the imposed rate, and such imposed rate
should be in writing.
The three promissory notes between Solidbank and Permanent
all contain the following provisions:
"5. We/I irrevocably authorize Solidbank to increase or decrease
at any time the interest rate agreed in this Note or Loan on the
basis of, among others, prevailing rates in the local or
international capital markets. For this purpose, We/I authorize
Solidbank to debit any deposit or placement account with
Solidbank belonging to any one of us. The adjustment of the
interest rate shall be effective from the date indicated in the
written notice sent to us by the bank, or if no date is indicated,
from the time the notice was sent.
6. Should We/I disagree to the interest rate adjustment, We/I
shall prepay all amounts due under this Note or Loan within
thirty (30) days from the receipt by anyone of us of the written
notice. Otherwise, We/I shall be deemed to have given our
consent to the interest rate adjustment."

The stipulations on interest rate repricing are valid because (1)

the parties mutually agreed on said stipulations; (2) repricing
takes effect only upon Solidbanks written notice to Permanent
of the new interest rate; and (3) Permanent has the option to
prepay its loan if Permanent and Solidbank do not agree on the
new interest rate. The phrases "irrevocably authorize," "at any
time" and "adjustment of the interest rate shall be effective
from the date indicated in the written notice sent to us by the
bank, or if no date is indicated, from the time the notice was
sent," emphasize that Permanent should receive a written
notice from Solidbank as a condition for the adjustment of the
interest rates. (Emphasis supplied.)
In this case, the trial and appellate courts, in upholding the
validity of the escalation clause, underscored the fact that there
was actually no fixed rate of interest stipulated in the
promissory notes as this was made dependent on prevailing
rates in the market. The subject promissory notes contained the
following condition written after the first paragraph:
With one year grace period on principal and thereafter payable
in 54 equal monthly instalments to start on the second year.
Interest at the prevailing rates payable quarterly in arrears.40
In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner cardholder
assailed the trial and appellate courts in ruling for the validity of
the escalation clause in the Cardholders Agreement. On
petitioners contention that the interest rate was unilaterally
imposed and based on the standards and rate formulated solely
by respondent credit card company, we held:
The contractual provision in question states that "if there occurs
any change in the prevailing market rates, the new interest rate
shall be the guiding rate in computing the interest due on the
outstanding obligation without need of serving notice to the
Cardholder other than the required posting on the monthly
statement served to the Cardholder." This could not be
considered an escalation clause for the reason that it neither
states an increase nor a decrease in interest rate. Said clause

simply states that the interest rate should be based on the

prevailing market rate.
Interpreting it differently, while said clause does not expressly
stipulate a reduction in interest rate, it nevertheless provides a
leeway for the interest rate to be reduced in case the prevailing
market rates dictate its reduction.
Admittedly, the second paragraph of the questioned proviso
which provides that "the Cardholder hereby authorizes Security
Diners to correspondingly increase the rate of such interest in
the event of changes in prevailing market rates x x x" is an
escalation clause. However, it cannot be said to be dependent
solely on the will of private respondent as it is also dependent
on the prevailing market rates.
Escalation clauses are not basically wrong or legally
objectionable as long as they are not solely potestative but
based on reasonable and valid grounds. Obviously, the
fluctuation in the market rates is beyond the control of private
respondent.42 (Emphasis supplied.)
In interpreting a contract, its provisions should not be read in
isolation but in relation to each other and in their entirety so as
to render them effective, having in mind the intention of the
parties and the purpose to be achieved. The various stipulations
of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them
taken jointly.43
Here, the escalation clause in the promissory notes authorizing
the respondent to adjust the rate of interest on the basis of a
law or regulation issued by the Central Bank of the Philippines,
should be read together with the statement after the first
paragraph where no rate of interest was fixed as it would be
based on prevailing market rates. While the latter is not strictly
an escalation clause, its clear import was that interest rates
would vary as determined by prevailing market rates. Evidently,
the parties intended the interest on petitioners loan, including

any upward or downward adjustment, to be determined by the

prevailing market rates and not dictated by respondents policy.
It may also be mentioned that since the deregulation of bank
rates in 1983, the Central Bank has shifted to a market-oriented
interest rate policy.44
There is no indication that petitioners were coerced into
agreeing with the foregoing provisions of the promissory notes.
In fact, petitioner Ignacio, a physician engaged in the medical
supply business, admitted having understood his obligations
before signing them. At no time did petitioners protest the new
rates imposed on their loan even when their property was
foreclosed by respondent.
This notwithstanding, we hold that the escalation clause is still
void because it grants respondent the power to impose an
increased rate of interest without a written notice to petitioners
and their written consent. Respondents monthly telephone
calls to petitioners advising them of the prevailing interest rates
would not suffice. A detailed billing statement based on the new
imposed interest with corresponding computation of the total
debt should have been provided by the respondent to enable
petitioners to make an informed decision. An appropriate form
must also be signed by the petitioners to indicate their
conformity to the new rates. Compliance with these requisites is
essential to preserve the mutuality of contracts. For indeed,
one-sided impositions do not have the force of law between the
parties, because such impositions are not based on the parties
essential equality.45
Modifications in the rate of interest for loans pursuant to an
escalation clause must be the result of an agreement between
the parties. Unless such important change in the contract terms
is mutually agreed upon, it has no binding effect.46 In the
absence of consent on the part of the petitioners to the
modifications in the interest rates, the adjusted rates cannot
bind them. Hence, we consider as invalid the interest rates in
excess of 15%, the rate charged for the first year.

Based on the August 29, 2000 demand letter of China Bank,

petitioners total principal obligation under the two promissory
notes which they failed to settle is P10,355,000. However, due
to China Banks unilateral increases in the interest rates from
15% to as high as 24.50% and penalty charge of 1/10 of 1% per
day or 36.5% per annum for the period November 4, 1999 to
February 23, 2001, petitioners balance ballooned
to P19,201,776.63. Note that the original amount of principal
loan almost doubled in only 16 months. The Court also finds the
penalty charges imposed excessive and arbitrary, hence the
same is hereby reduced to 1% per month or 12% per
annum.1wphi1
Petitioners Statement of Account, as of February 23, 2001, the
date of the foreclosure proceedings, should thus be modified as
follows:

WHEREFORE, the petition for review on certiorari is PARTLY

GRANTED. The February 20, 2009 Decision and April 27, 2009
Resolution of the Court of Appeals in CA G.R. CV No. 80338 are
hereby MODIFIED. Petitioners Spouses Ignacio F. Juico and Alice
P. Juico are hereby ORDERED to pay jointly and severally
respondent China Banking Corporation P4, 7 61 ,865. 79
representing the amount of deficiency inclusive of interest,
penalty charge and attorney's fees. Said amount shall bear
interest at 12% per annum, reckoned from the time of the filing
of the complaint until its full satisfaction.
No pronouncement as to costs.
SO ORDERED.

Principal
Interest at 15% per annum
P10,355,000 x .15 x 477 days/365 days
Penalty at 12% per annum

P10,355,000.00
2,029,863.70
1,623 ,890. 96

P10,355,000 x .12 x 477days/365 days

Sub-Total
Less: A/P applied to balance of principal
Less: Accounts payable L & D

14,008,754.66
(55,000.00)
(261,149.39)
13,692,605.27

Add: Attorney's Fees

1,369,260.53

Total Amount Due

15,061,865.79

Less: Bid Price

10,300,000.00

TOTAL DEFICIENCY AMOUNT

4,761,865.79